The Australian Taxation Office wrongly investigated almost 6,000 small business owners for being non-compliant cash economy taxpayers, according to a review by the Inspector General of Taxation released yesterday.
The review, conducted by the Inspector General of Taxation Ali Noroozi, looked at the way the ATO uses benchmarks to target the cash economy.
The review found general support for the benchmarking approach used by the ATO but it also found the Tax Office made adjustments in only 24% of the 7,600 benchmark audit cases it considered, leaving 5,830 businesses wrongly accused.
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Noroozi told SmartCompany any kind of benchmarking is always going to capture some compliant taxpayers but this should be minimised as much as possible.
“You would think there is room for improvement so that such a large number of taxpayers would not necessarily be caught,” he says.
Noroozi warns the figure of 24% needing adjustments may even be lower as a result of small businesses not fighting the ATO’s initial assessment.
“The representative bodies of these small businesses were claiming that a whole lot of small businesses just pay the default assessment because they don’t have the time or resources to convince the ATO that the default assessment is correct. So they pay it just not to deal with the compliance burden,” he says.
“We were not able to quantify how much of that there is, so it could be that 24% figures might be even lower.”
Noroozi says the capturing of compliant business taxpayers through the ATO’s benchmark-based program is a burden disproportionately borne by small businesses and results in unnecessary stress and extra compliance costs for small businesses.
“The compliance burden on small business is greater because small businesses have a lot to do without an enormous number of staff so their main concern is to run their business and they are worried about time away from business,” he says.
Noroozi has recommended to the ATO that it improves its risk identification and audit processes to exclude more compliant taxpayers earlier in the process, saving them time and additional costs.
The ATO has agreed with nine of the 11 recommendations made in the Inspector General of Taxation’s review and partially agreed to two.
Noroozi says he has told the ATO if compliant taxpayers are caught up in the investigations, the Tax Office needs to ensure they are dropped out of the system as quickly as possible with the least impact on them.
“I have suggested the ATO get an independent expert in analysing statistics to get assurance that the methodology is sound,” he says.
“And, secondly, they tell taxpayers the escalation process, so if taxpayers find the auditors are not doing things as expected they know how to escalate the matter.
“If it’s the first time the Tax Office is auditing the taxpayer maybe the Tax Office should allow the taxpayer to provide other cogent explanations with a warning that next time you need to have proper records.”
He says the ATO has already started improving its benchmarking system to address the problems raised in the report.
In the meantime, Noroozi’s recommendation to small businesses that may be targeted by the ATO is to make sure their records are up to date.
“Good record keeping is a business’ best defence in the event of an audit, but it also makes good business sense,” he says.