The intricacies of the Australian Taxation Office (ATO) and other government revenue authorities’ audit activities are ever evolving. They demand constant vigilance from businesses, self-managed superannuation funds (SMSFs), individuals and their supporting accounting professionals.
Employing a blend of cutting-edge strategies, including advanced data matching, artificial intelligence, industry benchmarking, and many others, the ATO actively pinpoints potential concerns and risks embedded in lodged returns. These methods have consistently demonstrated their effectiveness. Consequently, the ATO is dedicated to ongoing enhancements, aiming to streamline the scrutiny process for lodged returns.
The five most common audit activity areas from 1 July 2023 to 31 December 2023 were:
- Income Tax (WRE)
- Payroll Tax (All States)
- BAS (Pre & Post Assessment)
- Employer Obligations (PAYG/SG/FBT)
- Income Tax (Full/ General/Combined)
The below pie chart shows the distribution of Audit Shield claims activity in Australia*.
The below ribbon chart places into perspective how some of the top Audit Shield claim types have changed from the 2020/21 financial year, through to 31 December 2023. The ribbon chart also shows, by the height of the line, a representation of the volume of the claim activity in the corresponding period. What is noteworthy is that Income Tax (WRE) has jumped up to position number one. The lower total volume of the claim activity in the ‘To 31 December 2023’ section is a result of only 6 months data being represented (1 July 2023 to 31 December 2023).
Examining the trends from 1 July 2022 to 31 December 2022 and comparing them with the latest data for 1 July 2023 to 31 December 2023 reveals interesting shifts in the frequency and focus areas of audit activity. This comprehensive analysis aims to provide nuanced insights into the alterations observed.
1. Income Tax (WRE):
Surging to the top of the list, Income Tax (WRE) now commands 14.91% of audit activity, marking a substantial increase compared to the period 1 July 2022 – 31 December 2022.
The frequency of Income Tax (WRE) Audits and Reviews rose by almost 5%, underlining the intensified scrutiny on work-related expenses claims. This shift suggests a heightened focus by the ATO on ensuring compliance, particularly in expense areas such as motor vehicle, home office, tools and equipment, travel, and various other work-related expense claims.
Claim proportion (frequency) 1 July 2023 to 31 December 2023: Income Tax (WRE) accounted for 14.91% of all Accountancy Insurance claims.
2. Payroll Tax Investigations (All States):
Maintaining a robust position as the second highest audit activity area, Payroll Tax Investigations (All States) constituted 11.13% of total Audit Shield claim activity for 1 July 2023 to 31 December 2023.
While the frequency remains relatively stable, the specific nature of audits has evolved. This consistently high frequency underscores the continued emphasis on issues like related employer entity grouping, contractor arrangements, and cross-state employee registrations.
When diving a little deeper into the mix of activity amongst the states, noteworthy statistics comparing 1 July 2022 – 31 December 2022 to 1 July 2023 to 31 December 2023 were:
- VIC grew by 1% ↑
- WA grew by 4% ↑
- NSW grew by 8% ↑
- QLD dropped by 5% ↓
- SA dropped by 1.5% ↓
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 2023 to 31 December 2023: Payroll Tax Investigations (All States) accounted for 11.13% of all Accountancy Insurance claims.
3. BAS (Pre & Post Assessment):
BAS (Pre & Post Assessment) holds its ground as a significant audit activity area, securing the third position with 9.78% of total audit claims.
The frequency of audits and reviews has shown a marginal increase compared to the period 1 July 2022 – 31 December 2022.
Claim proportion (frequency) 1 July 2023 to 31 December 2023: BAS Audits and Reviews (Pre & Post Assessment) accounted for 9.78% of all Accountancy Insurance claims.
4. Employer Obligations (PAYG/SG/FBT):
Employer Obligations (PAYG/SG/FBT) slides to the fourth position, accounting for 9.29% of total audit claims from 1 July 2023 to 31 December 2023 after holding the number two position with 12.39% of all audit claims from 1 July 2022 – 31 December 2022.
Many accounting professionals may find themselves less prepared when facing audits and reviews related to Employer Obligations such as PAYG, SG (Superannuation Guarantee), and FBT. This is often due to their limited involvement in the direct preparation of their clients’ payroll.
As a result, some businesses may not have been able to stay fully informed about the latest developments and requirements regarding SG obligations. Additionally, they may be dealing with cash flow challenges, leading to a higher frequency of audit activities. The introduction of Single Touch Payroll (STP) has been instrumental in aiding the ATO in identifying instances of underpayments and late payments of SG by employers.
Claim proportion (frequency) 1 July 2023 to 31 December 2023: Employer Obligations Audits and Reviews (PAYG/SG/FBT) accounted for 9.29% of all Accountancy Insurance claims.
5. Income Tax (Full/General/Combined):
Entering the top five, Income Tax (Full/General/Combined) claims 8.91% of total audit activity.
This category has seen a notable rise in frequency compared to the same period last year, showcasing a broadened focus on income tax audits and reviews. The comprehensive approach adopted by the ATO underscores their commitment to ensuring compliance across various income tax related aspects.
Claim proportion (frequency) 1 July 2023 to 31 December 2023: Income Tax (Full/General/Combined) accounted for 8.91% of all Accountancy Insurance claims.
In navigating the intricate landscape of tax audits, understanding the nuances of evolving trends is paramount. The reordering of the top audit activity areas from 1 July 2022 to 31 December 2022 when compared to the latest data from 1 July 2023 to 31 December 2023 underscores the dynamic nature of the ATO focus areas.
Businesses, SMSFs, individuals and their supporting accounting professionals should leverage these insights, staying informed and adaptive in the face of changing audit landscapes.
Audit activity outside of the accountant’s control:
There are many ATO, State and Federal government revenue authority audits and reviews where quite often the accountant did not prepare or review the work the client has prepared and lodged themselves.
To put that into some perspective, almost half of all audit activity the Accountancy Insurance Claims team recorded between 1 July 2023 to 31 December 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 – 11.13% BAS Audits and Reviews – 9.78% Employer Obligation Audits and Reviews – 9.29% Land Tax – 6.68% ATO Excess Super Contributions – 6.39% WorkCover – 3.19% Stamp Duty – 0.87% |
Total:
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About Accountancy Insurance:
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