Data matching, and how the ATO uses it
Tax in Australia is based on a system of “self-assessment”, which means every taxpayer is required to provide all the information needed to complete a tax return. Under self-assessment, any information you give to the ATO is accepted as being accurate and complete, and the ATO does not take on the responsibility of completing people’s tax returns — a task that is left to taxpayers or preferably their tax agent.
However, it is well known the ATO will check up on the facts when it can – details in tax invoices from a supplier, or the payment summary that you get from an employer for instance – to make sure everyone is meeting their obligations (or at worst is not engaged in out-and-out fraud).
This perennial tool that the ATO uses is called “data matching”, which involves comparing information it has been given by taxpayers with data that others hold. This can help identify people who appear to be living beyond their means, where income is inconsistent with spending. For example, the ATO can compare a person’s reported income to information from government licensing bodies for luxury cars or boats.
Other sources of third-party information are banks and financial institutions, which are required by law to pass on information, as well as welfare organisations and employers. This includes Medicare, Centrelink, WorkCover, land title offices and planning authorities, as well as property title transfers, tenancy agreements, share registers, managed investment funds, building contractors – and many more.
As a result, the ATO has access to investment data and all banking transactions and can detect who is either not disclosing all of their income or not meeting their obligations. So even if you haven’t been buying lavish yachts and sports cars, the ATO can easily find out if you earned interest from a term deposit at the bank which you didn’t report in your tax return. For some, data anomalies can trigger a tax audit.
The ATO’s data matching efforts sometimes uncover certain hot spots — a recent example being its discovery of undisclosed wealth in the thoroughbred horse market. The ATO has devised a list of “industry benchmarks” with average ratios and performance indicators for businesses operating in certain industries. If the data reported in a business’s tax return does not fit within the expected range, this could raise an alarm bell (although not all industries are benchmarked).