ATO expands employment tax crackdown through random audits*

The novel tactic involves “all-encompassing” reviews of businesses’ PAYG, FBT and superannuation obligations, mid-tier firm Grant Thornton says.

The ATO has quietly begun randomly auditing businesses to scrutinise their compliance with employment tax and the keeping of proper records through “all-encompassing”, resource-intensive reviews, Grant Thornton says.

The ATO is conducting the audits through the Random Enquiry Program (REP), which until now had only been used for individual and business income tax returns.

Employment tax partner George Bendall said the audit was limited to a one-year scope but encompassed all aspects of a business’ employment tax obligations.

“It’s a new approach to the ATO’s review of employment taxes and covers all taxes – PAYG, FBT, superannuation – so it’s a broad and wide-ranging audit,” he said.

“There’s also emphasis around data keeping and records,” Mr Bendall said. “They need to be reasonably accurate but some businesses may have become slack over time.”

While the ATO had previously conducted audits for specific obligations like superannuation, they were triggered by data matching or employee complaints and not done at random or at this scale. “This is different. This is all employment taxes,” he said.

The ATO commenced the REP in 2016 to measure the individual tax gap. It has since expanded the program to measure the small business income tax gap, auditing 1,671 small businesses between 2017 and 2020.

Mr Bendall believed the REP’s application to employment tax obligations could be attributed to recent high-profile employment tax breaches by big firms, universities and even celebrity restaurants.

“After a reprieve during Covid-19 we’ve definitely seen an increase since all these newsworthy items around wage underpayments,” he said.

Grant Thornton, through discussions with the ATO, confirmed that audited businesses were selected on a random basis, regardless of size or turnover. The ATO typically requested several documents to substantiate they were compliant during the period of review.

The firm had begun receiving several REP requests just before Christmas, he said. “The information requests, from what we’ve seen, are standardised and have a very deep request list. There are many different pieces of information that the ATO are asking for.”

As the audits were still in progress, Mr Bendall was unsure how long they would take to complete but estimated “at least two months”.

“History tells us that when we’ve had these audits before, for instance in superannuation, the ATO will look at a period and identify areas of risk with how the business operates. If there are issues identified in that one-year period, the review is going to expand.”

He said the audits were “all-encompassing” and a “drain on resources”, with the ATO asking businesses to produce financial statements, payroll records, logbooks and bank statements for scrutiny. 

“I would say it’s quite a drain on resources, and it really will be just one extra thing for taxpayers to deal with,” he said.

Total compliance with all employment tax was “very unusual”, according to Mr Bendall, who was now advising clients to “really focus back on employment taxes, as something they need to concentrate their efforts on”.

In his experience, businesses tended to neglect record-keeping and FBT obligations in particular. However, a failure to lodge required obligations could result in penalties up to $782,500 plus interest for significant global entities. 

Mr Bendall said the ATO could also impose director penalty notices, making company directors personally liable for the unpaid amount of PAYG withholding and super.

“Businesses should be taking this seriously and to look into doing a pre-audit audit, and certainly making a voluntary disclosure if they are picked to help with penalties,” he said.

* This article was originally written by Christine Chen and published on Accountants Daily on 11th of February 2024.