The tax auditing process can seem to be wildly complicated and daunting. Things may seem even more difficult if you end up needing to dispute results. However, you can set yourself up for a straightforward and successful process by gaining an understanding of how the ATO audit process and disputes operate, and adopting a strategy based on this.
The Audit Process
The ATO’s objective when conducting audits is to ensure that you are complying with Australian tax law. It is therefore a primarily investigative process involving intensive case examinations.
The ATO’s approach is deducing whether you are honest and trustworthy in running your small business. They may ask you questions they already know the answers to, just to verify the 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, which should be specified during the initial meeting.
Audit Strategy Tips
Avoid giving them a dump of information. Focus on giving them only what is relevant and act genuinely during the investigation process. This will help assure them that you are reliable.
Avoid making claims unless you are sure that it is accurate. Avoid guessing. 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.
Keep your calm. 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 a couple of years to complete.
Review your material and understand your position. Since the material is likely to be dense, it is important to make sure it is ordered and accurate. Look out for mistakes and if you find any, make sure to 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 possible stage of a dispute. After processing your request form, an impartial professionally trained facilitator will meet with you and the auditing team. Their aim will be to identify issues, develop options and attempt 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. At this case conference, 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 previous outcome, the next stage would be to lodge an objection. Section 14ZU sets out the requirements. The form must be completed in writing, specifying arguments against the ATO’s finding. It also needs to be within the prescribed period. 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 remain unsatisfied, 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, your objection will not be read 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 by showing what it should have been. If you are disputing a decision, you will need to show that it should not have been made, possibly in favour of an alternative.
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.