They're bad for the economy, for the accounting industry and for our clients, so why are outrageous tax claims still so widespread?
At a glance
- The ATO has released data providing evidence of dodgy claims by a large percentage of taxpayers.
- A random sample of returns with rental deductions found that nine out of 10 contained an error.
- The ATO will conduct 4500 in-depth audits this year, with a focus on over-claimed interest, capital works claimed as repairs, and omitted income from accommodation sharing.
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More than 50 per cent of her clients try to make claims that are “not correct”, says Kerri Dickman FCPA, principal at KDC Accounting. Some do it innocently without understanding the regulations. A few try to make claims they know are dubious. The majority, she says, ask to make incorrect claims because their previous accountants have allowed them to do so.
“That’s a big issue for us because we’ve now got to talk them out of it and say, ‘Well, I’m more right than your previous accountant’,” Dickman says.
“That can be quite tricky, so we’re always looking for ways of proving it. We’re not the black knight bringing them the bad message, we’re the white knight saving them from future trouble with the ATO [Australian Taxation Office].”
The ATO is certainly identifying plenty of trouble. Media stories about outrageous tax claims are never short on real-life content.
For instance, there is the notorious account of Gary Ogden, an IBM salesman whose more than A$100,000 in sham claims included meals taken on the way to family ski holidays, sunscreen and sunglasses (he didn’t work outside), payment of over A$5000 to his seven year-old son for secretarial services, and depreciation of an outdoor patio setting.
Unsurprisingly, Ogden’s tax agent, David Warren McNeice – who also gave advice to other clients that they could claim school fees, personal training sessions and family pets (as guard dogs) – has been deregistered.
The ATO itself has flagged cases about dodgy deductions in media releases. They include a wine expert who claimed more than A$9000 for wine he bought while on holiday in Europe, intended for personal consumption; a doctor who had receipts for a conference in the US, but who had never left Australia; and a taxpayer who claimed car expenses and whose logbook recorded kilometres on days when he was out of the country.
No crooked claims story would be complete without a mention of Linda Taylor from South Australian home-styling business Signature Styling. Taylor deceitfully obtained almost A$140,000 in GST refunds by lodging 32 monthly BAS (business activity statements). She claimed expenses of over A$2 million, while overall sales, including GST, only added up to A$259,977 for the period. The refunds were spent on beauty services, restaurant meals, hotel stays and shoes.
While real-life tales of tax dodging are always exceedingly readable, they flag a larger problem. Dodgy claims exist at all levels in society and, as Dickman says, they’re sometimes supported by tax agents.
Dodgy tax claims: treating the cause
The ATO has released data providing evidence of dodgy claims by a significant percentage of taxpayers.
“A random sample of returns with rental deductions found that nine out of 10 contained an error,” says the ATO’s assistant commissioner Gavin Siebert, in relation to the 2017-2018 financial year.
“We expect to more than double the number of in-depth audits we conduct this year to 4500, with a focus on over-claimed interest, capital works claimed as repairs, incorrect apportionment of expenses for holiday homes let out to others, and omitted income from accommodation sharing.”
It’s to be expected that the ATO would seek to identify and punish those who are providing or allowing suspect claims, but how can the problem be treated at its root level, to prevent individuals from even considering fraudulent tax claim activity?
When accountants allow or encourage dodgy claims, their clients speak with friends and the problem becomes greater for the entire industry.
Certain issues might be solved, Dickman says, if the ATO simplified some of its substantiation requirements, such as the four-week diary for determining a percentage claim of internet costs. This diary must itemise every member in the house and their business or non-business usage of the internet, minute by minute.
It’s the type of red tape that makes taxpayers furious. It often leads to the ATO denying a legitimate claim and could encourage taxpayers to seek a more creative solution. Once they have creatively ignored one ATO directive, what’s to stop them ignoring more?
“The ATO has been saying that it thinks we, the tax agents, are helping taxpayers to cheat,” Dickman says. “We’re not helping them to cheat, it’s just too hard for most taxpayers to meet the onus of proof, and they justifiably feel hard done by when we say they can’t claim an expense they have incurred in earning income. This is the difference between incurring expenses and substantiating them according to legislative requirements.”
Clean up the tax agent industry
One potential solution is greater direction and clarity from the ATO. Another, Dickman says, involves the accounting industry turning its focus back onto itself.
“I’ve just been at a CPA Australia [public practice] event in the Hunter Valley and we discussed A$60 tax returns,” she says. “There is no way you can do a tax return correctly for A$60. My minimum fee is A$363 and I am still concerned, under this new regime, that that’s not going to be enough. The expectation on us to check everything will be so high that we’ll soon become cost prohibitive for our clients, and that will lead to even more errors in returns, and more stress for taxpayers.”
Presenting at the same event was Robyn Jacobson FCPA, senior tax trainer from TaxBanter, who says she has heard of a tax agent who lodges a high number of tax returns daily, averaging one every 30 minutes.
“Add to this the fact that many of these agents are saying they guarantee a refund, and alarm bells should be going off for the consumer, for our industry and for the ATO,” Jacobson says. “They are not likely ensuring that all they are claiming on behalf of their clients is legitimate within the law.”
The Tax Agent Services Act requires agents to take reasonable care in ascertaining their clients’ tax affairs, Jacobson says. That doesn’t mean clients must be individually audited, but agents need to ask the right questions and have a level of professional cynicism if things don’t “smell right”.
“The ATO is only going to get smarter and smarter with the use of big data and artificial intelligence,” she says.
Change the mindset
When accountants allow or encourage dodgy claims, their clients speak with friends and the problem becomes greater for the entire industry. Jacobson calls it the “Friday night pub syndrome”, where friends talk about what their accountants allow them to claim, then everybody expects to be treated like the clients of the least reputable tax agents.
Along similar lines, Dickman says she has heard, more than once, of clients or potential clients expressing the opinion that the most reputable tax agents work for the ATO and not for their clients.
“Recently I saw a Facebook post on a community notice board page that said, ‘Can anyone recommend an accountant who is actually going to work for me and not the tax office?’ They really felt that their accountant was on the ATO’s side. This attitude is a serious problem and it needs to be solved collectively, by the industry and the ATO.”
Finally, Jacobson says, there’s a widespread perception in the community that if people are only cheating a little bit, then it doesn’t matter. If everybody does it, and there is a perception that multinationals are avoiding paying billions in tax, then why would it be a problem?
“What these taxpayers fail to realise is that the ATO is reviewing every single individual tax return that is lodged, and its data analytics is smarter than ever to detect incorrect claims, even small ones,” she says. “The use of ‘nudge’ technology to compare amounts claimed in real time against prior year returns and other taxpayers in the same occupation code is assisting to prompt taxpayers to consider the accuracy of their claims before tax returns are lodged.
“But overall, there’s a sense of entitlement that says, ‘I’m working hard and my income hasn’t risen and I’m struggling, so why shouldn’t I just help myself out a little bit?’ Individually it might not seem like much, but across 13 million taxpayers, it adds up. That shortfall is why schools, hospitals and roads can’t be built.”
Strange claims, indeed
Sometimes truth is stranger than fiction. Here are some claims that can be legitimate in certain careers and industries.
For certain outdoor workers, and flight attendants.
If they are required for carrying work items and are fit for work purpose.
For your office and reception area, not your lounge room or home office.
For the office recreation area.
Only if they are bona fide guard dogs kept on a premises or essential in a line of work, such as breeding or dog training.
For models and some professional athletes, but only at the time of work/competition.
If you make a living as a knife swallower.
Only for hand/foot models.