Nassim Khadem, 05 November 2015

The Australian Taxation Office will commence random audits of a sample of hundreds of small and medium businesses and individual taxpayers next year to identify the amount of revenue not collected because of tax evasion.

The Tax Office has confirmed it will do the random audits for small business and individual taxpayers, but not high-wealth individuals or companies.

The ATO has released a broader estimate of the tax gap – it says about $3 billion in revenue may be missing because of tax evasion and misreporting.

The $3 billion still does not include the income tax gap. Once income tax is included – which will be the case next year – it could take the figure into tens of billions or higher.

In response to questions from Fairfax Media, the ATO said in 2015-16, 600 taxpayer reviews will be undertaken within the ATO, and a “handful” of these would be randomly audited which could include letters or phone calls, but no door knocks as happened in the United States with Internal Revenue Service agents. “Only in instances where we identify strong reasons to believe the taxpayer has not complied with their tax obligations, would the taxpayer then be escalated to audit,” an ATO spokesman said.

The move was made after an expert panel consisting of former OECD senior adviser Richard Highfield, UNSW Australian School of Business Professor Neil Warren, and Deloitte Access Economics director Chris Richardson had advised the ATO that it only use random audits or SMEs (small and medium enterprises) and individuals. “There’s a bit of a culture shock [that’s been] required among some ATO staff to go down this path,” Mr Highfield said.

Tax Commissioner Chris Jordan told Parliament’s Standing Committee on Tax and Revenue last year random audits had the potential to upset taxpayers who were doing the right thing and there could be high costs involved in doing random audits. “It is a live issue and one that has been holding us back a little bit as to whether it is worth doing,” Mr Jordan said.

CPA Australia chief executive Alex Malley told Fairfax Media he was not supportive of random audits. “One of the concerns with random audits is that their purpose may be more about the integrity of a process than revenue collection,” he said.

But Mr Highfield said random audits for small and medium businesses and individuals would help produce a more informed estimate of tax evasion, including that associated with the cash economy and over-claimed deductions. Random audits were not appropriate for high-wealth individuals and large businesses where the ATO already focused much of its compliance efforts, he said.

Chartered Accountants’ Australian tax leader Michael Croker said the ATO had at one stage discussed using random audits for the high wealth individual and private group taxpayer segment. In relation to now using them for the SME segment, he said: “These audits should be carefully targeted, properly resourced and completed within a quick timeframe.”

In the United Kingdom Her Majesty’s Revenue & Customs conservatively estimates the the tax gap (including income tax) for 2013-14 is £34 billion ($72.7 billion), which is 6.4 per cent of tax liabilities.

The United States Internal Revenue Service (IRS) has estimated the tax gap in 2006 (the latest year for which figures are available) was $US450 billion ($625 billion).

In Australia the ATO measures the tax gap based on estimates around tax evasion, fraud, incorrect reporting, non-payment of liability, non-registration and non-lodgement. It does not include interest charges or penalties. It also does not include “tax minimisation” by individuals and companies, which the ATO notes “is allowable under the law”.

“As part of our ongoing development of the estimates, we intend to analyse penalty and interest charges to better understand taxpayer behaviours and the drivers of the tax gap,” an ATO spokesman said.

Previously the ATO’s estimates only included the GST and the luxury car tax gap. This year it also estimates a range of other taxes including the wine equalisation tax, petroleum, diesel and beer excises, fuel tax credits and PAYG withholding gap.

The Inspector-General of Taxation Ali Noroozi has not advocated a position either way, only noting that despite many OECD countries using them, such a program is unlikely to be popular with Australian taxpayers.

“If they [taxpayers] are perfectly compliant, then they are not going to appreciate somebody knocking on their doors and wanting to go through everything,” Mr Noroozi said in a report tabled in parliament last year.

Extracted in full from the Sydney Morning Herald.