As ATO Closes Income Tax Gap, How Important Is Audit Insurance?

The previous few federal budgets have included funding aimed at supporting the ATO in implementing and enforcing measures to close the burgeoning gap in lost tax revenue as a result of non-compliance. This action has been spurred on by numerous factors, not least of which includes the active ‘Black Economy’ in Australia. With compliance rules shifting and becoming more stringent, SMEs with nothing to hide are considering audit insurance in response to the ATO’s aggressive new measures aimed at closing the income tax gap.

How ATO Is Tackling The Problem

In the first half of the 2019/20 financial year, the ATO’s hotline for suspicious behaviour, known as the Tax Integrity Centre, received upwards of 25,000 calls. These were from honest taxpayers whose frustrations at those avoiding and evading their taxation obligations reached a breaking point. The most common issues included not declaring income, cash payments to staff or simply a mismatch between a certain lifestyle with a supposed income.

Peter Holt, the ATO’s Assistant Small Business Commissioner says “people are sick and tired” of “dodgy behaviour” that equates to “effectively stealing from the community.”

According to a recent report released by the ATO’s Black Economy Taskforce, the black market size could amount to more than 3% of total GDP, putting a huge strain on everyday business owners who follow the rules.

In addition to tip-offs and communal efforts to encourage an economy of full compliance, legislative support has come in several forms. For example, the Black Economy Procurement Connected Policy mandates tax compliance for any businesses bidding for government-offered tenders. Further to this, as of January 2020, and following the Currency (Restrictions on the Use of Cash) Bill 2019, new limits have been placed on cash payments above $10,000.

With fewer people transacting in cash and ATM average withdrawals dramatically lower now than ten years ago, it is become increasingly difficult to operate this way in our effectively cashless society

Is Audit Insurance Worth The Investment?

Aided with newer and more advanced technologies, the ATO has become more creative in how it goes about enforcing taxpayers’ financial obligations to the community, underscoring the renewed need for tax-payers and their accountants to look more closely at having the appropriate audit insurance in place in preparation for a future crackdown and increasingly inevitable tax audit.

The idea of being audited probably sends chills down the spines of most business owners whose primary focus is growing a profitable business. Nobody wants to get notified by the ATO of an impending audit, especially if the accountant or their clients have no audit insurance protection in place, and it occurs smack bang in the middle of the busiest part of the year. Consider the ramifications of having to cease all business activity to prioritise collating the necessary paperwork, all the while managing business-as-usual activities. It is not difficult to envision a costly and chaotic situation as a result of this oversight.

As automation and the obvious benefits of AI further support the ATO in carrying out its tax-collecting activities, we are witnessing a shift in the importance of being insured against the costly risks of a tax audit. Audit insurancetypically considered an add-on is becoming an essential mix in the various forms of protection leveraged by taxpayers in seeking advice from their advisors.

When Do Businesses Get Audited?

The ATO is becoming much savvier in identifying reporting anomalies and is determined to crack down on deliberate over-claiming. This includes work-related expenses such as clothing and travel, as well as cases of under-reporting weekend trade and the unreconciled use of cash as wage payment.

There are a plethora of triggering events where an audit may be undertaken. For example, audits of Business Activity Statements are most common, however, the ATO has also targeted landlords of rental properties, as well as black market business owners whose intention is to under-report and operate under the radar. Unfortunately for them, the ATO has become increasingly sophisticated in its detection methods, making audit insuranceincreasingly worthwhile for advisors and business alike.

Another focus area of the ATO’s clampdown complies with cryptocurrency laws where the use of these financial instruments like Bitcoin and other characteristically similar digital currencies is becoming increasingly commonplace in business trade.

The ATO has also placed more scrutiny on taxpayers obligations surrounding superannuation with employer obligation audits increasing off the back of the ATO’s introduction of SuperStream whereby missed guarantee payments are immediately brought to light.

What Are The Costs Of Compliance?

It is difficult to accurately estimate the incurred costs on a business being audited by the ATO but we can assume it will cost a considerable amount of employee hours, which can add up quickly and without notice or any forecasting.

Lacking adequate protection through audit insurance means advisors must level with their clients in explaining these unforeseen costs. For some taxpayers that choose to go down the path of self-insurance, it sometimes translates to moderate upfront savings with more substantial (and unexpected) costs down the road.

While some accountants, financial advisors and wealth managers may instruct their clients to self-insure as a method of protection, this can leave them underprepared and exposed to the litany of fees and employee costs that result from a comprehensive tax audit. By self-insuring instead of using an audit insurance solution (like Audit Cover), business owners are limited in how efficiently and effectively they can respond to the ATO’s reporting requirements and discovery of documentation.

The obvious risk for advisors is losing out on their professional fees as a result.

Is Audit Insurance The Best Way To Prepare?

Given the momentum of the ATO’s renewed crackdown, no stone is being left unturned, and no taxpayer is entirely protected from a potential audit. Given the inevitability of more ATO audits aimed at closing the income tax gap, more tax advisors, accountants and practitioners in the space are seeking external support in the form of audit insurance providers. This assurance and added layer of protection afford peace of mind for both the firm itself and its clients.

This trend of more frequent and effective ATO auditing is a direct result of more intuitive and automated data analysis systems. As technology gets better at detecting misbehaviour (intentional or otherwise) via systems likeSingle Touch Payrollaudit insurance will become more of a necessity than a luxury in an ever more vigilant environment.

Food For Thought

In summary, the ATO’s has adopted various new initiatives aimed at better compliance and more accurate reporting from Australian taxpayers. As a result, those relying on unsubstantiated claims or failing to keep up with tax obligations like rent or GST are being targeted. While education and engagement are pillars of the ATO’s approach in addressing the issue, the buck stops with enforcement.

Tax advisers, now more than ever, must keep up with the shifting legislative and technological tax landscape to make sure their clients are receiving the greatest possible protection.

With lodgement methods changing and new online services such as myGovID, it is more important than ever that tax advisers are across these changes, adept at spotting vulnerabilities and seriously considering the advantages of audit insurance for their clients.

The Future of Tax Accounting

It is abundantly clear that the ATO is better than ever at enforcing taxpayer obligations. If your clients are falling foul of their duties to the ATO and the broader community, the message must be drilled home.

The ATO is shining a light on tax agents whose claims are consistently high. This kind of attention can have an impact on brand protection and reputation. As more taxpayers rely on pre-filled returns in their tax lodgement, practitioners are being forced to shift their business models and come up with new value-add offerings while providing access to the broad range of deductions or concessions to which they are legally entitled.

Audit Insurance offers a comprehensive way of ensuring no stone is left unturned in reviewing a client’s tax compliance if (or when) it gets that ominous letter in the mail or phone call from the ATO audit taskforce.