Submission on the review of the ATO’s cash economy benchmarking

On 3 February 2012, the Institute lodged a submission in relation to the review by the Inspector-General of Taxation into improving the ATO’s cash economy benchmarking processes. 

In our view, this review represents an important opportunity to examine the veracity of concerns raised by small businesses and their advisors in relation to the use of benchmarking tools by the Australian Taxation Office (ATO). Given the ATO’s increasing use of benchmarks in assessing taxpayer risks, we believe it is timely that your office is looking into specific aspects of this area at this time.

The Institute's submission made the following key points:

Risk identification

  • While the ATO has demonstrated that the results from the cash economy benchmark letters can have a positive impact on overall compliance levels, it is our view that the sophistication of the process should be improved to ensure that the strategy can be directly targeted at those who are underpaying their tax obligations [as opposed to the majority of businesses that appropriately meet their compliance obligations]
  • It is clear to us that ineffective processes are likely to create increased ‘reverse workflow’ both for the ATO as well as for tax agents and taxpayers
  • The ATO has stated that the benchmarks complement their use of other sources of information – such as the data matching program – in identifying those that are not meeting their tax obligations. However, in our view there is scope to more efficiently identify a range of compliance risks through better use of other information available to the ATO.

Differentiation

  • The benchmarks are typically published as a range of numbers, which recognises the variations that can occur between businesses. However, in the Institute’s opinion, the range does not always adequately take into account differences such as location, management decisions or specific or unusual business types
  • One solution to increase the effectiveness of the use of benchmarks is to have a wider range of industry codes, and perhaps dividing some industries into smaller segments in order to improve the likelihood of the ATO only targeting those taxpayers who are participating in the cash economy.

Basis for amended or default assessments

  • According to the ATO, default assessments are only raised where, after a number of requests, there are inadequate or no records to allow the ATO to verify their reported income. If there is a benchmark for that particular industry, the ATO may use this as a basis for making the assessment. If the ATO consistently follows that approach, the Institute does not see any cause for concern in the use of the Commissioner’s powers in this way
  • According to the ATO, there is a distinct relationship between benchmarking and record keeping, with default assessments often being raised where record keeping obligations have not been adhered to. It therefore follows that ATO should further promote adequate record keeping requirements for taxpayers, especially for new businesses, where early intervention in relation to record keeping should assist those businesses to fully understand their obligations from the outset.

Record keeping

  • Specific targeting of the cash economy would be improved if the ATO complemented its use of benchmarks with key messages in respect of what constitutes an appropriate record keeping standard. Additionally, given that compliance costs can have a proportionally greater impact on small businesses than on larger businesses [and this compliance burden appears to have been growing over time], the ATO will need to find a way to simplify some of its record keeping information and requirements to make it easier and cheaper for small businesses to meet their obligations.

ATO approach, processes and practices

  •  Latest statistics from the ATO have shown that a relatively small number of tax agents were linked with the majority of taxpayers that fell outside of industry benchmarks in a material way
  • The Institute believes that the ATO should engage with those tax agents in the first instance [perhaps in conjunction with the Tax Practitioners Board] to identify and address any shortcomings in their approach to managing tax compliance obligations on behalf of their clients, rather than contacting the relevant taxpayers directly. As you would expect, the approach that the ATO should adopt will need to vary based on the number of relevant clients that are outside the benchmarks.

Article last Updated 6 February 2012