The ATO has small businesses, trusts, wealthy individuals and self-managed superannuation funds (SMSFs) firmly in its sights this year as it outlined which high-risk businesses and individuals it will focus on in its 2013-14 compliance crackdown. Below are the key scrutiny areas you should know about.
Payment of superannuation guarantee
Given the recent increase in the superannuation guarantee (SG) rate from 9% to 9.25%, the ATO will monitor employers to ensure they are paying their employees the correct superannuation amounts. Under the new director penalty regime (consult this office for more information), directors of employer companies may be held personally liable for their company’s unpaid SG debt. As a result of employee complaints in the following industries, the ATO will contact around 12,000 employers in:
- cafes and restaurants
- carpentry services, and
- real estate services.
CGT non-disclosure and under-reporting
The ATO is on the lookout for businesses engaged in complex restructuring in attempts to disguise asset sales or manipulate asset valuations to artificially reduce their CGT liabilities, and will conduct a number of audits and reviews to clamp down on these businesses.
“Some businesses attempt to reclassify revenue and capital items so they can inappropriately access concessional tax treatments. Others simply fail to disclose capital gains tax events or they claim the small business concessions when they are not eligible.”
Failure to identify and report fringe benefits
The ATO’s recent compliance activity on car fringe benefits revealed that in many cases where there was a fringe benefits tax (FBT) adjustment, employers had simply failed to recognise and report their FBT obligations. The ATO will increase its efforts to identify employers that may have an FBT obligation but are not in the FBT system.
Goods and services tax (GST)
GST is always on the forefront of ATO compliance activities, but this year it will focus on businesses in the mining, wholesale trade, manufacturing, financial and insurance services, government and retail trade in particular.
The ATO will also continue to monitor and investigate taxpayers that incorrectly report GST when they acquire, use, develop, sell or transfer real property – using external data to match property transactions with business activity statements (BAS) to identify under-reporting of sales.
Fraudulent phoenix activity in real property
The ATO has identified more than 2,000 property developers who have placed companies into liquidation to avoid financial obligations such as PAYG withholding, income tax, GST and super liabilities, and will demand lodgment from these developers, enforce payment and apply penalties.
Research and development (R&D)
A business’s records must clearly demonstrate the necessary direct link between registered R&D activities and expenditure being claimed for the purposes of the R&D Tax Incentive (consult this office to find out more). Where the expenditure is between associates, the ATO will look to ensure that the amounts have been paid and that any mark-ups between connected or affiliated entities have been excluded. Further, the ATO will work closely with AusIndustry to ensure that the new definition of R&D activities is being appropriately applied.
Taxable payments reporting in the building and construction industry
From July 1, 2012, businesses in the building and construction industry must report the total payments they make to each contractor for building and construction services each year. The ATO will address identified compliance problems including:
- non-lodgment of tax returns
- omission of contract income by contractors in their tax returns, and
- non-compliance with GST obligations.
Small businesses in the cash economy
Using increasingly sophisticated risk models, industry comparisons, data matching, community information and new audit approaches, the ATO will identify businesses that under-report income tax or GST and unfairly compete with honest businesses.
Private company schemes
The ATO will continue to focus on tax avoidance schemes that attempt to extract profits from privately-owned businesses in ways that reduce or eliminate the original shareholder’s tax liability, including:
- the creation of new share classes to stream dividends to associated entities with lower tax rates or accumulated losses, and
- claiming inflated deductions to reduce reported profits so that funds can be transferred to shareholders or associates without triggering the deemed dividend rules.
Employers that misreport PAYG withholding
The ATO will also pay attention to those who may not be meeting their PAYG obligations by using intelligence gathering and information matching as well as conducting reviews and audits when it detects discrepancies that indicate employers are not withholding and reporting correctly.
Australian Business Register (ABR)
The ATO will contact over 600,000 Australian business number (ABN) holders asking them to check that their business details are up-to-date on the register. Further, the ATO will data match to identify businesses that are no longer trading and cancel their ABNs, as well as focus on registrants that it believes are not entitled to ABNs, particularly where the ATO considers they are employees rather than contractors.
This year, the ATO will increase the number of default assessments issued to businesses that persistently fail to lodge activity statements. Using data matching, the ATO is able to identify whether a business has income or is trading, and then use this information to estimate tax owed. Default assessments are issued with penalties of up to 75% of the tax liability – a clear incentive for taxpayers to lodge before the ATO gets to them.
Misuse of trusts, including omitted income
The growth in trusts has resulted in an increasingly prevalent scheme where trustees artificially reduce trust income in an attempt to direct tax liabilities to certain beneficiaries, who have little or no capacity to pay the debt while actually using the income for their own benefit. The ATO has introduced new labels in the trust return to help it identify such schemes.
In cases where a refund is unusual or there appears to be some suspicious activity, the ATO will contact the business to understand the nature of the enterprise and what gave rise to the refund. The ATO will identify around 2% of refunds for review.
Self-managed superannuation funds (SMSFs)
The ATO monitors the registration of SMSFs using information on the ABR. If an SMSF is in its first year of operation and the ATO considers it highly likely that the fund will not operate correctly, the ATO will remove its lodgment concession – meaning the fund must lodge by October 31. The ATO will not issue a notice of compliance until after the fund has lodged its first annual return and the ATO is satisfied that the fund is doing the right thing.
When it comes to established SMSFs, the ATO will focus on:
- whether the fund has been established as a genuine super fund
- lodgment obligations
- the use of prohibited loans
- related party transactions
- funds with a history of non-compliance, and
- incorrect reporting of exempt current pension income, tax losses and non-arm’s length transactions.
Wealthy individuals using complex business structures
On the same note, wealthy individuals were found to use strategies to avoid their tax obligations – such as failing to report all income (including dividends, capital gains, and income from foreign sources). As a result, the ATO is set to contact wealthy taxpayers where the distinction between business and personal income and expenses are blurred, asking them to explain situations in which their wealth appears inconsistent with reported tax and economic performance.
Incorrect claims for work-related expenses
This year, the ATO will pay particular attention to:
- building and construction labourers, construction supervisors and project managers
- sales and marketing managers, and
- high work-related travel expenses across individual income tax returns.
Individuals who fail to declare income or claim deductions and benefits incorrectly
Apart from identifying discrepancies – such as when individuals do not report some or all of their income – the ATO is set to further expand its information-matching program and check the correct reporting of:
- private health insurance rebate claims
- flood levy exemptions
- taxable government grants and payments, and
- certain payments to contractors in the building and construction industry.
The ATO will continue to provide advice to new rental property owners as well.
Tax planning schemes
Domestic promoters and participants in illegal tax planning schemes that promise high investment returns and significant deductions to self-funded retirees are in the spotlight as well.
Consult this office on what you can do to avoid the ATO’s compliance spotlight.