Is your business constantly under scrutiny from the ATO? Or have you been in business for many years and never heard a peep from the taxman?
Looked at in isolation, the way the ATO chooses which businesses to audit can seem random. Why my business and not the one next door?
In reality, there’s a lot of science and a lot of technology involved in making decisions around which businesses to target.
It all comes down to risk. How risky is your business? Behind the scenes, the ATO has invested millions of dollars developing sophisticated computer algorithms which constantly monitor your business (and every other business in Australia) with a view to identifying those businesses which represent a high enough risk to warrant some form of compliance action, such as an audit.
So far as the ATO is concerned, there are two components to risk. The first is money: the revenue which your business earns and the tax that it pays to the ATO.
Put simply, BHP (for instance) is a bigger tax risk than Fred’s Garage around the corner. That’s not because BHP is necessarily more or less compliant with its tax obligations than Fred’s Garage but because BHP is a great deal bigger.
If BHP were to fail to comply with its obligations, the impact on government revenue would be far greater than if Fred’s Garage were to become non-compliant.
The second component of risk to the ATO is measured by the likelihood that a particular business will not comply with its tax obligations.
This looks at a variety of factors and produces a risk score based on each business’s level of compliance with those factors, in the current year and in previous years.
Amongst the factors that the ATO looks at are:
- Failure to comply with lodgement obligations for income tax returns and BAS’s
- Failure to pay outstanding tax debts
- Declining or erratic tax performance measured over several years
- Inconsistency between information reported in tax returns and information gathered by the ATO from third parties, such as banks, customers, suppliers, ASIC, etc
- Results which are outside the ATO’s own benchmark figures for similar businesses
- Presence of “high risk” transactions like capital gains, loans to shareholders, etc
- Unexplained tax losses
- Large, on-off or unusual transactions
- Complex group structures and unexplained flows of money around those structures
This list is by no means complete but it gives a flavour of the types of factors which the ATO takes into account. Broadly speaking, the more risk factors your business triggers, the higher the likelihood “score” your business will be given by the ATO.
That score is then combined with an assessment of the revenue risk your business poses and an overall risk score is allocated. This risk score is reviewed and refreshed regularly as up to date information is gathered by the ATO.
Mark Chapman is the director of tax communications at H&R Block and a former senior director of the ATO.