How to Audit Proof Your New Business
Starting a brand new business is a whirlwind of tasks and responsibilities that can seem never-ending. You are constantly busy trying to become established in your industry, enticing loyal customers and streamlining your business practices.
The last thing you need is the ATO showing up to audit your business in its first few years of operation.
The ATO determines the need to undertake an audit on your business by first conducting an audit risk assessment and then reviewing your tax affairs. During that review, if they find areas of concern that they believe need to be closely examined, they will likely undertake an audit.
The higher the risk of non-compliance they perceive, the more likely they will move straight to a business audit, rather than seeking more information from you.
Because of this, the best ways to avoid an audit for your new business is to reduce the possibility of non-compliance and by being as open and honest with your tax statements as possible. We have compiled a list of things you can do from day one of your business operation to ensure you don’t run into any problems at tax time.
Tax Obligations for your Company Structure
The way that you have structured your business will have implications at tax time. Whether you’re a sole trader, a partnership, a company or a trust, there will be individual obligations and rules that you will need to follow.
If you have employees, or plan on hiring employees in the near future, you must be up-to-date with your payroll and tax obligations, including pay slips, PAYG tax withholding and superannuation payments. This is an area that the ATO monitors closely to check for any discrepancies.
For just one or two employees, it may not be too difficult to manually calculate their wages and pay slips as long as you have the requisite knowledge.
But once you start to employ more people, to ensure you maintain your own personal productivity as well as the accuracy of your documents, it is best to use wage management software that will help you fulfil all your obligations easily.
Perhaps the most important step to ensuring your business is audit-proof is to keep accurate and detailed records of your income and expenses.
Having up-to-date, simple records will help you to understand exactly how well your business is going and will also help you meet all of your tax responsibilities. Keeping an account of all of your transactions will help you to claim your entitled tax deductions.
Signing up to a comprehensive accounting system created to help small businesses is the best solution for your new business. You can easily track your company budget and stay on top of your tax needs. There are systems that will calculate your GST to make lodging your BAS Return simple, and will create invoices that can be easily sent to customers and update your accounts receivable. They will also create reports that are tailored to include all the information your accountant will need when lodging your tax return.
Check Your Small Business Benchmarks Regularly
Another way that accurate and up to date records will help your business avoid an audit risk assessment is to allow you to compare your business to industry performance benchmarks.
A very common technique that the ATO will employ is to check whether your business falls outside small business benchmarks when compared to the performance of other similar businesses in your industry. If you do fall outside these benchmarks, the ATO’s auditors might start training their sights your way.
If you undertake regular checks throughout the year, you may be able to detect if there are any issues that are appearing. This can give you an early warning of any issues within your business and will alert you that you should do something different before tax time.
Keep Track of Receipts
The ATO expects you to keep a record of your receipts for all sales and purchases you made for your business.
If the ATO request more information about certain expenditures or claims, it is vital that you have written evidence of those transactions. If you are unable to provide them then the ATO might decide to undertake an audit.
This can be quite a task for small business owners, however there are ways of making the whole process a lot easier. Firstly you can scan or upload a photo of the receipts and keep them safe on your computer. By keeping backups or uploading them to the cloud, you can be sure that you will always be able to find them. Then, you should make notes about the business purpose of the receipts to help you remember exactly what it was for. There are a variety of apps that will help you do this, such as Receipts and Squirrel Street.
Tax Audit Insurance
Whilst audits are time consuming and complicated, they can also be very expensive for your small business. Especially if you have initially failed to pay the correct amount of tax, you will be expected to pay what you owe, plus any administrative fees that the ATO imposes. However, often the biggest cost for small businesses is the accountant fees that you will accumulate.
Audits take a long time to complete, and you will need an experienced accountant to help you navigate through all the demands that the ATO have. To help you pay this fee, many accountants offer tax audit insurance. Each year, you pay a small lump fee to your accountant, and in return they will waive their professional fees incurred when representing you during an audit or investigation.
To see how we can help your new business, learn more about Cashflow Manager Cloud.