5.1 The vast majority of stakeholder concerns that the IGT has received in the past with respect to the ATO's risk assessment tools from this market segment relate to the ATO's use of benchmarks to risk assess business operating in the cash economy. The IGT has already conducted a specific review319 into this area, the findings and recommendations of which were well-supported by affected stakeholders and from which conclusions will be drawn in the final chapter of this review.
5.2 The ATO does use other risk assessment tools in this market segment; however, the IGT has received limited feedback from stakeholders on these tools. This may be due to a number of reasons including that there may be a lack of awareness, limited resources of stakeholders in this segment to engage with the IGT and/or the low level of adverse impact caused by the use of these tools.
5.3 Accordingly, this chapter primarily describes these other risk assessment tools in order to raise awareness of them amongst the affected stakeholders and to invite further feedback. In the event that there is significant adverse feedback, the IGT may consider conducting more specific reviews in this area in the future.
5.4 It should also be noted that the Productivity Commission has released its research report Regulator engagement with small business in October 2013. In particular, this report makes a number of observations relevant for micro businesses. Although the ATO is one of many regulators impacting micro businesses, several observations in the Productivity Commission's report are consistent with observations in previous and current IGT reports.
5.5 The ATO defines micro businesses as those businesses with an annual turnover below $2 million. They employ one in five Australian workers and account for more than a quarter of tax revenue collected, including approximately $14 billion in PAYG withholding tax for their employees.320
5.6 There are approximately 2.8 million micro businesses in this market segment.321 The ATO's Micro Enterprises and Individuals (ME&I) business line has primary responsibility for this market segment. Other ATO business lines also assist in managing various tax risks in the micro businesses market segment. For example, the Tax Practitioner and Lodgment Strategy (TPALS) and Superannuation business lines also administer this market segment in relation to the cash economy and superannuation risks respectively. Whilst the management of taxpayer risks may belong to several business lines, the ME&I business line combines some of these risks when conducting certain compliance activities. For example, the ME&I 'employer obligations' stream verifies a business's compliance with Pay As You Go withholding, superannuation guarantee and fringe benefits tax obligations.322
5.7 The ME&I 'micro active compliance' group is principally involved in monitoring and managing tax compliance risks for this segment.
Risk assessment tools used in the micro business segment
5.8 The ATO has identified 'expert business rules' as the primary risk assessment tool used in the ME&I business line. These rules essentially query tax return and schedule information and certain third party data to identify potential risks. There is a wide variety of risks that the ATO must manage for this market segment. For example, with respect to Capital Gains Tax (CGT), taxpayers may not correctly report capital gains from various events such as the sale of shares or property. In such cases, certain expert business rules would operate to determine whether there is a risk that the taxpayer may not have disclosed a disposal of shares or property.
5.9 By way of example, taxpayers may claim CGT concessions for small businesses to which they may not be entitled. Expert business rules would query information from income tax returns and CGT schedules in risk assessing the taxpayer's eligibility for such concessions.
5.10 The ME&I business line groups these risks into common themes or issues, CGT being an example of one such theme. Each of these themes has a number of specific risks falling under it along with expert business rules to address them.
5.11 A taxpayer may trigger several risks under a variety of expert business rules. The ATO has advised that it does not aggregate these risks for a given taxpayer for analysis. Therefore, taxpayers are selected for audit only on the basis of individual risks in isolation. Where a taxpayer is selected for an audit, it would initially examine the specific risk which triggered the audit. The scope of the audit may be increased to take into account risks identified during the audit process.323
5.12 Additionally, the ATO also uses the Risk Assessment and Profiling Tool (RAPT), a database that contains taxpayer information and allows ATO officers to query and inspect different sets of information. The RAPT also has internal rules to detect risks within the database.
5.13 In addition to the ME&I methods outlined above, the Cash Economy segment of TPALS uses the following tools:
- small business benchmarks — a given business's reported financial performance ratios significantly differ from the norms of their industry (as already mentioned, this area was the subject of a specific IGT review in 2012324);
- cash economy model — a risk model which analyses reported taxpayer income against other data sets to determine if a taxpayer is 'living beyond' their reported means; and
- data-matching — the ATO may be able to match the records of third parties (such as suppliers or customers of the taxpayer) against reported taxpayer income to determine possible underreporting (aspects of the use of data-matching for individuals are the subject of a separate current IGT review325).
5.14 In addition to the ME&I and TPALS cash economy risk tools outlined above, the ATO may also conduct compliance activities in this market segment due to:
- risk pilot programs: hypotheses are developed and tested to determine the level of any risk;
- small scale strategies: includes following up previously audited taxpayers to ensure change in non-compliant behaviour of the taxpayer; and
- referrals: referrals from government agencies or community members.
5.15 The ATO currently does not have a process for the analysis of risks in a collective or aggregate manner that may be identified in the micro business segment. The IGT is of the view that such holistic analysis may result in an improved examination of taxpayer behaviour and more accurately measures the risks posed by a particular taxpayer.
5.16 Several risks viewed in isolation with respect to a single taxpayer may be low. However, when these risks are viewed as a whole, the result may be that the relevant taxpayer does present a high level of risk. The ATO should conduct research into how it can gain an aggregated view of taxpayers' risks to better understand the total risk posed by the taxpayer and differentiate and prioritise its treatment accordingly.
The IGT recommends that the ATO research and develop strategies to improve aggregated taxpayer risk analysis in the ATO micro business segment.
5.17 Chapter 8 draws on information from the IGT's Review into the Australian Taxation Office's Use of Benchmarking to Target the Cash Economy to make additional IGT observations relevant to the micro business market segment.
319 IGT, above n 7.
320 ATO, above n 33, p 23.
321 Ibid p 75.
322 Australian Taxation Office, 'An overview of employer obligations', intranet page.
323 ATO communication to IGT, email 21/06/2013.
324 IGT, above n 7.
325 IGT, above n 118.