Work-related expense claims the main culprit as tax gap puts focus on tax agents

A random sample of 858 tax returns found an error rate of 72 per cent, with agent-prepared returns with an error rate of 78 per cent.

A small number of tax agents will be subject to increased scrutiny by the Australian Taxation Office.

Of the 22,000 active tax agents in Australia, 150 “outlier” tax agents will be subject to increased scrutiny from the Australian Taxation Office (ATO) as a result of deeper analysis of the data the ATO collects and the first ever research into the income tax gap for individuals.

The study into taxpayers categorised as “individuals not in business” estimated a A$8.7 billion discrepancy between the revenue the ATO actually collects and the amount that would be collected if all taxpayers were fully compliant. 

The A$8.7 billion figure for the 2014-15 financial year equates to 6.4 per cent of the tax revenue for this category, which represents 47 per cent of the national tax base. 

In comparison, the tax gap for large corporates was estimated at 5.8 per cent, or A$2.4 billion.

Incorrect work-related expense claims

The main cause of the individual tax gap is incorrectly claimed work-related expenses, according to the ATO research. These are claimed deductions that are not connected to income, are private expenses, or are not backed up by invoices, statements or receipts. 

Rental properties were another significant source of incorrect claims, while the gap also included an estimated A$1.4 billion in unreported cash wages.

Professional Development: Accounting for income taxes. This course places emphasis on the practical application of IAS 12 Income Taxes, including how tax-effect accounting is applied to a set of financial statements.

Tax agents under scrutiny

The study showed a high error rate in returns prepared by tax agents. 

The random sample of 858 tax returns found an error rate of 72 per cent, but agent-prepared returns had an error rate of 78 per cent compared to 57 per cent for self-prepared returns. about 66 per cent of individual returns are prepared by agents.

“While the majority of mistakes made by agents are avoidable, we are concerned to see a minority of tax agents exaggerating or falsifying claims to attract clients or retain their market share,” says ATO deputy commissioner, Alison Lendon.

The ATO has identified 500 tax practitioners that it now has in its sights, and will zone in on 150 of them over the 2018-2019 tax year with increased scrutiny and regular inspection. 

The compliance crackdown is being funded through an additional A$138 million earmarked for the ATO in the 2018 Federal Budget.

CPA Australia head of policy, Paul Drum, describes these tax agents as “outliers” and says CPA Australia supports the ATO compliance push.

“This research shows that a small number of agents are not up to it, while some are making honest mistakes, but others are intentionally disregarding the law and some are just committing fraud,” says Drum, who notes that the research found that 20 per cent of agents were “exemplary”.

Stronger enforcement of tax laws

The ATO research, Drum says, should be a catalyst for stronger regulatory and legislative enforcement by the ATO and the Tax Practitioners Board, while the role of professional bodies such as CPA Australia is to educate its members.

“We recognise that this is not simply the ATO’s responsibility, it is a shared problem,” says Drum.

He says that some agents should be more carefully checking the veracity of what is provided by their clients, and this has implications for their own compliance to professional codes of conduct and to the Tax Agents Services Act 2009 (TASA).

“This does not mean agents are required to ‘audit’ everything a client tells them or gives them, however if the information provided does not seem credible, or appears to be inconsistent with the client’s previous claims or statements, further enquiries should be undertaken in order for the agent to meet their obligations under the TASA,” says Drum.

Listen to the podcast: ATO spotlight on work-related expenses

Standard tax deductions

A common issue is the perpetuation of the “urban myth” of the standard deduction.

“The rules say you don’t need a log book for vehicle expenses if you do less than 5000 kilometres a year, and the ATO has advised that many claim 4999 kilometres even if they don’t do any work-related travel,” says Drum.

For many agents, however, it is not an issue of wilful avoidance, but rather one of not spending enough time on individual returns. 

Related article: Tax dodgers and fudgers cost federal government $8.7 billion in a year

In the push to win market share and drive up their own incomes, some agents are also over-promising on deductions and likely refunds to clients.

“In the main, this is often lower value and high-volume work,” says Drum. “So, it gets back to how much time accountants can spend with clients on this work at their current charge-out rates.”

Costs of a tax return to rise?

A consequence of higher standards and better ATO compliance could be an increase in the cost of preparing returns.

“Instead of a race to the bottom with everyone undercutting on fees, costs might go up,” says Drum.

The ATO said that of the A$8.7 billion gap, only about A$500 million had been successfully clawed back.

Even the advent of new digital systems, such as Single Touch Payroll, introduced from 1 July 2018 would only lessen the gap by A$250 million over a four-year period.

The immediate solution, says Drum, is for improved compliance from tax agents, who will now understand that the ATO is on “high alert”.

“I suspect that tax agents are going to be a lot more circumspect on the preparation of returns this year,” he says. “It will be interesting to see if there is a behavioural shift between this year and next when the ATO runs the same exercise.”

Read next: Tax office cracks down on work-related expense claims


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December 2018
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