Crowe Horwath Sydney Pty Ltd The Tax Institute MANAGING A TAX AUDIT Adrian Abbott Crowe Horwath Sydney Pty Ltd

MANAGING A TAX AUDIT OVERVIEW No right answer The ATO is trying to standardise Tax Office contacts. They are using internal manuals, PSLA’s and face-to-face training sessions and standardised responses. To standardise written and oral responses. For example: If you enquire as to why is the client subject to audit, the ATO’s written manual response is: “This is a new audit product undertaken by the small and medium enterprise business line in the ATO to review the taxpayers compliance. Your client has been selected on the basis that their entity has large deduction/low profits etc (state the relevant risks) we wish to check the accuracy of the claims being made”. This is one of many examples. No right answer Every one of us has our own methodology of dealing with the ATO. Today, I will express an opinion, not necessarily correct and not necessarily adopted by others, but I would appreciate having feedback from each of you.

MANAGING A TAX AUDIT The ATO is not an organisation, but individuals The Tax Office is truly multi-cultural. The first thing you need to understand is who are you talking to? What is their personality? Training - commercial understanding. Prejudices, ethnic and cultural backgrounds. Financial circumstances. Language ability particularly on technical issues. Their day-to-day employment and personal issues.

MANAGING A TAX AUDIT Finding rapport Example: GIC debt to ATO of $383k How do you find rapport? Example: GIC debt to ATO of $383k That needs to be contrasted to the issue of your client’s circumstances. Debt Recovery Officer trying to recover $400k of debt from a person with $4m of property, $4m of bank debt and earning $500k per annum and unable to meet the interest. Contrast that with an ATO Officer earning perhaps $60k to $80k working four days a week, a sole parent and flat out trying to pay the rent. Audit triggers Data matching - Benchmarking Comparing tax returns to BAS’s. FBT as to motor vehicle expenses. Financial performance against industry patterns, tax payments and variation compared to previous years. Bucking industry trends. Losses or tax rate differs from industry patterns. History of tax planning. Media publications. Marine and motor vehicle registries. By far the most important is Industry Codes Austrac.

MANAGING A TAX AUDIT THE ATO CONTACT When does the audit start The answer is the very first contact, or more importantly the client review you do at the end of each financial year. Develop an audit strategy Achievable outcomes, timeframes and procedures, communication. Minimise timeframe. Identify weaknesses and strengths. Voluntary disclosure. Identify points of contention. Establish the chances of success. Fight only winning issues. Concede primary tax liability, if the quantum is small and focus on penalties. Establish one person only to liaise with the ATO. Note the schedule for finalising the audit ATO for issues of interest remission. Advise associated persons or entities if they are caught within the audit.

MANAGING A TAX AUDIT How to respond to the ATO phone call Client must refer the ATO to the Tax Agent. The Tax Agent must establish the reason for the audit. Spend as much time as possible obtaining that information, that is the key. Audit from large GST refunds $500k - $100 million property portfolio, or other example being G3 on the BAS being $1.7 million of fully franked dividend. Answering ATO questions Question whether to answer questions by phone or have them in writing, with subsequent face-to-face delivery of information. ATO will take notes – query whether they are accurate. Information and client records The ATO will have done client record and information search, including benchmarking tax returns, may have looked up websites, face book, media reports, AUSTLEE, WORDLII, ASIC, IBIS ratios, Google Maps. The ATO might know more than you think at the initial interview. Understanding what the ATO already knows

MANAGING A TAX AUDIT THE INTERVIEW Who should not attend The client. The lawyer - unless critical. Who should attend The accountant. A note taker from the accountant’s office. A specialist in any tax law issues that are the subject of the audit. What preparation do you need Perfectly prepared. Understanding all issues surrounding the ATO audit questions. Have prepared answers and in writing for expected questions or issues that will be raised by the ATO. Any written material – there should be one copy for each of you attending and two copies for the Tax Office as the Tax Officer will always have another Tax Officer present.

MANAGING A TAX AUDIT Expected questions by the ATO ATO ratio and benchmarking You must have read the benchmarking data website and compare the client’s figures to the benchmarking. Where you cannot find relevant benchmarking, then you should do your own benchmarking by questioning the client on what he knows of the industry and its averages. Tax Agent’s aim for the interview To make sure that the ATO believes you are honest at putting forward all the issues. Are knowledgeable and accurate in your presentation. Make sure that any errors by your client, or issues to be resolved, are brought forward at the start. Questions of fact Obtaining every fact and understanding how that applies to the law is the secret. Questions of law You must understand how the position works. Example 2 x 40% shareholders and 1 x 20% shareholder and the application of the Small Business Concession $6 million asset position Section 328 – 125 and be able to prove who controls the company: minutes, correspondence, witness statements by others than your client.

MANAGING A TAX AUDIT Where should the interview be held Never at the client’s business premises. Never at the residence of the client. The preferred place is the Tax Office meeting room. Although small, they give the ATO Officers comfort, as they are in familiar surroundings and they do not pick up an impression about the Tax Agent from the premises. Contrast KPMG’s offices to a one man band at Cabramatta.

MANAGING A TAX AUDIT AUDIT HAS COMMENCED Question of voluntary disclosure Audit process and information flow From discussions with the Auditor and any written communications, you know the area of the audit, make sure that you are 100% on the factual position and 100% on what the requirements of the ATO are. For example, travel expenses – know the rulings, PSLA’s, substantiation and personally inspect the records to make sure that they comply. Work out what can be done to rectify the shortfall of interest i.e. obtain duplicate invoices, travel agent itineraries, taxpayer statement as to the business and the reason for the travel expense. Understand the facts and the type of fact sought FBT issue, example “In respect of employment” – motorcar for wife’s birthday.

MANAGING A TAX AUDIT Position Paper and the response It is critical to correct the factual position of the Position Paper, including providing the actual evidence itself. Sadly, the ATO uses slabs of rulings and or PSLA to substantiate conclusions. If you can prove factual errors, than the Position Paper will fall over.

MANAGING A TAX AUDIT INHERENT CONFLICT Ensure client’s rights are protected Legal professional privilege. The Accountants concession and ensure that no admissions are made as to wrong doing. What needs to be guarded against Wrong or incomplete information. Maintaining a cordial relationship. Not getting a feeling of honesty and openness. Not understanding the factual and legal position. Control and managing stakeholder’s and the ATO