How the ATO is nudging Australians to pay more tax
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How the ATO is nudging Australians to pay more tax

The Australian Taxation Office has started ‘nudging' us to pay more tax.

Tax authorities worldwide have worked out that a nudge - rather than a kick in the guts - is a good way to encourage voluntary compliance, especially since most people  don't deliberately try to do the wrong thing.

In 2016 the Australian Taxation Office (ATO) began using pre-emptive prompts – often pop-up messages on people self-lodging their tax returns in myTax – to let taxpayers know if their work-related expense claims appear out-of-step with their peers.

In Australia, about 30 per cent of small businesses did not pay their tax liabilities on time in the 2017 financial year and together owed around 67 per cent of total collectible tax debt.

In Australia, about 30 per cent of small businesses did not pay their tax liabilities on time in the 2017 financial year and together owed around 67 per cent of total collectible tax debt.

Photo: Gabriele Charotte

It was a move that Britain’s tax authority - there is a special division unofficially dubbed the "nudge unit" - and others around the world have been using to get people to voluntarily amend their tax returns.

Using behavioural economics is a low-cost approach to getting people to pay more tax, and early indications are it is having a positive impact here.

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First, it can ensure Australians pay their tax debts quicker, before penalties mount up and leave them in an audit nightmare.

In Australia, about 30 per cent of small businesses did not pay their tax liabilities on time in the 2017 financial year and owed about 67 per cent of a total collectible tax debt of $20.9 billion.

Last year the Australian National University (ANU) in collaboration with the ATO last year conducted an experiment to see if reminder letters about outstanding debts actually work.

The target population of taxpayers was restricted to small business taxpayers with a history of compliant payment behaviour who had missed their May 2017 tax deadline.

A total of 4787 unpaid debt cases were randomly allocated to receive a reminder letter either one, two or three weeks following their missed tax debt due date; and a control group of about the same size did not receive a letter for the seven week duration of the trial.

The results from the field experiment - revealed in a report published by researchers Christian Gillitzer from the School of Economics, University of Sydney, and Mathias Sinning from the Tax and Transfer Policy Institute at ANU – showed the letters resulted in behavioural change.

It found the probability of an overdue debt being paid by the end of the seven week trial was approximately 25 percentage points greater for cases receiving a reminder letter relative to cases in the control group, which did not receive a reminder letter.

Receipt of a reminder letter increased the probability of payment for debts

Receipt of a reminder letter increased the probability of payment for debts

Photo: Supplied

Receipt of a reminder letter increased the probability of payment for debts up to about $7500, but had no discernible effect for debts above $7500.

It's not jut tax debts where a nudge can apply.  The agency has also been sending letters to taxpayers and their accountants claiming higher than average deductions on tax returns.

The agency, uses data analytics to compare a taxpayer’s return to those lodged by people in similar circumstances. If the ATO finds inconsistencies or something that looks out of place, the taxpayer or their agent, gets a letter telling them they aren't in line with their peers.

It's a smart tactic aimed at reducing the nearly $22 billion in work-related expense deductions that 8.6 million taxpayers claimed in 2015-16.

$22 billion in work-related expense deductions were claimed by 8.6 million taxpayers claimed in 2015-16.

$22 billion in work-related expense deductions were claimed by 8.6 million taxpayers claimed in 2015-16.

Photo: Shutterstock

The ATO and a specialist behavioural economics research unit within the federal government – known as the Behavioural Economics Team (BETA for short) - recently partnered to undertake a trial targeting tax agents whose clients had lodged higher than expected work claims.

Overall, the 2277 agents in the trial had a total of 22,776 clients. Of the total 22,776 clients, 11,296 clients were attached to agents who received the letter and 11,480 clients were attached to agents who did not receive the letter.

The results, published in a report by BETA, found 17 per cent of agents in the letter group lodged amendments, compared with 1 per cent of agents in the "no letter" group.

It said the letter reduced work-related expense claims by $2.2 million and increased tax paid by $0.9 million. On average, identified clients represented by agents in the letter group reduced their work related expense claims by $191, compared with a $2 increase in the "no letter" group.

The letter also led to an increase in the average total tax paid per client of $76, for a total of $0.9 million. The report said if the letter had been sent to all agents in the trial, it is expected the letter would have cut work-related expense claims by about $4.4 million and increased tax paid by about $1.7 million.

Of course there is a disclaimer in the report: It said the impact of the reduction in work-related expense claims to the increase in tax paid was hard to determine because amendments to tax return labels other than work-related expenses could have influenced the net tax position.

The other issue is whether people who have  legitimate deductions start under-claiming on their tax returns.

There is also a risk, as Chartered Accountants recently noted in a submission, that some taxpayers game the myTax software by progressively lowering the deduction claimed online until it reaches a level where the ATO warning no longer appears.

As people get more savvy, no doubt tax authorities will too.