Hear the words ‘review’ and ‘ATO’ in the same sentence, and chances are you will start to get a bit nervous. Even though you have followed the rules, no business owner wants to be reviewed by the Australian Tax Office. It can be confronting and can also be very time consuming and costly.
Here at Dexterous, we are often asked why the ATO chooses to review certain pubs, clubs or hotels but not others? In some instances, it is random selection, but in other instances the ATO may have chosen you because of a red flag which resulted in the ATO wanting to know more about you and your business.
Listed below are 5 key red flags which may mean you are more likely to have the ATO review your pub, club or hotel:
1. Your staff complain about being underpaid
In an earlier blog post, we wrote about the importance of getting pay right for your staff and some tips for those in the hospitality industry. If you make an error with paying your staff, such as not paying them the correct penalty rates or you have unpaid superannuation, your staff may contact regulatory bodies. If they do so, these bodies such as Fair Work Australia and the ATO may contact you and start asking questions. Particularly if they find you have not met these obligations (even if it’s an honest mistake or oversight!), this could lead to a review. The reason for this is that if the ATO can see you haven’t met your obligations in one area of your business, they will likely think that there are other areas you also haven’t met your obligations in.
2. Your numbers don’t meet ATO benchmarks for the hospitality industry
What many business owners don’t know, is that the ATO publishes benchmarks for a number of industries, including hospitality. These benchmarks look at key ratios, such as average percentage cost of sales to standardise what the average hospitality business should look like numbers-wise. The benchmarks were last updated in 2016-7, and a summary directly from the ATO website is included below for the hospitality industry:
If your numbers don’t meet these benchmarks, particularly if they differ significantly, you are more likely to be flagged by the ATO for a review.
3. Your annual tax return does not match up to your activity statements.
Your activity statements are a quarterly (or monthly, if you have higher turnover) snapshot of your business’s performance. If you take the sum of these activity statements for the year they should reconcile to your annual tax return. If they don’t reconcile, the ATO will want to know why. Why don’t they agree? Is there something missing from your income tax return or have you made a mistake? One cross-check we do here at Dexterous as part of our annual tax compliance for businesses is to ensure that your annual tax return reconciles back to your activity statements for the year.
4. You have never reported a profit
Unless you have other sources of income or have received investment or personal funds, you can only continue operating your pub, club or hotel for a limited time if you consistently run at a loss. The ATO knows this. Therefore, if you have never reported a profit and have been operating your pub, club or hotel for a number of years then it is likely you will be flagged by the ATO.
5. You have a fancy lifestyle
For most pub, club or hotel owners, you shouldn’t worry about an ATO review because as the saying goes, ‘if you have done nothing wrong, then you have nothing to worry about’. Regardless, it can still be a stressful and costly process to go through. Many accounting firms offer audit insurance, which means that if you are chosen by the ATO for a review, your insurance may cover any fees you incur in assisting with the review, such as accounting or bookkeeping fees.
