ATO can improve efforts to catch SME tax dodgers, Audit Office says

The Australian National Audit Office has delivered a blunt warning for entrepreneurs who might be pushing the boundaries of tax laws – the taxman has plenty of room to step up its compliance efforts even further.

The ANAO’s audit of the Australian Taxation Office’s SME compliance measures was delivered yesterday and found that compliance efforts had picked up $1.266 billion in taxes, penalties and interest from the SME market in 2009-10.

The audit found the ATO uses two main tools for its compliance efforts: the SME Risk Engine and the Risk Differentiation Framework.

The Risk Engine is essentially a giant computer program that “profiles taxpayers against risk rules (indicators of a taxpayer’s non?compliance with an obligation) and gives a probability score of potential non?compliance”. The scores feed into a pool of potential compliance cases for the ATO to investigate.

But that’s where the system starts to struggle and the SME tax cheats get to breathe a sigh of relief, according to the ANAO’s report.

“The ANAO’s analysis has shown that, of the 100 SME taxpayers with the highest probability score, only 55 were subject to compliance action. Of these, the ATO found no evidence of non?compliance for 42 taxpayers (76.4%). This low success rate would suggest that the methodology used to calculate risk scores could be improved.

“The methodology would be enhanced by running the Risk Engine more regularly, updating Risk Engine rules to incorporate additional data sets, and documenting the process and criteria used for a manual process of weighting results.”

The ANAO also found a number of problems with the Risk Engine itself, including the fact it didn’t differentiate effectively between SMEs of different sizes (such as businesses between $2-10 million in revenue and those with $10-50 million) and the fact that the ATO’s benchmarking tools were not part of the Engine.

The audit also found that the Risk Engine was not run between November 2009 and May 2011, when the fieldwork for the audit was completed.

“In this period there were no updates on each taxpayer’s risk score against all risk rules in the Risk Engine.”

The Audit Office recommended that the ATO run its Engine more often and confirm the validity of the rules behind the algorithm more frequently.

Yasser El-Ansary, senior tax counsel with the Institute of Chartered Accountants, says the report highlights the ATO has more work to do in the SME sector, but this will need to be handled carefully.

“I think the observations about the ATO’s focus on SMEs paint a picture that more work could be done on the part of the ATO, but that work needs to be carefully calibrated to ensure the best return.”

“If you are going to go into the SME sector, what you need to do is make sure that your processes for managing risks and managing compliance activities is as efficient as possible.”

But El-Anary acknowledges the eclectic nature of the SME sector can make it tough for the ATO.

That will be an ongoing challenge. It’s very easy to define large businesses… and at the other end of the spectrum you’ve got very, very small businesses. But the biggest challenge is the group in the middle. They can vary in their level of their sophistication and level of complexity.

“That presents a challenge for the ATO because what might work for very small businesses in the sector might not work for the larger ones.”