The Australian Taxation Office (ATO) has released its annual compliance program highlighting some of the areas on which it plans to focus its attention for this year.

At the individual and SME levels, it’s very much a continued focus on the areas we have been talking about for the past four or five years – Division 7A, the small business CGT concessions, revenue versus capital, contractor versus employee, undisclosed foreign income - with some new areas thrown into the mix. 

Over the past few years we have assisted many taxpayers with audits covering many of the focus areas – so it’s not a case of the ATO saying and not doing! We assume the ATO has been emboldened by what it has found in audits to date and is casting the nets wider.

As with recent years, the ATO’s compliance model seeks to differentiate between attitudes to compliance of different groups of taxpayers (eg specific industries) as well as their advisors. We are seeing cases where the ATO does appear to be targeting the clients of certain advisors.

One of the keys to the compliance program is the ATO’s ever improving information-gathering and matching capabilities. The government has allocated the ATO significant funding to improve these capabilities even further.  Increasingly, taxpayers and their advisors should assume the ATO has access to up to date information about them and their activities. Taxpayers are sometimes surprised to learn the ATO has a better understanding of their structures and activities than they do themselves!

The ATO predicts that by 1 July 2014 it will have more and higher quality data available to it on matters such as:

  • share and unit sales;

  • property sales; and

  • international bank transactions.

Individuals

Some of the areas of focus for individual taxpayers include:

  • Failure to disclose income. For example, undisclosed income from foreign sources is an area we are seeing on the rise in ATO audits. AUSTRAC and the sharing of information with other jurisdictions is increasingly enabling the ATO to identify taxpayers who appear to be generating income in foreign jurisdictions. Often, a lack of records/documentation or credible evidence makes this a happy hunting ground for the ATO but an unpleasant one for taxpayers faced with the burden of proof.

  • The use of complex structures including trusts, companies and SMSFs by wealthy individuals to under-report income or not disclose disposals.

  • The blurring of distinctions between business and personal income.

  • Unsubstantiated work-related travel expenses. We have recently seen a number of audits in which taxpayers have simply claimed the ATO published daily allowances for food and accommodation multiplied by the number of days of travel, without being able to provide any evidence of what they actually spent.

SMEs

The ATO has developed “data-mining” tools to ascertain or “map” the relationships between individuals and their respective entities.  With this information, they seek to find all income and assets within a group and detect compliance issues.  From what we’ve seen, they often get it pretty right.

Areas of focus will include:

  • Division 7A, including shareholder loans and private use of a business’ lifestyle assets; and

  • misuse of trusts, eg artificially reducing a trust’s income and distributing it to certain  beneficiaries, with limited capacity to pay tax, who are then assessed on the trust’s net income.  The ATO have indicated they will apply Part IVA to such schemes. 

The new ATO Trusts Taskforce will focus on such schemes and will work with other agencies where necessary, for instance where prosecutions result. 

However, the Taskforce will not be focusing on “ordinary trust arrangement and tax planning associated with genuine business or family dealings”;

  • incorrect claiming of small business CGT concessions. The grouping rules for  determining which assets are included in the $6 million maximum net asset test as well as which assets are active assets are particularly difficult and problematic;
  • non-disclosure/under-reporting of capital gains, including reclassifying revenue transactions as concessionally taxed capital gains; and
  • outstanding lodgement obligations

We have been successfully involved in many audits and litigation in recent years focusing on Division 7A, the small business CGT concessions and the revenue/capital distinction. Treating these as focus areas in the 2013/14 compliance program suggests the ATO is convinced there is further, widespread non-compliance; possibly due to the difficulty in interpreting and applying the ever evolving legislative provisions.

The clear message is, taxpayers and their advisors are often getting it wrong.  Prevention is better than cure – so don’t be afraid to seek expert advice before lodging a return.

Employers

Areas of ongoing focus for employers include:

  • the incorrect treatment of workers as contractors rather than employees - leading to failure to withhold under the PAYG system and failure to pay the superannuation guarantee.  Significant penalties apply. We are increasingly hearing of cases where, upon termination of an engagement, a worker who has been treated as a contractor (often at their own insistence so as to use an entity) asserts they should have been treated as an employee and received leave and superannuation entitlements. The ATO is one of their first points of call; and
  • failure to pay the newly increased rate of superannuation guarantee.
Tax professionals

Areas of focus include:

  • risk differentiation, eg hidden or cash economy, non-lodgement of returns and high risk refunds.  Where the ATO see these things and have concerns, they will contact the tax professionals early before they become significant issues.  They plan to contact 100 tax practices in 2013/14 accordingly;
  • improving lodgement performance and achieving the 85% on time lodgement benchmark; and
  • information security, including agents seeking proof of their clients identity and properly questioning their affairs to avoid the lodgement of fraudulent tax returns.