TAX AUDITS – WHAT ARE THEY?
The ATO is responsible to the Government and the community for collecting the revenue and ensuring that everyone pays the correct amount of tax.
A tax enquiry or audit is an examination of your tax affairs by the ATO to see if you have done what you are required to do under the tax laws. Including whether you have declared all the assessable income you receive and are entitled to the deductions and tax offsets you have claimed on your tax return. The ATO assumes that you are trying to deal honestly with your tax.
Some ATO visits are to provide assistance and information. In contrast, others are routine checks of simple details you normally have on hand, such as your Australian Business Number or GST registration. If a tax officer visits you, they will let you know the purpose of the visit at the outset.
The enquiries or audits conducted vary in their complexity. Sometimes they only involve a phone call or a letter asking you to provide further information or verification of your claims. In some cases, a tax officer may visit you. In some cases, you may be asked to bring all your records for examination.
The ATO sometimes decides to look more closely at tax returns making similar claims or from within the same industry, and can request the records and paperwork you used to complete your tax return.
It is also possible that your tax return has been audited without you knowing about it. The ATO receives information from a number of sources as a matter of course. For example, banks are required to provide details of how much interest each account held with them has earned. Using this information, it is a simple check to see whether or not taxpayers have declared that interest in their return. The ATO also cross-reference Centrelink payments with tax returns. Over one billion transactions are data matched each year.
The ATO will send you a letter if they detect that an amount is missing on your tax return. If you agree the amount should be on your return, you do not need to do anything. The ATO will issue you with a Notice of Assessment telling you how much you need to pay. This may include interest penalties. If you disagree with the ATO, the letter will tell you what to do.
IF YOU ARE SUBJECT TO ENQUIRY OR AUDIT
If the ATO undertakes checks of your tax affairs, it does not mean they think you are dishonest.
If you make an honest mistake, where allowed under the law, they will take this into account when considering any penalties that may be imposed.
In addition to honest mistakes, the law recognises that errors can be caused by a range of factors, including carelessness, recklessness, or intentional disregard of the law.
If the ATO discovers that a taxpayer has intentionally sought to avoid paying tax or has over-claimed payments, they take firmer action in considering penalties and possible prosecution action.
THE ENQUIRY OR AUDIT PROCESS
An enquiry or audit usually involves examining your tax affairs to ensure that the information is accurate and to confirm your taxation liability or entitlement.
The ATO may also contact other parties such as banks, employers, customers, and suppliers to obtain information.
The ATO must conduct enquiries and audits in an impartial, fair, reasonable, and professional manner. Regardless of the type of enquiry or audit, the following principles apply:
- The ATO will treat all taxpayers in accordance with the law and the principles outlined in the Taxpayers Charter.
- The tax officer conducting the enquiry or audit will outline the audit process and, where appropriate, will endeavour to guide you through the process – particularly if you are experiencing an audit for the first time or are not represented by a professional adviser.
- Seek to minimise cost and inconvenience to you.
NOTIFICATION OF AN ENQUIRY OR AUDIT
In most circumstances, the ATO will notify you of their intention to make enquiries or conduct an audit of your tax affairs.
The notification will be in writing, normally be made to your address for service and may be preceded by a phone call.
This notification will tell you the name and telephone number of the tax officer conducting the enquiry or audit and explain the expected nature, scope and duration of the enquiry or audit and indicate the information and records that will be required.
The ATO will seek to complete the enquiry or audit in the shortest possible time. Still, the time it takes depends on several factors such as the type of enquiry, the adequacy of your records, availability of information, the complexity of the matter and the level of your co-operation.
The ATO will advise you that you may have a representative present at the start or any stage of the enquiry or audit. If you need to consult with your representative, you will be given reasonable time and opportunity to do so. They will also tell you about your rights and obligations in relation to the enquiry or audit.
There may be situations where the ATO decides that urgent access action is appropriate and prior warning may not be given. For example, there may be a reasonable belief that the existence or integrity of documents, information or goods is under threat. Urgent access requires the approval of a senior tax officer. In these cases, the ATO will give you reasonable time and opportunity to consult your representative after the urgent access.
HOW TO PREPARE FOR AN ENQUIRY OR AUDIT
If you have been notified of an enquiry or audit, you should prepare for it by reviewing your relevant records, tax returns, and activity statements. Any error should be immediately disclosed. If you do this, the level of penalty that may otherwise have been imposed may be reduced. If you notify the ATO of any error before they notify you of an audit, the level of penalty that may otherwise have been imposed will be reduced.
AT THE START OF THE ENQUIRY OR AUDIT
At the initial interview, the tax officer conducting the enquiry or audit will provide Tax Office identification and a telephone contact number when first meeting with you. If you ask, they will tell you their manager’s name and telephone number, except in very limited circumstances.
You will have the opportunity to volunteer information about any possible irregularity or omission in relation to your tax affairs. If you do this, the penalty that may otherwise have been imposed may be reduced.
DURING AN AUDIT
The ATO will arrange any interviews or meetings at times and places mutually convenient, usually during normal business hours and will explain the purpose of any interview or visit.
They also undertake to ask clear and unambiguous questions and provide you with all reasonable assistance and explanations to clarify their meaning.
You may choose someone to act on your behalf or to attend interviews with you. The tax officer will inform you in advance when he will have a legal adviser present to assist him during an interview.
You will be given reasonable time to collect records, documents and papers for examination and gather information about any matter that arises unless the ATO has reason to believe that the existence or integrity of the documents is at risk. You will receive a written receipt of any records collected at an interview, and the ATO will return the records as soon as possible or as mutually agreed.
The ATO will answer any reasonable and relevant questions you ask relating to the enquiry or audit. You can take notes of any conversations or interviews, and if you ask, or where the ATO considers it reasonable, tape record interviews. A copy of the audiotape will be provided to you, free of charge, at the conclusion of the interview.
You can ask to be provided with a signed copy of the tax officer’s written record of the interview. If the tax officer asks you to sign the interview record, he will explain the implications of doing this.
The ATO will respect your right to, and give you adequate opportunity to claim, legal professional privilege in relation to certain communications between you and your barrister or solicitor. They will allow for some advice to remain in confidence between you and your professional accounting adviser in certain circumstances.
The ATO must use discretion if and when they make any enquiries of third parties and do so without any implication of wrongdoing by you. They must allow you the opportunity to give your views on any relevant issue, including any proposed adjustments and keep you informed of the progress of the enquiry or audit. How often this happens will vary according to the type of enquiry or audit being conducted.
Under the tax laws, the Commissioner can require a person to provide information, attend and give evidence, or produce any books, documents, or other papers in the custody of or under that person’s control.
When you are required under the law to attend a formal interview, you are the person who must answer any questions asked in the interview.
You may still choose to have your representative or adviser present. In this situation, you will be given a reasonable opportunity to consult with your representative or adviser, who can only advise you about the meaning of a question, not what answer you should give.
In very limited circumstances, you will not be allowed to have your representative or advisor present, such as when your representative or adviser may have had a role in the transaction under review. In this situation, you will be given reasonable time to obtain alternative representation.
Should you be required under the law to attend a formal interview, the tax officer will explain before the interview that the law obliges you to answer questions put to you during the interview.
If you bring an interpreter to a formal interview because you do not speak English, you are allowed to answer through the interpreter.
ATO OBLIGATIONS ON AUDIT COMPLETION
The ATO must clearly explain the basis of any adjustments made as a result of the enquiry or audit and inform you if any error has been detected, resulting in you paying too much tax or receiving less than your entitlement.
They will clearly explain the reasons for any penalty or interest and how this will be calculated and give you the opportunity to explain any circumstances which you believe could justify a reduction of any penalty or interest.
Within seven days of making a decision, the ATO will provide you with written notification of the outcome of the enquiry or audit. You will be advised of your review rights and the remedies that may be available to you.
The ATO will also draw to your attention any matters that will help you to understand and meet your taxation obligations in the future.
Settlement meetings are usually held for more involved or complex audits. If there is a settlement meeting, the tax officer conducting the audit will be accompanied by at least one other officer, except in very straightforward matters.
Settlement agreements should be reached without any inducements, coercion or duress, and the ATO undertakes to document the terms of any settlement agreement reached and provide you with a copy.
COMPUTER ASSISTED VERIFICATION: E-AUDIT AND RISK ASSESSMENT
If you maintain electronic financial records, the ATO will consider an e-Audit. This involves the use of computer-assisted verification (CAV) techniques to analyse your records.
These techniques may not be appropriate in every compliance or client engagement activity. The ATO may use their information systems risk assessment (ISRA) tool to assess system risks and as part of assurance and trust activities.
Benefits of Computer Assisted Verification/e-Audit
The use of CAV in audits and other compliance activities has a range of benefits, including:
- It is cheaper and more efficient to provide information electronically
- Fewer requests to supply paper copies of transactions and reports
- Providing electronic information reduces the time the ATO spends in your premises, minimising disruption to your regular business activities.
A tax officer skilled in e-Audit will also be able to analyse your electronic information more efficiently, accurately, and thoroughly than if they had used manual processes.
The e-Audit process
The following describes how the works with you when conducting an e-Audit.
Accessing your records
Using formal access powers, the ATO is permitted full and free access to documents required for the purpose of the Acts they administer. “Documents” include electronically stored required.
Supplying electronic information
When they identify a need for electronic information to be provided, the ATO will schedule a meeting with you to understand the:
- Accounting and Point of Sale systems you use if they have not already done so.
- System architecture diagram.
- Format and extent of electronic records available.
- Electronic records required.
- Documentation available to assist in their analysis – for example, your chart of accounts, reference tables or data dictionary.
Your tax adviser and information technology specialists are welcome to attend this meeting.
The ATO will request that you download a copy of the mutually agreed electronic information from your system to any of the following:
- A tax officer’s biometric thumb drive
- A secure drop box via SIGBOX
- Any other agreed to medium.
It is recommended you keep a copy of the electronic information you supply to the ATO for your own records.
Data review and analysis
The ATO use specialised software to verify that the electronic information you provide is accurate and complete. They then conduct a series of tests on your data to ensure you comply with tax laws and conduct these tests in accordance with the nature of the compliance activity being undertaken.
Specialised software will read the electronic information provided but does not allow any changes to be made to the data you have supplied.
There is no risk to your computer system
The process involves you downloading a copy of the required electronic information. The ATO will not operate your computer system.
When the compliance activity is completed
The original electronic information will be stored as part of a case file kept as a record of the compliance activity.
Information Systems Risk Assessment (ISRA)
The integrity of information systems used to support your business affects the accuracy and completeness of the information you report to the ATO. They may use the ATO information systems risk assessment (ISRA) tool to assess your system’s risks regarding the correct reporting of your tax and super obligations.
ISRA is a process that provides a high-level overview of your information systems—using standard questions, enabling the ATO to derive a risk rating for key elements.
An ISRA is normally undertaken as part of a larger review or audit. If you are a privately owned and wealthy group or a public group, the ATO will also use their ISRA tool as part of their governance assurance and justified trust models.
Benefits of ISRA
The use of ISRA in audits and other compliance activities has a range of benefits, including:
- Providing an efficient way to understand your business, its systems, and processes.
- Highlighting compliance risks, which reduces the scope of any subsequent compliance activity.
The ATO will prepare a final report detailing the findings and incorporating any of your feedback. This includes recommendations to address any issues identified that may impact the accuracy and completeness of your reporting of your tax obligations.
The ATO will discuss the results detailed in the ISRA report with you in a final interview, and you will have the opportunity to work through the findings and offer any comments.
It is important that you are aware of your rights and obligations when dealing with the ATO. Suppose they advise you that they intend to undertake compliance activities in relation to your tax affairs. In that case, you will be told about your relevant rights and obligations as set out in the taxpayers charter.
PENALTIES AND OFFENCES
In conducting audits and making enquiries, the ATO may determine that you have underpaid your tax or received more payment than you were entitled to.
Generally, the tax laws provide for penalties to be imposed where the requirements of the law have not been met. In both cases, there are different rates of penalty based on the type of behaviour or the degree of culpability involved.
The law also provides for prosecution action to be undertaken for a range of taxation related offences. These offences include making a false or misleading statement in a tax return, making a false or misleading statement to a tax officer, and keeping incorrect or false records with an intention to deceive or mislead a tax officer.
BOOKS, DOCUMENTS AND PAPERS
As discussed earlier, a tax audit is a systematic examination of a taxpayer’s affairs by the ATO to establish whether a taxpayer has complied with the Tax Act.
The ATO is constantly involved with a public relations and media program regarding its audit and compliance programmes to ensure higher community awareness and compliance levels.
Section 262 A of the Tax Act places the onus on the taxpayer to retain certain records to enable the income tax liability to be assessed and then verified in the event of an audit.
The records must be in English or readily convertible to English. Adequate records can take many varying forms, but the retention of records is essential. As a guide, records must be kept for five years if you are lodging your income tax returns on time. Lack of adequate records makes taxpayers particularly vulnerable to Asset Betterment Assessments.
RIGHT OF ACCESS
Before dealing with sections 263 and 264, we stress that it is essential to seek professional advice when faced with a full audit.
Under section 263, an authorised ATO officer has full and free access to all buildings, places, books, and documents for any of the Act’s purposes and for that purpose to make extracts from or copies of any such books, documents, or papers.
The following matters should be considered if you receive a request for access under section 263:
- The access must be “for the purposes of the Act”, and the ATO officer must have proper authority.
- Under section 263, the auditor is not given the right to ask questions or remove records as this section does not contain the word “audit” or “investigation”.
- The ATO officer will normally provide an identification card, and this should be checked to ensure it contains the necessary authorisation under section 263.
- You may ask for a clear statement of purpose to establish that the request for access meets the requirement in section 263 that access is for the purposes of the Act. If this is not provided, correspond with the ATO, requesting a written statement, promising full co-operation upon a satisfactory reply.
- Remember that the ATO has no right to use force but that you are obliged to provide the auditor with reasonable facilities and assistance. This would include a desk, a chair, and a power point for a scanner. The photocopier may be necessary because the ATO may not seize documents. The auditor does not have the authority to borrow or take away any of your documents or records.
- A taxpayer should take appropriate professional advice as to whether the auditor’s questions should be answered. Perceived exposures should be balanced because penalties may be reduced if an early disclosure is made in an audit.
- It should be noted that a taxpayer is not under any obligation to answer questions and that it may be appropriate to request that written questions be submitted.
- On occasion, the auditor suggests that a tape recording of the conversation be kept. Again, seek professional advice. You should keep file notes of all discussions.
POWER TO OBTAIN INFORMATION
Section 264 is the only other section in the Act that authorises the ATO to conduct an Audit. This section enables the ATO to ask questions, require answers and obtain documents and records. For such a request to be valid, procedures must be followed, and certain limitations imposed by the Court.
ASSET BETTERMENT ASSESSMENTS
The Commissioner’s arbitrary power to issue Asset Betterment Assessments demonstrates how important it is for taxpayers to retain adequate accounting and financial records.
Essentially a default assessment is the Commissioner’s estimate of your taxable income in a given year, taking into account your accumulation of assets and his estimate of your living expenses.
The default assessments may be issued where you have failed to lodge an income tax return, or the Commissioner is not satisfied that the return lodged is complete or accurate. Once the ATO issues a default assessment, the onus is on the taxpayer to prove why the amended assessment should be set aside.
Effectively, you may have to satisfy the ATO how you have accumulated assets over a specified period of time. This accumulation is consistent with the taxable income you have disclosed in conjunction with your living expenses over the period.
In recent court cases, the ATO has been successful in amending assessments on this basis. Taxpayers have failed in their onus of proof largely due to a lack of financial records and documentation to support their contentions.
Most taxpayers want to know what issues are of interest to the ATO and the focus of their activity.
Risk assessment work in the property market has identified capital gains as a compliance issue for individual taxpayers. Taxpayers who disclosed rental income in prior years but no longer do so are being asked to explain the cessation of rental income, whether they have sold the property and if so, whether there was a capital gain.
The ATOs focus will be on omitted or incorrectly calculated gains from rental properties, holiday homes and units, vacant land and residential property purchased off the plan; Australian property owned by non-residents, shares, and distributions of capital gains from managed funds.
The ATO systematically matches data by working with state revenue offices and commercial providers to gather data on property sales to understand the overall market. They also conduct risk assessments on sales of properties in high capital growth areas and properties sold off a plan. They can examine the ASX share registry and public data sources for information on share sales and match data reported by managed funds with tax return information.
The ATOs automated system also allows the matching of large volumes of internal and external data.
Sources of external data include:
- Interest and dividend income
- Government pensions, payments, and allowances
- Health insurance premiums paid
- Salary and wages, allowances etc.
In recent years data matching has been, and will continue to be, performed on millions of taxpayers, resulting in hundreds of thousands being contacted with “please explain” letters.
The ATO’s data matching capacities keep improving, and around one billion transactions a year are audited. Below are some recent initiatives.
During 2020/21, the ATO cross-referenced information reported in tax returns against over one billion transactions provided by third parties to identify omitted income and gains or incorrectly claimed offsets or entitlements to an exemption from surcharges.
The ATO also contacted over 300,000 taxpayers who had apparent discrepancies in the information they reported in their tax returns.
The majority of taxpayers who made errors on their return and had to repay money didn’t wait for all pre-fill information to be available. Nine out of ten returns were adjusted as a result of our enquiries.
Traditionally the ATO has focused on areas such as omitted interest and employment income. However, with better quality data now available from more sources, they continue to expand data matching capability to encompass a greater range of areas, such as:
- Capital Gains Tax from the disposal of shares and property
- employment-related foreign source income
- contractor income from payments made by government agencies.
ATO DATA-MATCHING PROGRAM – LIFESTYLE ASSETS
In July 2021, the ATO announced its intention to acquire lifestyle assets data from insurance policies for 2020-21 through to 2022-23 for the following assets where the value is equal to or exceeds nominated thresholds.
|Asset class||Minimum asset value threshold|
|Fine art||$100,000 per item|
The data items include:
- Client identification details (names, addresses, phone numbers, dates of birth, Australian business number, email addresses), and
- Policy details (policy number, policy inspection date, start date of current policy, end date of current policy, total value insured, purchase price of the property insured, registration or identification number of the property, insurance category, policy cost, description of the property insured, primary use type)
The objectives of the lifestyle assets data-matching program are to:
- promote voluntary compliance and increase community confidence in the integrity of the tax and superannuation systems
- assist with profiling to provide compliance staff with a holistic view of a taxpayer’s wealth
- identify possible compliance issues with income tax, CGT, FBT, GST and superannuation obligations
- determine avenues available to assist in debt management activities
- gain insights from the data to help to develop and implement treatment strategies to improve voluntary compliance, which may include educational or compliance activities as appropriate
- identify and educate those individuals and businesses who may be failing to meet their registration and/or lodgement obligations and assist them to comply
- help ensure that individuals and businesses are fulfilling their tax and superannuation reporting obligations.
The ATO has started using auditors from other compliance areas to check on employers providing benefits that may be liable to FBT.
Employers outside the FBT system are being targeted. Where compliance work (an audit) is being undertaken primarily on other taxes, ATO staff have been told to look at FBT issues where information held by the ATO indicates an FBT risk.
The most common example is the employer with motor vehicles registered in the business name, but no FBT return has been lodged or any employee contributions disclosed.
The ATO is providing additional FBT training to compliance staff in these areas. The ATO continues its focus on luxury vehicles.
When will extra ATO scrutiny occur?
Privately owned and wealthy groups
The ATO view privately owned and wealthy groups as:
- Companies and their associated subsidiaries (often referred to as economic groups) with an annual turnover greater than $2 million are not public groups or foreign-owned.
- Resident individuals who, together with their business associates, control net wealth over $5 million.
In March 2020, the ATO revealed that over 90% of the high net wealth private groups’ income tax was paid voluntarily with little intervention from the ATO in 2016/17. This indicates a high level of compliance.
Additional scrutiny will occur where:
- amounts are taken from a company and are not repaid
- a complying loan agreement has not been put in place
- minimum yearly repayments are not made on a loan
- interest income from a loan is not declared on the company tax return
- a company asset is used for private purposes
- there are arrangements designed to avoid the application of Division 7A.
The focus is on directors who are shareholders of private companies who report low levels of salary and wages and minimal other sources of income.
The ATO examines whether shareholders and their associates are extracting wealth and maintaining a lifestyle that cannot be supported by the level of income reported.
Transactions through interposed entities
Division 7A will apply if a reasonable person concludes that a private company made a payment or loan to an interposed entity as part of an arrangement involving one or more interposed entities making a payment or loan to a target entity.
The ATO focus on those arrangements that seem artificial or lack commerciality.
Unpaid trust entitlements
Division 7A may apply where a private company is a beneficiary of a trust and is presently entitled to an amount of trust income but does not actually receive payment of that distribution. This amount is known as an unpaid present entitlement (UPE).
Situations that attract attention include:
- Private companies that include assessable trust distributions but do not receive payment of the distribution from the trust before the earlier of either the due date for lodgement or the date of lodgement of the trust’s tax return for the year in which the present entitlement arose.
- There is a failure to put the funds retained by the trustee on a sub-trust for the sole benefit of the private company beneficiary.
- There is a failure to pay the UPE at the conclusion of the term specified in an investment agreement.
- There are arrangements releasing the trustee from having to pay the UPE to the private company beneficiary.
This covers many taxpayers—the ATO’s publication covers areas of ATO concern and audit focus.
Many taxpayers seem to ignore the obvious fact that the ATO scrutiny will be strongest whenever big money is made. This is normally when the temptation to avoid tax is strongest.
The ATO uses the term “wealth crystallisation points”, which include:
- The sale of family businesses whereby sale prices are understated to cheat on capital gains tax.
- Family companies making big loans to shareholders. In these cases, dividends are sometimes disguised as loans to avoid tax.
- Illegal tax evasion schemes entered into to avoid a large “one-off” profit – an extremely profitable transaction may be scrutinised.
- Successful public listings of private companies.
Avoid shady tax schemes
Given the increasing sophistication of the ATOs data matching and detection processes, getting involved in tax evasion schemes is asking for trouble. The ATO also works closely with enforcement agencies such as the Australian Federal Police and the Australian Crime Commission, and consequently, the chances of being caught are now much greater.
Maximise legal tax breaks
Due to tax reform, tax can be minimised in legal and straightforward ways. For example:
- Maximise superannuation deductions – note the tax-free payouts after reaching age 60
- Negatively gear shares and property
- Maximise gains on family homes that are exempt from CGT
- Ownership of assets in discretionary trusts means distributions are paid to the lowest taxed beneficiaries.
SPECIFIC TARGETS IN 2021/22
The following matters indicate where some ATO attention may be:
Self-Managed Super Funds (SMSF)
Throughout 2021/22, the ATO will focus on non-arms-length income being derived by SMSF’s. This includes income from property development.
Occupations Targeted for Special Attention This Year
- Tradespersons and labourers in the building and construction industry – for example, plumbers, electricians, carpenters, tilers, and concreters
- Construction supervisors
- Construction project managers
- All sales and marketing managers
- Special attention related to the vehicles used by the construction industry – 1-ton utilities and above.
In the past, taxpayers claimed 100% of the expenses related to those vehicles, especially if the taxpayer had the use of another vehicle for all the private travelling done by the taxpayer. The ATO assumed that the private portion relating to the utility would have been minimal and normally allowed the claim.
The ATO is now questioning the reason for the claim and how the percentage of work use was determined.
Logbooks for cars
The ATO will check logbooks to ensure the details have been recorded correctly.
Provided the course leads to an increase in the current skills of the taxpayer, to a promotion or an increase in income and the taxpayer is currently employed in a position utilising those skills, all the expenses related to that course can be claimed.
Seminars and self-development course
The seminar or course can only be claimed if the seminar/course is directly related to the taxpayer’s current income-earning activity. In some instances, only some of the subjects in a course would be related to the current occupation. A percentage of the total course fee can then be claimed.
The main attention in 2022 will be on the loan interest, property repairs, and property investment seminars/courses attended and claimed. Since 1 July 2017, travel expenses to inspect or collect rent on residential investment properties are no longer tax-deductible.
Non-commercial (low) rental income from associates will also continue to be closely scrutinised in 2022.
Repairs cannot be claimed to get the property ready for tenants. Interest should be apportioned if a loan has both private and investment portions. Property investment seminars can usually only be claimed partially – the course content will have to be checked to determine what can be claimed.
Work-related expenses (WRE)
This ATO focus is aimed at those who use MyTax. Users are encouraged to get their claims right by using the ATO website resources, particularly in relation to claims for:
- mobile phones
- self-education expenses
- cents per kilometre vehicle claims
- overnight accommodation
In July 2017, the ATO announced it was increasing scrutiny on WRE claims. Treasury is concerned that these have gone up by 20% in the last 5 years. An education program is underway, and even those with relatively modest claims may be audited.
In the May 2018 Federal Budget, an additional $131 million was allocated to the ATO to check taxpayers’ WRE Taxpayers will be required to substantiate their claims. If they have been careless, significant penalties may apply.
This will be further accentuated throughout 2021, with the ATO likely to challenge many cents per kilometre motor vehicle claims – particularly if such claims are unusual for a taxpayer’s occupation. Uniform claims are already receiving close scrutiny in 2019/20.
The tax gap for WRE claims is estimated to be $8 billion. Letters sent out by the ATO have been very effective in reducing claims outside the occupation-specific norm. Those doing their tax on MyTax have “pop ups” to alert clients to possible excessive claims.
“Cut and paste” claims
The ATO has warned taxpayers about making “cut and paste” claims for the year ended 30.6.2021 due to the COVID-19 pandemic taxpayer activities have clearly changed. For example, the ATO would expect to see a fall in travel and motor vehicle claims in most situations. This would largely be due to zoom conferencing and working from home.
Below is a very brief summary of the taxpayers’ Charter.
You can expect the ATO to:
- Treat you fairly and reasonably.
- Treat you as being honest in your tax affairs unless you act otherwise.
- Offer you professional service and assistance to help you understand and meet your tax obligations.
- Accept you can be represented by a person of your choice and get advice about your tax affairs.
- Respect your privacy.
- Keep the information they hold about you confidential in accordance with the law.
- Give you access to information they hold about you in accordance with the law.
- Give you advice and information you can rely on.
- Explain to you the decisions they make about your tax affairs.
- Respect your right to a review.
- Respect your right to make a complaint.
- Administer the tax system in a way that minimises your costs of compliance.
- Be accountable for what they do.
In return, the ATO expects you to:
- Be truthful and co-operative in your dealings with them.
- Keep records in accordance with the law.
- Take reasonable care in preparing your tax returns and other documents in keeping records.
- Lodge tax returns and other required documents or information by the due date.
- Pay your taxes and other amounts by the due date.
Taxpayer’s Charter turns 25!
The taxpayer’s Charter has been with us now since 1997, and it is clear that the ATO considers the taxpayer’s Charter in its system development and internal procedures. The ATO maintains it has adhered to the principles embedded in the Charter. Independent surveys show the perception of the vast majority of Australians is that, by and large, the ATO has done a good service for the country. However, the Charter has no force of law and is merely a statement of intention. As a result, taxpayers have no real redress in the event of breaches of the Charter by the ATO. It is clear there have been numerous complaints about Tax Office breaches of the Charter which have not been addressed or remedied by the ATO or the Government.
In an “early warning” to taxpayers, the ATO issues taxpayer alerts to warn taxpayers about tax schemes and/ or arrangements that concern the ATO and are likely to attract close scrutiny.
TAXPAYERS WITH UNDISCLOSED OVERSEAS INCOME
The Operation Wickenby Tax amnesty for these taxpayers expired in December 2014.
The current situation is that such taxpayers who did not access the amnesty can expect to come under increasing scrutiny, given that G20 nations, along with several other tax jurisdictions, have agreed to commence an exchange of information.
In the recent past, there has also been a trend for disgruntled employees of financial institutions to download and send information to various revenue authorities.
In April 2016, this continued with the leaking of the “Panama Papers” when 11.5 million documents from one of the world’s largest offshore firms, Mossack Fonseca, fell into the public domain. The ATO was able to identify over 800 Australians, and a number of world leaders were embarrassed by the disclosures. Further audit activity is inevitable.
Another key issue is over 90 national revenue authorities agreeing to share tax data. Initially promoted by the OECD, much of this activity commenced in 2017.
In 2021 this activity continues to gather momentum, and along with “whistle blowers” now being a real risk, the situation for taxpayers with undisclosed overseas income only worsens.
Cash payment limit
To tackle tax evasion and money laundering, a limit of $10,000 for cash payments made to businesses for supplies of goods and services was introduced from 1 July 2019. An electronic payment method or cheque will be required instead.
Carve-outs from this measure are anticipated for consumer-to-consumer (non-business) transactions and transactions with financial institutions (which would still be subject to existing anti-money laundering and counter-terrorism financing reporting requirements).
‘Significant global entity’ definition
The definition of a ‘significant global entity’ (‘SGE’) will be broadened ‘to ensure that Australia’s
multinational tax integrity rules operate as intended.’
SGEs are subject to the Diverted Profits Tax rules, the Multinational Anti-Avoidance Law, and the Country-by-Country reporting obligations. While not mentioned in the Budget measures, any amendment to the SGE definition will presumably also impact the increased penalty regime applicable to SGEs and the General-Purpose Financial Statements lodgement obligations.
AUSTRALIAN TAX GAPS – ATO AUDIT FOCUS
The tax gap is an estimate of the difference between the amount the ATO collects and what they would have collected if every taxpayer were fully compliant. Tax gaps exist in all countries to some extent. The gaps are driven by cultural and human factors, global forces, complexity in business and legal systems, those who take aggressive tax positions, and genuine errors.
Tax gap estimates and their trends over time provide useful insights into the longer-term operation of the tax and superannuation systems. Along with other performance measures, they tell a story about the performance and integrity of the system, including levels of willing participation and significant shifts in compliance. They guide the ATO in determining priority risks and opportunities and where to invest resources.
Rapid changes to the economy, society and technology mean the issues driving tax gaps continue to evolve. No tax system can eliminate tax gaps; the cost of doing so would be excessive.
Instead, the ATO aims to identify, manage, and sustainably reduce gaps over time. Effective tax gap management requires engagement with all stakeholders on the size of gaps, the risks and drivers, and how these issues can be collaboratively addressed.
ADDRESSING THE GAP
ATO focus on prevention (before correction) influences the gross tax gap and drives it down. To focus just on correction would influence the net gap only.
The ATO takes this into consideration as they continue to refine and develop the range of strategies employed to manage tax gaps.
The ATO’s primary strategy is to make it as easy as possible for Australians to comply with their tax obligations, and they look at this from many perspectives:
- enhancing their digital services
- improving their processes and technology, including data-matching capability
- providing advice to the Government via Treasury, where they see law reform options
- working with partner agencies and stakeholders to improve the tax and superannuation systems
- providing guidance and advice to clarify areas of uncertainty, including issuing Taxpayer Alerts if they see potential risks
- dealing with non-compliance, including investigating aggressive tax planning.
Currently, the ATO is conducting tax gap audits, and the information gathered from all tax gap activities will inform further audit activity. Early indications are that SMEs have serious compliance issues with fringe benefits tax and Division 7A loans.
TAX GAP AND HOW THE RESULTS ARE DRIVING ATO ACTIVITY
In May 2021, the ATO disclosed the net small business income tax gap estimate for 2017-18 is 11.5% (or approximately $11.1 billion per annum).
Of the businesses in the Random Enquiry Program, they saw around 70% doing their best to report correctly and pay the right amount of tax. Attributes common to these small businesses were:
- good record keeping
- effective use of technology to manage their business; and
- ongoing engagement with a tax professional – especially before making important decisions or making changes to their business structure or buying or selling assets.
At the other end of the spectrum, the ATO saw about 4% of small businesses deliberately engaging in shadow economy behaviour but adding up to more than half of the size of the gap. The most common shadow economy behaviours observed were:
- deliberate omission of income
- deliberate omissions in record keeping; and
- overclaiming of deductions.
Separate to shadow economy behaviour, more than $5 billion of the small business income tax gap results from other, less deliberate behaviour – making honest misunderstanding obligations.
BUDGET MEASURES: CRACKING DOWN ON ORGANISED CRIME AND THE BLACK ECONOMY
The Government has already taken action to reduce the impact of the black economy. Their measures are estimated to return over $5 billion to the budget to fund essential services.
Since 1 July 2018:
- Businesses cannot manufacture, distribute, possess, or use software to hide their sales to reduce the taxes they owe.
- The Australian Taxation Office has raised over $500 million in liabilities through nearly 106,000 interactions with businesses, including over 5,500 mobile strike team visits, to tackle black economy behaviour.
- The Illicit Tobacco Taskforce has seized in excess of 71 tonnes of smuggled tobacco and approximately 103 million cigarettes, equivalent to more than $161 million in evaded tobacco duty.
The Government will progress additional measures, including:
- Ensuring people in certain high-risk industries cannot hide or under-report their income.
- Making it harder for businesses to pay cash wages to staff while also evading their obligations to report the income.
- Requiring businesses to have a good tax record when tendering for large Government contracts.
The Government will strengthen the Australian Business Number (ABN) system to disrupt black economy behaviour and target ABN misuse, generating an additional $22.2 million gain to the budget over the forward estimates. This measure will better align an ABN holder’s obligations with community expectations of compliant and honest business behaviour.
In addition to this, in June 2020 Federal Parliament passed legislation introducing Director Identification Numbers (DIN) to tackle the black economy and phoenix activity. This regime will apply from June 2022.
SIMPLIFYING AND RESOLVING TAX DISPUTES
Since 1 March 2019, the Federal Government has made it simpler for small businesses to resolve tax disputes with the Australian Taxation Office (ATO).
Disputes with the ATO can be stressful and intimidating, and small businesses often lack the expertise, time, and resources to challenge ATO decisions in the Administrative Appeals Tribunal (AAT).
The Government has created a small business concierge service within the Australian Small Business and Family Enterprise Ombudsman’s office to support small businesses without legal representation. Additional features to those announced earlier include:
- Prior to applying to the AAT, unrepresented small businesses can receive one hour of legal advice on a $100 co-payment payment.
- After paying the AAT a reduced application fee to review an adverse ATO decision, such as affirming an audit or cancelling an ABN registration, the small business will have a dedicated case manager throughout the process. Unrepresented small businesses may receive an additional hour of free legal advice administered by the Australian Small Business and Family Enterprise Ombudsman’s office.
The general rule is that these hearings in the AAT will be without lawyers. Where the ATO engages external legal counsel in the AAT and the small business does not have legal representation, the ATO will cover the cost of providing the small business with equivalent legal representation. The AAT’s decision will be made within 28 days of the hearing.
RISK FOCUSES FOR THE ATO
In the 2021/22 year, the ATO is increasing their focus on compliance activity after last year’s pause.
ATO compliance focus areas for small businesses going into this tax time are:
- Using third-party data like the Taxable Payments Annual Report ensures that more than $390 billion of income from contract work is declared in tax returns.
- Monitoring loss claims, particularly for first-time loss-makers, and closely monitoring loss carry back and temporary full expensing measure claims, and
- Monitoring small businesses to ensure they make appropriate distinctions between private and business activities and accounting for these accordingly. For example, that brand new Ute that has just been purchased and might be eligible for a full deduction this year. If it’s being taken on fishing trips for the weekends, this needs to be accounted for.
It is important to ensure that JobKeeper and JobMaker Hiring Credits amounts are included as income in the tax return.
ATO REVIEW OF TOP 500 LARGEST PRIVATE COMPANIES
In June 2021, the ATO published a report on its interim findings from the Top 500 tax performance program. The program, established under the Tax Avoidance Taskforce, encourages transparency from Australia’s largest privately-owned groups and helps the ATO to determine whether they are correctly meeting their income tax and GST obligations.
Established in 2016, the Tax Avoidance Taskforce aims to ensure multinational enterprises, large public and private businesses (and associated individuals) pay the right amount of tax in Australia.
According to the ATO, as a key program under the Tax Avoidance Taskforce, the Top 500 program provides insights into the operations of Australia’s largest privately-owned groups. It allows them to provide the community with confidence that this group, which comprises some of Australia’s largest private businesses and wealthiest taxpayers, pay the right amount. It is apparent that most large private groups report correctly and meet their taxation obligations.
Australia’s Top 500 private groups control $207 billion in net assets, report around $195 billion in total income and have over 16,000 associated entities. The group structures they use are complex, large in terms of the number of entities involved, and contain any combination of company, partnership, and trust structures, operating both inside and outside of tax consolidated groups.
The ATO has engaged with more than 400 groups through this Top 500 program to improve their transparency and build mutual trust, with more than 50 groups attaining the highest transparency rating.
The ATO notes that the trust and confidence established under the Top 500 program has prompted several groups to provide intelligence and commercial insights that have informed the ATO’s industry-based guides in sectors of the economy where Top 500 groups commonly conduct business.
The Top 500 program is an extension of the ATO’s focus on Justified Trust, which is a concept adopted from the Organisation for Economic Cooperation and Development (OECD).
Of the 500, just 52 groups have obtained the highest transparency rating of justified trusts, which assures the ATO that tax issues are treated correctly. The group benefits from a scaled-down “monitoring and maintenance” period of three years from the ATO.
To achieve justified trust. The ATO must be satisfied that a group has effective tax governance and that flagged risks are not present. That tax outcome from both ongoing and atypical transactions are understood, and that differences in accounting and tax results are complete and can be explained in context.
The largest portion of 213 groups have engaged with the ATO but have either not supplied evidence or are uncertain about committing to attainting justified trust. A further six are unwilling to work with the ATO. There clearly is more work to do.