Being that it’s early in a new financial year, the ‘hot’ topic seems to always be around the ATO’s new audit ‘hotspots’, what to claim, or what not to claim. You might have seen on the news or The Project over the last few days one of those topics getting a bit of a run, being what not to claim, or more rightly, the crazy things people have claimed.
I’m not going to go into detail about what you should or shouldn’t claim, because that really depends on each individual’s circumstances, but I will quickly discuss what you should and shouldn’t do if you do get that notice that your return is being reviewed. There are a few forms of review that the ATO can take regarding your return, generally in the following 3 ways (just to clarify, these are not the technical descriptions the ATO use):
1. Hey, you’re outside the norm, check your return and make any changes;
2. Something specific piqued our interest in your return, please substantiate it;
3. We’re doing an audit, please support everything in your return.
Firstly and most importantly, don’t ignore these letters! Once you get one, the ball is rolling with the ATO and it won’t just go away if you do nothing.
That said, if you get one of the general letters, they’re usually to inform you that your claims are higher than the average person in your occupation. These letters don’t necessarily mean any action will be taken by the ATO in looking further into your return, they’re just an acknowledgement that something has made you pop onto their radar. It will usually also ask you to review your claims and lodge an amendment should you find you’ve made an error. This is the time to consider your return and the claims you have made, and whether you have all the receipts, etc. to substantiate those claims. The ATO usually notes on these letters that amending your return now won’t come with any penalties (which will be discussed further below) but may incur some shortfall interest charge on the net change to your return. (This is a letter that you can ignore, but only if you’re happy you can substantiate everything in your return.) So ensure you have all your ducks in a row should you receive one of these letters, because the next contact, should it happen, may be a full audit of your return.
The next level of seriousness in the ATO’s arsenal is where there’s a specific item in your return that the ATO wish to look at. This is usually where you have something really outside the norm of your occupation, or you’ve got a one-off income or expense item they want to look at. I.e. a capital gain on the sale of an investment, or some deductions that don’t seem to correspond to any income items you have. If you do get one of these letters, you’ll likely have to show all the information used to substantiate the details of that item in your return, but they’re not interested at anything else in your return at this stage. Once again, documentation is key.
The pinnacle of the ATO’s seriousness arsenal is a straight-out notice of audit (or if you didn’t respond to either of the previous two methods of correspondence). These usually demand a response within a specified time period to start the audit process with the ATO officer assigned. An audit of your return will usually entail having to provide all documentation to substantiate all the information within your return. These can happen for any number of reasons like; it was totally random, or, you had something unusual and you’re in a high-risk occupation, or, you claimed your $58,000 wedding.
Under each of these scenarios (especially the first), you’re generally given a time period where you can voluntarily disclose any information that may be incorrect in your return where you may be spared any penalties. If you don’t though, and the ATO subsequently find that you’ve omitted something or claimed something dodgy, like the aforementioned wedding, then the ATO can issue you with a penalty which is on top of the shortfall in tax that comes about from the audit (See PS LA 2012/5 if you want to read the nuts and bolts). The penalty amount is always as a percentage of the shortfall amount, depending on the level of severity, varying from 25% to 75%. The ATO can then consider whether to remit the penalty in certain circumstances.
I imagine that the person who tried to claim their wedding would likely have received the maximum penalty amount possible…
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