Small business owners. Rogue tax practitioners. Uninformed taxpayers. Rental property owners. Such taxpayers have long managed to avoid consequence for partially-correct tax returns. Finally, it seems the Australian government has acknowledged the extent to which individuals are undermining its principal revenue collection agency – the Australian Taxation Office (ATO)
Fresh off a funding windfall from the Federal Budget and state-of-the-art data matching technology, the ATO is as well-resourced as ever to spot illegal expense claims lodged by individual taxpayers and their registered tax agents.
Budgetary Funds Flow to ATO
When the Australian government issued its 2018-19 Federal Budget, it was clear that a need to bolster the resources of the ATO had been realized. And rightly so, many would argue, given the immense tax gap troubling the nation.
Indeed, July saw the ATO reveal that the individual income tax gap figure had ballooned out to $8.7 billion. Quite simply, this figure represents an estimated difference between the total amount of tax collected from individual taxpayers and the amount that the ATO believes they would have otherwise collected in the instance whereby every Australian taxpayer executed their respective tax returns in a fully legally-compliant manner.
Adding context to this $8.7 billion figure – which the ATO, alongside top-tier academics and economists, extrapolated from a sample of 858 cases from 2014-15 – is the extent to which it dwarfs the net income tax gap for multinationals.
Indeed, for all the heated debate concerning the degree to which multinationals comply with Australian taxation law, the ATO estimates that it is losing out on roughly $2.5 billion annually. Whilst still concerning, it ought to be emphasised that this estimated business-related tax gap is less than one-third of the total amount avoided by Australian taxpayers.
At least these individual taxpayer discrepancies are followed up by the ATO, correct? Well, no. Remarkably, the Tax Office and its expert panel estimated that a paltry $500 million of this exorbitant $8.7 billion tax gap was successfully recouped.
Now knowing this, the impetus for the 2018-19 Federal Budget’s multiple tax-collection-related funding initiatives is much easier to comprehend.
One of these, for example, saw the Government provide the ATO with $130.8 million so as “to increase compliance activities targeting individual taxpayers and their tax agents,” according to page 31 of Budget Paper No. 2.
“One thing that stands out from this year’s Federal Budget is the Government’s determination to properly resource the ATO and related organisations.” – Prof. Robert Deutsch (Snr. Tax Counsel, The Tax Institute)
ATO Targets Tax Agents
Throughout 2018, the ATO has repeatedly taken to the public forum to voice their increased level of concern over incorrect claiming from registered tax practitioners. Prompting such discourse has been the damning revelation that such false expense claiming “is actually worse in agent-prepared returns” as opposed to self-prepared tax returns.
Indeed, tax agencies have long had to contend with the oft-unrealistic demands of particular clients when it comes to lodging expense-related claims. In an ever-competitive space, tax practitioners are well aware that a consistent refusal to adhere to these demands will increase the chance that a prospective client will leave for a competitor of lesser professional integrity.
Tax Office Ups Public Awareness
Realising that the enforcement of a sweeping crackdown on rogue tax agents would likely yield little long-term benefit, the ATO has also been committing resources toward educating taxpayers.
Notably, the Tax Office uploaded a publication to help Australians gain clarity regarding popular tax “advice” they repeatedly hear. Specifically, the ATO clarified the “top 10 tax myths and misunderstandings it says are causing incorrect claims.”
The informative, easy-to-read article informs individuals about record-keeping exemptions (e.g., $150 for clothing and laundry, $300 for work-related expenses, etc.), the apportionment of travel expenses, and whether certain everyday expenses can be claimed (e.g., gym membership, cosmetics, Netflix subscription, etc.).
With the push to educate Australians, it appears as though the freshly-funded ATO is preparing to clamp down on incorrectly claimed work-related expenses. This is further supported by the fact they identified it as the main driver behind the aforementioned $8.7 billion income tax gap for individual taxpayers.
In their corresponding media release, the ATO identified the most common work-related expense claim mistakes as being: “claiming deductions where there is no connection to income, claims for private expenses, or no records to show that an expense was incurred.”
“High rates of incorrect claims for rental property expenses and non-reporting of cash wages” were notably highlighted as “other areas of concern” by the ATO; suggestive of another area that may attract more of their attention moving forward.