When it comes to deflecting ATO scrutiny of the creative industries, we’re in this together with our clients.
Last week we attended a seminar about managing ATO audits, to find out what they’re targeting and how to continue protecting our clients from scrutiny. We do things the right way because we professionally represent the artistic and creative industries … which we love … and that’s a huge responsibility!
The ATO checking random tax returns has always been business-as-usual under our self-assessment tax system. It’s always been the tax agents who do the wrong things who tend to be targeted. Rarely do we hear from the ATO regarding our clients, and past enquiries have been sorted out smoothly. We’re used to explaining the nexus between our clients’ unique deductions and their related income streams, know what stones to look under and keep records of our reasonings and workings. We’ve been prepared all along for the ATO, but they’ve never targeted us or our clients.
In these times of rapid change we must not rest on our laurels.
This year ATO audit activity is increasingly sophisticated, automated and data-driven. Algorithms are used to identify patterns in claims by tax agents. Much of the ATO’s evidence can be gathered online and without making inquiries of taxpayers or tax agents. The ATO will identify what they think is the appropriate review or audit activity based on their risk profile of the taxpayer or tax agent. We learned that they may not exclude from scrutiny tax agents who have a good track record so far.
Tax agents must review their own risk, by ensuring adequate processes are in place to assist in identifying things such as unusual deductions, clients who disclose low taxable income but have a lavish lifestyle, business non-compliance with employee obligations, Division 7A and trust issues.
If the ATO audit one client of a tax agent, they may look at other clients’ tax returns to see if it’s a systemic problem. That kind of audit has the potential to snowball. We are aware of this each time we say “I’m sorry we cannot claim your [illegal deduction] or leave out your [cash income] because it would expose others to risk”.
We do not want the creative and artistic industries coming under the ATO spotlight!
With regards to individuals, areas where documentation is being looked at includes over-claiming for work expenses and negative gearing. Our clients typically have substantial and complex deductions, which is not unusual at all for arts, entertainment and innovation activities. Could this be the year that ATO want to find out why our clients are so special, and test them? We will be prepared for that possibility. Right now, all Australian tax agents should be.
So, at tax time we ask our clients to get on board.
Please don’t rush through our tax questionnaire which asks you to attach and describe the records needed for your tax return. Don’t enter any estimates without explanations. Let us know if you’re unsure of anything or if you’ve lost receipts. Please book a video meeting with us to run through the details, to delete anything that wouldn’t pass muster. We’ll then turn our focus to what we know you CAN claim to improve your tax result!
If subjected to an audit, you are responsible for the costs (professional fees) involved.
We’re often asked why we request so much information, take a bit longer to do returns and charge a bit more. Our clients expect us to save them the most tax legally and competently represent them to the ATO. This necessitates a high standard of care and specialist industry insights. They don’t want to end up paying more for mistakes. It is, after all, why they are happy to pay us for our time and expertise.
“Save a penny, spend a pound” has never been so true when it comes to tax services.
In recent years, tax services have become devalued by low-cost providers, and costs driven down by offshore outsourcing. Cheap online options have also skewed the public’s perception of the value of tax services. A popular online tax return company only pays its Australian accountants around $10 for each tax return they prepare, whether it takes them 10 minutes or 1 hour. With so little incentive for low-paid accountants to spend time researching and exploring ways to improve someone’s tax outcome and minimise ATO audit risk, how can such paying such low fees for a tax return even be worthwhile?
In our opinion, tax agents who compete on price are more likely to cut costs and take risks. Their customers are shopping on price alone and may also increase the risk exposure of that tax agent practice. It is this race to the bottom in our industry which is contributing to the ATO now cracking down on individual taxpayers for a $8.7 billion tax gap, with the Deputy Commissioner stating:
“We are taking further steps to address the error rate in agent-prepared returns, which is currently higher than the error rate for self-prepared returns… While the majority of mistakes made by agents are avoidable, we are concerned to see a minority of tax agents exaggerating or falsifying claims to attract clients or retain their market share.”
At Electra Frost Accounting we position ourselves as a specialist, premium tax services provider.
We charge a reasonable $400 to $600 for most individual tax returns. Would you believe that professional firms were charging sole traders this much ten years ago! In the meantime, our costs have gone up and up – insurance, technology, salaries, professional education requirements, licence fees and more. If we charged any less, we simply couldn’t operate viably, or we’d have to do less for our clients which is not acceptable to us.
Anyhow, the results we deliver far outweigh the cost of our fees overall. In the current climate of ATO focus it would be madness to cut corners. So, we’re not going to!
Organised and accurate documentation is key to being prepared should an audit be requested.
With its centralised information portal MyGov and increasing ability to automatically cross-match data, the ATO’s database can now access more insights than ever, making their net ever wider and stronger. If their systems flag an anomaly or mismatch with certain ATO benchmarks for income and expenditures, a review can be triggered.
A review usually begins with a phone call or letter to the taxpayer (our client) or their tax agent (that’s us!). How effectively a review is handled may decide whether it turns into an audit, which can become extremely expensive and stressful if it drags out for months.
If the ATO request any records or documents you may only have a few weeks to provide them, and the sooner you respond the better.
As a result, it’s more important than ever that tax submissions are not only correct, but exhaustive.
The key boxes to tick when preparing for a tax submission now are:
- Work expenses are correct and recorded in detail.
- Supporting diaries and logbooks are available.
- The loan statements for negatively rental properties are checked.
- Private expenses are excluded.
- Dividends are picked up.
- Any cash payments are entered in your accounts.
- Overseas income is included.
- At least five years of documentation is in an orderly system.
- Your tax return is lodged on time.
What happens in an audit?
Initially, the ATO invites taxpayers or their tax agents to disclose any mistakes, requests documents and conducts informal interviews. There is no ‘right to remain silent’. Normally, the ATO contact tax agents first, and our response must be prompt, cooperative and carefully worded. We speak to the ATO on our clients’ behalf.
If the ATO auditor calls our client directly, we recommend politely asking them to call us instead (ask for a reference number and email it to us).
The ATO auditor may then seek to verify the information with third parties. They may phone employers to cross-check claims. For example: “Does your employee have to work from home, drive during work or use their own phone?”. As you can imagine, an employer getting a phone call out of the blue like that may not be forthcoming in your defence! Evidence you can provide such as diary records and letters from your employer may be more persuasive.
In the Australian tax system, taxpayers are guilty until they prove themselves innocent.
The standard of proof required by ATO auditors can be very high and they can even demand to see records from more than 5 years ago. It’s not a defence to blame the tax agent. If material wrongdoing is uncovered, a taxpayer’s contrition is more likely to influence a reduction in penalties from 50 to 75% of the tax shortfall to 25% for “not taking reasonable care” than a blaming attitude will.
An audit would be costly for you and could even put our licence at risk.
In one terrible case we learned about, a tax agent had 40 clients audited at the same time for claiming the maximum 5000km for car expenses without satisfactory evidence that the auditor would accept. Only one client engaged a tax lawyer to object and appeal, and they won… but it cost them far more than the tax saved. The other 39 clients didn’t bother to appeal as it wasn’t worth it. As a result of having 39 clients on record for “losing” to the ATO, the tax agent lost his licence. It took a very long time and cost $20,000 in legal fees to get his licence back. We don’t know if his business survived.
This illustrates how much risk we are exposed to when claiming something as ubiquitous as the “cents per km method”. This is why we ask clients to detail and explain their trips and call them into a meeting if they provide sketchy details in this section of our tax questionnaire.
Our measures of protection
Electra Frost Accounting has a whole lot of measures in place to protect you and us from the unwelcome expense of an ATO audit and safeguard your best possible tax return.
The Electra Frost Accounting team work to exacting standards and follow exhaustive procedures developed by Electra over many years. This involves:
- employing qualified accountants who keep their tax knowledge up-to-date and are personally trained by Electra to understand creative businesses;
- not outsourcing to cheap offshore tax preparers;
- asking clients to use a special online tax checklist that Electra wrote, which is specific to creative industries tax clients;
- sending regular reminders to clients to lodge their tax returns;
- reviewing questionnaire responses to identify areas that we need to focus on to ensure completeness and accuracy;
- meeting with clients to discuss their tax returns and leave no stone unturned; agreeing to remove any indefensible claims and finding more tax deductions and rebates which may have been overlooked earlier;
- sending clients advice notes with their completed tax returns, to draw their attention to important details and tax planning recommendations.
- putting our phone number on all tax returns so Electra can explain any claims to the ATO on clients’ behalf if they call with questions;
- removing from our client list any who continuously lodge late, to maintain a good lodgment performance rating with the ATO and protect our licence;
- educating our clients through our email newsletters, blog and upcoming podcasts;
- investing in the most modern and well-supported accountancy practice technologies that we tailor to our specific processes to enhance our insights into your financial information.
- encouraging our clients to use cloud accounting software with integrated document filing systems, which more easily enables them to maintain accurate and up-to-date documentation.
- Electra Frost continually supervising her accountants’ work and completing all tax returns through to lodgment.
- being appropriately insured and adhering to the Code of Professional Conduct for tax agents.
We Are In Your Court.
You deserve a tax professional you can count on. Our knowledge and experience is the strength behind the Electra Frost Accounting practice.
Electra has been a tax agent in business for 12 years, with an exemplary tax education – she holds two degrees in taxation and is a Chartered Tax Adviser who maintains her knowledge with over 50 hours of CPD annually. Our dedicated accounting staff are on professional pathways and attend regular tax seminars to keep them aware of changes in tax laws and accounting best practices too. We work as a close-knit team with open lines of client communication.
If you ever have any concerns about your tax situation or the ATO contacting you, please do not hesitate to contact us for advice.