The Australian Tax Office (ATO) conducts audits to verify compliance with your tax obligations and make sure you’ve paid the correct amount of tax. The ATO can issue audits to any taxpayer, not only businesses, and they usually use information matching to determine the results.
When you’re selected for an audit, it can be daunting to prepare for – even if you believe you’ve done everything by the books. However, while not all audits issued mean that something’s gone wrong with your tax return, if you’re found to have given incorrect information or withholding statements, you could be liable for several audit penalties.
But what exactly does this mean, and what can you do about it? Explore everything you need to know about the ATO audits and the potential penalties you could face below.
What is an ATO audit?
An ATO audit is simply the process carried out by the ATO to make sure taxpayers are in compliance with the taxation laws. Audits are put in place to make sure that both individuals and businesses are paying the correct amount of tax, and sometimes who’s chosen can be random. However, other times your account might be flagged because of discrepancies between the information you provided or changed within your circumstances.
During an audit the ATO will request certain documents about your declared income, and once they’ve reviewed all of the necessary information, they’ll send you a report of their findings. There are a few ways this could go:
- If the ATO finds that you’ve underpaid your taxes, you might be told that you need to pay the difference, along with interest and penalties.
- If the ATO believes you’ve purposely evaded tax, they might begin a criminal investigation.
There’s no need to panic – as long as you’re confident that you’ve submitted correctly and haven’t intentionally disregarded the law, you shouldn’t have a reason to be worried.
Filing taxes isn’t the easiest task, so the ATO does offer grace (within reason) to minor discrepancies. They’re much more interested in finding cases of fraud or tax evasion, so as long as you’re honest and keep your records neat and tidy, you should be able to sail through an audit without any issues.
Potential penalties you might be imposed with
Tax laws state that interest is calculated and enforced from the date a tax liability was received, while penalties are only issued if the ATO believes you purposefully omitted information or made an unsubstantiated claim on your tax return.
Here’s what you could face if the ATO issues a penalty:
Interest charges
Interest charges might incur if you need an amendment making on your assessment because of a shortfall. Just like interest can be charged from your bank for late fees, the ATO operates in a similar way. Interest will start being charged from the date of your original assessment, so depending on when the audit is done, you could have a hefty interest charge coming your way.
The risk of this fine is generally enough to encourage people to file on time. But if you’ve made reasonable care with your tax return and can prove it through good bookkeeping and receipts, the ATO can cancel interest charges in certain circumstances.
Prosecutions
Tax laws sometimes involve criminal offences that can carry significant penalties if you’re proven to not have met your obligations. These might include:
- Intentionally making false claims or misleading statements
- Withholding information
- Keeping false or inaccurate records
- Refusing to complete your tax return
- Failing to meet before a tax officer and answer questions that may lead to a potential audit
- Hindering a tax officer who is conducting an audit on you
These are all offences and will be referred to the Commonwealth Officer or Director Public Prosecutions and any other law enforcement agencies that need to be aware of the criminal breaches and charges.
Administrative penalties
False or misleading statements might not always be penalised if you can prove that reasonable care has been taken, but a mistake was still made. However, if the ATO believes that there’s cause for reasonable blame for you intentionally violating tax law, they can charge you with significant penalties. How much they charge you will depend on the circumstances of your case and the extent of your actions.
It’s worth noting that if you know that you have included misleading information in your tax return, voluntarily disclosing this before or during your audit can often result in significant penalty reductions. You have the chance to present your reasons and evidence for why you did what you did, and the ATO will review your case and come to a decision on whether they reduce, remove, or leave your penalty as it is.
What does an audit penalty mean?
As you can see, there are many reasons why you may receive a penalty after your audit – but what does this mean for you?
You’ve been caught giving false or misleading statements
You’ll often be liable for a penalty if you’ve knowingly made a false or misleading statement on your tax return that results in a shortfall amount. A shortfall amount is the amount that is less than what was needed, meaning that you’ve paid less tax than you were obligated to because of your false or misleading statements.
Your penalty will be worked out depending on the reason for your false statement being recorded:
- Failure to take reasonable care: 25% of the shortfall amount
- Recklessness: 50% of the shortfall amount
- Intentional disregard: 75% of the shortfall amount
Giving false information on your tax return doesn’t always lead to a shortfall amount – but it will still end in a penalty. if you’ve knowingly submitted misleading statements that haven’t resulted in a shortfall, your penalty might look like this:
- Failure to take reasonable care: 20 penalty points
- Recklessness: 40 penalty points
- Intentional disregard: 60 penalty points
You’ve failed or refused to lodge your tax return
Individuals and business owners who have an obligation to lodge a tax return in Australia will need to do so by a certain date. If you don’t report this due date, you might be given a Failure to Lodge (FTL) penalty. The size of your penalty will depend on the size of your business:
- Small entities: One penalty unit for each period of 28 days that the tax return is overdue, amounting to a maximum of five penalty points.
- Medium entities: (With an assessable income or current GST turnover of $1 million or more) The penalty unit is multiplied by two.
- Large entities: (With an assessable income or current GST turnover of $20 million or more) The penalty unit is multiplied by five.
- Significant global entities: The penalty unit is multiplied by 500.
You’re failing to comply with other tax requirements set out by the ATO
There are a number of other tax requirements set out by the ATO, each coming with their own penalty requirement should you fail to comply with them:
- Keeping or retaining records as required: 20 penalty units
- Retaining or producing declarations as required: 20 penalty units
- Providing access and reasonable facilities to an authorised tax officer: 20 penalty units
- Applying for or cancelling goods and services tax (GST) registration when required: 20 penalty units
- Issuing a tax invoice or adjustment note when required: 20 penalty units
- Both principal and agent must not issue tax invoices or adjustment notes for the same taxable supply or adjustment event: 20 penalty units
- Registering as a PAYG withholder when required (withholders must be registered): 5 penalty units
- Lodging an activity statement electronically when required (non-electronic notification): 5 penalty units
- Paying an amount electronically when required (non-electronic payment): 5 penalty unit
What’s a penalty unit?
Tax laws allow the ATO to impose penalties when you fail to meet your tax obligations, often resulting in penalty units being issued. Each unit is worth a certain amount of money that you will need to pay back, and how much the units are worth depends on when your infringement first took place:
- On or after 7 November 2024: One penalty unit equates to $330
- 1 July 2023 to 6 November 2024: One penalty unit equates to $313
- 1 January 2023 to 30 June 2023: One penalty unit equates to $275
- 1 July 2020 to 31 December 2022: One penalty unit equates to $222
- 1 July 2017 to 30 June 2020: One penalty unit equates to $210
- 31 July 2015 to 30 June 2017: One penalty unit equates to $180
- 28 December 2012 to 30 July 2015: One penalty unit equates to $170
- Up to 27 December 2012: One penalty unit equates to $110
Learn more about penalty units here.
How to complain or dispute the results of your audit
If you don’t agree with the outcome of your ATO audit, there are several ways you can dispute this. Either going through an alternative dispute resolution (ADR) or in-house facilitation with an ATO facilitator is the best way to have it handled timely so you’re not racking up more interest charges.
An ADR is a process where both parties agree to use a third party to resolve the differences, using mediation, conciliation, or arbitration. If you want to go the in-house facilitation route, you’ll meet an ATO representative and a facilitator to come to an agreement.
You also don’t have to do this – you can go straight to lodging a complaint or objection. Learn more about your right to this, and how you go about it, here.
Book A Free Strategy Meeting With A Business Accountant Today
No one wants to put themselves at risk of an audit review, so one of the best ways to prevent this is to hire a business accountant who can help you keep accurate records and file your taxes on time at the end of each financial year. Instead of having to look after every other aspect of your business at the same time, your accountant can focus their time on your books to avoid anything that might flag the ATO to begin an audit. Why not book a free, no obligation strategy meeting with Walker Hill to discuss your options today?
