Data-matching: Mark Story
Sophisticated data matching allows the tax office to identify people who fail to disclose all their income
As Orwellian as it may appear, the Australian Tax Office has the means to detect when you appear to be living well beyond your means. Those found to have undisclosed income could end up being fined and, in worst-case scenarios, jailed.
The ability of the ATO and other government agencies, together with private companies, to “overlay and analyse” data from any number of sources is far from new. After all, this is what the financial intelligence agency AUSTRAC was set up to do in 1989.
Since then, however, AUSTRAC’s ability to electronically track and match various sources of public data (ATO, Centrelink, child support, Medicare, and the Department of Immigration) with private data – such as motor registries, private credit agencies, banks, your employer and even online marketplaces – has become highly sophisticated.
Like it or not, the ATO no longer regards anything, beyond legal and/or accountant privilege, as private. Sophisticated electronic data-matching, together with a heightened approach to collecting tax, especially with federal budgets deep in deficit, are a wake-up call to those who are tempted to fly under the radar.
The ATO has said that “compliance activities” such as data-matching have already helped it to collect more than $9 billion from Australian taxpayers. High-risk targets
However, despite the growing sophistication of data-matching, mistakes can be made – and they tend to be whoppers. For example, Centrelink attracted a lot of negative attention to data-matching for taking an aggressive and robotic approach to a recent debt recovery program.
Flaws in the methodology it used to data-match over 230,000 welfare recipients’ ATO data with their self-reported income have wrongly identified thousands (around 20%) of people as owing money to Centrelink. Lacking any human checks, Centrelink incorrectly calculated a recipient’s income by basing it on their annual salary rather than taking a cumulative 26-week snapshot of what they were paid.
Despite the bad wrap Centrelink incurred over its heavy-handed approach, Mark Chapman, tax commu-
nications director at tax preparation firm H&R Block, says the ATO typically exercises its data-matching powers responsibly.
“While the ATO does give every taxpayer a risk profile, it’s only those deemed high risk who are comprehensively monitored,” he says. “These include people with overseas assets and those with glaring anomalies between their income and their outgoings.”
Avoid the crackdown
Most at risk are those who remain blissfully unaware of the ATO’s ability to track what they do online, and/ or those with glaring discrepancies between what they earn and what they spend.
For example, if you’re selling more than a certain amount of goods via eBay or similar online marketplace annually, the ATO may conclude that you’re trading for profit, rather than making pocket money from offloading some old furniture.
The ATO has warned users of “sharing economy” apps that it performs data-matching with third parties to detect undeclared income. For example, last year it wrote to 20,000 ridesharing drivers about their tax obligations after data-matching identified them as earning an income through Uber or similar apps, such as Airtasker and Airbnb.
As a result of concern over meeting their tax obligations and navigating their way through what deductions can be claimed, people who offer accommodation on Airbnb teamed with H&R Block.
Assistant ATO commissioner Matthew Bambrick has stated that income should be declared regardless of whether the sharing economy activities are “odd jobs”, such as an occasional Airtasker task, renting out a room through Airbnb or a full business. That means amounts paid for renting out all or part of a house or unit through the sharing economy must be declared as rental income in a tax return.
To avoid getting caught up in the ATO’s crackdown, Chapman urges Uber drivers to declare their gross ridesharing income. He says, unbeknown to many, it’s also compulsory to register for GST if you transport passengers through ride-sourcing regardless of your annual turnover.
To offset any tax liability, rideshare drivers can claim numerous potential deductions, including fees and commissions to Uber, cost of in-vehicle snacks provided to passengers, insurance premiums and other vehicle costs such as fuel, servicing and cleaning. Chapman also reminds people to keep the all-important logbook.
Non-disclosure is illegal
There’s also a prevailing misconception that money kept or placed overseas is not accessible for tax purposes, says Rami Brass, director of tax services with RSM Australia.
He says overseas bank havens seldom work because people are invariably found out once they bring money back to Australia and start “splashing the cash”. The ATO has extensive powers to obtain information from overseas tax jurisdictions.
Given that hiding money is illegal, Brass says the better option is to seek professional help early, identify all the potential options, including trusts and/ or partnership arrangements for maximising tax deductions.
He says that alarms bells should ring loudly if seemingly credible accountants appear willing to participate in questionable practices. “The better option is always to disclose all earnings, plus funds held elsewhere, and willingly pay any outstanding tax rather than attempt to disguise.”
While there’s absolutely nothing wrong with using cash, Brass warns that doing cash transactions purely to avoid tax is likely to land you in hot water, he says.
Brass also reminds people that non-disclosure of payments made using cash is an equally serious offence. Individuals or small businesses using cash payments to hide earnings usually catch the eye of ATO when data reports reveal their spending far outweighs their income, he says.
“Individuals working in a cash environment, like tradies, domestic help and cash-only retailers, typically face the greatest temptation of understating their earnings.”
Most people get caught out when they spend over a certain amount. But in addition to data-matching, the ATO also uses what’s known as benchmarking to flag when a business’s earnings or gross margins are seriously out of whack with its peers. While there might be good reasons why your business falls outside the benchmark, Chapman says the ATO will still want to know why.
“Given that their third-party data does actually match what they disclose on their tax returns, data-matching for the vast majority of taxpayers isn’t an issue,” he says. “However, if you’re one of less than 1% of taxpayers under review annually, it’s time to stop and consider the consequences of your actions.”