The Tax Office’s new data matching technology is catching out more taxpayers than ever.
Tax experts say they have seen a significant increase in the number of “please explain” letters, which can be sent out up to two years after lodging a tax return.
If you’re riding around in the latest sports car and enjoying life in an exotic overseas location, but only declaring income of $10,000 on your tax return, it’s easier than ever for the Tax Office to be aware of your lifestyle.
It’s able to assess the assets you own – cars, properties, boats – and work out how much income you would need to support your lifestyle.
And for those suspected of serious tax evasion, the Tax Office scrapes social media sites to find out a little more about their lifestyles.
Instagram posts in front of a convertible or enjoying the high life in the Caribbean might not sit too comfortably with the Tax Office if income to pay for the lifestyle has not been declared.
Rapid advances in technology enable the Tax Office to drill down to low-level evasion and innocent mistakes.
Tax experts say the Tax Office will be reasonable if the mistakes are innocent, with the shortfall in tax repaid, plus “penalty” interest.
The interest, which is tax deductible, is up to 9 per cent a year. Penalties
There is, however, a range of penalties in the Tax Office’s armoury for more serious offences.
Failure to take reasonable care results in a penalty of 25 per cent of the amount owed. Recklessness incurs a penalty of 50 per cent of the amount owed and intentional disregard attracts a penalty of 75 per cent.
H&R Block tax communications director Mark Chapman says it’s important not to ignore a please explain letter and to give the Tax Office everything it asks for.
“If you fail to co-operate, the Tax Office can impose higher levels of penalty,” he says.
“Tax audits and reviews can be stressful and potentially expensive in terms of extra tax payable, interest and penalties.”
Liz Russell, a senior tax agent at Etax, says taxpayers need to take immediate action as they typically have only two to three weeks to respond.
She says that if you bury your head in the sand and do nothing, the Tax Office will make an adjustment based on what it thinks should apply.
“This year, we are seeing more data matching letters being issued, but that doesn’t mean more people are doing the wrong thing,” she says. Net cast wider
“The Tax Office’s latest technology helps it cast a wider net and catch more errors or unusual deductions claims,” Russell says.
The long arm of the Tax Office is extending beyond the long-standing compliance hot spots of work-related expenses, rental property income and capital gains tax to those earning income from the sharing economy.
The Tax Office says it is looking at those working as Uber drivers, letting rooms on Airbnb and offering services through Airtasker.
As the transactions in the sharing economy are made electronically, they are easy to trace.
Tony Fittler, the managing partner at HLB Mann Judd, Sydney, has also seen an increase in data-matching letters from the Tax Office.
“You have to assume that the Tax Office is getting much more information,” Fittler says.
Tax Office will be specific about what it thinks you have not declared. The letter will state exactly what adjustments it plans to make based on that new-found information.
Russell says in some circumstances little can be done and if you agree with the information in the letter, you do not need to contact the Tax Office.
After the deadline to object passes, the Tax Office will automatically send you an amended assessment.
“But if a taxpayer disagrees with what a Tax Office letter says and has the evidence to support their claims, the Tax Office will usually be understanding and reverse its position,” Russell says. Data matching not infallible
But the Tax Office’s data matching is not infallible, Tony Fittler says.
“It’s important to check the information carefully, as we have found data-matching errors,” he says.
Mark Chapman says being proactive when dealing with the Tax Office can help.
“If you haven’t yet been contacted by the Tax Office, but you become aware that there may have been a mistake in your tax return, then consider submitting an amended tax return or making a voluntary disclosure,” Chapman says.
“This will minimise the likelihood of penalties. The best policy is to stay out of trouble in the first place.”
A “sure-fire” way get into trouble with the Tax Office is failing to declare taxable income, he says.
“Even if you are relying on information pre-filled by the Tax Office itself, the responsibility for ensuring that you’ve included everything you need to rests with you.”
And he says foreign income is a growing area of concern to Tax Office.
It is not only foreign income from employment, but also income-producing assets such as an overseas rental property, as well as income from overseas shares and bank accounts, Chapman says.
Other common triggers for an audit include not disclosing capital gains on the sale of shares and property, he says.
And don’t forget bank interest. n Banks report all the interest they pay to the Tax Office so any discrepancy is easy to pick up, Chapman says. Small businesses
Business people have to be particularly careful, Chapman says.
“If you run a small business and don’t declare all your sales, the Tax Office will often identify that your business performs poorly compared to other similar businesses,” he says.
“They do this by establishing ‘benchmarks; for businesses in certain sectors.
“If your business is outside the benchmark for your sector, expect additional Tax Office scrutiny.”
Work-related expenses is another continuing hot area for Tax Office scrutiny.
Taxpayers, particularly those who doing their tax returns themselves, can easily get it wrong, Chapman says.
“Tax law can be difficult and it can be hard to know what to claim and not what to claim,” he says.
Chapman says the Tax Office is looking closely at work-related deductions, including the deductions of up to $300 that can be made without receipts.
It’s important to claim only for items you actually spent the money on. And even with the first $300 you need to be able to show how those claims were calculated, he says.
“You do need to have spent the money,” he says.
It’s important not to claim private or domestic costs, such as the cost of the car for the daily commute to and from work, which is not an allowable deduction.
Chapman says if in doubt on what to do in response to a query from the Tax Office, seek professional help from an accountant or tax agent.
Liz Russell says a tax agent can communicate with the Tax Office about any special circumstances you’ve faced.
“That could be the difference between whether you get a penalty, or a refund,” she says,