Thursday, 29 September 2011

Refund integrity checks - should you be concerned?

The ATO’s “refund integrity check” program has been generating a lot of concern amongst our membership. It has been the top item on TaxVine member feedback for a number of weeks, with many members querying why their clients have been caught up in the checks and the associated delays.

The Commissioner has stated that the integrity checks have identified over 64,000 potential cases of fraud or overstated refunds. The dollars involved are significant – some $269 million thus far. The ATO states that last year’s program was highly successful, with over 70% of refunds stopped for checking resulting in an adjustment to the amount of the refund. It is understandable that the ATO is trying to stop this kind of tax leakage.

The issue for tax agents is that some of their clients who have lodged legitimate refund claims may be unwittingly caught up in the delays. It is realistic to expect that the ATO’s computer system will sometimes take cases offline for investigation that turn out to be perfectly lawful. After all, this is an investigation tool, and sometimes the result of a check is a “tick and release”. The key is to ensure that legitimate refunds are not unduly delayed, and that impacted taxpayers and agents are not unfairly burdened with compliance difficulties.

I think returns stopped for refund integrity checks fall into three broad baskets:
  1. Returns that include something unusual, but which turns out to be legitimate/lawful: for example, an unusually high level of PAYG credits, multiple payment summaries, a higher than average claim for work related expenses etc. Though outside the norm, the return is lodged in accordance with the law.
  2. Returns that include something unusual, which turns out to be an unintended error: for example, a taxpayer who claims some self-education expenses in the false belief they were entitled to do so. Often these cases are due to a misunderstanding of how the technical tax law operates.
  3. Returns that are lodged with fraudulent details or deliberate overstatements of deductions: this would include deliberate evasion by altering payment summaries to increase the PAYG credits, claiming work related expenses that were knowingly not incurred, claiming a spouse rebate even though the taxpayer does not have a spouse etc. Often the actions are reckless and in complete disregard of the law.

For agents with returns that appear to be caught up in the first category, I would recommend checking your client’s return and gathering the substantiation that the ATO may need to see prior to releasing the refund. Having this material on hand, ready for the ATO enquiry, will ultimately speed up the investigation process and get the refund into the hands of your client quicker. The ATO will send you a letter outlining their concerns – this will include a dedicated call centre for you to call should you have any further queries about the reason for the review.

The second category is an unfortunate one. Most agents would hope that their own review processes should have stopped such a claim; however, mistakes happen, and the best course of action is to estimate the outstanding tax liability and settle it as soon as possible. This should avoid further interest on underpaid tax penalties.

Tax agents need to be wary of clients who may fall into the third category. The ATO has released a list of indicators of suspicious behaviour on their website (scroll to the bottom of the page for the complete list). A combination of the indicators should arouse the suspicions of agents, who should then deeply consider whether to act for the client. Tax agents are bound by a Code of Professional Conduct, which includes an obligation to act lawfully in the best interests of their clients. To knowingly lodge a tax return that contains fraudulent or blatantly false details is likely to constitute a breach of the code.

The ATO has confirmed they are investigating agents who have a high number of the clients that having been subject to adjustments following refund integrity checks.  I personally think this is a good idea. Honest agents should not have their business compromised by the “dodgy agent down the road” who promises large tax refunds, but fails to examine the veracity of his/her clients' details or deductions.

The Tax Institute is keeping a close watch on how the refund integrity check program progresses, and we are interested to hear your experiences. There will be opportunities to assist the ATO to refine their integrity model and processes, and your feedback will help us in this process.

Tamera Lang
Tax Counsel, The Tax Institute

Monday, 12 September 2011

State Taxes in the cross hairs

The countdown is on to the Government's tax forum in October. I will be representing members at the forum and will be contributing strongly to the debate on the priority areas for reform.

There are 125 taxes across all levels of government in Australia, yet just 10 of them collect 90 per cent of all revenue. The other 115 'rats and mice taxes' potentially stand in the way of a simpler tax system.

The tax system should not be getting in the way of people getting on with their lives and getting on with their businesses; efficiency, equity and simplicity are the goals.

Reform of some of the least efficient and worst designed taxes in Australia - State taxes - particularly stamp duty on property conveyances, is a priority area for reform. Why is there a disincentive for people to move homes in order to move closer to locations that give them better work prospects? Huge sums of money being payable as stamp duty on property purchases act as a brake on labour mobility. Insurance duties are also ripe for the shredder - it is perverse that people who are doing the right thing and insuring against risk are penalised with a stamp duty on their insurance contracts.

The GST is one of the biggest revenue raisers for the federal government, which it hands to the States and Territories; $50 billion a year and rising and yet it is constantly ruled out-of-bounds. The Federal Government says that while it won't be changing the GST rate or base, "we still expect and welcome a broad and constructive discussion" at the tax forum - as long as it doesn't include the tax that dare not speak its name. The GST was an effective mechanism for doing away with many messy and inefficient State taxes. The GST is the States' revenue lifeline and they have precious few alternatives to raise cash. So if the GST remains untouched, most of those badly designed State taxes seem likely to be spared the axe.

What do you think? Which State taxes should be abolished? Which ones should be kept?

Robert Jeremenko
Senior Tax Counsel

Friday, 2 September 2011

The Great Tax Debate

This week saw The Tax Institute in conjunction with the Australian Tax Research Foundation host ‘The Great Tax Debate: Constructing Tomorrow’s Tax System’.

The event provided a necessary platform for tax reform discussion ahead of the Government's tax forum in October. We were very pleased with the solid turnout of interested members and non-members, who heard and questioned key thought leaders in our political, business, academic and social welfare sectors. Our facilitator for the day was Ali Moore, from ABC's Lateline. The entire event was also continuously web streamed and watched by over 350 people. The footage from this event will be available to watch on our website very soon.

Independent MP, Rob Oakeshott, joined Opposition Assistant Treasurer, Senator Mathias Cormann, to discuss the politics of tax reform and the Government's tax forum in October. Professor Greg Smith spoke about some key areas of possible tax reform and the need for a national conversation on reform, rather than an 'announce and push through' method of achieving change. He also spoke of the need for an independent body to progress a blueprint for achieving some of the tax reform vision contained within the Henry Tax Review.

Henry Ergas addressed the need for reform of our Commonwealth/State financial relations and called for a flatter tax system that will enable us to have sustainable social spending into the future. The Centre for Independent Studies' Adam Creighton gave an economic historian's perspective on tax reform and 'where to from here'. Cassandra Goldie, CEO of the Australian Council of Social Service, addressed some of the possible reforms to the tax transfer system and spoke about the role of the tax system for those experiencing poverty and inequality.

I had the opportunity to discuss some of the pressing areas for reform when I joined the speakers for the panel session at the end of the day. The reform of inefficient State taxes and a flattening of the personal income tax scales are some of the real opportunities for reform.

The Tax Institute will continue our work on the priorities and process for driving tax reform and ensuring the Government commits to a blueprint for reform beyond the October tax forum.

A selection of papers by the speakers at The Great Tax Debate will be published in a special edition of the September Taxation in Australia journal.

As always, I welcome your views on areas of reform you would like me to address at the October tax forum and beyond. Where would you like to see reform?

Robert Jeremenko
Senior Tax Counsel