The ATO's post-Covid money chase

It’s not just businesses that are struggling to deal with the legacy of the COVID pandemic. The Australian Taxation Office (ATO) is battling to close an expanding gap between what Australians owe and what it is taking in.

And the new federal government certainly won’t be discouraging a post-COVID revenue hunt. For tax practitioners, that means a changed ATO attitude to important areas of small-business taxation. In an address in April, ATO small business head Deborah Jenkins pulled back the curtain on how the office is approaching life after COVID.

Ms Jenkins told tax practitioners that the ATO wants to “continue this effective partnership as we work with small businesses to help them recover, maintain, or exit gracefully (or with dignity)”. Then she advised that the ATO will be working particularly hard in four areas:

1. debts owed to the Tax Office;

2. GST fraud;

3. the shadow economy; and

4. mistakes caused by complexity.

Which among these is actually new as opposed to a continuation of previous years? And what is the ATO already doing? After all, actions can speak louder than words.

1. Debt bombs

The big issue for the ATO this year is the vigorous pursuit of debts owed by small businesses. This is new in more ways than one. The ATO has been lenient on tax debt since the pandemic began in early 2020. During lockdown, it did not pursue small business debts with its usual urgency. Small businesses enjoyed the leniency, as the next chart shows.

But as a result, small businesses now owe more money than ever before: more than $24 billion at the end of the last financial year. That’s much more than any other sector. In fact, the ATO faces two debt bombs, and they are connected.

One is debt owed by the people and businesses of Australia to the Tax Office. The other, much bigger, is debt owed by the federal government. The size of the latter helps explain why the former is being pursued with fresh vigour. Australia’s new Treasurer, Jim Chalmers, will be extremely eager to round up as much revenue as possible as he struggles with the fiscal situation left behind by COVID.

“For the first time in the history of this country, an incoming government is inheriting $1 trillion of debt,” the Treasurer has been telling people. So every dollar of revenue counts. Mr Chalmers has said he intends to start improving the budget by hitting big tech companies.

But the tax changes for multinational companies announced by Labor are expected to raise less than $2 billion in the next few years, meaning there will be more pressure on tax compliance in other areas. Mr Chalmers met with Tax Commissioner Chris Jordan in his first few days in the job.

“I would have liked to have been a fly on the wall”, said Tony Greco, the IPA’s senior tax adviser and an advisory panel member at the Board of Taxation. “He was probably saying, ‘If there’s money to collect, collect it!’”

Interestingly, the ATO recently revealed it is worried that the idea big business is not paying its share has started to affect small-business payment rates.

“Perceptions of performance in the large market have spilled over into other markets,” said Deputy Commissioner Hector Thompson in May.

The ratio of collectable debt to tax collections has blown out from under 6 per cent in 2018–19, prior to COVID, to more than 8 per cent in 2020–21. The ATO will be looking to pare that ratio back — and that means asking more business owners to pay up. Who should get ready for attention? Anyone with a debt, particularly those who own a ute and boots. Companies in the construction sector owe the ATO more than $7 billion, a figure higher than for any other industry.

2. GST fraud

We’ve had GST fraud for as long as the GST itself — for example, people claiming GST on invoices for services that were never rendered and for which payment was never made. It’s a game of cat and mouse. As ever, the ATO is data-matching and chasing businesses for claims that look out of line.

In 2022, however, the ATO has become aware of a whole new kind of GST fraud. It went viral in 2021–22 via ads telling individuals and business owners they were eligible for loans or grants. Scammers then accessed MyGov accounts, registered an ABN, and put through fake GST refund claims, collecting a cut. An estimated 40,000 Aussies with claims worth an average of $20,000. 

That added up to $850 million, and the ATO is now pursuing the fraudsters in what it calls Operation Protego. Cleaning that up could be expensive. If your clients were pulled in, the ATO is keen to make contact.

3. The shadow economy

All the indicators show cash use is declining in Australia.

But it retains a vital place in one sector: the shadow economy. Most of us know a cafe or takeaway shop where the EFTPOS machine always seems to be broken, or have had a tradie ask to be paid in cash.

The ATO has been trying to chase out shadow economy activity for FEATURE TAX DEBT years, explained Mark Chapman, head of tax communications at H&R Block. He calls it a “perennial favourite target of the ATO” with unreported sales “a big risk”.

The ATO has used all sorts of tactics to sniff out unreported sales. For example, it got information on wholesale coffee bean deliveries to cafes.

“From that data, the ATO was able to extrapolate roughly how many cups of coffee each shop should have sold and — using average coffee prices — and what the value of turnover would be for each shop,” Mr Chapman said.

The other way in which shadow economy activity is facilitated is via tax agents and accountants who help businesses hide income or deal in cash. As Kylie Parker of Lotus Accountants explained, some agents attract less ethical clients.

“Like attracts like. If you’ve got someone that’s going to do something dodgy for you, they tell their friend and the friend wants it as well,” she said.

But the ATO is trying to uproot less-than-exemplary tax agents by reporting them to the Tax Practitioners Board. Referrals from the ATO rose by 140 per cent in 2020-21, and the board terminated the registration of 75 practitioners.

4. Mistakes and complexity

While it is chasing debts and attempting to shine light on the shadow economy, ultimately, the ATO realises chasing wrongdoers is inefficient.

“We know we can’t audit our way to success,” Ms Jenkins said in May.

Instead, the ATO is pursuing a philosophy that owes much to modern manufacturing practice: save effort by doing things right in the first place. So the Tax Office wants advisers to help clients understand their obligations and avoid mistakes.

As Ms Jenkins put it, “getting tax and superannuation understood by small businesses and their advisers, and the right amount paid in the first place, is the most efficient way to administer the tax system”.

Major errors the Tax Office is seeing at the moment relate to reporting obligations for the business structure, and mistakes over: the law surrounding specific tax issues such as fringe benefits; personal services income; capital gains tax; Division 7A; and foreign income and legal expenses, and associated travel costs.

Changing times The issuing of director penalty notices is one sign the era of leniency is coming to an end, and a new government is keen to maximise its business tax take. With inflation rising and the labour market still tight, 2022–23 will challenge many businesses — and their tax advisers.