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Warning: This information may not apply to the current year. Check the content carefully to ensure it is applicable to your circumstances.
Compliance program 2007-08
Compliance program 2007-08
Download a PDF version of this document (NAT 7769, PDF, 2,553KB)
Our compliance program describes how we go about achieving high levels of voluntary compliance with Australia's tax and superannuation laws.
It sets out the practices and patterns of activity that attract our attention, and how we plan to respond to them.
Being open and accountable is central to our compliance strategies.
As taxpayers we have rights and obligations, and this publication sets out the issues we need to be aware of in our personal and business affairs. As citizens we need to have confidence in the integrity of our tax and superannuation systems - and we describe here how the Tax Office goes about encouraging voluntary compliance with the law and trying to ensure a fair and level playing field for individuals and businesses.
As we work with the community, our aim is to be as least intrusive as possible to the majority of individuals and businesses who want to meet their tax and superannuation obligations, while at the same time being highly visible to those who are reluctant to comply.
In all we do we are guided by the taxpayers' charter, which sets out how we apply the principles of integrity, fairness, respect, transparency and accountability in dealing with taxpayers.
Providing help and information and making actual compliance cheaper, easier and more personalised is the starting point for compliance under a system that relies on the cooperation and support of taxpayers and their agents. This is complemented by a risk management approach that drives our compliance verification work. Assessing the risks to the laws we administer helps us make informed choices about where to direct our scarce resources.
Given the pervasive role of the tax and superannuation systems in the business of government, we are also working with other agencies to develop solutions that simplify how people deal with government as a whole and to minimise the burden of regulation.
The shape of the tax and superannuation systems is a matter for government. Our responsibility is the care and management of these systems, ensuring that they operate as intended and at least cost to taxpayers. It also involves implementing new measures including, this year, the major changes to the superannuation system.
Achieving high levels of compliance requires us to work closely with the community, and to engage in an open dialogue about managing the risks to the community's tax and superannuation systems. I invite community groups, business and professional representatives to participate in this dialogue.
Michael D'Ascenzo
Commissioner of Taxation
Results for 2006-07 are based on preliminary data and are indicative only. Final results will be published in our Annual report 2006-07, due for release in October.
Notes
Liabilities are the net value of debit and credit amendments from active compliance intervention on returns, statements and claims. The impact is a combination of tax, penalties, interest and transfer payments and cover excise, goods and services tax, income tax and superannuation products.
Results include activities undertaken to prevent incorrect refunds or payments being issued.
Estimated collections are actual monies received from large business income tax liabilities raised in 2006-07 and liabilities raised in prior years. For other areas, cash collections are for liabilities raised only in 2006-07 and have been estimated using rates which were determined using a sampling approach and are based on collections in 2005-06 from liabilities raised in 2005-06.
The 2004-05 and 2005-06 figures are taken from our annual reports for 2004-05 and 2005-06.
Cash collections for 2004-05 and 2005-06 include collections on tax, penalties and interest raised in prior years from all areas. Cash collections for 2006-07 do not include any collections on tax, penalties and interest raised in prior years, except for the large income tax area. Therefore, collections in 2006-07 are not directly comparable to the other years.
Preliminary estimates of credit amendments arising from the resolution of disputes and interest remission in 2006-07 in the large market is approximately $775 million. These amendments generally relate to liabilities raised prior to 2006-07.
Of reported liabilities for 2006-07, the preliminary estimate indicates that $237.2 million is in dispute from the large market results.
GST Large Active Compliance results include disclosures made outside the scope of an audit and disclosures where an audit has not commenced.
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We are committed to providing you with advice and information you can rely on.
We make every effort to ensure that our advice and information is correct. If you follow advice in this publication and it turns out to be incorrect, or it is misleading and you make a mistake as a result, we must still apply the law correctly. If that means you owe us money, we must ask you to pay it. However, we will not charge you a penalty or interest if you acted reasonably and in good faith.
If you make an honest mistake when you try to follow our advice and you owe us money as a result, we will not charge you a penalty. However, we will ask you to pay the money, and we may also charge you interest.
If correcting the mistake means we owe you money, we will pay it to you. We will also pay you any interest you are entitled to.
You are protected under GST law if you have acted on any GST advice in this publication. If you have relied on GST advice in this publication and that advice later changes, you will not have to pay any extra GST for the period up to the date of the change. Similarly, you will not have to pay any penalty or interest.
If you feel this publication does not fully cover your circumstances, please seek help from the Tax Office or a professional adviser.
The information in this publication is current at August 2007. We regularly revise our publications to take account of any changes to the law, so make sure that you have the latest information. If you are unsure, you can check for a more recent version on our website or contact us.
Download a PDF version of this section (NAT 7769, PDF, 198KB)
'Our compliance program sets out the areas of risk to compliance and how we intend to respond, as well as a wide range of measures to help those people trying to comply.
By being transparent, we hope to deter those who are thinking of not complying and to reinforce the broader community's confidence in our administration.'
Jennie Granger
Second Commissioner, Compliance
Implementing policy
As manager of Australia's tax and superannuation systems, the Tax Office has a key role in implementing new measures. In 2007-08 this will see us:
- helping Australians engage with the Better Super reforms
- working with the tax profession and other parts of government to prepare for the proposed new tax practitioners regulatory framework - this will support the continued development of a capable and well-regulated profession and protect taxpayers who rely on tax practitioners
- applying new laws that provide for penalties for promoters of tax exploitation schemes, who have previously been able to pass on all the tax risks to scheme participants
- implementing a uniform eligibility test for small businesses, making it easier for them to determine their eligibility for concessions covering capital gains tax, goods and services tax (GST) and the simplified tax system, and
- implementing the extension of the fuel tax credits scheme.
Managing tax risks in a global economy
As business, investment and employment become increasingly globalised, we are working to ensure information and support are available to help people meet their obligations. Increasingly, we are working more closely with other agencies and tax jurisdictions to detect and combat cross-border tax avoidance and evasion.
Taskforces such as Project Wickenby apply the complementary resources and powers of different regulatory and law enforcement agencies. Multilateral initiatives such as the Joint International Tax Shelter Information Centre foster international cooperation and the exchange of information among member tax administrations.
Promoting good governance and sound practices for business
For larger business groups, our priorities are to help boards and senior management refine their corporate governance processes to encompass effective management of material tax risks, and to provide more certainty in applying tax law.
For smaller businesses, our priorities are to provide enhanced assistance to those that want to comply with their obligations while also maintaining our focus on outstanding tax and superannuation obligations.
Expanding our monitoring of wealthy people
We pay special attention to the tax affairs of wealthy people, particularly by identifying related assets and income sources and by monitoring groups of related entities controlled by these individuals.
Dealing with cash transactions and tax evasion
New strategies to tackle tax evasion arising out of cash transactions, particularly business-to-consumer transactions, include developing industry-specific benchmarks that let businesses know what attracts our attention.
Our mission is to achieve high levels of voluntary compliance with Australia's tax and superannuation laws. In supporting a range of economic and social policies, we collect income tax, GST (on behalf of the states and territories) and excise, make payments for a range of benefits (including the baby bonus, family tax benefits and excise grants) and regulate the payment of superannuation contributions and the operation of small superannuation funds.
Income tax (including personal tax, company tax and capital gains tax) is the largest source of federal revenue, accounting for around 75% of the total revenue collected in 2006-07. GST accounted for about 15% of total revenue, while excise on alcohol, tobacco and petroleum accounted for about 10%.
We believe that being open and accountable about our compliance activities encourages voluntary compliance. This is why we publish our compliance program, describing the tax and superannuation compliance risks we are most concerned about and what we are doing to address them. It reflects a 'prevention is better than cure' approach.
We see risks in terms of the tax and superannuation systems not working as intended by Parliament. Accordingly, our compliance program involves a mix of help and information (including helping taxpayers deal with us online at minimal cost and effort) and verification and enforcement activities (such as risk reviews, audits and prosecutions). Increasingly, we are engaging with professional and industry bodies in managing the community's tax and superannuation systems.
Our compliance program is driven by risk, which informs how we allocate our limited resources. By making the program public, we invite community feedback on these choices.
Maintaining public confidence in the tax system requires us to keep the community informed on how we go about encouraging everyone to pay their fair share of tax and ensuring there is a level playing field for business.
The intelligence gained from these activities helps us keep Treasury and the Government informed on how these systems are working in practice, and allows us to have input on proposed new measures.
Frameworks
The compliance program is guided by the taxpayers' charter and our compliance model to support the delivery of our Strategic statement 2006-10.
The charter requires us to be open and to treat people fairly and with respect, to inform people of their rights, obligations and entitlements, and to act in accordance with the law.
The compliance model is based on the premise that we can influence taxpayer behaviour through our responses and interventions.
It directs us to address the cause rather than the symptoms of non-compliance.
To do this we need to understand the business, industry, sociological, economic and psychological factors that drive behaviour.
The model's core principle is to make compliance as easy as possible for those who want to comply. At the other end of the spectrum, we apply the full force of the law when people wilfully seek to abuse the system.
Making it as easy and inexpensive as possible
On the assumption that the vast majority of taxpayers want to comply with their obligations, our starting point is to make compliance as easy and inexpensive as possible. There are three main aspects to this.
First, we consult and collaborate with taxpayers and their advisers to co-design the administrative processes that affect them. An empathetic, user-based approach ensures administrative solutions are designed around what works for taxpayers and citizens.
Second, we aim to provide taxpayers and their advisers with the information they need to understand and meet their obligations. Information products are tailored to the needs of different taxpayer segments and industries. Taxpayers are encouraged to come to us for personalised advice that we will stand by.
Third, we aim to provide convenient and inexpensive ways for people to undertake transactions with us, such as reporting information and making and receiving payments.
We are working with other agencies to develop whole-of-government solutions that minimise red tape and compliance costs.
One such example is the continuing development of electronic returns pre-filled with information from other government agencies, financial services providers and employers. We are also supporting initiatives that reduce the reporting burden for taxpayers across all layers of government.
Verifying and enforcing compliance
While our compliance verification activities vary according to the taxpayer segment, they generally involve:
- building risk profiles - identifying risk characteristics among groups of taxpayers (such as particular patterns of transactions) by analysing information we collect in returns and from third parties such as financial institutions, government agencies and auditors of self managed superannuation funds
- data matching and applying risk profiles to taxpayers - identifying inconsistencies, unreported transactions and other risks by automatically checking returns against taxpayers' past behaviour and third-party data
- reviewing specific taxpayers where we identify inconsistencies or other risks, and
- auditing taxpayers where reviews confirm the risk.
Taxpayer returns (including activity statements and other reports) are the foundation for verifying compliance, which is why we put so much emphasis on the need for taxpayers to lodge returns in full and on time. The returns also contain information required by others such as the Australian Bureau of Statistics.
When risks are identified, our contact with taxpayers depends on the nature and complexity of the risk. But it typically starts with letters and phone calls seeking more information or clarification, and extends to field visits and audits where required. Risk profiling is as much about identifying taxpayers who represent little or no risk to the tax and superannuation systems so that we can leave them alone as it is about identifying non-compliance.
The timespan for compliance verification activities is becoming shorter. Early intervention can resolve issues before they get bigger, while earlier closure gives taxpayers more certainty about their tax affairs.
Visibility of compliance verification
The compliance program is structured around a set of taxpayer segments that we use to tailor our help and verification activities across all taxes and payments, including superannuation and excise. The segments are:
This publication has chapters covering all of these segments. There is also a chapter on tax practitioners, who perform a vital role in the self-assessment system as intermediaries. The threat to the tax system posed by tax-related crime is also the subject of a chapter.
We have included several features this year that address themes or particular issues affecting more than one segment, including changes to superannuation.
While this publication explains how we plan to respond in 2007-08 to the current major risks to the tax and superannuation systems, it does not cover every aspect of our compliance work.
As compliance risks change during the year, we may vary our plans in response to the changes, or to feedback from the community.
Individuals
Download a PDF version of this section (NAT 7769, PDF, 406KB)
Around 11.5 million individuals lodge income tax returns.
Tax agents prepare around 73% of the tax returns lodged by individuals. Around half of the individuals who prepare their own returns lodge online using e-tax.
Individuals pay around 43% of total tax collections, paid mostly through their employers.
Helping Australians engage with Better Super
We are implementing the new Better Super measures through a program of help and education, supported by targeted compliance activities.
Capital gains on disposal of property and other assets
We will be closely monitoring capital gains arising from the sale of real property and shares, including distributions from managed funds.
High-income individuals
We are focusing on public company executives to identify any under-reporting of income arising, for example, from benefits such as employee share schemes.
Our compliance activities for individuals involve:
- providing taxpayers and tax agents with the information and services they need to comply
- maintaining a high level of compliance with lodgment obligations, and
- verifying information in returns.
Helping people comply
Our aim is to make it easier, cheaper and more personalised for people to deal with us. In consultation with community representatives and tax agents, we are enhancing our electronic lodgment products and improving online access to information.
In 2007-08 we are extending the pre-filling of tax returns for individuals to include:
- salary, wages and allowances, where the employer has lodged the employee's payment summary electronically
- dividend and interest income, and distributions from managed funds
- payments from Centrelink, the Department of Education, Science and Training and the Department of Veterans' Affairs
- Medicare out-of-pocket expenses and private health insurance information, and
- Higher Education Loan Programme details.
Taxpayers with other sources of income, such as rent, capital gains and foreign income, will need to add the details to their returns, as will those whose employer has not lodged payment summaries electronically.
Lodgment and reporting compliance
We deal with the failure to lodge tax returns by contacting taxpayers by letter or phone, undertaking field reviews, referring taxpayers for prosecution, making assessments based on available information, and where necessary imposing statutory penalties and taking prosecution action. We also attempt to influence behaviour through approaches to tax agents and representative bodies.
When income tax returns are lodged, our verification processes focus on identifying any omitted income or non-allowable or over-claimed deductions.
At a broad level, we undertake risk profiling - analysing information in returns and from third parties to identify risk characteristics among taxpayers (such as patterns of transactions).
At the level of the individual taxpayer, we detect discrepancies by automatically matching information in returns with data from third parties on investment and employment income and government benefits, including payments from overseas). Refunds are automatically checked against criteria based on intelligence from our compliance activities before assessments issue.
We follow up discrepancies (both those that increase and those that decrease a taxpayer's liabilities or entitlements) and may contact the taxpayer to verify the information in their return.
We also monitor compliance in this segment through tax agents, risk assessing their client bases to identify common mistakes or claims that are outside occupational or industry norms. We then contact the agent and taxpayer to seek verification, and check their tax return preparation and record keeping practices.
Tax file number registrations
Using a set of risk criteria, we select some identity documents for closer examination before issuing tax file numbers. To prevent tax file numbers being used for fraudulent purposes, we cancel redundant registrations where taxpayers have died or left the country.
At a broader level, we are working with other government agencies to combat identity-related tax fraud.
Lodging returns
Our compliance work in relation to lodgment is driven by risk assessment. We use risk profiling to identify those groups most likely to not comply with their lodgment obligations, or where failure to lodge in full and on time increases other tax risks.
This year we are focusing on people who:
- pose a high risk to revenue, including those we expect to have high tax liabilities
- are in high-profile professions that influence the wider community
- have child support obligations
- are identified as high risk from major enforcement projects, or
- are promoters of tax schemes or are using tax havens.
Capital gains on disposal of property and other assets
In 2007-08 we will:
- write to individuals who purchased investment property, shares or units in a managed fund in 2006-07 to inform them of their capital gains tax obligations if they dispose of these assets, and
- send letters, before 2006-07 returns are due, to individuals who appear to have made capital gains, alerting them of their reporting obligation.
We will examine around 6,000 at-risk cases this year, including taxpayers who made a gain from disposing of assets to invest in superannuation.
We continue to expand the use of data matching to identify under-reporting of capital gains. We obtain information on asset transactions from state title and revenue offices, securities exchanges and share registries, as well as reports from managed funds.
Much of our effort is focused on educating people about their obligations. Our results to date indicate that we have:
- raised awareness and use of our capital gains tax publications
- significantly increased visits to the capital gains tax section of our website, and
- improved understanding of the main residence exemption, with requests for rulings on this falling over the past 12 months.
High-income individuals
Reviews of the tax affairs of public company executives and directors with total remuneration of more than $1 million have identified cases where it appears that income is not being fully reported. This mainly involves income from employee share benefits such as options and rights issues, as well as cash bonuses and non-income capital benefits.
We are contacting some company executives and directors who have failed to lodge tax returns for one or more years.
In 2007-08 we will comprehensively examine the tax affairs of top public company executives who are considered at risk, and continue risk-assessing private company executives and directors.
High-risk refunds
Before we issue refunds, they are automatically checked against a set of criteria, based on intelligence from our compliance activities, to detect incorrect or fraudulent returns.
Depending on the circumstances, we may:
- match the return information with data supplied by third parties, including employers
- contact an individual or their tax agent to get more detail about return information
- contact an individual's employer to verify employment details
- undertake more detailed investigations, or
- refer the matter for prosecution.
During this process we detect a range of incorrect claims covering items such as work-related expenses, interest and dividend deductions, rental deductions and gifts.
Work-related expenses
Work-related expenses present a continuing compliance challenge, with around 7.1 million individuals claiming $12.5 billion in 2005-06 income tax returns1 an increase of 9.3% over the previous year.
Based on our analysis of claim patterns for the previous year, we are paying special attention in 2007-08 to claims from:
- tourism workers, travel consultants and guides
- fitness and sporting industry employees
- construction industry employees
- guards and security employees, and
- mining site employees.
Our compliance approach involves:
- providing personalised information to taxpayers to raise awareness and understanding of their rights and responsibilities
- requesting additional information to substantiate claims where necessary
- reviewing claims that are outside normal claim patterns, and
- reviewing tax agents whose claim patterns vary significantly from benchmarks.
Before 2006-07 returns are due, we will write to employees identified as at risk of not complying, pointing to information on work-related expenses and asking them to take particular care with their claims. Tailored information will be sent to taxpayers who have not previously claimed work-related expenses to help them claim correctly.
We plan to conduct 15,000 reviews or audits of at-risk cases and visit 300 tax agents to review their work practices and claims.
Rental income and expenses
In 2007-08 we plan to examine 6,000 at-risk cases (where material amounts are involved), focusing on:
- incorrect apportionment of interest deductions
- claims for capital works that exceed the construction expenditure
- initial repair or renovation costs incorrectly claimed as repairs and maintenance instead of being attributed to the capital cost of the property
- borrowing expenses claimed in a single year (instead of being spread over five years), and
- incorrect return schedules.
This work will include contacting tax agents whose clients have unusual patterns of rental claims.
Before 2006-07 returns are due, we will write to:
- new entrants to the investment property market, advising them how to report rental income and claim deductions, and
- people identified as being at risk of not complying, reminding them to check the accuracy of their claims before lodging their return.
Non-disclosure of income and benefits
We will match about 50 million transactions this year to verify details such as:
- employment income, including salary and wages, allowances, lump sum payments and reportable fringe benefits
- government benefits and other payments
- interest and dividend payments, and
- health insurance premiums paid, and the period of cover.
We follow up material discrepancies with individuals and give them the opportunity to check the information from other parties. Where necessary, we amend the return and impose penalties where appropriate.
Funding superannuation contributions
In 2007-08 we are addressing compliance risks where taxpayers may have sought to fund contributions to superannuation from income sources that have not been properly taxed. These include:
- the unreported disposal of assets that should be subject to capital gains tax
- in-specie contributions - assets assigned or transferred into self managed superannuation funds at less than market value that may not have been treated properly for capital gains tax purposes
- borrowed funds where taxpayers incorrectly claim the interest cost as a deduction, and
- other sources, such as proceeds from cash economy or criminal activities.
Aggressive tax planning
Our concerns include arrangements where, for a relatively small cash outlay, participants create large losses by acquiring prepaid service warrants that may be redeemable for legal and other professional services.
We continue to monitor the characteristics of aggressive new financial products that may be marketed to individuals. Some of these new products, designed to maximise tax deductions on investment borrowings and reduce interest paid on borrowings for private purposes, appear to have features that may bring into operation the general anti-avoidance provisions in the law.
When we identify aggressive tax planning schemes, we encourage participants to come forward early to take advantage of the provision that allows significant reductions in penalties for taxpayers who make full and true voluntary disclosures.
Early intervention
We encourage promoters of managed investment schemes to apply to us for product rulings that provide investors with certainty on the deductions that can be claimed. Product rulings are listed on our website. Where a ruling has not been issued, we encourage potential investors to apply to us for a private ruling on the tax implications of the investment.
Investors need to be aware that they are not protected if the scheme is not implemented as described in the product ruling and that the product ruling does not relate to the commercial viability of the arrangements.
We check that managed investment schemes are implemented as described in their product rulings, and we identify schemes that have proceeded without product rulings.
New laws target promoters of aggressive schemes
New laws provide for penalties for promoters of tax exploitation schemes. Promoters have previously been able to pass on all the tax risks to investors.
Data matching: over 50 million transactions
We use information from a wide range of third-party sources to verify information reported in income tax returns and activity statements.
Some third parties are legally required to provide the Tax Office with a range of information, including:
- annual pay as you go (PAYG) withholding payment summaries from employers
- details of interest, dividend and unit trust distributions paid to investors from investment bodies
- details of payments (and tax withheld) to non-residents from payers of interest, unfranked dividends and royalties
- details about contributors, dependants and health cover for each person covered by a private health insurance policy from private health insurance funds and Medicare Australia, and
- details of welfare benefits from Centrelink, the Department of Veterans' Affairs and other government organisations.
We also receive:
- property data from state revenue and land titles offices
- share data from the Australian Securities Exchange and other share registries, and
- details of financial transactions, including data on significant cash and suspect transactions and international funds transfers, from the Australian Transaction Reports and Analysis Centre (AUSTRAC).
We also exchange information with other government organisations including Centrelink, the Department of Immigration and Citizenship and the Child Support Agency.
Under double tax agreements, we supply information to other countries about the Australian income, including investment income, of overseas residents who pay tax in Australia. We also receive information from participating countries on income earned by Australian residents in those countries.
Results of our activities are based on preliminary data and are indicative only. Final results for 2006-07 will be published in our Annual report 2006-07, due for release in October.
Income tax
- We amended 251,100 individuals' returns after issuing the original assessments, while individuals self-amended 418,000 returns. In addition, approximately 160,000 returns were amended on behalf of taxpayers who had not claimed their entitlement to the child care rebate.
- We reviewed 27,100 returns in relation to high-risk refunds, resulting in revenue adjustments2 of $27.4 million.
- We wrote to 225,000 individuals about work-related expenses, asking them to review their claims before they lodged their returns, or to provide further information. This resulted in revenue savings of $22 million. About 15,500 reviews or audits were completed, resulting in revenue adjustments of $13.1 million.
- We wrote to 65,000 individuals about rental income and expenses, asking them to review their claims. Revenue savings of $1.4 million resulted. We also completed 6,700 reviews or audits, resulting in revenue adjustments of $7 million.
- We reviewed or audited 6,100 returns that failed to fully disclose capital gains tax, resulting in revenue adjustments of $33.3 million. We also wrote to 5,200 individuals involved in the sale of assets alerting them to their potential capital gains tax obligations, resulting in an estimated $6.8 million in additional revenue.
- We identified 30 high-income individuals who had not lodged in one or more years, raising almost $940,000 in liabilities and collecting $730,000. Four individuals remain subject to enforcement action and more than 200 individuals have been identified with potential remuneration discrepancies. These will be followed up in 2007-08.
- We compared third-party information against returns, identifying 257,200 income and benefits discrepancies that resulted in revenue adjustments of $143.8 million.
Superannuation
- We wrote 1.2 million letters to individuals informing them they may have lost track of their superannuation.
- We detected 10,800 individuals who had not included reportable fringe benefit amounts in their returns, resulting in $12.6 million in additional revenue.
- We contacted members of 450 self managed superannuation funds who had inappropriately accessed their superannuation before retirement.
- We followed up high-income earners, resulting in 15,800 income tax lodgments and $26.5 million raised in surcharge liabilities.
- We advised 90 individuals about their excessive eligible termination payments, resulting in an additional $2.3 million in revenue.
- As part of the Better Super campaign, 1.8 million members were contacted about the provision of their tax file number to their fund.
Lodgment
Through targeted enforcement action we completed over 24,000 cases, resulting in the finalisation of 90,000 income tax returns and fringe benefits tax returns, and 5,600 activity statements. This raised liabilities of $20.5 million. We prosecuted 900 cases.
Tax agents
We wrote to over 200 tax agents and visited 300 about work-related expense claim patterns. Where we detected tax agents with a high number of claims, we conducted audits and reviews of their clients.
Helping Australians engage with Better Super
With funding announced in the 2006 Federal Budget, we are undertaking a major campaign to ensure people understand the Better Super changes, including the extension of co-contributions to the self-employed and the new contribution limits.
In the lead-up to the changes taking effect on 1 July 2007, our educational focus was on raising awareness - not only of the benefits of the changes but also of the impact of financial decisions on a person's tax position, including capital gains tax. Once they have made decisions, people also need to understand, for example, their obligation to report capital gains on investment assets sold to free up funds for superannuation contributions.
Other priorities have been to raise members' awareness of the tax consequences of not providing a tax file number to their superannuation fund and of changes to the taxation of employment termination payments.
In addition to raising awareness, we are pursuing compliance activities where members improperly access their superannuation early, individuals exceed the contribution limits, or undeclared reportable fringe benefit amounts lead to over-claimed co-contributions.
We are also reviewing deductions for personal superannuation contributions to ensure claimants are entitled to these deductions.
We have a tailored compliance program for self managed superannuation funds, which have special management and reporting obligations.
Superannuation complaints - keeping employees in the picture
We receive more than 12,000 complaints a year from employees about their employers not paying the correct superannuation guarantee contributions or not offering choice of superannuation fund. We acknowledge employees' complaints in writing and from this year, due to a change in the privacy laws, are able to keep employees more informed on the progress of the investigation.
As well as keeping people informed, we expect to significantly reduce the time it takes to act on these complaints this year. These steps complement a heightened focus on early intervention for outstanding superannuation guarantee payments.
Micro enterprises
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The micro enterprise segment includes entities with an annual turnover of up to $2 million and consists of approximately:
- 1.9 million individuals with business, partnership or trust income
- 600,000 companies
- 400,000 partnerships
- 400,000 trusts, and
- 300,000 super funds.
There is a significant degree of overlap between these entities. Around 2.5 million of them report active business income in their income tax returns. About 95% of micro enterprises lodge their returns through tax agents.
Micro enterprises pay around 11% of all tax we collect. They contribute a further 6% of total tax collected through amounts they withhold from payments to employees. Nearly 25% of people employed in Australia during the year worked for micro enterprises.
Supporting micro enterprises through a coordinated assistance program
This year we are significantly changing and improving our assistance program for small businesses to support their needs at critical points in the business life cycle.
Expanding debt collection capabilities
Extra funding in the 2007 Federal Budget will be used to target tax debts more than two years old and superannuation guarantee charge debts, as well as enabling us to further engage with debtors by using automated dialling technology and external collection agencies.
Cash economy
While maintaining a focus on cash transactions between businesses, we are paying more attention to business-to-consumer cash transactions. For example, we will respond more quickly to information provided by the public and use third-party information to identify business operators with lifestyles that do not match what they report in their income tax returns.
Employer obligations
To meet their tax and superannuation obligations, employers need to keep good records and manage their cash flow. We continue to provide the necessary tools, education and support to help them comply, while conducting reviews and audits to deal with non-compliance.
Self managed superannuation funds
In the face of very strong growth in the number of self managed superannuation funds, we are developing support tools for trustees and auditors, while increasing reviews and audits and pursuing outstanding lodgments.
While most micro enterprises try to meet their tax obligations, they are often hampered by a lack of time and resources, given the range of issues they have to deal with.
Our compliance approach is based on:
- providing micro enterprises with the information and support they need to apply sound business practices and comply with their tax obligations
- identifying and alerting them to compliance risks - that is, practices and patterns of activity that may suggest non-compliance
- intervening early where they fail to meet payment obligations - to prevent debts escalating, and
- identifying and taking action against taxpayers who deliberately or persistently fail to comply.
Supporting micro enterprises
Providing taxpayers with the assistance they need to understand and effectively deal with their tax entitlements and obligations is central to improving voluntary compliance.
This year our Small Business Assistance Program is being enhanced with support from the 2007 Federal Budget. We are aiming to provide practical assistance that is relevant to the issues facing businesses at various stages of their development. The program is being developed in consultation with business representatives and tested with business operators.
Our assistance packages will be tailored to meet the needs of businesses. Assistance and advice will be available to businesses on start-up and at various other points in the business life cycle - such as when a business registers for GST or decides to take on employees, or if it is having difficulties meeting its obligations.
We offer support in the form of assistance visits, seminars and workshops, and over the phone. We are also making more and better use of local industry bodies, business assistance centres and other local organisations to make sure micro enterprises get the help they need. In particular, we are using these channels to provide practical guidance to micro enterprises that are concerned about compliance with their tax obligations.
For many businesses, dealing with us online is faster and more efficient than using paper forms. We help businesses better understand and use our electronic products such as e-Record and our record keeping evaluation tool. We also provide practical help to businesses in accessing the Business Portal.
We are implementing a new policy measure that will help reduce complexity and compliance costs for taxpayers by providing a single definition of 'turnover' for small businesses.
Compliance risks are identified through risk assessment processes. We match data to identify unreported transactions and businesses operating outside industry or economic norms. The data is drawn from a vast range of information reported by taxpayers, as well as third parties such as other government agencies and financial institutions.
The level of risk determines what compliance action we take. Depending on the circumstances, compliance activities may include letter and phone contact, visits, audits, assessments made on the basis of available information, penalties and court action.
ABN registrations
To minimise the number of inappropriate registrations for Australian business numbers, we are systematically reviewing those that do not appear to represent active businesses.
Record keeping
Our field activities include reviewing record-keeping practices. Where we identify poor record keeping, a business is offered advice and assistance to improve. Depending on the circumstances, we may schedule another visit to check that practices have improved.
If a business owner does not make a genuine attempt to change their practices and their record keeping remains unsatisfactory, we apply a graduated approach to penalties, extending to prosecution for those who consistently fail to meet their obligations.
Lodging on time
To identify businesses that pose the highest risk of not lodging returns or lodging late, we compare information from internal and external sources and tailor our response to the level of risk and the compliance history of each business.
We deal with failure to lodge by contacting businesses by letter or phone, undertaking field reviews, making assessments based on information available, or imposing statutory penalties and taking prosecution action. Leveraging off their key role, we also seek to influence lodgment behaviour through tax agents, by offering flexibility in lodgment dates for returns lodged through agents, and other forms of practical assistance.
This year we have a particular focus on the following risk areas:
- self managed superannuation funds
- businesses with outstanding tax or superannuation guarantee debts
- businesses that fail to lodge on time
- business operators with child support obligations
- cash-based businesses that display conspicuous consumption, and
- businesses identified through major enforcement projects.
Refunds
We monitor GST and income tax refunds that are assessed as high risk, unusual or have a high monetary value.
Before refunds are issued, they are automatically checked against a set of criteria, based on intelligence from our compliance activities, to detect incorrect or fraudulent statements and returns. We also undertake post-issue verification checks. Refunds may be verified by phone, by visiting the business or contacting third parties.
We regularly refine the criteria used to select refunds for review to minimise the impact of our compliance activity on complying taxpayers, who are entitled to prompt refunds.
Personal services income
We use data matching to identify entities that receive personal services income, and examine the status of personal services businesses to verify whether they pass one of the personal services business tests.
Business expenses
We are examining the records of micro enterprises to determine whether they are correctly claiming business expenses and to understand the causes of incorrect claims.
This involves:
- reviewing and seeking more information from higher risk taxpayers about their business expenses so that we can determine whether their claims are correct
- encouraging voluntary disclosure throughout a review, and escalating cases to audit where it is necessary to further investigate the deductibility of business expenses claimed
- visiting tax agents whose clients have very high business expenses, and reviewing their claims, and
- educating the community where we find a common misunderstanding about the deductibility of business expenses.
Asset disposals
We plan to increase compliance activity in this area in 2007-08 by reviewing a wider range of transactions by micro enterprises that may result in a capital gain.
Given the infrequent nature of these transactions, micro enterprises are not always aware of the capital gains tax and GST implications.
In 2007-08 we will send letters to taxpayers who have:
- purchased a property during the year, outlining their record-keeping requirements and advising of potential capital gains tax implications, or
- sold a property during the year, explaining the potential capital gains tax implications.
Compliance verification is based on matching data from third parties, such as financial institutions and property registries, with return information to identify taxpayers who fail to disclose or significantly under-report a capital gain.
Property transactions and GST
Our compliance activity will have a specific focus on taxpayers who:
- do not report real property sales
- incorrectly report under the margin scheme
- incorrectly report material GST adjustments arising from a change in the extent of creditable purpose, or
- avoid GST obligations by not lodging activity statements.
We continue to enhance our range of GST information products for intermediaries such as real estate agents and conveyancers.
We will continue to work with established industry consultative forums and tax professional associations to identify areas of the GST law that require clarification and then develop solutions, including rulings and information products, or refer matters to Treasury.
Aggressive tax planning
Our general approach to countering aggressive tax planning in the micro enterprise segment builds on our approach outlined for individuals, with a focus on prepaid service warrants, some film investments and employee benefit arrangements.
We are also investing more resources into detecting and acting on offshore arrangements for evading tax.
Fuel tax credits
To support the extension of the fuel tax credits scheme from 1 July 2008, we are providing information and advice to existing and new recipients through our website, direct mail, advertising, industry associations and participation in industry events.
We will match this with more reviews of claims and compliance with the fuel tax credits system, particularly in the transport industry. Firm action will be taken where potential fraud is detected.
Cash economy
Typically, the compliance risk in the cash economy involves businesses or individuals under-reporting or not reporting cash income or cash surrogates (for example, through barter activities), or transactions subject to GST.
In 2007-08 we will:
- address behaviour that is typical of individual cash economy participants, while continuing to review industries where cash transactions are significant and present opportunities for widespread non-compliance, and
- pay more attention to business-to-consumer transactions, while continuing to address transactions between businesses.
As with other tax risks, a key means of addressing this risk is to systematically compare tax return information with data from third parties to identify taxpayers who are under-reporting or operating outside the norm.
New and developing strategies include:
- developing and publishing quantitative benchmarks that will enable trades and other businesses to assess their own tax risk
- systematically comparing tax return information with third-party information, including calls to our tax evasion reporting hotline (1800 060 062), data sourced from other government agencies, industry bodies and associations, and indicators of conspicuous consumption such as purchases of luxury cars and boats, and
- identifying connections between under-reporting income and failing to meet other obligations. This might be seen, for example, in behaviour such as failing to report cash income and, as a result, being able to over-claim social security benefits and/or underpay child support.
Helping businesses meet their payment obligations
The level of collectable debt (debt not subject to dispute or insolvency) in the micro enterprise segment remains an ongoing concern. Micro enterprises account for about two-thirds of outstanding collectable debt at any point in time.
We understand that taxpayers can make honest mistakes or fall behind on their payment obligations. In these situations, taxpayers can expect us to treat them fairly and take their individual circumstances into account.
When taxpayers experience difficulty meeting their tax obligations, they should contact us early (on 13 11 42) so we can discuss their situation and help stop the problem from becoming worse.
In the 2007 Federal Budget we received extra funding of $125.7 million over four years to reduce debts more than two years old and collect superannuation guarantee charge debt owed by employers.
We will do this by:
- expanding the use of dialler technology
- engaging external collection agencies to collect debt on our behalf, and
- increasing the number of staff dedicated to recovering superannuation guarantee charge debts.
These initiatives will enable us to intervene earlier in debt cases, follow them up more quickly, and effectively contact more taxpayers with outstanding debts.
By contacting people early we can work with them to ensure their debt does not grow and become unmanageable. This contributes to the ongoing viability of these businesses, and more broadly helps to maintain a level playing field for businesses that meet their payment obligations on time.
In relation to superannuation guarantee charge debt, we have also found that the earlier the intervention with businesses, the better the outcome for employees.
We take firm action against micro enterprises that are unwilling to work with us to clear their tax debts, including garnishee notices, statutory demands, and bankruptcy or liquidation.
Results of our activities are based on preliminary data and are indicative only. Final results for 2006-07 will be published in our Annual report 2006-07, due for release in October.
Supporting micro enterprises
We visited or telephoned 27,800 new and established micro enterprises to help them understand their tax obligations and report correct information.
Employer obligations
We conducted 2,500 field audits, 1,800 outbound phone reviews and 17,000 desk reviews of employers' compliance with their PAYG withholding, superannuation guarantee and fringe benefits tax obligations, raising revenue of $259.9 million.
Income tax
We completed 3,300 income tax reviews and audits, resulting in additional tax and penalties of $76.4 million. These activities included:
- 280 reviews and audits of alienation of personal services income, resulting in additional tax and penalties of $3.8 million
- 260 reviews of non-commercial losses, raising additional tax and penalties of $797,000, and
- 31 reviews and audits of businesses involving the use of tax havens, resulting in additional taxes and penalties of $2.6 million.
GST
- Our phone and field verification checks resulted in 11,200 activity statements being adjusted.
- We did 880 audits involving serious evasion and fraud, raising liabilities of $84 million in GST and $41.5 million in other taxes.
- We undertook 890 reviews and audits in relation to property transactions, raising liabilities of $37.6 million in GST and $959,000 in other taxes.
Excise
- We conducted a comprehensive education campaign to advise businesses on their entitlements and obligations under the new fuel tax credits scheme. Existing energy grants credits scheme claimants were transferred to the new arrangements with direct tailored assistance, and promotional activity has significantly increased awareness levels among potential claimants.
- We conducted 590 audits and reviews, resulting in 1,700 claims being adjusted.
Superannuation
- We acted on 13,100 cases relating to employee complaints and referrals on employers' superannuation guarantee obligations, raising $237.6 million in liabilities.
- We contacted 70,000 superannuation funds to make sure they lodged income tax returns - 23,600 returns were lodged as a result of this activity.
- We undertook over 4,000 audits and reviews of self managed superannuation funds.
- We conducted 172 superannuation specific seminars and over 800 general seminars.
- We contacted all employers to advise them of changes to their obligations arising from the Better Super legislation.
Lodgment
We finalised over 170,000 cases through targeted enforcement action. As a result, 82,000 income tax returns and fringe benefits tax returns were finalised, along with 395,000 activity statements. This raised liabilities of $502.4 million. There were 4,300 cases subject to prosecution.
Cash economy
We wrote to, phoned or visited 62,000 businesses during the year to check for non-compliant behaviour. Our compliance activities established more than $157 million in total liabilities.
Self managed super funds - a continuing compliance challenge
As the number of self managed superannuation funds continues to grow, we are developing support tools for trustees and will issue guidelines for approved auditors on preparing auditor contravention reports.
Trustees will be able to lodge a combined form covering their income tax, regulatory and member contribution statements for 2007-08.
For new funds, we are undertaking a program of special compliance checks to assist trustees in understanding their obligations, including obtaining confirmation that a trustee declaration has been signed and can be produced. We are also further analysing the reasons why people set up self managed funds with a view to ascertaining motivation, so we can tailor our education, support and compliance activities.
There will be a significant increase in compliance activities for self managed funds generally, focusing on requirements around in-house assets, loans to members and income tax issues such as special income. We will continue to examine auditor contravention reports. Where funds do not meet the definition of a self managed fund, we will work with the trustees to restructure the fund so that it can meet the definition.
We are also expanding our compliance reviews of approved auditors to ensure they are fulfilling their roles.
Meeting employer obligations
Employers play a critical role in the Australian tax system by withholding from salary and wages and other payments to employees under the PAYG withholding system. Last year, over 800,000 employers withheld and paid more than $100 billion to the Tax Office on behalf of their employees, which represents about 44% of net tax revenue.
Employers also make superannuation guarantee contributions for their employees, and have fringe benefits tax obligations where they provide non-cash benefits to employees.
Our approach to maximising compliance by employers is to:
- provide the necessary tools, education and assistance to employers and their advisers to enable them to comply with their PAYG withholding, superannuation guarantee and fringe benefits tax obligations
- use data matching, compliance monitoring and intelligence reports to identify employers who are at a high risk of not complying, and
- conduct reviews and audits of employers to detect and deal with non-compliance.
Helping employers comply
Larger employers generally have good systems to manage their employer obligations. Most of the problems we see are with smaller employers and often stem from poor business practices. These include inadequate record keeping and cash flow management and not having any back-up when unexpected problems arise, such as personal issues or the loss of a key staff member.
Helping employers meet their obligations is an integral part of our Small Business Assistance Program, which is being enhanced with support from funding announced in the 2007 Federal Budget. The program supports businesses at critical points in the business life cycle, such as when they decide to take on employees. It also helps businesses better understand and use our electronic products such as the Business Portal.
Last year we released three new online decision-making tools to help businesses meet their tax and superannuation obligations when paying employees:
- an employee/contractor decision tool, to help people work out whether their new or existing workers are contractors or employees for tax and superannuation purposes
- a superannuation guarantee eligibility decision tool, to help employers work out if they have an obligation to make superannuation contributions for their employees, and
- a superannuation guarantee contributions calculator that calculates how much superannuation employers should be contributing for their eligible employees.
In 2007-08 we will finalise a study into the causes of non-compliance with employer superannuation obligations to help us revise strategies to improve compliance. This will complement our business assistance program.
How we select employers for review
We monitor employers' compliance with their obligations and use data matching to detect cases that appear to be incomplete or inconsistent, such as where:
- information reported by an employer in activity statements does not match the credits claimed by their employees in their tax returns
- employers' PAYG withholding annual reports do not match amounts reported in their activity statements, or
- an employer is registered under a state or territory workers' compensation scheme but does not appear to be registered for PAYG withholding.
We also receive information where people believe that specific employers are not fully complying with their obligations. This includes instances where an employee does not receive a payment summary or an employer is believed to be paying cash wages and not withholding tax.
We value the information given to us in this way and investigate both specific employers and industry practices.
In 2007-08 we expect to conduct around 2,700 field audits and 1,300 phone reviews, and contact 26,000 employers by letter. During these audits and reviews we will look at employers' compliance with their obligations under PAYG withholding, superannuation guarantee and fringe benefits tax.
We also receive complaints from employees that their employer does not appear to have paid sufficient superannuation guarantee contributions, or has not offered them a choice of superannuation fund. We follow up all of these complaints, taking firm action against employers who do not meet their superannuation obligations. This year we expect to significantly reduce the time it takes to act on employee complaints, and we can now keep them informed on the progress of our investigations following recent changes to privacy laws.
We will follow up with employers on around 12,000 complaints received directly from employees.
From these interactions, we gather information about how employers manage their tax and superannuation obligations and the problems they have in complying. This helps us improve our support programs, better target compliance activities and provide advice to Treasury where the system is not working as it should, or gives rise to unintended consequences or compliance costs.
Small to medium enterprises
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There are around 120,000 enterprises in Australia with an annual turnover of between $2 million and $100 million3. These small to medium enterprises consist mainly of privately held groups.
Small to medium enterprises pay around 11% of the total tax we collect. They contribute a further 10% of total tax collected through amounts they withhold from payments to employees. Nearly 25% of people employed in Australia during the year worked for small to medium enterprises.
High-wealth individuals
With a stronger focus on individuals with a net wealth of $30 million or more, we are paying special attention to non-disclosure and under-reporting of capital gains, offshore transactions involving the concealment of assets and income, and the abuse of tax concessions.
Accessing business profits
We are looking closely at schemes to access business profits without paying the correct tax, particularly in the context of proposed legislative changes affecting the treatment of shareholder loans.
Business exit strategies
With intergenerational change and demographic trends indicating an increase in owners disposing of their businesses, we are working to raise their awareness of tax risks around this key stage in the business life cycle.
Small to medium enterprises range from small, simply structured businesses with high turnovers but low margins to more complex enterprises involving multiple entities, including subsidiaries of larger multinationals.
Generally, the smaller businesses do not have access to the same resources and expertise as large businesses, although they may have to deal with equally complex tax issues. The relative lack of disclosure requirements for private companies also presents us with particular compliance challenges, as does the personal connection the controllers have with their businesses.
Our risk management approach with small to medium enterprises is to:
- provide businesses with the information and support they need to apply sound business practices and comply with their tax obligations
- alert businesses to compliance risks - that is, practices and patterns of activity that may suggest non-compliance, and
- take action against taxpayers who deliberately or persistently fail to comply, which may include letter and phone contact, visits, audits, penalties or court action.
Our compliance work includes comparing information that businesses provide to us in returns with information supplied by third parties, including financial institutions, government agencies and industry. This data matching is increasingly automated and comprehensive and includes reviews of unusually high refunds and unusual PAYG instalment payment patterns.
We also use statistical analysis to help identify tax risks based on business results that are outside industry norms or expected economic performance. Factors that may indicate higher risk include the extent to which a business makes losses and engages in related-party and international transactions, particularly where the transactions involve tax havens. Major business transactions are also tracked to ensure they are properly accounted for in tax returns.
In implementing new measures and responding to high-risk tax issues, we consult closely with industry and professional groups and representative businesses. We seek their input in designing information products and services, and we cooperate with them in alerting businesses to risky practices.
Taking a 360-degree view of the taxpayer
Compliance verification for small to medium enterprises is increasingly based on:
- identifying related entities and directors
- looking at the business life cycle, and
- addressing the complete range of compliance obligations.
Identifying related entities
Given that many small to medium enterprises represent groups of closely related entities, we focus on the economic group rather than the individual taxpaying entity.
Around 90% of business entities in this segment are privately owned, and many of these are part of larger groups controlled by one or a few individuals. This can give rise to issues around the transparency of the decisions and actions of the controlling individuals that affect the tax affairs of the businesses they own.
We are developing a detailed understanding of the overall tax performance of these privately held groups, including the individuals who control them. This is similar to the approach we use for high-wealth individuals.
Where an entity is identified as engaging in high-risk tax practices, we identify related entities and expand our investigations to profile the tax performance of the group as a whole, including the controlling individuals.
The business life cycle view
Our compliance focus is increasingly on events or phases in the business life cycle such as growth spurts, restructures, succession planning and business disposals. This enables us to understand the economic, demographic and behavioural drivers that affect compliance, especially in the areas of business finance, asset disposals and capital management.
Addressing the complete range of compliance obligations
Traditionally, we have tended to respond to individual instances of non-compliance, such as failure to lodge a return or to report a specific type of income. We now take a more holistic approach that involves:
- identifying high-risk taxpayers and their associated entities and following up all their compliance obligations, and
- using intelligence from this intensive work to further improve case selection and raise awareness of the risks.
The rapid business growth of some small to medium enterprises outstrips their ability to manage their regulatory requirements. For example, we sometimes find poor record-keeping practices in fast-growing businesses.
We are responding with help and education tailored to the specific needs of small to medium enterprises. New products of particular relevance to this segment include:
- a web-based tool to help taxpayers complete Schedule 25A (for international dealings)
- a practice statement, fact sheets and a yearly repayment calculator to help private companies dealing with changes to Division 7A (for capital management), and
- more educational and interpretive products (for taxation of trustees and trust beneficiaries).
Small to medium enterprises also benefit from initiatives designed to help employers in general meet their tax and superannuation obligations.
Our continued focus on whole economic groups rather than individual taxpaying entities has resulted in some changes to the way we count cases, leading to a reduction in the nominal number of planned income tax audits and reviews this year. However, this has not reduced our overall compliance effort as we expect to see a broader level of coverage across the segment this year. We plan to undertake 390 audits and 460 reviews of small to medium enterprise groups, focusing on:
- losses
- capital gains
- wealth extraction
- international transactions
- service trusts
- prescribed private funds
- fringe benefits tax, and
- phoenix arrangements.
We will also contact about 2,500 small to medium enterprises by letter or phone to verify specific income tax and fringe benefits tax issues. We also expect to check about 6,000 income tax returns where claims for refunds appear excessive or unusual.
Lodgment
Some small to medium enterprises appear to be using non-lodgment or partial lodgment as a means of circumventing our compliance programs.
In 2007-08 we are focusing on:
- ensuring that activity statements are lodged by small to medium enterprises that report high annual losses, given that these businesses have the potential to be wound up with outstanding withholding amounts. We are also working to improve lodgment for businesses that have subsequently recouped their losses and returned to a taxable position
- ensuring that companies with directors who have been associated with insolvent or bankrupt entities are up to date with their lodgment obligations, and
- checking that superannuation funds fully comply with their lodgment obligations.
Losses
We are responding to high-risk cases of loss generation and utilisation more quickly, given the shorter periods for amending income tax returns disclosing losses. Our compliance focus is on the larger small to medium enterprises.
Compliance issues around losses in 2007-08 include:
- recouping losses without taking into account changed ownership or the fact that a different business is being conducted
- misclassifying losses as capital or revenue
- having revenue losses where the origin of the losses is artificial and has no economic or legal basis
- attempting to use related-party losses outside of a consolidated group, and
- incorrectly applying the consolidation loss rules.
Capital gains
Compliance issues we are focusing on in 2007-08 include:
- arranging to reduce the capital gain when a business is sold
- failing to report capital gains tax events (including by non-residents)
- artificially creating significant capital losses to offset capital gains
- incorrectly re-setting the cost base of assets, particularly under consolidation
- misclassifying income to obtain the most advantageous capital position
- claiming small business concessions when not eligible, or incorrectly calculating the claim
- arranging to avoid capital gains tax on offshore transactions, and
- failing to account for capital gains arising from the sale of assets where the proceeds have been transferred into a superannuation fund.
Extracting wealth from businesses
In 2007-08 we are concentrating on business owners who try to extract value from their business without paying the correct tax. Ways owners attempt to do this include:
- using loans, payments and debts forgiven by private companies to, in effect, distribute company profits to shareholders (or their associates) in a non-taxable form, and
- using mechanisms such as share buy-backs, capital reductions and the sale of shares to exit from businesses - particularly in relation to disposing of nominally pre-capital gains tax assets (where a capital gain may still arise) and tax issues arising out of actions to enable the business to be sold, such as writing off or forgiving shareholder loans.
We are also working with professional bodies to implement recent changes to Division 7A of the Income Tax Assessment Act affecting private companies.
International transactions
Business is becoming increasingly globalised and small to medium enterprises are participating strongly in the trend.
Transfer pricing and profit shifting
We continue to examine arrangements between related Australian and offshore entities to shift profits (and tax) from Australia to other countries. This is supported by a program of advance pricing arrangements, which we enter into with individual businesses to provide more certainty about the tax treatment of their transfer pricing arrangements and help reduce the cost of compliance.
We have been monitoring transfer pricing risks at the upper end of the small to medium enterprise segment, and we are now assessing the extent of these risks for businesses with an annual turnover of $2 million to $10 million.
We are also looking closely at:
- heavily geared Australian-based operations overstating interest deductions, and compliance with the thin capitalisation rules, and
- restructures, and trade in services and intangibles.
Use of tax havens and other aggressive arrangements
We continue to investigate attempts to avoid Australian tax obligations by concealing income or gains, and overstating deductions or losses, through arrangements that involve tax havens and countries with banking secrecy. Such arrangements include the use of credit and debit cards to return hidden funds to Australia.
Our high-profile response to arrangements of this sort is Project Wickenby, which helps raise community awareness of the risks involved for those tempted to participate.
This year we will:
- use the new promoter penalty laws to act against promoters of aggressive schemes involving offshore and other arrangements
- in conjunction with financial institutions, write to account holders to encourage voluntary disclosure (with the benefit of reduced penalties) and thereby bring non-complying taxpayers into the tax system, and
- enhance our analytical techniques and increase reviews and audits of taxpayers with high-risk transactions identified through AUSTRAC.
We are also seeking further cooperation with foreign tax authorities to exchange information and act jointly on specific arrangements. And, in association with Treasury, we are negotiating information exchange agreements with cooperative tax havens.
Other international risks
To verify that Australian businesses properly declare their foreign source income, we match information they report in their returns against information received from our overseas counterparts under tax treaties. This capability is increasing year by year as we negotiate to extend the electronic exchange of information.
We also use data matching to:
- check that Australian taxpayers are withholding and remitting tax on interest, dividends and royalties on behalf of foreign residents, and lodging annual reports where required
- identify foreign residents who have not declared income or capital gains from taxable Australian property, and
- check that foreign residents with GST registrations are meeting their tax obligations.
Service trusts
While our emphasis on help and education for professionals using service trust arrangements continues, the nature and extent of future active compliance work at the broad level depends on the outcomes of our current risk assessment work. In particular, we are analysing income tax returns of firms using these arrangements.
At the taxpayer level, our approach to compliance will reflect the degree of ongoing risk we see with service entity arrangements. Arrangements in line with our guidance will have a low risk of audit unless there are concerns about the actual existence of the arrangements.
Prescribed private funds
Prescribed private funds are a special category of non-profit entity for charitable purposes. The number of registered prescribed private funds continues to increase, as does the value of the funds held in them.
As prescribed private funds are closely held funds not open to public scrutiny, we continue to carefully monitor them to ensure they meet their ongoing requirements for listing.
Fringe benefits tax
Business-provided motor vehicles are an important component of remuneration for small to medium enterprises, and our information and education activities emphasise the correct treatment of these vehicles for fringe benefits tax purposes.
We will review a number of taxpayers specifically in relation to fringe benefits tax on car benefits, particularly businesses that attribute a high level of business use to a luxury vehicle.
In response to the change in the minor benefit threshold from $100 to $300, we are issuing further guidance in 2007-08 to clarify the application of the exemption.
Businesses also have difficulty applying the correct fringe benefits tax treatment for meal entertainment. In 2007-08 we will release an information product developed collaboratively with business representatives to help taxpayers meet their tax obligations associated with meal entertainment.
Phoenix arrangements
Phoenix arrangements - that is, attempts to evade tax through the deliberate, systematic and sometimes cyclical liquidation of related corporate trading entities - continue to be a focus.
In 2007-08 we are increasing our emphasis on early intervention by:
- more effectively identifying and tracking phoenix operators
- discouraging new or emerging phoenix operators from becoming serial recidivists, by identifying and contacting them earlier about their behaviour, and
- examining tax agents to identify links to such behaviour.
As phoenix arrangements sometimes involve non-compliance outside the tax jurisdiction, we work and exchange intelligence with other government agencies, especially the Australian Securities and Investments Commission.
We also continue to work with key industry associations to co-design strategies to address phoenix risks, and raise more systemic issues with Treasury.
Where we have evidence of offences that may warrant prosecution, we work with the Australian Federal Police and the Commonwealth Director of Public Prosecutions.
GST
Refund integrity
We continue to monitor GST refunds, undertaking pre-issue and post-issue checks to ensure that the correct amounts are claimed, while seeking to minimise the impact on taxpayers' cash flow. Refunds may be verified by phone or by visiting the business. We may also contact third parties to substantiate claims.
Property transactions
We continue to monitor real property transactions, with reviews and audits focusing on:
- unreported property sales, particularly of new residential premises
- valuations used under the margin scheme (which must comply with certain requirements)
- incorrect reporting of adjustments arising from a change in the extent of creditable purpose, and
- incorrect treatment of supplies to associates.
Data matching is being increasingly used to identify taxpayers who fail to disclose or significantly under-report GST on real property transactions. It involves comparing information from third parties (such as property registries) with return information.
We continue to work with industry consultative forums and tax professional associations to identify areas of the GST law that require clarification and then develop solutions, including rulings or information products, or refer matters to Treasury.
Financial supplies
We continue to find that one-off or unusual transactions, such as a financial supply, are sometimes not reported correctly. This year we are looking closely at:
- supplies of services to associated entities at less than market value, and
- failure to calculate GST using a fair and reasonable apportionment methodology.
International
We are examining material risks associated with international transactions to ensure that GST is correctly applied and paid on goods or services consumed in Australia.
Integrity of business systems
We are undertaking a range of compliance activities to review controls on GST matters arising in the course of major business events, such as accounting system changes and business restructures.
Aggressive tax planning
We are responding to aggressively marketed schemes involving corporate limited partnerships, offshore structures and losses, and questionable arrangements for extracting accumulated wealth from private companies.
The new promoter penalties laws may apply to promoters of these schemes. The new laws provide for a scaled set of responses, including requests for voluntary undertakings, interim injunctions and civil penalties.
In relation to GST, we are focusing on schemes actively designed and marketed to exploit the concessionary provisions of the GST legislation.
Superannuation funds
Our activities to improve compliance by superannuation funds include:
- auditing self managed superannuation funds for income tax and regulatory compliance, and
- auditing a number of funds regulated by the Australian Prudential Regulation Authority to verify the accuracy and completeness of their returns and reports, including lost member reports, member contribution statements and departing Australia superannuation payments.
To support Better Super changes, we will verify with funds that they have applied the appropriate tax treatment to end benefit payments.
Fuel tax credits scheme
Our focus in relation to the fuel tax credits scheme in the small to medium enterprise segment is similar to that for micro enterprises. We expect to conduct 240 audits of small to medium enterprises this year.
More resources to monitor high-wealth individuals
We continue to monitor the tax affairs of around 1,100 high-wealth individuals - people who, together with associates, effectively control $30 million or more in net wealth.
Ongoing analysis routinely identifies high-wealth individuals who appear to have a relatively low risk of non-compliance. We continue to strongly encourage and support voluntary compliance by this group of taxpayers. For example, in 2007-08 we are publishing a booklet for high-wealth individuals, setting out what attracts our attention, what we consider to be a risk, and details of our information collection and compliance processes. With the involvement of a group that includes tax advisers to high-wealth individuals, the booklet is being designed to help these taxpayers adopt and maintain high standards of corporate governance.
Where tax risks do occur in relation to high-wealth individuals, they continue to include non-disclosure and under-reporting of capital gains, offshore transactions involving concealment of assets and income, and abuse of tax concessions.
During 2007-08 we plan to increase the number of staff working in our high-wealth taskforce and substantially improve our information collection and risk assessment processes.
These initiatives include:
- more automated ways of accessing and using third-party information on large financial transactions and capital holdings, to improve identification of high-wealth individuals
- new tools that enable more timely analysis of data, including:
- a tool that retrieves, collates and interrogates data holdings using predetermined search criteria and queries, and
- a tool that maps relationships in data and helps us identify groups of connected individuals, entities and transactions, and
- a dedicated risk-profiling tool for high-wealth individuals that analyses returns and third-party information to identify tax compliance risks. This tool is expected to streamline our risk-profiling ability, enabling us to concentrate on higher-risk cases.
We plan to undertake 200 risk reviews and start 40 audits of high-wealth individuals this year.
Results of our activities are based on preliminary data and are indicative only. Final results for 2006-07 will be published in our Annual report 2006-07, due for release in October.
Income tax
- We completed 990 audits, 760 reviews and 1,600 phone and letter-based verification activities. As a result, we raised liabilities of $338 million and disallowed current year and carried forward losses of $288 million.
- We completed reviews of 210 high-wealth individuals - audits of 22 individuals raised $280 million.
Employer obligations
We completed 321 field audits, 320 outbound phone reviews and 5,726 desk reviews of employers' compliance with their PAYG withholding, superannuation guarantee and fringe benefits tax obligations. This activity raised revenue of $73.8 million.
GST
- We raised liabilities of $37.6 million as a result of 510 property reviews and audits.
- We reviewed 80 enterprises that floated shares on the Australian Stock Exchange. Due to the high number of GST credit over-claims discovered, we worked with the Australian Stock Exchange to inform taxpayers about their proper entitlements. A link was created between the Australian Stock Exchange and Tax Office websites.
Excise
- A comprehensive education campaign advised businesses about their entitlements and obligations under the new fuel tax credits scheme. Existing energy grants credits scheme claimants were transferred to the new arrangements with direct, tailored assistance, while promotional activity has significantly increased awareness levels among potential claimants.
- We made 150 phone calls to check taxpayers' understanding of reporting fuel tax credits on the business activity statement, resulting in net liabilities of $1.4 million.
Lodgment
We targeted our enforcement action to finalise almost 9,000 non-lodgment cases. As a result 4,700 income tax returns and fringe benefits tax returns were finalised, along with 11,900 activity statements. This raised liabilities of $308.5 million. There were 400 cases subject to prosecution.
Superannuation
- We acted on 2,853 cases relating to employee complaints and referrals on employers' superannuation guarantee obligations, raising $113.88 million in liabilities.
- We contacted all employers to advise them of changes to their obligations arising from the Better Super legislation.
Large businesses
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There are around 1,900 business groups in Australia with an annual turnover of more than $100 million4. These large businesses each contain on average around 20 entities. Around 60% of these entities are public companies and a similar proportion are Australian-owned. This segment also includes around 150 superannuation funds with 20 million member accounts.
Large businesses pay around 38% of the total tax we collect. They contribute a further 16% of total tax collected through amounts they withhold from payments to employees. More than 25% of people employed in Australia during the year worked for large businesses.
Promoting good governance
We are working closely with large businesses to identify, as early as possible, issues that may give rise to tax risks and to provide more certainty about their tax affairs.
Alignment of tax and economic performance
A gap between the tax and economic performance of a corporate group often indicates increased tax risk, particularly in relation to the correct characterisation of income and expenses for tax purposes, transfer pricing and GST compliance.
Evolving capital markets
Mergers, acquisitions and divestments, including the growing role of private equity investment and its impact on global financial and capital markets, may have implications for tax revenue and compliance.
International
In response to an increase in the level of tax risks associated with complex international arrangements, we are working closely with our foreign counterparts, sharing information and undertaking coordinated compliance work.
The value, volume and complexity of transactions undertaken by large businesses carry inherent risks for tax compliance. The Tax Office works very closely with large businesses, reflecting not only their critical importance in paying and withholding taxes, but also their role as intermediaries in transactions between us and other taxpayers.
Our approach to optimising voluntary compliance in this segment is based on:
- promoting good corporate governance
- ensuring large businesses have the information and support they need to comply with their tax obligations, including having certainty around complex areas of law
- profiling all large businesses, using a comprehensive range of quantitative and qualitative indicators, to identify both broad trends and specific cases where tax outcomes appear inconsistent with business performance, and
- risk reviewing and auditing appropriate businesses.
Large businesses generally have access to the necessary advice, either internally or from external advisers, but their need for certainty sometimes prompts them to seek advice from us, particularly in the case of new law. In turn, we consult with large businesses and their advisers on complex areas of the law, as well as on administrative processes to ensure their reporting obligations are as streamlined as possible.
We seek an open dialogue with large business on how the tax system is working in practice, with the aim of co-designing administrative improvements or raising policy matters with Treasury.
Verification of large business compliance is more intensive than in other segments, reflecting the scope for differences of view and the economic impact of the issues.
In response to both the high potential risk in this segment and a taxpayer's need for certainty, compliance activities are increasingly undertaken in real time parameters. For example, we make real-time enquiries about the nature and tax outcome of major new transactions and disclosures to the market. We track payments in real time and immediately follow up missed registration, lodgment and payment deadlines. Payments are monitored against expected economic outcomes on a sector-by-sector basis.
The intensive nature of compliance work in this segment is seen in the relatively high proportion of the largest businesses subject to review or audit, with around 70 significant income tax audits planned for 2007-08.
We provide more detail about our approach to compliance in Large business and tax compliance 2006, including the indicators and ratios used for profiling, the risk filters used in selecting cases, and details of our review and audit processes.
Good corporate governance and greater certainty
We encourage self-regulation and voluntary compliance. This is supported by high standards of corporate governance and awareness of the implications of major transactions.
The standard of corporate governance has a direct bearing on whether a company has a high, moderate or low tax risk level.
We continue to focus on managing risks around potential weaknesses and deficiencies in business systems that capture, process and collate GST data used to prepare business activity statements. Both our compliance activities and voluntary disclosures by taxpayers indicate that this remains an area of risk. Of particular concern are business restructures, accounting system changes, and transactions outside core business functions.
Initiatives such as publishing Large business and tax compliance 2006 and the Commissioner writing personally to chief executives are designed to promote transparency and to facilitate corporate governance in relation to a company's tax affairs. For example, the booklet sets out governance questions to help directors and senior management identify where tax risks may occur so they can be appropriately managed.
Other initiatives designed to provide more certainty for taxpayers and to reduce compliance costs include a priority rulings process, forward compliance arrangements and advance pricing agreements.
We are exploring with the Corporate Tax Association additional ways of helping large companies manage their tax risks. For example, agreements to disclose specific information to us at certain times through the year could give taxpayers earlier certainty in their tax affairs.
We are also considering how we can become more current in our approach to company tax compliance, such as engaging in pre-lodgment discussions, and reviews of large transactions and changes in company profitability.
In order to engender trust we reaffirmed our general practice of advising taxpayers of situations where there has been an apparent overpayment of tax.
In turn, large businesses are demonstrating a willingness to work with us. For example, requests for advice increased by 12% in the year to 30 June 2007. They also worked with us in developing guidelines to ensure that their staff do not make improper facilitation payments.
Alignment of tax and economic performance
Large businesses are generally highly compliant with registration, lodgment and payment obligations. Our main concerns relate to the correctness of the information provided in income tax returns and schedules.
Many of these issues arise not from an unwillingness to comply, but from different views on applying the law in the light of the very complex transactions and environment in which a large business operates. This often manifests in the difference between tax performance and economic performance - that is, a business is disclosing large accounting profits to its shareholders and the market, but returning low levels of taxable income, or even tax losses. While there can be good reasons for this, large disparities warrant some consideration.
In these circumstances, what particularly attracts our attention are the adjustments a business makes to its accounting profit in calculating its taxable income and tax payable, along with the basis for those adjustments.
Specific issues we are examining
Characterisation of income and expenses
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Characterisation of transactions in a way beneficial for income tax and GST purposes but at odds with their economic substance.
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Consolidation
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Cost setting outcomes for entities joining and leaving a consolidated group.
Structuring and tax planning that is intended to confer benefits that are inconsistent with the intent of the consolidation laws.
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Losses
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Large business revenue losses utilised and carried forward that do not meet the loss recoupment and deductibility tests - particularly as they are transferred into consolidated groups.
Loss generation and utilisation that does not reflect economic realities.
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Profit shifting
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Related party cross-border dealings where tax profit returned in Australia does not reflect the economic contribution made here.
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Implications of evolving capital markets
The dollar value of mergers and acquisitions involving Australian-based businesses almost doubled in 2006. Many of these transactions have a cross-border element and involve private equity groups.
We are closely monitoring the tax implications of these activities, both at the economy-wide level and at the group and transaction level.
We are also examining the role of investment banks and other intermediaries in promoting and facilitating merger, acquisition and divestment deals, along with the appropriate treatment of their fees.
In line with our general approach to compliance in the large business segment, we work directly with the groups involved in corporate restructures before and after the deals are announced. The aim is to encourage voluntary compliance before tax returns are lodged and to provide assurance that the tax structuring and tax outcomes are in accordance with Australian law.
In 2007-08 we are increasing our compliance activity in this area, particularly in making detailed enquiries before returns are lodged.
So that our position is understood more broadly, we communicate the technical issues arising out of this activity to industry and Treasury using established consultative forums.
Specific income tax issues we are examining
Corporate restructures and capital gains tax
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The tax outcomes (including the use of rollovers, the tax values of significant assets and the utilisation of capital losses) of major transactions, including corporate restructures, mergers, acquisitions and divestments of assets from external sources. Transactions that are contrived and lack commercial reality may attract the general anti-avoidance provisions in Part IVA.
Transactions undertaken by non-residents in relation to taxable Australian property, including business assets of permanent establishments, and transactions that may be contrived to circumvent the operation of the integrity provisions in the new non-resident capital gains tax provisions.
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Hybrid capital raisings
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Capital raisings that involve the use of hybrid securities (where the instrument contains features that are common to both debt and equity). This includes hybrid instruments that may be classified as debt for income tax purposes but as equity for accounting purposes.
Arrangements where there is a potential for corporate financing instruments to be misclassified as debt rather than as equity, resulting in interest deductions; circumvention of the debt/equity provisions using unit trusts; and tax planning involving stapled instruments, tax-deferred distributions and capital gains tax deferrals.
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Asset infrastructure deals
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Aggressive tax planning structures that investment companies put in place when acquiring large infrastructure projects.
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International
We are focusing on:
- global corporate restructures that shift assets, functions and risks offshore, and
- financial arrangements whose success relies heavily on artificially generated tax benefits in Australia or overseas. Such arrangements have become more common across a range of commercial activity, including internal financing, structured transactions between financial institutions, and mergers and acquisitions.
These arrangements are of concern to revenue agencies around the world. In analysing and investigating them for Australian tax purposes, we will work closely with our overseas counterparts, sharing information on specific arrangements or taxpayers and undertaking coordinated, simultaneous audits where appropriate.
Specific income tax and GST issues we are examining
Tax havens
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Transactions and arrangements that involve tax havens and other low-tax jurisdictions, and that appear to artificially reduce Australian tax. While most transactions and arrangements that large businesses have with tax havens are made for legitimate commercial reasons, we will examine high-risk cases to ensure the law is correctly applied.
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Cross-border arbitrage
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The use by large businesses of complex structuring and hybrid financial instruments to obtain benefits, such as duplicate deductions or credits, not intended by law, or designed to take advantage of inconsistencies between the laws of different jurisdictions.
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Transfer pricing and profit shifting
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Transfer pricing processes and outcomes that are not in line with the arm's length principle - sometimes indicated by a group's tax performance being out of alignment with its economic performance
The use of arrangements between related Australian and offshore entities to shift profits (and tax) from Australia to other countries, including:
- restructuring of Australian-based operations seeking to shift functions, assets and risks offshore, such as the sale of intellectual property at a nominal price in return for a royalty stream, and
- payment of excessive guarantee and other fees, and provision of services by Australian-headquartered companies to overseas subsidiaries at no charge.
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Advance pricing arrangements deliver more certainty
Advance pricing arrangements provide taxpayers with more certainty about the tax treatment of their dealings with related parties offshore.
We have around 60 advance pricing arrangements, which are negotiated with the taxpayer (and the foreign tax administration in the case of multilateral arrangements). The arrangements, which run for up to five years, help the taxpayer and the Tax Office manage transfer pricing risks. For taxpayers specifically, advance pricing arrangements are a tool for managing the risk of a transfer pricing review or audit and, potentially, double taxation.
While we expect the advance pricing arrangements program to continue at the current level in 2007-08, we have commissioned an external review of the program to evaluate its role and performance, including our processes, governance arrangements and program evaluation criteria.
Property transactions
With large businesses we have a specific focus on GST compliance in relation to:
- major infrastructure projects
- use of the margin scheme, particularly in relation to the method of determining value and apportionment
- complex transactions, where we look at the history and structure of the transaction and the subsequent effect on net GST, and
- GST adjustments arising from change in the extent of creditable purpose.
We are pursuing margin scheme arrangements where prices are manipulated to reduce or eliminate the margin for GST. In response to more sophisticated aggressive tax planning activity in the property sector generally, we are enhancing our ability to identify GST property schemes through collaborative relationships with other agencies.
We continue to work with industry consultative forums and tax professional associations to identify areas of the GST law that require clarification and then develop solutions, including rulings or information products, or refer matters to Treasury.
Financial services
GST compliance issues in the financial services sector include:
- supplies of services to associated entities at less than market value
- recovery of GST using a fair and reasonable apportionment methodology
- GST incorrectly recovered on costs relating to mergers and acquisitions
- GST incorrectly recovered on costs relating to 'financial supplies' made before 1 July 2000, and
- GST incorrectly recovered on trustee service costs by including reimbursements out of the trust property as consideration for a trustee service.
Our response will include public rulings, education, audits and advice to Treasury where the law is not operating as intended.
GST aggressive tax planning
We continue to scrutinise transactions or arrangements designed primarily to obtain a GST benefit not intended by the law. In particular, we are focusing on the active design and marketing of schemes designed to exploit the concessionary provisions of the GST legislation.
In 2006-07 we focused heavily on supporting excise payers through key reforms. While education and support will continue, we are now focusing more on active compliance, including:
- reviewing large businesses to confirm they have the controls to assure the accuracy of returns and claims, and
- undertaking reviews and audits to deal with non-compliance with excise obligations.
We have key client managers to provide a single point of contact for major payers and recipients of fuel tax credits.
Our compliance activities in 2007-08 will include auditing a number of funds regulated by the Australian Prudential Regulation Authority to ensure:
- complete and accurate information has been provided in member contribution statements, departing Australia superannuation payment advices and lost member register returns, and
- member end benefits have been correctly treated for tax purposes.
Although case selection will largely be based on returns and reports lodged before the Better Super measures took effect, we will check compliance with the new measures, including whether funds are:
- accepting personal contributions only where they hold a member's tax file number
- ensuring correct and timely reporting of release authorities
- not accepting directly rolled-over employer termination payments
- correctly reporting contributions by members who contributed more than $1 million between 10 May 2006 and 30 June 2007
- crystallising the pre-83 contribution component, and
- paying unclaimed monies to the Tax Office.
We are also continuing the audit program for unfunded defined benefit schemes to ensure they are correctly maintaining accumulated surcharge debt accounts for individual members.
Given that over 70% of income tax collections from all superannuation funds are received from this segment, we carefully monitor the compliance of funds in relation to their income tax obligations. This year we have a particular focus on:
- the use of pre - 1 July 1988 funding credits, to ensure compliance with the new methodology for claiming such credits, and
- analysis of the revenue and total investments of large funds, with an emphasis on identifying changes linked to Better Super.
Tackling aggressive tax arrangements through cooperation with our foreign counterparts
Aggressive tax planning arrangements based on international transactions pose significant revenue risks, not only in Australia but throughout the world. These arrangements range from relatively simple round-robin transactions to complex debt/equity, capital allowance or other arbitrage arrangements. Some but not all of these involve tax haven countries.
Tax systems are based on national jurisdictions but economic activity is increasingly global. This provides opportunities for aggressive tax planners to manipulate differences between national systems and set up contrived structures that operate in ways not anticipated by the legislature to obtain tax benefits without any economic benefit.
We are increasingly cooperating with other tax administrations and participating in joint activities such as:
- designing standard approaches to tax administration to achieve consistency through the Organisation for Economic Cooperation and Development (OECD)
- sharing best practices and information on arrangements of concern through bodies such as the Joint International Tax Shelter Information Centre, the 7-Country Tax Haven Forum, the Commonwealth Association of Tax Administrators and the Study Group on Asian Tax Administration and Research
- jointly with Treasury, negotiating tax information exchange agreements with cooperative tax havens
- proactively sharing information on specific taxpayers with our treaty partners through exchange of information provisions
- undertaking joint or simultaneous compliance activity with our treaty partners, and
- hosting visits by international delegations from other tax administrations that help build our joint capabilities and provide opportunities for strengthening relationships.
Private equity - implications for compliance
Private equity refers to an equity investment, often by institutional and other fund investors, in a company that is taken from the public register into private hands. The usual objective of the equity investors is to enhance the value of their investment and realise that enhanced value by selling the asset after three to five years.
Our primary focus is on what are termed leveraged buy-outs - where substantial amounts of debt are employed to acquire an entity with a turnover of more than $100 million.
Private equity has only recently emerged as a growing part of merger and acquisition activity in Australia. We are concerned where the complexity and lack of transparency of significant transactions suggest possible risks to the tax system.
Features of a private equity deal that attract our interest.
Having reviewed a number of cases, we have found that the following features might constitute potential revenue risks:
- Profit participation arrangements where payments are received by participants - such as executives of the target group, equity participants or their associates - on the successful completion of the deal. We may need to confirm whether those returns are properly characterised as being on revenue or capital account.
- Where these arrangements result in payments to tax haven entities, we may check to ensure that any Australian residents involved are complying with the foreign income attribution regime.
- Treatment of distributions to investors of unit trusts or other private equity investment vehicles, and whether the characterisation of those payments (revenue or capital) accords with the tax law.
- The characteristics and treatment of transaction fees paid to advisers or participants may need to be checked, as does adherence to the arms length principle for fees paid to related overseas parties.
- 'Black hole' expenditure incurred, for example, by target companies in the course of a failed private equity bid, and whether such expenditure is appropriately categorised.
- Where non-residents are substantially operating in our jurisdiction, the value of profits properly attributable to any enterprises that constitute permanent establishments in Australia.
- Cost base uplifts of assets when structuring into (and later out of) a newly consolidated group. We may need to review the nature of the tax cost setting process and ensure that appropriate allocations have been made.
- The structure and tax character of debt and equity investments and the nature of any impacts on the thin capitalisation safe harbour measures to ensure structural integrity of the tax law.
- Where the making of financial supplies results in an understatement because GST was not charged on the acquisition of services from offshore entities, or full GST credits were claimed where there would otherwise be no entitlement.
Our response
When dealing with cross-border issues, our usual practice is to collaborate with other Australian regulatory agencies and with the Organisation for Economic Cooperation and Development and our treaty partners. This is especially so when emerging business models have such a widespread impact that a domestic focus alone does not allow us to gain the necessary understanding of the potential revenue risks.
We also continue to monitor and review the tax and economic drivers to understand any possible revenue impacts and look at industry trends within the tax system.
Results of our activities are based on preliminary data and are indicative only. Final results for 2006-07 will be published in our Annual report 2006-07, due for release in October.
Responding to feedback and encouraging voluntary compliance
In 2006-07 we made significant improvements to our processes and procedures in response to external feedback. These are set out in the Large business and tax compliance booklet 2006.
The booklet was launched at a large business symposium. A first of its kind, the symposium set a platform for enhancing relationships and also provided an opportunity to explore ways of lifting the bar in tax administration for large businesses.
As a result of the symposium, the Commissioner wrote to the chairs of all major companies and distributed a one-page guide for directors and board members to help them with their governance.
We also put in place a program of visits by senior Tax Office executives to the top 100 corporate groups, to enhance a two-way flow of communication and feedback.
Surveys of large business taxpayers indicated an increased level of client satisfaction (up from 73% to 77%) during the year.
Income tax
- We completed 40 compliance audits of large businesses and 170 comprehensive risk reviews, resulting in over $1.5 billion in additional collections5, $2.2 billion in new income tax liabilities6 and over $1.2 billion in notional tax7.
- We completed 275 private binding rulings, 90 class rulings, 10 product rulings and 690 objections8.
- Taxpayers are increasingly seeking pre-lodgment discussions with us in relation to potential ruling requests, demonstrating the effectiveness of our efforts to encourage voluntary compliance.
- We finalised 32 new advance pricing agreements and 4 mutual agreement procedures.
- We completed 874 exchange of information requests from our treaty partners.
- We finished 4,700 lodgment cases, resulting in the finalisation of 1,800 income tax returns and fringe benefits tax returns, and 3,200 activity statements, yielding a net credit of $22.1 million.
Employer obligations
We conducted 11 field audits and more than 350 reviews of employers' compliance with their PAYG withholding, superannuation guarantee and fringe benefits tax obligations, raising additional revenue of $7.8 million.
GST
Over $310 million in GST liabilities was raised through compliance activities in this market.
- We finalised over 780 compliance audits. These included audits relating to the incorrect application of the margin scheme and other risks in the property industry, and integrity of business system audits, which remain a focus area in 2007-08.
- We completed over 2,400 cases in relation to deferred GST.
- We reviewed over 6,000 refunds to verify them as correct before we issued them.
- Two forward compliance arrangements were completed.
Excise
- One of the two forward compliance arrangements for GST also covered excise.
- We started three large client reviews in 2006-07 which focus on different excise commodities, and have developed a large client program to start in 2007-08.
- We worked with tobacco manufacturers in the restructure of the Australian tobacco industry.
Superannuation
- We reviewed 17 large superannuation funds to verify their reporting obligations around member contribution statements, departing Australia superannuation payments and lost member reports.
- We audited six unfunded defined benefit schemes to ensure compliance with their obligations around the individual surcharge debt accounts they hold for members.
- We acted on 244 cases relating to employee complaints and referrals on employers' superannuation guarantee obligations, raising $6.63 million in liabilities.
- We advised all employers of changes to their obligations arising from the Better Super legislation.
Non-profit organisations
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There are about 700,0009 non-profit organisations in Australia. They include charitable, religious and community service bodies; sporting and recreational clubs; business and professional associations and trade unions; private schools; some hospitals; and some large financial and insurance companies. More than 10% of people employed in Australia during the year worked for non-profit organisations.
A range of tax concessions apply to non-profit organisations. Some of these concessions require the organisation to be endorsed by the Tax Office.
Lack of tax expertise in some organisations
Tailored help and education helps to meet the needs of organisations that rely on volunteers with limited tax expertise.
Multi-party transactions that result in incorrect GST claims
Non-profit organisations involved in multi-party transactions need to ensure the correct treatment for GST.
Non-profit organisations tend to be highly compliant with their tax obligations, but often have a low level of knowledge about the tax and superannuation systems. Where compliance issues arise, they are mainly due to mistakes or a lack of knowledge.
Many non-profit organisations have limited resources for managing their tax affairs and rely heavily on volunteers, who turn over regularly. Only around 24% of non-profit organisations have their returns prepared by tax agents.
We focus on providing non-profit organisations with help and advice so that they can comply with their tax obligations at minimal cost. We provide tailored information products, and work with representative bodies to design systems and processes that support good compliance practice at the least cost to the sector. Compliance risks and issues are discussed with the sector in regular forums, and we alert people generally through an online news service, which draws attention to further information on our website.
As with other taxpayer segments, our compliance verification work starts with comparing information that organisations report in returns against data supplied by third parties, including government agencies and financial institutions. To identify systemic areas of non-compliance and other risks, we monitor trends and analyse information gathered from our review activities and other dealings with taxpayers and their advisers.
A high level of compliance with lodgment obligations is critical to the effectiveness of this data matching activity, and this year we are particularly monitoring lodgment compliance by non-profit organisations with significant turnovers or high levels of tax payable.
In the relatively few cases where organisations ignore their obligations or there are deliberate attempts to abuse concessions, our compliance activities escalate to audits and other firm enforcement steps.
We focus on arrangements that seek to abuse the concessional status of charities and deductible gift recipients, particularly where those arrangements are related to individuals or commercial entities with close links to known promoters of aggressive tax planning schemes.
We publish details of endorsed organisations online, enabling grant providers and the community generally to verify the tax status of particular non-profit organisations. We believe this transparency contributes to the integrity of the system.
Tailored help and education
Having developed a tailored range of publications and services for non-profit organisations in collaboration with representative bodies, we are now concentrating on raising awareness of these products and their use.
We are also further developing online information and application packages and problem-solving tools as we encourage non-profit organisations to actively seek tax information and conduct transactions online.
Current initiatives are particularly designed to address risks associated with:
- the blurring of boundaries between non-profit and commercial activities
- endorsed organisations maintaining their status
- employer obligations, and
- the fuel tax credits scheme.
The fringe benefits tax treatment of meal entertainment is a complex area for non-profit organisations to understand and manage. In 2007-08 we will release an information product on meal entertainment and fringe benefits tax that has been developed in collaboration with the sector. With the change in the minor benefit threshold from $100 to $300, we will issue further guidance in early in 2007-08 on the application of the exceptions.
Non-profit organisations will also benefit from initiatives designed to help employers in general meet their tax and superannuation obligations (see Meeting employer obligations).
Many non-profit organisations will benefit from the extension of the fuel tax credits scheme from 1 July 2008. To support this, we are providing information and advice to existing and new recipients through our website, direct mail, advertising, industry associations and participation in industry events.
An information package for Indigenous grant providers and recipients, co-designed with representatives of these organisations, will also be launched in 2007-08.
We will also deliver specific products and messages to support the implementation of several new tax measures affecting non-profit organisations.
GST
Incorrect credit claims in multi-party transactions
Where a non-profit entity pays for a supply made by another entity to a third party, there may often be no acquisition by the non-profit entity and therefore no GST credit entitlement. However, GST credits may sometimes be claimed in this situation.
We issued public ruling GSTR 2006/9 in October 2006 to explain our view of how GST applies to multi-party transactions. In 2007-08 we plan to further communicate our position through non-profit representative bodies and tailored information products. We would consider funding a test case in this area, noting that there are alternative views on this point.
Misclassifying supplies as GST-free
There is evidence of some incorrect treatment of transactions as GST-free among endorsed charitable institutions, endorsed trustees of charitable funds, gift deductible entities and government schools.
We have published guidance material and will work with non-profit representative bodies to educate their members. We are developing a GST accounting tool for residential colleges.
We are also investigating instances of non-compliance in relation to tertiary student residential accommodation that may involve aggressive tax planning.
Misclassifying grants
The treatment of grants for GST purposes continues to be a compliance issue. In 2007-08 we are planning to clarify this issue for non-profit organisations through tailored information products.
Pre-endorsement checks
Charities must be endorsed by the Tax Office to be exempt from income tax. Organisations wanting to receive tax deductible gifts must also be endorsed, unless they are listed by name in the tax law.
We check all endorsement applications. Where information on the application does not match the expected organisational profile, we may contact the organisation or conduct a review. In 2007-08 we expect to receive and check around 5,000 endorsement applications.
Changes in activities after endorsement
There is a continuing risk that once organisations have been endorsed they may vary their activities in ways that affect their entitlement to concessions. Accordingly, we emphasise the need for endorsed organisations to review their operations at least annually, or when there is a major change in their structure or operations, and tell us if they are no longer entitled to be endorsed.
To ensure that dominant characteristics of the organisation remain charitable, our post-endorsement compliance work in 2007-08 will focus on:
- political lobbying activities
- commercial operations, and
- prescribed private funds.
As well as monitoring the operations of endorsed organisations, we also look closely at their administrative and financial management processes, particularly the level of self-review. We follow up previously identified compliance failures or risks to ensure that our corrective advice has been followed.
In 2007-08 we expect to:
- write to 360 entities to test the level of self-review
- review 85 targeted cases to determine if the organisations remain eligible for tax concession and/or deductible gift recipient endorsement, and
- review 40 prescribed private funds, focusing on identified risks such as excessive accumulation, valuation of gifts and loans.
Clubs and their commercial activities
Clubs and other non-profit organisations that actively engage in commercial activities may be incorrectly self-assessing themselves as exempt from income tax. As well, some taxable clubs understate their taxable income due to incorrectly classifying transactions as mutual dealings with members.
Our compliance work involves a mixture of help and education, designed and delivered in collaboration with the clubs industry, and reviewing individual cases.
In 2007-08 we plan to issue a guide designed to improve the quality of the initial self-assessments done by clubs, and the ongoing self-reviews of their status they need to undertake.
Refunds of franking credits
Tax-exempt organisations that receive franked dividends from companies they have an interest in are entitled to a refund of the attached franking credits.
We check all refund claims, contacting the claimant for more information if required and, where necessary, undertaking a more detailed review.
Results of our activities are based on preliminary data and are indicative only. Final results for 2006-07 will be published in our Annual report 2006-07, due for release in October.
Income Tax
We completed 27 reviews of prescribed private fund endorsement, resulting in lodgment of 24 outstanding information returns and 12 educational written advices being issued.
We checked 3,350 applications for refunds of franking credits, with 110 applications varied down, saving $3.2 million in revenue.
We reviewed the entitlements for 130 deductible gift recipients and tax concession charities, resulting in 57 entitlements being revoked and 15 educational written advices being issued. These reviews raised $1.66 million in tax and penalties.
We did 46 reviews of non-member income in relation to taxable clubs and associations. These reviews raised $300,000 in liabilities and prompted the disallowance of $444,000 in carried forward losses.
We checked 5,205 applications for endorsement as a charity or deductible gift recipient, with 1,251 disallowed.
Employer obligations
Our verification activities checked employers' compliance with their PAYG withholding, superannuation guarantee and fringe benefits tax obligations. We conducted 79 field audits, 66 outbound phone reviews and 1,378 desk reviews, which raised revenue of $15.6 million.
Superannuation
We acted on 241 cases relating to employee complaints and referrals on employers' superannuation guarantee obligations, raising $9.58 million for employees.
We contacted all employers to advise them of changes to their obligations, arising from the Better Super legislation.
Helping non-profit organisations comply
In response to a number of natural disasters, we provided tax advice regarding the establishment of deductible gift recipients (DGRs) to assist those affected. In the case of the Gippsland floods, we contacted the Victorian Government to offer assistance with establishing DGRs under the new Australian disaster category. We also expedited the endorsement of a DGR for the victims of the Newcastle floods.
New publications to assist non-profit organisations included a fringe benefits tax guide. We also updated the following core publications:
- Income tax guide for non-profit organisations
- GiftPack for deductible gift recipients and donors
- Tax basics for non-profit organisations
Government organisations
Download a PDF version of this section (NAT 7769, PDF, 177KB)
Across the various levels of government in Australia there are about 17,000 different organisations. Nearly 15% of people employed in Australia during the year worked for government organisations.
Most government organisations are exempt from income tax, and GST they pay is generally refunded to them. Overall, this segment receives a refund equal to around 3% of the total tax we collect.
As a result of the amounts they withhold from payments to their employees, government organisations contribute about 9% of the total tax we collect.
Reputation risks in relation to tax management
Government organisations face increasing tax management risks arising from the blurring of the boundaries between government and commerce (see Public-private partnerships).
Incorrect GST treatment of more complex transactions
We are helping government organisations apply GST to multi-party, public-private and property transactions.
Mindful of community expectations for good corporate governance, government organisations show a high level of compliance with their tax obligations.
Non-compliance most often occurs in relation to unusual or complex transactions. Frequent restructuring and involvement in commercial ventures (for example, land development) also create challenges for tax compliance.
We provide practical advice and tailored information products for government organisations through a dedicated part of our website, as well as support products such as private rulings.
We also work closely with treasuries, finance departments and local government organisations to promote good practice.
We check activity statements and returns and, where there is potential for non-compliance, undertake reviews and audits of specific cases. We continue to emphasise the need for government entities to lodge activity statements and returns on time.
To promote good tax governance, we plan an awareness-raising campaign targeting chief executives, chief finance officers and tax managers, coupled with a suite of self-assessment products. This is likely to include a checklist, a model certificate of assurance and a risk matrix for use by government agencies.
The aim is to ensure government organisations recognise that sound management of tax affairs is an integral part of good governance generally.
The program will initially cover Australian Government agencies, with learnings from this phase incorporated into awareness activities for state and local government organisations.
GST
Incorrect credit claims in multi-party transactions
When a government entity pays for a supply made by another entity to a third party, there will often be no acquisition by the government entity and therefore no GST credit entitlement.
GST credits may be incorrectly claimed in this situation. For example, a government agency that provides subsidies for taxi transport may, depending on the nature of the arrangement, incorrectly claim a GST credit on the payment, even though the agency is not acquiring a supply for GST purposes.
We issued public ruling GSTR 2006/9 in October 2006 to explain our view of how GST applies to multi-party transactions. In 2007-08 we plan to further communicate our position through discussions with agencies and tailored information products, as well as undertaking audits10.
Treatment of grants
The treatment of grants for GST purposes continues to be a compliance issue. In 2007-08 we are planning to clarify this issue for government organisations through tailored information products.
Property transactions
There is evidence of some incorrect GST treatment of property transactions involving government organisations. They may incorrectly apply the margin scheme or otherwise incorrectly treat land sales, land swaps and developments for GST purposes. Special provisions apply in relation to the margin scheme where government is involved in land acquisition.
We will communicate the correct position through discussions with agencies, followed up with audits where there is potential non-compliance. In particular, we are looking at the interaction between government and property developers, and government involvement in barter transactions and infrastructure projects.
Public-private partnerships
The increasing use of public-private partnerships to build infrastructure carries the risk that those involved may seek arrangements that shift the taxing point between entities or reduce the overall GST liability in ways not intended by the law.
Risks can arise for both parties. The government side may rely on advice from their private partner, while the private entity may incorrectly see itself as an extension of government and therefore entitled to special treatment.
As well as broadly raising awareness of the need for good tax governance among government organisations, we provide administrative advice and, where necessary, private rulings.
Machinery of government changes
Governments frequently restructure themselves, in the process abolishing and creating new entities. This gives rise to GST issues, including changes to ABN registration and arrangements for issuing tax invoices.
To ensure organisations are aware of their GST status during machinery of government changes, we provide administrative advice and support and, where necessary, private rulings.
Fringe benefits tax
As government employers have specific obligations in relation to the fringe benefits tax treatment of meal entertainment, an information product on this issue is being developed in collaboration with the sector.
In response to the change in the minor benefit threshold from $100 to $300, we will issue further guidance early in 2007-08 on how the exemption applies.
For issues relating to other employer obligations such as superannuation, see Meeting employer obligations.
Fuel tax credits scheme
The extension of the fuel tax credits scheme from 1 July 2008 will affect local government in particular. To support this, we are providing information and advice to existing and new recipients through our website, direct mail, advertising, industry associations and participation in industry events.
We will match this with more reviews of the accuracy of claims and compliance with the scheme.
Results of our activities are based on preliminary data and are indicative only. Final results for 2006-07 will be published in our Annual report 2006-07, due for release in October.
Employer obligations
We did 21 field audits and 40 desk reviews of employers' compliance with their PAYG withholding, superannuation guarantee and fringe benefits tax obligations, raising revenue of $250,000.
Superannuation
- We actioned 71 cases relating to employee complaints and referrals on employers' superannuation guarantee obligations, raising $3.88 million in liabilities.
- We contacted all employers to advise them of changes to their obligations arising from the Better Super legislation.
Tax practitioners
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Tax practitioners play a vital role in the Australian tax system. Some 26,000 registered tax agents lodge around 73% of income tax returns for individuals and over 95% of returns for businesses. Many agents also provide financial advice and act as independent auditors of self managed superannuation funds.
Tax practitioners include legal practitioners who provide tax advice to taxpayers or act on their behalf, and bookkeepers who provide limited tax services to businesses and other organisations.
Improving services for tax practitioners
Following extensive consultation with tax practitioners, we are improving services for tax agents and the professional associations with a package that offers better access to Tax Office specialists and a stronger voice for regional concerns and issues, among other things.
Preparing for a new regulatory framework for tax practitioners
The government has released draft legislation for a new regulatory framework for tax practitioners that may underpin the continued development of a capable and well-regulated profession and protect taxpayers who rely on tax practitioners. We will continue to collaborate with other government agencies and professional bodies in designing the supporting new administrative arrangements that may be necessary.
Tax practitioner compliance
To ensure continued high standards of tax practitioner integrity, we are further developing our analytical capabilities to make more effective use of information sources, such as the recently established tax agent integrity line.
Effective tax administration depends on more than the efforts of the Tax Office. It relies in particular on a capable and well-regulated tax profession. We place a high priority on our relationship with tax practitioners, who play a crucial role in influencing levels of voluntary compliance. Supporting and influencing one tax practitioner means we can support and influence many taxpayers.
Central to our strategy for working with tax practitioners is enabling them to be increasingly self-sufficient through ease of access to authoritative information and advice, delivered electronically where possible.
We are working on ways to improve online information and transaction products, as well as direct access to our technical specialists. And in response to feedback from agents seeking better access to senior staff, we are piloting the appointment of senior tax officers who will consult and respond to tax practitioners on a regional basis.
We also aim to work closely with professional associations to meet the needs of the profession. For example, to review the effectiveness of the 2007-08 lodgment program, we formed a group comprising tax agents and professional associations and consulted with more than 130 individual agents. These reviews led directly to changes to our lodgment program for this year.
Enhanced services
A working group drawn from the tax industry has identified two broad needs among tax practitioners: they want to be self-sufficient, and they want better access to experts.
In response, we are supporting tax practitioners with a raft of new service initiatives co-designed with them to meet the needs of the profession through to 2010 and beyond. These initiatives build on the existing dedicated channels and services, including the agent lodgment program, deferral arrangements, practice support, the Tax Agent Portal and the tax professionals section of our website.
We will introduce some enhancements to the existing portal in September 2007. These enhancements should include the facility to submit amended PAYG and GST quarterly instalments electronically, as well as downloadable payment slips, providing the ability to print a payment slip for a range of tax obligations in PDF format.
Service-level improvements
Our relationship manager service provides a number of specialised services to tax agents. It also helps us understand their current needs, through a dedicated practitioner phone service, the case management of complaints and personalised field services.
In 2007-08 we are exploring ways to:
- provide more timely resolution of cases that have exceeded standards of the taxpayers' charter
- offer more personalised service by enhancing field operations and structuring our office-based teams to provide a regional service, and
- further enhance lodgment and deferral support, following the recent introduction of the automated lodgment deferral facility.
Better access and more personalised service
We are working on:
- an advice matrix, which outlines our service standards and levels of protection provided by our advice products, designed to direct the enquirer to the appropriate advice service for a specific query
- an improved service card aimed at increasing the use of our online services for simple transactions, while directing tax practitioners to our phone lines when appropriate
- an appointment booking system to improve access to specialist officers, and
- improvements to the tax professionals section of our website.
Local consultation
This year, as a pilot, we have appointed senior Tax Office representatives in North Queensland, Tasmania and Melbourne to facilitate services to tax practitioners and seek local feedback.
The representatives will consult with tax practitioners on regional issues, and identify opportunities to improve services and collaborate in designing local responses.
We have also collaborated with representatives of the profession to re-invigorate regional tax practitioner forums to complement the range of other national forums.
BAS service providers
The Tax Office acknowledges the role that business activity statement (BAS) service providers and bookkeepers play as intermediaries in the tax system.
We have established the Bookkeeper Advisory Group to provide input into the design of administrative interactions between bookkeepers and the Tax Office. In particular, the group will continue to help us develop products and services that meet the needs of bookkeepers, such as an electronic newsletter and an advisory visit program tailored for BAS service providers.
A new regulatory framework
Following detailed discussions with the tax profession, the government released draft legislation in May 2007 for a new regulatory framework for tax practitioners. The main features of the framework are:
- a National Tax Practitioners Board to replace the existing state-based boards
- regulation of entities that provide BAS services, and
- a legislated code of professional conduct to govern tax practitioner services.
We will continue to collaborate with key stakeholders in designing the administrative arrangements to support any new framework.
Compliance and tax agent integrity
The integrity of the tax system depends on the Tax Office, tax practitioners and professional associations working together to ensure professional and ethical behaviour.
Given their influential role in the tax system, we pay special attention to ensuring that tax practitioners comply with their personal tax obligations. We also monitor activity that may indicate the promotion of aggressive tax planning arrangements, and will apply the new promoter penalty laws where appropriate. Practitioners who abuse their position of trust and engage in deliberate evasion or fraud are investigated and referred for prosecution.
Tax agents themselves are sometimes aware of improper activity in their industry. We launched a tax agent integrity line in February 2007 to enable agents to give us information on inappropriate activity or report people who are not registered but acting as tax agents. In responding to these calls, we are careful to ensure that allegations are not inappropriately recorded or acted on. To date, a significant amount of valuable information has been provided through this channel (see Snapshot of our 2006-07 activities).
Tax agent profiling
Risk profiling of tax practitioners is a key tool for identifying and managing compliance risks in relation to taxpayers generally. We access a wide range of information and use a variety of profiling techniques to detect non-compliant behaviour.
For example, by reviewing the expense claims of a tax agent's entire client base we can identify claim patterns, in relation to certain expenses, that vary significantly from the norm. While there may be a legitimate explanation for the variation, it may also reflect poor business practices or a tax agent who encourages clients to 'push the envelope' and engage in aggressive and risky compliance behaviour.
Profiling enables us to make informed decisions about how we direct our attention and effort. It helps us distinguish between lower-risk taxpayers and practitioners and those who represent a higher risk. We can then respond appropriately by, for example:
- providing ongoing support, cooperating on administrative issues and being less intrusive to low-risk agents, and
- applying more intensive scrutiny and enforcement attention to high-risk agents.
Reporting in March 2007 on the relationship between the Tax Office and tax practitioners, the Australian National Audit Office concluded that the relationship had improved significantly, with surveys of tax agents showing a marked improvement in the attitudes of agents towards the Tax Office since 2003.
The proportion of agents satisfied with Tax Office services increased from 39% in 2003 to 70% in 2005, while the level of dissatisfaction dropped from 38% to 14% over the same period.
According to the report, factors contributing to the improved relationship include the easing of pressures on tax practitioners, and the progress made by the Tax Office in implementing recommendations made by the Audit Office.
While we acknowledge this positive report, we also recognise there are areas requiring improvement. The review provides a positive platform for further enhancing our relationship with tax practitioners.
A former tax agent was sentenced to five years in jail in June 2007 for identity-related income tax fraud.
Over the course of two years or more after being deregistered, he created false identities and documents in order to lodge 58 false income tax returns under 17 identities for the purpose of obtaining tax refunds. He also used the identities of some of his former clients who had permanently left the country.
The former tax agent pleaded guilty to one count of defrauding the Commonwealth, two counts of obtaining a financial advantage by deception, one count of aiding a financial advantage by deception, one count of attempting to obtain a financial advantage by deception, and one count of aiding an attempt to obtain a financial advantage by deception.
Snapshot of our 2006-07 activities
Results of our activities are based on preliminary data and are indicative only. Final results for 2006-07 will be published in our Annual report 2006-07, due for release in October.
- Results from the 2006-07 state of the industry research show that overall, tax agents are increasingly more satisfied with the service they received from us (39% in 2004, 70% in 2005, 78% in 2007).
- The March 2007 biannual tracking of tax agents' perception of service and usage of channels survey indicated that:
- 96% of surveyed tax agents agreed that the information received from us helps them deal with the tax system, and
- 90% agreed that it is easier to deal with the tax system now than in the past.
- Our premium phone service for registered tax agents answered over 160,000 calls, of which 87% were answered within two minutes. The March 2007 biannual tracking of tax agents' perception of service and usage of channels survey indicated that 94% of surveyed tax agents were satisfied with their recent phone contact with us.
- We delivered over 310 presentations to more than 6,500 tax agents, and in November 2006 we did an online presentation through our website. On 26 June 2007 we conducted seminars at 212 venues, attracting 17,500 registrations.
- We consulted with accounting professional associations and bookkeeper representative organisations through avenues such as the Chief Executive Officers Forum, National Tax Liaison Group, ATO Tax Practitioner Forum and their various advisory groups and sub-committees. This ensures that strategic issues affecting administration of the tax system and the relationship with the tax profession are effectively managed.
- Our consultation with tax practitioners extended through a wide range of Tax Office projects. Nearly 7,000 tax practitioners completed surveys and another 1,000 participated in other activities such as user testing, focus groups and pilots.
- We conducted over 5,100 visits to tax agents through the relationship manager program. In addition, over 5,700 issues raised by tax agents were resolved.
- 221 tax practitioners had access to tailored lodgment programs where circumstances beyond their control caused a lag in lodgment performance. We continue to work with over 120 practitioners to help them regain control of their lodgment obligations.
- We investigated 113 allegations of people acting as unregistered tax agents, with 8 cases being successfully prosecuted and further prosecutions pending. Another 18 people have given undertakings that they will comply with the law.
- We reviewed 186 registered agents, with 106 agents being referred for review by a tax agents' board or warranting further action by us. Referrals to tax agents' boards resulted in:
- 22 formal warnings
- 11 deregistrations
- 11 re-registrations being refused
- 7 deciding not to re-register
- 3 suspensions, and
- 17 agents being contacted to explain their actions.
A further 19 agents have given written undertakings that they have modified their work practices.
- 175 tax practitioners were prosecuted for lodgment offences.
- The state-based tax agents' boards:
- cancelled 97 registrations
- received 683 written complaints
- referred 72 tax agents to us for investigation, and
- suspended 7 tax agents.
- Since its introduction in February 2007, the tax agent integrity line has taken over 63 referrals about agents' behaviour or allegations of people acting as unregistered agents. From this, 39 matters were further analysed with 14 of them under investigation at 30 June 2007.
New laws tackle avoidance and evasion schemes
Promoter penalty laws provide for civil penalties to be imposed on the promoters of tax exploitation schemes.
Before April 2006, a promoter was able to pass on all the tax risks to a scheme's participants, who may not have been aware of the scheme's illegitimacy and associated risks.
Tax exploitation schemes are aggressive arrangements with little or no economic substance that are created mainly to obtain a tax benefit not intended by the law.
The penalties may also apply where a scheme promoted on the basis of conformity with a product ruling is implemented in a way that is materially different to the ruling.
The new laws allow us to accept voluntary undertakings by promoters about modifying their conduct that are enforceable in the Federal Court - for example, a promoter could undertake not to sell a particular scheme.
We can also apply to the Federal Court for an injunction to stop actual or possible conduct prohibited under the laws. For example, we could seek an injunction to halt a promoter conducting seminars to market a tax exploitation scheme, and apply to the Federal Court for a civil penalty to be imposed where a promoter has engaged in prohibited conduct.
Where it has been established that a promoter has marketed a tax exploitation scheme and received commissions, we can seek a civil penalty of the greater of double the commissions received or $575,000 for an individual or $2.75 million for a company.
This regime provides a flexible range of real-time responses to deter the promotion of schemes. We will apply the provisions proportionately, in line with our compliance model.
The application of the promoter penalty laws is integrated into our overall compliance response to aggressive tax planning. For example, we visit tax agents who have encouraged or helped clients to participate in schemes, to review their activities and ensure we have identified all participants. This also provides an opportunity to warn that promoter penalties may apply.
The promoter penalty laws are in addition to the criminal laws that may apply to the activities of promoters and their associates. We will continue to pursue potential criminal activity and respond to it with the full force of the law.
Recent developments
In 2007-08 we are focusing on early engagement with professional bodies and intermediaries to influence community standards on the acceptability of abusive schemes. We will also be engaging with known promoters to deter them from promoting abusive schemes.
Promotion has moved on from the mass marketed schemes and the employee benefit arrangements of the 1990s.
Some changes have been positive, with many promoters getting out of the tax industry. Some, however, have stayed in the game and are targeting clients with new or growing prosperity and offering tailored schemes.
We are also seeing more sophisticated attempts at promoting and operating schemes, with confidentiality agreements, password-protected web pages, the use of encryption and detection software, and payments to offshore entities, including those in tax havens.
Dealing with tax crime
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A small number of people deliberately engage in criminal behaviour to evade their tax obligations, or otherwise attempt to defraud the Commonwealth through the revenue system.
Tax-related crime threatens the integrity of the system - directly because of the threat to revenue and indirectly through the impact this behaviour has on community confidence in the system.
We respond vigorously to the threat posed by tax-related crime, using our own powers and resources and collaborating with law enforcement agencies and the Commonwealth Director of Public Prosecutions, as well as with foreign tax administrations.
Tackling cross-border tax crime
We have formed continuing partnerships with law enforcement agencies and our foreign counterparts to tackle cross-border tax crime, including Project Wickenby.
Identity crime
Identity crime continues to be used to commit tax fraud.
Promoter penalties
Promoter penalties will deter the promotion of tax exploitation schemes.
Our general approach
Criminal activity targeting the tax system involves both opportunistic individuals and organised groups, often associated with other forms of crime. Their techniques are constantly evolving and becoming more sophisticated, as is our enforcement response.
We tackle serious evasion and fraud by:
- gathering and analysing intelligence on risks and threats to the tax system, both directly and through other agencies, including the federal and state police, AUSTRAC and our overseas counterparts
- investigating suspected cases, often jointly with law enforcement agencies, with a view to prosecution, usually by referral to the Commonwealth Director of Public Prosecutions
- using powers available under the Proceeds of Crime Act to confiscate assets obtained from tax-related crime
- complementing our criminal investigation work with civil audit work and the application of tax penalties, and
- publicising the outcomes of this work to raise community awareness.
In recent years we have greatly improved our intelligence capabilities to respond to tax-related crime, particularly in understanding the threats and detecting attempts to use electronic and cross-border arrangements.
During 2006-07 we worked with the Commonwealth Director of Public Prosecutions to bring 80 cases before the courts. These resulted in 75 convictions, including 45 custodial sentences ranging from three months to eight years. This included one sentence of six years in relation to fraud by a tax agent.
As tax crime is often associated with other forms of crime, we work with other agencies to investigate serious breaches. For potentially criminal matters, we usually call on law enforcement agencies such as the Australian Federal Police for support to obtain evidence.
In the past 12 months we have further strengthened our partnerships with other domestic and foreign agencies, particularly through multi-agency taskforces such as Project Wickenby and Project Gordian.
Multi-agency working arrangements are now entrenched at both strategic and operational levels. As well as the Tax Office, they involve the Australian Crime Commission, Australian Federal Police, Australian Customs Service, Australian Securities and Investments Commission and AUSTRAC. We have strong relationships with the Australian Government Solicitor, Attorney-General's Department and Commonwealth Director of Public Prosecutions.
Recent changes to the law, coupled with new cross-agency governance and information technology solutions, enable the Tax Office and other agencies to share information more effectively for the purposes of Project Wickenby.
We also cooperate with foreign tax administrations to target evasion and fraud, sharing information with them under government-to-government agreements. We find that our overseas counterparts are particularly eager to cooperate where there is evidence of potential criminal behaviour beyond that of the more common forms of tax avoidance.
The Proceeds of Crime Act 2002 provides us with a compliance tool where traditional responses are not relevant or are unlikely to be successful.
Changes to the Proceeds of Crime Regulations in 2006-07 gave us additional powers under the Act, which allows for the restraint and confiscation of assets derived from tax-related criminal activity. It also provides us with specific information gathering tools for investigating and prosecuting criminal asset matters.
Identity crime
Around one-third of all fraud cases we investigate involve some element of identity crime.
In cooperation with partner agencies, we have been very successful in clamping down on attempts to create identities for the purposes of defrauding the tax system.
The threat in relation to identity crime now comes from opportunistic individuals and organised groups exploiting the growth in online transactions to steal personal identity data. This can then be used to take over an identity and conduct fraudulent transactions with the tax system. There is also an organised global trade in stolen identities.
In response to this growing problem we are:
- strengthening proof of identity requirements
- undertaking a community education program on the security of the tax file number and its link to personal security, and providing information to tax practitioners on ways to protect their client data
- investing in our intelligence capabilities, including the analytical capabilities of our staff and more sophisticated analytical tools and techniques, to identify and respond to suspect transactions, and
- investigating and prosecuting cases of tax-related identity crime.
Our efforts are part of a whole-of-government response to this issue involving greater inter-agency cooperation.
Secret offshore dealings
The improper use of tax havens and, in some countries, bank secrecy provisions continues to be a risk for the tax system, leading to the concealment of assets and income. This sometimes involves the use of credit and debit cards to return hidden funds to Australia (see Identity crime).
High-volume, low-value suspect transactions
We are seeing coordinated attempts at fraud using high volumes of low-value transactions through returns and activity statements. Those involved aim to slip under the radar of our risk identification systems.
In response, we are gathering intelligence with law enforcement agencies and financial institutions and refining our risk identification filters.
This type of fraud often includes an element of identity crime.
Credit and refund fraud
Credit and refund fraud is perpetrated through fraudulent registrations and claims, and the use of complex structures and transactions.
Before we issue refunds they are automatically checked against a set of criteria based on intelligence from our compliance activities. Where we identify any form of fraud, we work with our partner agencies to investigate and prosecute.
Illicit tobacco growing and trading
The end of Australia's legal tobacco growing industry in 2006 has meant that the mischief involved in illicit tobacco has changed from the diversion of legally grown tobacco to illicit importation and growing. We are monitoring this issue and will undertake enforcement action with the Australian Customs Service as required.
Project Wickenby
Project Wickenby is a major multi-agency initiative, funded by a special allocation from the government, focusing on the international promotion of arrangements allegedly involving the concealment of income and falsification of deductions. At 30 June 2007 it involved:
- 16 criminal investigations led by the Australian Crime Commission or Australian Federal Police
- 136 tax audits involving 234 taxpayers, and
- several investigations by the Australian Securities and Investments Commission.
While our main goal with this type of action is improved voluntary compliance, we have:
- raised total additional tax, including penalties, of $54.64 million from over 70 amended assessments and collected $17.79 million (the total amount includes seven completed voluntary full disclosures. In addition, $12.37 million has been restrained under the Proceeds of Crime Act), and
- issued 531 notices under section 264, and undertaken 25 access visits with notice and 62 access visits without notice.
Our preliminary analysis suggests there has been substantial improvement in post-Wickenby tax compliance by Wickenby participants. In addition, there is evidence that some taxpayers have chosen not to proceed with proposed arrangements.
An intended benefit for all the agencies involved has been increased capability in areas such as information technology, legislative infrastructure, skills and multi-agency taskforce management and operations.
A Newcastle man was sentenced in March 2007 to eight years' jail for GST fraud of $500,000 and attempted GST fraud of $64 million. This followed a joint investigation by the Australian Federal Police and the Tax Office.
The former company director was found guilty of one count of obtaining a financial advantage by deception and four counts of attempting to obtain a financial advantage by deception.
Having lodged a false activity statement claiming GST credits for bogus purchases, the offender obtained a refund of $505,103. He then tried to claim further refunds but our verification checks revealed the purchases were fictitious and the payments were immediately stopped.
A reparation order was made for $505,103, and the offender will have to serve a minimum of five years and four months before being eligible for parole.
Results of our activities are based on preliminary data and are indicative only. Final results for 2006-07 will be published in our Annual report 2006-07, due for release in October.
Serious non-compliance
During 2006-07 we:
- conducted 241 audits, raising liabilities of $94 million, about half of which came from Project Wickenby
- collected $8 million in liabilities (plus Wickenby collections of $15 million)
- commenced 240 investigations and brought 80 prosecutions before the courts, 75 of which were successful
- executed 13 search and 27 seizure warrants, and seized 7,000 kg of leaf and cut tobacco, and
- issued 52 excise penalty infringement notices.
Project Wickenby
As part of our Project Wickenby activities we:
- raised liabilities totalling in excess of $50 million
- collected more than $30 million in additional revenue (some of which may be attributed to improved compliance behaviour) from Wickenby participants for the 2005-06 year
- started 136 audits involving 234 taxpayers, and
- had $12 million restrained under the Proceeds of Crime Act.
Additionally, at 30 June 2007 there were 16 Wickenby-related criminal investigations under way, eight with the Australian Crime Commission and eight with the Australian Federal Police.
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Footnotes
1 These figures relate to 2005-06 income tax returns processed during the 2006-07 financial year.
2 The reference to revenue adjustments in this publication refers to 'net' revenue adjustments (the balance of adjustments increasing and/or decreasing liabilities).
3 We are in the process of recategorising the small to medium enterprises market by increasing the upper turnover limit to $250 million. This is expected to increase the number of enterprises in the SME market to 121,000.
4 We are in the process of recategorising the Large business market by raising the lower turnover limit to $250 million. This is expected to shift around 1,000 business groups from this market segment into the small to medium enterprises segment.
5 Some of this may have been from previous years' activities.
6 Some assessments are subject to disputes which may ultimately be resolved in favour of the taxpayer. We will cover this in our Annual Report 2006-07.
7 For the large business segment, notional tax includes future income tax revenue impacts associated with the reduction of carried forward losses.
8 As well as a range of public rulings which have relevance to large business: see public rulings program on www.ato.gov.au
9 Lyons, M. 2001, Third sector: the contribution of non-profit and cooperative enterprises in Australia, Allen & Unwin, Sydney, p. 21.
10 However our view of the law is not universally accepted, and a test case may be funded on this issue.
Last Modified: Thursday, 16 August 2007
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