Not long into Tax Time 2016, ATO assistant commissioner Graham Whyte said in a media release that “every tax return is scrutinised using increasingly sophisticated tools and data analytics developed by our ‘data doctors’ at the ATO. Large increase in tax audit insurance claims over past 12 months
He went on to say: “This means we can identify and review income tax returns that may omit information or contain unreasonable deductions.”
The ATO’s confidence in its new sophisticated systems seems to have been justified, with recent data from one of Australia’s most reputable providers of tax audit insurance for the accounting profession, Accountancy Insurance, confirming that the number of claims continues to increase — with a solid showing in the number of claims, but an outstanding increase in total claim value.
Rod Spicer, General Manager of Claims and Underwriting, says: “To ensure we are keeping abreast of trends in audit activity we are regularly looking to our statistics, which are based on claims of client accounting firms utilising our tax audit insurance offering, Audit Shield. What we have seen from our claims statistics in the past 12 months is that full audits, including comprehensive risk reviews and high wealth individual (HWI) reviews, increased by 34% in the number of lodged claims, and 98.8% in the total claim value.”
But the spike in claims is not a sudden phenomenon. For example, Rod says claims relating to BAS/GST have been up for the past three years. He says Accountancy Insurance has been dealing with more than 3,000 tax audit insurance claims each year for some time now, although recent years have seen up to 4,000 claims coming in the door.
This fact alone, plus the regular experience of the Accountancy Insurance team, underlines a common misconception among accounting practitioners — that tax audit insurance may not be needed if the quality of an accountant’s work is up to scratch. Rod points out that the reality to keep in mind is that the ATO’s “data doctors” have been provided with additional resources, and will have audit funding increased by a proposed 55% over the next four years.
Another factor that tax practitioners need to remember, he says, is that the ATO can change its methodology in a way that effectively bypasses the, until now, “usual” arrangements. “In regard to HWIs, we have seen the effect of the ATO’s change in focus,” Rod says. “The ATO are no longer issuing many private group structure questionnaires, but instead using the information that they have been able to gather through their own internal data matching means and then, where deemed appropriate, commencing a comprehensive risk review, many of which progress to a full audit.”
The ATO’s focus areas
With Accountancy Insurance providing cover to more than 2,700 accounting firms across Australia, New Zealand and Canada, the data it is able to glean from its claims activity can be viewed as a solid indicator of audit activity.
As can be seen in the graph below (sourced from data supplied by Accountancy Insurance’s claims department), insurance claims stemming from BAS assessments have dominated the 2015-16 income year (and were the most prominent for the previous year). “This is solid evidence of the ATO focus on GST,” Rod says. “What you’ll find is that a large portion of this activity centres on the building and construction sector. But this is an area that has a lot of complex rules and regulations, so that doesn’t necessarily translate into wrong-doing.”
Another big area of regulation that generally sees a lot of claim activity centres on employer obligations, such as superannuation guarantee (SG), PAYG withholding and FBT. With regard to SG, Rod says that the new SuperStream system is set to make a potentially huge difference regarding future claims and audit activity.
“With all manner of businesses required to register with SuperStream, this will give the ATO access to all that data — without waiting for someone to complain that they haven’t been paid their SG,” he says. “I think we’ll see that the ATO will let SuperStream settle in and let all that data gather until perhaps after June 2017. I can almost guarantee that the increase in real time data with the introduction of SuperStream will result in a large increase in SG audits over coming financial years.”
Payroll tax as well is a substantial area in regard to claims made. “We’ve divided up claim activities into the states of course, as that’s the way these taxes are administered,” Rod says. “But you can see that the total of payroll tax claims puts this area easily in with the largest claim activity.” He says another common issue with claims activity with regard to payroll tax obligations is the involvement of contractors, which also has an influence on the claims made with regard to SG obligations.
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