ATO compliance program to scrutinise small businesses

Micro-enterprises will be a key focus for the tax office in the new financial year, according to its compliance program, with close attention to be paid to sham contracting, the cash economy and super.

The compliance program, released by the Australian Taxation Office today, will include a 25% increase in audits of about 2.8 million businesses with sales less of than $2 million.

The ATO says the cash economy – when businesses deliberately use cash transactions to hide income and evade tax obligations – is a key focus area for the year ahead. The crackdown will translate into 20,000 reviews and audits.

“A clear link exists between compliance with tax obligations and good record-keeping practices. We will continue to visit businesses, and work with tax practitioners and industry and professional associations, to identify and share best practice in record-keeping,” it says.

“We will review the tax affairs of businesses that appear to be doing the wrong thing –administrative penalties and prosecutions may result from these reviews.”

Another major area of interest for the ATO in the year ahead is sham contracting: an area of contention that has generated countless media scrutiny in the last few months.

Sham contracting is when an employer tries to disguise an employment relationship as an independent contracting relationship in a bid to sidestep employment entitlements such as pay-as-you-go withholding tax and superannuation guarantee payments.

Nearly 25,000 businesses will come under the ATO’s microscope next year to ensure they comply with their employer obligations, with micro-enterprises under close scrutiny.

“About 20% of the Australian workforce was employed by micro-enterprises last year. As employers, they withhold and pay about $14 billion in pay-as you-go-withholding on behalf of their employees,” the ATO says.

“Although the majority of employers do the right thing, some do not meet their obligations… Last year, we followed up complaints on around 14,000, mainly micro, employers.

“This year, we expect to contact around 12,500 mainly micro-employers regarding complaints about unpaid superannuation.”

The ATO will also review more than 4,000 employers where it finds evidence of non-compliance with super guarantee obligations, particularly in the following industries:

• Computers system design and related services
• Accommodation
• Accounting services

The ATO is also keen to ensure the trustees of self-managed super funds are doing the right thing, outlining strict requirements in its compliance program.

This financial year, it will look at newly-registered funds to ensure they have not been established to “provide illegal early release of superannuation funds to their members”.

The ATO will also monitor SMSFs to check that annual reports are being filed. It is a breach of various tax and super laws if a trustee of an SMSF fails to lodge an annual report.

Loans to members are also being targeted. For example, investing in a family business that might breach the “5% rule” is against the rules. An SMSF can invest no more than 5% of its assets in a related-party transaction

Finally, the ATO has issued guidance on new tax arrangements for the streaming of trusts, stating: “If the ATO hadn’t taken action before June 30, about 600,000 trusts could have been left in limbo, so there’s wide relevance for small businesses.”

Earlier this month, legislation to enable the streaming of franked dividends and capital gains for tax purposes, as well as targeted anti-avoidance rules, was introduced into parliament. The legislation was passed and has received royal assent.

According to the ATO, the streaming changes will only affect trusts that make a capital gain, or that are in receipt of a franked distribution, for 2010-11 or a later income year.

Trustees have been given a two-month extension to August 31 to make records to satisfy the “specifically entitled” requirement for franked distributions.

While the tax office will not be selecting cases for audit solely to determine whether trustees have complied with the law, it will be investigating cases where there has been a deliberate attempt to exploit weaknesses or deficiencies in the new provisions.