How to stay in the taxman’s good books

The ATO’s Compliance Program for 2009-10 has already generated plenty of attention in the press. While it certainly presents a window into the many issues the Tax Office will be looking at, it’s important for SMEs to be aware of what specific issues the Tax Office is likely to examine when it looks in their direction.

The ATO has estimated that its compliance program for the previous 2008-09 year resulted in more than $8 billion being raised in liabilities and the recovery of more than $5 billion in unpaid taxes. That is not small beer!

Perhaps the message to come from this latest Compliance Program is that the ATO recognises that times are tough, will do what it can to help businesses survive, but will not countenance attempts to reduce tax bills by illegal means. The Tax Office certainly understands that these difficult economic circumstances may prompt some taxpayers to push the tax envelope (eg. by seeking to improperly utilise losses or by engaging in offshore transactions to avoid tax) and is ready to move against such actions.

Here’s an overview of the tax issues to keep an eye on.

Businesses that don’t declare all cash income can expect contact from the Tax Office as programs to deal with the cash economy are expanded.

Work expense claims will again feature high on the ATO’s review list. The ATO says it will focus on occupations with patterns of large/rising claims, returns that do not fit the pattern for a particular occupation and claims in returns lodged by tax agents that are outside the norm. The Tax Office will specifically look at work-related expense claims for people employed as truck drivers, sales and marketing managers, sales representatives and electricians.

Investors will face scrutiny too. The ATO says it expects an increase in the number of people claiming losses on the sale of investments and it has written to people who purchased investment properties, shares or units in a managed fund last year to inform them of their capital gains tax (CGT) obligations. The Tax Office will closely examine claims relating to retail investment products, managed investment schemes and other retail financial products to ensure deductions claimed are legitimate. The ATO will also continue to encourage participants of dodgy schemes to make voluntary disclosures and take advantage of possible reduced penalties.

The ATO will match over 400 million records from third parties and look at more returns for risks concerning employee share schemes, health insurance policies that don’t provide sufficient private patient hospital cover, and eligibility for tax offsets and the Medicare levy exemption. The ATO says it is following up over 500,000 reported income discrepancies and issuing 100,000 letters advising taxpayers where it has some concerns with the income reported.

Very small businesses

The Tax Office says there are about 2.7 million micro businesses (ie. turnover less than $2 million) in Australia. More than 60% of these businesses are in property, trades, construction, finance, professional and technical services, primary production and retail.

In its compliance activities in the coming year, the Tax Office says it will:

• continue helping viable businesses stay on track through its small business assistance program, introduce temporary penalty and interest concessions and implement new measures including the small business and general business tax break;
• contact new employers to help them understand how to comply with their obligations;
• review employer returns to ensure PAYG withholding obligations are being met and dealing firmly with employers who are not meeting their obligations;
• identify possible cash economy participants using additional information sources including benchmarks and follow these cases up.

The Tax Office also plans to identify and educate industries it considers are at high risk of not meeting superannuation guarantee obligations. The focus will be especially on road freight transport, automotive repair and electrical services industries.

Specific tax compliance issues for micro businesses include:

• Property assets and investments – here, the ATO will expand its data matching on asset transactions from state revenue offices, land titles offices, share registries and other sources. The ATO will also focus on GST treatment of property transactions, in particular, unreported property sales, incorrect application of the margin scheme and non-lodgment of activity statements. It will check property transaction reporting for capital gains – in particular, sales of property, capital losses and correct use of CGT small business concessions. The ATO will also ensure shares are correctly taxed, in particular, that losses are correctly accounted for.
• Refund fraud – the ATO will examine the misuse of tax return labels, and will be increasing its scrutiny of trading stock reporting and company losses.
• Partnership and trust distributions – the ATO will check (using data matching) that distributions from partnerships and trusts have been correctly disclosed.

SMEs themselves

According to Tax Office figures, there are around 140,000 enterprises in Australia with an annual turnover of between $2 million and $250 million. It says these SMEs consist mainly of privately held groups. For ATO compliance purposes, the segment also includes more than 1,669 highly wealthy people who, with associates, effectively control $30 million or more in net wealth. The sector is significant, paying around 15% of the total tax collected by the ATO.

The Tax Office says that, when conducting risk assessments and other compliance activities of SMEs, its focus is on the economic group (including related companies, super funds, trusts, partnerships and controlling individuals) rather than individual entities. It also looks at the transparency of business transactions between associated entities and their tax effects. For wealthy taxpayers, the ATO takes a similar approach and profiles and assesses the risk of all groups associated with these people.

Specific tax compliance issues for SMEs that the ATO will look at include:

• Paying tax liabilities – while the ATO says it will support viable businesses to meet their tax obligations, it will garnishee businesses deliberately choosing not to meet their obligations.
• Income tax and FBT compliance activities – The ATO says it will: