Related Article: Chris Simmons explains the WHY behind AML regulations

Most people insure their car, their home and their health without thinking twice. But very few think to insure against the cost of a tax audit or government revenue agency review — even though it can be just as financially damaging.

Tax audit insurance, also known as audit protection insurance, covers the professional fees you would incur if the ATO or another Australian Government Revenue agency selected you or your business for a review, audit or investigation. It does not cover any tax, penalties or interest that might be the outcome of the audit but it covers the cost of having qualified professionals respond to it on your behalf.

At MJC Partners, we offer this protection through our Audit Safe Service. This article explains how it works, who needs it, what it covers and why the current compliance environment makes it more relevant than ever.

Why compliance activity is increasing

The ATO today is a very different organisation to what it was even a few years ago. It now receives information automatically from banks, employers, government agencies, property records, cryptocurrency providers, share registries and online platforms. It also receives almost 50,000 tip-offs from the public each year.

The result is that no taxpayer is immune. Audits and compliance checks can be triggered by inconsistencies in tax returns, industry-wide reviews, large claims that attract scrutiny or simply random selection. It is not a question of whether you have done anything wrong — it is a question of whether you are prepared if the ATO or another revenue agency comes calling.

Last year, MJC Partners experienced a substantial increase in the number of ATO reviews, audits and information requests affecting our clients. In fact, the professional time we spent responding to ATO compliance activity was more than double that of previous years. Many of those clients had done nothing wrong but responding still required significant work, time and professional fees.

What are the current ATO hotspots?

The ATO publicly identifies its compliance focus areas each year. Understanding these hotspots is important even if your affairs are in order as being in a flagged category can increase your chances of being reviewed.

SMSF

• Asset valuations
• Related party transactions
• Non-arm’s length income (NALI)
• Contributions & pension compliance
• Property transactions & valuations
• Documentation supporting SMSF decisions & transactions
• Use of SMSF assets for personal benefit

What is tax audit insurance and what does it cover?

Tax audit insurance covers the professional fees you would incur if the ATO — or another Australian Government revenue agency — selected you for an audit, review, investigation or enquiry. This includes fees for MJC Partners to respond on your behalf, as well as any specialist fees (such as taxation lawyers) that we engage to assist in the response.

It does not cover the tax, penalties or interest that may result from the audit itself. At MJC Partners, we offer this protection through our Audit Safe Service. Cover commences the day after payment is received and expires on 30 September the following year. Previously lodged returns are covered retrospectively from the date cover commences.

The following audit types are all covered under MJC Audit Safe Service:

• Record Keeping
• Capital Gains Tax
• SRO Land Tax Audits
• Stamp Duty
• Superannuation Guarantee
• Workcover / Workers Compensation
• SMSFs

A real example: when audit insurance matters most

One of the most common misconceptions about tax audits is that they only happen to people who have done something wrong. In reality, some of the most time-consuming and costly reviews we have managed at MJC involved clients whose tax affairs were entirely in order.

A business owner we assisted had built a successful business, purchased a new family home and upgraded vehicles over several years. The ATO subsequently requested information to understand how these purchases had been funded based on the income reported in their tax returns.

 

There was nothing wrong with their tax affairs. However, significant professional time was still required to gather records, prepare explanations and respond to the ATO’s enquiries. 

MJC’s Audit Safe Service is designed to help cover exactly those professional fees.

What are the benefits of tax audit insurance?

• Financial protection: Professional fee protection of up to $15,000, covering accountants and specialists who respond on your behalf.
• Expert representation: MJC Partners handles the entire process, from gathering records to corresponding with the ATO or relevant agency directly.  Specialist fees (such as taxation lawyers) engaged by us to assist are also covered.
• Peace of mind: Knowing the costs are covered means you can focus on your business rather than the audit process.
• Immediate activation: Cover commences the day after payment is received and runs until 30 September the following year.
• Tax deductible premium: The cost of the insurance itself is tax deductible.
• Covers previously lodged returns: Protection applies retrospectively to current and prior year returns.

What is not covered?

It is equally important to understand what Audit Safe Service does not cover:

• Audits notified before cover commenced: Any audit activity where the ATO or another revenue agency made contact before your participation fee was received is not covered.
• Tax, penalties, fines or interest: Cover applies to professional fees only, not to any tax amounts, fines, government imposts or penalties determined by the ATO or any other agency.
• Fraudulent or high-culpability matters: Cover does not apply where the ATO imposes final culpability or shortfall penalties of 75% or more, or where a return is deemed to have been fraudulently lodged.
• Work that should have been completed before the audit: Costs for outstanding lodgements or other work that should have been done prior to the audit activity are excluded.
• Advisory or educational notices: Correspondence from the ATO or any other government agency that is informational, advisory or does not compel you to take action is not covered. This includes warning letters about possible future audit selection.
• Government benefit reviews and licence matters: Reviews of government benefits or entitlements, industry status, licence compliance, membership or registration processes are not covered.

You must have Audit Safe Service in place before the ATO contacts you. Once they have reached out to you, no insurer can offer protection for that event.

How to take out MJC’s Audit Safe Service

MJC’s Audit Safe Service is available to MJC Partners clients only. If you would like to find out more or activate your cover, please get in touch with our team and we will walk you through the process.