The risk of non-compliance

Despite my career being nearly old enough to order a drink at the bar, it never fails to surprise me how many business owners want to push the boundaries.

Whether it be ignoring rules and regulations, or being unnecessarily aggressive in claiming expenses or hiding revenue, it does often feel that tax avoidance is a national sport in Australia.

This is particularly the case with new businesses, perhaps blissfully unaware of how complex the Australian tax and legal system truly is.

I suspect there is another aspect at play too - the unexpected cost and time involved in doing everything correctly.

Many new businesses just want to hit the ground running, and get on with the process of growing the business and making money.

Compliance is seen as an unnecessary evil, grudge money and something that only needs to be done to tick the box.

Those that undervalue compliance related tasks, often get burnt at a later stage in their business development.

Let’s get real. Growing a business on dodgy practices is no way to grow a business at all.

By being dodgy and underpaying staff or not issuing invoices, you are effectively telling your employees and customers that you aren’t a legitimate business operator.

Employees know when you are being dodgy. All it takes is for them to feel that they are being ripped off, exploited or undervalued for them to make a complaint against you. That’s when the walls really start falling down around you.

Neglecting your compliance obligations often has negative commercial repercussions, above and beyond the obvious compliance risks.

When you set the example at the top that the owners don’t care about compliance, it sends the message to your employees that it’s okay to cut corners.

This is completely reckless as you can’t control every action employees take. Having employees consider illegal practices as the norm means you as the business owner are likely liable for actions and potentially crimes that you don’t even know are being committed on your behalf.

Another one people don’t appreciate is the difficulty that can be involved in selling your business when you have fudged the books.

This happens from time to time. A business owner will underreport their sales or include private expenses. When it comes time to sell their business, we are busy doing the due diligence, and the supplier alerts us to the fact that they have been dodging up their books and want to now ‘legitimise’ their accounts so that they can achieve a higher sale price.

Any accountant operating for the buyer would see all these adjustments and ‘add backs’. Would you trust a vendor that has been dodging up their books? If they are lying to the tax man, what hope do you have that they are fairly representing their business to you?

Difficulty obtaining finance is another issue faced by people that don’t value compliance. If I received a dollar for every time I needed to lodge a tax return in short notice to help a client get finance or get their family assistance payments back up and running, I’d have an extra million in the bank by now.

Some additional repercussions of neglecting or undervaluing compliance obligations are:

• Increased costs over time. The tax code is written to reward those that do the right thing and punish those that don’t. Do the wrong thing in the eyes of the ATO, and you may face interest charges, penalties, fines for deliberate recklessness, and have deductions denied. Getting it right from the beginning is always better than paying a professional to fix it later.
  

• Increased chance of audit from the ATO. With far reaching powers and more data collection ever before, it’s only a matter of time until your first audit hits if you’re dodging up the books.
  

• Lack of financial information on which to make decisions. Without up-to-date financial information, the business owners are literally flying blind.
  

• Increased chance of theft by employees, as you don’t have adequate financial controls to detect such activity.
  

One of my biggest frustrations as an advisor was when a new business owner came to me, two years after they started their business.

There’d be mistakes to no end, unlodged tax returns, plenty of fix up work, and a genuine under-appreciation for the level of work required to rectify everything. This often results in a large quote for accounting services, which sours the relationship from day one.

How different the relationship would have been if the client visited the advisor first, used the correct structure from the get-go, remembered to charge GST, lodged on time and had good financial practices etc.

There’s no doubt that in Australia, tax avoidance is considered by many to be a national sport. In my opinion however, the power the ATO holds to audit has never been higher, and the access to information they hold has never been greater.

Not complying is fast becoming an outdated practice, and trust me, you don’t want to be on the receiving end of a genuine ATO enquiry.

Seek advice early. Pay the right amount of tax, but not more than legally required. Be open to receiving advice. Comply. Sleep easier at night.

Sometimes the biggest mistakes are the ones you don’t even know you are making.