As an accountant you are acutely aware that quite often reviews or audits of your clients can be unavoidable. You can undertake every type of due diligence that there is in the book, yet the Australian Taxation Office (ATO) or other State Revenue Agencies will still collect and often use data through a variety of data matching and artificial intelligence sources. These are designed to find discrepancies in a lodged return and they have been proven to work very well.
Read on to see what statistics and insights the Accountancy Insurance Claims team has collected from the 2018/19 financial year.
Employer Obligations Audits
Employer Obligations Audits (by claim type), has now taken over as our most frequent claim type. For accountants this may be the most frustrating type of audit activity as it’s one where accountants are not in control. In general accountants don’t get involved in their client’s payroll preparation or maybe see it once a year (when it’s too late) at tax return preparation time.
Even the most complete and accurate preparation of a client’s return can still result in scrutiny by the ATO. With the advent of more transparent and timelier data capturing by the ATO, any errors or omission in this space will be enquired upon by the ATO at a lightning pace.
Claim proportion (frequency) 2018/19: Employer Obligations Audits (PAYG/SG/FBT) accounted for 20.23% of all Accountancy Insurance claims.
Super Guarantee (SG)
The unpaid versus paid SG gap by employers is increasing exponentially and the ATO is not going to allow this to continue post Single Touch Payroll (STP) launching. The ATO will still need to audit employers for all the unpaid SG from pre 1 July 2019. We would expect to see this occur in the coming months and most likely for a number of years following.
By 31 October 2019, at the latest, most employers in Australia will have to report their SG contributions for the first quarter of the 2020 financial year under STP. This means that for the first time ever since SG started over 25 years ago, the ATO will have live and up-to-date data on ALL employers that have not met their SG obligations for the first quarter of the 2020 financial year and every quarter going forward thereafter.
Reviews and audits for SG are expected to start with the employers that are non-compliant under STP given the ATO will now know who they all are.
BAS Reviews is one area where the Claims team have noted a genuine reduction in claim occurrences. The main reason for the reduction in BAS Reviews is thought to be attributed to the increased focus on Employer Obligations Audits, especially in the SG area. Despite the decrease in the past 12 months it is still the 2nd most frequent claim type and still attracts a lot of audit attention from the ATO.
Claim proportion (frequency) 2018/19: BAS Reviews (Pre & Post Assessment) accounted for 12.80% of all Accountancy Insurance claims.
Payroll Tax was the 3rd most frequent claim type and continues to be a major focus area by all State Revenue Offices around the country. Issues such as grouping, contractors, employees based in other states (requiring registration in other states), and employers not being registered when they should be are key factors affecting these statistics. Data sharing with other government agencies is definitely assisting all the State Revenue Offices in raising red flags in this area, as well as in other related tax areas such as Land Tax and Stamp Duty.
Claim proportion (frequency) 2018/19: Payroll Tax (All States) accounted for 11.47% of all Accountancy Insurance claims.
Following closely behind Payroll Tax in claim frequency is Income Tax which can cover a vast array of different types of ATO audit activity that can be linked back to the lodged income tax returns of taxpayers. Comparing the claim frequency of Income Tax in 17-18 to that in 18-19, we can report a small increase in this area.
Claim proportion (frequency) 2018/19: Income Tax Audits (Full/General/Combined) accounted for 9.44% of all Accountancy Insurance claims.
Work Related Expense Claims (WRE)
Claims for Work Related Expenses have been increasing over the past 12 months as the ATO cracks down on taxpayers “over claiming” in their tax return - as the ATO said they would be. The ATO is continually developing and using new methods to benchmark their data analytics on how much someone should be claiming in WRE based on their occupation. This is then cross referenced with what the taxpayer is claiming as WREs in their lodged return. If there is a significant difference in what is perceived as “standard” then quite often the ATO will want to know why and seek validation and justification of the WRE claims through either an official enquiry, review or audit of the taxpayer.
Who is being audited?
Throughout the mix of accounting firms and their participating clients working with Accountancy Insurance (which is well over 3,000 firms), we have seen – as a quick snap shot, an increase in the cost of audits for:
> Salary and Wage clients
> $1M to $3M turnover sized business groups and;
> $10M to $25M turnover sized business groups.
Where we have seen a reduction in the cost of audits is in the $75M to $100M turnover sized business group audits. The frequency has dropped slightly but the costs to respond has dropped significantly.
Another notable highlight is that more accountants are being audited themselves. Although it is not necessarily a high frequency, we have seen the number of accounting firms being audited increase by nearly 42%!! If an accountant has more than 20 paid clients, Audit Shield provides coverage to the firm for these sort of audits of the firm up to a prescribed limit.
For a detailed breakdown of the claim frequency in Australia based on claims processed by the Accountancy Insurance Claims team click here.
It can be said with a fair amount of certainty that the ATO and all of the State Revenue Offices are here to stay and that they will continue to find new and innovative ways to deal with those taxpayers that are intentionally or unintentionally not paying their fair share of tax.
As official reviews, audits, investigations and enquiries of taxpayer lodged returns and their taxation affairs in general continue to remain prevalent, the best course of action is to ensure that your accounting firm has a comprehensive tax audit protection solution such as Audit Shield in place.
Audit Shield will ensure your professional fees will be covered in the event of ATO and other government revenue agency initiated client audit activity. It also means that you can avoid the awkward conversation concerning additional fees incurred when dealing with audit activity with your client. It’s a win-win and no net-cost solution for your accounting firm and your clients.
To find out more about Audit Shield visit the Accountancy Insurance website or call our team on 1300 650 758.
Director, Accountancy Insurance