Can the ATO profile individual tax agents?
The Australian Taxation Office’s multimillion dollar funding to increase compliance enforcement has raised eyebrows. Here’s what you need to know.
In Australia, a standard deduction for work-related expenses has been discussed for many years. It has its pros, including the simplification of the tax reporting and tax enforcement systems.
It also has its cons, including the fact that taxpayers might claim the standard amount whether they have actually incurred the expense or not.
The Henry Review Final Report from December 2009 recommended that: ‘A standard deduction should be introduced to cover work-related expenses and the cost of managing tax affairs to simplify personal tax for most taxpayers.
Taxpayers should be able to choose either to take a standard deduction or to claim actual expenses where they are above the claims threshold, with full substantiation.’ But the recommendation did not become a reality.
Tax agents vs self-assessment
Recently, the Commissioner of Taxation, Chris Jordan, has made public comments about the ‘gap analysis’, or the difference between what people should be claiming and what they are claiming. Most controversial have been his statements around incorrect claims being higher amongst individuals who have utilised the services of tax agents compared to those who self-prepared their tax return.
“We are continuing to see a level of incorrect claiming for deductions that is concerning – particularly in relation to over-claiming of work-related expenses,” he said during a speech at The Tax Institute National Convention in March 2018.
“While the amount of each adjustment may be small, the overall impact when extrapolated to the whole population is significant … the work-related expenses gap is estimated to be greater than the large corporate tax gap of $2.5 billion.
It would seem complacency has crept in and the three golden rules of deductions are not being observed.
“Though this is not new news, what is concerning is the different results for self-preparers and those who use an agent. The incorrect claiming in these random enquiries is actually worse in agent-prepared returns.
“It would seem complacency has crept in and the three golden rules of deductions are not being observed. That is, you must have spent the money and not been reimbursed, it must relate to your work (not private expenditure), and you must be able to prove your expenditure if asked.
“These results are really disappointing. For years I’ve heard how tax agents were guardians of the system – these random enquiry results tell me this is not the case for some agents.”
They were strong words, which has prompted the Government to allocate $130.8 million in the 2018–19 Federal Budget from 1 July 2018 to the Australian Taxation Office (ATO) to increase compliance activities targeting individual taxpayers and their tax agents.
Robyn Jacobson, a Senior Tax Trainer with TaxBanter, says a reference in the funding announcement to ‘significant compliance issues for individual taxpayers’ suggests the funding is for ATO compliance activities around work-related expenses.
There has been a growing misconception over many years by some taxpayers and their tax agents that the substantiation exception constitutes a standard deduction, but it does not.
The recent Budget announcement should be of no concern to good tax agents, she explained. But tax agents who interpret the ‘substantiation exception’ as a ‘standard deduction’ that can be claimed by their clients – those who automatically include a claim for clothing and laundry of $150 in every client’s tax return, for instance, or $300 for other work-related expenses – should be very worried, indeed.
“There has been a growing misconception over many years by some taxpayers and their tax agents that the substantiation exception constitutes a standard deduction, but it does not,” said Robyn.
“You still have to come back to the two basic requirements in the tax law – an individual must incur an amount to claim it, and it must have a nexus to deriving their assessable income.”
Can the budget solve the issue?
So how can $130.8 million help an organisation the size of the ATO to police a nation of tax agents and taxpayers? Easily, remarked Robyn.
“The ATO doesn’t necessarily have to devote labour to these reviews and checks,” she said. “They can use data matching. They build software systems, very sophisticated data matching programmes, then obtain data from third parties and match it up to their data. The system spits out exceptions and anomalies and that report is all they need to tell them where to look.”
If everybody paid the correct amount of tax, everybody would pay less tax.
The ATO can also profile individual tax agents by looking at data such as average deduction claims for clients of a specific agent, average income of an agent’s clients, predominant occupation code of their clients, an agent’s prosecutions and amendments rates, etc.
“If any of these are disproportionately higher or lower than other agents then that attracts the ATO’s attention,” she said. “If people are shopping around to find tax agents who will give them better deductions, those agents will be easily identified, and this is a good thing. After all, if everybody paid the correct amount of tax, everybody would pay less tax.”
About the author
Chris Sheedy is one of Australia’s busiest and most successful freelance writers. He has been published regularly in the Sydney Morning Herald, Virgin Australia Voyeur, The Australian Magazine, GQ, In The Black, Cadillac, Management Today, Men’s Fitness and countless other big-brand publications. He is frequently commissioned to carry out copywriting and corporate writing projects for organisations, including banks, universities, television networks, restaurant chains and major charities, through his business The Hard Word.