When an accountant prepares a tax return in Australia, it is not uncommon for the Australian Taxation Office (ATO) or a government revenue authority to initiate an audit or review. However, this does not necessarily imply any faults in the accountant’s work – in fact a lot of the time the returns are submitted completely correctly. In most cases, these reviews are a result of the ATO implementing targeted measures rather than reflecting the specific lodgements by the accountant or taxpayer themselves.
The ATO utilises various advanced techniques, including data matching and artificial intelligence, to identify potential issues within lodged tax returns. These methods have historically been very effective, and as a result, the ATO continues to improve its efficiency in scrutinising lodged returns.
As accountants ourselves, we enjoy delving into the details of the numbers. This year, we have conducted a more comprehensive analysis of the distribution of claims noted by our claims department between 1 July 2022 – 30 June 2023.
Here is a pie chart depicting the frequency of Audit Shield claim activity among Australian taxpayers who have the protection of Audit Shield*.
Audit Shield claims activity showed a general increase of 9% across all audit activity areas between 1 July 2022 – 30 June 2023 when compared to 1 July 2021 – 30 June 2022.
The above ribbon chart places into perspective how some of the top Audit Shield claim types have changed from the 2020/21 financial year, through to the 2022/23 financial year. The ribbon chart also shows, by the height of the line, a representation of the volume of the claim activity in the corresponding financial year. What is noteworthy is the path that Payroll Tax Investigations (All States) followed, from the number three position in 2020/21, to the number four position in 2021/22, up to the number one position in 2022/23.
During the last 7 months, Audit Shield claim activity increased by more than 14%! The top three highlights of ATO and State Revenue Authority claim trends noted by our claims team were:
1. Payroll Tax Investigations (All States):
Payroll Tax Investigations (All States) continues to be a major focus area by all State Revenue Offices around Australia. The Accountancy Insurance claims team noted an overall increase of over 3.4% in Payroll Tax Investigations over the frequency in the 2021 – 2022 financial year.
When diving a little deeper into some states individually, noteworthy statistics comparing 1 July 2022 – 30 June 2023 to 1 July 2021 – 30 June 2022 were:
- VIC grew by 42% ↑ (this is on top of 2021/22 which was equivalent to pre Covid activity)
- WA grew by 84% ↑ (this is now back to pre Covid activity)
- NSW grew by 462% ↑ (albeit off a small base in 2021/22)
- QLD dropped by 9% ↓ (both 2021/22 and 2022/23 above pre Covid levels)
- SA grew by 75% ↑ (albeit off a small base in 2021/22)
Issues identified in Payroll Tax Investigations include:
- Grouping of related employer entities
- Contractors
- Employees based in other states (requiring registration in other states)
- Employers not being registered when data (e.g., STP) shows they are over the Payroll Tax registration threshold
- Data sharing with other government authorities (ATO, WorkSafe, icare, etc.) is also a key contributing factor in identifying employers to target for Payroll Tax Investigation activity
Claim proportion (frequency) 1 July 2022 – 30 June 2023: Payroll Tax Investigations (All States) accounted for 13.74% of all Accountancy Insurance claims.
2. Employer Obligations (PAYG/SG/FBT) Audits and Reviews:
Many accounting professionals find themselves unprepared when faced with audits and reviews related to Employer Obligations such as PAYG, SG (Superannuation Guarantee), and FBT. This is primarily because they are not always directly involved in their clients’ payroll preparation.
Consequently, some businesses may not have stayed up to date with the latest developments and requirements regarding SG obligations, or are faced with cash flow problems, leading to a high frequency of audit activity. Single Touch Payroll (STP) has significantly aided the ATO in identifying instances of underpayments in SG.
Claim proportion (frequency) 1 July 2022 – 30 June 2023: Employer Obligations Audits and Reviews (PAYG/SG/FBT) accounted for 12.55% of all Accountancy Insurance claims.
3. Income Tax (Full/ General/ Combined) Audits and Reviews:
Income Tax audits and reviews have consistently ranked among the top three categories of Audit Shield claim activity for the past two years. This is our audit category which encompasses a broader focus by the ATO in that they are looking at a wholistic or full audit or at a combination of (say) Income Tax and GST in the one audit. It doesn’t include any of the ATO High Wealth/Next 5,000 audits as we include these in another dedicated category.
Even though from our pie chart you can see that there are a host of specific ATO audits, this general category has consistently been in our top five showing that although the ATO with their data matching can be specific or targeted, there is still plenty of the general or broad based audits every year.
Claim proportion (frequency) 1 July 2022 – 30 June 2023: Income Tax (Full/ General/ Combined) Audits and Reviews accounted for 10.18% of all Accountancy Insurance claims.
Other significant Audit Shield claim activity statistics:
Our claims team also highlighted other audit type frequencies when comparing the activity of 1 July 2022 – 30 June 2023 to 1 July 2021 – 30 June 2022:
- Superannuation Fund Reviews grew by 116% ↑ (greater than pre Covid activity)
- ATO (High Wealth) Audits and Reviews dropped by 18% ↓
- Income Tax (WRE) Audits and Reviews grew by 26% ↑
- Income Tax (Rental Property) Audits and Reviews dropped by 35% ↓
Audit activity outside of the accountant’s control:
There are many ATO, State and Federal government revenue authority audits and reviews (including three of the five highest claim types noted) where quite often the accountant only becomes involved after the government revenue authority initiated audit activity has started.
To put that into some perspective, over 50% of the audit activity the Accountancy Insurance Claims team recorded between 1 July 2022 – 30 June 2023 were for claim types where the taxpayer (your client) and/or a bookkeeper may have prepared the lodged returns or managed the employer obligations compliance that were subject to audit activity.
Here is a breakdown of those figures:
- Payroll Tax Investigations – 13.74%
- Employer Obligation Audits and Reviews – 12.55%
- BAS Audits and Reviews – 9.86%
- ATO Excess Super Contributions – 5.55%
- WorkCover – 4.85%
- Land Tax – 4.53%
- Stamp Duty – 0.81%
Total: 51.89%
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