As we head into tax return time, Australian taxpayers could find themselves subject to a tax audit or review from the tax office if their numbers don't look right or if, indeed, the right numbers don’t appear at all.

With around 15 million taxpayers, the Australian Taxation Office (ATO) is using data analytics and fact checking to verify numbers on peoples’ tax returns.  The ATO's verification activities include conducting computer checks to detect common errors and inconsistencies, including in specific risk areas such as the reporting of cryptocurrency trading and share market transactions.

The ATO compares data obtained from third parties such as banks and stockbrokers to detect inconsistencies between individuals' tax returns and its own information.

If you're a cryptocurrency investor, watch out, because you're on the ATO's hit list for the 2020-21 year. The ATO is ‘concerned’ that many investors believe their cryptocurrency gains are tax free or only taxable when the holdings are cashed back into Australian dollars.

"This year, we will be writing to around 100,000 taxpayers with cryptocurrency assets explaining their tax obligations and urging them to review their previously lodged returns,” Assistant Commissioner Tim Loh said.

“We also expect to prompt almost 300,000 taxpayers as they lodge their 2021 tax return to report their cryptocurrency capital gains or losses. We are alarmed that some taxpayers think that the anonymity of cryptocurrencies provides a licence to ignore their tax obligations."

ATO data analysis shows a dramatic increase in cryptocurrency trading since the beginning of 2020. It is estimated that there are over 600,000 taxpayers that have invested in crypto assets in recent years. CGT also applies to the disposal of non-fungible tokens (NFTs).

According to Bruce Brammall of Bruce Brammall Financial, there is a lot of misunderstanding about cryptocurrencies and the requirement that any capital gains on trading be disclosed.

“We don't personally advise investors to trade in crypto currencies, but if people do, and they have and made a gain, then any gains in the currency must be disclosed to the ATO and capital gains taxes are payable," he says. "A lot of people don't understand this because they are trading in a currency, which isn't seen as a traditional asset class." 

Peter Bembrick, tax partner at HLB Mann Judd in Sydney adds that cryptocurrency exchanges have also had specific obligations to report transaction data to the ATO and other authorities since April 2018.

"As in many other areas the ATO’s information gathering processes are becoming more and more sophisticated so there is nowhere to hide and gains must be disclosed," he says.

Share investors also on ATO’s radar

The ATO will also be checking for undeclared capital gains on asset sales such as shares and undeclared foreign income. Many Australians have invested in shares listed on offshore share markets, so if you have income producing shares outside Australia, you must declare all the dividend income in your tax return.

“More generally for share investors, the ATO is likely to take a close look at taxpayers incurring substantial capital losses and offsetting them against large capital gains,” says HLB Mann Judd's Bembrick.

Given the large movements in the share market throughout the early months of the pandemic, it is likely that many investors incurred large capital losses during the 2021 tax year, or late in the 2020 tax year. Any capital losses from 2019-20 may be recouped against capital gains made later in the 2021 tax year.  

“In order to ensure that the ATO accepts the legitimacy of these transactions, it is very important that appropriate records are maintained and are readily accessible, especially cost base records and data for investments that were held for some years," says Bembrick.

"This including those that may have been inherited from deceased estates or were sitting in long-established family investment vehicles.

Another thing to watch out for is the Australian Taxation Office's 'wash sale' rule, which prohibits the quick sale and re-purchase of securities to minimise tax. According to Brammall, if you are selling shares just to crystallise a loss to offset a capital gain on other shares, then the wash sale could be violated. The ATO is especially interested in sell and buy transactions that occur for the same securities in a short timeframe.

“The ATO will look at your motivation for selling shares and if it is just to get a tax benefit, or to offset a capital gain on other shares, then the ATO will see that as a wash sale and that's when you've got a problem,” he says.

Another area in focus for the ATO is tax agents whose clients have relatively high work-related deductions. According to Brammall, that includes employees who are claiming the most work-related expenses for any given profession. So, for example, for an accountant, it is those claiming the greatest work-related expenses, typically sitting in the top 10 per cent of work-related deductions for that professional group, that will come on the ATO's radar, he says.

With so much working from home due to the COVID-19 pandemic, the ATO has introduced a simplified method to claim 80 cents for each hour you work from home (from 1 March 2020 and extended through to 30 June 2021) to cover all deductible running expenses. The shortcut method is straightforward; just multiply the hours worked at home by 80 cents.