ATO Enforcement Of Sales Suppression Technology

Following the commencement of the Treasury Laws Amendment (Black Economy Taskforce Measures No 1) Act 2018, which strengthened penalties to deter the possession, manufacture and distribution of electronic sales suppression technology (ESST) from the 2019-20 income year onwards, the ATO along with the Treasury has recently released the results of a review as required by the enacting legislation.

Since the introduction of these new powers, the ATO has mostly focused its efforts in addressing ESST behaviour as part of the broader shadow economy program. Where the ATO identifies actual or suspected ESST use, detailed compliance action is undertaken to identify both cash and electronic sales suppression across businesses. According to the ATO, the use of ESST is not only in income, and can also facilitate payment of cash wages and the subsequent non-compliance with employer obligations such as PAYG withholding and super guarantee contributions.

Traditionally, ESST has been embedded in and focused on manipulating POS software, however, the ATO has observed the evolution of ESST with the advent of more complex systems. For example, it has seen ESST which has been embedded into other parts of electronic systems of business taxpayers containing very sophisticated components and coding to hide the technology that requires analysis of the broader computer architecture and countering the ESST's in-built-detection and anti-forensic mechanisms.

To combat this leap in technology, the ATO is now broadly defining ESSTs to include the following:

• cloud-based software that works with the POS system;

• use of encryption software to conceal documents from the ATO;

• remote access that can facilitate individual and bulk deletions from mobile devices from anywhere in the world in real time;

• conceal phantomware and programs that enable rapid removal or alteration of data by either a portable device (ie USB) or an external/cloud-based service;

• suppression of HR and payroll data which enables falsifying employee and wage records;

• digital sources relating to ESST which can be located in computer hard drives, operating systems, servers, software, program coding, log entries, POS systems, communication, and external devices where most can only be identified by digital forensics experts undertaking imaging activities.

One new sales suppression technique that has emerged that particularly concerns the ATO is a "foreign zapper" that operates over the internet and allows for the same activities of alteration, deletion, replacement, and manipulation of sales data. The zapper is not present during normal use and the software may also allow for remote crashing of hard drives which makes verification of accurate records difficult.

To date, 46 sales suppression software cases have been completed by the ATO with around $1m in penalties being applied and raising around $7.4m in tax liabilities. Anecdotally, the ATO is aware of a four-fold increase in the use of ESST during the pandemic and ESST manufacturers have also adapted to the post-pandemic model by offering more sophisticated technology that takes advantage of business taxpayers' increased use of electronic payment platforms and digital operations.

In addition, to apply ESST penalties successfully, there is a requirement for significant investment of ATO resources, given the difficulties in gathering sufficient evidence to support the enforcement decision, as it is common for an ESST to delete the audit trail. Highly trained ATO officers are usually required to gather information from many sources to corroborate the existence, manufacture, sale and use of ESST. However, the ATO notes that the general risk to tax collection posed by ESST is outside its risk tolerance, therefore further compliance action is required.

Need more information?

While most businesses won't have to worry about further compliance action planned by the ATO on ESST, some businesses may be inadvertently caught up in using overseas based services that may implement this technology. The ATO has the discretion not to seek penalties in circumstances where taxpayers have made a genuine mistake. Contact us today for more information.