WHO SHOULD READ THIS
- Accountants, Advisers assisting clients with property transactions
THINGS YOU NEED TO KNOW
- Property transactions which report a low amount of tax payable have an increasing possibility of being reviewed by the ATO
WHAT YOU NEED TO DO
- Review tax records prior to property transactions to ensure you can support the appropriate tax treatment.
The information age may have started in the late 1990’s, but the Australian Taxation Office (ATO) is entering into its own information gathering renaissance. The days when the ATO relied on its own investigations and the taxpayer’s honesty are long gone – the ATO now has long informational reach that extends across international borders. The ATO’s sources of information are increasing, as is the quality and detail of that information.
It remains to be seen whether the ATO will fall into the classic ‘big data’ trap, of having mountains of information but lacking the sophistication (in terms of experience, expertise or resources) required to utilise that information in a way that is consistent with a dutiful and fair administration of the tax law.
It is important therefore to understand what information the ATO is likely to have on hand regarding your clients, so you can properly identify whether any particular activity by a client is likely to be seen by the ATO as unusual and worthy of further investigation. By identifying transactions or activity that will be caught in the ATO’s information gathering web, you can properly prepare for ATO queries by ensuring from the outset that the commercial or private drivers behind the activity in questions are documented.
If the taxpayer can establish early in their dealing with the ATO that the taxpayer should be considered low risk (i.e. because it has documented its transactions properly or otherwise or taken proper advice etc.), then the dealings with the ATO will be significantly less painful (for all parties involved) and can hopefully be resolved without the ATO commencing a formal audit or review of the taxpayer. This means less time, heartache and cost for the taxpayer.
It is also worth noting that the ATO’s view on proper tax risk governance will feed into their risk assessment of taxpayers. If increased compliance activity is to be the new norm, taxpayers may wish to devote resources to increasing the chance that the ATO will view them as low risk, including by implementing tax risk mechanisms.
From 1 July 2016, the states and territories of Australia were obliged to report certain information about transactions to the ATO relating to transactions.
This obligation arises out of amendments to Division 396 in Schedule 1 of the Taxation Administration Act 1935 (Cth), which imposes reporting obligations on a number of entities. Other entities will be required to disclose details of certain transactions from 1 July 2017. The other reporting entities are:
- certain government entities
- publicly listed companies
- trustees of unit trusts, and
- trustees of trusts other than unit trusts.
The reporting entity is required to provide sufficient information to assist in the identification, collection or recovery of possible tax related liabilities. The reporting entity may report on the identities of the parties.
Real property transactions
New South Wales is the only state which has published any details on what information it will be provided to the ATO. New South Wales has indicated that the title office will provide the following to the ATO:
- property details (i.e. information to identify the property)
- transactional information (i.e. contract price, settlement date etc.), and
- identify information for both the transferor and transferee (i.e. names, addresses and ACNs etc.).
New South Wales (NSW) intends to collect this information by requiring land tax clearance certificates to be obtained for every sale of land. It is the application for the land tax clearance certificate that will be the mechanism by which the information is provided to the titles office (and then to the ATO).
While there is no guidance from other states and territories yet, it is safe to assume that they will collect a similar sort of information as NSW.
With sufficiently sophisticated data mining techniques, this level of information could give rise to greater enforcement of the tax law. One simple example is to review land transactions for properties that were sold close to twelve months after they were bought – and comparing that against the taxpayer’s returns for how the property was treated (i.e. as a revenue or capital asset).
Unit trusts transactions
Trustees of unit trusts will also be required to report on unit transactions – not just transfer or sales but changes to the type, name, or number of the units in the trust. This reporting obligation will have to be separate from the tax return for the trust – as the report containing the information must be provided to the ATO within 31 days from the end of the financial year.
This requirement on unit trusts may catch out taxpayers with ‘private’ or family unit trust structures which are not obtaining proper advice on dealing with those units – potentially inadvertently causing value shifting or other CGT issues. The data matching opportunities are also self evident.
Government related entities, when those organisations provide grants or consideration for services provided, will be required to report on those transactions.
Entities regularly being engaged by the government related entities, or those receiving grants, should be aware that transactions will be reported to the ATO and appropriate steps should be taken to ensure the proper tax outcome occurs, for instance, ensuring that the if it is a charity receiving government grants, proper registrations (to allow the charity to be an income tax exempt entity) are maintained.
ATO Data-matching letters
The ATO has already started issuing what it refers to as ‘data-matching letters’. These letters are issued based on information provided to the ATO via the transaction reporting regime. These letters set out the ATO’s view of the CGT liability, and warn taxpayers that a failure to respond can result in amended assessments being issued to the taxpayer (which may include penalties and interest)
Common queries relating to land are likely to be in relation to pre-CGT or main-residence exemptions, as this would result in situations where the ATO can see that capital gains were made, but the taxpayer reports no CGT liability.
As always with ATO queries, prevention is better than a cure. By ensuring appropriate records are kept, ATO queries regarding disposals of land should be able to be addressed without excessive costs.
In the 2016 budget, the Australian Government proposed to introduce mandatory disclosure rules (the MDRs) for tax advisers involved in ‘aggressive tax planning’ for their clients. Details are limited at the moment, as the only substantive document released by the Government is a treasury discussion paper (the Discussion Paper), outlining the intended operation of the mandatory disclosure rules.
The MDRs are part of the OECD’s Base Erosion and Profit Shifting (BEPS) project. Accordingly, the Discussion Paper phrases Australia’s proposed mandatory disclosure rules in light of what the OECD recommends as part of the BEPS project, in the OECD/G20 Base Erosion and Profit Shifting Project Action 12: 2015 Report (OECD Report).
The Treasury acknowledges that there are competing policy imperatives in drafting the MDRs. They must assist the ATO with targeting tax avoidance schemes, without placing an undue compliance burden on taxpayers. There should also be no overlap with existing disclosure rules.
Treasury has provided a set of initial views on how the MDRs should operate. Key principles in these initial views are:
- the ATO should have a broad discretion in determining what constitutes ‘aggressive tax planning’
- ‘aggressive tax planning’ should be identified in a similar manner to the current taxpayer alert system
- the ‘aggressive tax planning’ must contain specific described features
- the MDRs should apply to tax advisers who are involved in the ‘design, distribution and management of aggressive tax arrangements’ (in the OECD Report, the MDRs would apply only to ‘promoters’ of aggressive tax planning arrangements)
- the end taxpayer will need to report in their tax returns that they are involved in a particular, disclosed ‘aggressive tax planning’ exercise (by way of reference number), and
- penalties will apply to tax advisers who fail to disclose.
The informational value of the MDRs for the ATO is clear to see. By requiring tax advisers to disclosure aggressive tax planning arrangements, it provides a straightforward list of taxpayers for the ATO to review.
The biggest issue that requires further guidance is just how detailed the ATO will be in determining what constitutes ‘aggressive tax planning’. If the ATO adopts a position similar to the dividend stripping rules, and leaves it open ended enough that schemes ‘in the manner of’ aggressive tax planning schemes will need to be disclosed – then there will be considerable uncertainty for tax advisers as to what needs to be disclosed, and presumably disputes at a later stage when the ATO takes the view that a particular position should have been disclosed (but the adviser takes a different view).
Worryingly, there is no mention in the Discussion Paper of legal professional privilege, and whether the MDRs will override that taxpayer right. While we consider it unlikely the ATO would seek to extend its reach that far, it is worth noting that in the OECD report, it suggests that where a lawyer claims privilege in respect to the disclosure, the disclosure obligation would instead fall upon the taxpayer. This is concerning as taxpayers may inadvertently waive privilege over advice by providing documents to the revenue authorities1.
While the Discussion Paper only discusses potential penalties in the context of monetary penalties, presumably the Tax Agent Services Act 2009 (Cth) will extend potential penalties to include suspension or prohibition on continued provision of tax services, as a failure to disclosure would constitute a failure to comply with the tax laws.
It is worth noting again that the views in the Discussion paper are preliminary only – the MDRs have a long way to go before they become law. It is important however for the tax profession keep an eye on the progress of the rules.
There have been queries whether this regime is necessary for Australia, given Australia already has in place a regime of penalties for individuals promoting tax avoidance arrangements2.