Since the mid 1980s, Australia’s tax system has operated on a ‘self-assessment’ basis. This means that the ATO (Australian Taxation Office) accepts and processes tax returns on the basis of taxpayers’ disclosures. However, there are processes in place to identify false disclosures.
How the ATO tracks potential non-compliance
In past years, the ATO’s main method for tracking non-compliance was a ‘review and audit’ process to gather information on potentially non-compliant taxpayers. These were often executed in a seemingly disorganised manner, and sometimes perceived as ATO ‘fishing expeditions’.
Over the past few years however, the ATO has invested heavily in improving its ability to collect and process information on a real-time basis. Organisations such as banks, public companies, land titles offices, insurers and motor vehicle registries now provide continuous data feeds directly to the ATO.
The ATO then uses this information, along with data that it collects from tax return disclosures, to build a risk profile for each taxpayer. Individual risk profiles are largely determined by the size of the discrepancy between what the ATO expects to see for that taxpayer based on the information it has collected, versus the actual information submitted within the tax return lodged by the taxpayer.
What to do if you are contacted
- Treat it seriously – If the ATO undertakes a review or an audit of a taxpayer’s affairs, they generally have a set revenue target in mind and a good idea of what they are looking for due to the risk profile they have predetermined. Therefore any ATO contact with you, be it a review, audit or ‘friendly educational call’ should be treated seriously.
- Provide a comprehensive response – The ATO will read a lot into your attitude to tax compliance from the start to finish of its enquiries. A cursory or flippant attitude to the ATO’s initial information request will likely prolong the length of the audit at significant longer term cost to you. Conversely, a well-considered and thorough response to the ATO from the outset, which does not leave the ATO to ‘fill in the blanks’, can put you in greater control of the direction that the audit will take, and will more often than not result in the ATO discontinuing its action.
- Seek assistance from your tax adviser – In most cases, it is wise to seek advice early your advisor to plan your response to the ATO. Whilst such an approach will generally result in greater cost upfront, it is significantly more cost-effective in the long run and typically results in a far better outcome.
Tax audit insurance may also be worthwhile as part of your overall tax risk management strategy.