A BAS or GST audit from the ATO can be complex and stressful. Here is what to expect, what the ATO looks for, and how to manage the process effectively.
For small and medium-sized businesses, an ATO audit of your Business Activity Statement (BAS) or GST compliance is among the most common types of audit activity. The ATO uses sophisticated data-matching and risk analysis to identify businesses whose GST reporting appears inconsistent with their income tax returns, industry benchmarks, or third-party data.
Receiving an ATO letter indicating that your BAS is under review can be alarming, but it is manageable if you understand the process and take the right steps. This article explains what a BAS audit involves and how to respond effectively.
BAS and GST audits are typically triggered by one or more of the following: discrepancies between the GST-inclusive turnover reported on your BAS and the revenue declared in your income tax return; unusually high or unusual input tax credit claims relative to your industry and revenue; inconsistencies between your BAS reporting and third-party data held by the ATO; or missing BAS lodgements.
The ATO’s data-matching capabilities mean that inconsistencies between your BAS and your income tax return are identified automatically. A business that reports $1 million in GST-inclusive sales on its BAS but only $800,000 in revenue on its tax return will attract attention.
High input tax credit claims are also a common trigger, particularly claims for GST credits on assets that may be used partly for private purposes, or claims for credits on transactions that do not actually attract GST.
A BAS audit typically begins with the ATO issuing a letter advising that it is reviewing your GST compliance for a specific period. The letter will generally request records including tax invoices for your GST supplies and input tax credit claims, bank statements reconciled to your BAS, and cash receipt books or point-of-sale records.
The ATO’s auditors will then reconcile your records against your BAS lodgements to identify any discrepancies. Where discrepancies are identified, the ATO will discuss its findings with you and give you an opportunity to provide additional information or explanations before any amended assessment is issued.
In a BAS audit, the ATO is typically looking for: unreported GST-inclusive sales, including cash sales that may not be fully captured in your records; input tax credit claims for expenses that are not valid tax invoices or do not meet the tax invoice requirements; claims for GST credits on mixed-use items at 100% when they should be apportioned; and incorrect treatment of GST-free supplies.
Record-keeping is central to every BAS audit. The ATO requires valid tax invoices for all input tax credit claims over $82.50. Missing or defective tax invoices are one of the most common reasons for input tax credits to be disallowed in a BAS audit. Note also that unclaimed GST credits have a shelf life: they generally expire if not claimed in a BAS lodged within 4 years.
The most important principle in responding to a BAS audit is the same as for any ATO audit: do not respond without professional advice, and do not provide documents or make admissions without first understanding what you are providing and what it means.
Once you have engaged a professional adviser, the next step is to gather and review the requested records carefully before they are provided to the ATO. Where there are errors in your BAS, and errors are common, it is generally better to identify and acknowledge them yourself, with explanations, than to allow the ATO to find them independently.
A cooperative, transparent, and professionally managed response to a BAS audit will almost always produce a better outcome than a defensive or evasive approach.
If the BAS audit results in an amended assessment, increasing your GST liability or reducing your input tax credit entitlement, you have the right to object. For a GST assessment, the objection must generally be lodged by the later of 60 days after the notice of amended assessment is given to you and 4 years after the end of the relevant tax period. A well-founded objection, supported by appropriate evidence and legal argument, can succeed in having the assessment reduced, and if the objection is disallowed, the matter can be taken to the Administrative Review Tribunal or the Federal Court within 60 days of the objection decision.
Australian Tax Experts regularly assists businesses in managing BAS audits from initial response through to objection and appeal. Contact us to discuss how we can support your matter.
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