There’s perhaps no worse feeling than being told you’re being audited by the ATO, but spare a thought for a Northern Territory construction business owner, who was told he owed the tax office a staggering $860,000.
Flustered by the eye-watering amount owed and the tight deadline he had to contest it, he approached Despina Cleanthous, a Darwin accountant with 15 years’ experience, who was equally as shocked by what she uncovered.
The tradesman had admittedly made errors when lodging his company tax returns and business activity statements himself, but was fully prepared to pay any legitimate shortfall. What left both him and his accountant speechless was that between $260,000 and $280,000 of the total was made up of penalties and interest.
It was so unusual that Ms Cleanthous suspects the audit may have calculated using AI — a claim the ATO has denied.
“They (the client) lodged everything themselves up to that point, got the audit and realised they needed assistance,” Ms Cleanthous said.
“So they came in and sought our help and we just helped compile what they had provided to us to the ATO. So the assessment ended up coming back and I think what really struck us was that the client was more than happy to pay the shortfall in that they understood that they made an error and things that were not reported correctly.
“So there was no issues from the client’s front on that, but it was more the fact that assessment and penalties were just astronomically high.
“So $260,000 thereabouts was in penalties and interest for the two-year audit. So it was something that we had never seen in terms of the size of penalty. The remaining was in the debt and shortfall, but then what rose in that was the assessment in itself just seemed very odd.”
Shocked by what she saw, she posted a video about the audit on Instagram, which has since gone viral.
“The ATO are out for blood. I have never seen them like this before,” she said in the clip. “This is insane.”
She told news.com.au she made the clip because her “jaw hit the floor” after reading the details of the audit.
“At first I was like, well, okay, you know, there was a fair bit missing, sure there was a bit, and then I just saw the assessment and I thought this cannot be right,” she said.
Why the bill was so high
Ms Cleanthous said the bulk of the debt arose after the ATO entirely wiped out the business’s expenditure on building supplies due to an innocent bookkeeping misallocation.
Because the business was classed under construction and labour services rather than retail, the self-lodging owner had entered his job materials under the “cost of sales” ledger rather than a standard materials and supplies account.
Instead of reclassifying the genuine deductions to the correct category, the tax office disallowed them altogether.
“They took away key materials that it took for this person to run their business,” she said. “Materials that they were required to use to generate income were taken away. All of it.”
One of the assessment notes stated that the reported cost of sales would be reduced to nil because the taxpayer was in the business of providing services, not the sale of goods.
“The client had categorised it as cost of sales, and the ATO said, ‘Well, no, you’re a services business and you don’t sell products, so we’re removing it in its entirety’,” Ms Cleanthous said.
“The nature of how it was recognised shouldn’t impact the end tax result, because it is still an ordinary deductible expense incurred to generate income. It was not a small amount of materials, as you can imagine for a business operating all year in construction. To wipe it out completely made no sense.”
To compound the hit, the assessment applied a blanket reduction of roughly 2 to 3 per cent across the firm’s remaining general expenses, seemingly as an arbitrary safety buffer, before levying heavy shortfall penalties on top.
Accountant suspects AI was used by the ATO
The suspected lack of scrutiny has led Ms Cleanthous to question whether human eyes ever reviewed the file, or whether automated decision-making and artificial intelligence were allowed to run unchecked without oversight.
“We are wondering: was this done by a human, or was it run through an AI which didn’t have all the context required to run a fair audit?” Ms Cleanthous said.
“Unless an automated system understands the full scope of what a business requires to operate, how can it provide a fair result?
“In construction, you need timber and pallets to build. To treat those items as non-deductible products purely because of a data-entry label feels like an automated system stripping away legitimate expenses.
“What’s interesting is we’ve actually contacted the officer or the person that was dealing with it and they’re not responding to our phone calls. So there’s been a few phone calls that have been made in follow-up to this result to get more clarity and to maybe just explain that they’ve done their assessment incorrectly on certain items.”
Ms Cleanthous likened the situation to the former Coalition government’s discredited Robodebt scheme, a scheme she was a victim of herself, noting that several other small operators had contacted her with similar complaints of inflated assessments and disallowed claims.
She said that when she started in accounting 15 years ago, the ATO was easier to deal with, but that it has become tougher in the past two years.
“ … this season in particular has been really relentless and we get phone calls from them when debt hasn’t even fallen due that the clients are aware of,” she said.
“And so they’re chasing, they’re really going hard and making it almost impossible for us to train people. Everyone wants to do the right thing. And what we’re trying to do is communicate as best as we can. And sometimes you get a really good person on the phone, and they’re really helpful. And other times you have to cycle through three or four people. But this is probably the worst assessment I’ve ever seen.”
‘Feels like a full revenue grab’
Adding to the pressure on the business was an aggressive timeline from the ATO. Ms Cleanthous said the taxpayer was given just seven days to pull together an objection and defend the legitimacy of fundamental business expenses.
She said tight deadlines were common. During another routine audit, she was handed a strict fortnight deadline to submit documentation while three months pregnant, only for the ATO to drag out the process until after she gave birth, ultimately confirming no material wrongdoing.
“There is so much pressure on the accountant and the client to get all this information across on a strict deadline, but there is no leniency the other way,” she said.
“The ATO took their time getting this assessment together, and we were given seven days to respond. When we try to call the officer in charge to explain the error, nobody answers.”
Ms Cleanthous believes the audit reflects an increasingly aggressive recovery strategy by the tax office, one she fears disproportionately harms self-employed contractors and small firms that lack the legal muscle of multinational corporations.
“The ATO is being harsher than ever because it feels like a full revenue grab,” she said.
“It frightens people from ever wanting to engage with the system.”
While Ms Cleanthous warned business owners against attempting to lodge complex company filings without professional help, she maintained that clerical errors should not attract financially crippling penalties.
Her firm is now lodging a formal objection against the $860,000 assessment, bracing for what could take six months or more to reverse an assessment she believes should never have been issued.
The ATO responds to AI claim
The ATO issued a lengthy response to the situation. It said AI is used for some tasks, but would not have made the decisions in a case like this.
“The ATO has been using advanced analytics and machine learning models for years as part of how we administer the tax and super systems, long before generative AI,” a spokeswoman said. “These tools help identify potential errors, under-reporting, unusual claims, fraud, and other compliance risks by analysing tax returns alongside information reported by employers, financial institutions, government agencies and other third parties.
“The ATO does not use AI to make compliance decisions or determine a taxpayer’s obligations.”
The ATO’s AI transparency statement states that: ‘Decision making that adversely impacts taxpayers’ rights will always be made by a human. Taxpayers have a right of review of our decisions. Their rights apply regardless of the technology we use to help us make those decisions.’
The spokeswoman said the office knows that most small businesses do the right thing and meet their tax and super obligations on time.
“The majority of our interactions with small businesses focus on education, guidance and support to help them get things right from the outset. Our compliance activities are targeted to areas where we identify elevated risk,” she said.
“We have a range of approaches available to support compliance. Depending on the circumstances, these may include education and guidance, prompts and reminders, opportunities to correct errors, reviews and audits, and the application of penalties where appropriate.”
She said the ATO takes a risk-based approach to compliance and recognises that mistakes can occur.
“In considering correcting any lodgment error, the ATO takes into account the specific facts and circumstances, including the taxpayer’s behaviour, compliance history and the steps taken to comply with the law,” she said.
“Where statements are found to be false or misleading, including through omissions, the law provides for administrative penalties to apply in certain circumstances. The law sets out different penalty rates depending on the taxpayer’s behaviour, including failure to take reasonable care, recklessness and intentional disregard of the law. The applicable behaviour and resulting penalty are determined based on the facts and circumstances of the individual case.”
The Commissioner has the discretion to remit penalties and interest where appropriate. Requests for remission are considered on their merits and in accordance with published ATO guidance and relevant legislative requirements.
Taxpayers who disagree with an assessment or other ATO decision have access to review and objection rights under the law. Information about these rights, as well as the ATO Charter and service commitments, is publicly available.
Responding to the criticism of how long taxpayers are given to respond to an audit, the spokeswoman explained the process.
“The time required to finalise an audit will depend on the circumstances of the matter. Consistent with the ATO Charter, the ATO is committed to treating taxpayers fairly and reasonably, providing support and assistance, keeping them informed and ensuring they understand their options,” she said.
“We seek to progress audit matters in a timely way while ensuring the relevant facts and circumstances are properly considered.”
The ATO provides a range of education, guidance and support services to help businesses understand and meet their obligations and address issues early.
“We continue to strongly encourage businesses who may be having difficulty meeting their obligations to engage with us or their registered tax professional as early as possible,” the spokeswoman said. “We remain committed to working with businesses to find the right support.”