There\u2019s perhaps no worse feeling than being told you\u2019re 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.<\/p>\n
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\u2019 experience, who was equally as shocked by what she uncovered.<\/p>\n
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.<\/p>\n
It was so unusual that Ms Cleanthous suspects the audit may have calculated using AI \u2014 a claim the ATO has denied.<\/p>\n
<\/p>\n
\u201cThey (the client) lodged everything themselves up to that point, got the audit and realised they needed assistance,\u201d Ms Cleanthous said.<\/p>\n
\u201cSo 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. <\/p>\n
\u201cSo there was no issues from the client\u2019s front on that, but it was more the fact that assessment and penalties were just astronomically high.<\/p>\n
\u201cSo $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.\u201d<\/p>\n
Shocked by what she saw, she posted a video about the audit on Instagram, which has since gone viral.<\/p>\n
\u201cThe ATO are out for blood. I have never seen them like this before,\u201d she said in the clip. \u201cThis is insane.\u201d<\/p>\n
She told news.com.au she made the clip because her \u201cjaw hit the floor\u201d after reading the details of the audit.<\/p>\n
\u201cAt 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,\u201d she said.<\/p>\n
Why the bill was so high <\/p>\n
Ms Cleanthous said the bulk of the debt arose after the ATO entirely wiped out the business\u2019s expenditure on building supplies due to an innocent bookkeeping misallocation.<\/p>\n
Because the business was classed under construction and labour services rather than retail, the self-lodging owner had entered his job materials under the \u201ccost of sales\u201d ledger rather than a standard materials and supplies account.<\/p>\n
Instead of reclassifying the genuine deductions to the correct category, the tax office disallowed them altogether.<\/p>\n
\u201cThey took away key materials that it took for this person to run their business,\u201d she said. \u201cMaterials that they were required to use to generate income were taken away. All of it.\u201d<\/p>\n
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.<\/p>\n
\u201cThe client had categorised it as cost of sales, and the ATO said, \u2018Well, no, you\u2019re a services business and you don\u2019t sell products, so we\u2019re removing it in its entirety\u2019,\u201d Ms Cleanthous said. <\/p>\n
\u201cThe nature of how it was recognised shouldn\u2019t 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.\u201d<\/p>\n
To compound the hit, the assessment applied a blanket reduction of roughly 2 to 3 per cent across the firm\u2019s remaining general expenses, seemingly as an arbitrary safety buffer, before levying heavy shortfall penalties on top.<\/p>\n
Accountant suspects AI was used by the ATO<\/p>\n
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.<\/p>\n
\u201cWe are wondering: was this done by a human, or was it run through an AI which didn\u2019t have all the context required to run a fair audit?\u201d Ms Cleanthous said. <\/p>\n
\u201cUnless an automated system understands the full scope of what a business requires to operate, how can it provide a fair result? <\/p>\n
\u201cIn 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.<\/p>\n
\u201cWhat\u2019s interesting is we\u2019ve actually contacted the officer or the person that was dealing with it and they\u2019re not responding to our phone calls. So there\u2019s 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\u2019ve done their assessment incorrectly on certain items.\u201d<\/p>\n
Ms Cleanthous likened the situation to the former Coalition government\u2019s 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.<\/p>\n
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.<\/p>\n
\u201c \u2026 this season in particular has been really relentless and we get phone calls from them when debt hasn\u2019t even fallen due that the clients are aware of,\u201d she said.<\/p>\n
\u201cAnd so they\u2019re chasing, they\u2019re really going hard and making it almost impossible for us to train people. Everyone wants to do the right thing. And what we\u2019re trying to do is communicate as best as we can. And sometimes you get a really good person on the phone, and they\u2019re really helpful. And other times you have to cycle through three or four people. But this is probably the worst assessment I\u2019ve ever seen.\u201d<\/p>\n
\u2018Feels like a full revenue grab\u2019<\/p>\n
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.<\/p>\n
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.<\/p>\n
\u201cThere 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,\u201d she said. <\/p>\n
\u201cThe 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.\u201d<\/p>\n
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.<\/p>\n
\u201cThe ATO is being harsher than ever because it feels like a full revenue grab,\u201d she said. <\/p>\n
\u201cIt frightens people from ever wanting to engage with the system.\u201d<\/p>\n
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.<\/p>\n
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.<\/p>\n
The ATO responds to AI claim<\/p>\n
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.<\/p>\n
\u201cThe 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,\u201d a spokeswoman said. \u201cThese 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. <\/p>\n
\u201cThe ATO does not use AI to make compliance decisions or determine a taxpayer\u2019s obligations.\u201d<\/p>\n
The ATO\u2019s AI transparency statement states that: \u2018Decision making that adversely impacts taxpayers\u2019 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.\u2019<\/p>\n
The spokeswoman said the office knows that most small businesses do the right thing and meet their tax and super obligations on time. <\/p>\n
\u201cThe 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,\u201d she said.<\/p>\n
\u201cWe 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.\u201d<\/p>\n
She said the ATO takes a risk-based approach to compliance and recognises that mistakes can occur. <\/p>\n
\u201cIn considering correcting any lodgment error, the ATO takes into account the specific facts and circumstances, including the taxpayer\u2019s behaviour, compliance history and the steps taken to comply with the law,\u201d she said.<\/p>\n
\u201cWhere 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\u2019s 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.\u201d<\/p>\n
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. <\/p>\n
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.<\/p>\n
Responding to the criticism of how long taxpayers are given to respond to an audit, the spokeswoman explained the process.<\/p>\n
\u201cThe 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,\u201d she said. <\/p>\n
\u201cWe seek to progress audit matters in a timely way while ensuring the relevant facts and circumstances are properly considered.\u201d<\/p>\n
The ATO provides a range of education, guidance and support services to help businesses understand and meet their obligations and address issues early. <\/p>\n
\u201cWe 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,\u201d the spokeswoman said. \u201cWe remain committed to working with businesses to find the right support.\u201d<\/p>\n","protected":false},"excerpt":{"rendered":"There\u2019s perhaps no worse feeling than being told you\u2019re being audited by the ATO, but spare a 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