The importance of a good tax agent
The ATO have released figures that in the first two months of the 2018 tax return season they have found and corrected $53 million of errors.
Even extrapolated for a full year, this is still a far cry from their estimate of $8 billion a year but they are finding errors. Some of these errors will just be human error, but the ATO are taking a hard stance and have been provided with a bigger budget than ever, to check returns and find tax-payers and agents who are doing the wrong thing.
The ATO have a tiered system for penalties. When they believe there is an error in your tax return, they first give you a chance to correct the error with no penalties. If there is tax to be paid back, they will charge shortfall interest, but generally they won’t charge a penalty if you voluntarily disclose an error in your return early. If it gets to a review or audit, they will write to you explaining what they are auditing and what you will be required to provide. The audit process can take months, depending on the type and scope of the audit. If they find an issue with your return, your original notice of assessment will be amended and you may receive a penalty based on their findings. Penalties start from 25% of the tax payable as a result of the audit, up to 75% for more serious cases. They have also been applying an uplift in penalties of 20% lately, taking the maximum penalty to 95% of the tax payable.
For example, a hypothetical tax payer claimed $10,000 for motor vehicle expenses for driving their car to and from work at the mines. They are employed as an operator and they are in the 39% marginal tax rate (37% + 2% Medicare). The ATO instigates an audit and finds that the tax payer isn’t required to use their vehicle for earning assessable income (any travel to and from work is not tax deductible) and subsequently amends the tax return. Worst case, the tax payer will be required to pay back the $3,900 in tax refund they received from the motor vehicle claim, plus potential penalties of up to $3,705 plus shortfall interest on those amounts. A total amount payable of $7,605 payable plus interest!
The importance of using a good tax agent is twofold. Firstly you want to be sure you are claiming the right deductions. Backyard accountants are everywhere. So often do we hear, “but my mate claimed it”, or “Johnny from work said I can claim it”. Unfortunately while your mate from work probably means well, they are potentially putting you in a situation where you can be fined by the ATO like the example above. Taxation law isn’t simple – it requires continual, professional development to keep up with changes that our governments are constantly making.
Another reason to use a good tax agent is assistance during an audit. An ATO audit can be daunting; their letters are worded strongly and they have been very aggressive in their approach to audits lately. Unfortunately due to the complexity of Australian tax law and the costs of keeping staff well trained in tax law, the first level of audits are completed by ATO staff who aren’t trained in tax law. They follow a script and if anything varies from that script, they don’t know how to handle it. In a recent audit we assisted a client with, we relied on a rarely used section of the tax act and the ATO employee in charge of the audit had never heard of it. The ATO took the stance that the $14,000 deduction wasn’t acceptable and were looking to reduce it to zero. The client would be have had their tax refund reduced and they would have been penalised. We wrote to the ATO, explaining the relevant section of the tax act and how it was applied and the deduction was accepted with no changes to the client’s tax refund.
It may be tempting to lodge yourself online or use a cheap agent to save a few dollars. However, the peace of mind of knowing your return has been completed correctly, within the law and you have the support of an experienced tax agent is invaluable.