What to do when the ATO comes calling

This article was current at the time of publication.

Tax agents and taxpayers should be aware that the Australian Taxation Office (ATO) is continuing to ramp up its tax compliance activities.

The 2023-24 Federal Budget contained a series of measures designed to further strengthen the ATO’s resources in terms of tax collection from businesses and individuals.

They include funding that will see the ATO’s average staffing level grow by more than 2000 people over the 2023-24 financial year, from 18,402 to 20,774 employees, according to Budget Paper No. 4: Agency Resourcing.

The extra staff numbers combine with other funding that will enable the regulator to extend its GST compliance program, and personal income tax compliance program and enhance its data matching capabilities.

In particular, the Australian Government has allocated around $40 million to the ATO so it can improve its small business data capabilities, including the design of a new compliance system to track unpaid superannuation.

Boosting tax receipts

The government has outlined its key objective of improving engagement with taxpayers to ensure the timely payment of tax and estimates its latest measures will increase tax receipts by $9.1 billion over the five years from 2022–23.

Enhanced data matching capabilities, leveraging technology resources from other government departments and the private sector provide the ATO with much greater visibility over financial transactions.

Reporting discrepancies picked up through data matching increases the risk of being contacted by the ATO and potentially being subject to an audit.

Partner Tax Advisory at financial advisory and accounting services firm Findex, David Hall, says the ATO is continuing to focus on larger private companies under its ongoing Top 500 and Next 5,000 programs funded by the Tax Avoidance Taskforce.

The ATO has been progressively contacting and engaging with Australia’s largest private wealth groups – based on turnover and net assets – and using data matching and analytic models.

The regulator says both programs seek “to give the community confidence that Australia’s largest privately owned and wealthy groups are paying the right amount of tax”.

“What we’re not seeing yet is that [being applied to] medium-sized and emerging private groups as much, but I suspect that will be stepped up,” Hall says. “That doesn’t mean it’s not happening, but it could be very targeted.”

Other areas of focus

The budget allocated $1.9 million in new funding over two years from 2023–24 for the establishment of a public registry of beneficial ownership of companies and other legal vehicles, including trusts.

Hall says the ATO is continuing to monitor trusts, especially concerning disbursements of funds under section 100A of the Income Tax Assessment Act 1936 (the Act).

“We’re hearing about some activity around trusts and trust distributions, but it seems to have been more historic.”

The ATO recently clarified its position on reimbursement agreements in Section 100A in Taxation Ruling TR2022/4, which addressed when unpaid present entitlement or an amount on sub-trust will result in a form of “financial accommodation” and be subject to Division 7A of the Act.

Hall adds that fringe benefits tax (FBT) remains another target area for the ATO and that there is a focus on cars and twin cab vehicles.

“We’ve heard anecdotally that clients are being audited for FBT and that the ATO is failing around 80 per cent of car logbooks in these FBT audits,” he says.

“Is the ATO being extremely aggressive in terms of its interpretation of logbooks, or are people just being slack? It’s showing there’s a bit of a problem there.”

Nine-step tip sheet for tax practitioners

CPA Australia has developed a nine-step fact sheet Responding to ATO enquiries detailing the areas of focus for the ATO and considerations for tax practitioners when engaging with the regulator.

Steps include ascertaining the ATO’s purpose, undertaking a risk assessment, informing the client, preparing to respond, engaging with the ATO, and the processes around complaints, objections and disputes.

Hall says that in most cases the ATO contacts tax agents in the first instance rather than going to clients directly.

“But we do see instances where they go straight to the taxpayer,” he adds. “The taxpayer needs to contact their tax agent. That helps the tax agent respond appropriately and answer the ATO’s questions.

“We like to talk to the ATO officer and find out what their concerns are. If it’s purely that there’s some mismatch we can usually answer that because we will know why.

“It might actually curtail an audit because the risk they’ve identified is answered.”

Meanwhile, Hall says having an audit insurance policy to cover the accounting costs of responding to and handling an ATO audit “is a must”.

“I think people undervalue it until you have an audit.”

Hall says the scope of ATO audits can potentially be expanded, but not to be afraid of pushing back and questioning something if you think the ATO is going beyond its remit.

“We’ve found that this happens a lot. There’s nothing wrong with that, but at the end of the day, there’s a large cost for the client [if] that audit drags on and gets more complicated.”