ato logo
Search Suggestion:

How we assess risk

Find out how we use data matching analytics and other intelligence to assess risk and tailor our engagement.

Last updated 29 October 2019

To understand your circumstances and profile privately owned and wealthy group clients we use sophisticated data matching systems, analytics and other forms of intelligence.

We use a framework to differentiate risk and tailor our engagement with you based on your group's profile and the choices and behaviours made by your group.

We share with you what we know, including our view of your group's profile, so you can work with us where needed.

Risk differentiation framework

We take many approaches to managing risk. One approach we take is by using the 'risk differentiation framework'. We use this framework to tailor our engagement based on our understanding of your risk position, circumstances, choices and behaviours.

The risk differentiation framework is based on information we hold and our understanding of your private group. We use it to assess your level of tax risk, taking into account the relative likelihood and potential consequences of non-compliance.

When seeking to understand your private group, we consider your tax and economic performance in comparison to similar businesses. We define similar businesses as private groups with similar characteristics to your group.

To determine groups that are similar to you, we consider three general phases for a private group:

  • establishing wealth
  • retirement and transitioning wealth
  • the associated behaviours and activities that affect the way wealth, income and tax is managed.

This method of group comparison recognises that income and wealth may be derived through different activities including:

  • operating a business
  • investing
  • working for a salary.

We adjust our comparison as we learn more about your group.

Find out about:

We use this group comparison to determine our initial view of your tax and economic performance. For your:

  • tax performance – we use a tax to income ratio when comparing your tax performance with similar businesses. If this ratio is high, it may indicate under-reported income or over-reported deductions
  • economic performance - we use profitability ratio when comparing your tax performance with similar businesses. If the ratio is low, this may indicate compliance risks such as bad debts, profit shifting, under-reporting of income or over-reporting of expenses.

These comparisons form a part of our likelihood and consequence scores.

Your likelihood score is the propensity of a tax outcome occurring with which we do not agree. We form this assessment by considering:  

  • the tax and economic performance of the group compared to similar businesses
  • the complexity of group structure
  • specific indicators of compliance risk.

Your consequence score is the potential impact of non-compliance on revenue, in influencing community engagement, our reputation and precedential outcomes of non-compliance. When considering consequence we take into account factors such as:  

  • wealth
  • total business income
  • the potential quantum of tax at risk.

The combination of likelihood and consequence informs our initial perception of risk. This perception does not assert non-compliance but may prompt our engagement with you.

We continue to improve our risk differentiation framework as we consider new information through interactions with our clients and alternate data sources, to maximise the effectiveness of our client engagements.

Risk differentiation framework

A graphic representation of the preceding text. Risk is shown as increasing according to the consequence and likelihood of non-compliance.

How we apply the risk differentiation framework

We tailor our engagement and services with you based on our understanding of your position on the risk differentiated framework, circumstances, choices and behaviour. Initial risk categorisations of your group are preliminary only and not definitive. The initial categorisation does not assert compliance or non-compliance. It indicates that we may wish to ask further questions based on what we currently know.

Lower risk

Most privately owned and wealthy groups sit in the lower to medium likelihood and consequence quadrant of the risk differentiated framework. We generally accept this level of risk and reflect it in the nature of our interactions.

Our engagement and services for lower risk groups focus on making it easy to get things right. This includes help and education initiatives, the ability to engage with us early for advice and guidance services, and pre-lodgment support.

Significant restructures and one-off significant transactions will still attract our attention and we may contact you prior to lodgment to provide advice so you get things right up front.

There will be some situations where we will engage you regardless of your risk position. An example of this includes providing educational material, pursuing outstanding debts or lodgment, or where we have an established ongoing relationship as part of your group being part of our Top 500 Program.

See also:

Higher risk

Higher risk categorisation may warrant us asking further questions.

In addition to the engagement and services provided to lower risk groups, we may engage more directly with you to understand and work through any issues and to help you get things right.

Our engagement approach will be influenced by your risk position on the risk differentiated framework. Your willingness to cooperate and engage constructively with us in mitigating the risk will influence how we engage with you. Our engagement approach is also influenced by the potential consequences. For example, as your risk profile moves up the consequence scale, our engagement is likely to be more direct and frequent.

See also: