7.1 Recent ATO research144 shows that record keeping is not perceived to be an area to which small business dedicate much effort. Small business participants in the research saw it as 'a necessary chore' and tended to fit it in when they could, arguing that 'it could get in the way of the real task of getting and doing work'.
7.2 Although many displayed this attitude they did have systems in place, such as common software packages, and used expert advice, such as from accountants and tax agents, to help them meet these obligations.
7.3 Tax agents themselves identified three 'levels', or types, of relationship with their clients based on their clients' record keeping and reporting behaviour:
Most prevalent were those clients who were felt to be honest and transparent in their reporting and as much as possible kept accurate and orderly records of their transactions.
The second level consisted of clients whom they often had to chase for accurate or complete records.
Dialogue with these clients focused on informing them that of operating 'outside the norm' which increased their risk of audit.
This warning was not without self-interest, as they knew that if enough of their clients were audited it increased the risk that they themselves could come under scrutiny.
Lastly (and reported as being a very small minority), there were clients who the agents felt were behaving 'irresponsibly' and clearly misrepresenting their income and transaction history.
Tax agents reported that they would terminate any relationship with such a client if they found out they were behaving in this way as they posed a risk to their own practice. It was highly undesirable to have any kind of relationship with such clients.145
7.4 In this review, stakeholders have raised concerns that not only is the law itself general in nature (section 262A of the ITAA 1936), but also the ATO's ruling on record keeping, Taxation Ruling TR 96/7 Income tax: record keeping — section 262A — general principles, is not specific enough. Also, some have mentioned that the ATO needs to provide more record keeping assistance, or alternatively, needs to better communicate that such assistance is available.
7.5 In the IGT's view, there can be large expectation variations between the ATO and taxpayers as to what they consider proper record keeping documentation. For example, some tax agents report that the records being asked of taxpayers by auditors is too onerous ('boxes and boxes') and beyond what is actually required, such as asking a restaurant for waiters' dockets from 2 years ago, when TR 96/7 only requires a cash register 'Z' total readout plus last month's cash register till roll.146
7.6 Another tax agent pointed out that a client had all the records, except for last month's duplicate till roll, which caused the auditor to dismiss the quality of all of the records provided and substitute it with a default assessment.
7.7 It should also be noted that not all stakeholders believe that the record keeping requirements are onerous as:
- electronic bookkeeping software was cheap and prevalent;
- help can be provided early in establishing these systems;
- there is an incentive to get records right to claim input tax credits.
7.8 In general, whilst stakeholder concerns were raised in the context of the ATO's benchmarking strategy, issues relating to record keeping go beyond the benchmarking strategy and affect small businesses generally. The ATO's research147 indicates that differentiated approaches to improve small business record keeping are needed and should be based on the different taxpayer attitudes to record keeping and the different types of relationships with their tax agents.
Industry specific record keeping guidance — 'practical compliance'
7.9 In addition to TR 96/7 and the Record keeping for small business booklet, the ATO publishes industry specific record keeping guidance on their website. These industries include:
- Primary production;
- Pubs and clubs;
- Restaurant and catering;
- Service; and
7.10 These facts sheets are useful in that they provide more specific guidance about how a business should keep their records. For example, the restaurant and catering fact sheet recognises that restaurants tend to use a cash register, and provides guidance accordingly. The fact sheet then acknowledges that for 'food-court, fast-food or takeaway businesses it is impractical to record every individual transaction as this would seriously impair the normal conduct of the business.'148
7.11 This can be contrasted with the requirements of section 262A of the ITAA 1936 to 'keep records that record and explain all transactions ... relevant for any purpose of this Act'. Thus the ATO is able to allow taxpayers to achieve 'practical compliance' as opposed to 'strict compliance'.
7.12 The role of industry representative bodies and tax practitioners is crucial. Industry specific record keeping guidance will only be credible to small business taxpayers if they believe it is reasonable from the perspective of their peers and their advisors, and not just the revenue authority.
7.13 In this respect, the ATO as a 'brand' will always have its limitations. Research commissioned by the ATO in July 2011 about the small business benchmarks (although not requested by the ATO to do so) recommended that the small business benchmarks be relaunched with a focus on telling small businesses that the benchmarks provide an indication of whether they are likely to be audited, and that the benchmarks provide a way for the 'ATO to more accurately identify potential tax cheats.'149
7.14 Importantly, the reason for the recommendation to reduce the focus on the 'level playing field' message was that 'statements suggesting that the benchmarks were 'designed to help businesses' were often taken with a pinch of salt' by small businesses.150 Similarly some tax agents 'perceived that the benefits emerging from the benchmarks would most strongly advantage the ATO rather than small businesses. Although they recognised the potential value for some small businesses, the benchmarks were perceived as a tool made more for the benefit of the ATO than for small businesses themselves.'151
7.15 This highlights the need to engage taxpayer representative groups and tax agents not only to ensure that any industry specific record keeping guidance is in fact appropriate for that industry, but that it also has the credibility needed for acceptance by the taxpayer. In some circumstances, the ATO may need to rely on other organisations' branding and communication channels to achieve this goal.
7.16 The IGT recognises that this same research highlighted that industry associations greatly vary in their size and scope and the nature of the services they provide to their members. Furthermore, as a communication channel, 'most acknowledged they were not interested in 'mass communication' from the ATO given they lacked the capacity to 'digest' communication and make it more appropriate for their members. There was however some strong desire for more industry specific communication from the ATO.'152
7.17 Since industry bodies have a strong desire for industry specific communication from the ATO, it is reasonable that these bodies assist in the development of industry specific record keeping guidance.
7.18 In addition, it should also be recognised that record keeping requirements may need to be augmented to accommodate the legal structures adopted by small business owners. For example, company structures may have specific record keeping requirements compared to trust structures or sole traders. These aspects should also be subject to consultation and may require an important overlay element that is in addition to the specific industry requirements for a given taxpayer's circumstance.
7.19 An approach that seeks to establish independent but appropriate standards for each specific industry and business structure type with input from the relevant stakeholders provides for greater conformity and oversight than situations where the ATO has, or is perceived to have, created the rules internally.
The role of the ATO in providing record keeping assistance
7.20 In February 2012, the Office of Tax Simplification (OTS) in the UK reported on the ways which Her Majesty's Revenue and Customs (HMRC) administration could be improved for the benefit of small businesses.153 With respect to record keeping, and 'practical compliance', the OTS stated:
In particular new businesses need to be made fully aware of the importance of good business records very early on in the life of the business. Where professional help has not been sought, HMRC is probably best placed to highlight this. At the very least we recommend that HMRC sends all new small businesses a simple easy to read leaflet setting out the minimum records needed and where further guidance may be found. For those businesses that have internet access recommending that they work through the online business records review tool (ensuring that the business is given the URL) would be a good way to guide new and existing businesses through what records they need to keep.154
7.21 Similarly, the ATO has available on its website the Record Keeping Evaluation Tool which helps small businesses find out which records it needs to keep, understand how their record keeping rates and, if appropriate, consider suggestions for improvement.155
7.22 The ATO provided the following download statistics for the Record Keeping Evaluation Tool which indicates the level of usage of this tool.
(to 28 Feb 2012)
Source: ATO data supplied to IGT, 29 March 2012.
7.23 The IGT considers that these download statistics are relatively low when considering the fact that there are an estimated 1.4 million businesses operating in the cash business segment.
7.24 In terms of awareness, the OTS report found that:
Good business records, appropriate to the needs of the business, are crucial for all sizes of business. Small businesses may not initially seek advice on business records by which time errors may have been made and documents and information lost. We think that HMRC should, when small businesses are first set up, be more proactive in ensuring that they understand precisely what records they should keep and what their obligations are in other respects. It is not sufficient in our view to have information available online, HMRC should take more responsibility for encouraging and assisting businesses to access the information or take professional advice.156
7.25 In Australia, the Joint Committee of Public Accounts and Audit (JCPAA) also expressed similar concerns about businesses' awareness of ATO assistance:
The Committee felt that the 'no strings attached' small business advisory service was a commendable initiative by the ATO and encourages wide business sector participation. To maximise uptake, the Committee recommends that the ATO consider additional cost effective promotion of this service — for example through the existing communication channels of correspondence to taxpayers; through tax information brochures; and through key industry bodies such as Council of Small Business of Australia.157
7.26 The ATO has a variety of record keeping information available on its website. However, as indicated by the Tasmanian Regional Tax Practitioner Working Group in July 2010,158 'the majority of clients are not actively aware of the ATO record keeping publications and would not search for them on our [the ATO] website'.
7.27 The ATO advised that taxpayers may freely request the abovementioned 'no strings attached'159 Small Business Assistance Visits. Information about the visits is available on the ATO website and publicised at various business exhibitions and summits. Furthermore, the ATO seeks to provide information about available assistance through the publications of business and industry associations.
7.28 Importantly, the ATO's Small Business Assistance Program also makes outbound phone calls to sectors which it believes might be at risk of needing extra help (be it record keeping or other tax matters). The phone calls ensure that taxpayers are aware of the free ATO assistance available to them. It targets these sectors through various channels, such as:
- local councils or industry associations;
- communities where a large business has closed down, and other businesses may be struggling as a result;
- those with a history of late payment or late lodgment; and
- those who have recently registered for GST or PAYG Withholding.
7.29 Importantly, those outside the benchmarks have not been targeted, apart from record keeping assistance visits which are non-compulsory face to face assistance visits offered through outbound phone calls. It is the IGT's view that businesses outside the benchmark could also be targeted for outbound phone calls, alerting them to the availability of Small Business Assistance Visits.
7.30 The ATO advises that small businesses can also obtain record keeping assistance through a variety of agencies, not just the ATO. For example, small businesses may:
- go to a Business Enterprise Centre;160
- attend a mobile office staffed by Centrelink and the ATO (visits regional communities); and
- receive information from an industry association newsletter, which often sources their information from ATO publications.
7.31 Furthermore, the ATO has advised that it regularly works with other government agencies, at the Federal, State and local level, to deliver small business assistance. This is also useful since small businesses often have reporting obligations other than taxation.
7.32 The variety of obligations, along with their various sources of assistance, is in itself a source of complexity for small business, not only here but in the UK. HMRC have launched 'My New Business'161 which is a website designed to provide both tax and non-tax assistance to small business. The concept of a 'one stop shop' or 'portal' is nothing new in Australia. The Business Enterprise Centres Australia website aggregates tax and non-tax information for small businesses. All Australian States and Territories as well as the Commonwealth162 also have government websites that act as small business portals.
7.33 In this respect, the IGT understands that the Federal Government will appoint a Federal small business commissioner in the second half of 2012, with the Commissioner:
- providing small businesses with a new voice to highlight their issues to the Australian Government;
- providing a one stop shop for small business services and information; and
- ensuring the interests of small business remain at the forefront of Government policy making.163
7.34 The IGT regards the establishment of the Office of the Small Business Commissioner as an opportunity to simplify and enhance the way in which small businesses access tax and non-tax information including record keeping assistance.
The initial bulk mail out letters program — a missed opportunity
7.35 Another issue related to record keeping is the ATO opportunity to use its letters program to promote educational products and services. The ATO approach with the bulk mail out letters program was to identify small businesses that were outside the benchmarks and invite them to review their records for omitted income.
7.36 In 2010, 37,847 letters were sent to taxpayers notifying them that they:
- were in a benchmarked industry;
- were outside the benchmark for that industry; and
- should review their records and disclose any errors found.
7.37 Importantly, none of these letters (there were four versions) contained any information about how to get help with record keeping.
7.38 In 2011, 22,344 letters were sent to taxpayers with the same essential message, but this time included a recommendation to access the website, to access tools and publications.
7.39 The ATO advises that during 2010, the bulk mail out letter program occurred concurrently with the start of the correspondence audit strategy. That is, there was no deliberate lag between businesses receiving an education letter and businesses being subject to correspondence audits. Furthermore, the ATO indicated that during 2010, it was not a prerequisite that a business receive an education letter before being subject to a correspondence audit.
7.40 The IGT is of the view that the letters program was a missed opportunity for the ATO to promote the products and services available to small business taxpayers with respect to record keeping, especially the Small Business Assistance Visits.
7.41 Timing is also an important issue. Whilst the bulk mail out letter program was an important 'self-management' initiative, the letters and educational prompts are with reference to a year of income in which a taxpayer has already created their records and lodged their tax return and activity statements.
7.42 Notwithstanding this, the letters could have provided encouragement for taxpayers to obtain educational assistance to implement new record keeping systems for the future.
The role of tax practitioners in promoting record keeping
7.43 The ATO has the opportunity to allow tax practitioners to take a more proactive role in their clients' record keeping. By doing so, the tax practitioner may have greater control over the likelihood that, and manner in which, their client is selected for compliance action.
7.44 The ATO has indicated that it is developing a Guide for Tax Practitioners — Best practice: Assisting clients to correctly report income including cash transactions. The aim is to ensure that tax practitioners are aware of the ATO's expectations with respect to record keeping and the reporting of income. The ATO consulted with tax agents of low risk cash economy clients to understand how they influenced their clients.164 The ATO has advised that the guide is being developed in consultation with the Tax Practitioners' Board, tax agents and professional associations.
7.45 The IGT encourages the ATO to continue the development of this guide. Furthermore, the IGT is of the view that the ATO should encourage small businesses to seek the assistance of tax professionals to enhance the record keeping capability of the business. This can be achieved by either the business operator receiving training in bookkeeping or by the business operator deciding to engage the services of a tax agent or bookkeeper to perform the work.
7.46 It is generally appreciated that tax agents, BAS agents and other advisors play a vital role in the self assessment tax system and their collective support and engagement needs to be fostered and supported in improving the tax system's operation. While most taxpayers do their best when engaging with the ATO, it is important to appreciate that they also consider their tax agent to be a personal trusted advisor in managing their way through the tax system.
7.47 Research165 suggests that of all the time and activities spent throughout the year complying with tax laws, on average small businesses spend up to 65 per cent on record keeping. From a time perspective, small businesses would benefit from external help with their record keeping.
7.48 The ATO, therefore, should consider encouraging small businesses to engage with their tax practitioners in relation to record keeping. For example, where a tax practitioner demonstrates knowledge of best practice and an ability to teach it to small businesses or assess them, the ATO could recognise the tax practitioner as a 'record keeping advisor'. This would provide an incentive for the tax practitioner to adopt the best practice guide.
7.49 In the long run, these recognised tax practitioners could review small business records and provide a degree of assurance to the ATO about the adequacy of taxpayers' record keeping systems, such as that provided in prudential reviews. This assurance could be considered relevant in deciding to exclude compliant taxpayers from future audit selection processes. This would provide an incentive for small businesses to seek tax practitioners for this service, with the benefit being that the review was carried out by someone that knew the business better than perhaps an ATO officer over the phone.
7.50 General acceptance of the Best Practice Guide is essential to ensuring that it is widely adopted by tax practitioners and applied to their small business clients in good faith. Consultation with a wide range of tax practitioners is therefore vital.
The ATO should foster better record keeping and accurate reporting of income in a manner that minimises overall costs for small businesses through a variety of means including:
- the development of industry specific record keeping guidance in consultation with small business owners, industry associations, tax agents and bookkeepers;
- consultation with the new Federal Small Business Commissioner about the possibility of a 'one-stop shop' for information on small business record keeping and reporting of income;
- improvement to promotion of its publications and assistance in relation to record keeping (including small business assistance visits) through a diverse range of channels including tax agents;
- making those small businesses falling outside the benchmarks aware of the ATO's 'no strings attached' assistance visits;
- consultation with relevant tax practitioner representative bodies with a view to establishing a 'taxpayer record keeping assurance process' which could be used as a factor in excluding compliant taxpayers from audit selection.
ATO response: Partially agree
The ATO agrees with sub-recommendations 7.1(a) to (d). We disagree with sub-recommendation 7.1(e).
As part of the Compliance Program, where the ATO identifies an industry of particular focus for the cash economy we will work with relevant stakeholders on the development of industry specific record keeping guidance in accordance with element 7.1(a).
The ATO agrees to consult with the Federal Small Business commissioner, once appointed, on the possibility of a 'one-stop shop' for information on small business record keeping and reporting of income
As part of the enhanced communication processes, the ATO will improve the promotion of its publications and assistance visits in accordance with sub-recommendations 7.1(c) and 7.1(d).
In relation to sub-recommendation 7.1 (e), we are concerned that too specific a focus for the suggested consultations may restrict their scope and outcome.
We are also concerned that a 'taxpayer record keeping assurance process' may not lead to reduced costs for small businesses in line with your intent. Further, it is doubtful whether it is appropriate for the ATO to establish an 'assurance' process as envisaged in this sub-recommendation.
That said, the ATO will continue to support small businesses and to foster better record keeping and, through consultation, develop further ways to minimise overall costs for small businesses.
144 Australian Taxation Office, internal communication in relation to GfK bluemoon’s report, Cash Economy: Small business benchmarks and record keeping, a report prepared for the ATO, July 2011.
146 Taxation Ruling TR 96/7 Income tax: record keeping – section 262A – general principles, paragraphs 12 and 13.
147 Australian Taxation Office, internal communication in relation to GfK bluemoon’s report, Cash Economy: Small business benchmarks and record keeping, a report prepared for the ATO, July 2011.
148 Australian Taxation Office, Record keeping in the restaurant and catering industry – recording income in a restaurant, Australian Taxation Office, Canberra, 25 October 2010, viewed 2 July 2012.
149 GfK bluemoon, Cash Economy: small business benchmarks and record keeping, a report prepared for the ATO, July 2011, page 51.
150 ibid, page 31.
151 ibid, page 41.
152 ibid, page 48.
154 ibid, paragraph 4.11.
155 ATO communication to IGT, 2 April 2012.
156 HM Treasury, Office of Tax Simplification Small business tax review: Final report – HMRC administration, HM Treasury, London, February 2012, viewed 20 March 2012, paragraph 4.10.
157 Joint Committee of Public Accounts and Audit, Report 426 Biannual Hearing with the Commissioner of Taxation, Canberra, November 2011, paragraph 1.76.
159 Joint Committee of Public Accounts and Audit, Report 426 Biannual Hearing with the Commissioner of Taxation, Canberra, November 2011, paragraph 1.68.
163 Gillard, J (Prime Minister of Australia), O'Connor, B (Minister for Small Business), Government appoints Small Business Commissioner, Media Release, 14 March 2012, Department of Prime Minister and Cabinet, Canberra, viewed 26 June 2012.
164 ATO communication to IGT, 31 May 2012.
165 Lignier and Evans, Paper 5 The rise and rise of tax compliance costs for the small business sector in Australia. Presented to the 10th International Tax Administration Conference Atax UNSW, April 2012.