ATO’s new challenge

The SME community’s relationship with the Australian Taxation Office has been a complex one over the past four years.

While most entrepreneurs take the attitude that the less they have to do with the taxman the better, during the GFC the ATO stood out as a great friend to the sector.

The Government may have done little to provide long-term assistance to SMEs, but the ATO stepped up, taking an extremely empathetic stance with those struggling to pay their tax debts. Payment plans, interest-free periods and other assistance became the norm and no doubt many businesses squeezed through this period which they might not have otherwise done.

Of course, the empathy could only run for so long, and the ATO is now actively (some would say aggressively) pursuing businesses that are not meeting their obligations.

In some ways, the traditional us-against-them dynamic of the SME/ATO relationship has been restored.

It’s that us-against-them relationship that has been the subject of an inquiry by Ali Noroozi, the Inspector General of Taxation who was charged with the task of investigating claims that some of the ATO officials who audit medium-sized companies (between $100 million and $250 million in turnover) and wealthy individuals are not sufficiently knowledgeable, have been intimidating taxpayers and generally abusing their power.

The feeling among many tax experts is that these practice areas are sometimes used as a “training ground” for ATO audit staff to cut their teeth.

It would appear the level of expertise of the ATO officials can vary wildly.

On the one hand, taxpayers have complained of having to spend inordinate amounts of time explaining the on-the-ground workings of tax laws to audit staff, who should frankly know better.

Take this example form Noroozi ‘s report: “A… taxpayer claims that they paid approximately $500,000 in fees to their tax adviser during a risk review primarily because of lack of understanding by the SME officer of the taxpayer’s business and the technical issues around the business. They say that throughout the course of this risk review, the taxpayer’s advisers were required to explain to the SME officer the technical issues across a number of meetings — essentially providing lessons in the accounting and tax treatment of the areas under review.”

But on the other hand, the inquiry heard complaints that ATO officials would use the lack of knowledge in a business to threaten or intimidate taxpayers, who would, in some cases, take the path of least resistance and just pay up.

However, the inquiry cast doubt and whether just paying up was all that smart. When it comes to assessments of wealthy individuals, a staggering 85% of cases ended up in dispute, with 40% of taxpayer objections upheld.

When it came to cases involving medium-sized businesses, 58% of taxpayer objections were upheld.

To its credit, the ATO has accepted all but one of the 41 recommendations made by Noroozi, which cover:

• Better matching the complexity of casework with officers’ training and experience.
• Improving ATO approaches to recruiting and developing compliance officers.
• Strengthening staff training including the involvement of external experts.

The question now is: How quickly can the ATO meet the new challenges set by the recommendations? How quickly will taxpayers and their advisers see a change on the shop floor, as it were?

Yasser Al-Ensary, senior counsel at the Institute of Chartered Accountants, says he’s yet to see much change just yet and expects it will be two to three years before there is a discernible difference.

This is the public service, but let’s hope it’s much faster than that.