Tradies like to be rebels who push the boundaries when it comes to tax. The ATO is aware of this so this tax time, exercise some caution or risk a tax audit.
The Australian tax system is based on self-assessment. That means the ATO will typically agree with what you tell them in your tax return until they have reason to believe it is false. At that point, they will audit you. The Government has just spent billions on COVID-19 stimulus. When things slow down towards the end of the year, without a doubt they will be matching data and looking for inconsistencies to find audit targets to help recoup some of this money.
Here are four common ways Tradies may find themselves the target of a tax audit.
1. Cash
One thing Tradies are notoriously known for is doing a job for cash. Cash is legal tender so it is fine to be paid in cash for the work done, but it is illegal not to declare it. Offering discounts for cash to customers you don’t know can be a very dangerous thing and if that customer happens to be an ATO officer you have just put yourself in the perfect position to get an audit. Customers are also becoming savvy to the fact that cash jobs may not come with any warranty and they have avenues to report you to the ATO. It is time to join other taxpayers and pay tax on the income you earn, not just the amounts deposited into your bank account.
2. Overclaiming purchases
The ATO has data about the expected profit margin for different types of business and when these margins are outside of what is expected, they will consider audit. If you are claiming the purchases on your cash jobs (double dipping) or you are renovating your house with the help of your business, your margins are going to move outside of what is expected. You cannot claim private expenses, so just because you purchased something at Bunnings, it is not necessarily tax-deductible. You will need to demonstrate how that item was used in your business or what job it was used on. Awareness of expected margins can help prevent an audit so do some research on the ATO website for your business category.
3. Subcontracting
Each year businesses in certain industries (including Building and Construction) need to lodge a Taxable Payments Annual Report informing the ATO what has been paid to other subcontractors in your industry. Inconsistencies with this information from both the contracting business and the subcontractor are the perfect source for audit activity. Make sure you have correct details for your subcontractors and check their ABN to see if they are who they say they are and if they are registered for GST. Make sure your records reflect their GST status.
4. Not paying superannuation
There is still a misconception from some employers that compulsory superannuation is optional. Making workers subcontract to you as a sole trader does not eliminate the need to pay compulsory superannuation for them. If you have not paid your staff or sole trader subcontractors their superannuation, expect an audit. Similarly, if you consistently don’t lodge your Business Activity Statements and have withheld tax from staff, you are going to be a target. The ATO take your responsibility to pay wage-related deductions very seriously.
The best way to avoid an audit is to be honest and make sure your data is accurate, consistent and paid and reported on time. This is not the time you want to stand out from the crowd.
Joanne McCauley, Founder, Tradie WAGS
