Australian experience with high risk industry based small business compliance strategies

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Australian experience with high risk industry
based small business compliance strategies
GENERAL
The Commonwealth Association of Tax Administrators
17th August 2006
SEGMENT
AUDIENCE
DATE
Presented byAnnette Chooi Assistant Deputy
Commissioner Australian Taxation Office
www.ato.gov.au
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Introduction

• Topics covered in todays presentation
• overview of high risk industry based strategies
  within small business compliance program
• compliance activities undertaken by industry
  specialist teams
• assessing effectiveness of the industry based
  approach
• examples of an industry based approach, and
• a word of caution!

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Overview of high risk industry based strategies

• Many small businesses operate in industries where
  cash dealings are common
• some fail to report due to poor record keeping
• others deliberately make cash dealings off the
  books, reasons for this include
• they believe that the Tax Office cannot readily
  detect these dealings
• employees may refuse to work other than for
  cash-in-hand
• consumer demand for cheaper goods and services,
  and
• competitive advantage.

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Overview of high risk industry based strategies

• We can identify industries that have the most
  opportunity to engage in non-compliant behaviour
  by taking into account business, industry,
  sociological, psychological and economic factors.
  
• We also use indicators of poor tax performance to
  identify potential high risk businesses within
  that industry.

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Overview of high risk industry based strategies

• Using these indicators we have identified the
  following industries as being high risk
• property, building and construction
• restaurants, cafes and take away food outlets
• licensed hotels and clubs
• unlicensed car dealers
• fishing, and
• Tourism.

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High risk industry based strategies

• In 2004/5 our industry teams activities resulted
  in revenue adjustments of almost A200 million
  (excluding penalties). These activities included
• identifying businesses with amounts outside
  industry norms
• conducting audits checking income against key
  indicators
• cold-calling businesses to check registration
  details
• investigating community tip-offs, and
• investigating business to consumer transactions.

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High risk industry based strategies

• A number of relationships have been created with
  the community in order to
• gain further knowledge
• better understand structural issues, and
• better understand motivating factors within the
  cash economy.
• These relationships have also built on the
  willingness of the industry associations to
  promote good compliance.

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Benefits of the high risk industry based approach

• The industry based approach to small business
  compliance provides a range of benefits,
  including
• detailed understanding of factors affecting
  compliance in high risk industries, such as
• business and consumer attitudes
• business practices, and
• other structural drivers for not reporting cash
  payments
• allowing development of more sophisticated risk
  identification and assessment tools.

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High risk industry monitoring levels
Schematic representation of the universe
diagram for high risk industry monitoring
Level 1 Entire Taxation Community
Level 2 Potential High Risk population
Level 3 Industry Division
Level 4 Industry Sub-Division (First 2 digits of
the ANZSIC code)
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High risk industry based approach

• Each industry needs its own strategy.
• The key is to find a touch point where the
  business has come into contact with the
  legitimate business environment.
• The following examples show how a high risk
  industry based strategy can work.

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Unlicensed car dealers

• Match ATO data with data from major auction
  houses and Customs to identify high risk cases.
• Also to raise levels of awareness we are
• negotiating with peak motor industry bodies to
  distribute compliance messages using articles in
  their journals and newsletters, and
• placing large posters at auction houses advising
  people of their tax obligations.

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Building and construction industry

• A number of strategies can be adopted
• obtain owner builder transactions from local
  councils
• unannounced registration integrity checks
• cross check quotes and appointments from diaries,
  and
• cross check trade supplier data against builders
  licences and Tax Office data
• this information is cross checked with
  registrations, lodgment, and reported income and
  expenses on returns and activity statements.

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Restaurants

• Ratio analysis identifies businesses outside
  industry norms.
• Further analysis can uncover
• cash wages paid from daily takings, and
• income levels which are insufficient to cover the
  taxpayers lifestyle expenses.

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Non-industry based approaches

• An industry based strategy should not be the
  exclusive approach adopted.
• Danger of missing high risk cases!!
• Other methods include
• general intelligence gathering and analysis, and
• information from third parties.
• The following examples highlight this point.

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General intelligence gathering

• Advertisements by lending institutions in the
  press offering low documentation loans.
• Concerns that undeclared income was being used to
  fund these loans.
• Pilot study found
• approximately 50 of loan applicants had an
  average of three years in outstanding tax
  returns, and
• there was a significant amount of undeclared
  income.

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Third party information

• Information from other government agencies,
  including
• Australian Transaction Reports and Analysis
  Centre (AUSTRAC)
• Centrelink
• Department for Transport, Energy and
  Infrastructure, and
• Lands Titles Office.

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Conclusions

• Industry based strategies are effective in
  detecting and responding to some compliance
  risks.
• Compliance strategies should be tailored to
  specific characteristics of the industry or the
  risk being treated.
• Some high risk cases will go undetected unless
  other strategies are used in conjunction with
  industry based approaches.