ATO Audit Triggers for Businesses: Avoiding the Red Flags

Welcome, to the Podcast! Our newsletter made easy! Please note, this podcast features AI-generated voices for your hosts, Mia Taylor and Leo Baker, bringing you expert insights from owner, Ben De Rosa, at Aevum Accounting. Each week, we're here to help you confidently navigate the ins and outs of Australian tax – whether it's for your individual finances, or the complexities of your business. We'll cut through the jargon to give you strategies for compliance, smart planning, and that ultimate peace of mind. So, if you're looking to understand your obligations, maximize your financial position, or simply gain clarity on your money matters, you're in the right place. Let's get started with our review of the week! Ryan Cook says "We use Aevum Accounting & Ben De Rosa for all our business needs at Hurricane Roof Plumbing. We meet quarterly with Ben and make the most of his business advisory and consulting services. Aevum Accounting look after not only our tax affairs but our bookkeeping and processing as well. This allows us to focus on what we do best and takes the stress out of our financial affairs. We highly recommend Aevum Accounting and working with Ben De Rosa." Thank you for the amazing feedback Ryan we love hearing from our clients and a positive review gets our podcast started on the right foot. Over to you Leo. Alright everyone, welcome back! I’m Leo Baker. And I'm Mia Taylor. Last time, we talked about individual audit danger areas. Today, we're shifting our focus to a crucial topic for all our business-owning listeners: Audit Triggers and Focus Areas for Businesses. That's right, Mia. For businesses, the ATO's data-matching and analytical capabilities are incredibly sophisticated. They're not just randomly picking targets; they're looking at specific indicators on your tax returns and through third-party data that can flag you for closer scrutiny. Understanding these "danger labels" is your first line of defence. Absolutely. The ATO scrutinises specific labels on business tax returns to identify potential audit targets. It's like having a giant digital magnifying glass on every submission. Let's break down some of these key labels. First up: Small Business Entity (SBE) status and aggregated turnover range. Yes, businesses often claim SBE concessions, which are fantastic, but the ATO will definitely verify your eligibility. They want to make sure your aggregated turnover falls within the correct range to qualify for those concessions, which can include things like instant asset write-offs or simplified depreciation. Get this wrong, and it could unravel quite a few things. Next, we have Base Rate Entity status. This might sound a bit technical, but it’s crucial for determining your company tax rate. The ATO will check if your passive income is within the 80% threshold. If more than 80% of your income is passive – like interest, rent, or dividends – you might not qualify for the lower 25% company tax rate and could be liable for the full 30% rate. This is a common area of error. And then there are Fringe Benefit Employee Contributions. These entries can prompt checks for both Fringe Benefits Tax, or FBT, and GST compliance. It becomes particularly tricky when these contributions are journalised, rather than handled directly through payroll. The ATO wants to ensure that any benefits provided to employees, and their corresponding contributions, are correctly accounted for under FBT rules and that any GST credits or payments are accurately reported. Another big one, especially for businesses operating with trusts, is Gross Distribution from Trusts. The ATO is specifically looking for distributions made outside of a 'family group' where a Family Trust Election is in place. If a trust with a Family Trust Election distributes income to someone outside of that defined 'family group,' it can trigger Family Trust Distribution Tax, or FTDT, which is essentially a very high penalty tax rate. This is a complex area, and any misstep here can be very costly. These specific labels are really about the ATO confirming that your business structure and income streams match what you're claiming and that you're applying the correct tax rates and concessions. Moving on, let's talk about something that can feel very heavy-handed: Default Assessments. This is where the ATO gets serious, Leo. They are actively using default assessments against taxpayers they suspect of operating in the shadow economy – essentially, businesses not reporting all their income or operating entirely 'off the books.' And the kicker here is how difficult it is for taxpayers to prove these assessments are excessive without adequate records. If the ATO issues a default assessment because you haven't lodged returns or provided sufficient information, they can essentially estimate your income and impose a tax bill. Without proper books and records, it's incredibly challenging to dispute that figure, leaving you liable for potentially huge, unsubstantiated tax debts. It's a huge motivator for good record-keeping. Which, of course, is a cornerstone of what we preach at Aevum Accounting. Proper bookkeeping and record-keeping aren't just about compliance; they're your ultimate defence. Finally, let’s discuss Contractor Payments, an area that often causes headaches for businesses. This is another area where the ATO's data-matching is incredibly powerful. They use Taxable Payments Annual Report, or TPAR, data to identify contractors in industries like building and construction who might be under-reporting their income. If you're a business making payments to contractors in a TPAR-reporting industry, you're required to submit this data annually. And the audit trigger for businesses isn't just about the contractor's income, it's about your compliance too. Businesses that fail to withhold tax from contractors who don't quote an ABN may lose their tax deduction for that payment. This means if a contractor doesn't provide an ABN and you don't withhold tax as required, the entire payment you made to them might not be deductible for your business, significantly increasing your taxable income. It’s a huge penalty for a seemingly simple oversight. It highlights the importance of checking ABNs and understanding your withholding obligations when dealing with contractors. So, as you can hear, the ATO's focus for businesses is multi-faceted, from checking specific labels on your return to scrutinizing your contractor payments and even using default assessments against the shadow economy. The overarching message here is clear: proactive compliance and meticulous record-keeping are your business's best friends. Don't wait for an audit letter. Understand these danger areas, ensure your financial records are watertight, and if your business structure or transactions are complex, always seek professional advice. That's exactly right. At Aevum Accounting, we're here to help you navigate these complexities, ensuring your business remains compliant, efficient, and poised for growth. And that brings us to the end of another episode! We hope today's discussion has provided you with valuable insights and helps you navigate your financial world with greater confidence. Before we go, a quick but important reminder: The information and strategies shared on this podcast are for general informational purposes only and do not constitute specific tax or financial advice. Everyone's situation is unique, and tax laws are complex and constantly evolving. For personalized advice tailored to your specific individual or business needs, we always recommend consulting with a qualified professional. You can connect with our team at Aevum Accounting visit our website to learn more about our services, including detailed tax guides for various occupations, and how we can support your financial journey. Thank you so much for tuning in! If you enjoyed this episode, please consider subscribing, leaving us a review, and sharing it with anyone who might benefit. Your support helps us reach more Australians. Until next time, stay savvy, stay proactive, and keep building your financial future! From all of us at Aevum Accounting, goodbye for now!