ATO Target Areas - Before, During, and After COVID-19
As we expected, the Australian Tax Office (ATO) is poised to double down its debt recovery and audit activity efforts. Slowly but surely, it is lifting self-imposed restraints that gave Australians temporary relief in 2020. Here, I take a look at the ATO target areas in 2020 and how they could expand, shift and evolve in the year to come.
As JobKeeper and JobSeeker wind up at the end of March, we will see a renewed sense of purpose and dogged determination from the ATO and other State Revenue Offices. As anticipated, these agencies are keen to claw back lost designated tax revenue. As such, it will be essential for taxpayers, accountants, and business owners to get a sense of the recent ATO target areas. As our economy recovers, we could see new strategies rolled out to restore Australia’s economy to its once enviable pre-pandemic position.
ATO Inactivity in 2020: Looking back
Reflecting on the year gone by, the ATO made a big difference to Australians’ lives. It did this by pumping the breaks on many of its critical functions around debt collection and revenue recovery. The ATO stopped carrying out many of its typical tasks, pausing to allow the federal government a more direct and effective pathway to economic recovery through its COVID-19 stimulus measures.
It is no secret that there is now a deep-seated financial shortfall incurred by the ATO, which included:
- A roughly 10% loss in its $15B anticipated compliance revenue; and
- A burgeoning debt portfolio that in 12 months ballooned by $8B to $53B
What to expect as a result
Once the harshest impacts of the pandemic ease and the economic dust settles, we can expect markets to bounce back, which seems to be already occurring in many states. At this point, the federal government will establish a plan with the ATO to return the national economy to its previous strong position.
How will this take place? The ATO will likely receive substantial financial support to manage some critical tasks such as historic tax liability collection, as well as a reinforcement of its existing tax-recovery and tax-crime investigation entities.
ATO Snapshot from 2019
The ATO relies on three prongs to achieve its outcomes, including prevention, education, and better detection and enforcement systems. Also, it functions as the leading agency for the various taskforces established to address different aspects of tax crime in Australia.
These task forces investigated, reviewed, and audited taxpayers during the previous financial year, focusing on work-related expenses, black economy participants, and fraudulent GST claims. Their success is, in part, drawn from the newly established Tax Integrity Centre, which encourages community members to report anything that seems unusual or suspicious.
The Commissioner of Taxation annual report 2019-20, which investigates the ATO methods and results in addressing tax crime, gives a good sense of how successful the ATO has been in terms of its enforcement.
The most noteworthy results of the many taskforces included:
- The Tax Avoidance Taskforce
- Tax liabilities: $2.7B
- Cash collections: $1.6B
- The Serious Financial Crime Taskforce
- Liabilities: $131M
- Cash collections: $59M
- The Black Economy Taskforce
- Liabilities: $787M
- Cash collections: $696M
- The Phoenix Taskforce
- Liabilities: $112M
- Cash collections: $47M
- The Superannuation Guarantee Taskforce
- Liabilities: $111M
- The Illicit Tobacco Taskforce
- Tobacco valued at $171 million.
Potential ATO focus areas for 2021
Multinationals vs. SMEs
The ATO has hinted that it will continue looking into large multinationals because of the substantial debt recovered in this area. However, the primary focus will likely remain small and medium businesses, as well as high net-worth individuals. These two groups alone comprise roughly half of the total debt revenue gap, and despitea slow start, all signs point to a ramping up of debt recovery efforts over the year.
Directors (Penalty Regime)
As we know, 2020 represented an anomaly year packed full of stimulus packages and paused tax obligations. As we roll into the new year, the ATO will be more equipped than ever to target directors using director penalty notices. The scope of liability is already broad. Changes to corporate PAYG laws, superannuation, and GST will give the ATO new weapons in its already large arsenal to bring directors’ personal assets into the equation.
Equally, employers need to understand that in order to meet the eligibility criteria for superannuation guarantee amnesty, all outstanding debts must be either paid in full or paid through regular payment plan installments.
The recovery of wrongly distributed COVID-19 stimulus funds is another prominent focus area. Job Keeper payments made to ineligible recipients, such as prisoners and the dead, has already come under fire. When you consider the sheer volume of applications and the program’s cost is around $130B, it is no surprise there is such a level of scrutiny. It is unlikely that the ATO will absorb any wrongly received payments, even if it means that the entities will have to liquidate and people with lose their jobs.
As expected, the ATO will again be looking closely at work-related expenses. With most people working from home last year (and many still), the ATO will place particular focus on the following:
Laundry, clothing, and dry-cleaning “If I rotate dress shirts for my Zoom meetings but continue to wear track pants, claiming dry cleaning for my suits should be fine, right?”
Home expenses like rent when you do not run a business from home “If I work from home, and I am paying rent to live here, therefore I am paying rent to work, right?”
Food relating to working overtime “If I’m checking my email around 10 pm but finished at 5 pm, and then order UberEats, that meal should be covered…no?”
Mobile phone and internet “If my personal phone is also my work phone, and I use my home internet to complete work tasks, then most of that should be tax-deductible, surely…”
Motor-vehicle costs “If I use my car to drive to and from work, and the ATO will pay 68c per kilometer under 5000km, then I probably drove about that distance.”
Claims when no receipt is needed “If the ATO doesn’t need receipts when the claim is under $300, I’ll claim a few extra things while I’m at it…”
Property Investment Claims
If you are fortunate enough to fall into this category, then take heed the ATO is watching. According to the ATO commissioner, Chris Jordan, 90% of returns had errors. Lost rent due to COVID-19 explains part of the reason there are so many false or misleading claims in this area: The areas of concern cover:
- Interest expense claims, such as the costs of borrowing on both your family home and your rental property
- Wrongly apportioning rental expenses and income between joint owners
- Rental properties where the property was not rented or listed, but instead being lived in by the owner
- Make an immediate and lump sum claim for the renovations and repair work on a newly purchased rental property instead of claiming these deductions over several years.
The primary takeaway here: if you cannot prove it with records, receipts, or other evidence, then do not claim it. The ATO cannot look through every single tax return manually but will continue employing newer, smarter automation technology to help in its mammoth effort of recovering lost revenue and closing the tax revenue gap.