The Australian Taxation Office (ATO) and other government revenue authorities employ a multifaceted approach to reviewing lodged returns of taxpayers in Australia. Utilising advanced data matching, artificial intelligence, industry benchmarking, and other sophisticated methods, the ATO effectively identifies potential concerns and risks embedded within those lodged returns. These techniques allow for a thorough examination of taxpayer compliance.
Many of the flags from the ATO can be related to specific campaigns or areas where the ATO has announced they will focus their attention. For example, in the 2024/25 tax season, the ATO has indicated they will concentrate on incorrectly claimed work-related expenses, rental property expenses, sharing economy income, and capital gains from crypto assets.
This article investigates the five most common Audit Shield claims activity categories, compiled by the Accountancy Insurance claims team from 1 July 2023 to 30 June 2024. These were:
- Payroll Tax (All States) – 14.64%
- Income Tax (WRE) – 12.40%
- Employer Obligations (PAYG/SG/FBT) – 10.21%
- Income Tax (Other Specific) – 9.78%
- Income Tax (Full/General/Combined) – 9.25%
The below pie chart shows the distribution of Audit Shield claims activity in Australia*.
Claims frequency 1 July 2023 to 30 June 2024* (Technical)
The above pie chart excludes the ATO (Individual Excess Super Contributions) category to give a more accurate representation of ATO and other government revenue authority initiated audit activity between 1 July 2023 to 30 June 2024. Throughout the article all stats will be referenced from this pie chart because including the ATO (Individual Excess Super Contributions) category in the data set gives an inauthentic bias to what our claims team historically see in Audit Shield claim activity.
Claims frequency 1 July 2023 to 30 June 2024* (Actual)
Looking at the “actual” data set, the ATO (Individual Excess Super Contributions) category presents as the most frequent claim type. However, our claims team did not want to give the false impression that the ATO has been focusing on this category more than in previous years. As a general statement, this is simply untrue. The ATO (Individual Excess Super Contributions) category jumped to the “actual” number one claim frequency position by a statistical anomaly. This was a result of backlogged and previously unsubmitted claims which surfaced prior to 30 June 2024.
This article will delve into the top five audit activity areas 1 July 2023 – 30 June 2024 (Technical), examining trends and providing insights into why these areas might be a focal point for the ATO. Additionally, we will compare the latest data with the previous year’s to highlight any significant changes.
1. Payroll Tax Investigations (All States):
The most common audit activity area from 1 July 2023 to 30 June 2024 was Payroll Tax Investigations (All States), accounting for 14.64% of the total claims. This represents an increase from the previous year, where Payroll Tax Investigations (All States) was 13.74%.
When analysing the total activity within the category for each state, we compared the period from 1 July 2022 to 30 June 2023 with the period from 1 July 2023 to 30 June 2024. These were the results:
- VIC: 31.02% (an increase of 18.80%) ↑
- WA: 25.91% (an increase of 12.58%) ↑
- NSW: 19.71% (a decrease of 42.51%) ↓
- QLD: 20.44% (an increase of 14.88%) ↑
- SA: 0.73% (a decrease of 5.94%) ↓
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 30 June 2024: Payroll Tax Investigations (All States) accounted for 14.64% of all Accountancy Insurance claims.
2. Income Tax (WRE) Audits and Reviews:
Income Tax (Work-Related Expenses or WRE) audits and reviews made up 12.40% of the total claims for the period, showing a significant increase from the previous year’s 6.79%. The frequency of Income Tax (WRE) audits and reviews underlines the intensified scrutiny on WRE claims by the ATO, which the ATO specifically said they would be focussing on. What the ATO scrutinises includes:
- Motor vehicle and travel claims
- Mobile phone and internet costs, especially those claiming the whole bill or “double dipping”.
- Claims for work-related clothing, dry cleaning and laundry expenses
- Overtime meal claims, unions fees and subscriptions
The increase in audits may also reflect the ATO’s response to evolving work patterns and the associated changes in deductible expenses.
Claim proportion (frequency) 1 July 2023 to 30 June 2024: Income Tax (WRE) Audits and Reviews accounted for 12.40% of all Accountancy Insurance claims.
3. Employer Obligations (PAYG/SG/FBT) Audits and Reviews:
Employer Obligations, including PAYG, Superannuation Guarantee (SG), and Fringe Benefits Tax (FBT), accounted for 10.21% of the audit activity from 1 July 2023 to 30 June 2024. This marks an increase from the previous year’s value of 10.18% across 1 July 2022 to 30 June 2023.
The ATO places a high priority on employer obligations to ensure compliance with PAYG, superannuation contributions, and fringe benefits reporting. The increase in audits in this area may be attributed to enhanced data matching capabilities and an increased focus on ensuring employers meet their obligations.
Why?
- Businesses will not have kept up to date with their superannuation guarantee (SG) obligations.
- With Single Touch Payroll (STP), the ATO can easily identify and flag under payments of SG.
Claim proportion (frequency) 1 July 2023 to 30 June 2024: Employer Obligations (PAYG/SG/FBT) Audits and Reviews accounted for 10.21% of all Accountancy Insurance claims.
4. Income Tax (Other Specific) Audits and Reviews:
Income Tax (Other Specific) audits and reviews constituted 9.78% of the total claim activity, an increase from the previous year’s frequency of 8.46% across 1 July 2022 to 30 June 2023. This category encompasses a variety of specific income tax issues that may arise, which require detailed scrutiny by the ATO. Some of these include audits and reviews of Research & Development Tax Offset, Non-Commercial Losses, Temporary Full Expensing Claims, Trust Distribution Compliance, Personal Services Income, and Professional Firms Profit Allocation.
The ATO’s focus on this area could be due to the diverse nature of income sources and the potential for unique or less common deductions that may not be easily flagged through standard auditing processes.
Claim proportion (frequency) 1 July 2023 to 30 June 2024: Income Tax (Other Specific) Audits and Reviews accounted for 9.78% of all Accountancy Insurance claims.
5. Income Tax (Full/General/Combined) Audits and Reviews:
Income Tax (Full/General/Combined) audits and reviews compromised of 9.25% of the total claims for the period 1 July 2023 to 30 June 2024. This category includes ATO audits that combine numerous audit categories in one audit matter such as Income Tax, GST, CGT and Employer Obligations.
This is a slight decrease from the previous year’s frequency of 10.18% across 1 July 2022 to 30 June 2023.
Claim proportion (frequency) 1 July 2023 to 30 June 2024: Income Tax (Full/General/Combined) audits and reviews accounted for 9.25% of all Accountancy Insurance claims.
Audit activity outside of the accountant’s control:
Certain audit activities often fall outside of the control of the accountant, particularly when the client prepares and lodges their own returns. These include audits and reviews by the ATO and other government revenue authorities for:
- Payroll Tax – 14.64%
- Employer Obligation (PAYG/SG/FBT) – 10.21%
- BAS (Pre & Post Assessment) – 9.14%
- Land Tax – 6.47%
- WorkCover – 2.51%
- Stamp Duty – 1.07%
These accounted for 44.04% of all Accountancy Insurance claims for 1 July 2023 to 30 June 2024.
The ATO and other government revenue authorities continue to enhance their audit methodologies, leveraging advanced technologies to ensure taxpayer compliance. The focus areas for the period from 1 July 2023 to 30 June 2024 highlight the evolving landscape of audit activity in Australia. By understanding these trends, public practice accounting firms can better prepare and support their clients in navigating the complexities of tax compliance.
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