The costs of an unforeseen tax audit could be damaging if your business is unprepared.
To combat tax evasion and ensure compliance with tax laws, the Australian Taxation Office (ATO) is increasing the number of random audits it conducts on businesses each year. Because the costs involved in preparing for and undergoing an audit can be significant, tax audit insurance is something every business should consider for its insurance portfolio.
What types of risks could a business face regarding taxation?
Typical risks a business could face include:
- Inconsistent records – if the information in your income tax returns, business activity statements, payroll tax or employee records doesn’t reconcile, this may red flag an audit by the ATO.
- Non-compliant contractor payments – failing to deal correctly with sub-contractors’ entitlements such as superannuation payments can also attract attention from the tax office.
- Outstanding tax lodgements – failing to lodge on time or being late with payments signals to the ATO that your business systems are not the best and may require closer examination.
The penalties for infringements of the tax laws can range from warnings and financial penalties (often with interest if committed over time) right up to criminal prosecution and possible jail time if found to be deliberately avoiding tax.
What is tax audit or accountancy insurance?
Tax audit insurance is a type of business insurance that covers you if your business is ever randomly audited by the Australian Taxation Office. It covers the costs of preparing for the audit, including the professional fees of those involved such as accountants, lawyers, bookkeepers and other advisers. It also covers any other expenses incurred during the audit process itself, such as locating and presenting further evidence as requested by the ATO.
The cost of tax audit insurance in Australia differs by state due to varying stamp duty rates, but a typical premium for $10,000 worth of cover would start from around $200 a year.
Examples of tax claims
The costs involved in an audit can be significant, as demonstrated by these two typical tax audit insurance claim examples:
- BAS review claim – the ATO requested details substantiating two years worth of BAS returns. The cost of investigating and preparing this information was more than $3,000.
- ATO audit claim – the ATO requested a full review of a business’s income over a three-year period. The cost of the review was nearly $16,000.
What's covered and what isn't covered?
Tax audit insurance will typically cover all the costs involved with preparing for an audit and satisfying ATO requirements during the audit, including the professional fees of those involved.
Tax audit insurance does not cover any fines a business may receive as a result of an audit. It is purely to cover the expense of defending the investigation and has nothing at all to do with the outcome of that investigation.