It was hard to miss the media splash about international tax evasion when the Pandora Papers were released, with local interest focussing on what Australian tax authorities would do with this massive trove of information.
But it seems the ATO is relaxed. Deputy Commissioner and Serious Financial Crime Taskforce Chief Will Day responded that the tax man doesn’t “rely on data leaks to do our job. We detect, investigate and deal with offshore tax evasion year-round.”
So where does the ATO get its data from and how is it being used?
Information from many sources
As some of the most powerful computers in the country are matching data from just about every facet of a taxpayer’s financial life, the ATO doesn’t miss much. Every year it receives reams of data from share registries, banks and financial institutions, allowing it to identify most of the financial transactions occurring in Australia. In 2020, more than 600 million transactions were reported to the ATO.
Property and lifestyle assets are also key areas of interest, with data from state and territory title offices and revenue agencies covering real property transactions, rental bond payments and property management all flowing to the ATO.
Data is also exchanged with tax agencies in other countries to ensure correct reporting of overseas income and income earned by foreign residents.
Current data-matching programs by the ATO cover credit and debit cards, ride-sourcing providers, sharing economy accommodation platforms and cryptocurrency service providers. Information on online sales over $12,000 also end up with the tax man.
Government departments data sharing
Government agencies are also a major source of data for the ATO, with detailed protocols on information sharing in place with the Australian Electoral Commission, Services Australia (Centrelink and the Child Support Program), and the Department of Home Affairs’ visa and passenger movement records.
Motor vehicle registrations from the states and territories provides data on all motor vehicles sold or registered where the value is over $10,000.
The new Single Touch Payroll (STP) system for businesses is also used to confirm employment income, deduction reporting, payments to contractors and superannuation contributions.
Even tips from other businesses and individual taxpayers can be used in specific data-matching activities.
Matching and analysing the data
Once all this information is received, it’s validated against the ATO’s internally collected data. Algorithms and other analytical tools are used to refine the data and match it against information reported in tax returns.
Although the ATO uses some of the data it receives to pre-fill sections of your tax return, much of it is used to identify discrepancies in taxpayers’ returns.
You are then contacted and provided with details of the discrepancy so you can check your records. Discrepancies can be as simple as omitted interest, employment income or government payments; CGT from the sale of an asset; payments to contractors in the building and construction industry; or distributions from partnerships, trusts and managed funds.
Data-matching is also undertaken on taxpayers purchasing expensive consumer items (such as boats, racehorses, antiques and luxury cars) to determine whether they can afford the items based on their declared income.
Helping businesses operate
Data-matching programs help the ATO identify businesses that may not be reporting all their income, operate outside the system, or operate but fail to lodge a tax return.
Careful analysis of financial data helps businesses to operate on a level playing field. Running part of a business ‘off the books’ and not reporting all the income received provides an unfair advantage.
By data-matching, the ATO can also better understand trends and patterns in specific industries. This is used to create performance benchmarks (or financial ranges) for each industry, particularly in relation to tax and activity statements. These benchmarks cover turnover comparisons with your cost of sales, total expenses, rent, labour and motor vehicle expenses.
The ATO also develops a key benchmark range for an industry. If data analysis shows your business operates outside this range, it’s a red flag raising the possibility that your business may be avoiding its tax obligations by not reporting some of its income. The benchmark range may also be used to determine how much tax a business should have paid if there are insufficient or no records available.
If you would like help with understanding your tax obligations and preparing your tax records, please contact our office today.
Case study: Data-matching reveals dishonest business
A business selling horse riding equipment online with sales of $1,280,003 was selected for review.
The ATO discovered the owner had registered the account in another person’s name and was selling unbranded horse saddles made by his parent’s company in China.
It also found another online selling account and a website where no income was reported. These were linked to a specialised payment system account and the owner’s personal bank account which showed significant AUSTRAC activity to Chinese bank accounts. (AUSTRAC is the government agency tasked with detecting and preventing serious criminal abuse of the financial system).
An ATO audit determined the entity had been under-reporting income and over- reporting expenses for the life of the business. The owner was required to pay $103,263 in GST, $259,298 unpaid income tax, and penalties of $181,280.
5 tips for good tax recordkeeping
If the tax man contacts you about your business tax return, it’s essential to have records on hand covering all transactions related to your tax and super affairs. The key rules are:
- Keep all records related to starting, running, changing or closing your business.
- Store your business records safely so they are protected from damage.
- Keep records for five years.
- Ensure you can produce your records if the ATO requests them.
- Keep records in English, or in a form that can easily be converted into English.
The ATO has an online Recordkeeping Evaluation Tool you can use to produce an evaluation report outlining how well you are keeping your business records.