ATO’s data matching takes the (coffee) cake

feature-cake-200aThe ATO has been conducting an increasing range of data-matching exercises in its efforts to combat the cash economy. I could say the latest exercise takes the cake, but it doesn’t – it takes the coffee!

In its latest drive, the ATO has announced data-matching programs targeting coffee sellers and also hardware store trade account holders. One gets the distinct impression that the ATO’s data-matching program knows no bounds.

It is, of course, totally legitimate for the ATO to target the cash economy as it does have an impact on tax revenues and also on SME competitiveness. For example, a competitor up the road charging cash prices and not returning all or any of the income can undercut the prices charged by another business that correctly complies with its tax obligations. But it’s a question of how far data-matching checks can (or should) go and the compliance costs on SMEs of those checks and any resultant ATO action.  

Where the tax man identifies a business that appears not to have declared all or part of its income, the ATO says it would either write to them asking them to explain and offer them an opportunity to make a voluntary disclosure, or it may contact them directly through the ATO’s audit area. Where businesses fail to comply with their tax and related obligations (even after being reminded of them), other actions may be taken by the ATO, including making default assessments of a business’s tax liabilities.

But, back to coffee. The ATO has obtained coffee supplier data that it says identifies businesses (such as coffee shops and cafes) that have purchased more than 15kgs of coffee per week in the 2009-10 and 2010-11 financial years i.e. between 1 July 2009 and 30 June 2011. The information about coffee sellers in the program will be checked by the ATO to ensure they are reporting all of their business income. The ATO expects to match records of more than 8000 individuals.

The following organisations have provided the coffee data to the ATO:

  • Segafredo Zanetti Australia Pty Ltd, suppliers of Segafredo
  • Cantarella Bros Pty Ltd, suppliers of Vittoria Coffee, Aurora and Delta
  • SL-DE Holdings (Australia) Pty Ltd, suppliers of Piazza d’Oro, Douwe Egberts
  • Valcorp Pty Ltd, suppliers of Lavazza
  • Primo Coffee Pty Ltd
  • Complete Coffee Pty Ltd, suppliers of Primo Caffe Bar Coffee Range and Caffe Di Stefano Signature blend
  • Coffex Coffee Pty Ltd.

The ATO has also obtained details of individuals or businesses that hold trade accounts with purchases between $10,000 and $3 million in the 2009-10 financial year from Wesfarmers Limited (Bunnings Group Ltd). Individuals and businesses in the program will have data purchases cross-checked with reported income to check tax compliance.

Also related to the building industry, the ATO has obtained data on complaints and licensing information for the 2009-10 and 2010-11 financial years from NSW Fair Trading, Qld Building Services Authority and Government of SA Consumer and Business Services. The data will be used to identify those in the building industry who use cash transactions to avoid tax or fail to report correctly.

The ATO expects to match records for about 20,000 individuals in both the above building industry related programs.

Small business benchmarks

In other SME tax compliance news, the ATO has updated its small business benchmarks with data from the 2010 financial year. Two new activity statement benchmark ratios for a wide range of industries have been added. The ATO has now published benchmarks for businesses with different turnover ranges across more than 100 industries encompassing over 900,000 small businesses.

For the purpose of the benchmarks, a small business is any business reporting an annual turnover of up to $15 million.

The ATO has stated in its 2011-12 Compliance Program that it had identified 46,000 businesses that may be under-reporting their cash income based on the benchmarks.

So the likelihood of an SME hearing from the ATO is increasing.

The kinds of benchmarks used include cash sales benchmarks, performance benchmarks (which provide key business ratios for different industries) and input benchmarks (which show an expected range of income for tradespeople based on the labour and materials they use).

The use of benchmark ratios has come in for some criticism and the Inspector-General of Taxation is currently reviewing how they are being used.

The Inspector-General said his review would look at the concerns raised by taxpayers and tax agents over how the benchmarks are developed and applied. The review will also consider whether recordkeeping requirements expected of small businesses are too onerous and if it is fair to use benchmarks as the basis for default assessments.

It has been suggested that the ATO’s overall approach in using the benchmarks can be “heavy handed” with too much faith being placed in benchmarks. A major concern for SMEs is whether large numbers of compliant taxpayers are being unnecessarily targeted and thereby being subjected to unnecessary compliance costs.

My article last year entitled Taxing the Tax Man – how the ATO use of industry benchmarks will be investigated explains further.

The newly released activity statement ratios are considered by the ATO to be “key benchmark ratios” which the ATO can use to identify businesses that may not be reporting some or all of their income. The ATO may also use these ratios to quantify income that it has identified as not reported. According to the ATO, the key benchmark ratios provide the “most accurate predictor of business turnover for each industry”.

The ATO recommends taxpayers review their business benchmarks regularly.

The new activity statement benchmark ratios are:

  • Non-capital purchases/total sales (G11 / G1):
  • Non-capital purchases include trading stock and normal running expenses that are reported at label G11 on the activity statement.
  • Total sales includes all GST-free sales, input taxed sales and taxable sales that are reported at label G1 on the activity statement.
  • GST-free sales/total sales (G3 / G1):
  • GST-free sales do not include GST in the sales price reported at label G3 on the activity statement.
  • Total sales includes all GST-free sales, input taxed sales and taxable sales that are reported at label G1 on the activity statement.

The ATO says the ratios have been developed using a complete financial year’s activity statement data from a particular industry. To compare their performance against the benchmarks, the ATO suggests businesses should use their activity statements for the entire financial year.

The ATO’s use of benchmarks is not new, and SMEs should be aware of these latest ratios. The closing date for submissions to the Tax Inspector-General’s inquiry has now closed, and his report and its recommendations will be awaited with some interest.



Terry Hayes is the senior tax writer at Thomson Reuters, a leading Australian provider of tax, accounting and legal information solutions.Terry Hayes

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