• Helping taxpayers to report correctly

    Prevention is always better than cure. Experience tells us that assisting and encouraging taxpayers to comply with their tax obligations early is much more effective than enforcing compliance later. Helping companies, small businesses and individuals to get their returns right the first time reduces the need for costly and time-consuming remedial action.

    There are a number of ways in which we help taxpayers report complete and accurate information.

    Pre-filling assists with lodgment

    Our Pre-filling service, available in e-tax, provides data to assist taxpayers when preparing their returns. This includes information on payment summaries, share disposals, interest and dividends, private health insurance, and prior-year tax returns, as well as reminder messages about lodgment. Pre-filling is also available to tax agents using the Tax Agent Portal.

    Since the pre-filling service was first piloted in 2007, there has been a steady increase in the number of pre-filling requests and actual lodgments using e-tax. Pre-fill downloads from the Tax Agent Portal have also increased over this period and now exceed the number of electronic lodgment service (ELS) lodgments by tax agents (see Figure 1).

    Figure 1: Use of pre-filling and e-tax

    Figure 1 show the increasing use of the pre-filling service. The graph shows the increase over time in the use of the pre-filling service in e-tax and the Tax Agent Portal.

    Information matching identifies discrepancies

    We use information-matching activities to identify incorrect reporting in individual tax returns. Where taxpayers have omitted small amounts of interest income, we issue an advisory letter prior to their next return. If the same thing occurs in the following year, we issue a discrepancy letter and, where necessary, make amendments and apply penalties. Taxpayers have the option of automatic amendment or, if they disagree with our assessment, providing additional supporting information.

    We identify taxpayers who have failed to lodge a tax return and use third-party data to verify the need for lodgment. Third-party data we hold includes:

    • payments and grants received
    • payments by businesses to contractors
    • income from salary and wages
    • income from investments, partnerships and trusts
    • income from property and shares
    • interstate and international financial transactions.

    Where cases are identified we contact the taxpayer and, if the issue is not resolved, take action as needed.

    Changing taxpayer behaviour

    Our concerted effort to help taxpayers to provide complete and accurate information, along with our strict compliance action against those who refuse to do the right thing, has resulted in positive changes in taxpayer behaviour.

    Over the last five years, we have been tracking the compliance behaviour of individual taxpayers who have received advisory or discrepancy letters. The results indicate positive changes in more than 1.1 million taxpayers who have subsequently lodged correct returns after under-declaring income/gains in previous years. This has raised $537 million in revenue in 2012–13.

    Pre-filling information provided at the time of lodgment has also helped improve voluntary compliance behaviour, with taxpayers lodging correct returns in the following years after using the pre-filling service for the first time. In 2012–13, this has directly led to an additional $787 million in revenue collections for the community, raised from the improved compliance of 2.9 million taxpayers lodging correct returns following their first use of the pre-filling service.

    Through sharing the information we hold with taxpayers, we have seen a decrease in the amount of under-reported interest. In 2009–10, $15 billion in interest income was reported to us, with $225 million (1.5%) not reported in individual income tax returns. In 2010–11, this reduced to $192 million or 0.88% of interest not reported. In 2011–12, $24 billion in interest income was reported to us by Australian financial institutions with a further reduction in under-reported amounts in individual tax returns down to 0.73% or $175 million.

    Figure 2: Unreported interest income

    Figure 2 shows the steady decrease in the amount of under-reported interest from 2009-10 through to 2011-12.

    The effectiveness of our information matching is highlighted by the continual decrease of under-reported interest since we began matching information in the late 1980s. At that time there was a $4 billion difference identified between the interest earned and the interest declared in individual taxpayer tax returns.

    Tackling new and emerging risks

    Our original focus for information matching was to identify and address simple discrepancies and un-reported income. This has changed significantly in recent years in response to changing taxpayer behaviour. We now use more than 600 million annual transactions to develop an almost complete picture of individual and business financial dealings, including income earned, investment details, and asset acquisitions and disposals. We identify undeclared income/gains and fraudulent claims.

    We continue to receive more data earlier, and from more sources. Australian financial institutions progressively provide their information to us, with most received by the end of July even though, by law, it is not required until 31 October. Similarly, employers are required to provide information to us by 14 August but, increasingly, many large employers provide their information in early July.

    By the end of July 2013, we had already received approximately 66% of expected third-party pre-filling data, an increase from 61% in 2012.

    Over the last three years, we have also increased information matching to deal with a growing range of more complex risks, including:

    • income from capital gains tax from the disposal of shares and property
    • foreign source income
    • income from employee share schemes
    • health insurance policies, including the level of cover held by an individual
    • contractor income from payments made by government agencies.

    The comprehensive scope and timeliness of information now available means that we can readily identify people who are required to lodge returns but have failed to do so. Increasingly, where individuals fail to lodge returns despite our requests, we issue default income tax assessments based on an estimate of the known income and undertake action to recover the tax owed.

    Revenue raised from our information-matching activities has trebled since 2008–09, rising from around $250 million to more than $939 million in 2012–13 (see Figure 3).

    Figure 3: Revenue raised from information-matching activities

    Figure 3 shows the increase in additional collections over time from the use of information matching.

    Data quality is set to improve

    The government has recognised the effectiveness of our data and information-matching activities by providing additional funding to expand and improve our systems and capabilities.

    From 1 July 2015, we will share more and better data – with individuals and small businesses (mainly sole traders) – on sales of shares, property and units in managed-investment trusts, as well as a greater range of international bank transactions.

    Last modified: 07 Mar 2016QC 37651