ATO benchmarking can be improved: report

The Assistant Treasurer has released the Inspector-General of Taxation’s Review into the ATO’s use of benchmarking to target the cash economy. The Inspector-General conducted this review in response to concerns raised by small businesses and tax practitioners about the ATO’s use of small business benchmarks. The Inspector-General has made 11 recommendations to improve the use of benchmarks by the ATO, only two of which the ATO has objected to (in part). The recommendations (and objections) include the following:

• The ATO should improve community confidence in the ATO’s industry performance benchmarks by publishing material that provides assurance that the methodology used to develop the benchmarks is robust and by communicating it more broadly. Such material should include all current benchmarking inputs and methodology and appropriate comparisons of ratios between country and metro businesses and between states and territories. (The ATO objected to this part of the recommendation on the grounds that publishing large numbers of additional country and metro benchmarks, or benchmarks for comparison between states and territories, has the potential to cause confusion.)

• To minimise compliance costs and improve risk identification for mixed businesses, the ATO should consult with tax agents and taxpayers with a view to developing alternative risk models to assess the risk of underreporting by mixed businesses.

• To more accurately target non-compliant taxpayers, the ATO should examine completed correspondence cases to identify whether additional useful predictors of underreporting or compliance exist and use such predictors to refine the risk identification process. The ATO should also implement strategies to exclude compliant and low-risk taxpayers from correspondence audits at the earliest point.

• In relation to ATO correspondence audits, published guidance should include a statement that the ATO considers that the strongest evidence to support reported income are records meeting the ATO’s record-keeping requirements and that where such record-keeping requirements are not met, the ATO will allow taxpayers to provide a cogent explanation supported by appropriate evidence. The guidance should explain how, where the ATO does not accept the explanation, the ATO will calculate the amended assessment by taking into account the taxpayer’s personal circumstances.

• The ATO should foster better recordkeeping and accurate reporting of income in a manner that minimises overall costs for small businesses through a variety of means, including the development of industry-specific guidance on recordkeeping in consultation with small business owners, industry associations, tax agents and bookkeepers, etc and consultation with relevant tax practitioner representative bodies with a view to establishing a “taxpayer record keeping assurance process” that could be used as a factor in excluding compliant taxpayers from audit selection. (The ATO objected to this last part of the recommendation on the basis that a “taxpayer record keeping assurance process” may not lead to reduced costs for small businesses.)

According to the Assistant Treasurer, these recommendations should improve the ATO’s risk identification and audit selection processes to further exclude compliant taxpayers from audits, thereby minimising unnecessary compliance costs in relation to the cash economy and GST obligations.

Sources: IGT Report – Review into the ATO’s use of benchmarking to target the cash economy, www.igt.gov.au/content/reports/ATO_benchmarking/downloads/Cash_Economy_Benchmarking.pdf;

Assistant Treasurer’s media release No 113, 3 October 2012, www.treasurer.gov.au/DisplayDocs.aspx?doc=pressreleases/2012/113.htm&pageID=003&min=djba&Year=&DocType=