The Tax Office's annual compliance program is a bit like those ''speed camera ahead'' warning signs. Do the wrong thing and you can't say you weren't told.
Our self-assessment tax system might give the impression that your tax return slips through automatically each year, but the truth is the ATO has become increasingly sophisticated in identifying taxpayers who are at risk of getting it wrong.
You can thank technology for this. In the old days, catching tax cheats was hard work and relied chiefly on audits - a time-consuming task that often meant honest taxpayers were put through the wringer as well. But the ATO now has the technological means to do things such as cross-match vast amounts of data to track down unreported income and to build models for different types of taxpayers to identify those whose tax affairs fall outside the norm.
This year, the Tax Office says it will receive more than 600 million pieces of data from third parties, such as financial institutions in Australia and overseas, to use in checking tax returns.
This has grown from 409 million in 2007-'08 and the discrepancies found have grown accordingly. In 2007-'08, the Tax Office says, it found 266,000 discrepancies in tax returns from cross-checking this data; last year it found more than 540,000.
The data relates to everything from bank interest and other investment income, such as dividends and managed-find distributions, to employment and income-support payments, super and health-insurance payments, property and share transactions and employment-related foreign source income.
When the ATO began matching information on bank interest earnings with tax returns in the late 1980s (this was before you had to give your bank your tax file number), it found a $4 billion difference between the interest earned and what was declared in returns. In 2010-'11 the level of under-reporting fell to $192 million.
This information is also used to pre-fill sections of your tax return.
The Tax Office says most information is now available for pre-filling by the end of July (it is legally required by October 31), which makes it easier to get it right. But the onus is still on you to check that everything has been included.
This year, the Tax Office will focus on undeclared income, such as dividends, interest, capital gains and foreign-source income, so checking that pre-filled data will be vital - particularly if you file your return early and not all the information is automatically included. Along with details about income, it also collects data on shares and property sold or transferred, so it will be on the lookout for any unpaid tax on capital gains.
Other target areas for individuals are tax avoidance schemes, over-claiming in refunds and work-related expenses for defence-force non-commissioned officers, information technology managers, and plumbers. If you fall into one of these categories, your claim for work expenses will be reviewed before your refund is paid and you may be asked for more information.
This is part of an ongoing work-related expenses program which targets particular occupations that have a pattern of high claims.
High-income earners, particularly medical professionals, should also take care as the Tax Office will be looking at their investments. It is interested in widely-marketed financial products that promise substantial tax benefits, such as those sold in the lead-up to June 30. While many of these products are legal, the ATO is on the lookout for schemes or products that step over the line into tax avoidance. It recommends those considering an investment with promised tax benefits should check if it has a product ruling from the Tax Office, which legally binds the Commissioner to the tax outcomes for investors, provided the arrangement is implemented in accordance with the ruling.
For small and micro businesses (the Tax Office defines a micro business as having a turnover of less than $2 million), the data matching used on individuals is also supplemented by risk-profiling that models typical business ratios for each industry.
Businesses that fall outside the norm can then be targeted to see if they're not paying enough tax.
The cash economy continues to be a target and last year the Tax Office boosted its firepower by obtaining third-party information from suppliers of raw materials to industries that used high levels of cash. This means it can now look closely at businesses that appear to be buying more raw materials than their reported sales would justify.
Plastering and cafe businesses have been singled out for particular attention this year.
Also in the spotlight are contractor arrangements in which employers try to avoid tax and super responsibilities by engaging workers as contractors rather than employees. Last year, about 1100 businesses were selected for audit and almost half of those that engaged contractors were found to be wrongly treating individuals as contractors.
Other target areas for micro and small businesses include employer obligations, GST, ensuring businesses are correctly registered in the tax and super systems, incorrect fuel-tax credit claims following implementation of the clean energy measure, participation of wealthy individuals in the tax and super systems, the use of trusts to minimise tax, the treatment of private company profits under Division 7A, capital gains, fringe-benefits tax, integrity of business systems for GST and excise obligations, and GST and property transactions.