ATO Audit Case Study

Dated: October 2008

The Australian Taxation Office selected a plumber for audit after he lodged income tax returns with net business losses of $84,000 over a two-year period. He also declared net losses on two rental properties during this time.

Separated from his wife, the plumber remained in the family home while his wife and three of their five children moved into a second property that he also owned.

During an audit interview, the plumber admitted to overstating expenses by including personal amounts of $245,000. The ATO also found he was inflating purchases then claiming input tax credits and business deductions on the higher amount. Overstated expenses totalled $284,000 over two years.

Further analysis showed the plumber had not recorded and reported all cash transactions, and was reporting income based only on his records of invoices paid. A review of his bank account revealed that deposits were $71,500 more than the total income he reported in activity statements.

When the ATO analysed the plumber’s private living expenses they found that his lifestyle could not be supported by his declared income. However, when the bank account deposits were added back as income and the inflated expenses were excluded, his net business income was sufficient to cover personal living expenses.

Auditors also discovered a number of invoices listed as unpaid. They contacted several of his customers and found that some of these payments had been made in cash.

The plumber then admitted to another $44,000 in unreported cash over the two-year period.

On completion of the audit the ATO found that the plumber had understated his net business income by $394,000 over two years. This led to:

• a GST adjustment of $46,000
• an income tax adjustment of $102,000, and
• a 75% administrative penalty.

The ATO are considering the case for prosecution.