The Australian Tax Office (ATO) is cracking down on personal tax to raise $1.1 billion in revenue.
To do this, the tax office is using data matching technology to sniff out any suspicious claims.
But what you may not know is that it also has the authority to remove deductions that it thinks are inaccurate.
So what should you do if you get a letter from the ATO regarding that, and what does it mean for your claim?
Senior tax agent at Etax, Liz Russell, says ignoring the problem could cost you thousands of dollars.
“Many taxpayers don’t realise that the ATO could audit their return anywhere from one month to even two or three years after it is lodged,” she says.
“Generally, taxpayers have between two to three weeks to respond to an ATO letter so it’s important to take action as soon as a letter is received. Jump straight on the phone to your tax agent and get advice on what to do next.
“If taxpayers avoid opening a data matching letter… and do nothing, they risk their return being adjusted based on assumptions. This can lose taxpayers hundreds, if not thousands of dollars.”
If you receive a letter, you’re not alone
“It’s not uncommon for well-meaning taxpayers to receive these letters,” says Russell.
“Often they’ve just made a simple mistake. For example, they forgot to include one PAYG summary after switching jobs during the year, or they didn’t realise that bank interest, allowances and Centrelink payments like Newstart and Youth Allowance, are classified as income and must be declared.
“Last year, an increased number of taxpayers were issued with data matching letters and we’re likely to see the same thing in 2018, although this doesn’t mean more people are doing the wrong thing. Rather, the ATO’s improved technology has broadened its reach, allowing it to identify more errors and unusual deduction claims.”
What you need to do next
The ATO letter will list the items in question and outline the changes it plans to make based on the discrepancies flagged.
If a taxpayer disagrees with the ATO and has the evidence to support their claims, the ATO will usually be understanding and reverse its position.
“The evidence required by the ATO is quite standard. Assuming a taxpayer’s records are up to date, and they have access to their bank statements and employment records, it should be easy enough to gather,” says Russell.
“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.”
After receiving the taxpayers’ evidence, the ATO will determine whether or not to alter their return. If the ATO does follow through with any changes, another notice of assessment will be issued to reflect the new information.
If a claim is flagged and the taxpayer is unable to substantiate it, the penalty will be based on whether the ATO thinks that the taxpayer took reasonable care when completing the tax return.
“There usually won’t be a penalty when an innocent mistake, such as entering an incorrect digit or forgetting the PAYG summary from a second job, has been made,” says Russell.
“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.
“In situations where the ATO determines that the taxpayer did not take reasonable care, was reckless in completing their return, or intentionally disregarded tax rules, a penalty might be issued in addition to repaying any overpayment and interest.”
This is usually at a cost of $210 per unit, or as much as 75% of the amount owed if it finds that there was intentional disregard.
It’s also possible for a taxpayer to receive a refund prior to a data matching letter. If the ATO does adjust their return, the taxpayer will either receive an additional refund or be required to pay some of the original refund back.
“It’s important not to ignore a data matching letter,” says Russell.
“They can be confronting, but remember your accountant has your best interest in mind and can help negotiate with the ATO on your behalf.”
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