Compliance program 2010-11

Our general approach

Given the large number of micro businesses in the community, we use information matching extensively. We use sophisticated profiling tools to identify micro businesses not complying with their obligations, including businesses:

• operating outside industry or economic norms
• at highest risk of not lodging returns or lodging returns late
• with undisclosed income or capital gains.

We tailor our activities to the circumstances and level of risk. Our activities include mail and phone contacts, visits, reviews, audits, assessments, penalties and referring cases for prosecution.

We have a range of support tools to guide micro businesses and reduce the costs of complying with their obligations. Our website provides valuable information, including decision making tools and calculators to guide businesses with capital gains tax, fringe benefits tax, fuel tax credits, goods and services tax, pay as you go withholding, employment termination payments and superannuation guarantee.

We issue warnings such as taxpayer alerts where we have concerns. This includes concerns about retail investment products in the marketplace, particularly those promising tax benefits that may not be available under the law. We encourage promoters of retail investment products to apply for product rulings to provide investors with certainty about the tax effects of an arrangement. We also check that arrangements are implemented as described in their product rulings and seek to identify schemes that do not have a product ruling to ensure that the entities behind such arrangements have not contravened the promoter penalty laws.

Initiatives and innovations

Our small business assistance program continues to provide help. This year our focus will be on businesses needing or requesting more intensive support to meet their ongoing obligations. Last year we directly assisted over 85,000 small businesses as part of this program and we expect to assist a similar number this year.

Cash economy

Our analysis indicates that some businesses deliberately under report or omit income, using cash transactions to hide income and evade tax obligations. This includes businesses:

• paying cash-in-hand wages or treating employees as contractors
• skimming some or all of the cash takings
• running part of their normal business activities off the books
• not reporting the exchange of goods and services for other goods and services
• operating underground, avoiding obligations by not registering or not lodging returns.

We are expanding our ability to detect businesses operating in the cash economy by:

• matching data from an increasing number and range of sources
• identifying those operating outside the benchmark for their industry
• identifying people whose lifestyle cannot be supported by their reported income.

We will scrutinise businesses deliberately choosing to under report or omit income from cash transactions. Where we find businesses deliberately using cash transactions to hide income we will apply the full force of the law. We will apply penalties and sanctions and raise default assessments where appropriate. Cases of serious evasion will be referred for prosecution and tax practitioners deliberately doing the wrong thing will be reported to the Tax Practitioners Board.

Our cash economy activities this year will see the tax affairs of over 26,000 micro businesses reviewed and audited.

Small business benchmarks

As part of our strategy to address the cash economy we are continuing to expand our range of small business benchmarks. These benchmarks are designed to help businesses compare their performance against similar businesses and provide them with guidance on what we would normally expect to see in their reporting.

We have published benchmarks for over 100 different business types on our website. These cover a broad range of industries, including building and construction, retail, hospitality and personal services.

Businesses that find they are outside the benchmarks for their industry should check that they have correctly recorded and reported their income and deductions. If they find a mistake, businesses should make a voluntary disclosure to us.

Comparing a business against the benchmark ranges for its industry is one way we select businesses for audit. If businesses do not report within their benchmark ranges it may indicate that they are not recording and paying tax on all of their transactions, especially cash transactions. Of course, there may be other explanations as well.

We also use benchmarks during an audit to establish if a business's tax returns and activity statements are accurate, and to assist us calculate default assessments where a business provides insufficient or unreliable information, or has not met lodgment obligations.

Where a business fails to meet its lodgment obligations we may issue a default assessment based on benchmarks.

Around 100,000 micro businesses can expect us to contact them because their reported income is outside published benchmark ranges.

Business activity statement (BAS) refund integrity

We have significantly improved techniques for identifying compliance issues relating to BASs. Increased access to third party information is also improving detection of potential fraudulent claims. We have improved refund verification methods both before and after issuing a BAS refund. We are focussing on:

• omitted or incorrectly reported property sales and acquisitions
• incorrectly applied margin scheme rules.

We will verify refunds by phoning or visiting businesses and contacting third parties to substantiate claims.

We have received additional funding from government to increase our focus on preventing refund fraud. Our computerised checks are now expanded to identify possible fraudulent activity in BASs to stop those refunds from issuing. Where we identify fraudulent claims we will prosecute taxpayers.

We expect to verify over 48,200 refund claims from micro enterprises this year.

Employer obligations

Employers play a crucial role in Australia's tax and superannuation systems. Last year, about 800,000 employers paid pay as you go withholding to us on behalf of their employees. Employers also make superannuation guarantee contributions for employees and incur fringe benefits tax obligations where they provide non-cash benefits to employees.

Employers may experience compliance issues, including poor record keeping and cash-flow difficulties. Many have been negatively affected by the global economic downturn. Some employers deliberately avoid their obligations by paying cash wages and avoiding payment of superannuation guarantee.

We will be highlighting our concerns, including clarifying how the law applies, with employers and representative bodies. We will contact employers and provide online products informing them of the correct treatment of workers and how to access our assistance.

We will monitor and, where appropriate, visit businesses to ensure they are reporting the correct amounts of pay as you go withholding and making the appropriate superannuation guarantee payments.

We will investigate all complaints about employers not complying with their superannuation guarantee obligations. This year we expect to take action on over 17,500 employee complaints about unpaid superannuation. We will also undertake 800 compliance reviews targeted at industries and employers showing a pattern of non-compliance, including the road freight transport, automotive repair and electrical services industries.

This year we will conduct a communication campaign aimed at promoting knowledge of superannuation guarantee obligations and increasing compliance in the computer system design and related services, accommodation and accounting services industries.

We are continuing to work with promoters, industry representatives and sporting bodies to provide guidance on withholding obligations for visiting entertainers and sportspersons.

Property assets and investments

Where micro businesses appear to have sold assets or made a capital gain, we will alert them to their capital gains tax and goods and services tax obligations. We will also outline to tax practitioners the common errors in applying the capital gains tax provisions.

This year we will increase our information matching and focus our review and audit activities on:

• small business capital gains tax concession claims
• reporting capital gains and goods and services tax on the sale of shares and real property, including disposal of real property by non-residents
• application of margin scheme rules
• non lodgment of tax returns and activity statements where a capital gains tax event has occurred
• developers avoiding their payment obligations by not lodging their activity statements.

Losses

Our research reveals that some micro enterprises are using losses they are not entitled to.

Where micro enterprises incurred a loss for the first time in 2009 we will contact them and provide information about incurring and using losses. We will also review the tax affairs of businesses using losses to ensure that tax payable is not incorrectly reduced in current or future years.

Contractors

There is a risk that a number of contractors will seek to alienate their personal services income through entities such as companies, partnerships and trusts. Using this type of arrangement means that people in the same work situation pay different levels of tax.

We will continue our test case program to clarify the law and provide further information to contractors and their tax agents.

We will match data from labour hire firms and the mining industry to identify and target contractors, particularly engineers and computer technology specialists. We will also review the tax affairs of contractors identifying themselves as a personal services business and businesses in receipt of government stimulus payments.

International dealings

To identify micro enterprises receiving foreign-sourced income, we will use information matching, including data from the Australian Transaction Reports and Analysis Centre (AUSTRAC), for online transactions and money transfers, as well as information supplied by overseas revenue agencies. Our focus on haven-related transactions will also continue. We will pay particular attention to businesses where we identify discrepancies between this data and their reported income.

Managing tax debt

Although the economy is showing clear signs of sustained improvement, some businesses are experiencing financial hardship.

We have a range of services to help businesses having difficulty paying their tax debts including:

• flexible payment arrangements that align with cash flow - for eligible businesses these can be interest-free provided the payment arrangement is maintained
• interest-free deferral of the payment due date on activity statement liabilities
• cash flow relief for businesses through reduced uplift factor for pay as you go and goods and services tax quarterly instalments
• pay as you go instalment variations.

Businesses experiencing difficulties meeting their obligations should contact us early to discuss their situation and the assistance options available to them.

Our online payment arrangement calculator can help businesses explore payment arrangement terms including instalment amounts, timeframes and potential general interest charges.

To ensure a level playing field for business and fairness for all we will take firmer action where businesses:

• are unwilling to engage with us
• continually default on agreed payment arrangements
• do not have the capacity to pay and do not take steps to voluntarily resolve their situation.

Firmer action includes garnishee notices, director penalty notices, statutory demands and the commencement of wind up proceedings.

Self-managed superannuation funds

Trustees of self-managed superannuation funds are responsible for running their funds in accordance with the strict requirements for attracting concessional tax treatment. We help support the vast majority of trustees who seek to do the right thing. We work with self-managed superannuation funds trying to fix problems that may occur. We also take firm action, including making self-managed superannuation funds non complying if they commit serious breaches of the rules.

This year we will audit or review around 10,800 self-managed superannuation funds. We will focus on loans to related parties and follow up on undertakings given in previous years to rectify breaches. More than 1,800 of our compliance activities will focus on whether trustees have properly met their income tax obligations. We will examine deductions claimed for exempt current pension income and the treatment of losses. We also plan to review 40 self-managed superannuation funds where re-reporting of member contributions appears to have been done to avoid tax liability for excess contributions made by one or more of the trustees.

Sections within Micro enterprises

• Our general approach