Taxman warns on compliance in tough times

Businesses under pressure may find the temptation to hold back on tax obligations irresistible. But, as TERRY HAYES warns, the taxman is known for his vigilance.

By Terry Hayes

Businesses under pressure may find the temptation to hold back on tax obligations irresistible. But the taxman is known for his vigilance.

The Tax Commissioner has warned businesses and tax advisers to beware of potential tax abuse during the current global economic crisis.

In the current environment, he said the tax office would be on the lookout for:

• An increase in losses and a temptation among some to use them inappropriately.
• An increased number of debt cases.
• A possible increased risk of lower disclosure and reporting.

Michael D’Ascenzo says the current economic climate places the tax office in a somewhat difficult position. On one side, he said it must be “vigilant for abusive tax practices”. On the other, the tax office is “committed to being empathetic to people facing genuine hardship”, but it has to balance this approach with the need to protect other businesses from unfair competition.

I have previously warned about possible tax problems that might arise from the financial crisis (see Taxman can help in tough times, 9 Oct 2008, and Unpaid tax debts – SME directors under fire, 17 Sept 2008) and it is not surprising that the Commissioner is now prominently flagging the issues that concern the tax office.

The Commissioner said the tax office has a major concern with the level of micro enterprise tax debt. Micro enterprises are classified as businesses with turnover of less than $2 million.

He is concerned that deteriorating global economic conditions are likely to exacerbate this situation, so any SME in this position might expect some close attention. That attention, however, may not be all bad, as the tax office is genuinely keen to help businesses in trouble.

For example, the tax office attempts to contact taxpayers with a tax debt as early as possible – they may be offered extra time to pay or remission of the general interest charge may be offered. The tax office also works with the Australian Financial Counselling and Credit Reform Association so it can get involved in cases earlier, offering timely and personalised advice to those in need.

In cases of serious hardship (such as major life disruption, dire financial straits), the tax office may offer a release or waiver of tax debts.

However, where a taxpayer is simply unwilling to pay a tax or super debt, the tax office will take debt enforcement action. This could include the use of garnishee notices, statutory demands, and in some instances actions subject to court processes, depending on the circumstances.

The Tax Commissioner considers that pressure in the current environment could mean some businesses may be tempted by what he called “high risk behaviours”. For example, he says attempts at input credit fraud and refund fraud may increase in a more depressed financial environment.

However, he says the tax office’s identification techniques are improving and it is getting better at stopping such activity. In 2007-08, 44 people were convicted for refund fraud and 35 of these received a jail sentence. The Commissioner said that developing industry benchmarks also helps compliance – I’ve discussed this before in my column Taxman keeps machining the benchmarks.

It is also the case that changing economic conditions may expose a company’s underlying cost structures – with the emphasis sometimes shifting from profits to cashflow. Tax is seen as a cost and in cutting costs to help cashflow, the tax office is concerned that cutting tax may lead to some risky tax compliance behaviour. How those tax costs might be cut could give rise to tax issues that may only surface at a later tax audit, so the tax office is keen to be on the front foot here.

Bad debts and financial stress – a case study

Steve, a semi-retired tradesman, had lost $30,000 through bad debts and was under significant financial stress. He also had an activity statement debt. He asked for an advance from his cash management fund but was advised that the funds had been frozen.

Steve contacted the tax office to propose a payment arrangement that left him with sufficient funds to continue trading. The tax office agreed to his proposal and also remitted the general interest charge. Steve later contacted the tax office again to advise that he was now in a position to finalise his debt more quickly, the arrangement was adjusted accordingly and Steve paid out his tax debt.

Small debt but unable to pay – another example

The Australian Financial Counselling and Credit Reform Association contacted the tax office about one of its clients. Bill was a contractor experiencing serious hardship. He had a small income tax debt and was unable to engage in paid work because of caring responsibilities for his children. He had lost his home and was receiving emergency payments from Centrelink. The Commissioner said the tax office was able to release the amount outstanding and “give him one less thing to worry about”.

The pressure is on

The current economic climate is placing increasing pressures of all kinds on many SMEs to simply survive, let alone prosper. Maintaining proper tax compliance won’t always be easy. The tax office recognises that, and is willing to help, but it won’t stand idly by where a business avoids its tax responsibilities, whether it be by delaying tax payments or entering into arrangements that are doubtful, or by some other means.

The desirability of cutting costs is an understandably high priority for many SMEs at the moment and while tax is a cost, cutting that particular cost is fraught with difficulties for the unwary.

If an SME gets into financial difficulties that may affect its tax compliance, or is considering entering into an arrangement that may have doubtful or unclear tax consequences, consult your adviser or accountant. Contacting the tax office for help may not be out of the question too.

Terry Hayes is the senior tax writer at Thomson Reuters, a leading Australian provider of tax, accounting and legal information solutions.