How to prepare for ATO compliance activity

Intro:
Hello, and welcome to the CPA Australia podcast, your weekly source for accounting, education, career, and leadership discussion.

Elinor Kasapidis:
Hello, and thanks for joining us today. My name is Elinor Kasapidis, and I'm the tax policy advisor here at CPA Australia. This week on the CPA Australia podcast, we will be discussing dealing with the ATO on difficult and complex issues, with Miles Dayeton from Dayeton Tax Consulting. With the large numbers of JobKeeper and cash flow boost reviews currently being undertaken by the ATO, we think it's important for members to consider the potential for the ATO to review their claims.

For many members who haven't interacted with the ATO in a compliance context, it can be a challenging experience. During this episode, we will discuss knowing when to reach out for expert assistance when the ATO starts compliance activity, what to consider when providing advice to your clients, and the potential risks of not being prepared for ATO review, and things to consider when engaging with the ATO.

Our guest today, Miles, has worked with the ATO in a wide range of roles. In the latter part of his career, he was involved in the implementation of compliance strategy for large public groups and international corporations. This role included the reporting of results, providing instructional material for compliance teams, and developing better ways of working. Miles left the ATO and now works for a medium-sized accounting practise, handling the firm's day-to-day ATO activity. He has also established Dayeton Tax Consulting, whose major focus is assisting accountants and tax agents to manage the more difficult tax issues. Welcome, Miles.

Miles Dayeton:
Thanks, Elinor. Great to be here.

Elinor Kasapidis:
Our topic today is dealing with the ATO on difficult and complex issues. Miles, you've seen both sides of the fence. What's your perspective?

Miles Dayeton:
Well, I just see plenty of opportunities for a more productive dialogue. That can be improved. Just improved understanding. And from what I've seen, there's two basic areas, and being very simplistic, where businesses and tax practitioners might strike difficulty, and that is where you've got a situation where the underlying issue is very complex, hard to understand, a lot of law involved. And that might be of something like transfer pricing, for argument's sake, and we'll really explore that in our next podcast.

The other may be where it's a relatively simple matter, and use JobKeeper as an example of that, and where it's... The problem then arises, and the problem also arises with the transfer pricing example, where then you start to deal with the ATO. And so some of those issues may be new to an accounting practise and... They really not too sure of their ground, and another, when it's just generally uncertain around the law. And what the practitioner then has available to them is that they can develop a view in-house, or the business can try and sort it out themselves, or they can look to bolster their position with getting advice, say, from another firm.

So nothing really new there, but really just trying to... What I've seen is where the difficulties may arise. If we use JobKeeper as a case in point, because it seems to be rather topical, and let's say the client as about to interact with the tax system... I'll explain the rationale why that's a important issue in itself. But if I could ask you a question first, Elinor.

Elinor Kasapidis:
Absolutely. Go ahead.

Miles Dayeton:
JobKeeper's pretty straightforward, isn't it, you'd say. And all, really, a business needs to do is show that their turnover is reduced by 30%, period on period. And that's pretty much it. But have you found any issues?

Elinor Kasapidis:
Actually, what we have found with JobKeeper is that there's actually significant complexity in the application of the various rules and legislative instruments, which was quite an unanticipated. There were also surprises for some when they discovered they weren't eligible. For example, the new businesses. Over 8,000 of them had their payments stopped. So CPA Australia spent significant time liaising with the ATO throughout the period. We raised these issues of concern, these areas of uncertainty that you talk about, and we aim to support members in the profession in applying the rules correctly. We received a lot of member queries, so, really, that shows it's not as straightforward as government announcements may make it sound.

We have also heard from members that they also invested significant time in getting across the rules in record speed, which is that in-house research that you mentioned, and there were still elements where professional judgement was required. You needed to make a call for JobKeeper purposes. So our practitioners certainly recognise the risks related to the advice they give. They've also expressed concerns about what might happen if they get it wrong. What's been your experience, Miles?

Miles Dayeton:
Yeah, El, pretty much exactly the same. And I mean, even just using GST turnover. A lot of businesses won't necessarily understand they need to [inaudible 00:05:45] that. What's attributed one period to the next. And I've been seeing similar problems with cash flow boost. So a fledgling business or a business that's changed its structure or done something like that, and hasn't met those really tight time constraints of, say, the 12th of March to report, really runs into some problems. And yes, you can ask for a review of the decision or if that's not forthcoming, you can also object. But that's all very time-consuming, and as a busy practitioner, it's time you perhaps don't have.

Elinor Kasapidis:
So what do you say in terms of decisions that flow from the approach that the practitioner chooses to take?

Miles Dayeton:
Well, yeah, that's,, I suppose one of the nub or one of the main points I've trying to get across, El, is at some point, you've got to report to the ATO, and you've got to report by a certain time. So that means that you have to... Forces you to make a decision, whether it be the business or the practitioner, or whatever it might be. You have to crystallise your position at some point. So what then you have to have in mind is the things that might unfold once you've put pen to paper, so to speak. What will be the situation when your matters or your issue, or what have you told the ATO is going to be reviewed? And so often, under pressure, you probably don't really think through that very well.

And so you put down something just to get JobKeeper, I think, and all the COVID-19 initiatives are classic case in point, where you're not exactly sure of what you're supposed to be saying and telling the ATO, and then you've also got the issue where you don't fully appreciate the ramifications. So what I suppose I'm saying is you're picking up a risk, or assuming a risk. You've got the risk of being caught. You've got the risk of providing the wrong advice to your client, and then having a problem. You've got the risk, your professional risk, as a practitioner, or even as a business.

Elinor Kasapidis:
And so what comes from that? So you talked about risk and uncertainty, so what comes next?

Miles Dayeton:
Well, I suppose what I've looked at, and it's just a way of classifying it or categorising it in my own mind, El, is that you've got a number of options and they're not discrete. But the first may be, "Well, look, I just chance my arm," in that situation where you're rushed. And the next option is well, you really consider a position, but you then are happy to work with the ATO through it. So that might be that you request a ruling, or have a workshop with them about the issue. The third option, and this is maybe going up to the larger businesses, and the larger transactions, but where you really try and to get your view properly thought through. You seek external advice on it, and all that sort of thing.

So I suppose, just very quickly, trying to categorise those things. There's an option of just, I might call it, chancing my arm. Next option might be working pretty closely and pretty early with the ATO. And the last option might be the fortress type of thing, where, as I say, seek all the advice I possibly can, and do not approach the ATO until I have to maybe report, or whatever

Elinor Kasapidis:
Would option A be a sound practise, Miles?

Miles Dayeton:
Well, look, it probably has been in the past, but as we know, the ATO is getting better at so many things: data matching, what have you. Think... I can't remember. There's a high number of people that have already been picked up for incorrect or inappropriate JobKeeper claims. So I will say if you've got high appetite for risk and you're comfortable that your client has, possibly. The next option, I mean, is something where you're comfortable working through the facts, so working with the ATO, and you're comfortable that you've got a fairly strong position on that, and prepared to be fairly open. So that's another way of looking at the world. And then I suppose where the last option is that you... It's an external to the ATO view. So it might be something like a reasonably-argued position. But that's got a lot of cost involved and it still might mean that you haven't got something that's agreeable to the ATO.

Elinor Kasapidis:
And for many practitioners who often have very dedicated clients, but they are time poor, and they do want to offer value for money, there's that judgement call as to whether the additional cost or time of another opinion or perspective sufficiently reduces the risk, or perhaps also looking at whether that risk is sufficiently high enough to justify that additional information in the first place. So what are the things that you think our members should consider when looking to engage externally, either with the ATO or with expert advice?

Miles Dayeton:
Well, that's exactly right. And it is very much a cost-benefit analysis. "What's my risk of getting caught? What's my risk of losing a client because I've given them incorrect advice?" or whatever. And I think that's one of the things that we need to, perhaps, suggest that the PR practitioners think a little bit ahead. And I know that's easy to say, but, really, develop a bit of a fast-and-loose, if you like, decision tree about, "Well, what happens here? What happens there?" And have I got that covered?" And those are decisions that... And a decision-making process, that's pretty difficult under time pressure, I fully recognise that. And cost. And then whether... And the amount of stress. Maybe Might you can think about audit insurance, as well, to mitigate that client risk, but there's a number of issues there that you need to deal with.

Elinor Kasapidis:
So continuing JobKeeper as the basis for our example, I'm a practitioner. I have a client who's current GST turnover has dropped by the 30% necessary between March 2019 and March '20. So it seems pretty clear cut that they're eligible for JobKeeper support. What's the issue here?

Miles Dayeton:
I would have thought so, and I suppose this is one of the things, and we need to... And this is what I suppose I'm saying, El, in terms of looking ahead. So you have a situation where, potentially, there's a Practical Compliance Guidance, 2020/4, which looks at a number of situations where there's potential for a scheme or an arrangement that's not acceptable to the ATO to have been undertaken by the client, or by the business. If we can just use a simple scenario to illustrate that. Client uses a cash basis for GST reporting, and as you say, they've reported the turnover has dropped by 30%. But what happened was, this is early stages, obviously. Client gave one of their major customers a concession for easier payment terms. They thought that their client might struggle to make payments anyway, and they're one of the biggest and longest standing clients, so there's a fair bit of trust involved there.

And so for a few reasons, like just allowing them to change the payment terms, seemed like a sound business approach. Keep them in business, keep them in float, keep the relationship happening and so on and so forth. So that means that the income that would have come through in March has come through in a later period, and then given rise to that... One of the factors that gave rise to that 30% drop. So the question is, is that a genuine attempt to help a customer, or is it some sort of manipulation of the turnover numbers?

Elinor Kasapidis:
That's an excellent question. When we come back, Miles will talk through the factors to take into consideration if the ATO does get in touch in this scenario and asks for an explanation.

Announcer:
We hope you're enjoying this episode so far. We just wanted to take a brief moment to let listeners know that CPA Congress is going virtual this year from the 10th to the 12th of November, join the global CPA Australia community at Virtual Congress, and hear from industry experts about leadership, finance, and accounting skills, and how you can keep taking care of business. For more information, go to the link in the show notes. And now back to the episode.

Elinor Kasapidis:
Welcome back. We were discussing the potential issue with what appeared to be a straightforward decline in turnover test calculation. Miles left us with the million-dollar question. Was the change in payment terms, which impacted the entity's turnover figures, a genuine attempt to help the customer and assist them, or was it a manipulation of the turnover numbers? So let's say the ATO starts a review of the client's JobKeeper claims. Miles, you referred earlier to PCG 2020/4.

And in this guide, the example number one talks about deferring the making of suppliers to obtain the JobKeeper payment. So differentiating commercial decisions from a scheme is not always an easy area for clients or practitioners to navigate. On one view, this scenario is that the client did undertake a scheme, and let's assume that the ATO suggests that they believe this to be true, that a scheme had been adopted by the client. Using your options, how can we explore how that might play out?

Miles Dayeton:
I think that you could basically say that the client has interpreted the initial JobKeeper instructions in a certain way, and they've looked to support their customer's actions, with business decision. And that business would be at an arm's length. So it's not something to them. So it's not something that they're manipulating or whatever,, necessarily. And where they've got a sound record of interactions with the ATO, broadly speaking, there's no record of non-compliance or anything of that nature, if they've adopted what I'm calling, before, the chancing their arm approach, they may have a concern now, because they possibly haven't developed, if I could call it, a defence. And that was what I was saying earlier about thinking through to where something that I put in my tax return, or in this case, a job application, where that could lead down the track.

Miles Dayeton:
So they possibly haven't done that. A better-prepared client, with one of the, if you say, using our fortress example, where they've really thought through the legislation, and got all their facts together in a well-prepared way, they're in a very, very good position to be able to deal with that. If I can then go back to the other option, which is about, "Well, let's deal with the ATO on this," it's more than likely that you might've given the ATO a call or emailed them, whatever it might be. And at least you might have a reference number or something like that, saying, "Look, I have asked for advice previously, and I was informed of such and such."

So we've got a number of different situations where it can be pretty problematic for the clients at one level, through to, well, you're probably on fairly sound, solid ground, where the ATO is saying, if you've made an honest mistake or error, they're not going to be throwing the book at you. There's a number of... How you want to interact with the ATO is predicated on a number of things, El. Your level of comfort in approaching them. And you may have had a poor experience in the past, or never have had to speak to them before. Your appetite for risk. You have a reasonable position, but you're concerned that you're going to be intimidated by the ATO, and roll over and just accept their case. The client's appetite for risk. So are they up for a challenge or whatever it might be?

Some practitioners are, let's say more, more assertive than others and would be happy to take on the ATO. And then it can all also relate to the ATO people that you engage with. You might get someone that's fairly bullish in their approach, from the ATO's perspective. Others may be far more, what shall we say, understanding, and able to... You may be able to relate to them better.

Elinor Kasapidis:
So those factors, I think, are really important. It's almost, when the ATO comes, the practitioner, the client, you need to have a conversation about what your tactics and strategy will be, in terms of engaging with the ATO, and the approach to resolving the issue. Continuing the example, let's say the review concludes, and at the completion of this very brief exercise, because reviews are very high level, the ATO officer tells me that they don't accept the explanation, and demand repayment of the JobKeeper payments, as well as suggesting that they're going to impose significant penalties. As a practitioner, what are the things I need to think about now?

Miles Dayeton:
Well, El, just to... For the sake of labouring the point, I think it goes back to the approach that the practitioner wishes to take. They may... And that would pick up those factors that we were just talking about before: their appetite for risk, how comfortable they are with the client, and where the client would sit with the ATO. And then, of course, based on that, the preparation. So if we've gone for the chancing the arm approach, probably I'm not particularly well-prepared, and I would need to then consider an objection, that then I start to have to spend the money because I've got to go around and chase documentation and facts and all that sort of thing.

Miles Dayeton:
So you've got a position where it's... I've tried to save money, potentially, and time earlier on. Now, when the ATO has a look, I've got to spend that money. So that's what I'm calling... That's an example of where the approach plays out. If I've interacted with the ATO and sought their advice, or had a discussion with them, having that information together is something that certainly wouldn't harm your case. So saying, "Look, I've been here, I've approached the ATO in an open and transparent manner." And that's when that type of approach may start to yield benefit.

Elinor Kasapidis:
Certainly. So preparation is key, and I think that's usually the best advice for almost every situation. And then when you think about the ATO, you're first engaging with them. You're looking at a range of tactics and overall strategy in terms of how you want to resolve it. But also if the interactions continue, the ATO continues to not accept the position, you do still have that objections phase to get through, if not the court. So all of what you do at the beginning really needs to be able to carry you through that whole process. So when you think about that overall approach, the decision points that come on that journey, and through the JobKeeper scenario, what are the key points that you'd like our listeners to take away from this?

Miles Dayeton:
I suppose one of the things that I think, and this is probably showing my bias or whatever, and because I'm ex-ATO, but I think because it makes sense, when you've got a situation like JobKeeper, the earlier and more comprehensively you approach the ATO, I think that works in your favour. That may not always sit well with practitioners. I know a lot of them just... And all the clients will say, "Well, don't tell the ATO anything. Those... Whatever. We don't want to engage with them in any way." But I suppose the point, then, I'm trying to get across is that there's a range of ways of dealing with the ATO, as well. It doesn't necessarily mean that you're just going to tell them everything and accept what they say as well. So that's another factor, and I think I was trying to make that point earlier, Elinor.

Elinor Kasapidis:
So really is also... I'm hearing a lot of communication. So it is actually having that conversation with your client, having that conversation with the ATO. And of course, as an intermediary, you're often translating between two parties with different perspectives, and trying to get to the right resolution. With that in mind, do you have a preferred approach or suggestions from your experiences in dealing with the ATO on issues like this?

Miles Dayeton:
Yes, Elinor, I mean, I suppose what I'm saying is that you take a consistent approach, and that approach is communicated, to use your word of earlier, throughout the practise and you're dealing with your client. And based on that approach, that then follows, or your decisions flow from that. So if you've decided, "Look, we're going to just play our cards close to our chest," that you adopt that approach. Probably flipping and flopping is maybe where you get into trouble. And I think... But then having said that, doesn't mean that taking a definite... Or taking an approach means that you're locked into something, because obviously circumstances change. But what it does do is set you up so that you know, "Look, we're going for a... We're not going to spend money here, but the client is prepared that there could be an expensive issue down the track."

And so, as you said before, preparation is key. Preparation based on the approach that I'm going to take. So if you're looking at everything here, I'm going to dot every I and cross every T. I'm going to have a reasonably-argued position, so I may have to seek advice from external practitioner who's a bit more expert in a particular area. And I think what that does, or what it should do, is set it up so that it has benefits for everybody, in my view. Because the ATO gets benefits because they know they haven't got a lot of digging around to do... Go back. If you've taken a certain view, they know that the information is there. They know the facts. Not going to be arguing about the facts. You might've applied the law differently, but at least understand how you've done that. As opposed to all of these guys, have not done the preparation, not done the work. So we're going to take a different approach to them as well.

For the practitioner, I think they're in the driver's seat and for the client, the surprises are reduced. So it means the whole thing can be very, very well-managed, and what that does is then reduce the cost. It can take the time factor, take that out of it, to a certain extent. And the stress, because you know. "I'm expecting stress because I've taken a laissez-faire approach. Alternatively, my stress has reduced because I've already talked to the ATO about this." So my suggestion is to have a broad approach in mind, and base your intended dealings with the ATO on that, and prepare accordingly.

Elinor Kasapidis:
Thanks, Miles. Those insights will be very helpful, because the ATO has indicated with its black economy task force work and its data-matching programme on top of JobKeeper and cash flow boost claims, they will be expanding their compliance activities ever more into that small-medium business market. And the likelihood of practitioners being contacted about one of their clients is likely to increase. So those tips and insights were very, very helpful. Thank you so much, Miles, for joining our podcast today.

Miles Dayeton:
Thanks, Elinor, and thanks, CPA, for having me on. It's been great discussion.

Elinor Kasapidis:
Be sure to visit our show notes on the CPA Australia podcast webpage for links and more information on this week's episode. Thanks for listening.

Outro:
Thanks for listening to the CPA Australia podcast. For more information on today's episode, please visit the show notes at www.cpaaustralia.com.au/podcast. Never miss an episode by subscribing to our podcast, on Apple Podcasts, Spotify, or Stitcher.