You would not be alone if you find the tax auditing process, at first glance, to seem wildly complicated and daunting. Things may seem even worse if you end up needing to dispute the results. However, having an understanding of how the ATO audit process and disputes operate, and adopting a strategy based on this, can set you up for a straightforward and successful process.
The Audit Process
Auditing is primarily an investigation process involving intensive case examinations. When the ATO conducts audits, their objective is to ensure that you are complying with Australian tax laws in regard to the amount you are paying in tax.
When it comes to small businesses, the ATO’s preliminary approach is deducing whether you are honest and trustworthy. They may ask you many questions, some of which they will already have answers to. They will examine source documents to verify accuracy of the information you provide them with. The information they require will vary depending on the scope of the audit and what their unique concerns are, although that should be made clear during the initial meeting.
Audit Strategy Tips
Do not give a dump of random information. Give them only what is relevant and act genuinely during the investigation process. This will help assure them that you are reliable and trustworthy.
Do not make any claims unless you are sure that it is accurate and correct. Do not guess. Since part of their role is to ascertain whether the information you originally provided them with is accurate, the ATO will test later provided information against earlier provided information. Maintaining a high level of accuracy will help your case move smoothly.
Keep your calm. Since the ATO may test you, it is important to remain calm and collected. If you have given them relevant accurate information, there is no need to feel under pressure during their testing procedures.
Do not rush them. This could frustrate the process. Allow them to move through their procedure at their own pace. Audits can take up to a year or two to complete.
Review your material and understand your position. Since the material is likely to be dense and abundant, it is important to make sure it is ordered and accurate. If you come across any mistakes, notify the ATO.
The Dispute Process
If you disagree with a tax audit result, there are multiple possible stages to pursue. The first two are internal with the ATO, and the second two are external statutory procedures outlined in Part IVC of the Tax Administration Act 1953 (Cth).
Stage 1: In-house facilitation. This is the first stage of a dispute, particularly for less complex disputes. After processing your request form, an impartial professionally trained facilitator will meet with you and the auditing team with the aim of identifying issues, developing options and attempting to reach a resolution.
Stage 2: Independent Review. Small businesses with a turnover less than $10 million are eligible to request an independent review for a number of tax types including income tax and GST.
You will need to specify the areas of disagreement. An officer who has not had any prior involvement in your audit will then review all the material and hold a case conference with the audit team where information that was previously provided will be considered. Following this, the reviewer will come to an outcome and prepare written recommendations on each issue in dispute which the audit team will incorporate in the final decision.
Stage 3: Objection. If you are unhappy with the independent review’s outcome, you can lodge an objection. Section 14ZU sets out the requirements. The form must be completed in writing within the prescribed period with detailed arguments against the ATO’s findings. The Commissioner of Tax will then decide whether to partly allow it, wholly allow it, or disallow it.
Stage 4: Administrative Appeals Tribunal or Federal Court. If you believe the Commissioner has erred in their decision, you can appeal it to either the AAT or the federal court. Generally, at this stage, you will be limited to the grounds you have previously stated. However, the courts will not read the objection narrowly (Re Confidential and Commissioner of Taxation (2012) 56 AAR 273) and you may seek approval to alter your existing grounds of objection (Gilder v FCT (1991) 22 ATR 872). If you are disputing an assessment, you will need to show that it is inaccurate. If you are disputing a decision, you will need to show that it should not have been made.
By understanding the process and adopting the mentioned strategies early in the process, you will give yourself the best chance of having a successful outcome. The multiple dispute stages can help you achieve a satisfying result, but it is advisable to start off on the right track to minimise uncertainty and costs.