Income tax: ATO says Australians underpaying by $8.7bn a year

Guardian Web |

Australians are underpaying a total of $8.7bn in income tax, according to tax office estimates made as part of a crackdown aiming to net an extra $250m a year.

On Thursday the Australian Taxation Office released its first ever “tax gap” estimate that some 93% of income taxes are paid voluntarily or with little intervention, leaving a non-compliance rate of about 6.4% or $8.7bn in the year 2014-15.

The figures are based on a random sample of 858 of the 9.6m individuals who lodge tax returns and are not in business. A study of the sample found 72% of returns had one or more errors.

Returns prepared by tax agents actually had a higher rate of adjustment for error (78%) than self-prepared returns (57%). While many adjustments were small (37% were less than $150), one-quarter were for sums of $1,000 or more.

The most common causes of the gap – and the focus of ATO compliance activity – are incorrectly claimed work expenses, incorrect claims for rental property expenses and non-reporting of cash wages.

Incorrect expense claims were caused by a lack of connection between expenses and income, claims for private expenses, or lack of records to show an expense was incurred.

The ATO deputy commissioner, Alison Lendon, said the federal government had invested $130m over four years in the 2018 budget to help tackle non-compliance, which ranges from “small but avoidable errors” to “aggressive” tax-minimisation behaviour such as “deliberate” over-claiming of deductions.

“There’s about 200,000 individuals who are taking that more aggressive and deliberate stance,” Lendon told Guardian Australia.

The ATO is targeting about 500 tax agents it has labelled “high risk” for activities including large deductions, hiding income, potentially falsifying documents and engaging in fraud.

Lendon said the crackdown would focus on 150 tax agents in its first year, as compliance activity would “flow through” to their clients. The ATO will conduct an extra 65,000 audits of income tax returns.

Related: ExxonMobil spent $10m fighting Australian Tax Office

It aims to net $250m a year on top of the $500m the ATO normally recovers, for a total of $750m a year.

The ATO has also rolled out “real-time analytics”, including messages that alert people filing their tax returns when their deductions are outside the norm for their occupation and income category.

Lendon said the ATO was “not suggesting everybody was a deliberate over-claimer” but the technology provided a simple prompt to “go back and fix” any possible errors in deductions.

She confirmed the ATO would use other data sources such as information from banks, the share and property register to check that individuals are declaring all sources of income.

The Institute of Public Accountants chief executive, Andrew Conway, said the tax gap was a “guesstimate at best” but “you can’t argue that this report points to a serious issue”.

He said the fact 72% of returns contained errors was “a worrying statistic, given the quantum of the gap and considering Australia’s current fiscal position”.

“It should be noted that often the work of the tax agent is only as good as assertions made by their client,” Conway said. “The tax agent is not required to validate all client assertions. It is also human nature for individuals to want to maximise refunds and, in doing so, may mislead their agent in the course of preparing their return.

“The IPA continues to carry out quality assurance of its members and actively seeks to weed out unprofessional behaviour and reduce error rates.”

The ATO estimates the net income tax gap for large corporates at 5.8% or $2.5bn in 2014-15. Lendon said the ATO would “continue to focus on multinationals and large corporates”.

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