Being tax audited by the Australian Tax Office (ATO) is an uncomfortable and expensive risk every Australian business, no matter the size, must face. Although diligent bookkeeping may serve as a basic preventative measure for an audit, it may never provide the protection you are looking for.
I’ve never been audited before. Why do you think I can get audited now?
The ATO’s cross-checking technology is rapidly improving, and each year, according to ABC News, the ATO contacts approximately 2 million taxpayers about their returns. Not only can a tax audit impress a significant financial and emotional burden on business owners, the ATO can also pass hefty fines.
To combat this, a number of accounting firms try to sell their clients ‘tax audit shields’.
Tax audit shields: should you get one for your business?
In general, tax audit shields are a form of insurance that provide businesses with relief of payments, up to a prescribed amount, from the professional fees that you are required to pay should you be selected for an audit.
Tax audit shields are touted as fixed, low cost solutions – but are they worth your time and money?
What many companies need to be aware of is that their Management Liability Insurance policies may already cover such tax audit fees.
Why Management Liability Insurance is important
Generally, Management Liability Insurance Policies with a Tax Audit Extension covers fees, charges or disbursements of an accountant or registered tax agent where the company has been issued a formal notice from the ATO.
The nominal fee required for Management Liability Insurance can also protect the company, its directors and employees involved in running the business from risks such as:
- Directors and employees being personally sued for alleged mismanagement of the company
- Shareholder claims against directors for mismanagement
- Employment related matters such as unfair dismissal and discrimination
- Occupational Health & Safety related claims from employees and regulatory bodies
- Defamation including libel and slander claims
- Embezzlement of funds
- Fines and Penalties payable for breaching statutory laws and regulations
In summary, Management Liability Insurance is designed to cover you and your business against claims which arise from the management of your company, including company tax audits. In particular, it provides Directors & Officers Liability Insurance (D&O Insurance) if a director and/or employee are sued personally for being negligent in fulfilling their duties.
This form of cover also extends to cover the business as a result of management’s actions in running the company. It extends to protect your business from employee crime such as embezzlement. It is an essential form of coverage for business both small and large.
Any business which operates as a company needs to ensure their directors and officers have liability insurance for acting in their capacity as a director or officer of the company. This will ensure the directors, officers and employees are protected for any claims made against them personally.
It is important to note, however, that although this Policy covers accounting fees, it is not designed to cover legal fees, or any payments, fines or penalties issued by the ATO.
To see how a Management Liability Insurance policy can help with tax audits, let’s look at the following examples as provided by DUAL Australia.
A hotel: 15 staff, $2 million turnover
Background: The Office of State Revenue conducted an audit in relation to tax returns previously lodged by various entities within the Insured’s group of companies.
Outcome: The Insured purchased the Tax Audit Extension under their Management Liability Policy and were able to claim in respect to Accountants’ costs in responding to the audit.
Construction company: 93 staff, $30 million turnover
Background: The Insured was the subject of an ATO Audit for its tax returns between the years of 2014 – 2017.
The outcome: The Insured engaged their Accountant to assist in responding to the audit. The Insured was able to claim under the Tax Audit section of the Policy in respect to reimbursement for Accountant fees.
If you’re thinking of purchasing a tax audit shield, you must first understand that similar tax audit protection can be provided under your Management Liability Insurance Policy. Speak to your insurer or broker about your existing policy and if it provides you with the protection you need during tax time. If your business doesn’t currently have a Management Liability Insurance policy in place (and in particular, a Tax Audit Extension), it may be worth investigating this policy further.
As usual, we’re here to help. If you’d like to discuss how Management Liability Insurance can work for you, or if you’d like to see how you can reduce your premiums in your current policy, don’t hesitate to contact us.
This article was written by Alishia Oliver,
Account Manager at Crucial Insurance and Risk Advisors.
For further information or comment please email email@example.com.
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