Are you confident your asset registers are accurate? How to avoid tax risk and compliance issues.
Each year, the ATO flags areas of tax risk to ensure businesses remain compliant and avoid legal consequences. This year, the spotlight is on the your asset register tax risk regarding property, plant and equipment (PP&E).
What is tax risk?
Ineffective reporting, bad strategy, unsuitable operations or lack of compliance are a few of the factors that could see your company accounting for, or even paying, an incorrect amount of tax. It’s also the threat that an internal influence will result in a tax operating model that is misaligned with the position the business ought to have based on their risk profile. Put very simply, it is the risk that the incorrect amount of tax will be paid or reported.
Why does the ATO flag areas of tax risk each year?
The ATO routinely undertake assurance reviews to ensure that companies are complying with their tax reporting and financial obligations. The main focus of the assurance review is to ensure the companies are paying the correct amount of income tax, and to identify areas of risk. A lot of the time, if a business is doing something wrong regarding their tax treatment, it’s because they were unaware their process was incorrect. An assurance review gives them the opportunity to correct their processes to avoid consequences.
When the ATO has identified areas of risk, they publish their results in a findings report. This report gives information about potential tax risks so companies can stay informed to avoid falling into the same risk trap.
What has the ATO flagged as a tax risk?
In the latest findings report, the ATO has identified Fixed Assets (being property, plant and equipment) as a tax risk.
The specific areas that have been flagged are:
- Incorrect application of effective lives
- Incorrect calculations
- Accelerated depreciation
“We are seeing instances of the incorrect application of effective lives, incorrect calculations and accelerated depreciation. We also have concerns with the use of automated software where the outcomes may not be compliant with the law, the incorrect use of project pools, and the incorrect treatment of balancing adjustments on disposals.” Australian Tax Office
There’s a lot that can go wrong when accounting for PP&E. Depending on the magnitude of the error, you could end up paying much more in tax than necessary, or could even end up facing legal consequences. A simple miscalculation or understatement of the depreciation charge could lead to an overstatement of profits, which could have your business paying exorbitant bills unnecessarily. It certainly pays to manage your fixed asset register tax risk effectively!
How to manage tax risk
It’s imperative to have a tax governance and internal control framework to ensure your tax operating model is legally compliant and aligns with the business goals and processes. The ATO has a risk management and governance review guide to help companies design and test their own internal control framework with the goal to minimise risk.
In the ATO’s findings report, concerns were expressed regarding the use of automated software resulting in non-compliance, the incorrect use of project pools, and incorrect accounting of balancing adjustments on disposal of an asset. AssetAccountant™ is a cloud-based fixed asset register that effectively manages risk associated with these areas by reliably and compliantly recording assets and calculating effective lives and depreciation.
Risk can have dire consequences for a business if not managed effectively. AssetAccountant™ is an affordable solution to ensure your asset register is accurate and your liabilities are correct. Try it for yourself for free.