The ATO is introducing a computer assisted verification process called e-Audit. The process for selecting taxpayers for an e-Audit is the same as a normal audit. The e-Audits process is said to be more efficient, accurate and thorough than traditional audits, with the advantage of also minimising the time the ATO spends on your business premises.
Before expanding our discussion on e-Audits, below is an outline of what an ATO audit is, and how they have traditionally been carried out.
| The Traditional ATO Audit Process |
| What is an ATO audit?
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The ATO conducts audits where they consider there is a risk that a taxpayer has not met their obligations or have misstated (whether intentionally or unintentionally) their tax position resulting in a shortfall of tax paid. In these cases, where a more in-depth examination of the issue is required, they may conduct an audit, investigation or review to determine whether a misstatement or failure to meet obligations has occurred.
Their audit program ranges from relatively quick examinations of source documents to more intensive analysis of complex arrangements and transactions. |
| How the normal ATO audit process works |
Before commencing the audit, the ATO will notify you about:
- The subject matter and scope of the audit (eg. super guarantee, GST reporting);
- The period(s) under audit;
- The documents and records which they require access to;
- Their expectations of you when they request information or records;
- Your audit officer or contact at the ATO for the audit matter; and
- The expected completion date.
During the audit:
- You need to collate all the requested documentation for the period under audit. The information required by the ATO varies from case to case, but may include things such as detailed ledgers from your accounting records; copies of contracts with employees, customers or suppliers; copies of invoices and receipts; employee timesheet records etc.
- You may wish to engage your accountant to review the documents you have prepared, or to collate this information for you.
- In some cases, the ATO will attend your business premises or your accountant’s office to inspect records and/or observe and question employees.
- A formal response is submitted to the ATO together with and requested documents. In some cases, you will be required to present them in a meeting with the ATO.
Finalising the audit:
- After receiving all the required information, the ATO will seek further clarification or documentation from you if necessary.
- The ATO will then make a decision based on the information provided to them.
- You will be advised of the outcome of the audit and its finalisation in writing.
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| Areas commonly audited by the ATO |
- Deductions claimed in individual tax returns – to ensure these are valid and not excessive.
- Income understated or not included (individuals and business)
- GST compliance – to ensure correct GST treatment and reporting.
- Superannuation guarantee compliance – to ensure you are meeting SG obligations.
- PAYG Withholding – to ensure you are withholding correctly and remitting in full.
- Fringe Benefit Tax – to ensure all benefits have been included and calculated correctly.
- Specific income tax matters – for example complex international tax issues.
- Tax avoidance schemes.
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| Outcome of an audit |
- If there has been an understatement of tax, any shortfall in tax must be paid.
- Interest charges may apply to the amount of tax that should have been paid, from the date when the tax should have been paid.
- Penalties may apply for making the error or failing to comply with taxpayer obligations.
- Further penalties may apply where the ATO believes the mistake or failure to comply was intentional or reckless.
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What you need to know about e-Audit
The ATO has provided the following information on what e-Audits will involve:
| The e-Audit Process |
- Accessing your business records – the ATO will use their formal access powers to access the documents required, although it is said they will usually take a cooperative approach and consult with you as to what is needed.
- Supplying your electronic information – the ATO will first attempt to understand your accounting systems, system architecture, format and extent of electronic records, and any other documents available to assist in their analysis. They will then identify information needed on a mutually agreed basis and organise to download it either to a secure biometric thumb drive, a secure drop box folder, or another agreed way.
- Data analysis and review – specialised software will be used to verify the data provided to ensure it is accurate and complete. A series of tests will then be conducted on your data to ensure that tax laws have been complied with. The specific tests conducted depend on the nature of the compliance activity that is being audited.
- Completion of the e-Audit – when the e-Audit is complete, the data that has been provided by your business is stored as part of a case file and kept as a record of the compliance activity.
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| Possible information requested during an e-Audit |
- Names and versions of all points of sale, accounting, payroll, financial management system, enterprise reporting system, or any other software and systems used in the course of meeting your tax obligations, including manual processes;
- Contact details of accountant or person(s) responsible for preparing your BASs and financial records; and
- System support documentation (e.g. system architecture diagram, data dictionary, BAS preparation papers and other working papers).
- For those taxpayers unable to provide any of the above, the ATO will attempt to visit your business premises to obtain any data required to carry out the e-Audit and this may include bank records and copies of back-up data for the period examined.
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So is it good or bad?
According to the ATO, a tax officer skilled in e-Audit will be able to analyse the electronic information obtained more efficiently, accurately and thoroughly than if they had use manual processes. In addition, providing electronic information reduces the time spent on your business premises minimising disruption to your business.
On the other hand, taxpayers may be understandably confronted by the extent of access given to the ATO to their electronic based accounting records, which results in taxpayers and tax agents having less control over the information being disclosed.
So, it seems the jury is still out. It will be difficult to assess the real impact on taxpayers until we start seeing e-Audits in practice. Until then, if nothing else, it does demonstrate that the ATO is finally showing signs of embracing the new digital age, and that is a positive step in the right direction!
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