Mr. D runs a small café. Although he can make the best coffee and prepare the most delicious meals, he is not good with his paper work. He did not think accountant is that important and would just wrote on a piece of paper his sales, his purchases and expenses based on whatever invoices he could find and asked his accountant to do the tax reporting accordingly.
After years of hard work, Mr. D successfully bought his new beautiful dream home and leased out his old home to earn some rental income. But not long he got a surprised call from his accountant that the ATO has contacted him asking him to provide detailed information regarding the tax return lodged because the ATO does not believe with the level of income he reported he could actually afford to buy a house with this price tag. Apart from the piece of paper given to him, the accountant could not produce any more information, so he asked Mr. D to quickly provide the extra information including bank statements, purchase invoices, merchant statements, staff roster and wage record, super payment record. Most of all he is asked to provide a list of his living expenses! Soon the ATO review escalated to be an audit.
Not being able to find all the documents, he started to realise the seriousness of the audit and called us on recommendation of his friend.
We went through all the paper work he can provide and started to try to reconstruct all the missing information. We advised him to contact banks asking for all the missing bank statements and loan statements, we contacted his suppliers asking for all his purchase records, compared various bank transactions to work out the actual cash flow, compared to his living expenses and use the asset betterment method to work out the possible missing income. We contacted the ATO on his behalf and after many rounds of communication, eventually worked out a reasonable amount of tax payable to the ATO, lowered his penalty and remitted part of the interest payment.
Mr. D learnt his lesson in a hard way. But ever since he understood the importance of keep good record and proper tax reporting. Nowadays he does not only have a good set of financial statements and tax returns, but also has grown his business and built a healthy asset portfolio.
At ML Tax Solution, we believe good record keeping, proper tax advice and responsible tax reporting are the best defence for any ATO review or audit.