Small business owners and individuals were put on notice last year when the Australian Taxation Office (ATO) advised it would be commencing a new program of random audits in 2015–16 to claw back an estimated $3 billion in lost revenue.
As well as targeting deliberate tax evaders, the ATO has its sights set on those making claims for tax deductions that are either extraordinarily high or do not confirm with the allowable deductions that relate to their specific industry or area of employment.
Each year, around more than two million business tax returns and 12 million individual returns are lodged with the ATO, either directly or via a registered accountant. The bulk are quickly assessed and processed if they raise no red flags. However, on average around 350,000 returns are identified by the tax regulator as containing errors or omissions.
But that number is set to get much bigger. By leveraging more advanced software technologies and analytics, the ATO will soon be able to quickly cross-check every business and individual tax return against bank account data and other transaction databases that show an online paper trail of business conducted and items bought and sold. The ATO will be able to do this in real time and anything that doesn’t fit inside the ATO’s rigid parameters will set off alarm bells.
“These enhancements mean that every return is scrutinised and it’s becoming a lot easier to identify claims that are significantly higher than those claimed by people with similar occupations and employment income,” says ATO Assistant Commissioner Adam Kendrick.
Staying inside the tax boundaries
Aside from outright tax evasion, where individuals set out to escape the ATO’s notice through false and misleading claims, a high percentage of the individuals contacted by the ATO after lodging their returns are found to have incorrectly claimed for deductions they are not entitled to.
Generally speaking, businesses and individuals can claim a tax deduction on any expense directly related to earning income. The ATO outlines a range of allowable deductions on its website which, depending on specific circumstances, can include the following:
- Clothing-related expenses.
- Gifts and donations.
- Home office expenses.
- Interest, dividend and investment deductions.
- Professional fees.
- Self-education expenses.
- Tools and equipment.
- Vehicle and travel expenses.
The ATO website also enables browsers to search for deductions for specific industries and occupations, including fitness and sporting industry employees, hospitality and airline industry workers, journalists and others.
Triple-checking deductions
One look at any online job-seeking site will show you the vast array of jobs, professions and industries there are.
From a tax perspective, each area of specialisation is likely to have its own unique characteristics and associated deductions. Do your homework to make sure you don’t incorrectly claim deductions for your clients that they’re not entitled to.
Reducing risk with Tax Audit Alert
Having a detailed understanding of the allowable deductions for hundreds of different roles and industries is a huge task, even for tax accounting professionals. So it’s little wonder many accountants are not entirely aware of what can be legitimately claimed by their clients – business owners and individuals – when they come in to have their tax affairs sorted.
As a trusted adviser, being able to advise your clients around what they can and can’t claim in relation to their industry and role is vital. Failure to do so can even have legal ramifications.
But help is at hand, thanks to market-leading software that incorporates the ATO’s average work-related deductions for all occupations. Thomson Reuters’ Tax Audit Alert, as part of Tax Assistant, raises ATO audit alerts at the time of data entry, providing direct proof to clients that their claims may provoke an ATO audit.
In doing so, Tax Audit Alert is helping accountants to better engage with their clients and reduce the risk of ATO audits; engage in specific conversations on each deduction item; maximise tax refunds; and reduce wasted time reworking audited clients’ returns.
As the ATO’s data-matching capabilities become more and more sophisticated, accountants have an opportunity to cement their role as a trusted adviser as clients try to navigate the shifting tax landscape.
