Tax audit insurance – being targeted in the gunsight’s of the Australian Taxation Office audit division, can be a costly and time consuming affair. So taking out a tax audit insurance policy for peace of mind, to protect you from the high, unexpected costs of an ATO audit might be worth considering.
Australian Taxation Office (ATO) audit activity is expected to increase exponentially over coming years after the 2019/20 Federal Budget announcement that the government will provide $1 billion of funding over four years for the Tax Avoidance Taskforce.
The aim of that funding is to dramatically expand the reach and the range of the Taskforce’s programs, many of which target high net-worth individuals and Australian expats!
ATO audit risks increasing
For Australian expats living and working all around the world, the chances of being the target of an ATO audit are perhaps greater than ever before.
Why? Well, for quite a few reasons actually. We believe that ATO audit risks are increasing because:
- The federal government has provided the ATO with $1 billion in additional funding too combat tax avoidance.
- Over recent years, ATO has invested heavily in technology designed to increase their data-matching capabilities
- Australia continues to expand the reach of it’s tax information sharing agreements, and in more recent times has adopted the Common Reporting Standard (CRS), a global standard introduced by the OECD for the automatic exchange of information bank account and financial information between approximately 160 different countries. Australia’s adoption of the CRS has provided the ATO with an absolute mountain of data about Australian taxpayers that they never had access to before. This means that the days of bank secrecy are effectively over. Thus our view is that Australian expats should operate from the premise that the ATO already knows how much they have earned, and how much they hold in offshore bank accounts!
- Australia has ridiculously complex residency rules and a complex tax system generally, much of which is subjective in nature and open to interpretation. This creates uncertainty and can result in taxpayers and the Australian Taxation Office to arrive at vastly different conclusions about how a particular item of income or expense should be treated. This translates into increased audit risk along with the risk of audit adjustments.
- And finally but not least we have an extremely revenue hungry government that seeks to increase it’s take from nationwide tax revenue.
From speaking with vast numbers of our clients located in every timezone of the world over the years, we know firsthand and that this causes many Australian expats good reason to worry.
For our clients though, the worry is less about having done anything wrong, but more a worry about the time, the effort, the frustration and the high compliance costs of having to deal with the ATO and go through the audit process.
So, to help put your mind at ease and take some of the worry away, we’ve negotiated with a tax audit insurance provider so that (if you choose to) you can take up Audit Shield tax audit insurance to give you piece of mind about your affairs and to minimise any potential, un-budgeted costs.
What is Tax Audit Insurance?
Tax audit insurance is a type of insurance that protects against unexpected costs that you can experience if you are unfortunate enough to be selected for a tax audit.
As the Australian Tax Office continues to increases the number of audits that they perform each year, tax audit insurance policies have become more and more popular over the years.
Although you can take out a tax audit insurance policy yourself to cover you personally, at Expat Tax Services, we’ve negotiated with an insurance provider to offer tax audit insurance protection for our clients under a group policy cover. It covers the cost of any accountancy fees or professional fees that can result from or are associated with your business or personal tax returns being audited.
By nature, audits are generally unexpected, compulsory for you to be involved in and can be very expensive. Many individuals or small businesses find that the fees associated with an audit can be overwhelming. Tax audit insurance protects you against the cost of these fees.
Given that an audit can be carried out by the Australian Tax Office at any point in time, having appropriate cover enables our clients to sleep easily, knowing that the unexpected costs of an ATO audit are covered.
What is a tax audit?
A tax audit is when the Australian Tax Office or a Government department asks you questions about information reported in, or excluded from your tax return. Typically throughout the audit process you will also be required to provide invoices, receipts and various other documentation that you have to support the figures in your tax returns.
If you have been selected for an audit (whether deliberately by the ATO or randomly), you will be notified via letter (or perhaps via email if the ATO has your email address on file). The letter will usually ask you a number of questions and will typically request your records.
Although the ATO does target perceived high-risk industries, professions and clients, in fact, many taxpayers who are unfortunate enough to be undergoing an ATO audit have simply been selected at random. Accordingly, just because you receive a letter, it doesn’t mean that the Australian Tax Office thinks you are dishonest or have purposefully gone about things the wrong way. Instead you may just have been unlucky or because something in the system has flagged that your file could be of interest.
Either way, the ATO just wants to confirm that you have given them accurate information and that you have complied with your Australian tax obligations.
Who is most likely to be selected for an audit?
A common theory is that self-employed people are more likely to be audited than those who are employed by an employer. The Australian Taxation Office has said, though, that this is not true. We have the formal word that being self-employed is not a factor that influences scrutiny.
For Australian expats and individuals generally, the ATO employs data-matching and benchmarking to determine who should be selected for audit. Where the ATO have specific data about a taxpayer, but that data is not reflected in the tax-payer’s return, a red flag gets raised and there’s a high chance that the taxpayer will be audited. The ATO also uses benchmarking to analyse a taxpayer’s return against all other taxpayers in that same occupation or industry, raising red flags for taxpayers whose claims vary markedly from the standard for similar taxpayers. Where that occurs, theres a higher chance of audit for that taxpayer.
Finally, Australian expats and other high net-worth individuals are also targeted for audit deliberately by the ATO. For selected industries and groups of taxpayers where the ATO perceives that the risk of mis-stated returns, tax evasion or tax-avoidance is high, taxpayers within that segment will be specifically targeted.
For Australian expats, we most often see ATO audits around the issue of that taxpayer’s Australian tax residency status. This is prevalent due to the sheer complexity of Australia’s residency rules combined with the ATO’s extremely rigorous data-matching capabilities.
For small businesses, though, this is a different case. The Tax Office has said that there are a set of small business benchmarks that are used to match data and other risk indicators. These are used to identify small businesses that could potentially be avoiding or struggling to meet their taxation and superannuation obligations.
Interestingly, more recently, tax agents and accountants are more likely to be audited as there has been evidence of outstanding tax debts and possible avoidance. Who would have thought that?
What do I need to do if I do get audited?
Firstly, we highly recommend that you speak with and engage your account, whether that be our firm or another, to assist you with the audit. Dealing with a government department can be daunting at best, but as Australia’s tax system, particularly as it relates to Australian expats is so complex, dealing with the ATO can be incredibly difficult. The ATO wields enormous power and has a mammoth amount of resources at it’s disposal to use against you if it desires. Hence the reason why we highly recommend that you engage professional assistance from your accountant or advisors.
Once you’ve engaged an accountant, the next step is relatively simple. You and your advisor will need to compile answers to questions raised by the ATO and you’ll be required to hand over all of your receipts and documentation to the ATO to be reviewed.
You and your accountant and/or lawyer may also need to meet with your nominated tax officer (in person or via phone) to ensure they have the information they need and all questions are answered. But it is mainly the job of the ATO’s tax officer to go through all your records with a fine-toothed comb to make sure everything is correct and in order.
Why do I need tax audit insurance?
We all know we make mistakes. It’s just what we do sometimes. But unfortunately, simple mistakes can sometimes be very costly.
Most of the errors found in tax audits are common, honest mistakes. They might be typos such as misspelled names, addresses, wrong bank details, birth dates or getting your spouse’s (or children’s) details wrong. But in the case of the Australian Tax Office or a related government body being involved and finding a mistake, they can be quite expensive.
Sometimes it’s not even about the mistakes. It could be that you were just randomly selected. But even so, even where the ATO makes no adjustments to your tax return, dealing with the whole audit process can be very costly indeed. Costly, in both time and dollars, especially where you do not have tax audit insurance coverage.
What are the stats relating to business audits? How likely are you to be the recipient of an audit in any given year? Well, in 2015, the Australian Tax Office estimated that around 350,000 individual taxpayers were issued with an enquiry about an error, omission or inconsistency in the tax return forms they lodged.
What happens in a tax audit?
Firstly, a tax official will request access to all of your records. They will then diligently go through each and every form or piece of documentation associated with the audit’s scope and your initial lodgement.
Also, the Australian Tax Office has no qualms in using its contacts to confirm data. Or looking through your social media to check details and data or to confirm that your story lines up across all fronts.
The ATO often uses third parties such as your bank, employer or insurance provider to double check the numbers that you’ve used in your documentation or return. They are just double checking that you have been honest, or that if there is an issue, it was a pure mistake, not purposefully deceitful.
These cross-checks, though, are actually very profitable to the Tax Office. They brought in about $100 million dollars in 2014 and $1.8m from Melbourne alone in 2018! This being the case, and with an additional $1 billion in funding, it’s unlikely these cross-checks will stop any time soon.
From your point of view, though, the cost of an audit can start to add up when you’re paying the tax official an hourly rate to carefully go through and verify your records. Those cross-checks we mentioned earlier don’t come for free either (no mate’s rates around here), and yes, you will receive the bill for them at the end.
What audits are covered under tax audit insurance?
There are quite a few different policies offered in the market, and each policy may have slight variances in what is covered or not covered. Generally, areas that should be covered under tax audit protection insurance are:
- Income tax assessments
- Fringe benefit tax assessments
- GST or BAS compliance checks
- Superannuation guarantee and compliance checks
- Self-managed superannuation fund audits
- Termination payment tax assessments
- Sales tax assessments
- Payroll tax assessments
- Land tax assessments
- Worker’s compensation or work cover compliance checks
- Record keeping compliance
As always, when considering whether to take up an insurance policy, check your product disclosure statement or chat to your insurer to understand what is covered or not covered under the policy.
What are the benefits of tax audit insurance?
Apart from passing on the cost of an audit to someone else, which is a huge benefit, the annual premiums you pay for insurance are be tax deductible so that’s positive too. Maintaining appropriate tax audit insurance cover also provides peace of mind in knowing that you’re not overly exposed either.
What’s covered under tax audit insurance?
Tax audit insurance can include providing cover for an individual audit, business audits, director audits and self-managed super funds. As a general rule, tax audit insurance covers accountancy fees and professional fees associated with your business or personal tax returns being audited. This includes paying an officer his hourly rate to trawl through all your paperwork and documentation to confirm it is correct.
There are some variances, though, so make sure you check your individual policy.
What’s not covered under tax audit insurance?
Once again, check your individual policy, but most commonly, fees not directly related to the audit response are not covered under your policy (understandably). Also, if there are any prescribed limits for fees in your policy, anything above these will not be covered and will still be your responsibility.
And sadly, any additional tax payable as a result of the audit are not covered either.
What does this mean for expats? Should expats have tax audit insurance?
There is no evidence to say that you are more or less likely to be audited as an expat. However, if you are selected, it can be a much harder process.
The way income earned overseas is taxed is very complex, especially if your employer is a small or medium business and doesn’t have much experience in structuring salary packages for staff working overseas.
There can be complexities around your residency status, understanding impacts from the overseas tax regime you may be under, and differences in retirement saving schemes. Also, if you have a self-managed super fund, you must make sure that it is still meeting the compliance requirements that it needs to and is reporting on time.
Take the time to understand your responsibilities, your new tax regime and any tax considerations you might have in Australia.
It is always a good idea to get some expert advice if you are unsure. Even if it is just to make sure there have been no changes to legislation or practices that may impact on you and your particular situation.
Considering the complexities around expat taxation, having tax audit insurance is the best way to ensure you aren’t going to be hit with any unexpected costs. You will have peace of mind that if in the worst case, you are selected for an audit and there is an issue, it won’t cost you the earth to rectify the issue and pass the audit.
Remember, audits can be expensive for individuals or businesses in Australia. Adding an additional layer of complexity adds further potential for higher costs. Protect yourself!
We use, and recommend Audit Shield Tax Audit Insurance; please consider if these products are right for you and your situation
If you are interested in Audit Shield Tax Audit Insurance, please contact us to arrange coverage or to learn more.
- Accountancy Insurance: https://www.accountancyinsurance.com.au/products-services/audit-shield/
- In the Black: https://www.intheblack.com/articles/2015/03/02/if-youre-an-aussie-working-overseas-take-care-not-to-fall-into-these-tax-traps/
- ABVBAC: http://www.advbac.com.au/preperation-audit-australian-tax-office//
- Proactivefs: https://proactivefs.com.au/how-does-the-ato-determine-who-they-audit//
- Smart Company: https://www.smartcompany.com.au/finance/tax/ato-small-business-1-8-million-from-random-melbourne-audits//
Latest posts by Shane Macfarlane (see all)
- Tax considerations for Australian expatriates whilst overseas - 13/09/2019
- Being an expat overseas can enrich your family’s life - 03/09/2019
- Taxes for Australians living in Bali - 27/08/2019