Compliance program 2011-12
Compliance program 2011-12
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Our compliance program is part of our holistic approach to encouraging, supporting, protecting and championing the interest of honest taxpayers and advisers, and of continually improving our processes and capabilities for doing that.
The professional administration of Australia's taxation and superannuation systems is something we strive for and the community expects.
These systems are community assets and our role is to support and protect those willing to properly fulfil their civic and legal responsibilities and to be fair but firm with those who do not do so.
We foster an environment that encourages willing participation and ensures those who do participate appropriately are not disadvantaged. We do this by making good use of the information available to us and by seeking innovative ways of doing business through technology.
By providing assistance and guidance to taxpayers and their advisers and using preventative strategies we make compliance with the law as easy and inexpensive as possible.
We encourage people to come and talk to us upfront so that we can provide certainty, or come and talk to us if they think they have a problem - as we may be able to help out.
If people seek to disadvantage others and the community, they may face serious consequences. It's not worth the risk.
The approach we take in our compliance program is consistent with our compliance model. The model directs us to differentiate between the different attitudes of taxpayers and their advisers as we address risks to the fair operation of Australia's taxation and superannuation systems.
Our compliance program highlights the compliance issues attracting our attention and what we are doing to address them. In doing so it reflects our corporate value of openness and accountability. It also seeks feedback from the community on the risk-management choices we make.
Michael D'Ascenzo
Commissioner of Taxation
We believe that the taxation and superannuation systems are community assets and that we all have a role to play in their protection.
To help protect these systems we deter and detect non-compliance.
The compliance program highlights the issues attracting our attention, how we will monitor and treat them and the consequences for those unwilling to participate.
Importantly, the program raises community awareness by helping people understand their rightful entitlements and to recognise behaviours that pose risks to them.
We outline our risk management approaches that are based on our considered view of taxpayers' compliance history and relationship with us.
This year we have included three feature articles:
- promoting a level playing field for Australian business
- what is Project Wickenby
- good governance and promoter penalty laws.
The snapshot of our 2010-11 compliance activities is provided as an appendix.
We have a professional and capable workforce that supports the community to build on Australia's strong culture of willing and proper participation. This helps us provide a world-class taxation and superannuation administration for the benefit of all Australians.
Bruce Quigley
Second Commissioner, Compliance
Our compliance program identifies what is attracting our attention, what we see as risks and what remedies we will adopt. It focuses on all aspects of the taxation and superannuation systems including how we work with tax practitioners.
While the program explains how we plan to respond to the major risks we have identified it does not attempt to cover every aspect of our compliance work.
We encourage taxpayers and businesses to comply willingly with their taxation and superannuation obligations. Our compliance strategies vary depending upon a taxpayer's circumstances and the information they provide.
We want to make it as easy as possible for taxpayers to do the right thing by providing help and education, record-keeping advice and lodgment assistance.
We assist those in our community who are new to the tax system, or to Australia, to understand their obligations. Providing information in other languages, our portals, e-tax, use of SMS, online tools and Tax Help are just some of the ways we make it easy for taxpayers to comply.
Through pre-filling we provide upfront access to the information held in our systems for those who choose to deal with us electronically. This allows taxpayers and tax practitioners to address any discrepancies in the data before lodging and helps reduce post-lodgment compliance activity.
Data matching makes a major contribution to our compliance efforts as we continue to examine new sources of data and programs.
We cooperate and share information with a range of bodies including state and Australian Government law enforcement agencies, other government departments and agencies and increasingly with overseas tax administrations.
Sometimes people will need our assistance in the form of a reminder or visit to help get things going correctly. Where necessary, we step up our actions, which may include reminder letters, record-keeping visits and phone calls to arrange debt repayments.
We clarify the law and communicate our views through public and private rulings, checklists, fact sheets, practice statements, taxpayer alerts and strategic litigation. We also consult with industry bodies on issues of concern to them.
Furthermore, the certainty provided through the private ruling system is an important factor and depends on taxpayers making full and true disclosure of the relevant facts.
As part of our risk management approach, we may follow up from time-to-time on taxpayer implementation of private rulings to ensure the integrity of the rulings system is maintained and continues to deliver the certainty expected by taxpayers.
Detecting non-compliance deters others. Where a taxpayer chooses not to comply, we introduce more intense strategies. These may include compliance reviews and audits, final notices, penalties and legal action.
We continue to provide guidance and support through a range of dedicated products developed especially for different practitioners.
The model reflects the different taxpayer attitudes towards compliance and the corresponding strategy that best responds to each particular attitude. With the right responses and interventions we can positively influence taxpayer behaviour.
Our aim is to influence as many taxpayers as possible to move down the pyramid into the 'willing to do the right thing' zone.
We take a risk-management approach to compliance and are increasing our efforts to differentiate our engagement with taxpayers based on our view of their relative likelihood of non-compliance and the consequences of their behaviour.
We will verify compliance via risk reviews and audits where we believe the likelihood of non-compliance is higher and we will also seek assurance that compliance is occurring where the consequences are relatively high.
We have a strong focus on deterring, detecting and dealing with non-compliance to ensure that those meeting their civil and legal responsibilities are not disadvantaged.
The economy continues to feel the impacts of the global financial crisis, recent floods and other natural disasters. This environment presents a number of challenges as we balance the support we give to people in these circumstances and the actions we take against those unwilling to comply with their taxation and superannuation obligations.
We are committed to supporting viable businesses experiencing short-term financial difficulties. We take the individual circumstances of each taxpayer into account when considering the level of support and assistance we can provide.
Our support for taxpayers, tax agents and superannuants extends across a range of high quality products and services.
We know tax practitioners play an important role in supporting the integrity of our taxation and superannuation systems. We are dedicating significant resources to managing our relationship with them, by providing specifically designed services and products to meet their needs.
We are focused on improving online services for approved auditors of self-managed superannuation funds.
When many in the business community are under pressure it is important that the system is seen as fair and equitable. We are taking firm action where businesses are not viable or unwilling to engage. These businesses have an unfair advantage by not complying with their taxation and superannuation obligations.
We use data-matching and risk-profiling techniques to identify entities that appear to be using non-lodgment, or partial lodgment, as a means of circumventing our compliance efforts.
Our work on Project Wickenby contributes to protecting the integrity of Australia's financial and regulatory systems by preventing promotion of, and participation in, abusive secrecy haven schemes.
Our collaboration with the Organisation for Economic Co-operation and Development (OECD) is increasing global transparency and providing significantly more exchanges of information. We are continuing our partnerships with international revenue authorities and domestic law enforcement bodies.
We work with Treasury and continue to consult, collaborate and co-design with taxpayers and our consultative forums to address those issues of uncertainty and contention in the law.
We welcome the community's cooperation in identifying tax avoidance arrangements, including employers where they are not meeting their obligations and abusive practices and schemes involving promoters and participants.
Our compliance program identifies matters of concern to us and highlights what we intend to do so that taxpayers can make informed choices.
This year we will:
- enhance our tax fraud detection and management
- concentrate on sham contracting arrangements where individuals are incorrectly set up as contractors, instead of as employees of a business
- deliver our GST commitments to the states and territories
- reduce phoenix arrangements through a coordinated program of reviews and audits of directors
- focus on those who fail to report some or all cash transactions to ensure a level playing field
- protect employee rights by ensuring employers are paying the correct amount of superannuation guarantee
- use data matching and risk profiling to identify those who are using non-lodgment or partial lodgment to circumvent their responsibilities
- identify businesses who have received government payments and review those suspected of not correctly reporting income or not meeting their pay as you go withholding and superannuation obligations
- examine businesses operating outside our small business benchmarks
- extend our focus on lodgment compliance within private groups, including wealthy Australians
- continue to deal with the abusive use of tax secrecy havens including Project Wickenby
- strengthen our involvement in multi-agency task forces that target the tax implications of organised crime
- consider tax exploitation schemes and apply promoter penalty legislation
- implement strategies to deal with concerns we have with trustees of self-managed superannuation funds
- regulate self-managed superannuation funds and act against the illegal access or release of superannuation
- engage our very largest taxpayers in cooperative compliance approaches
- examine large business corporate governance processes for managing income and indirect tax risks
- develop strategies to optimise the role of the Tax Practitioners Board, including the referral of tax practitioners who breach their responsibilities
- develop a framework to tailor information, products and services for registered agents that enable us to differentiate and target our approaches
- focus on tax returns or activity statements lodged by unregistered preparers.
Each year around 12.4 million individuals lodge income tax returns.
For most individuals, lodging an annual income tax return is their major - and sometimes only - interaction with us.
We provide targeted and meaningful information to the community through a variety of programs. These range from assisting people new to the taxation and superannuation systems to being on the ground helping people affected by natural disasters.
As most Australians willingly meet their obligations, we are protecting the taxation and superannuation systems by deterring, detecting and dealing with those who do not.
Each year around 634,000 people register for a tax file number, taking their first step into the taxation and superannuation systems. These people, along with others in the community, may need extra support to understand their obligations.
We are continuing our work to include taxation and superannuation concepts in all levels of the education system. We are also building an online, interactive curriculum resource to help teachers educate youth and prepare them for the workforce.
From our field work we have gathered evidence of sham arrangements, where individuals are incorrectly set up as contractors instead of as employees of businesses. As a result these individuals may not report all of their income; they may access welfare benefits unfairly, avoid paying their fair share of tax and not fulfil other obligations. They may also miss out on entitlements, such as superannuation, leave and workers compensation.
People can advise us if their employers have not been making superannuation guarantee contributions on their behalf. We investigate all of these complaints. For example, last year we received over 16,300 employee complaints.
We will audit businesses to ensure they are meeting their obligations as employers (see Micro enterprises).
Deductions for work-related expenses have increased by around 16% since 2007 and are one of the largest categories of claims made in tax returns. Advisory letters are being issued to help people understand their tax obligations and correctly claim expenses.
We also have a number of guides for specific occupations. This year we will closely examine claims for deductions made by:
- real estate employees
- carpenters and joiners
- earthmoving plant operators
- flight attendants.
We selected these occupations because of the number of employees and the relatively high amount of work-related expenses being claimed in previous years compared with other similar occupations.
One example we find is that claims for travel deductions by flight attendants are not always correct. Where an amount for travel expenses is included in the salary package of a flight attendant then these payments are not considered to be a bona fide travel allowance, so any deductions for travel expenses need to be fully substantiated.
We will also visit tax agents with clients in these occupations.
The most common mistakes for many occupations include:
- insufficient documentation to support motor vehicle and travel expenses
- incorrectly claiming home office, mobile phone and internet expenses.
People with overseas income need to be aware of their Australian tax responsibilities. This includes reporting in their tax returns money received as pensions, rent, and interest from bank accounts, dividends and other business income from Australia and overseas.
We work closely with AUSTRAC, banks and other overseas tax jurisdictions to improve our ability to trace fund flows around the world and identify Australians with income and assets hidden offshore.
Last year we contacted over 10,000 taxpayers where we identified a potential discrepancy - and adjusted returns in over 90% of cases. We intend to contact a similar number this year.
Taxpayers can make voluntary disclosures of undeclared foreign income, profit from offshore assets or over-claimed deductions. When taxpayers make a voluntary disclosure any penalty is reduced.
Over the last four years, people have made over 7,600 voluntary disclosures and we have conducted a further 2,600 audits. We are increasing our audit activities in cases where businesses may try to conceal income and assets offshore.
To obtain more complete information about offshore income and assets, we have increased our use of exchange-of-information provisions in Australia's existing double tax agreements and in newly-signed tax information exchange agreements.
Our pre-filling service helps individuals and tax practitioners get tax returns right by partially completing tax returns with information we already have. Individuals still need to check and, if necessary, correct the pre-filled details and add any missing information. Pre-filling continues to have a very good take-up by the 91% of individuals lodging via a tax agent or e-tax. In 2010-11, the pre-filling service was accessed 2.4 million times by the 2.5 million individuals lodging through e-tax.
Given this strong reliance by taxpayers, we are continually seeking to improve the information available for pre-filling. For example, share disposals and employee share scheme data will be available for pre-filling in 2011 tax returns.
We will alert people who have received Australian Government Disaster Recovery payments that they may be eligible to claim exemption from the Temporary Flood and Cyclone Reconstruction Levy.
Each year we cross reference information reported in tax returns against at least 500 million transactions reported by other parties. Information that we match includes:
- employment, welfare and investment income
- property and share dividends and disposals
- employee share schemes
- foreign transactions and international funds transfers
- superannuation information
- health insurance policies, including the level of cover held by an individual.
We will contact over 400,000 taxpayers who have apparent discrepancies in the information they reported. Where necessary we will amend their returns.
Where people have not lodged, we will issue assessments based on information we currently hold. We will impose penalties as appropriate.
Our matching program also extends to superannuation obligations. We will match information provided by superannuation funds, including member contribution statements, lost member reports, auditor contravention reports and self-managed superannuation fund annual returns. We will ensure the law is followed when individuals claim income tax deductions for personal contributions to superannuation funds. The information will also help us to manage contribution caps and calculate co-contributions.
Some individuals, organised groups of people and unregistered tax return preparers are making false claims to receive a refund. These claims may arise for a number of reasons, but for others it may include the use of a false identity or theft of tax file numbers and personal details.
Claims outside normal occupation, individual or industry ranges may result in us thoroughly reviewing all aspects of the person's tax affairs before we issue a refund. Last year we checked around 29,000 refunds and found more than 20,000 were incorrect or fraudulent.
We expect to review over 30,000 refunds and will remove any incorrect or fraudulent claims before we issue refunds.
We will be monitoring products currently being marketed or utilised that are claimed to allow those with both business and personal loans to use their business income to pay off their personal loan. We will be issuing guidance in the form of a tax determination during the year and then following up with both the marketers and participants in these arrangements to make sure their arrangements are allowable.
Tax returns or activity statements lodged by unregistered preparers are a concern. Last year we referred 17 unregistered preparers to the Tax Practitioners Board for investigation. These are part of 175 groups of 50 or more people we identified as having their tax returns lodged via a single source through e-tax.
People can advise us if their employer has not been making superannuation guarantee contributions on their behalf. We investigate all of these complaints. Last year we received over 16,300 employee complaints and expect this year to investigate approximately 17,000 employee complaints.
The establishment and operation of illegal early-release schemes, even on a small scale, undermines confidence in Australia's superannuation system.
There are strict rules, with limited exceptions, for preserving superannuation savings until retirement. Schemes offering early access to superannuation, often targeting particular groups within the community, are illegal and attract significant penalties for promoters and individuals.
As illegal early-release schemes are identified we will warn the community about them through media releases, alerts and other communication activities. We have put in place processes that stop registrations of suspect self-managed superannuation funds and tools that allow larger funds to check on the membership of self-managed superannuation funds, before rolling over funds, thereby decreasing the opportunity for illegal early-release. We will also audit both promoters and participants of schemes. Last year we referred four cases for prosecution and will refer future cases where appropriate.
Superannuation contribution caps limit the amount of contributions qualifying for concessional tax treatment. We will review contributions to identify cases where the caps have been exceeded and deal with them appropriately.
We review the tax affairs of individuals with incomes over $1 million and in particular their use of closely-held entities, including charitable trusts and self-managed superannuation funds.
This year we will pay particular attention to:
- large deductions, including gifts and donations and the cost of managing tax affairs
- incorrect calculations of net capital gains and losses
- deductions for contributions to self-managed superannuation funds
- claims for large revenue losses
- non-disclosure of partnership and trust distributions
- alienation of personal services income
- non-commercial loans with related entities
- under-reporting of employment benefits including participation in employee share schemes.
Over the last four years we have reviewed the tax affairs of a high risk group of over 2,000 highly-paid people. During this time we corrected around 60% of tax returns as a result of audit or review. This included correcting higher deductions or loss claims where people were not entitled to them. Other areas of concern are the omission of income, especially from employee share schemes, and the use of tax-minimisation strategies.
This year we will also focus on a number of highly-paid professions, including those from medical practices and football codes.
Micro enterprises
There are around 2.8 million micro businesses and 422,000 self-managed superannuation funds in the micro enterprises market.
Micro enterprises have an annual turnover, or superannuation fund assets, of less than $2 million. They range from owner-operators to entities with significant numbers of employees. Many of these are sole traders or family businesses.
Registered tax agents and business activity statement (BAS) agents play a crucial role in this market with 93% of micro enterprises using them to lodge their returns and 50% to lodge their activity statements. Our support programs recognise the importance of these intermediaries and include flexible programs for lodgment of returns and statements.
About 20% of the Australian workforce was employed by micro enterprises last year. As employers they withhold and pay about $14 billion in pay as you go withholding on behalf of their employees.
Although the majority of employers do the right thing, some do not meet their obligations - and we follow up with field, phone and desk reviews. This year we expect to review the tax affairs of around 24,500 businesses to ensure they are reporting the correct amounts of pay as you go withholding.
Some employers may be incorrectly treating employees as contractors, pressuring them to get Australian business numbers, thereby reducing labour costs and gaining a competitive advantage over other businesses. Many of these arrangements are 'shams' as they aim to sidestep an employer's obligations to their workers, including pay as you go withholding, superannuation guarantee and a range of other workplace entitlements.
While prevalent in the building and construction industries, sham arrangements are spreading into industries with more traditional employee-employer relationships. We have identified cases in:
- call centres
- cleaning
- security
- logistics
- retail
- tourism and hospitality
- education
- aged care
- health
- telecommunications.
In our field visits with employers we use our online employee/contractor decision tool to differentiate between legitimate contracting and arrangements that seek to disguise the true relationship in order to blatantly abuse the tax system and to avoid employer responsibilities to workers.
The Temporary Flood and Cyclone Reconstruction Levy has been incorporated in the pay as you go withholding schedules to update the rates of withholding. A new flood levy exemption withholding declaration will cater for employees entitled to exemption. When we visit businesses to check compliance with their employer obligations, we will review their tax affairs to ensure employers are correctly applying the levy and exemptions.
We investigate all complaints about employers not meeting their superannuation guarantee obligations. Last year we followed up complaints on around 14,000 mainly micro employers. This year we expect to contact around 12,500 mainly micro employers regarding complaints about unpaid superannuation.
We will continue our pro-active activities regarding employer compliance with superannuation guarantee obligations. We will undertake an education and communication campaign aimed at promoting knowledge of superannuation guarantee obligations in several target industries:
- cafes and restaurants
- real estate services
- carpentry services.
These industries have been selected based on analysis of previous employee complaints.
We will review over 4,000 high risk employers where we find evidence of non-compliance with superannuation guarantee obligations, particularly in the industries where we have previously focused our communication activities, including:
- computers system design and related services
- accommodation
- accounting services.
Many contractors operate as sole traders or through companies, partnerships or trusts. In many cases, the income received for the work they do may be classified as personal services income. Income received for a particular contract is personal services income if the majority (more than 50%) of it is for the skills, knowledge, expertise or efforts of the person performing the services.
Individuals streaming their personal services income through another entity may incorrectly split their income with an associate, sometimes a spouse or child, in a much lower income tax bracket. These types of arrangements often mean people in the same work situation inappropriately pay different levels of tax.
We will continue our test-case program to clarify the law relating to personal services income. We will provide further information to contractors and tax practitioners to help them get the tax treatment right.
We will use information received from labour hire firms to identify contractors, particularly in engineering and computer technology industries. We may review or audit the tax affairs of these contractors where we see apparent anomalies.
We cross reference information reported in tax returns and activity statements against transactions reported by other parties including:
- payments received from government programs
- payments to contractors
- income from investments and partnerships and trusts distributions
- property and share ownership and disposals
- foreign transactions and international funds transfers.
In this way we are able to identify micro enterprises that have not lodged, have under-reported income and goods and services tax or over-claimed entitlements.
Some micro businesses are receiving payments from government agencies as the result of the Economic Stimulus Plan and other initiatives. To ensure that this income is correctly accounted for in tax returns and activity statements, we continue to collect and match payment details.
We have received information relating to payments made by the Department of Climate Change and Energy Efficiency to over 10,000 insulation installers. We also use our data-matching program to analyse payments made to businesses by state governments and building management groups under the Building the Education Revolution program.
We will identify businesses that have received government payments. We will review the tax affairs of businesses we suspect of not correctly reporting this income, or not meeting their pay as you go withholding and superannuation obligations.
Businesses are using a number of avenues to advertise their goods and services on the internet. These include individual websites, online newsletters/blogs, internet search engines, online marketplaces and social media platforms.
We will pay particular attention to those using the internet to conduct their business and we will take action, including information matching, where we find businesses trading over the internet and not reporting all their income. Last year a project found under reporting of income by businesses trading over the internet to be a significant issue.
For those involved in repair and reconstruction activities following the recent natural disasters, we are supporting business reconstruction. At the same time, we are addressing emerging tax and superannuation issues in communities affected by the disasters.
We support reconstruction efforts by ensuring government agencies and authorities, insurance companies, employers, contractors and employees have access to all relevant information to help meet their obligations.
Some businesses participating in the cash economy are not paying their fair share of tax. They continue to undermine Australia's taxation and superannuation systems. These businesses are becoming more visible to us as a result of increased and more sophisticated data-matching activities.
We are likely to detect businesses with inadequate records, or those failing to record all sale transactions, paying cash-in-hand wages or operating outside the system. Last year we continued to see poor record-keeping practices by some small business owners. Specifically, some businesses did not record all sales transactions, thereby leading to a higher risk of not reporting all cash income and their GST on sales.
A clear link exists between compliance with tax obligations and good record-keeping practices. Record keeping therefore continues to be an important focus of our compliance and help and education strategies. We will continue to visit businesses and work with tax practitioners and industry and professional associations to identify and share best practice in record keeping.
We will pay particular attention to the:
- plastering and
- coffee shop industries.
We will work closely with these industries and their associations to ensure we provide the assistance people in these industries need to help them meet their obligations. We will review the tax affairs of businesses that appear to be doing the wrong thing. Administrative penalties and prosecutions may result from these reviews.
Our small business benchmarks help businesses compare their performance against the rest of their industry. They are also used in our risk-assessment and audit-selection activities.
We have now benchmarked the key business ratios across 107 industries, covering 600,000 businesses. In the next 12 months we will publish benchmarks for a further 30 industries showing a high degree of cash economy activity. Our use of benchmarks shows that many businesses appear to be doing the right thing.
However, we have identified 46,000 businesses potentially under-reporting their cash income. A significant portion of these businesses are associated with a relatively small number of registered agents. We will be contacting tax agents with a high number of clients operating outside our small business benchmarks to identify any particular reasons for this.
Businesses outside industry benchmarks may need to review their record-keeping and business management practices.
We will always take into account the individual circumstances of each business we review, based on records maintained by that business. Where a business does not have records to show its income and expenses, we can use our benchmarks and other information available to us to assess the profits of the business. Default assessments may include an additional penalty of up to 75% of the tax liability. Businesses can also incur penalties for failing to either maintain correct records or to keep them for the statutory five years.
We will review or audit businesses where we identify:
- that the sale of shares and property has not been included in income tax returns and activity statements
- that claims have been incorrectly made for the small business capital gains tax concession
- the GST margin scheme rules may have been applied incorrectly
- outstanding tax returns and activity statements when we know a capital gains tax event has occurred.
We will also review property developers who claim activity statement refunds during the construction stage of a development, but fail to fully report sales for both income tax and GST as they complete the developments. This year we expect to undertake approximately 580 property-related GST audits and reviews, including consideration of prosecution in egregious cases.
Self-managed superannuation funds allow people to control their own super investments for their retirement. Each year there are about 30,000 new self-managed superannuation funds established. At 31 March 2011 there were over 445,000 funds in operation.
Trustees of self-managed superannuation funds are responsible for running their funds in accordance with the strict requirements for attracting concessional tax treatment. We will continue to support the vast majority of trustees seeking to do the right thing by providing guidance and support such as the SMSF News publication, both to trustees themselves and the intermediaries they rely on such as approved auditors.
We work with self-managed superannuation funds trying to fix problems that may occur. We also take firm action, including making funds non-complying, if they commit serious breaches of the rules.
Failure by a fund to lodge an annual report is a breach of tax and superannuation law. Where a self-managed superannuation fund has repeatedly not lodged a return we may issue assessments with penalties based on the information available to us. As these funds have not met their regulatory obligations we may also make the fund non-complying. This will result in the fund losing access to concessional tax treatment. Prosecutions may result where trustees fail to meet their fund's lodgment obligations.
This year, the focus of our compliance activity will be on:
- newly registered funds, to ensure they have not been established to provide illegal early release of superannuation funds to their members
- funds lodging their first annual return to ensure they are entitled to receive their 'notice of compliance'
- auditor contravention reports
- related-party investments, to ensure they are not contravening the prohibition of lending to members or the 5% in-house asset limit
- exempt current pension income and non-arms length income
- re-reporting of contributions and compliance with excess contributions tax release authorities.
Where appropriate, we will apply non tax shortfall penalties to cases where we identify incorrect fund reporting.
Around nine million business activity statements are lodged by micro enterprises each year. We analyse these statements to detect errors or possible fraudulent activity before we issue refunds. In some cases we may release the refund and seek verification at a later stage by phoning or visiting businesses and contacting third parties to substantiate claims.
We expect to verify over 47,000 refund claims during the year.
We will refer to the Tax Practitioners Board details of unregistered preparers and registered agents who have prepared fraudulent statements. Individuals who have perpetrated the fraud may be prosecuted.
We have received additional funding from government to increase our focus on preventing refund fraud, sham business operations and identity fraud. The more blatant fraudulent claims will be referred for prosecution.
Many businesses can access credits for the fuel used in business activities. We will review fuel tax credit claims that appear to be inflated or not legitimate. Those involved in preparing fraudulent statements may be prosecuted.
Wine producers finding it difficult to determine their liability and eligibility for the rebate can seek help through our assistance program.
Our reviews indicate that some wine producers have entered into uncommercial arrangements to gain access to the wine equalisation tax producer rebate. We also have concerns abut the potential diversion of wine exports to local consumption. We plan to conduct approximately 100 compliance activities on micro enterprises in relation to their wine equalisation tax obligations and activities associated with the reporting of wine exports.
Excise equivalent goods are imported alcohol (excluding wine products subject to wine equalisation tax), tobacco and petroleum products. We manage these, under delegation from Australian Customs and Border Protection Service, as part of the overall management of excise.
This year we will conduct around 20 compliance activities on micro enterprises in relation to excise equivalent goods.
Micro enterprise collectable tax and superannuation debt is currently over $9 billion, representing about two-thirds of outstanding collectable debt. We therefore place a strong focus on managing tax and superannuation debts in this segment.
We take a balanced and differentiated approach, based on a consideration of each business's individual circumstances. Where businesses face short-term difficulties but work with us to address their tax debts, we offer support. We balance this support with firmer action where businesses choose not to work with us, repeatedly default on agreed arrangements or do not have the capacity to pay. This ensures a level playing field for business.
When taking firmer action, we may use a range of available administrative and legal options, including garnishee notices, director penalty notices, claims, statutory demands and commencement of bankruptcy or wind-up proceedings.
If a business has a history of defaulting on payment arrangements or an escalating debt, we may ask for an upfront payment or request that payments are made by direct debit before agreeing to a payment arrangement.
Concerns we may have about the viability of a business will need to be addressed before we agree to a payment arrangement. When assessing a business's viability, we look at its ability to pay outstanding debts and to meet ongoing commitments.
We have a range of services to help viable businesses having difficulty paying their tax debts including:
- flexible payment arrangements aligned with cash flow
- remission of general interest charges where appropriate.
Businesses experiencing difficulty meeting their obligations should contact us early to discuss their situation and the assistance options available to them.
In our level-playing-field work, we have been targeting contracting arrangements. We visit businesses and review the way they engage their workers, paying particular attention to individual workers who may be common law employees but are being incorrectly treated as contractors. There are many circumstances where it is appropriate for a business to engage a contractor. But some businesses are deliberately engaging workers as contractors where the legal relationship is clearly employment. In these arrangements employers often require workers to obtain an Australian business number to make the arrangement look like a legitimate contract. Being able to quote an Australian business number does not make the worker a contractor.
Since commencing this work in 2009, we have completed approximately 2,0001 level-playing-field reviews and are concerned about the extent of 'sham' contracting we have detected. Up to 35% of businesses we visited were incorrectly treating employees as contractors. These arrangements have been long prevalent in the building and construction industry. But we are now finding these arrangements across many different sectors of the community, including cleaning, call centres, security, logistics, retail, tourism and hospitality, restaurants and cafés, education, aged care, health, transport, entertainment and telecommunications.
Under these 'sham' arrangements, employers sidestep their obligations to withhold from payments to their employees under pay as you go withholding and make superannuation contributions on their behalf. This gives them an unfair competitive advantage over complying employers' businesses. Employees miss out on their rights and entitlements such as leave, superannuation, workers compensation insurance and award wages and conditions. Some are happy to accept these arrangements to evade their own tax obligations and escape detection by other regulatory authorities including Centrelink and the Child Support Agency.
In our field reviews with employers we capture details of amounts paid to contractors (whether sham or legitimate) and use the Australian business number to match these with our records to check whether contractors are correctly reporting their contract income. Over 10% of invoices we have collected did not contain an Australian business number or contained an invalid number. We have been able to match income details of over 22,000 contractors. Of these, 31% of individual contractors appear not to have lodged a tax return and a further 20% have lodged but do not appear to have declared their contract income. We are following these up to ensure that they properly report their contract income.
We will continue with the level-playing-field work in 2011-12, to ensure that workers are properly engaged in the taxation, superannuation and welfare systems and correctly reporting their income, and that employers are meeting their obligations to their employees and not unfairly undercutting their competitors.
In the 2011-12 federal budget, the government announced a new tax compliance measure to require certain businesses to report annually to us on payments they make to contractors in the building and construction industry. The system aims to improve compliance with taxation obligations by providing us with payment information that will allow us to undertake industry-wide data matching and targeted audits of those who do not voluntarily report their income.
The introduction of a reporting regime will help to level the playing field within the building and construction industry, to the benefit of compliant contractors and businesses.
The new arrangements will apply from 2012-13. This year we will be consulting with industry representatives to inform the drafting of regulations to govern the details of the reporting arrangements. We will also work with software developers to provide the opportunity for the reporting provisions to be built into accounting packages. Before the commencement date, we will conduct an assistance and education campaign to help businesses understand the new arrangements.
There are over 175,000 businesses in Australia with an annual turnover of between $2 million and $250 million. We classify these businesses as small-to-medium enterprises.
Small-to-medium enterprises range from simple single entities, to businesses with highly complex group structures, many with offshore interests. This segment is notable for the diversity of its taxpayers in terms of structure, business size, activities and industry.
However, most of these enterprises share one characteristic - around 98% are privately-owned. The private nature of many small-to-medium enterprises can give rise to issues about transparency of decisions and actions of individuals in control that may influence the tax affairs of businesses they own.
Using sophisticated data mining techniques, we are now better able to detect relationships between grouped entities, including individuals, trusts, partnerships and beneficiaries. This capability allows us to better understand the compliance behaviours of private groups and track the funds flow through to the individuals in control.
Private groups, and the individuals who control them, can expect an increase in the level of scrutiny. Where we detect non-compliance, our treatments are differentiated to reflect the diversity of our population and the level of risk we identify.
The compliance approach in this segment is comprehensive and flexible. It is designed to treat basic non-compliance, such as omission of income and inappropriate access to small business concessions, through to complex tax arrangements often found among larger groups. We also focus on taxpayers with outstanding debts.
We recognise that smaller, privately-held businesses cannot access the same level of resources and expertise as larger businesses, although they often deal with equally complex tax issues. We therefore work with taxpayers and their advisers to co-design support products and services addressing specific needs of identified populations within this diverse segment. A key element of this work will be a refresh of our Wealthy and wise booklet. This booklet clarifies the compliance approaches we adopt for private groups in particular, highly wealthy individuals and wealthy Australians.
We are continuing our focus on highly wealthy individuals. We define a highly wealthy individual as an Australian resident who, together with associates, effectively controls $30 million or more in net wealth. At June 2011, we have identified and are monitoring the compliance of 2,660 highly wealthy individuals.
We are increasing our engagement with the tax practitioners and advisers managing the affairs of these people. We will work with key intermediaries to co-design products that help taxpayers achieve practical certainty and reduce ongoing compliance costs. These products may include annual compliance agreements and private binding rulings.
As we identify additional highly wealthy individuals, we will engage with them to help them understand our compliance approach and how we can support them in applying appropriate tax governance arrangements.
We manage our interventions according to our risk-differentiation framework. This enables us to apply an appropriate strategy, depending on the individual risk profile of taxpayers.
Common risks associated with highly wealthy individuals include:
- classification between revenue and capital account items
- capital gains tax not being returned
- Division 7A - access to company profits other than via dividends
- overseas interests and international dealings
- arrangements involving trusts.
These risks will be the subject of ongoing risk assessment and audit activity according to the strategies outlined in the risk-specific sections later in this chapter.
We will be contacting highly wealthy individuals where we identify outstanding lodgment obligations. We will also work closely with those who have been subject to compliance activity to clarify their payment obligations and support the collection of any outstanding debt.
Last year, we raised over $800 million in income tax adjustments from highly wealthy individuals, although much of that remains in dispute.
This year we will complete more than 380 risk assessments and reviews and 60 audits of these highly wealthy individuals.
Having developed our approach to private groups through our ongoing focus on highly wealthy individuals, we have been funded by government to expand this compliance approach to a broader group of wealthy Australians.
Over the last two years, we have been progressively applying this approach to individuals controlling a net wealth of between $5 million and $30 million. Currently, this population consists of more than 82,000 private groups. This reflects the diversity of the broader small-to-medium enterprise population. Having applied our risk-differentiation framework, we find most wealthy Australians meet their basic taxation obligations. Where we do identify risks, they generally reflect those we found among highly wealthy individuals.
Our interactions are driven by the nature and complexity of the risks involved. Where appropriate, we will contact taxpayers or issue pre-lodgment advice letters to resolve relatively straightforward issues. We will use this strategy to verify instances where income from dividends and interest is not disclosed. We will also pursue outstanding tax returns and associated schedules. We expect to contact over 2,000 wealthy Australians to resolve these issues.
Where we detect complex tax planning arrangements relating to capital gains tax, Division 7A, international and trust risks, we will move to more intensive interaction - such as review or audit. In 2011-12, we will complete at least 400 risk assessments and reviews and 55 audits of high risk wealthy Australians.
This is the final year of the four year budget-funded program to expand our risk assessment of businesses with turnovers between $100 million and $250 million. In the program's first three years, we have completed over 1,000 risk assessments, 270 reviews and 30 audits. This work has generated over $245 million in liabilities, with an additional $53 million liabilities raised from associated lodgment enforcement activities.
Our risk assessments find risks relating to international transactions, capital gains tax, trusts and tax-reconciliation items.
This year, we will:
- finalise our four-year program of risk assessments
- complete 400 risk assessments and reviews and 40 audits
- engage taxpayers and/or practitioners where we identify continued poor tax performance
- share our key findings and trends we identify with tax practitioners and key advisers servicing this segment.
Small-to-medium enterprises employ 28% of the Australian workforce and withhold and pay over $31 billion in pay as you go withholding obligations on behalf of their employees. They also make superannuation guarantee contributions on behalf of their employees. Where they provide taxable fringe benefits they may also have fringe benefits tax obligations.
Although the majority of employers do the right thing, some do not meet their obligations. In these cases we follow up with field, phone and desk reviews. This year, we expect to review the tax affairs of over 3,400 small-to-medium businesses to ensure they are reporting the correct amounts of pay as you go withholding. We will also review contracting arrangements to ensure employers are not engaging in sham contracting that sidestep obligations to their workers.
We will continue our focus on ensuring employers meet their superannuation guarantee obligations. This year, as part of our broader superannuation guarantee compliance strategy, we will ensure compliance reviews include small-to-medium enterprises showing a pattern of non-compliance. We will also investigate all employee complaints about employers not complying with their superannuation guarantee obligations.
We will continue to focus on lodgment compliance within private groups, including wealthy Australians and highly wealthy individuals. We will use data matching and risk profiling to identify companies, superannuation funds, trusts, partnerships and controlling individuals that appear to be using non-lodgment or partial lodgment as a means of circumventing our compliance programs. We will be contacting higher risk taxpayers and where appropriate refer for prosecution those who have not complied.
This work will focus on:
- using external data matching, such as AUSTRAC and property and share databases, to identify entities conducting significant business transactions
- industries and sectors with higher rates of non-lodgment and late lodgment, such as property, building and construction, mining and financial and insurance services.
We will continue to support the community in understanding the trust taxation provisions (currently subject to legislative change) while at the same time protecting the integrity of the tax system. We will publish fact sheets, public rulings and other products to clarify new and existing law.
A number of basic reporting requirements relating to trusts will not be affected by the law change. The trust taxation regime requires resolutions to be made in accordance with the trust deed by the end of the tax year. Distributions need to be properly recorded in trust accounts and trust returns need to be lodged on time. We will continue to monitor compliance with these requirements.
To better detect non-compliance, we are employing sophisticated relationship-mapping systems and increasing our use of external data sources. These strategies will be augmented by increased enforcement activities regarding lodgment and debt collection involving trusts (including cases where small advance payments of tax are made ahead of attempts to default on these obligations). Practitioners as well as trustees involved in manipulative practices will be subject to increased compliance focus through audits and reviews.
We will contact around 2,000 trustees and beneficiaries about a variety of issues including lodgment, correct return of trust distributions and the private use of trust assets. These activities will include the audit of a number of aggressive trust arrangements, including where we have identified non bona-fide beneficiaries. Criminal sanctions may also apply to the most egregious forms of trust-related tax schemes.
Phoenix activity is the evasion of tax and or superannuation guarantee liabilities through the deliberate, systematic and sometimes cyclic liquidation of related corporate trading entities. We continue to focus on reducing fraudulent phoenix activity through a coordinated program of reviews, audits and prosecutions. We anticipate enactment of new legislation this year. This will increase our ability to address this behaviour by making directors more accountable for the pay as you go withholding tax and superannuation debts of their companies.
In the 2011-12 federal budget, the government provided $22.1 million in extra funding over the next four years to help us address phoenix behaviour. In addition, 2010 legislation now allows the demand of payments of a 'security bond'. To date, we have issued 10 'security bonds'.
We will implement a number of new strategies to ensure we detect potential phoenix activity sooner and treat it appropriately. We have an integrated program of raising awareness, compliance and debt collection to address this risk. This will be augmented by the proposed changes to the director penalty regime. We will establish an ATO-wide phoenix database to support the ongoing and timely scrutiny of phoenix operators in their interactions with us, involving registration, lodgment, reporting and payment.
We will work closely with other government agencies to improve the exchange of information in relation to phoenix activity.
Currently, over 32% of small-to-medium enterprises are involved in international activities. Increasing globalisation raises a number of compliance issues, ranging from transfer pricing to simple errors.
We match data received under tax treaties, through automated exchange-of-information requests, and from AUSTRAC. We use this information to target our awareness-raising campaigns and select higher risk cases for review.
International profit shifting remains an area of concern. We will continue to promote our program of transfer-pricing advanced pricing arrangements. These arrangements allow businesses to obtain certainty and reduce ongoing costs. We offer 'simplified' arrangements where we will assist businesses with turnovers up to $250 million with arm's-length benchmarking analysis. We will undertake 25 reviews and 10 audits where we identify a significant risk of profit-shifting, particularly for companies with a history of profit performance consistently below industry averages.
We will be contacting over 600 taxpayers across a range of support and compliance campaigns focusing on:
- foreign source income derived by Australian residents
- international shipping companies operating in Australian waters
- non-resident withholding tax, with respect to payments of interest, dividends and royalties - with a specific focus on franchising and governance controls
- thin capitalisation, with respect to non lodgment of thin capitalisation schedules and reviewing calculations of safe-harbour limits
- the use of preferential tax regimes to evade income tax obligations.
Division 7A of Part III of the Income Tax Assessment Act 1936 (ITAA 1936) is an integrity measure aimed at preventing private companies from making tax-free distributions of profits to shareholders (or their associates). We are concerned that private company owners and some tax advisors do not fully understand their obligations regarding the correct treatment of company funds received by shareholders and associates other than by way of dividend.
We will issue around 350 pre-lodgment awareness letters to private companies and shareholders reminding them to put in place compliant loan agreements prior to lodging their tax returns. We will also contact private company owners through their tax representatives to verify compliance with their Division 7A obligations.
This year we are also focusing on the application of Division 7A to unpaid present entitlements. To help taxpayers meet their obligations, we will contact the owners or shareholders of private companies we have identified as having trust distributions in the past. We will advise private company owners about how the law applies, as explained in Practice Statement Law Administration 2010/4 and Tax Ruling 2010/3.
To help provide certainty regarding whether an unpaid present entitlement can satisfy the extended definition of loan for Division 7A purposes, we are working with the tax profession to identify a suitable case for test case funding.
We are increasing use of third-party data to match real property and share transactions. We will match third-party data from real property sales to our records as an integrity approach to identity instances of non-reporting. We except to extend this approach to the matching of share transactions using third-party share registry data. We will also match disposals by private groups to capture intra-group transfers and identify non-reporting of disposals by non-residents and corporate trustees not registered with us.
Where possible we will issue pre-lodgment letters, or contact taxpayers where we detect discrepancies. We will also use post-lodgment letters where we suspect taxpayers may have omitted or incorrectly reported their capital gains or losses. We will escalate high risk cases we identify for review or audit.
We will provide taxpayers and their practitioners with messages to help them manage their capital gains tax reporting obligations. We will use a range of communication products to raise awareness of new and emerging capital gains tax risks.
There are certain exemptions from capital gains tax for foreign residents, except when the asset is taxable Australian property. Taxable Australian property includes either real property situated in Australia, or a mining, quarrying or prospecting right in Australia. Disposals of shares in land-rich companies are also subject to taxation.
We are improving our ability to identify these transactions by monitoring merger and acquisition activity and through ongoing analysis of external data. Given the difficulty in collecting capital gains tax once the proceeds of any sale leaves Australia, we will need to act expeditiously.
We will continue to raise awareness of Division 855 by issuing taxpayer alerts, rulings and interpretative decisions clarifying the application of these provisions.
We are seeing compliance issues when small-to-medium enterprises report losses and offset losses against income or capital gains. These issues include:
- errors in the calculation of the loss amount reported in the tax return
- incorrect classification of the loss on either revenue or capital account
- limited awareness of the requirement to satisfy the continuity of ownership test and same-business test when using a carried forward loss against income or capital gains.
We will contact or send pre-lodgment awareness letters to taxpayers reporting losses for the first time. This will assist taxpayers and their agents with these issues. We will also contact taxpayers to verify higher risk loss claims through questionnaires. Where warranted, we will follow up with reviews and audits to address inappropriate or incorrect loss claims.
Professional firms play a significant role both as taxpayers and as intermediaries within the tax system. We have observed considerable restructuring among professional firms, particularly by accounting and legal practices.
We have commenced several reviews where we have noticed discretionary trusts being added or substituted as partners, and where the income of practitioners has dropped significantly post-restructure. We seek to understand the drivers of the restructure and whether the legal form of the new structure has been followed in practice. Where there is evidence that the legal form of the structure differs from that which has been entered into by the taxpayers, we will undertake a review to understand the commercial drivers of such restructures.
We regularly receive information from the states and territories, including data on motor vehicle registrations, boat registrations and real property.
Areas of concern that have carried over from last year's program include employers:
- failing to identify taxable fringe benefits
- failing to correctly value fringe benefits
- failing to lodge fringe benefits tax returns
- inappropriately accessing concessions and exemptions.
We will contact around 5,000 employers regarding these concerns as part of a broader employer obligations strategy. We have found some taxpayers mistakenly assuming their motor vehicle is exempt from fringe benefits tax without considering the private usage requirements of the vehicle. We will focus on this issue when contacting employers. We will contact employers who have stopped lodging fringe benefits tax returns to determine whether non-lodgment is appropriate.
We are seeing increasing use of exempt living-away-from-home allowances to remunerate employees. In many cases, these claims may be legitimate. However, we believe a growing population is using these exempt fringe benefits incorrectly to provide tax-free payments to their employees. Our data matching has also highlighted taxpayers who appear to be claiming excessive exempt amounts of fringe-benefits-tax exempt income. We will use reviews and audits to clarify these situations.
In the 2011-12 federal budget, the government announced reforms to the current 'statutory formula' method for determining the taxable value of car fringe benefits. The reforms will replace the current statutory rates with a single rate of 20% that applies regardless of the distance travelled. We will support employers in understanding and applying the new rate.
We are also increasing our level of engagement with employers, salary package advisors/promoters and tax practitioners to provide guidance and help them comply with fringe benefits tax obligations.
We are concerned that some taxpayers in the small-to-medium enterprise segment are not aware they may be subject to the TOFA rules. Alternatively, some smaller taxpayers may not have access to the resources or expertise to appropriately adopt these rules. We will continue our support and compliance activities to address these issues (See Large businesses).
This tax break has specific timelines and requirements for investment and acquisition that may give rise to a number of compliance risks. We intend to review over 60 claims.
We will encourage taxpayers to self review their GST obligations by providing a range of education and assistance products - such as our governance and risk-management guide, our property interactive tool and other checklists and fact sheets. We work with tax agents and BAS agents to build willing participation and compliance by taxpayers with their GST obligations.
We will use reviews and audits to ensure businesses comply where we detect non-compliance with their GST obligations.
Using third-party data and data-modelling techniques we continue to monitor GST refunds in the small-to-medium segment. We do this by undertaking pre- and post-issue verification checks to ensure the correct amounts are claimed, while seeking to minimise the impact on the cash flow of businesses.
We have received additional funding from government to increase our focus on preventing refund fraud sham business operations and identity fraud. The more blatant fraudulent claims will be referred for prosecution.
This year we expect to undertake over 12,000 audits and reviews of small-to-medium enterprises to ensure refund claims are correct.
Property transactions remain a high risk for compliance with GST. Some property transactions can be one off or unusual transactions not normally undertaken by a business. We will therefore monitor property transactions outside the traditional property industry sector.
A particular concern in the property sector is property developers claiming activity statement refunds during construction, but failing to fully report property sales, going into liquidation at that point.
To detect and deal with taxpayers not correctly reporting their GST on property transactions we will:
- improve our use of data-matching and analysis of property transactions and activity statements to inform businesses and their agents when we detect probable non-compliance - encouraging them to reassess the transactions and correct their reporting if appropriate
- continue our exchange of information and working with state and territory revenue offices to improve community compliance with property-related income tax, GST and state government obligations.
This year we expect to conduct around 1,200 audits and reviews relating to property transactions.
We will continue to work with the retirement village industry to address complex technical issues - making it easier for the industry to comply, particularly in relation to the apportionment of GST credits.
On 27 April 2011 we published GSTR 2011/1: Goods and services tax: development lease and disposal of a retirement village tenanted under a 'loan-lease' arrangement. This explains the GST implications relating to developing, leasing and selling tenanted new retirement villages; and the relevance of ingoing contributions (or 'interest free loans') received by the owner/operator. We will continue to work with the industry on understanding and applying our view.
Businesses with poor tax governance and risk-management frameworks present higher risks in terms of correctly reporting their GST liabilities. Ineffective systems can lead to significant under-reporting of GST.
To assist we will be developing a governance and risk-management guide on internal controls for businesses. Our fact sheet, GST and the integrity of your business system, outlines common errors and gives real-life examples.
This year our reviews and audits will focus on:
- retail
- construction
- financial and insurance services
- mining industries
- mergers and acquisitions.
We expect to undertake approximately 480 audits and reviews involving taxpayer contact.
We will work with taxpayers, industry groups and advisers to provide clarity and certainty, through rulings and information products, on:
- the correct characterisation of certain transactions - that is, whether they are input-taxed financial supplies
- determining the taxpayer's entitlement to input-taxed credits where the taxpayer makes both input-taxed and taxable and/or GST-free supplies.
We will develop an apportionment decision-making framework to assist both us and taxpayers apply a common approach to determining if an apportionment methodology is fair and reasonable.
We plan to undertake 30 audits and reviews in relation to the apportionment methodologies used by taxpayers.
Our GST guide - claiming input tax credits on acquisitions made in connection with a merger and acquisition activity provides advice on how to treat specific transactions through the various phases of the acquisition and merger process.
We continue to work with industry to clarify the law relating to international transactions, and to improve business understanding of the GST treatment of such transactions. Recent law changes regarding the domestic leg of international freight transport is an example of this approach.
Our focus will be broadened from incorrect classification of intangible/services to include various business models being used by exporters and importers of goods. In particular, we will be working with Australian Customs and Border Protection Services on the findings of their recent enhanced compliance campaign around the low-value threshold. Information received will be evaluated to determine if consignees regularly importing goods valued at less than $1,000 are required to register for GST, or if the suppliers of the goods to the consignee are making a taxable supply because the goods are delivered or made available within Australia.
We will undertake approximately 300 audits and reviews, in relation to taxpayers involved in serious and significant non-compliance with their GST obligations. This audit activity will also look at compliance with their income tax and other tax obligations. Where appropriate, we will refer for prosecution businesses that:
- purposefully do not register to participate in the GST system
- intentionally do not report, or under-report, their GST and other tax obligations
- collude with others to evade or avoid GST and other tax obligations
- intentionally do not pay their GST or other tax obligations, including through engaging in phoenix behaviour or offshore arrangements.
We are also working closely with other agencies, including Australian Customs and Border Protection Services and state revenue authorities, to share information indicating serious non-compliance.
This year we will undertake around 20 audits and reviews specifically targeting taxpayers engaged in serious and significant non-compliance with their excise, fuel tax credits and other fuel-transfer payments obligations. We will refer for prosecution those we find engaged in serious evasion or fraud in relation to these obligations.
'Excise equivalent goods' are imported alcohol (excluding wine products subject to wine equalisation tax) tobacco and petroleum products which we manage under delegation from Australian Customs and Border Protection Services as part of overall management of excise.
This year we will conduct approximately 90 compliance activities on taxpayers in relation to excise equivalent goods. Our activities aim at addressing the following issues:
- warehouses releasing goods without the proper authority to deal
- non-existent or inadequate record keeping
- taxpayers not meeting their licence obligations
- the risk of diversion of goods from import and export.
These activities will focus on the importer, owner of goods and warehouse operators.
We will continue to work closely with the Australian Customs and Border protection Service in relation to these risks.
We will be examining the risks associated with tax reporting of exports of excisable goods and wine. We will also be looking at the entire tax obligations of entities, in relation to exports, to enable us to understand whether exporters are complying with GST and income tax obligations.
We are concerned with a number of risk scenarios:
- entities may be claiming or reporting they have exported goods, including excisable goods, but no export has occurred - this may include diversion of goods
- entities may be reporting exports to Australian Customs and Border Protection Services and exporting goods but not including income in income tax returns.
We will be examining data across a number of agencies including Australian Customs and Border Protection Services and AUSTRAC to identify entities for further compliance activities.
We will increase our focus on entities we believe to have entered into uncommercial arrangements to gain access to the wine equalisation tax producer rebate. We also have concerns about the potential diversion of wine exports to local consumption.
We will undertake 40 active-compliance activities relating to producer rebate claims.
The parliament has passed legislation for arrangements for the taxation of alternative fuels. Subject to royal assent, the measure will commence on 1 December 2011.
We will use educational products and tools to encourage and support new and existing taxpayers and to facilitate willing participation.
The key industries affected will be manufacturers, importers, distributors and certain users of alternative fuels including biodiesel, liquefied petroleum gas (LPG), compressed natural gas (CNG), liquefied natural gas (LNG), methanol ethanol and renewable diesel.
Our administration of the superannuation system relies on timely and accurate reporting by superannuation funds of contributions they have received and other information.
We plan to undertake around 110 audits of small-to-medium enterprise funds regulated by the Australian Prudential Regulation Authority. Our audits will ensure the accuracy of fund reporting, including in respect of lost members and their treatment of amounts paid to departing temporary residents.
We will also check they have met their obligations to pay unclaimed money to us, and to release excess contributions where a release authority has been issued.
We will select these funds where their reporting indicates any potential inadequacies or discrepancies. We will apply non-tax shortfall penalties to incorrect fund reporting in appropriate cases.
We closely monitor the compliance of self-managed superannuation funds because of their higher value and higher risk.
We will ensure that trustees of these funds fulfil their obligations thereby ensuring that the considerable concessions provided for their retirement savings are appropriate. We will provide support and guidance to trustees of these funds and their advisers. We will also take firm action where we identify non-compliance, such as lodgment delays, unrectified auditor contravention reports and loan investments.
We have a range of services to help businesses experiencing difficulty paying their tax debts (see Micro enterprises).
Download information regarding Project Wickenby (NAT 7769, PDF, 420KB).
Project Wickenby is a multi-agency taskforce. Its role is to protect the integrity of Australia's financial and regulatory systems by preventing promotion of and participation in abusive secrecy haven schemes.
Timeline
2006
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Project Wickenby starts
AUSTRAC show dramatic rise in fund flow from Australia to secrecy havens
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2007
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Offshore voluntary disclosure initiative begins
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2008
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Positive change in behaviour is seen through compliance dividend
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2010
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Over $1 billion in liabilities have been raised to date. AUSTRAC results show a considerable decline in annual flows to secrecy havens
The first ever extradition of a foreign citizen to Australia for tax fraud and money laundering
Tax information exchange agreement is signed with Vanuatu
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2011
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Results of the offshore voluntary disclosure initiative: 7,699 disclosures with $836.02 million omitted income disclosed
18 people to date have received custodial sentences
Tax information exchange agreement is signed with Liechtenstein
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Goals
- Reduce tax avoidance and evasion.
- Enhance Australia's capability to detect, deter and deal with international tax avoidance and evasion.
- Assure the community the government is tackling serious abuse of the taxation system.
Partners
We lead a partnership of eight agencies, each bringing its expertise to deal with tax avoidance and evasion.
Our partners are the Australian Crime Commission, the Australian Federal Police, the Australian Securities and Investments Commission, the Commonwealth Director of Public Prosecutions, AUSTRAC, the Attorney-General's Department and the Australian Government Solicitor.
Strategies
Project Wickenby agencies have powers to assist in the investigation and prosecution of conduct associated with international tax mischief. Available methods include:
- letters and notices
- access visits and search warrants
- examinations and audits
- recovering proceeds of crime
- taxation assessments
- action for breaches of taxation and corporation laws
- criminal prosecutions of serious and summary matters.
Tools
We have a variety of intelligence techniques and tools to identify secrecy haven arrangements and their promoters. We use computer-based analytical tools to draw links between internal and external data and intelligence and to identify high-risk transactions and the parties involved. Our information sources include:
- AUSTRAC
- international information exchanges under our tax treaties
- financial institutions and other external sources
- credit and debit card transaction data
- tax returns
- internet research
- information from the public.
Concerns
People are becoming increasingly involved in international business and investment. Most dealings with secrecy havens are within the law. However, some schemes we are investigating involve:
- concealing income or gains, or creating false or fraudulent tax deductions
- concealing assets offshore to avoid obligations in Australia
- returning funds to Australian taxpayers in a deceitful manner, including as laundered money.
Concealment is our main concern. A taxpayer may seek to conceal assets and income by setting up a bank account in a secrecy haven where we do not have an agreement to exchange information. Taxpayers may also use an international promoter to set up and manage offshore trusts or companies that seek to conceal the taxpayer's beneficial ownership of assets.
Actions
Action taken against people found to be involved in concealing income, gains or illegal deductions will vary according to the level of their involvement and the nature of the offences committed. It may include all of the following:
- auditing
- amending tax assessments
- applying penalties and interest
- action under the Proceeds of Crime Act
- civil action under tax and corporations law
- criminal prosecution, fines and imprisonment
- banning directors of companies from the financial services industry - where relevant
- restricting departure from Australia.
Relationships
We are also expanding our relationships with tax administrations in other countries.
Through our bilateral tax treaties, we are able to share information on taxpayers suspected of being involved in abusive arrangements.
Tax information exchange agreements
These agreements outline an obligation between Australia and other participating jurisdictions. We agree to help each other by exchanging correct tax information relevant to the administration and enforcement of our respective domestic tax laws - civil and criminal. Under these agreements information is provided only on request - that is, a jurisdiction has no obligation to provide information unless the other party asks for it.
Currently we have signed 28 agreements.
Secrecy jurisdictions
Secrecy jurisdictions are countries with secretive tax or financial systems. They also may have minimal or low taxes for non-residents. The number of secrecy jurisdictions is gradually shrinking but remains a concern. Our focus has been on Vanuatu, Liechtenstein and Switzerland and now includes Panama, Samoa and the Channel Islands.
There are many secrecy jurisdictions of concern on our radar and Australia continues to monitor these.
Results
Project Wickenby is proving to be a significant deterrent against tax crime. So far we have:
- received information on over 32,000 bank accounts
- completed 2,124 audits and reviews and issued 1,911 assessments notices - there have been 23 criminal investigations, with 62 people charged and 18 convicted of serious offences
- witnessed a decline in fund flows of 80% to Liechtenstein, 50% to Vanuatu and 22% to Switzerland where Project Wickenby has had significant focus
- raised over $1 billion in tax liabilities
- collected over $563 million (including approximately $255 million in cash collections from active compliance, a compliance dividend of approximately $306 million and $2.1 million of other moneys recouped).
Messages
It is not illegal for taxpayers to deal with a secrecy haven, provided they comply with the relevant tax laws of both jurisdictions.
We encourage people to come forward and voluntarily disclose unreported income from offshore accounts and activities. Where taxpayers make a voluntary disclosure, they will generally face reduced penalties, provided they come forward before we conduct a review or audit. Generally, there will also be less chance of criminal investigation.
We are always willing to help taxpayers do the right thing. If you are concerned you may be involved in a suspect scheme and would like to discuss your situation with a tax officer, phone us on 1800 306 377.
You can remain anonymous if you prefer.
Large businesses
The large market consists of over 1,300 economic groups and entities encompassing over 32,000 businesses.
The majority of large businesses are public companies, with government enterprises, not-for-profit organisations and superannuation funds also represented.
About 1,100 of these groups have a turnover greater than $250 million and because of their unique characteristics we manage the remainder within the large market.
We have a range of strategies to encourage long-term voluntary compliance - positively supporting compliant behaviours and discouraging negative ones.
In a recent initiative, we engaged with businesses to develop a reportable-tax-position schedule. The schedule helps businesses increase disclosure of their most contentious and material tax risks.
We expect to issue around 300 private and 100 class rulings to provide guidance on the application of the tax law to particular arrangements. We also need to conduct tax reviews on around 400 large businesses to check on whether tax risks are present in these businesses and tax audits on around 150 large businesses to resolve identified tax issues.
We encourage large businesses to have in place sound management controls for tax governance and tax risks. Large businesses can anticipate a review of their corporate governance processes for managing income and indirect tax risk as a part of a risk review conducted by us. Our review of tax-governance processes may set the tone for the enquiry into tax issues - as the outcome may highlight potential weaknesses or deficiencies concerning compliance with tax obligations.
Businesses may report incorrect amounts of GST if their systems for capturing and recording taxation information fail. Businesses going through systems upgrades or other business changes are most at risk of incorrectly reporting their GST.
This year we will hold governance and risk workshops with the mining, retail, manufacturing, agriculture, electricity, gas, water and waste industries to share concerns in the area of compliance with GST.
Our relationship managers program will continue to work with large corporates, focusing on internal control and systems for all tax types in relation to mining joint ventures and merger and acquisition transactions.
We provide a number of products to assist businesses accurately assess and manage their tax risks including:
- annual compliance arrangements - help businesses achieve practical certainty and reduce compliance costs through upfront dialogue and disclosure
- advance pricing arrangement - an agreement between us and large business on the future application of the arm's-length principle in their international dealings with related parties. Like annual compliance arrangement, advance pricing arrangements provide practical certainty and reduce compliance costs for international dealings
- our rulings program - our view on a transactions, issues or products, providing taxpayers with legal certainty, provided they have disclosed all material facts
- publications addressing corporate governance and outlining our approach and processes - such as the Large business and tax compliance booklet and the GST governance and risk management guide, both available at www.ato.gov.au
We maintain relationships with numerous industry associations and have established consultative forums with large businesses and their advisors. We share information about how the tax system is operating, this helps us develop differentiated strategies for addressing risks and reducing compliance costs.
To provide guidance on specific issues, we also provide many electronic and printed publications, including the Large business and tax compliance booklet and the Integrity of business systems fact sheet. We also have periodic publications such as our e-magazine Large Business Bulletin, available by subscription.
We encourage large businesses to meet with us before lodging private ruling requests. This ensures we deal effectively and efficiently with the requests. Our early-engagement model provides a structured approach to dealing with ruling requests. This ensures we assess requests on receipt and identify technical issues and any information gaps. We also have a comprehensive strategic litigation program in place to resolve contentious issues.
To our largest businesses we offer a range of specialised services, including our key-client manager program and our expanded GST and excise-specific client-relationship manager program. We are also providing senior officers as dedicated lead relationship managers to an increasing number of key taxpayers - to resolve issues quickly and reduce irritants across all taxes.
We meet with large businesses regularly to discuss significant events, risk, technical and service issues. Sharing our perception of the relative risk level of a business allows us to work with them on a more personalised basis.
Australia's continuing recovery from the economic downturn is being accompanied by growth in merger and acquisition transactions involving complex arrangements and significant deal value.
These transactions involve a range of interactions with the tax system, giving rise to both income tax and indirect tax liabilities and entitlements, at both the corporate and shareholder level.
We have developed a mergers and acquisitions guide setting out the key compliance issues and common themes in merger and acquisition transactions. The guide is available on www.ato.gov.au
We will examine:
- restructures involving complex or novel financial arrangements and/or steps which do not appear to be necessary to achieve the business needs of the parties
- changes to effective ownership or control of businesses or assets where the appropriate taxing point is deferred or avoided
- arrangements that seek indirect tax benefits (see Financial supplies and GST for further details)
- issues relating to capital gains and losses made by Australian companies on the sale of overseas companies, including the sale of controlled foreign companies.
We continue to encourage businesses and their advisers to engage with us early and seek our advice on transactions before they occur.
We are concerned about capital gains tax planning by foreign residents, including foreign owned consolidated groups, seeking to circumvent the integrity measures that deal with the disposal of land rich property interests.
We are enhancing our ability to identify these and other transactions by monitoring merger and acquisition activity and other data.
We will raise awareness of capital gains tax obligations for foreign residents more generally by improving content on our website and addressing our areas of concern through targeted communications and alerts.
The consolidation laws are a significant feature of Australia's corporate income tax system. Risks include unintended or inappropriate outcomes where there are complex interactions between the consolidation provisions, other parts of the tax law and external regulatory frameworks. While this is often first seen as a change in the tax cost of assets on entry or exit from consolidated groups, the results can include reductions in capital gains tax and/or increases in losses or deductions under the capital allowance rules.
We will initiate reviews and audits on risks relating to consolidation, mergers and acquisitions and other transactions or business activities. Of particular concern are arrangements where the tax outcomes do not reflect the economic substance of the arrangement.
The rights to future income and residual cost setting rules have been the subject of review by the Board of Taxation. We will continue to monitor developments in relation to these laws and undertake activities to assist, and ensure, compliance with those laws.
We are concerned about the use of arrangements between Australia and offshore affiliates to shift or shelter profits. This incorporates a number of aspects of our international tax legislative regime, including transfer pricing and our anti-tax deferral regimes. We will undertake approximately 50 audits focusing on a range of international issues, including transfer pricing and thin capitalisation.
We have issued four tax determinations: TD 2010/20, TD 2010/21, TD 2010/D7 and TD 2010/D8 to provide clarity when private equity exits Australia. We have sent letters to private equity firms reinforcing our positions as set out in the determinations and requesting private equity firms to engage with us to provide certainty when disposing of Australian target companies.
We will present information sessions to advisers, private equity firms, industry representative bodies, chartered accounting firms, legal firms and other government stakeholders on our views in this area. We have five reviews in progress and we will conduct seven additional reviews and follow-up audits where necessary in relation to the identified risks.
We will work with stakeholders to implement law changes such as the International Telecommunications Amendment, those relating to international freight transport and any changes that might flow from the Board of Taxation's review of GST.
Risk to the Australian tax base arises when there is a failure to withhold, report or remit non-resident withholding tax on payments of interest, dividends and royalties to non-residents.
In circumstances where the withholding tax is payable, there may be other international tax risks associated with these transactions, such as transfer pricing.
Our compliance focus is on several specific areas and types of transactions including:
- transfers of Australian intellectual property (such as copyright) to non-residents where royalties are payable. Where these transfers involve related parties, transfer pricing issues may also arise
- mis-characterisation of payments properly subject to withholding tax - such as the characterisation of the payment as a service fee when a royalty is the correct characterisation
- circumstances where there has been a failure to identify a liability in the case of a bundled payment (where correct characterisation of parts of the payment would reveal a non-residents withholding tax liability)
- structured arrangements designed to, or claiming to have the effect of, avoiding withholding tax - such as hybrid financing where the return is claimed as a price differential and not 'interest' or a 'dividend' as defined in the withholding tax legislation.
We will continue to look at the financing arrangements undertaken by stapled groups to test compliance levels against the debt/equity rules. This includes commencing approximately six risk reviews and completing up to seven current audits. In conjunction with this compliance activity, we plan to formally communicate our view on this issue publicly through the release of a draft taxation ruling.
We will monitor income tax returns and undertake profiling activities to ensure TOFA taxpayers are applying the measure appropriately.
We will also undertake targeted compliance activities, including implementation reviews. These activities will look at:
- identifying taxpayers who meet the TOFA thresholds to ensure they are applying the TOFA rules
- restructuring prior to entry into TOFA
- calculating the balancing adjustment for TOFA taxpayers who have made the transitional election to bring in their existing financial arrangements
- the validity of elections made under the TOFA rules
- the appropriate application of the TOFA tax-timing methods, including compliance with the hedging method recording requirements.
Financial supplies and GST
Businesses making financial supplies may face uncertainty in determining their entitlement to claim GST credits. Our strategies continue to focus on providing clarity and certainty in characterising transactions and determining entitlement to input-tax credits.
We will do this through ongoing engagement and consultation with taxpayers, industry groups and advisers to increase our common understanding using forums, client relationship managers and compliance activity.
Businesses engaging in capital raising activities (for example, initial public offerings, mergers and acquisitions, rights issues and share buy backs) remain a particular focus area given the potential for GST credits to be over-claimed on related costs. A recently issued GST guide Claiming input tax credits on acquisitions made in connection with merger and acquisition activity gives practical guidance to businesses on how to treat specific transactions through the various phases of the acquisition and or merger process.
We will send letters to taxpayers involved in mergers and acquisitions including a copy of the GST guide and ask them to ensure they are correctly treating transactions for GST purposes during the process. We will also undertake 50 risk reviews on these activities to ensure they have properly complied with the GST law correct decisions. We will follow up with targeted communications to those involved in such transactions, reminding them of their responsibilities.
We remain concerned about a small number of businesses engaged in merger and acquisition transactions adopting non-commercial arrangements to claim input-tax credits which they would not normally be entitled to. We have issued a taxpayer alert (TA 2010/11) outlining our concerns about these arrangements and will follow them up with appropriate action.
To determine whether interest is deductible in Australia, we are examining the inclusion of foreign partnerships in consolidated groups to facilitate interest deductions in two countries (double dipping). We will exchange relevant information with foreign tax authorities where appropriate.
We are concerned about the possible incorrect treatment of business capital expenditure. This includes:
- claiming black-hole expenditure as an operating expense of the business in the year costs were incurred
- claiming black-hole expenditure where it should, for example, otherwise be amortised over the life of an asset
- failing to apportion a claim where the business is in receipt of both assessable and non-assessable non-exempt income.
We will consider the correctness of approximately 32 claims made, which in aggregate amount to in excess of $210 million. We will also seek to identify events where it is reasonable to expect a claim to be made or where a claim is absent from the income tax return, to enable a deduction to be made.
We will be reviewing approximately 45 significant claims for an immediate deduction for mining, quarrying or prospecting rights to ensure they are in accordance with the legislation given increased level of mergers and acquisitions activity in the mining and petroleum industries.
With the increase in losses incurred and carried forward during the recent global economic downturn, and the removal of foreign loss quarantining, there is a heightened compliance risk associated with losses.
We will be testing claims for losses to check for those that do not reflect genuine commercial arrangements, lack economic substance and do not meet the continuity-of-ownership test or the same-business test.
We will also be reviewing the large market financial services industry given the $47 billion of capital losses carried forward. Trusts (in particular managed investment trusts), superannuation funds and life insurance companies will be the subject of a specific focus to ensure capital losses incurred are genuine and used in accordance with the legislation.
Research and development (R&D) expenditure registered with AusIndustry in 2008-09 was $18.08 billion, a 21% increase from 2007-08.
We are concerned with a number of issues in regard to R&D claims including:
- normal business activities are being incorrectly classified as R&D activities
- companies are not capturing R&D expenditure on a contemporaneous basis, but rather claims are being calculated after the event by apportioning expenditure
- failing to apply specific R&D rules, for example the 'on own behalf' rules and feedstock rules
- non-capitalisation of labour involved in the construction of R&D assets
- unsubstantiated and ineligible claims of the R&D tax offset.
We will focus on producing guidance and ATO-view products to ensure taxpayers understand our view of the law and to encourage voluntary compliance. In the large market we plan to undertake reviews and audits of around 30 companies.
We are concerned about incorrect reporting of property transactions and whether GST is being reported correctly in relation to the construction and sale of retirement villages. We will be conducting approximately 10 risk reviews of large companies engaging in major property transactions.
As part of our overall property audit program we will seek to identify and take action on taxpayers who:
- obtain non-complying margin scheme valuations that reduce GST payable on property sales.
- are outside the property sector who occasionally undertake property transactions. We encourage taxpayers to adopt robust governance approaches to correctly classify, capture and report these transactions.
- attempt to carve out or separate particular supplies in an uncommercial manner in relation to retirement village operators that may result in an additional GST benefit as outlined in Taxpayer Alert 2010/7.
There are around 75 large superannuation funds. We are continuing to develop our 'real time' approach for engaging with key superannuation funds. Under our risk-differentiation framework we are applying our resources and tailoring our approach to large superannuation fund compliance based on our assessment of likelihood and consequences of non-compliance.
We will continue to review large fund compliance with their obligations to make pay as you go tax instalments and their income tax obligations including:
- exempt current pension income claims
- industry practice regarding the foreign income tax offset
- tax risks specific to pooled superannuation trusts
- fund mergers in light of capital gains tax loss rollover provisions
- use of trust structures and the tax treatment of distributions
- addressing potential unintended consequences of legislation applicable to large superannuation funds including those raised by industry
- capital losses being reported
- reporting under taxation of financial arrangements.
Our administration of a number of key aspects of the superannuation system relies on timely and accurate reporting by large funds of contributions they have received and other information.
We plan to undertake around 25 superannuation audits of large funds regulated by the Australian Prudential Regulatory Authority to ensure the accuracy of their reporting, including in respect of lost members and their treatment of amounts paid to departing temporary residents. We will also check they have met their obligations to pay unclaimed money to us, and to release excess contributions where a release authority has been issued.
We will select these funds where their reporting indicates potential inadequacies or discrepancies. Non-tax shortfall penalties will be applied to incorrect fund reporting in appropriate cases.
The parliament has passed legislation for arrangements for the taxation of alternative fuels. Subject to royal assent, the measure will commence on 1 December 2011.
Our client relationship managers will encourage and support new and existing taxpayers to comply with this measure with educational products and tools to facilitate willing participation.
The key industries affected will be manufacturers, importers, distributors and certain users of alternative fuels including biodiesel, liquefied petroleum gas (LPG), compressed natural gas (CNG), liquefied natural gas (LNG), methanol ethanol and renewable diesel.
We identify, deter and deal firmly with those who intentionally seek to obtain advantage through the illegal use of the taxation and superannuation systems. Through our actions we reassure the community we are serious about protecting them from those who intentionally seek to abuse Australia's taxation and superannuation systems.
Transactions disguised through offshore secrecy or through arrangements designed to hide the source, nature or ownership of assets and income are an ongoing focus for us.
We are detecting more cases for action by analysing AUSTRAC data, our banking transparency strategy and liaising with other government agencies and overseas revenue authorities. We also receive information through data-matching activities from concerned citizens. We conduct profiling to classify risk and take appropriate action. Our action may involve taxpayer questionnaires, letters to promoters, taxpayer reviews, default assessments, audit activities, imposing penalties and interest and prosecutions.
Project Wickenby has been effective in improving future compliance by identifying an additional $306 million in tax paid.
AUSTRAC's long-term analysis also indicates Project Wickenby is having a considerable impact on tax abuse associated with secrecy havens.
A general analysis of fund flows from Australia to secrecy havens shows a 15.8% decrease to 13 haven countries, particularly Vanuatu, Liechtenstein and Switzerland where Wickenby had a significant focus. This demonstrates the broader impact of Project Wickenby.
As we sign more taxation information exchange agreements we increase our ability to share information. Working with our jurisdictional and Project Wickenby partners will continue to improve our ability to find tax evasion arrangements. We will also focus on those who did not take the opportunity to come forward.
We are still seeing cases where foreign income is not declared. Under our current arrangements taxpayers are entitled to penalty reductions for voluntarily disclosing income not previously taxed.
Another focus is on offshore promoters who deal with advisers, participants and potential participants. By targeting these promoters, we expect to reduce participant numbers and raise community awareness that dealing in arrangements involving abusive secrecy haven schemes is not worth the risk.
This year we have additional federal budget funding to support our efforts in integrity outcomes relating to refunds of income tax, goods and services tax and excise. In particular this will enable us to enhance our detection of refund fraud across all lodgment channels, as well as providing additional compliance support, including criminal investigations. We will continue to send a strong deterrent message to the community by referring appropriate cases for prosecution.
We continue to expand our access to third-party data. In particular, additional data we are sourcing from the Department of Immigration and Citizenship will improve risk profiling of claims from temporary visitors, particularly claims for residency for tax purposes, spouse offset and goods and services tax refunds.
We will closely scrutinise returns where offsets and rebates are generating a refund, including a focus on the education tax refund. We will stop potentially fraudulent claims for refunds from issuing while we contact taxpayers for additional information to support their claims.
We protect and educate potential victims, including those ill-informed or poorly advised, by alerting them to the risks and consequences of involvement. We have increased both our broad and targeted messaging on tax file number and identity protection.
Organised crime is using highly organised, business-like and abusive approaches to the taxation and superannuation systems. Analysis of intelligence, including from other agencies, and our compliance casework, shows an increase in sophistication, increasing use of new technologies, and organised methods to manipulate the system.
We support the Commonwealth Organised Crime Strategic Framework by applying tax laws to taxpayers associated with organised criminal activity. We have increased our contribution to cross-agency taskforces by taking action to appropriately apply taxation powers to matters referred to us by law enforcement agencies. We expect this to be an increasing focus of our work. We have seconded officers to the Commonwealth Criminal Assets Confiscation Taskforce and expect to raise taxation liabilities in other taskforces dealing with serious and organised crime.
Our focus is across all markets and entities abusing the taxation system or having significant amounts of unexplained wealth.
Taxpayers may be prosecuted if they attempt to:
- defraud the tax and superannuation systems
- facilitate or collude with others to evade their obligations
- deliberately fail to participate where they should
- deliberately under-report or fail to report their income
- overstate their losses or deductions
- evade their superannuation responsibilities
- access super fund amounts illegally.
We continue to refer matters to the Commonwealth Director of Public Prosecutions. We are also broadening our prosecutions under the Taxation Administration Act 1953.
We work with taxpayers and their advisers across all markets, assisting and encouraging them to recognise, reject and report tax avoidance arrangements.
Reporting tax avoidance arrangements to us can prevent taxpayers becoming involved in inappropriate arrangements and ensure a level playing field by eliminating a competitive advantage that less scrupulous tax intermediaries may otherwise enjoy. Some people, including tax professionals, have provided us with information on arrangements they have seen. People may provide information to us by phoning 1800 177 006. We welcome this information.
Where we have concerns about particular arrangements, we will continue to warn the community - for example, by promptly issuing and following up on taxpayer alerts. We will continue to issue taxpayer alerts on a range of income tax, goods and services tax and superannuation issues as they arise. This keeps us on the front foot in protecting honest taxpayers.
We have published a guide for tax intermediaries, Good governance and promoter penalty laws and written to prominent entities in the law, accounting and financial product industries to help them understand the laws and highlight the need for improved governance. We have met with a number of these entities and will continue this program of engagement this year.
We strongly encourage entities involved in financial products being offered widely to seek product rulings from us. Rulings provide certainty about the tax consequences of participation in the arrangements. Where product issuers do not seek rulings, we will follow up. And where we have concerns about a product, we will take appropriate action, such as adjusting the claims of investors, issuing taxpayer alerts, seeking modification of the product by the entity and, in the most serious cases, applying the promoter penalty laws. We will also check the arrangements of some products with rulings to ensure they have been implemented in accordance with information provided to us in product ruling applications.
We will also ask advisory firms to encourage their clients to more fully engage with us through the private or class rulings system.
Where widely offered products, or boutique arrangements, offer tax benefits not available at law, we will encourage the issuers of these arrangements to modify or remove these features. Where these entities do not self-correct we will issue them with warnings highlighting the risks they run if they continue with their conduct. For the most serious cases involving the highest levels of risk and lowest levels of self-correction, we will consider applying sanctions available under the promoter penalty laws, including civil penalties and Federal Court injunctions.
In our ongoing assessment of key law and accounting advisory firms and financial institutions we have identified a number of firms and individual advisers with histories of advocating or supporting tax avoidance arrangements. We are now including this as one factor in our overall risk assessment of taxpayers.
We will commence reviews of higher risk advisory firms and financial institutions, and their clients, to determine whether they have participated in the same or other aggressive arrangements. We will also commence targeted reviews of individual advisers to ensure tax compliance in respect of their own affairs. Our assessments have shown that the higher risk advisers and promoters may also be higher risk taxpayers.
In addition, we will use our access and information-gathering powers to resolve enquiries faster and take more effective corrective action against scheme promoters and their clients.
The establishment and operation of illegal early release schemes, even on a small scale undermines confidence in Australia's superannuation system.
We will continue to review all registration applications for self managed superannuation funds to ensure that only people who are fit and proper are allowed to register and that funds are not established for the purpose of facilitating illegal early release.
We will also monitor the rollover process to ensure integrity in the system, work with the Australian Prudential Regulation Authority in promoting good practices in the funds they regulate, and provide our self-managed superannuation funds member verification service for those funds.
We will continue to identify, investigate, assess for tax and refer for prosecution individual participants and promoters of illegal early release schemes.
April 2011 marked the fifth anniversary of the introduction of the promoter penalty laws. Our experience in administering these laws shows a positive impact in deterring the promotion of tax avoidance and evasion schemes and changing behaviours in relation to the promotion of aggressive arrangements.
These laws provide a flexible set of remedies for the Commissioner to apply to deter the promotion of tax avoidance or evasion schemes and implementation of product ruling arrangements in ways that result in materially different tax outcomes for investors. In addition to accepting voluntary undertakings, the Commissioner can apply to the Federal Court for restraining or performance injunctions and/or seek civil penalties of up to $2.75 million per entity per scheme.
Our approaches for the first two years focused on helping tax intermediaries to prepare for the changes that these laws meant for their important roles in the system.
Since then, we have worked with a variety of tax intermediaries to educate them about the risks of engaging in conduct prohibited by these laws, both in general and through specific contacts about arrangements of concern.
We encourage tax practitioners to report such arrangements to us to help eliminate the competitive advantage that less scrupulous tax intermediaries may otherwise enjoy. We act upon referrals received from tax practitioners and the community to identify at-risk/high-risk arrangements and those who are involved in promoting them. Where appropriate, we have issued taxpayer alerts to advise the community of our concerns and followed up with the promoting entities, their associates and participating taxpayers to enforce compliance.
Since the commencement of the laws, we have conducted over 550 reviews of the conduct of entities potentially involved in arrangements that may have contravened these laws.
In most cases, entities we contact about specific conduct regarding doubtful arrangements correct their conduct without us needing to impose sanctions under these laws. Many have taken material off websites, changed seminar materials, altered scripting content or even ceased marketing particular products.
In addition to this self-correction, some entities involved in more complex or higher value arrangements have offered us enforceable voluntary undertakings for the purposes of these laws, which we have accepted.
In other cases where entities have not self-corrected at first instance, we have warned them of our concerns, highlighting the risks they run in continuing with their conduct, which has resulted in further self correction.
For the most serious cases involving the highest levels of risk and lowest levels of self-correction, we will initiate proceedings in the Federal Court to seek a civil penalty or an injunction as appropriate.
Since the introduction of the Tax Agent Services Act 2009 registered agents now include tax agents and BAS agents. More than 53,000 practitioners are now registered with the Tax Practitioners Board. Many newly registered agents operated in the profession before they were required to register.
Registered tax agents lodge around 71% of income tax returns for individuals and more than 95% of business tax returns. Many agents also act as approved auditors of self-managed superannuation funds.
Some tax practitioners are not required to register with the Tax Practitioners Board. These include legal practitioners providing tax advice to people or acting on their behalf, superannuation fund auditors, and bookkeepers providing accounting or other services as employees within businesses and organisations.
We will improve our understanding of the population of registered agents and how their behaviours influence the willing participation of others. We are improving our ability to profile a registered agent's practice, based on a risk assessment of demonstrated behaviour.
Working with key stakeholders, we will develop a framework differentiating our approach to them based on likelihood and consequences of risk. This will guide our decisions and response to registered agent behaviours. This will allow us to develop tailored information products and services, and better target our compliance approaches.
The lodgment program will differentiate between those with a proven track record of good performance and those who don't meet the standard lodgment program and regularly seek deferrals. We are working with registered agents to understand why they seek deferrals.
We will better target the support we offer through our lodgment assistance program, and limit ongoing support to practices that do not meet minimum standards.
Cash economy small business benchmarks help tax agents compare their client's individual business performance against similar businesses in their industry.
Most businesses are within benchmark and most registered agents have clients operating within benchmark. We have identified that about 50% of those businesses falling outside benchmark are represented by about 1,900 registered tax agents. We will contact registered tax agents with a high number of clients whose results fall outside benchmarks to gain an understanding of why this is the case.
We recognise the important role tax and BAS agents play in encouraging clients to keep good records. We will work with all registered agents to help them lift the standards of client record keeping.
We dedicate significant resources to managing our relationships with tax practitioners - including the provision of specifically designed services and products, like our professional-to-professional program, and tailored consultative arrangements.
Under the code of professional conduct administered by the Tax Practitioners Board, all registered agents must comply with taxation laws in the conduct of their personal affairs. Failure to meet these requirements puts a registered agent at risk of receiving compliance action. This may include prosecution and referral to the Tax Practitioners Board for consideration of disciplinary action under the Tax Agent Services Act 2009.
Our intelligence gathering and risk analysis allows us to detect agents who may be breaching the code of professional conduct, under the Tax Agents Services Act 2009, or entities that have not registered with the Tax Practitioners Board for the provision of tax agent services. We refer these matters to the Board for further investigation and application of sanctions by it, where appropriate.
We work through our consultative forums and industry associations to help deal with non-compliance with personal obligations by tax practitioners who don't need to register under Tax Agent Services Act 2009.
We encourage tax and BAS agents and the community to phone the Board on 1300 362 829 if they have concerns about practices that could bring the profession into disrepute. These could include activities of unregistered agents or those activities which abuse Australia's tax and superannuation systems. We will continue to support the Tax Practitioners Board on these matters.
Approved auditors of self-managed superannuation funds are a key part of the assurance framework for the self-managed superannuation funds system.
In collaboration with their professional associations, we will support auditors through guides, publications and support tools, such as the recently updated electronic superannuation tool eSAT. This tool assists auditors to complete compliance audits of self-managed superannuation funds and satisfy reporting obligations. We will also extend the super professional-to-professional support service to the top 100 approved auditors, who complete over 30% of the audits of self-managed superannuation funds.
We will be expanding our program of audits and reviews of approved auditors of self-managed superannuation funds to ensure they are properly fulfilling their role in accordance with the law and relevant professional competencies and standards. This year we will be undertaking 300 audits and 600 reviews - almost a 50% increase over our activities last year. Where auditors pose an on-going risk we will disqualify them as approved auditors and apply other sanctions, including referral to their professional associations' disciplinary committee, or prosecution, depending on the severity of behaviour.
We will also help prepare auditors for the proposed new registration required under the Government's Stronger Super program.
We have registered more than 186,000 non-profit organisations.
Most non-profit organisations self-assess their entitlement to tax concessions. However, some, such as charities and most deductible gift recipients, must be endorsed by us to access tax concessions available under income tax, goods and services tax (GST) and fringe benefits tax laws.
Recent changes announced by government propose that the legal status of certain groups such as charities will be regulated by a new statutory agency. Under the proposal, we will retain responsibility for administering tax concessions for the non-profit sector, including charities.
In the 2011-12 federal budget, the government announced its intention to establish a new independent statutory agency, the Australian Charities and Not-for-profits Commission (ACNC) from 1 July 2012. We will be required to make related structural changes.
To prepare for the commencement of the new commission, we will separate our activities relating to the determination of charity status and administration of tax concessions.
We provide organisations with assistance to manage their taxation and superannuation obligations and safeguard their reputations.
Regular changeover of office bearers and reliance on volunteers can make compliance difficult in this sector. Having good governance practices helps organisations identify and manage tax compliance risks and other risks that may affect their reputations and how they work. We have co-designed with the sector a new self-governance tool, due for release this year. The tool will help these organisations understand and meet their tax and superannuation responsibilities.
Not all clubs are exempt from income tax. All clubs should undertake an annual review of their status to assess whether they still meet the requirements to be exempt. Non-exempt clubs are taxable only on income they derive from non-members under the principle of mutuality. We will monitor higher risk entities to ensure they have correctly assessed whether they are exempt and whether they have correctly calculated their mutual income.
For clubs seeking assistance and guidance, we continue to develop and update help and education materials, often in cooperation with the peak bodies in the industry.
Our Income tax exemption and sporting clubs guide helps office bearers and advisers to self-assess if their club is exempt from income tax as a society, association or club established for the encouragement of a game or sport.
Some religious organisations continue to encounter difficulties with compliance. Some detect this through their internal governance processes and approach us for assistance to correct errors and mistakes. In other instances we may identify a need to intervene where parts of a religious organisation no longer operate in a way consistent with their tax-concession endorsements.
We will work with the broader religious community to deliver our key messages. We will do this before we undertake reviews to ensure they are using tax concessions appropriately for the benefit of the community.
We are also concerned that some training organisations endorsed as public benevolent institutions are expanding their services beyond individuals in need of direct benevolent relief. We will work with industry and government agencies to resolve compliance issues for training organisations. For example, we will provide information about how certain types of contracts let to these public benevolent institutions may have an adverse impact on the status of these organisations, and their access to tax concessions. We will also work with the affected training organisations so that all parties can make informed decisions.
Some charitable institutions and gift-deductible entities are incorrectly treating supplies as GST-free on the basis that they are made for nominal consideration, when they should be taxable or input taxed. Conversely some are treating supplies as taxable or input taxed when they should be GST-free.
We are working with charitable institutions and gift-deductible entities, particularly those providing accommodation, through a range of help and education products, such as tailored mail-outs, publications and consultative forums.
In the 2010-11 federal budget, the government announced changes to improve the accountability of public ancillary funds. The changes included providing trustees of public ancillary funds with greater certainty about their philanthropic obligations. They will also provide donors, and the charitable sector, with greater confidence that donations are being used effectively.
When the proposals become law, we will work with the sector to raise awareness of the new legislation. We will also assist with any transitional issues by providing new and updated information products and writing to existing public ancillary funds to explain the changes.
We have released a suite of products, including Private ancillary funds - frequently asked questions, to assist funds understand and meet their obligations. We will review 100 private ancillary funds entities to test the level of compliance with the new rules.
The High Court handed down its decision on Aid/Watch Incorporated, clarifying the extent to which charities are able to engage in political advocacy.
The Full Federal Court handed down decisions clarifying entitlement to income tax exemption in:
- Co-Operative Bulk Handling Ltd - whether the entity was established for the purpose of promoting the development of Australian agricultural resources.
- Wentworth District Capital - whether the entity was established for community service purposes.
In the 2011-12 federal budget, the government announced its intention to provide clarity about tax concessions being available for the 'related' commercial activity of a charity, but not the 'unrelated' commercial activity. We expect that the legislation, once passed, will clarify the extent of the Word Investments decision by the High Court in 2008. The High Court found where a commercial business with exclusively charitable objects that directed its profits to charities was eligible for endorsement as a charitable institution.
Due to the regular flow of court decisions in recent years we are now investing more resources into reviewing, maintaining and updating our advice and information products for the not-for-profit sector. The updated rulings will provide certainty about our approach to administering the tax concessions for the benefit of the broader community.
From 1 July 2012, the proposed ACNC will have the responsibility for advising the public about what is charitable. We expect to work closely with the ACNC to ensure that our advice about tax concessions available for charities is well-synchronised with their future advice.
When we are in the process of updating public rulings, we have been issuing decision impact statements on key court cases. We also ensure we correctly apply the decisions of the courts, where relevant, when determining the outcomes of requests for advice or endorsement for tax concessions.
Snapshot of our 2010-11 activities
The following information contains some of the highlights of preliminary results from our compliance activities undertaken throughout 2010-11. We will publish the final results in the Commissioner of Taxation Annual report 2010-11.
Our compliance focus for 2010-11 included a considerable effort ensuring that people and businesses affected by natural disasters were given a chance to deal with those impacts. For taxpayers in affected regions we deferred the times of key tax obligations, including lodgments, giving individuals, businesses and communities time to recover.
Shifts in our attention throughout the year reflected changing deployment of our resources - either to address the highest risks or to assist taxpayers and tax practitioners affected by natural disasters.
We also increased our commitment to a range of strategies and activities aimed at improving voluntary compliance and dealing with non-compliance - by actively supporting individuals, businesses and tax practitioners across the community.
We increased our attention on detecting and dealing with over-claimed refunds and cases of potential fraud. Our information-matching activities again increased, further supporting our efforts directed at those involved in the cash economy.
Our interest in wealthy taxpayers and cooperation with other agencies through Project Wickenby continued. We also continued our strong attention on lodgments, employer obligations, superannuation, and GST obligations.
Increasingly, we sought to engage with larger businesses on a prospective, cooperative basis to identify tax risks as early as possible and develop mitigation strategies cooperatively.
Our commitment to transparency regarding our risk concerns and treatment of compliance risks resulted in our implementation of a risk differentiation framework. Under the framework we informed most large businesses about our view of their compliance risk, relative to other large corporates. Where there were concerns with a large taxpayer's risk profile, we discussed the matters with them. Where we had no concerns we advised the taxpayer their return was closed.
The following information contains some of the highlights of the compliance activities we undertook during 2010-11 The information is based on preliminary results. We will publish our final results in the Commissioner of Taxation Annual report 2010-11.
Income tax
- We reviewed over 28,000 tax returns in relation to high-risk refunds, resulting in revenue adjustments of approximately $44 million.
- We reviewed over 29,000 income tax refunds identified as potentially over-claimed refunds or fraudulent claims, resulting in revenue adjustments of approximately $105 million.
- We raised approximately $103 million in revenue adjustments from over 500 reviews and audits of high-income executives and directors.
- We expanded the comparison of third-party data against information provided in tax returns, resulting in over 398,000 income and benefits discrepancies requiring revenue adjustments of approximately $347 million. These results included
- $56 million in foreign source income using data from the Australian Transaction Reports and Analysis Centre (AUSTRAC) and information supplied by our overseas treaty partners
- $15 million in incorrect Medicare levy exemption claims where no exemption certificate existed
- $12 million from non lodgers where we raised default assessments based on the information reported by third parties.
- We processed information about an additional 37 million share transactions in 2010-11, bringing the total share transactions we use in information matching to approximately 237 million.
- We received an additional 1 million property records, bringing the total number of processed real property transactions used in our matching activities to approximately 25 million.
- The offshore voluntary disclosure initiative resulted in over 7,600 disclosures by taxpayers since commencing in July 2007. Now finalised, this initiative resulted in over $155 million in tax and penalties across four years.
Lodgment
- We wrote to 1.9 million individuals following up their lodgment and phoned 122,100 individuals to further ensure they met their obligations. These activities resulted in us refunding net liabilities of approximately $100 million.
Debt
- We supported many individuals in meeting their payment obligations by granting payment arrangements, with over 80,000 in place at any point in time.
- We suspended debt collection action and automatically deferred due dates for tax payments for individuals affected by natural disasters.
- We took over 1,600 firmer and legal recovery actions against individuals who chose not to work with us or continually defaulted on agreed arrangements.
- We received over 5,000 applications for release from payment of tax debt and granted full or partial release in around 75% of release decisions made.
- The number of tax debtors in the individuals market is around 444,000.
Superannuation
- In 2010-11, we actioned over 16,300 complaints from employees relating to unpaid superannuation. Over the last five years, our superannuation guarantee compliance activities have resulted in around $1.3 billion of additional super being transferred to member accounts.
- We issued assessments to around 41,000 individuals who exceeded the contribution caps, raising approximately $285 million in liabilities. We also provided additional communications on various aspects of the excess contributions tax system to assist individuals in understanding how we apply the law. We undertook the majority of this activity in time for taxpayers to vary their contribution behaviour to avoid exceeding the caps in the 2010/11 year.
- As part of our commitment to addressing lost superannuation, we have contacted members regarding almost 266,000 lost superannuation accounts. These reviews have resulted in a number of accounts being removed from the lost member register.
Income tax
We completed over 2,100 reviews and audits, raising approximately $111 million in liabilities. These activities included:
- 400 reviews and audits of partnership and trust distributions, raising approximately $17 million
- almost 500 capital gains tax reviews and audits, raising approximately $46 million
- 130 reviews and audits of offshore income, raising approximately $14 million
- around 690 reviews and audits to identify omitted income, raising approximately $21 million.
Lodgment
- We wrote to 2.59 million micro enterprises following up their lodgment and phoned 95,100 entities to further ensure they met their obligations. These activities raised approximately $1.6 billion in liabilities.
Debt
- We continued to offer the measures introduced in 2009 to assist viable micro enterprises - payment arrangements free of general-interest charge for 12 months and deferred due dates for activity statement payments.
- Payment arrangements were a major part of the practical support we provided to viable businesses in this segment, with around 140,000 in place at any point in time.
- We suspended debt-collection action and automatically deferred due dates for tax payments for micro enterprises affected by natural disasters.
- We took over 46,700 firmer and legal-recovery actions against micro enterprises choosing not to work with us, continually defaulting on agreed arrangements, or not having the capacity to pay and not taking steps to resolve their situation.
- The number of tax debtors in the micro-enterprises market is around 778,000.
Superannuation
- In addressing employee complaints about unpaid superannuation we have actioned 10,000 superannuation guarantee cases involving micro employers, raising approximately $152 million in unpaid superannuation and penalties.
- We also undertook marketing and communication activities targeted at employers in high-risk industries, including the computer system design and related services, accommodation and accounting service industries. As a result of our previous activities, including targeted communication activities, we received almost 16,000 voluntary statements raising a further $45 million in unpaid superannuation.
- We undertook over 4,600 reviews of the superannuation guarantee compliance of high-risk employers, including employers in the industries of road freight transport, automotive repair and electrical services, raising $109 million in unpaid superannuation, mainly in the micro-market segments.
- We reviewed the regulatory compliance of over 11,100 self-managed superannuation funds, raising approximately $5 million in liabilities and resulting in a range of actions including making 70 self-managed superannuation funds non-complying, winding up 10 funds, issuing 154 enforceable undertakings and disqualifying over 312 trustees. We also issued 184 formal notices to taxpayers, promoters and third parties for access and information.
- We undertook over 900 audits and reviews and issued 1,500 tailored advice mail-outs, across all market segments relating to the income tax obligations of self-managed superannuation funds. These activities raised around $10 million in tax liabilities and resulted in a decrease in some of the more obvious errors.
GST
- Our telephone and field verification checks resulted in over 30,000 activity statements being adjusted.
- We undertook over 40,000 reviews and audits in the micro market raising net GST liabilities of approximately $435 million.
- We conducted around 12,000 small business obligations visits. These activities included over
- 9,000 business assistance visits
- 3,000 obligations support visits
- 130 national Indigenous program - assistance visits completed under the small business obligations and Indigenous sector compliance risks.
Cash economy
- We increased our scrutiny of businesses deliberately not reporting their cash income, with over 1.4 million small business evaluated against our sophisticated risk-detection systems and over 16,000 businesses directly contacted through our compliance activities. These compliance activities, aimed at detecting and dealing with those not paying their fair share, have raised around $151 million in liabilities. Our analysis shows that businesses subjected to compliance activity generally pay more tax in subsequent tax returns following our activity.
- Our small business benchmarks and associated compliance activity raised taxpayer awareness of the record-keeping obligations of all businesses. We wrote to over 107,000 taxpayers and their tax agents regarding their performance against small business benchmarks and other cash economy risk indicators. Our analysis shows that the taxpayers we wrote to increased the amount of GST they reported in subsequent periods and around 1,400 taxpayers voluntarily disclosed additional income they had not disclosed in returns lodged for previous years.
- We received 23,600 calls to our tax evasion hotline (1800 060 062) and 17,100 letters and emails. All the information we receive from the community is evaluated and informs our compliance risk programs. For example, this information resulted in us identifying around 24,000 taxpayers with outstanding lodgment obligations.
Income tax
- We completed over 1,650 reviews and audits and 6,200 phone and letter based verification activities for small-to-medium enterprises. At the end of 2010-11, we expect to have raised around $500 million in liabilities and over $1 billion in notional tax adjustments, in the form of reduced carried-forward losses and other deductions, protecting around $300 million in future tax payable.
- We finalised almost 50 advance pricing arrangements with small-to-medium enterprises.
- We completed over 200 private binding rulings, 23 class rulings, more than 150 objections and around 630 inbound correspondence items.
Lodgment
- We issued letters to more than 93,500 businesses and phoned 4,100 businesses with outstanding lodgment obligations. These activities raised approximately $810 million in net liabilities.
Debt
- Payment arrangements were a major part of the practical support we provided to viable businesses in this segment, with around 11,000 in place at any point in time.
- We suspended debt-collection action and automatically deferred due dates for tax payments for small-to-medium enterprises affected by natural disasters.
- We took over 8,500 firmer and legal recovery actions against small-to-medium enterprises choosing not to work with us, continually defaulting on agreed arrangements or not having the capacity to pay and not taking steps to resolve their situation.
- The number of tax debtors in the small-to-medium enterprises market is around 36,000.
Superannuation
- In addressing employee complaints about unpaid superannuation we actioned over 3,600 superannuation guarantee cases involving small-to-medium enterprise employers. These activities raised approximately $138 million in unpaid superannuation and penalties.
- We also completed 65 audits on small-to-medium Australian Prudential Regulation Authority funds to verify the accuracy and completeness of their superannuation reporting. These reviews identified a number of issues. Funds have since implemented changes to their systems and processes to rectify these issues for future reporting.
- We reviewed the regulatory and income tax compliance of a small number of small-to-medium self-managed superannuation funds as part of the broader strategy detailed in the micro-enterprises section of this snapshot.
GST
- As a result of more than 17,180 reviews and audits, we raised net GST liabilities of over $480 million. Of these activities, around 930 related to property risks, raising net liabilities of approximately $110 million.
- We issued over 910 private rulings and other forms of interpretative advice to members of this market segment.
Income tax
- We completed 46 compliance audits of large businesses and over 370 risk reviews. By the end of 2010-11 we expect we will have raised over $1.2 billion2 in liabilities and around $1.3 billion3 in notional tax adjustments, being the value of reduced carried-forward losses and deduction claims.
- We worked on several annual compliance arrangements to provide large businesses with greater certainty about income tax risk (see Annual compliance arrangements).
- We identified a complex scheme involving a number of financial institutions. The scheme was withdrawn from the market following tax rulings and compliance activity, with $470 million in revenue protected for the last three years, and around a further $310 million protected relating to future years.
- We completed around 280 private binding rulings, 60 class rulings and around 300 objections.
- We finalised over 30 advance-pricing arrangements and eight mutual agreement procedural matters with other tax administrations where the aim is to manage double taxation matters between jurisdictions.
Lodgment
- We issued letters to more than 2,900 businesses and phoned 120 businesses with outstanding lodgment obligations. These activities raised approximately $20 million in net liabilities.
Superannuation
- In addressing employee complaints about unpaid superannuation, we actioned around 150 superannuation guarantee cases involving large employers. These activities raised approximately $1 million in unpaid superannuation and penalties.
- We completed around 60 audits on large Australian Prudential Regulation Authority funds to verify the accuracy and completeness of their superannuation reporting. These reviews identified a number of issues. Funds have since implemented changes to their systems and processes to rectify these issues for future reporting.
GST
Our compliance activities gave rise to approximately $660 million in additional GST liabilities. Of this amount, around $140 million came through voluntary disclosures.
- We finalised over 1,430 reviews and audits focusing on integrity of business systems, financial supplies and property transactions.
- These activities resulted in raising approximately $194 million in GST liabilities.
- We also finalised over 1,880 reviews and audits across other risks in the large market.
- These activities raised over $462 million in GST liabilities.
- We issued over 580 private rulings and other forms of interpretative advice to members of this market segment.
Income tax
- We reviewed the entitlement to tax concessions for 190 non-profit organisations. This resulted in raising liabilities of almost $10 million. We also revoked the charitable tax concession or deductible gift recipient status of 15 entities.
- We advised further five entities they were not exempt and requested them to lodge assessments.
- Twenty entities were required to undertake corrective action to maintain their concessional status.
- Almost 100 school building funds voluntarily revoked their deductible gift recipient status.
- We also reviewed the activities of 125 clubs, resulting in 25 clubs lodging original or amended assessments and five cases being escalated to audit to review their entitlement to status as an exempt sporting club.
- We checked 4,800 applications for refund of franking credits, with 120 applications varied down, protecting over $8 million in revenue.
- We checked almost 4,430 applications for endorsement as a charity or deductible gift recipient, and disallowed over 1,100. We completed around 130 private rulings and over 75 objections.
Superannuation
- In addressing employee complaints about unpaid superannuation we actioned around 180 superannuation guarantee cases involving not-for-profit employers. These activities raised over $3 million in unpaid superannuation and penalties.
GST
- We completed around 1,960 compliance interventions resulting in over $19 million of revisions in addition to around 730 internal reviews.
- We issued around 380 private rulings and other forms of interpretative advice to members of this market segment.
GST
- We issued over 200 private rulings and other forms of interpretative advice to organisations in this market segment.
Superannuation
- We monitored auditor behaviour and contacted around 1,100 auditors through field visits and our audit program. We disqualified nine approved auditors of self-managed superannuation funds from acting as an approved auditor. We referred 14 approved auditors to their professional association for failing to carry out or adequately perform the duties of an approved auditor, or for not being a fit and proper person to be an approved auditor.
- We also successfully piloted the superannuation professional-to-professional support service. We also enhanced the electronic superannuation audit tool (eSAT).
Practical assistance to encourage compliance
- We delivered 55 broadcasts directly to affected agents, delivering urgent or important messages, 44 eLink and 10 BAS agent newsletters.
- We now have over 19,600 subscriptions for the monthly electronic BAS agent newsletter. Subscriptions grew by 13,000 in 2010-11.
- We now have over 25,000 subscribers to our weekly eLink subscription newsletter, an increase of around 3,200.
- Our online magazine, The Tax Agent, generated over 22,000 downloads from our website.
- Web casts have been growing in popularity. The compliance web cast in July 2010 attracted almost 7,000 hits, almost 26,000 hits in October 2010, almost 15,000 in February and over 7,000 hits for the April 2011 web cast.
- We answered around 1.4 million calls to our premium phone service for tax practitioners. We answered over 90% within two minutes.
- We have over 1,000 tax practitioners with our professional-to-professional service.
Ongoing assurance and integrity
- We referred 110 cases to the Tax Practitioner Board for potential breaches of the Tax Agent Services Act 2009, including the Code of Professional Conduct.
Aggressive tax planning
We have reviewed the conduct of around 500 entities either:
- potentially involved in arrangements that may contravene the promoter penalty laws, or
- potential participants involved in the arrangements.
These reviews raised liabilities of approximately $40 million.
Over the course of the year we sent letters to over 69,000 clients primarily to:
- participants in the managed investments scheme collapse
- participants in the stapled securities arrangements.
In addition, we offered enforceable voluntary undertakings to some entities involved in more complex or higher value arrangements. These always include an undertaking to cease marketing the arrangement in the future, and may include undertakings to internal governance or control processes for promoter penalty risks, and providing specific training for staff on promoter penalty issues.
Serious non-compliance, including Project Wickenby and prosecutions
- We completed almost 280 audits and over 660 reviews in 2010-11, raising approximately $360 million in liabilities.
- We completed around 110 investigations with around 50 briefs referred to the Commonwealth Director of Public Prosecutions and a further 17 briefs referred to our in-house prosecutions section for prosecution under the Taxation Administration Act 1953. We had around 47 prosecution cases brought before the courts. They were all successful.
- There were 40 custodial sentences with 30 people actually jailed as a result of this activity, the remaining 10 receiving suspended sentences. Included in these numbers were six prosecutions related to cash-economy matters. There are around a further 30 cash-economy cases in progress.
- We prosecuted around 1,000 individuals and over 200 companies for a variety of administrative offences including non-lodgment of returns and business activity statements, failure to comply with formal notices for information and making false or misleading statements. Some of these individuals and companies were subject to multiple convictions and bonds.
Project Wickenby
From inception in February 2006 to end of May 2011, Project Wickenby has:
- completed over 800 audits and 1,380 reviews, raising liabilities of over $1 billion
- resulted in 23 criminal investigations, with 62 people charged with indictable offences and 18 people convicted of serious offences
- collected over $563 million (including approximately $255 million in cash collections from active compliance, a compliance dividend of approximately $306 million and $2.1 million of other moneys recouped).
Analysis also shows around a 16% decrease in fund flows to 13 secrecy havens, demonstrating the broader impact of Project Wickenby. Trends also show declines in fund flows of 80% to Liechtenstein, 50% to Vanuatu and 22% to Switzerland.
Highly wealthy individuals and wealthy Australians
- We completed over 650 reviews and audits of highly wealthy individuals. We expect to raise over $800 million in liabilities by the end of 2010-11
- In addition, we completed over 600 reviews and audits of wealthy Australians. We also contacted over 2,000 of these individuals by phone or letter to clarify identified compliance anomalies. We expect to raise over $25 million in liabilities from these activities by the end of 2010-11.
Employer obligations
- Overall, we conducted around 29,100 reviews and audits of employers to ensure compliance with their pay as you go withholding, superannuation guarantee and fringe benefits tax obligations, raising revenue of over $700 million. We undertook this work across all market segments.
Annual compliance arrangements
- Currently, we have 16 annual compliance arrangements in place - five with government departments, the remainder with large business taxpayers.
- We had seven income tax related annual compliance arrangements in operation to provide large businesses with greater certainty about income tax risks. During the year we signed three new compliance arrangements, renewed one and are currently in negotiation with two taxpayers on renewal of existing arrangement. The revenue protected from these arrangements is in excess of $760 million on major transactions valued in excess of $30 billion being cooperatively risk assessed with large business.
- While there are relatively few annual arrangements, they are significant in terms of the coverage and impact they have on the economy. The value of turnover of public companies under an arrangement represents almost 11% of total turnover of all public companies.
Illegal early release of superannuation
- We audited over 920 individuals involved with illegal early release of superannuation benefits and 31 promoters, raising almost $14 million in liabilities. As our compliance activities have increased, the number of participants engaged in illegal early release has decreased over time.
- In acting against the more serious abuses of the superannuation system we had two civil penalty cases decided in the Federal Court. Convictions were recorded against trustees and fines totalling $27,500 were imposed. We also referred four illegal early-release cases for prosecution. Additionally we completed 138 prosecutions, resulting in 101 convictions and fines of approximately $202,849 relating to lodgment obligations of self-managed superannuation funds.
- As part of our focus on illegal early release we implemented real-time risk profiling of new self-managed superannuation fund registrations. To date we have stopped over 440 suspect funds from operating by withholding their details from Superfund Lookup.
- We also introduced a member-verification service, allowing Australian Prudential Regulation Authority funds to confirm whether an individual is a self-managed superannuation fund member before actioning a super rollover request. This service reduces fraud, limits the scope of illegal early-release schemes and increases the integrity of the rollover process.
Taxpayer assistance - guidance and advice
Each year we provide advice and guidance to taxpayers and others who ask for our assistance and views on the laws we administer. This year we have provided guidance and advice on around 30,400 occasion as follows.
|
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Interpretative guidance - non-binding
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Private written advice
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Total
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Individuals
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6,100
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3,200
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9,300
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Micro enterprises
|
8,200
|
3,600
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11,800
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Small-to-medium enterprises
|
1,700
|
600
|
2,300
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Large businesses
|
600
|
400
|
1,000
|
Non-profit organisations
|
5,100
|
300
|
5,400
|
Government
|
400
|
200
|
600
|
Non-binding advice by phone - inbound calls
In addition, to mid-June, we had received around 8.8 million calls from people across all markets, with around 1.5 million callers requiring general non-binding advice.
For copies of this document phone 1300 720 092 or visit www.ato.gov.au
Feedback
Email your comments to compliancefeedback@ato.gov.au
1 These reviews are the employer-related component of our level playing field activities.
2 Around $240 million of Large market income tax liabilities raised are not reported in these results because the taxpayer has shifted to another market.
3 Around $1 billion of Large market notional tax adjustments are not reported in these results because the taxpayer has shifted to another market.
Last Modified: Friday, 1 July 2011
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