Friday, March 05, 2010

Four hundred 'please explain' letters per day - how the Tax Office gets money

A blitz on the black economy has seen the Tax Office approach 109,000 small businesses in just eight months collecting $127 million.

Tax Commissioner Michael D’Ascenzo told a Melbourne conference yesterday the money had been extracted using a new system of "benchmarks" that identifies roughly how much tax a small business should be paying in each industry and then flags unusual cases and sends out queries asking whether are being careless with their bookkeeping or deliberately withholding tax.

Since July it has sent out the letters at the rate of 440 per day.

The best-paying 100 of those letters netted it a total of $9 million.

Among the industries he identified are floor sanding and polishing... painting and roofing trades.

For painters the Tax Office uses a rule of thumb assuming that for new work the cost of the paint as a percentage of what's charged to the customer is about 30 per cent. If a painting business reports charing a customer less than three and a third times the cost of that business will be flagged for further investigation.

The tax Office has prepared such ratios for about 50 such occupations and by July will have published more than 100.

The Commissioner also signalled a move into "pre-lodgement" intervention under which businesses whose tax position is at variance with their economic results and market norms will receive "advice" ahead of time to help them prepare their returns.

The backlog of 705,000 unprocessed returns built up since January when the new tax computer system was commissioned in and all 27 million taxpayer records and all 282 million forms switched across.

Some of the 180 computer systems it replaced have been used continuously since the 1970s.

"The unintegrated arrangement meant that new businesses could sometimes receive up to eight welcome to the system letters," Commissioner D’Ascenzo told the Tax Institute. "The temptation to continue to manage using the existing systems was not great."

The $434 million computer project was 50 per cent over budget and behind time.

It will form the backbone of the new pre-filled internet tax return service and the optional government calculated automatic tax returns recommended in the Henry Tax Review.

Mr D’Ascenzo said it allow "more consistent, personalised advice and quicker resolution of issues" because in most cases inquiry officers will have in front of them the taxpayer's complete history.

Published in today's  Age

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