The ATO has been increasing its scrutiny of small businesses over the past few years, and this year, they are expected to use data matching to check over 640 million transactions. Small businesses are more likely than ever to trigger an ATO audit, which is an expensive and disruptive exercise for any business.

Here are the top seven ways a small business may inadvertently spark ATO interest.

1. You short pay employees’ super, or pay it late.

The ATO is highly sensitive to incorrect super payments, and if an employee complains to the ATO, you can bet on an ATO review of superannuation guarantee obligations for all your employees, at the very least. These types of audits often escalate to include other areas, such as activity statements, fringe benefits tax or income tax. Not only can the audit be very costly, but you are then liable to pay interest on the super shortfall, along with administration charges and penalties. (You are also required to pay super on ALL wages (including overtime etc) rather than Ordinary Time Earnings when you pay it late.)

2. You frequently lodge your tax returns or activity statements late.

Having multiple activity statements or tax returns outstanding is a sure-fire way to get the ATO’s attention. We’re seeing a huge increase of late lodgement penalties even when a client usually lodges on time, so it’s safe to say the ATO is cracking down on late lodgements. Conversely, having a good compliance record of on-time lodgements is one of the best ways to improve your standing with the ATO.

3. Your tax return disagrees with your activity statements.

To effectively manage your tax risk, it’s crucial that the information reported on your tax return is reconciled to lodged activity statements, and activity statements be amended to reflect any variance. Significant variances will be identified in the data-matching process and could trigger ATO interest.

4. Your business owns motor vehicles, but you don’t lodge an FBT return.

The ATO again uses data matching to identify businesses that have purchased and registered vehicles but haven’t reported any private use – either in an FBT return, or by reporting a “fringe benefit employee contribution” in the income section of the tax return. So it’s crucial that businesses with motor vehicles keep detailed records and report business and private use accurately.

5. Your financial performance is not in line with your industry benchmarks.

The ATO statistically analyses financial performance of businesses within each industry, and develops benchmark figures for several Key Performance Indicators (KPIs). If your results are vastly different to the norm for your industry, the ATO may assume it’s an indication of unreported income or other tax avoidance.

6. Your business consistently reports losses for several years, or shows large variations of profit between years.

If you report operating losses three out of five years, the ATO will want to investigate to make sure your reporting is accurate and legitimate. They will also often investigate circumstances of businesses showing significant profit one year, and a loss the next.

7. You have foreign currency sales or purchases.

International transactions are a key area of compliance focus for the ATO. If your business has international transactions, you can mitigate the risk of audit with defensive strategies such as keeping records of transfer pricing documentation.

It is apparent from the list above that even businesses who are doing nothing wrong can sometimes attract negative attention from the ATO. If any of the above circumstances apply to your business, come talk to us about strategies to mitigate the risk of audit. Planning ahead can greatly reduce the cost of such an audit, if good procedures are in place for recording financial transactions and reporting to the ATO accurately and on time.