Appearing in In The Black magazine, March 2020
With the end of the current financial year in sight, tax advisers have to be aware of moves by the Australian Tax Office to improve the level of compliance as it works through existing programs and introduces some new initiatives.
Generally, the ATO is pleased with the direction of change, judging from recent comments by its head, Chris Jordan*. In the past few Budgets the ATO has received funding increases which it has used to address the income tax gap and the black economy. There has also been ongoing support for the Tax Avoidance and Phoenix Taskforces.
The intelligence-gathering work of the ATO has also increased, with tip-offs to its Tax Integrity Centre at record levels. As a result the ATO has conducted audit visits to businesses in areas where there appears to be a high level of black economy behaviour, such as not reporting transactions made in cash. The Melbourne suburbs of Frankston and Croydon, and Bega on the south coast of New South Wales have been targeted by the ATO in this program.
The high level of tip-offs might signal a social change, away from the longstanding culture of ‘gaming’ the tax rules towards the view that the system should be fair and transparent.
At another level, the introduction of Single Touch Payroll and the expansion of the Taxable Payments Reporting Systems appears to have improved compliance due to enhanced reporting.
“It is important that everyone pays their fair share of tax, no more and no less,” says Elinor Kasapidis, Tax Policy Adviser at CPA Australia. “The ATO has been signalling for some time the industries and practices where it has concerns. The latest efforts are a continuation of ongoing compliance activities to address the black economy. That has our support.”
Michael Papandrea FCPA, Director of ACT-based Papandrea Partners, sees the advances in technology and information-gathering that the ATO has made as a game changer.
“From a practice perspective we have to keep abreast of the changes under way,” he says. “Advisers have to ensure that they have the systems and training in place to consistently identify the clients who may be impacted by such changes, or areas of risk within their practice. Checklists and investment in smart software can be very useful in this.”
Issues for attention
An area that the ATO has long identified as problematic is rental income. In particular, on the deductions side, the ATO has indicated that some taxpayers claim travel expenses to visit their rental properties, while some claim expenses under repairs when they should be depreciated. There have been other cases where mortgage interest has been claimed when the property was not rented or available for rent, but was a holiday house.
Some property investors who do not use tax advisers seem to be unaware of the ATO’s data-matching capabilities, and so make claims that might not be fully compliant. This could represent at opportunity for tax advisers to increase their client base by emphasising that professional advice is now not just useful but effectively essential.
“Unfortunately, with the information available from Tax Advisor Google many taxpayers believe they are experts,” says Papandrea. “With its new AI systems the ATO has the ability to match behaviour with what is being declared. Up until now the cross-checking system has been limited. AI is closing that gap, so information will be available almost instantaneously to the ATO. This is where compliance is headed.”
Papandrea, looking towards the end of the financial year, believes that the ATO will continue its focus on GST compliance, especially GST on property transactions. Inappropriate claims on vehicle expenses or travel expenses will be another area of attention, as will debt forgiveness and trust distributions. Issues around the Superannuation Guarantee are likely to figure over the next few years, especially with an amnesty currently in place.
Kasapidis adds that the ATO has updated its information on private groups and has proposed increasing the reporting burden on high-wealth groups. There is also an ATO draft ruling on work-related expenses for non-business taxpayers which may impact some claims.
Another issue for tax advisers is the change Is the lodgement method, with the introduction of myGov ID and Relationship Access Manager. The previous ATO Portals system was the subject of criticism as lacking some functionality and not being user-friendly. While the new system might experience some teething problems the general view is that it will, over time, improve efficiencies for tax practices. However, advisers will need to ensure they are fully conversant with it before the end of the year, and that security issues such as password protection are addressed.
The overall trend is that the ATO is getting smarter at ensuring compliance. Taxpayers who might be tempted to ‘sail close to the wind’ should bear this in mind, and advisers should ensure that clients understand the message.
“Advisors should have their systems and knowledge up to speed and need to ensure that they can dissect their client base to identify the risk areas,” Papandrea notes. “They need to be on the front foot. Documenting discussions and advice at every stage is critical.
“The ATO is also looking closely at tax agents who have statistically been making the highest claims. Who would want to be dealing with that? You need to protect your brand and reputation.”
In the longer term, the move towards pre-filled returns for many taxpayers will mean that the business model of many practices will have to change.
“While increasing volumes of data are being used for pre-fill, tax advisers and agents still add value in more complex areas of tax and ensuring their clients have access to the full range of concessions and deductions available to them,” says Kasapidis. “Notwithstanding this, CPA Australia has for many years encouraged members to enhance their offerings to clients and focus on value-added services.”
Papandrea agrees. “Compliance will continue to be an integral part of any accounting business if done properly,” he says. “For example, a compliance review of a client’s affairs to stay abreast of the legislative changes and risk areas is the perfect segue into identifying areas of the client’s business that may require attention. This in turn leads to broader business advice for the client and the opportunity for a practitioner to expand into advisory services.”
* See the November 2019 issue of In The Black, ‘ATO’s Chris Jordan: the man with a tax plan’, at https://www.intheblack.com/articles/2019/11/01/atos-chris-jordan-man-with-a-tax-pla