Voluntary tax compliance? Taxman’s preferred option

Tax audits have been a long-time feature of the tax landscape in Australia. For SMEs, they can be a costly “intrusion” into the running of the business.

But it may come as a surprise to learn that the tax office says audits are no longer its main approach to tax compliance and are rarely used as the first option. Sounds good so far!

The tax office views tax audits as merely one of the approaches it uses to address non-compliance with tax laws. It says its overall approach involves supporting and improving voluntary compliance through what it calls “effective engagement with the community, well targeted support and assistance, and credible compliance activity – credible compliance activity being more than merely audits”.

Different approaches

In relation to SMEs, the tax office says it aims to understand the whole of the business, the overall causes of non-compliance, and then develop proportional responses. It also says it seeks to understand specific facts and circumstances related to a business.

The result of this approach is that the tax office aims to differentiate its responses according to the causes of the tax risk. These responses can vary from education and advice, where the cause of non-compliance is a lack of understanding, through to enforcement activity (where the cause is intentional non-compliance).

The tax office also regularly releases taxpayer alerts, which are intended to be an early warning to advise of its concerns about significant and emerging potential aggressive tax planning issues, or arrangements that the tax office has under risk assessment.

It also enters into what are known as annual compliance arrangements with large businesses, for example between the tax office and the ANZ bank to manage risks concerning income tax.

Under these agreements, in return for putting tax risks on the table, the tax office will sign-off on low risks and develop practical plans with the taxpayer to resolve high risks.

While these arrangements have so far been limited to larger businesses, the tax office says it is currently in the early stages of entering such an arrangement with an SME taxpayer.

This can provide some real certainty for the SME around tax, but the tax office warns that such an arrangement is not appropriate for many SMEs given the time required by both the taxpayer and the tax office. It’s something of a “watch this space” situation at the moment.

These agreements won’t be for all SMEs, but it is certainly possible that some will find them very useful.

Risk profiling

The tax office considers that being able to identify risks is central to its risk management. Its risk management systems are currently used to identify high risk cases as well as the prevalence of a risk, and therefore the overall impact on tax compliance.

A new level of sophistication in the tax office’s risk identification and management is being developed through the introduction of an enhanced system tool. From July this year, tax office compliance officers will commence using what the tax office calls an enhanced “risk assessment and profiling tool”.

This tool is designed to provide major improvements to the way the tax office assesses risk within different markets, and ensuring the information used in risk assessment activities is the most accurate and up-to-date.

The tool features a range of data from within the tax office, and external information from third parties such as ASIC and AUSTRAC, comparative ratios, and consistent views of indicators – for example, net profit versus assets, and gross profit versus sales.

In assessing risk, the tax office is using a new review approach for the SME market via a “preliminary risk review”. This review will form an initial assessment of risk, and is designed to act as a filter to ensure that progress to a more intensive review by the tax office is warranted. It is designed to match the level of compliance focus with the level of identified risk.

In the past, the tax office would have conducted such a review internally, without contacting the taxpayer or business in question. But it now considers that contacting the taxpayer provides the opportunity for voluntary compliance, while the additional information assists the tax office to make an appropriate risk decision as to what further action should or should not be taken.

The first preliminary risk reviews focused on private groups and single entities. In this regard, the tax office has completed 114 reviews with about 50% requiring some type of action, ranging from simple monitoring to specific or comprehensive review.

The current reviews focus on high risk cases and those with the “highest net negative reconciliation items in their tax return”. There are 26 reviews underway and the tax office plans to conduct more.