The importance of Tax Audit Insurance

No matter how prepared you are, the thought of an audit can make any individual or business’ palms sweat. Not only is it an interruption that needs to be navigated on top of business as usual, but the costs involved in responding to queries from the relevant tax agency can quickly add up. In the current climate of Covid, with businesses benefiting from government rebates, Jobkeeper, and other assistance during this difficult time, tax audits will become more frequent as the various taxation agencies look for ways to return budgets to surplus.

Tax Audit insurance covers professional fees, namely those of accountants and lawyers, to respond to audit and investigation notices issued by State and Federal tax agencies.  Tax Audit insurance can be purchased as a standalone policy or as an added coverage feature under Directors & Officers’ Liability (“D&O”) policies for large businesses, or Management Liability policies for SMEs.  Most businesses that purchase Tax Audit insurance do so as extensions under D&O or Management Liability policies.

In the past few years, insurers across the board have reported significant Tax Audit losses from claims in the order of $20,000 – $50,000 for professional fees in responding to tax audit and investigation notices. In the past, D&O and Management Liability insurers rarely charged a premium for Tax Audit cover, or to the extent they did, it was a nominal premium.  It was never difficult to obtain the cover and claim deductibles were minimal.

We are now seeing a major shift whereby many D&O and Management Liability renewals exclude Tax Audit cover unless specifically requested.  Where insurers are willing to offer Tax Audit cover, the underwriting questions have become more rigorous, significantly reduced sub-limits are being applied, and insurers are now imposing higher deductibles to eliminate “attritional claims” (ie: high-frequency, low-severity claims).  Insurers are now also charging meaningful premiums for the cover.

The benefits of a standalone Tax Audit Insurance policy

The main benefits of standalone Tax Audit cover compared to that offered as an added benefit under D&O and Management Liability policies is that higher limits can be obtained and directors and officers can obtain cover for personal audits and investigations, as well as for trustees of Self-Managed Superannuation Funds (“SMSF”).  We would typically recommend clients consider a standalone Tax Audit policy where personal or SMSF Tax Audit cover is required or where D&O and Management Liability insurers cannot offer adequate limits.   For example, most Management Liability insurers offer Tax Audit sub-limits ranging from $10,000 – $100,000 whereas a typical “entry-level” limit for standalone Tax Audit policies is $250,000.  Where personal Tax Audit cover is sought, the individual Directors, Officers or SMSF Trustees should be specifically named as insureds under the policy, in addition to any business entities.

Tax Audit insurance covers professional fees in responding to tax audit or investigation notices.  It does not cover the following:

  • Tax liabilities

  • Fines and penalties issued by the relevant tax agency

  • Liabilities arising from false or misleading conduct

  • Costs arising from delays in submitting tax returns

  • The time and wages of staff, including Directors and Officers, for responding to the audit or investigation notice.

With so many businesses benefiting from JobKeeper it is likely that more ATO Tax Audits will be conducted this year and in coming years. Tax Audit insurance is one of those policies that clients wish they had after the fact, and it is important to speak to your broker to decide if this type of insurance is beneficial to you and your business.  Whilst policyholders may not be covered for any additional money owed to the ATO after an audit is conducted, by covering the costs of professional fees, policyholders give themselves the best opportunity to minimise their financial exposures and disruption to the business.

For more information on Tax Audit Insurance and to obtain a quote, please contact us via the form below.