The letter you don’t want to get
IF YOU get this letter from the ATO, you could be in trouble.
As the tax man ramps up his crackdown on dodgy claims in a bid to claw back $1.1 billion in revenue, a growing number of Australians can expect to receive "data matching" letters this year.
The letter might highlight a PAYG summary the taxpayer forgot to include after switching jobs during the year, or bank interest, allowances and Centrelink payments that are classified as income and must be declared.
"The first point is don't panic," said Etax senior tax agent Liz Russell.
"It means that someone has lodged a tax return that the ATO believes may not contain all the information, or may contain incorrect information. The ATO is fed information from different institutions and then they do a data match with the tax return."
Whatever you do, don't ignore it. If taxpayers avoid opening the letter or do nothing about it, they risk their return being "adjusted based on assumptions", which could lose them "hundreds, if not thousands of dollars".
Not every tax return is data-matched. The ATO uses hi-tech data analysis comparing tax returns with those lodged by people in similar circumstances to determine suspicious claims.
"If a refund from their perspective looks reasonable within the occupation and range, they're probably not going to spend a lot of time chasing something up because it's not cost-effective," she said. "They're certainly doing anything that falls outside the expected ranges."
Ms Russell said more people receiving letters didn't mean more people were doing the wrong thing, but rather the ATO's improved technology had broadened its reach. "Computer systems are getting much more sophisticated every year," she said. "They're [not] matching all tax returns because there would be a lot more letters."
Ms Russell said many taxpayers were not aware that the ATO can audit their return anywhere from one month to even two or three years after it is lodged. If they receive a data matching letter, they usually have 28 days to respond - so jump on the phone immediately.
"If they don't hear from you in that time they will reassess you no matter what, so you have to do something if you don't believe it's correct, and even if it is correct and you've done it inadvertently, you should contact the ATO to see if any penalties are reduced," she said.
The ATO uses one of two methods to determine a penalty. Either they apply penalty units currently at $210 each, or they use a statutory formula depending on the severity of the breach.
Under this formula, failure to take reasonable care results in a penalty of 25 per cent of the amount owed, recklessness is a penalty of 50 per cent, and intentional disregard is a penalty of 75 per cent.
While little can be done in some situations, if a taxpayer genuinely disagree with the letter and has evidence to support their claims, the ATO will often reverse its position.
Ms Russell said the evidence required was "quite standard". Income-related items can be supported by a PAYG statement summary, private health statement or bank statement, while deductions require a receipt or supporting records such as a logbook.
"There usually won't be a penalty when an innocent mistake has been made, such as entering an incorrect digit or forgetting the PAYG summary from a second job," she said. "However if the mistake results in a larger tax refund than the taxpayer is entitled to, they'll have to repay the surplus amount, and potentially interest too."
With more data flowing to the tax office earlier each year, often the taxpayer won't even be sent a data-matching letter - their return will simply be adjusted for them.
"The data matching I think works in the taxpayer's favour to some extent, because a lot of institutions are getting info to the ATO earlier all the time, the ATO will actually correct your return without telling you," she said.
"They tell you when they send your notice of assessment when they've done it. 'We know you've got two group certificates, you've only put one, we'll just add it on.'
"Previously some institutions or employers didn't get their info to the ATO before you lodged your return, but there is a new system [Single Touch Payroll] where the employer is notifying the ATO every pay."
It comes as the ATO announces a new data-matching program specifically targeting around 190,000 taxpayers receiving income from short-term rentals.
The ATO said it would examine the information provided by the online platforms like Airbnb to identify taxpayers who had left out rental income and over-claimed deductions. In 2016, approximately 2.1 million individuals reported rental income of $42 billion.
The new data, which complements rental information already received from State and Territory Bond Boards, includes income received per listing as well as listing dates, inquiry and booking rates, prices charged or quoted per night and other information.
ATO assistant commissioner Kath Anderson said rental properties were high on the ATO's priority list. "The availability of short stay rentals has exploded thanks to the online revolution," she said in a statement.
"With the growing number of homes, apartments, units and rooms available via accommodation sharing sites, there is a real risk some people may not understand their tax obligations.
"We are increasingly using data and technology, to identify any missing income in your tax returns. This data will also identify taxpayers who use sharing economy rental platforms to list a property that is not genuinely available for rent in order to claim unwarranted deductions. There is no hi-tech hideaway for rental income.
"The ATO often allows taxpayers who have made genuine errors to amend their returns without penalty. But deliberate attempts to avoid tax on rental income could see the ATO take action."
Last month, the ATO revealed the so-called "income tax gap" for individuals was nearly three-and-a-half times that of big business, with each Australian cheating the tax man an average of $906. The tax gap is the ATO's estimate of how much tax it misses out on through dodgy claims.
In 2014-15, the estimated tax gap for individuals was 6.4 per cent, or $8.7 billion, driven primarily by incorrectly claimed work-related expenses. In comparison, the net income tax gap for large corporates was estimated at 5.8 per cent, or $2.5 billion.
The tax gap was calculated through a series of random audits, with those findings extrapolated across the entire taxpaying population. "Seven out of 10 returns randomly selected for review had one or more errors," ATO deputy commissioner Alison Lendon said in a statement at the time.