Technology is a powerful tool in organising records and assisting with your tax compliance. It has also allowed the Australian Tax Office (ATO) to more effectively target its audit activity and improve efficiency in data matching projects. As a result, we have noticed increased activity by the ATO in flagging income tax returns for further investigation.
ATO audit activity can range from a straightforward questionnaire to clarifying work-related deduction amounts and providing justification for claiming in a particular year, through to full scale audits of a number of years where they believe incorrect or misleading information has been provided.
Key factors used to flag income tax returns for further investigation include;
ANZSIC Occupation Code and Description
The ATO will benchmark taxpayers with the same occupation code. If deduction claims are quite high relative to other returns with the same occupation code, the ATO may seek further clarifications. It is important to try and use the correct occupation code, i.e. a ‘Surgeon’ may be expected to have higher deductions than a ‘Resident Medical Officer’.
The ATO will also benchmark income and may investigate further if they suspect there is underreporting (refer below regarding business activity).
Medical practitioners typically have higher work-related deductions compared to the average professional. Doctors undergoing college training can typically have $5,000 to $20,000 per annum in work-related deduction claims including;
- Professional subscriptions and registration fees
- Medical indemnity insurance
- College training fees
- Exam fees
- Professional development courses
- Conference registration and travel costs
- Reference books
- Medical equipment
If total deduction amounts are a high proportion of assessable income, there is increased likelihood of the income tax return being flagged for investigation. Claiming costs for pursuing further qualifications such as a Masters in Public Health or Diploma of Anatomy may create a “spike” in deduction claims in certain years and thus may increase the risk of audit activity.
Carrying on a Business Activity
Employers report gross income and tax withheld for their employees directly to the ATO, so this can be easily data-matched with their tax return information. An individual operating as a sole-trader under an ABN is more likely to be flagged for an audit. This is because there is a higher risk of underreporting of private source income earned during the year, as well as potentially claiming non-business related expenses. The ATO can also match information provided from other sources such as quarterly Business Activity Statements to pick up discrepancies with the income tax return.
Steps to take in order to minimise disruption and cost due to ATO audit activity;
- Declare all assessable income earned
- Check all deduction claims are allowable and included in the correct spot in your return with your tax adviser
- Ensure information is reconciled and matches other lodgements (e.g. Business Activity Statements)
- Be able to clearly justify how an expense relates to your income-earning activity
- Retain relevant records of all income and deductions for a minimum of 5 years
- Have an effective filing system to be able to retrieve records if required
- Be prepared to seek a private ruling from the ATO if you have a material amount of income/expenses and are unclear on the correct treatment
- Take out Audit Protection to cover additional costs for your tax adviser to deal with additional/unanticipated work resulting from audit activity
If you have any questions regarding the ATO auditing high deductions, get in touch on 1800 376 376 or request a free initial consultation.
* The information contained in this site is general and is not intended to serve as advice. DPM Financial Services Group recommends you obtain advice concerning specific matters before making a decision.