Tax audit insurance pays the professional fees you incur when the Australian Taxation Office, or another government body, reviews or audits your affairs. It does not pay the tax. That one distinction explains most of what the cover does and does not do. Our tax audit insurance page outlines the policies we arrange; this article explains how the cover works, so you can judge whether it suits your business.
What an Audit Actually Costs You
When the ATO opens a review or audit, the cost that arrives first is not a tax bill. It is time: your accountant’s time to read the correspondence, gather records, answer information requests, reconstruct transactions, attend meetings and put your position in writing. An audit can reach back across several years of returns and several entities, and the fees accrue whether or not any adjustment results.
Accountants charge for that work at their normal rates. For a small business, an unexpected run of professional fees can arrive at the worst possible moment, often while the owner is also giving up their own time to the process. That is the gap tax audit insurance is designed to fill.
What Tax Audit Insurance Typically Pays
The core of the cover is professional fees: the cost of your accountant, and in some policies tax lawyers or other specialists engaged with the insurer’s consent, to respond to a review, audit, investigation or enquiry. Depending on the wording, that can include:
- Income tax reviews and audits of individuals, companies and trusts.
- GST and activity statement reviews.
- Fringe benefits tax and PAYG withholding reviews.
- Employer superannuation obligations, where the ATO reviews contributions for staff.
- Self-managed super fund reviews.
Some policies extend to reviews by state revenue offices, for example of payroll tax or land tax, and to workplace audits of wage and record-keeping compliance. Some also respond to the cost of preparing an objection. Tribunal and court appeals are often limited or excluded. None of this is standard across the market, so check the list of included activities in the wording you are offered.
What Tax Audit Insurance Does Not Pay
- The tax itself, or any shortfall found by the audit.
- Penalties and interest charged as a result of the audit.
- Work you had to do anyway, such as preparing overdue returns, catching up bookkeeping or routine lodgements.
- Known matters: audits, notices or issues you knew about before the policy started.
- Voluntary disclosures, which are commonly excluded or restricted.
- Fraud, evasion or deliberate wrongdoing.
- Routine correspondence that does not meet the policy’s definition of a review or audit.
The practical point: tax audit insurance protects your cash flow against professional fees. It is not a way to transfer the tax risk itself.
How It Is Usually Offered
Many businesses first meet tax audit cover through their accountant. A practice arranges a group policy or scheme for its clients, and clients pay an annual fee to be included. When an audit arrives, the accountant does the work and the claim pays their fees.
That arrangement is convenient, but ask a few questions before joining:
- Is it insurance, or a service arrangement run by the practice? The two can behave differently if the practice closes or you move accountants.
- What happens to your cover if you change accountants mid-year?
- Are all your entities included: you personally, the company, the trust and the super fund?
Tax audit cover can also be arranged as a standalone policy through a broker, and some management liability packages include a tax audit extension. Our article on management liability insurance explains how those packages are put together.
Limits, Excesses and Conditions
Policies set a limit per claim and usually an aggregate limit for the policy period. Check that the limit is realistic for the size and complexity of your affairs, and whether it is shared across all insured entities. An excess may apply to each claim; our explainer on how an insurance excess works covers the basics.
Conditions matter as much as limits:
- Timing. Cover is typically triggered by a notice of review or audit received during the policy period.
- Prompt notification. Tell the insurer, or your accountant if they administer the scheme, as soon as the notice arrives.
- Consent. Fees incurred before the insurer approves the claim may not be paid.
- Compliance. Policies commonly require returns to have been lodged and records kept.
Tax audit insurance is also different from your accountant’s own professional indemnity cover, which responds if the accountant’s error causes you a loss. Our article on public liability vs professional indemnity explains how PI works.
Who Tends to Consider It
Any business can be reviewed, and a review does not mean anything was done wrong. The cover tends to be considered by businesses whose affairs have more moving parts:
- Employers, where payroll, withholding and super for staff create more to review.
- Transport, trade and construction businesses that engage contractors, where the line between contractor and employee can be tested.
- Groups with a company, a trust and a super fund, where one review can reach several entities.
- Businesses with fuel tax credits, significant GST refunds or rapid growth in turnover.
- Property investors with several properties and complex deductions.
The deciding question is simple: could the business comfortably fund an unplanned run of accounting fees at short notice?
Questions to Ask Before Buying Tax Audit Insurance
- Which reviews and audits are included, and by which bodies?
- Which entities are insured?
- What is the limit per claim and in total?
- Is there an excess?
- Can I use my own accountant, at their normal rates?
- Are objections included?
- What happens if I change accountants?
- How are prior notices and voluntary disclosures treated?
Tax audit cover works alongside the rest of your commercial business insurance rather than replacing any of it. If you are weighing a group scheme against a standalone policy, our tax audit insurance page is a good starting point for comparing the two.
Common Questions
Will tax audit insurance pay a tax bill after an audit?
No. It pays professional fees for responding to the audit. The tax, interest and penalties are generally excluded.
I have already received an ATO letter. Can I take out cover now?
Audits and notices known before the policy starts are generally excluded. The cover is for reviews that begin after it is in place.
Will it still respond if the audit finds a mistake?
Honest mistakes found during an audit do not usually stop the policy paying the fees, but fraud, deliberate evasion and voluntary disclosures are commonly excluded. Check the wording.
Talk It Through
Request a quote or call 1300 983 940 and we will explain the options and how they fit with the rest of your business cover.
General advice only. This article does not take your objectives, financial situation or needs into account. Consider the relevant PDS and Target Market Determination before deciding on a policy.