Should tax time be delayed?

Intro:
Welcome to CPA Australia's With Interest podcast, bringing you this week's need to know information for businesses and accounting professionals.

Jane Rennie:
Hello, and welcome to CPA Australia's With Interest podcast. I'm Dr. Jane Rennie, general manager of media and content at CPA Australia. It's Monday the 29th of August, and right now we're in the heart of tax time which kicked off on the 1st of July. But should it have commenced then? That's the central question of today's episode. And the reason we're discussing this is that the ATO recently disclosed that more than 180,000 tax returns, or around 4% of the 4.5 million returns filed in July, were manually reviewed by an ATO employee to verify claims, or were adjusted by the ATO, or both. The ATO has pointed the finger squarely at early lodgements as the culprit for the high number of returns which needed reviewing or fixing. Joining me to discuss this issue is CPA Australia's senior manager, tax policy, Elinor Kasapidis. It's a pleasure to have you on With Interest Elinor.

Elinor Kasapidis:
Thanks for having me.

Jane Rennie:
Elinor, has there always been such a high, let's call it error rate in people's tax returns or is this increasing?

Elinor Kasapidis:
The error rate, we're not quite sure whether it's increasing because the ATO doesn't regularly release this data. This is really the first insight we have into some of the behaviours the ATO sees with early lodges. The errors that they would tend to pick up are the discrepancies between prefilled data, so that's the information like interest and dividends and salaries that many people will see when they go to lodge their tax returns. So that the more that the prefilled data comes through and the more information that the ATO can see, it's more than likely that errors are going to increase where people are lodging without using that information.

Jane Rennie:
And when you say a discrepancy between what's in there and what the prefill says, is that, for example, the interest rate might be different, what the taxpayers indicated and what the prefill information comes in and says?

Elinor Kasapidis:
Exactly. So using interest as an example, you might have one account that you use quite regularly and a savings account, and you only remember to declare the information from the savings account. When the ATO receives your bank account information from the bank, you've forgotten that you had a couple of cents of interest, for example, on that regular everyday account. So those mismatches will generally be automatically amended by the ATO.

Jane Rennie:
And how's this prefill information coming to the ATO? Are they collecting it or is it being provided to them?

Elinor Kasapidis:
The ATO has really extensive information gathering powers under the legislation, and sometimes it's specified in the law. So what happens is that banks, for example, securities exchanges, clearing houses, and also data providers, sharing economy platform providers, they all provide that information to the ATO who then matches it to taxpayers' accounts.

Jane Rennie:
And I know that employers don't have to finalise the income data that they provide until around mid-July. Does that mean the banks and health providers, other organisations that you mentioned, they also get several weeks after the end of financial year to provide it to the ATO?

Elinor Kasapidis:
They do, and it's not as hard coded as the STP finalisation date. That's why the ATO does say generally they'll get most of the information by the end of July, and they did send out a notice earlier this year to say that most people's prefill would be ready, but some of the providers, it still trickles into August, which again, it's that thing about buyer beware. You've got to be sure that when you go to lodge your tax return, that the prefill information that you might be expecting is actually ready to go.

Jane Rennie:
Does that mean there's still potentially more prefill information coming to the tax office even now?

Elinor Kasapidis:
Possibly. So in some instances, and it's very rare, but sometimes a provider may have issues with the provision of data or they might need to do some integrity checks, for example, and as more and more data is collected and more and more businesses are asked to provide data to the ATO, there is that journey of making sure that it's easy to process at the end of the year. So certainly in certain circumstances, it may take a little bit longer.

Jane Rennie:
Just for my own education, Elinor, can prefill information be corrected? Can I override as a taxpayer if I think that's wrong? Can I put in a new figure or is the prefill the final source of truth?

Elinor Kasapidis:
No, it's not the final source of truth. You can amend it. What will generally happen is that if you want to change the information in that label, you are allowed to override it, but you will need to provide the ATO with an explanation, and that may be subject to review. And we have had members report that when they have modified those amendments, they sometimes do get a call from the tax office, and it may just also be where information is incorrectly. Like a bank account might have the wrong tax file number on there if you're a trustee of a trust or the guardian of your child. So there are some administrative things sometimes that explain the differences.

Jane Rennie:
So just thinking about this high rate of errors, you've worked for the ATO in the past. Can you give me a bit of insight as to what kind of issues this creates from the regulator side, if you're someone working at the ATO, for example?

Elinor Kasapidis:
Administratively, you can imagine 180,000 tax returns is still a lot of tax returns to either check or correct. As I understand it, a lot of that data matching and the prefill corrections are done automatically, but there's still a lot of that checking and reverse workflows and phone calls that do happen. For those that need to be manually reviewed, I think it's really just that matter of making sure that the experience is efficient and perhaps if people had waited a little bit longer, they wouldn't need to go through that process.

Jane Rennie:
And just on the distinction between manual review and other review, am I right in thinking there's a whole bunch of computers checking these returns and flagging whether something needs to be manually reviewed?

Elinor Kasapidis:
That's right, and the ATO's been really clear. For example, with work related expenses, they have a model which compares your claims against similar taxpayers who are working in the same industry or a similar job. So they identify those that they call outliers whose claims are a little bit more than they might expect compared to others. So those manual reviews are often calling up the taxpayer, asking for records, asking for an explanation for claims. And that back and forth, it can take a little while. So again, if you're contacted by the ATO or if you're making a large claim and you know it's a large claim, to make that process a lot easier for everybody, have your records ready and make sure you can explain what you're putting on your tax return.

Jane Rennie:
Elinor, I want to talk a little bit about what people and tax agents potentially should have done, because in the lead up to tax time the ATO did a huge amount of media letting people know that it's tax time and that they need to lodge. But it wasn't until the 27th of July that the ATO in a media release gave the green light for taxpayers to lodge their returns on the basis that that prefill information, more than 80 million pieces of information, had now been completed. I feel that taxpayers might rightfully feel confused and possibly a bit upset because it seems like a bit of mixed messaging. And I'd imagine a lot of those people who did lodge early probably thought they were doing the right thing by getting in there and getting their return in. Do you think that's possible?

Elinor Kasapidis:
It's a fair point, and it is really about that balance because we do a lot of tax time messaging as well, because what we want is to make sure that people are ready to go, that they've got their records in order, and that the process is as smooth as possible. We're also mindful that people leave it quite late and may be subject to penalties, or don't make an appointment with a tax agent on time. So that's really the driver behind all of that, but then to ask people to wait, particularly when they have perhaps a refund due to them, it can be difficult when they may not actually be sure as well what information is available to them via prefill.

Jane Rennie:
So is it really a fair call on the ATO's part to point the finger at early returns?

Elinor Kasapidis:
I'd like to hope that it's not pointing the finger so much as explaining some of the risks of lodging a return early. At the end of the day we do have a self-assessment system, so the ATO really can only educate people about what they need to make sure is in their returns. Having said that, I think there's always that conversation, and we hear it from our members as well. When is the right time to start lodging?

Jane Rennie:
I'm wondering also about accountants, whether accountants should have discouraged their clients from lodging in July and whether that has any professional implications, because accountants would be aware that early lodgement is more likely to lead to mistakes. What's your take on this?

Elinor Kasapidis:
Speaking to our public practitioners, I think it's pretty standard that if they're getting appointments to lodge very early, the standard response is please wait a few weeks. Our members and tax agents more generally are well aware of prefill information and the value of it. So certainly they are providing a service to the client, though, and that client may wish to access the refund. Ultimately the information that is put on the tax return, it's a declaration from the tax payer that it's true and correct. So what our members will tend to do is to inform them about the risks, make sure that you're declaring everything, do you know what can happen if the ATO finds prefill data that's a bit different. So I think those conversations do take place. But again, the service is available to clients and they make their own decisions.

Jane Rennie:
Again, Elinor, just for my information, if the ATO has found a discrepancy and they do need to amend a tax return, as a taxpayer, what's the first sign that I'd get? Would I receive a letter? Because I might already have had my refund if any was due to me paid, so would I get a letter or a text message from the ATO saying, "Look, we found a mistake and this is the new amount."

Elinor Kasapidis:
Generally, depending on your communication channel, you'll receive an amended assessment from the tax office with an explanation as to why they've changed it. And then if you have already received your refund and have to pay some money back, there'll be some information about how to pay that to the tax office. It really is that formal process. You lodge a tax return. You're saying, "This is my information." The commissioner of tax finds something that's different. He has the right to lodge an amendment and create an amendment. So I think it's depending if you've used a tax agent, whether you are online, or whether you're using paper, that will depend on how you're notified.

Jane Rennie:
It seems somewhat inevitable given that the ATO is collecting more and more of this prefill information each year that the problem's only going to get worse. So I've got a simple fix for you, Elinor, and it's one that I've heard voiced by other people. Why don't we just delay the start of tax time until, say, the 1st of August to give this information time to roll in?

Elinor Kasapidis:
Ultimately it's an interesting question and it's actually one that we raise with the tax office and the government as well each year, because it's around when should people have access to their refunds? When should they be able to finalise their tax affairs? Ultimately under a self-assessment system, the ability to declare and finalise their tax as soon as possible after the end of the financial year really is a right. And for many of us, we have tax withheld throughout the year, or we pay instalments to the tax office to cover our bill. And if we've had more withheld or we've paid more than we need, that's the money that's owed back to us. So having access to those refunds as early as possible is really, really important.

Elinor Kasapidis:
The other point is that the more prefill data you get or the more data you get, and the more you try to put into prefill, when is the right time to cut it off? So if we waited till September, we might be able to get cryptocurrency exchange data. If we wait till October, we might be able to get all the taxable payments reporting system data for business transactions. So then you might even be 12 months out until the ATO has all the data that it needs to fill out your tax return. And I don't think that's a feasible proposition.

Jane Rennie:
All right, well I've got another solution for you. How about just not showing unfinalized amounts, so that prefill information that hasn't been finalised in the tax returns? I mean, why include it in the first place? If it's so prone to error, why not just leave these amounts out until they are final?

Elinor Kasapidis:
There's two elements. I think there's transparency. So one of them is if the information is available, such as, for example, single touch payroll or superannuation information, it's good that is available so that people can see what information is held on them. The fact that it's clear that those amounts are unfinalized, and it is made clear if you have a look at the systems, it really then becomes a choice for the taxpayer. And once again, I'm just really reinforcing this self-assessment system that the choices are made available to taxpayers and it's on them to decide what's best for them.

Jane Rennie:
And you just said so it is made clear, does that mean if the amount isn't finalised there'll be a little red flag or popups just letting me know it's not final?

Elinor Kasapidis:
Yeah, and you'll see that it's unfinalized. So it's single touch payroll, so that income statement, I think, is the clearest example that most of us will see, and it will be clear. And the other thing is when it's finalised, you actually receive a notification. So one of the easiest things for people to do is to wait until... If all you have a salary in wage, wait for that notification to come from the tax office that it's ready, and then you can go in and lodge your return or go and see your tax agent.

Jane Rennie:
And does CPA Australia have any other solutions or recommendations that would help deal with the issue of high rates of errors in returns?

Elinor Kasapidis:
When you think about digital tax administration, the OACD has a blueprint, and a lot of it talks about real time reporting or the collection of data throughout the year. And we've seen the start of that with single touch payroll and some of the superannuation payment events. At the end of the day, the reason an STP can be finalised so quickly is because it's maintained and reported throughout the year and it aggregates. I think the more that data flows increased to the tax office and the more familiar businesses become with reporting, it's more than likely that throughout the year, these amounts are reported and it's just a reconciliation rather than having to do a huge data dump. So I think the timing is the solution, and instead of delaying people being able to lodge their returns and get their refunds, it's really about how do you get that information earlier and faster to make it easier for everybody.

 

Jane Rennie:
That's all we've got time for today. Thanks very much to our guest expert Elinor Kasapidis. With Interest is a weekly podcast. If you like what you've heard today, why not subscribe to With Interest on your favourite podcast app. From all of us here at CPA Australia, thanks for listening.

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