The ATO's 2017 hit list
With its data-matching capabilities at all-time highs, the ATO will be casting a wide net in 2017.
Every year accountants and businesses alike ponder what will be on the ATO’s regulatory hit list for the year to come. For 2017 and beyond, however, compliance targets may not be as obvious as they once were.
According to Tony Greco, senior tax adviser at The Institute of Public Accountants, the ATO used to be much more transparent, releasing a lengthy document on a yearly basis detailing the areas they would be honing in on.
“The ATO used to tell the industry these are all the things, these are all the market segments we’re looking at. Effectively it was a road map ahead,” Mr Greco says.
“They've moved away from that and it’s not as transparent as previously.”
This is somewhat understandable according to Mr Greco who says that telling people what they plan to crackdown on can be counterintuitive.
“If they’re telling people what they're going to focus on, people will generally steer away from those areas,” he says.
“But then people think if they’re not doing those things then maybe they’ll be off the hook, so it’s a twin edged sword.”
With the absence of such a document this year, Public Accountant spoke with the ATO assistant commissioner, Colin Walker, to gain some insight in to the ATO’s 2017 hit list.
Targeting tax agents
The first area to look at is of course what the ATO will be targeting in relation to tax agents and accountants themselves.
Mr Walker says that, as always, they will be checking that tax agents are complying with their own obligations.
“For all tax professionals we always look at their personal tax obligations, as does the Tax Practitioner Board who are their regulators,” Mr Walker says.
“We look at how they're complying with the law in their own personal tax affairs and we, like the regulator, have an expectation under the taxation services act that they will maintain their own obligations and that they'll turn their mind to supporting their clients in an appropriate way.”
Secondly Mr Walker says they will be looking at how accountants are managing their own client issues.
“We take a pretty clear focus on those agents that we see through our analytics who are doing the wrong thing,” he says.
“There are not many. It’s not a significant part of the population at all, but like most professions there is an element which we call ‘agents of concern’ who are involved in egregious activity.”
“So we've got quite a bit of work going on in that space all the time, trying to identify that risk and then in conjunction with the Australian Federal Police and the Tax Practitioner Board we then try to deal with those agents.”
A new approach to WRE
The ATO has recently begun a new way of looking at work related expenses by looking at agents as opposed to clients directly.
“Work related expenses have always been a focus of the ATO, both for self preparers and for agent lodgers,” Mr Walker says.
“What we're doing at the moment is taking a view from an agent perspective and looking at all their clients and doing the analytics,” he says.
“Essentially what we try to do is compare tax payers to tax payers in similar areas, in similar professions and then look for what you would describe as outliers, those that don’t seem to be around what you would expect would be the average type claims.”
Mr Walker says that agents who appear to be outliers can expect to receive contact from the ATO.
“We're looking at the agents and a number of those we will then send a piece of paper that essentially shows them what their client base looks like from the WRE claim perspective and then we're going to go out and talk to them about what we're seeing,” he says.
“If we find issues we can highlight those to the agents and clarify and clean up some of that and of course if we find significant problems in there we can actually deal with them directly with the agent.”
Mr Walker emphasises that not all agents who appear to be outliers will be making illegitimate claims.
“There are always cases where particular agents focus on particular types of industries and may even focus on particular types of tax payers,” he says.
“So you can actually be outside of what you would call the mean type figures but still be quite legitimate.”
Mr Greco adds that he would expect the ATO to be double checking accountants own personal WRE claims as well.
“For professionals such as accountants and tax agents, their own returns are subject to industry averages, so again looking at their level of spend,” Mr Greco says.
“Self education is a big one. They will make sure that the self education wasn’t a holiday, and a lot of people do tag on a holiday with a conference and that's okay so long as the main purpose of going was to attend such a thing.”
“Also normal averages for things like motor vehicle claims and subscriptions and the like.”
The black economy
When it comes to more general targets, the cash economy is at the top of the ATO’s list.
In December the government announced a task force lead by the former chair of the B20 anti-corruption taskforce, Michael Andrew, to take down the ‘black economy’ which includes those who operate entirely outside of the tax system or deliberately misreport their tax and superannuation obligations.
“We're very much looking at the cash and hidden economy,” Mr Walker says.
“That is a major focus for us and in the past it would've been viewed as catching people who are involved in the cash economy. The focus these days is very much around protecting the honest businesses from unfair competition.”
Mr Walker says the ATO now understands that it needs to deal with the impact of wrongdoers on law-abiding businesses.
“We don't want to have a situation where businesses are struggling because they are suffering from unfair competition,” he says.
“So we're very focused there in areas such as the restaurant and cafe, hair and beauty, and building and construction [sectors], and other areas such as the sharing economy industries will be focuses into the future in that space.”
Mr Greco adds that the increased amount of third-party data available to the ATO is helping to facilitate its crackdown on the cash economy.
“For small business there are benchmarks: the cash economy benchmarks, for example. They've been up and running a while and they use those quite extensively,” Mr Greco says.
“If a business is looking like it’s under-reporting income or is not as profitable on paper as the average, then what they'll do is they'll match that up with other data.”
Third-party data is useful because the benchmarks are averages and don’t take into consideration factors like location and number of hours worked according to Mr Greco.
“There's a lot of third-party data making its way into the ATO and the ATO has that at its disposal, and it also has the ability to ask for information,” he says.
“It can go to eBay, it can go to Airbnb, it can go Uber, and it can basically suck up all that information and then compare it to its record of activity that has been lodged. There's no limit to the amount of data.”
Other areas of scrutiny will include fringe benefits tax compliance, pheonixing and multinationals tax evasion.
Mr Greco highlighted that the ATO will likely look closely at fringe benefits tax compliance for things such as work vehicles.
“There's a lot of people using exempt vehicles and they are exempt only under the very strict condition that you use them just to go to and from work but a lot of these are lifestyle vehicles that people also use on the weekend,” Mr Greco says.
“[The ATO] look at sporting venues for example where a lot of these vehicles appear and they take number plates down and say, ‘well hang on a minute, this is more than to and from work you're using it for’.”
Phoenix activity will also remain on the ATO’s radar, as well as the governments, in 2017 according to Mr Walker.
“We’re very concerned about those who facilitate phoenixing and how we deal with that,” Mr Walker says.
“There is a phoenix task force that the ATO leads and we'll be continuing to work in that space.”
Mr Walker says that accountants can help facilitate this crack down by continuing to be open with the ATO about suspicious activity they’re seeing.
“The large agents quite regularly talk to us about what they are seeing, particularly in the building and construction industry, and what they are seeing is particular liquidators and agents at that egregious end who are involved in such practices,” he says.
“So we are very open and trying to build and develop those relationships.”
The final areas of focus are around the big tax players.
“Then you've got all the activity happening on multinationals and high wealth individuals, just making sure that they're compliant with the law,” Mr Greco says.
Mr Walker says they will be honing in on offshore tax evasion under the Serious Financial Crime Task Force and the Multinational Anti-Avoidance Law.
Mr Greco also reminds tax agents to always comply with the law as the chance of getting away with non-compliance is rapidly shrinking as the ATO’s level of data access rises.
“At the end of the day [agents] have to ask the right questions from their clients and if they find that the client does want to do something not in compliance with the law, it almost forces them to say ‘I can't lodge this return knowing that you want to miss expense this way or under report income or not disclose a capital gain’,” Mr Greco says.
“Effectively their licence is at risk because the Tax Practitioners Board has a code of professional conduct and regardless of which agent you go to they all have to be competent in the application of the law.”
“So if a tax agent decides not to follow the law then it’s a clear breach and there'll be pain if they client gets pulled up because the Tax Practitioners Board can do lots of things to that agent.”
An open door
As the ATO’s hit list becomes increasingly long and the chance of non-compliers getting caught becomes increasingly high, Mr Walker urges tax agents to be open and transparent with the ATO at all times.
“We’ve always encouraged being very open and voluntarily complying but also we've been very strong on encouraging people to come forward and tell us what they're seeing, what they're encountering,” Mr Walker says.
“We talk to agents very regularly about them coming to us when they see schemes or promoters come to them with things that they think are outside of the law or are pushing boundary lines within the law where they're uncomfortable.”
Mr Walker believes that when an agent is uncomfortable it's normally a pretty strong indicator that something is wrong.
“Agents are highly professional people and they know their law very well and they support their clients very well so it's not unusual for them to come forward and say ‘I don’t like what I’m seeing here’,” he says.
“In many ways it really challenges their professionalism when others are out there doing things that are wrong.”
Voluntary disclosure rewards will continue to be used to encourage agents to be more transparent, even if they are accidentally in the wrong.
“In Australia we have high levels of voluntary compliance so you don't want to hit those people over the head if they do something wrong occasionally,” Mr Greco said.
“If the client doesn't fully disclose and it’s not unreasonable for the agent not to ask that question then it’s not the agents fault if they've decided to underreport some income and it hasn't been brought to the agent’s attention, then you can't blame the agent for things like that,” he says.
Mr Greco believes this is part of a bigger shift at the ATO.
“The whole cultural aspect of the ATO is slowly changing and this is an example of one of those things where they've effectively given tax payers a break for trying to do the right thing or trying to lodge on time and haven’t been able to do so.”
Mr Greco says he feels that this can have both positive and negative implications.
“It’s good for people who are trying to do the right thing, and the tax law is complex, so every so often someone will get something wrong, hitting them over the head doesn't necessarily make them good tax payers going forward,” he says.
“But people who go out there to do the wrong thing, they're the ones that probably shouldn't be given the pity of these confessions. So it’s a balancing act but it’s very encouraging that they understand that the tax laws are complex and people generally try to do the right thing.”