As the end of another tax year looms, your mind inevitably turns to the issue of lodging your tax return. You may choose to lodge your return through the eTax system, a recent development by the Australian Taxation Office (ATO) that facilitates online lodgement directly to the ATO. Alternatively you may prefer to use the services of a registered tax agent.
Regardless of the method of lodgement, you may have wondered how certain amounts of income are in the system already, pre-filled by the ATO.
Have you ever wondered how the online tax form is prepopulated with your information and who’s responsible for that happening?
How does the ATO know my investment income?
The ATO is continually looking for new and innovative ways to streamline the annual tax return process, and to ensure taxpayers comply with the tax law. The aim of the ATO’s eTax software is to do both. Although pre-filling of taxpayer data is in its early years, this has already proven to be a very effective tax collection mechanism, while reducing some of the need for costly audit activities.
Each year before 31 October, financial institutions (including banks) are generally required to submit a report to the ATO, known as the Annual Investment Income Report (AIIR). The report is a record of all the investment income paid by that financial institution to each client during the most recent tax year (ie the previous 1 July to 30 June period).
Although a simple example of what is reported is interest earned on bank accounts, the AIIR submitted by the financial institution must include all interest income, withholding taxes paid, and the investor’s address and tax file number (TFN) in respect of any account that was open during the tax year.
The ATO uses the data it receives for two main purposes:
- pre-filling taxpayer information into eTax and the Tax Agent Portal, assisting with their streamlining objective
- data matching for retrospective audit activities, assisting with their compliance objective.
The investment income details you see in eTax or your registered tax agent sees via the ATO Tax Agent Portal have been sent by a financial institution to the ATO. The data is then uploaded to the computer used by you or your register tax agent.
How does the ATO know which income amount belongs to which taxpayer?
While you can choose not to provide your financial institution with your TFN when you open a bank or investment account, most people do provide their TFN to avoid withholding tax being deducted at the (current) rate of 49 per cent.
The ATO receives the AIIR information from financial institutions around Australia and runs millions of lines of data through its systems, resulting in an allocation of all investment income for the year to your own TFN in eTax and the Tax Agent Portal. If you haven’t provided your TFN, the ATO uses secondary identifying information, such as your address, to pre-fill the income fields.
This highlights the importance of providing the correct information when opening an account. For example, if you wished to open two investment accounts with the same financial institution, one account in your own name and another in the name of your self-managed superannuation fund (SMSF), a separate TFN should be provided for each account.
If, for example, an individual was to supply their personal TFN in error when opening an account for an SMSF, income attributable to the SMSF would appear in eTax and the Tax Agent Portal in their personal name rather than as income for the SMSF.
What do you do if the income details in eTax and the Tax Agent Portal are wrong?
Although financial institutions are expected to submit accurate data in the AIIR process, the ATO makes it very clear that it is the obligation of the taxpayer, and not the financial institution, to confirm the accuracy of the income details appearing in eTax and the Tax Agent Portal.
When preparing your tax return, if you disagree with the pre-filled numbers, a number of options are available:
- delete the pre-filled information and insert the correct information
- contact the ATO directly and explain why you disagree with the pre-filled information
- both 1 and 2.
Following option 1 may mean that, after the ATO commences its data matching procedures (matching the income declared in your tax return against the income supplied in the AIIR file by the financial institution), you could be contacted by the ATO to explain the discrepancy.
Note also that failure to respond to an ATO letter asking for an explanation may result in the ATO issuing a Notice of Amended Assessment and a Payment Demand.
What are the important things to remember?
It is most important to keep in mind that the eTax and Tax Agent Portal pre-fill information flow begins when you open your bank or investment account and provide your details (including your TFN) to the institution.
Ensuring that this is correct at the outset will reduce the likelihood of any discrepancies between pre-filled eTax and Tax Agent Portal information and your paper or electronic annual tax statements.
It is also important to confirm the income details against these statements when you complete your tax return using eTax or via the Tax Agent portal.
This will help you to avoid any discrepancies between the data pre-filled and your actual tax position, comply with the tax law, pay any tax that is due and reduce the chances of the ATO contacting you in respect of your tax return.