ATO Target Areas 2011-12

From our September 2011 issue

On 1 July 2011, the ATO released its compliance program for the 2011/12 income year.

Each year, the Commissioner sets out in the compliance program the ATO’s views on the most significant tax compliance risk areas for individuals, small to medium enterprises, high net worth individuals, large businesses and the not-for-profit sector.

An overview of the areas that are likely to affect your business is set out below for your information. Notably, these are the ATO’s areas of focus only. Falling into one of these areas does not mean you have done anything wrong, or will be required to pay additional taxes.

However, at the ATO’s discretion, one or more of the items on your tax return may be queried and you may be required to substantiate one or more claims on your income tax return.

If you receive any documentation from the ATO in relation to a risk review or audit, you should contact your tax adviser to discuss.

This year, the ATO will be focusing on a range of areas in relation to individuals and small to medium enterprises, including the following:

Employees vs contractors

The ATO will be checking to make sure employees and contractors have been correctly classified as such, from an employer as well as service provider/employee perspective. The ATO is of the view that persons inappropriately classified as contractors may be under-reporting income, but may also be missing out on entitlements such as superannuation, leave and workers compensation.

Specific industries being watched by the ATO include:

  •  Building and construction
  •  Call centres
  •  Cleaning
  •  Security
  •  Logistics
  •  Retail
  •  Tourism and hospitality
  •  Education
  •  Aged care
  •  Health
  •  Telecommunications.

 
The ATO is also concentrating on the following industries to make sure employers are fulfilling their superannuation guarantee surcharge obligations:

  • Cafes and restaurants
  •  Real estate
  •  Carpentry
  •  Computers system design
  •  Accommodation
  •  Accounting.

 

Personal services income

Income earned primarily through the provision of personal services or exertion is taxed in the hands of that person regardless of the entity that derives the income, pursuant to specific personal services income rules.

The ATO is watching for taxpayers who ignore these rules and report such income in the hands of a company, trust or another person where the personal services rules would apply to tax the income in the hands of the primary service provider.

Government payments

Where your business has received payments from the government through the income year (for example, insulation installers who have received payments from the Department of Climate Change and Energy Efficiency), these payments may have resulted in tax consequences. The ATO is using data-matching techniques to ensure that such taxpayers have correctly treated such payments.

Make sure you tell your tax adviser about these payments in the context of the preparation of the income tax return for the entity that received the payment.

Cash economy

The ATO is again watching taxpayers that participate in the cash economy to make sure they are reporting all of their income.

There is nothing at all wrong with operating in an environment of predominantly cash sales. In fact, in some industries this may be the main way in which payment for goods or services occurs. However, you should keep appropriate records of such transactions and report all of your income on your tax return.

In this regard, the ATO is targeting both businesses suspected of under-reporting income, as well as businesses that maintain inadequate records. Specific industries bring targeted are:

  •  Plastering
  •  Coffee shops.

 

Internet trading

The ATO has noticed that businesses trading over the internet are more likely to under-report their income. As with trading in the cash economy, there is nothing at all wrong with selling on the internet, but takings from any sales you make must be reported as income if you are carrying on a business.

If you sell over the internet and are not sure if it is merely a hobby or what constitutes a business, your tax adviser can help you sort through the issues and make a determination.

Work-related expenses

The ATO continues to focus on claims for work-related expenses (which continue to climb) and will be especially focusing on workers in the following industries in the coming year:

  •  Real estate employees
  •  Carpenters and joiners
  •  Earthmoving plant operators
  •  Flight attendants.

 

Overseas income

The ATO continues to use data-mining techniques to make sure taxpayers are reporting all of their overseas income.

Remember – Australian tax residents are taxed on their worldwide income, ie income derived from all sources. Where tax has been paid in a foreign jurisdiction, you will likely get a rebate or offset so that you may not only be required to pay top-up tax in relation to your overseas income, but you still need to report it!

Pre-filling

It is essential that all taxpayers – businesses and individuals – double check information that is pre-filled into their tax return. Australians are increasingly reliant on pre-filled information to complete their income tax returns, but the ATO is reminding taxpayers that this information may not be absolutely correct in all instances and should be checked against primary sources prior to lodgment.

Split loans

Split loans (for example, where one loan is used for two or more purposes, especially where at least one purpose is business-related, and at least one is personal) are again under the microscope. If you have such a loan, make sure costs in relation to the loan are apportioned correctly. If you are unsure, speak to your tax adviser.

Refund fraud

The ATO has gone to a lot of effort to build fraud detection tools into their data-checking systems, but it is still important to be wary of potentially fraudulent transactions in relation to your tax file number.

If you receive any correspondence from the ATO that relates, for example, to a return that you haven’t lodged, make sure you contact your tax adviser or the ATO as soon as possible.

Wealthy Individuals

Executives, directors and other highly paid individuals will have their tax affairs watched more closely by the ATO, with a specific focus on:

  •  Large deductions
  •  Incorrect calculations of net capital gains or losses
  •  Deductions for contributions to SMSFs
  •  Large revenue loss claims
  •  Appropriate disclosure of partnership or trust income
  •  Personal services income
  •  Loans with related entities
  •  Employee share schemes.

 

Division 7A

The ATO has noted that compliance with Div 7A continues to be a concern in the small to medium enterprise market.

Broadly, the ATO is looking at circumstances in which loans or payments have been made by private companies to shareholders (or an associate of), or where shareholders (or an associate of) have either used or had available for use the assets of the private company at less than market value during the income year.

Any such transactions may have resulted in deemed dividends which are required to be included in the shareholder’s income tax return. Top-up tax may also need to be paid.

Remember that, in this circumstance, an unpaid present entitlement under a trust in favour of a private company may constitute a “loan”, and if the trust is an associate of a shareholder, this loan may result in a deemed dividend.

If you are unsure of how to apply these rules, make sure you speak to your tax adviser. Getting it wrong could result in serious consequences.

Fringe benefits tax

The ATO is focusing on checking that fringe benefits are correctly identified and reported by employers, that the relevant documentation and declarations are obtained from employees, and that the correct fringe benefits tax is paid in respect of these benefits.

Small business benchmarks

You’ve probably heard a bit in the last year or two about the small business benchmarks. These “benchmarks” are broadly parameters within which other businesses in the same industry are operating.

The ATO uses these benchmarks to determine which businesses may be operating in the cash economy. If you fall outside the benchmarks, you may be asked to substantiate certain transactions. The ATO has the power to issue default assessments on the basis of the benchmarks where you are not able to substantiate the details on your income tax return.

If you need assistance in formulating a system by which to record the transactions you engage in to make sure that you have sufficient records if questioned by the ATO, you should approach your tax adviser for assistance.

This information is for guidance only and is not intended as specific advice to any reader. Professional advice should be obtained before acting on any information contained herein. The publisher accepts no responsibility for loss occasioned to any person or organisation as a result of action or the refrain of action as a consequence of the contents of this publication.