The Taxation Office introduced the system of self-assessment on the 1st July 1986. At a later date, it discontinued the requirement that businesses and individuals supply Financial Statements and schedules with their Tax Returns. The result is that the Tax Office now receives only total income figures and total expense figures classified under appropriate headings. The Tax Office now no longer examines the Returns before issuing assessments. It no longer has an assessing staff. All figures are taken on trust. However, the compensating factor here is that the former assessing staff are now deployed as auditors.
The Tax Office now relies on picking a certain number of taxpayers each year and putting a fine-tooth comb over them. Some taxpayers are picked at random. Others are picked because the Tax Office's information system shows that they have omitted income. You must remember that the Tax Office is now automatically informed of the following sources of income: 1) wages and salaries, 2) subcontract payments, 3) Social Security payments, 4) interest received from financial institutions, 5) dividends from companies, 6) superannuation pay-outs. Some employee taxpayers are picked for audit because they have claimed large deductions. When it comes to business taxpayers, the Tax Office computer carries out certain tests on the information supplied with the Return. The computer will nominate for audit those businesses that have diverged significantly from past performance figures and those that diverge significantly from the industry-average figures. In addition, the Tax Office targets each year certain employee groups and certain industries for increased audit activity. At the present time, the Tax Office is auditing businesses to ascertain the efficiency of their record-keeping.
The wise taxpayer, be he employee or businessman, will always be prepared for a Tax Office audit. He may even go so far as to do a mock audit ever so often. The taxpayer who has the assurance that, if a tax- audit team were to visit his premises tomorrow morning, they would find nothing wrong will sleep easy at night.
Normally, the first intimation of an audit will be a letter from your local Tax Office asking you to call at their office and bring with you certain documents to support claims for expenses claimed in your Return. You will be sent some blank substantiation schedules and you will be asked to list your supporting documents on these. Alternatively, you may be asked to call at their Office and explain why certain income was omitted. Or you could be asked to substantiate your claim to certain Rebates you have claimed. Often, when the Tax Office decides to do an audit, they will attempt to get their money's worth by doing an audit for the past three years. You must also remember that the Tax Office is entitled to obtain information from third parties about your affairs. Frequently, before the interview, they will have written to any banks you may have had dealings with, estate agents, Department of Social Security etc. Do not assume that the Tax Office is restricted to the information shown on your Return.
When you call at the Tax Office, you will be shown to an interview room. The auditor will examine your vouchers and listen to any explanations that you can offer. Later, you will receive an amended assessment if the auditor has decided that you have underpaid your tax. What are your rights in this situation? 1. You are entitled to bring someone with you to the interview as an advisor such as a tax agent, accountant, lawyer or even a friend. However, you yourself must answer the questions, not the person you brought with you. 2. You are entitled to record the interview or take notes. 3. You are entitled to obtain a copy of the record of interview from the Tax Office auditor at a later stage.
Remember that, in support of your claim for expenses, the auditor may accept substantiation other than receipts. If you have lost the receipts, you may be able to prove the claim by calling a witness e.g. a friend who saw you make the purchase. You may be able to substantiate the claim by producing the actual goods. For example, if the claim is for tools, you could produce the actual tools at the interview. Remember also that if you have lost receipts, you may be able to get a copy from the shop you originally received the receipt from. Even if they cannot supply you with a copy receipt, a letter from the shop assistant may be just as good.
Do keep receipts for all expenses claimed.
Do keep the receipts for 3 1/2 years.
Don't ignore the letter from the Tax Office.
Do take someone to the Tax Office interview with you, for moral support if nothing else.
Don't antagonise the auditor.
Do check the amended assessment when you receive it.
A Business Audit can be a much more elaborate affair. Often the stakes are much higher. The Taxation Office monitors businesses in a number of ways. Chief among these is comparing assets owned and/or lifestyle enjoyed with declared income. For example, a business owner declares a net income of $20,000 each year. Yet he buys a house costing $150,000 without the aid of a mortgage and takes overseas holidays each year. Clearly, there is something amiss here and an audit is called for. Basically, the auditor will try to compile a list of the businessman's assets. He will obtain this information from the Tax Return and also by examining public records such as Lands Titles Office, Motor Registry etc. The auditor will write to financial institutions like banks, Building Societies etc. The Tax Office will receive reports from the Cash Transactions Agency of amounts transferred in excess of $10,000. The Tax Office computer will compare the information for the business as shown in the Tax Return with industry-average figures. From all the above information, a picture will often emerge of large-scale tax evasion. The problem then for the Tax Office is how to nail the taxpayer.
When the Tax Office has built up a sufficient dossier, they will summon the taxpayer for an interview. This will usually be in writing. They will also usually inform the Tax Agent. Often, the initial interview takes place at the taxpayer's business premises. Frequently, the audit period extends back for a period of five years. You should also be aware that if a business audit is being carried out, the auditors will not usually restrict themselves to questions on your business activities. They will usually want a list of your private assets. They may want information on your spending habits. They may want to inspect your residence.
The audit will eventually conclude with an "exit interview". At this interview, the
auditor will lay his cards on the table. He will tell you what adjustments he proposes to make. He will also tell you what penalties he proposes to impose. You can then contest the adjustments. You can put forward circumstances in mitigation of the penalties.
Most of the powers of the Taxation Office are derived from only two sections of the Income-tax Act viz sections 263 and 264. Section 263 (1) provides that any officer authorised by the Commissioner "shall at all times have full and free access to all buildings, places, books, documents and other papers for any of the purposes of this Act, and for that purpose, may make extracts from or copies of any such books, documents or papers." Section 263 (3) provides "The occupier of a building or place entered or proposed to be entered. shall provide. the officer with all reasonable facilities and assistance for the effective exercise of powers under this section. Penalty for a contravention of this section is $1,000".
Another part of this section also provides that a Taxation Office official must produce his identity card signed by the Commissioner before he can insist on gaining entry to premises. It should be noted that the Tax Office can enter all buildings, not just the taxpayer's building. They can copy documents but cannot take away documents. Tax officials now often bring portable photocopiers with them. However, despite the wording of the Act, it has been decided that the Act does not give tax officials the right to inspect or copy documents received from lawyers which provide legal advice. In addition, the Taxation Office has said that it will not seek to inspect documents from Tax Agents and accountants to their clients which provide taxation advice. Neither will the Taxation Office seek to examine an auditor's working papers. A Taxation Office official is entitled to use force if necessary in order to obtain access to buildings or records. For instance, he could break down a locked door or break open a safe deposit box at a bank. Force must not be used if some other method would be effective and disproportionate force must never be used. A taxpayer must provide tax auditors with office space in his business premises if they so desire it. He must also allow them to use the facilities such as light, phone, photocopier, computer etc. Auditors often bring portable facilities with them. A taxpayer must also provide reasonable assistance to a tax auditor in such areas as providing information where documents are located etc. And, of course, under section 264, he must provide any information requested.
Section 264 provides that the Taxation Commissioner may require any person a) to supply him with any information requested or b) attend and give evidence before him or c) produce any books or documents in his control. It should be noted about this section that "any person" means what it says. It includes third parties such as banks, other businesses and even Federal and State Government departments employees. Consequently, the Tax Office can require financial institutions, other businesses and Government departments such as Telecom, Social Security etc to provide information about a taxpayer. The Tax Office regularly uses this power to obtain copy bank statements from banks. However, it has been decided by the Courts that a third party cannot be obliged to produce all of his records. He can only be compelled to produce documents relating to a named person. For example, John Smith is being audited by the Tax Office. Michael O' Brien cannot be compelled to produce all of his records to aid in the audit of John Smith. He can only be compelled to produce records which are of relevance to John Smith's affairs.
The taxpayer can refuse entry if authorisation signed by the Commissioner is not produced. The taxpayer is entitled to have an advisor present at any interview. The advisor can be a lawyer, tax-agent, accountant or just a friend. The taxpayer is entitled to record any interview and take notes. He is entitled to obtain a copy of the record of interview from the Tax Office. He is entitled to be given a reasonable time to collect any documents or obtain any information that is requested. The taxpayer is entitled to have any search delayed for a short while so that he can obtain legal advice.
He is entitled to claim legal professional privilege for documents received from lawyers or copies of letters written to lawyers. Where legal professional privilege is claimed for documents and the claim is disputed by the Tax Office, the best solution if for the documents to be identified and sealed in a container. The claim to privilege can be decided by the Court at a later date. If necessary, the taxpayer can apply to a judge in chambers for an injunction to prevent the Tax Office officials inspecting any documents for which legal professional privilege is claimed.
The taxpayer has the right to object to any assessment raised as a result of the audit. He is entitled to claim the cost of the audit as a tax deduction.
When initially advised of an impending tax audit, do make a thorough evaluation of your situation and then play your cards to your best advantage.
Do examine the authorisation of the auditor before allowing him access to your premises.
Do be co-operative with the auditor without conceding more than you have to.
Supply the auditors with an office of their own which is separate from your business, if this is possible.
Insist that the auditors direct all questions to one nominated person. This could be yourself or your accountant.
If any request for information proves difficult to answer, request that it be put in writing. Reply in writing after carefully considering the matter.
Do have an advisor present at all meetings with the Taxation Office officials.
Record all interviews and discussions.
Obtain a copy of the Tax Office's record of interview.
Do not antagonise the auditor.
Do not allow the auditors free access to your employees. Insist that all dealings are through a nominated person.
Do not allow the auditor to inspect any correspondence between you and your legal advisors or tax advisors.
Do not allow the auditor to take away any documents or records. Do not supply the auditor with any copies of records or documents. However, you must allow them to make their own copies if they so wish.
Do not concede any adjustments until the audit has been completed. At the audit conclusion, consider any proposed adjustments carefully with your advisor before conceding them.
The penalty rates applying to both Employee taxpayers and Business taxpayers are as follows.