In brief

  • On Monday, 2 March the ATO released Building Confidence, a publication which replaces the Annual Compliance Program to outline its key areas of upcoming compliance focus across all taxpayer  groups.
  • Building Confidence reflects the ATO’s commitment that the community should have confidence that non-compliance is dealt with so there is a level playing field for all taxpayers. The ATO is attempting  to strike an appropriate balance between encouragement and enforcement and aims to deploy a range of strategies to bring about more open and early engagement with taxpayers on matters of tax compliance.
  • While those taxpayers perceived to be willing participants can expect a ‘lighter touch experience’ with respect to ATO compliance intervention, taxpayers not meeting this standard can expect that the ATO will tailor its compliance activities according to their behaviour and the level of perceived risk associated.
  • Building Confidence provides guidance on the issues, transactions and industries that will be subject  to a heightened compliance focus over the coming 12 months. Taxpayers should be aware of these areas of focus and also be prepared for ATO engagement at an earlier stage than has traditionally been the case.

In detail

In the wake of feedback from tax professionals and industry representatives the ATO has released a new publication entitled Building Confidence to replace its previous Annual Compliance Program. This material is available online and is expected to be revised on an iterative basis to provide taxpayers with timely updates on new and evolving ATO compliance initiatives.

Consistent with earlier announcements by the Commissioner and Senior ATO officials, Building Confidence signifies a continuing shift in the ATO’s strategic approach for conducting its compliance activities. In seeking to engender an environment of cooperative compliance throughout the taxpaying community the ATO foreshadows that for those perceived to be willing participants the ATO will offer a lighter touch experience that should result in less effort in meeting their obligations. Conversely, for those taxpayers perceived not to be doing the right thing, they should expect the ATO’s compliance activities reviews, audits, etc) to be appropriately tailored in light of their behaviour and the level of risk

In seeking to facilitate this differentiated approach, the ATO is clearly signalling more open, transparent and earlier engagement with taxpayers with a view to reducing traditional ‘back-end’ compliance activities. Recent ATO initiatives such as the Pre-lodgement Compliance Review (PCR) program and the streamlined process for Private Binding Rulings (PBR) were early steps in line with this objective and taxpayers should be on notice that now, more than ever, they will need to be prepared for ATO intervention at a much earlier stage when seeking to satisfy their compliance obligations.

In outlining the ATO’s compliance strategies over the coming 12 months this latest publication highlights the key areas of compliance focus across each of the taxpayer groups.

The key takeaways and insights in relation to those taxpayers in the Public Groups and International and the Privately Owned and Wealthy Groups segments follow below.

Public Groups and International

Earlier engagement with taxpayers continues to be an overarching focus for the ATO in relation to Public Groups and International, with Building Confidence outlining objectives to increase pre-lodgement compliance arrangements available to taxpayers. It is expected that current ATO initiatives which  promote greater certainty for taxpayers on their lodgement positions, such as annual compliance arrangements, advanced pricing arrangements and mutual agreement procedures, will continue to evolve. In conjunction with increasing pre-lodgement compliance approaches, the ATO will also seek to use existing systems and controls outside of the ATO as part of an integrated compliance function. The External Compliance Assurance Process (ECAP) Pilot that invites the involvement of independent statutory auditors is currently under evaluation and may be expanded to pre-lodgement compliance checking.

Further, enhanced bi-lateral networks and international information sharing has continued to improve information channels available to the ATO. Practically, this means taxpayers should expect the ATO to be better informed and better prepared, meaning taxpayers will have to be audit ready at an earlier stage.

Not unexpectedly, the compliance focus for the next 12 months raises issues that commonly appear as  part of the Commissioner’s recent announcements, with Base Erosion Profit Shifting (BEPS) featuring prominently in light of the increasing public and political focus on this area. The ATO has expressly stated that they are reviewing offshore service and marketing hub arrangements and will be particularly interested in matters involving perceived profit shifting through transfer pricing and business value chain restructures.

Taxpayers need to be aware of the major industry sectors that the ATO has outlined as the focus of its compliance activities over the coming 12 month period, including banking and finance, energy and resources, superannuation, and insurance.

Significant tax issues attracting ATO attention in 2015

  • Capital gains tax
  • Losses – capital and revenue
  • Eligibility for tax concessions
  • Mergers and acquisitions
  • Divestments of major asset, demergers and cessation of business operations
  • Capital management including share buy-backs, capital raising, return of capital
  • Private equity entry and exits
  • Initial public offerings
  • Issues involving trusts
  • Tax consolidation issues
  • Financial arrangements
  • Infrastructure investments
  • Offshore evasion

Privately Owned and Wealthy Groups

Building Confidence also provides confirmation that ATO resources for Privately Owned groups will continue to largely focus on countering perceived aggressive structuring, avoidance and abusive arrangements. Project Wickenby will continue to investigate illegal offshore schemes, while the passing of the deadline for taxpayers to sign up to the Project Do It initiative means that we can expect that ATO to aggressively pursue those taxpayers with offshore arrangements who were eligible to participate in this amnesty but failed to register.

Activities that will be the focus of significant ATO scrutiny for taxpayers in this group will include capital losses, poor tax and economic performance, one-off or unusual transactions and profit shifting.

Data Matching

The ATO’s increased information gathering and data matching capabilities also mean that taxpayers should expect ATO attention in circumstances where key tax data does not align with tax returns or key business performance, whether this is attributable to non-reported income or utilising and generating losses.

The ATO receives data from many sources, including banks, financial institutions and other government agencies. This data is matched against ATO information to identify people and businesses that that buy and sell houses, investment properties, cars, boats and other assets and may not be reporting all their income.

As an example, the ATO is in the process of obtaining data from Australian share registries to cross- reference with its own internal data to identify cases for compliance and educational strategies. The ATO will obtain share ownership and disposal data dating back to the start of the Capital Gains Tax regime (19 September 1985) through to the end of the 2014-15 financial year. It is estimated that the total number of records that will be obtained is more than 95 million, relating to around 1.2 million individuals.

The takeaway

While Building Confidence demonstrates a shift in emphasis in the way that the ATO seeks t0 engage with taxpayers to ensure they meet their tax and superannuation obligations, it also highlights programs, strategies and identified risk areas that will enable more effective identification of potential risk of non- compliance from taxpayers. Taxpayers should continue to monitor updates to Building Confidence to remain up to date on ATO initiatives which may assist in providing greater certainty to their tax positions and minimise the potential for unwanted ATO attention.