The imbroglio between the Tax Commissioner and the tax advice industry came to a head this week when the Inspector-General of Taxation  Ali Noroozi buckled to outside pressure and announced a review into the Australian Taxation Office’s (ATO) audits of high wealth individuals (HWIs) and small and medium enterprises (SMEs) with annual turnovers of $100 million-$250 million.

These two groups and their representatives have raised concerns to Noroozi in relation to fairness and equity with the ATO’s audits and risk reviews. They have asserted that they incur significant unnecessary costs stemming from the wide scope of ATO information gathering requests and delays.

As well they have thrown in the old chestnut that ATO audit staff lack sufficient commercial awareness and tax technical skills as well as engage in inappropriate conduct.  This one has been around since Adam was a boy.

Sure there would be some valid complaints about some ATO practices but what’s really behind all this?  It’s simple.  Big tax bills; that’s what’s behind the whingeing and complaining of the tax advice industry (TAI).

The TAI has been left red-faced after its clients have been hit with big tax bills.  Just look at some of the results for these two ATO projects and you will understand what I mean.

The HWI’s taskforce started in 1996 and has raised $1.5 billion through active compliance as well as reduced the amount of losses claimed by another $1.3 billion since its inception.  In 2009 alone it completed 28 audits and 936 reviews and raised liabilities of $525 million.

In the SME sector the ATO had a lot of fun here, too.  It completed 409 audits, 706 reviews and 1668 phone and letter-based verification activities. As a result, it raised liabilities of $560 million and disallowed current year and carried forward losses of $1.1 billion.

Not only is the ATO as pleased as punch with the results but the government is, too.  In the 2008 and 2009 federal Budgets, the government allocated an additional $559 million of funding to the ATO for the purpose of enhancing the ATO’s compliance activities and management of known tax risks in relation to the large business and high wealth individual market segments.

This additional funding will be provided over 2008 to 2013 and is expected to increase government revenues by $3.28 billion.  Part of this additional funding relates to the ATO’s increased compliance focus on SMEs and HWIs.

In October 2009 the Tax Commissioner Michael D’Ascenzo appeared before parliament’s Public Accounts and Audit Committee.  He had this to say about HWIs:

The real success of the high wealth individuals was to lift the general level of compliance in that sector to what was appreciably higher than would have been the case even if you adjusted for economic growth and other economic conditions. It is that indirect voluntary compliance effect that I think was very useful. I also think it is very important that there is a message that everybody in Australia is subject to the same laws and that there is consistency in administration. I think that has been a very useful exercise and that is why the government has continued to fund it over many years.