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however, the IGT has received limited feedback from stakeholders on these tools. This may be due to a number of reasons including that there may be a lack of awareness, limited resources of stakeholders in this segment to engage with the IGT and/or the low level of adverse impact caused by the use of these tools.
5.3 Accordingly, this chapter primarily describes these other risk assessment tools in order to raise awareness of them amongst the affected stakeholders and to invite further feedback. In the event that there is significant adverse feedback, the IGT may consider conducting more specific reviews in this area in the future.
5.4 It should also be noted that the Productivity Commission has released its research report Regulator engagement with small business in October 2013. In particular, this report makes a number of observations relevant for micro businesses. Although the ATO is one of many regulators impacting micro businesses, several observations in the Productivity Commission’s report are consistent with observations in previous and current IGT reports.
5.5 The ATO defines micro businesses as those businesses with an annual turnover below $2 million. They employ one in five Australian workers and account for more than a quarter of tax revenue collected, including approximately $14 billion in PAYG withholding tax for their employees.320
5.6 There are approximately 2.8 million micro businesses in this market segment.321 The ATO’s Micro Enterprises and Individuals (ME&I) business line has primary responsibility for this market segment. Other ATO business lines also assist in managing various tax risks in the micro businesses market segment. For example, the Tax Practitioner and Lodgment Strategy (TPALS) and Superannuation business lines also administer this market segment in relation to the cash economy and superannuation risks respectively. Whilst the management of taxpayer risks may belong to several business lines, the ME&I business line combines some of these risks when conducting certain compliance activities. For example, the ME&I ‘employer
obligations’ stream verifies a business’s compliance with Pay As You Go withholding, superannuation guarantee and fringe benefits tax obligations.322
5.7 The ME&I ‘micro active compliance’ group is principally involved in monitoring and managing tax compliance risks for this segment.
RISK ASSESSMENT TOOLS USED IN THE MICRO BUSINESS SEGMENT
5.8 The ATO has identified ‘expert business rules’ as the primary risk assessment tool used in the ME&I business line. These rules essentially query tax return and schedule information and certain third party data to identify potential risks. There is a wide variety of risks that the ATO must manage for this market segment. For example, with respect to Capital Gains Tax (CGT), taxpayers may not correctly report capital gains from various events such as the sale of shares or property. In such cases, certain expert business rules would operate to determine whether there is a risk that the taxpayer may not have disclosed a disposal of shares or property.
5.9 By way of example, taxpayers may claim CGT concessions for small businesses to which they may not be entitled. Expert business rules would query information from income tax returns and CGT schedules in risk assessing the taxpayer’s eligibility for such concessions.
5.10 The ME&I business line groups these risks into common themes or issues, CGT being an example of one such theme. Each of these themes has a number of specific risks falling under it along with expert business rules to address them.
5.11 A taxpayer may trigger several risks under a variety of expert business rules.
The ATO has advised that it does not aggregate these risks for a given taxpayer for analysis. Therefore, taxpayers are selected for audit only on the basis of individual risks in isolation. Where a taxpayer is selected for an audit, it would initially examine the specific risk which triggered the audit. The scope of the audit may be increased to take into account risks identified during the audit process.323 5.12 Additionally, the ATO also uses the Risk Assessment and Profiling Tool (RAPT), a database that contains taxpayer information and allows ATO officers to query and inspect different sets of information. The RAPT also has internal rules to detect risks within the database.
5.13 In addition to the ME&I methods outlined above, the Cash Economy segment
of TPALS uses the following tools:
• small business benchmarks — a given business’s reported financial performance ratios significantly differ from the norms of their industry (as already mentioned, this area was the subject of a specific IGT review in 2012324);
Australian Taxation Office, ‘An overview of employer obligations’, intranet page.
ATO communication to IGT, email 21/06/2013.
data-matching — the ATO may be able to match the records of third parties (such as suppliers or customers of the taxpayer) against reported taxpayer income to determine possible underreporting (aspects of the use of data-matching for individuals are the subject of a separate current IGT review325).
5.14 In addition to the ME&I and TPALS cash economy risk tools outlined above,
the ATO may also conduct compliance activities in this market segment due to:
small scale strategies: includes following up previously audited taxpayers to ensure change in non-compliant behaviour of the taxpayer; and referrals: referrals from government agencies or community members.
5.15 The ATO currently does not have a process for the analysis of risks in a collective or aggregate manner that may be identified in the micro business segment.
The IGT is of the view that such holistic analysis may result in an improved examination of taxpayer behaviour and more accurately measures the risks posed by a particular taxpayer.
5.16 Several risks viewed in isolation with respect to a single taxpayer may be low.
However, when these risks are viewed as a whole, the result may be that the relevant taxpayer does present a high level of risk. The ATO should conduct research into how it can gain an aggregated view of taxpayers’ risks to better understand the total risk posed by the taxpayer and differentiate and prioritise its treatment accordingly.
RECOMMENDATION 5.1 The IGT recommends that the ATO research and develop strategies to improve aggregated taxpayer risk analysis in the ATO micro business segment.
5.17 Chapter 8 draws on information from the IGT’s Review into the Australian Taxation Office’s Use of Benchmarking to Target the Cash Economy to make additional IGT observations relevant to the micro business market segment.
6.2 The above concerns are the subject of a current specific IGT review.326 Chapter 8 draws on this later review to make additional observations.
6.3 Although the ATO uses other risk assessment tools in this market segment, stakeholder concerns were largely limited to the above two topics. This may be due to a number of reasons including that there may be a lack of awareness, limited resources of stakeholders in this segment to engage with the IGT and/or the low level of adverse impact caused by the use of these tools.
6.4 This chapter seeks to provide additional information on other risk assessment tools used in the individuals market. This may promote greater awareness and facilitate further stakeholder concerns which, if sufficiently significant, may form the basis of a future specific IGT review.
6.5 In other jurisdictions, some revenue authorities have published details and results from the use of their risk assessment tools. For example, HMRC in the United Kingdom have published details about how they use their system, called ‘Connect’, to gather and make connections between large data holdings.327
6.6 The individual market segment includes 12.4 million individuals who lodge income tax returns. For many individual taxpayers, the lodgment of their income tax return is their only interaction with the ATO.328
6.7 Within the ATO, the Micro Enterprises and Individuals (ME&I) business line has main responsibility for administering the individual market segment. Other business lines may be involved in different parts of this market segment, depending on the circumstances. For example, high wealth individuals are administered by the Small and Medium Enterprises (SME) business line.
Ibid. See also Inspector-General of Taxation, Review into the Australian Taxation Office’s Compliance Approach to Individual Taxpayers – Income Tax Refund Integrity Program.
HM Revenue & Custom, Closing in on tax evasion – HMRC’s approach (December 2012) http://www.hmrc.gov.uk.
ATO, above n 33, p 18.
6.8 Within ME&I, the Individuals Compliance and Data Management (ICDM) stream is responsible for managing the compliance risks of individuals for this market segment.
ATO RISK ASSESSMENT TOOLS USED IN THE INDIVIDUALS SEGMENT
6.9 The ATO income tax risk assessment tools used by various areas affecting the
individuals market segment are listed in the following table:
6.10 The ATO has through the course of this review supplied the descriptions for each of the above tools. These are outlined below.
Agent Rating Tool (ART)
6.11 The Agent Rating Tool compares returns prepared by a tax agent against those of a pre-determined peer (reference) group. The manner in which the peer groups are established has been validated on two occasions by representatives from Monash University.
6.12 A range of measures are determined for each agent and then compared against their reference group. For example, the Tax Agent Measure may be the median specified work related expenses (WRE) value for their client base. These include median client amounts in relation to motor vehicles expenses or other travel amounts.
6.13 The Reference Group Measure is the median Tax Agent Measure for the specified WRE label for the reference group. The median is used in preference to the average to avoid the influence of extreme scores and outliers.
6.14 For each agent performance measure, the difference between the agent’s value and the Reference Group value is indicated by the Deviation Score. The Deviation Score indicates how much an agent differs from the reference group median for that performance measure.
6.15 For each agent, deviation scores are added together to give a Total Deviation Score for each set of performance measures (for example WRE, Rental, CGT and Offsets). Based on these assessments, a risk score is generated to identify which tax agents within a particular population are significantly different to their Reference Group. The product developed to support the presentation of this analysis is called the Agent Rating Tool.
6.16 A key element of the ART is the ability to produce a consolidated one page profile which serves as a tool for the ATO officer to conduct a conversation with a tax agent regarding the return preparation processes and standards.329 Data matching with third party data
6.17 The ATO receives data in respect of property transactions from state and territory title and revenue offices and continues to expand the use of data matching to identify the omission of capital gains. The ATO use standard data matching rules based on its understanding of the risk to identify individuals who make a gain from disposing property where the property is not covered by main residence exemption.
6.18 The ATO also performs calculations to estimate the capital gains and make allowance for holding costs, such as stamp duty. The ATO compares this information to what has been declared in the return and contacts relevant taxpayers (after the notice of assessment has issued) where it identifies a capital gain has been potentially omitted or calculated incorrectly.330 Expert Business Rules
6.19 The Expert Business Rules use rules or parameters of known identified ‘at risk taxpayer’ behaviour across income tax return labels. These rules may use a range of ATO data holdings including corporate data holdings, compliance history information, Payment Summary Annual Reports, Annual Investment Income Reports and Department of Immigration Temporary Visa Holder data. Where these rules are triggered, a decision is taken to either monitor the behaviour or the individual income tax return is taken offline for review prior to issuing the assessment.331 Pattern Detection Model
6.20 The Pattern Detection Model is designed to detect patterns or commonality within individual income tax return data to detect ‘high risk’ behaviour. The model considers common variables amongst returns and determines whether a pattern exists.
This nature of exploration and discovery distinguishes data mining approaches such as the pattern detection model from traditional risk identification models such as the expert business rules.332 Identity crime and network detection model
6.21 This model is also used in the individuals market segment but is owned and maintained by the Serious non-compliance (SNC) business line instead of ME&I. The identity crime and network detection model uses known attributes of identity fraud to detect high risk returns using pre-set thresholds. Networks linked to this high risk population are subsequently identified and their size, value and growth assessed.
These models run across all lodgment channels.333 ATO communication to IGT, 3 June 2013.
ATO communication to IGT, 4 June 2013.