Small businesses have been urged to keep on top of their tax record keeping, after the Inspector-General of Taxation raised concerns about the way taxpayers are selected for audits.
Ali Noroozi is about to review so-called “risk engines” used by the Australian Taxation Office to determine whether audit targets are selected by computer programs or ATO staff.
Noroozi told the ABC there are concerns the ATO is failing to target the right taxpayers.
“We have had [taxpayers]… right from the very large to the very small saying that perhaps this risk identification process, or this risk engine, is not yielding the right results,” he said.
“Some of those that have been identified feel that they’re not risky enough to have been identified or practitioners feel sometimes that they have not identified the right taxpayers.”
According to Noroozi, the ATO compares incomes and deductions to the average to determine whether a business needs to be looked at in more detail.
“If you’re a coffee shop, for example, with a turnover of a certain amount – they would expect you to have reported income of this much and perhaps this level of deductions,” he said.
“If you fall outside of that range, you may well be selected for the tax office to have a further look at.”
An ATO spokesperson told StartupSmart candidates for risk reviews are generally selected based upon the output from rules-based engines, or computer programs.
“A smaller number are selected on the basis of qualitative intelligence obtained from various sources such as media reports, dob-ins, information from other tax administrations, and other government sources,” the spokesperson says.
“Once a risk review is completed, if sufficient concern exists about a matter, a manual decision may be made to proceed to an audit to gather the evidence necessary to support an adjustment.”
But the spokesperson says manual case selection processes are much slower, more expensive, and produce variable quality.
“A rules-based engine… can be quickly executed across a larger group of taxpayers, far faster, with much greater consistency, and at a much lower cost,” she says.
“The tax office regularly reviews the outcomes from its case selection processes and seeks to improve them.”
Frank Brass, regional director of H&R Block, says he has seen a fall in the number of clients affected by the ATO’s risk engines, but there are still concerns among businesses.
“We noticed a large spike in the number of clients affected by this risk engine – as they call it – last year and after some consulting with the ATO, it has dropped a fair bit this year,” he says.
“At a recent meeting I was at, there was something like 2,000 fewer clients affected than the same period last year, which is a significant number.”
“[However, there remains] a fair bit of angst out there for audits going on for businesses and how they’re selected.”
“They select them and then go to their benchmarking. They’re working on a review for that as well. The two are pretty much linked.”
Brass says businesses should therefore review the ATO’s small business benchmarks, and maintain good record-keeping.
“Basically, being [scrutinised further by the ATO] only applies if you don’t have the records to justify what you’ve done,” he says.
“It’s hard [to avoid being audited] if you’ve had a poor year… It’s very hard to justify why things weren’t as good as the year before.”
“That’s what the risk engines can’t take into account, which is the probably why a few more have been caught.”
“If you do get audited and you’ve got all the records, they won’t bother you again unless something changes significantly.”
“Have the records to justify any query and have them when you do your tax return, rather than when you get audited. Keep them all together as much as you can.”