ATO data powers can increase your tax bill
As many will be aware the Australian Tax Office (ATO) has far-reaching powers that allows it to access vast pools of external, third-party data. In the past the value of this access has been limited by the ATO’s inability to effectively categorise, sort and match this data; however after investing millions of dollars, finally ATO systems are becoming more and more sophisticated.
This means the ATO can use complex techniques to match their data with data from other institutions both in Australia and overseas, looking for discrepancies.
A typical example is as follows: a tax agent receives a letter from the ATO concerning ‘Client A’, stating that he recently sold a property in 2009; the letter notes further that there is no record of a capital gain in his 2009 return and that, unless the ATO is informed otherwise, Client A’s 2009 tax return will be amended for this income.
So, how is the ATO able to identify the fact that there may be more tax to pay? In this example there is a simple explanation - the ATO cross-references and compares land title office data with taxpayer returns.
This is not just happening with land title offices but also with share registries, motor vehicle registers, Centrelink, family tax assistance offices, state revenue offices, even marine registries. The list is growing.
While this activity by the ATO may be nothing new, the difference now is that the ATO is now making effective use of computer programs to data match and then issue a computer generated letter to the tax agent with little human interaction. For the ATO this is a simple and cost effective way to target more clients than the traditional high risk, high return targets.
A small fact that most people are unaware of is…
“The onus is on the taxpayer to prove what their income is, not for the ATO to disprove”.
So, if the ATO issues a letter stating that it believes the taxpayer has additional income from foreign sources of, say, $40,000 then the taxpayer has to prove he or she does not. The ATO has identified this additional income simply by an Australian bank reporting amounts transferred from overseas into the taxpayer’s bank account. In many cases there is a reasonable answer to why the amount is not included in the taxpayer’s return. However, proving this can be time consuming and costly for the taxpayer and their agents.
Another area that the ATO is targeting is the ‘cash economy’. A traditional ATO technique was to look for asset purchases on registers such as motor vehicles, yachts and property that a taxpayer would be unable to afford on the income declared in their tax return. The ATO would then issue an amended tax assessment for undeclared income of a level that would be reasonable to afford such items.
However, times change and a newer technique aimed at the cash economy is the use of comparisons; whereby the ATO compares similar taxpayers in a similar industry and looks for anomalies. These are called ATO ‘industry benchmarks’ and, if a taxpayer is outside them, then the risk of an audit is increased.
For example the ATO will expect the Profit Margin for a dentist earning in excess of $815,000 to be 22%. If a dentist lodges a return with a profit margin of 19% then the ATO will consider this outside the range. The tax agent will receive a letter saying that the taxpayer appears to have understated their income and unless they hear otherwise they will issue an amended assessment for the total expense figure divided by 78% (1-22%). If the expenses were $700,000 this would be an increase in taxable income of $30,000.
As advances in technology increase ever more rapidly, the ATO’s ability to find, analyse and match data is also increasing. The ATO is already targeting auction sites like eBay.
What should taxpayers do now?
Ensure you have proper record keeping procedures particularly regarding cash transactions
Keep detailed records on large transactions that are not taxable e.g. transfers from overseas or sale of the family home
Take out audit insurance, which insures you against the cost of your tax agents and bookkeepers putting together a case to support your position
Contact your Accountant for a preventative review now.
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