Australia's self-assessment tax system

The income tax system in Australia is based on self-assessment. This means information you provide to the Australia Taxation Office (ATO) is initially accepted as being true and correct when you lodge your tax return and other forms which disclose a tax liability.

The ATO uses cross-checking technology to assess tax returns which may raise a red flag to the ATO. Taxpayer reviews and audits are the ATO's way of confirming the information is accurate and complies with taxation laws and that the taxpayer has met their obligations.

What to do if your tax affairs are subject to an ATO audit?

Scrutiny by the ATO of your tax affairs is an unwelcome and daunting process. If handled incorrectly, it can lead to additional expense and stress.

  1. Stay calm. The letter is likely seeking documentation to support the claims in your return. It does not necessarily mean there is anything improper.
  2. Review your position. You need to review your tax position to ensure everything is in order and you agree the disclosures made to the ATO are correct. You may need to seek advice or input from your accountant (your accountant may liaise with the ATO on your behalf). The ATO may want to see your source documents to verify the accuracy of your claims, so have your supporting documentation such as receipts and invoices in order. Some common tax return mistakes include:
    • Failing to declare or miscalculating income
    • Claiming deductions you are not entitled to
  1. Provide factual responses to the ATO. Your answers should be honest and limited to the ATO specific questions. Do not provide more information than asked. If you notice an error or mistake you may need to correct it by lodging an amendment – the ATO looks favorably on self-disclosure.
  2. If you do not agree with the ATO audit decision and wish to assess your review options, seek legal advice if representation is required.

Time limit for ATO audit

For most taxpayers with simple affairs (e.g. individuals and smaller businesses), the period of review is generally two years.

For individuals or businesses with more complex affairs, the period of review is generally four years.

The time limit starts on the date the notice of assessment is issued by the ATO.

There is no review time limit if the ATO considers the taxpayer's actions are tax fraud or tax evasion.

What documentation should I keep on file?

The best outcome of an ATO audit is being able to show to the ATO that your tax affairs are in order, and you have complied with your tax law obligations. To do so, good record keeping and being able to provide supporting documentation such as financial statements, schedules, contracts, tax reconciliations is important.

Most documentation and records should be kept for a minimum of 5 years, with information relating to CGT assets to be kept for the time the CGT asset is held plus 5 years.

It can be best practice to keep documentation indefinitely, as the ATO review period is open if it is considered there is tax fraud or evasion.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.