Refund boom catches taxman’s eye

A surge in the value of tax refunds paid to small businesses and individuals could see the tax office ramp up its campaign to claw back a bigger share of tax deductions claimed by taxpayers.

The tax office recovered $41 million from micro-businesses – defined as businesses or participants in partnerships with annual income or turnover of less than $2 million – through a review of more than 30,000 income tax refunds in 2005-06, according to an Australian National Audit Office report released yesterday.

But this is just a drop in the bucket compared to the $5.5 billion paid to micro-businesses in tax refunds, an amount the ANAO describes as a significant increase on recent years.

Tax returns to individual tax payers during 2005-06 also increased substantially to $13.4 billion, an amount that exceeded budget expectations by 2.3%.

In response to this surge in tax refunds, the tax office has already increased the number of tax returns it reviews in an attempt to reverse illegitimate deductions, but the ANAO has urged the tax office to further ramp up its tax income review efforts.

“Due to the relatively low number of these refunds that are adjusted, there is considerable scope for the tax office to refine its high risk income tax refund tests to better target the underlying risks associated with the payment of high risk income tax refund,” the ANAO report says.

The tax office has agreed to take up all of the ANAO’s recommendations – so SMEs should be on alert to make sure they can provide evidence to support any tax deductions they make.