We were recently involved in audit discussions with the ATO for a long standing client. The audit was prompted due to a reduction in turnover and profit for the client as a result of a property fire at their commercial address. In no way was it for any adverse behaviour of the client. The ATO simply picked up an exception in their reporting.
It was therefore interesting to learn that the business had operated outside normal parameters and this was enough for the ATO to ask the question – What happened?
This event alone, told us that the ATO are there quietly there in the background comparing your business performance to others in similar industries. Therefore it is important to make sure your business performance is as consistent as it can be.
It is easy for the ATO to spot the cash economy. These can be indicated through significant changes in Gross Margins, wage to sale ratios and other key ratios. In our client’s case, the fire to their operations severely impact on the business and tripped a number of alarms with the ATO.
What is more frightening, is that once the ATO come for a quick chat, the number of rabbit holes they disappear down. It doesn’t take long for a list of items they want to clarify is presented. Again, in this case, all were supported with valid explanations but it goes to show the ATO don’t just stop at the first trigger point.
What are the keen learning points in this recent dance with the ATO?
- Make sure your agreements/arrangements, especially with related entities are well documented. You may be asked why you do the things you do.
- Check your Trust Deeds. In this case, the Deed was established in the 1970s. There were some strange clauses in there that nearly got the client in trouble
- Keep your software (MYOB, Xero) matched with the financials that are prepared. If balances are allowed to accumulate over the years without clearing the ATO start to see variances in your numbers and ours.
This year, lets take the time to do a complete review of your business to make sure we have answers to all the questions the ATO may throw at us.