The tax watchdog wants the Tax Office to improve its audit processes, after the ATO wrongly investigated almost 6,000 small business owners as part of a crackdown on the cash economy.
The Inspector General of Taxation, Ali Noroozi, conducted a review of the ATO’s use of benchmarking to target the cash economy.
The review found the tax office made adjustments in only 24% of the 7,600 benchmark audit cases it considered, which means almost 6,000 businesses were wrongly accused.
In light of the findings, Noroozi believes there is “room for improvement” on the ATO’s part in order to avoid 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,” Noroozi told SmartCompany.
“So their main concern is to run their business and they are worried about time away from business.”
Noroozi has recommended to the ATO that it improve its risk identification and audit processes to exclude more compliant taxpayers earlier in the process.
Noroozi said he has told the ATO if compliant taxpayers are caught up in investigations, it needs to ensure they are dropped out of the system as quickly as possible to minimise the impact.
The ATO has agreed with nine of the 11 recommendations made in the Inspector General’s review and has partially agreed to two.
This includes a recommendation to get an expert independent party to assess the benchmarking methodology and ensure it is comparing small businesses that are “sufficiently similar”.
The ATO estimates about 1.4 million small businesses operate in the cash economy. The benchmarks cover 900,000 of them, broken down into more than 100 industries.
Meanwhile, the Institute of Public Accountants has welcomed the release of the report, with chief executive Andrew Conway saying it is “pleased with the results”.
“Results of the review have vindicated the concerns expressed to us by small business practitioners,” Conway says.
“Considering that 76% of small businesses selected for an audit were found to be compliant, the concerns raised have been justified.”
“Prior to the review, too many small businesses were subjected to additional compliance costs, significant stress and time lost from running their business.”
“The heavy-handed approach had meant some small businesses were subject to default assessments prematurely.”
“We are confident that the IGT review of this matter will go a long way to alleviating such pressures from small business and help to reduce the regulatory burden and associated costs.”