Over the coming year, our compliance program for SMEs will focus on the following compliance risks:
- participation of wealthy individuals in the tax and superannuation systems
- use of trusts to inappropriately minimise tax
- Division 7A - treatment of private company profits
- capital gains - non-disclosure and incorrect reporting
- employer compliance with fringe benefits tax rules
- integrity of business systems for GST and excise obligations
- GST and property transactions.
Participation of wealthy individuals
We undertake two specifically funded programs to promote the proper participation of wealthy individuals in the tax and superannuation systems. These programs of support and enforcement activities focusing on wealthy individuals underpin our commitment to the community that all Australians pay their fair share of tax.
- Highly wealthy individuals (HWIs) - As outlined, we have maintained an ongoing compliance focus since 1996 on HWIs (defined as an Australian resident who, together with associates, effectively controls $30 million or more in net wealth). This year we will be focusing on identifying and engaging with more HWIs to help them understand our compliance approach. We are currently monitoring the compliance of 2,600 HWIs.
- This year, our program of reviews and audits will cover more than half of the HWIs that our risk models identify as higher risk. We expect to complete around 200 reviews and 50 audits of HWIs.
- Where an audit of a HWI indicates an ongoing risk of non-compliance, we may request additional information on an annual basis through expanded tax returns.
- Wealthy Australians - Over the last three years, we have been progressively expanding compliance activities in relation to individuals controlling a net wealth of between $5 million and $30 million (with more than 70,000 people in this category identified to date). Over the next year, this program will involve reviews of major business transactions and changes in financial ratios to ensure correct treatment in tax returns and activity statements. We expect to complete around 120 reviews and 50 audits of wealthy Australians.
Use of trusts
In the face of ongoing changes to trust tax law, we will continue to publish tailored information for affected taxpayers on the application of new and existing provisions while at the same time undertaking compliance activity to protect the integrity of the tax and superannuation systems.
To better detect non-compliance, we use information matching and relationship mapping systems to focus reviews and audits on groups involved in potentially manipulative practices. This approach is supported by trust tax file number matching, which links trust distributions to entities lodging income tax returns.
We will contact around 1,000 trustees and beneficiaries about a range of issues including lodgment, correct reporting of trust distributions and compliance with the trust tax file number withholding rules. We also expect to undertake around 30 reviews and at least 15 audits of aggressive trust arrangements.
We continue to use the full force of the law when dealing with the most serious tax avoidance behaviours, including partnering with law enforcement agencies and acting firmly to collect debt. We have established a Trust Taskforce in conjunction with Project Wickenby to respond to aggressive trust-related tax avoidance and evasion.
See Large businesses chapter, for our compliance approach to managed investment trusts.
Division 7A - treatment of private company profits
Division 7A of Part III of the Income Tax Assessment Act 1936 is an integrity measure aimed at preventing private companies from making tax-free distributions of profits to shareholders or their associates.
Over the past few years, we have focused on clarifying the law and education through tax rulings, decision support tools and fact sheets. We have seen increased awareness among private company owners and their advisers of the correct treatment of company funds received by shareholders and associates other than by way of dividends.
This year, we will be moving to a more active verification strategy. We will undertake around 100 letter and phone-based verification activities to ensure SMEs have appropriate loan agreements in place, and use our automated risk models to identify higher risk cases for more intensive reviews and audits.
We are continuing our focus on the application of Division 7A to unpaid present entitlements. In light of our interpretative views in Tax Ruling 2010/3 and Law Administration Practice Statement 2010/4, we will identify private companies and trusts that have engaged in unpaid present entitlement transactions to assure compliance with the Division 7A provisions. We will contact taxpayers as they are identified to request further information on these transactions.
If we identify a suitable case, we may provide test case funding to resolve the Commissioner's interpretation of unpaid present entitlements as addressed in Tax Ruling 2010/3.
A post-implementation review of Division 7A was announced by the Assistant Treasurer on 18 May 2012. The Board of Taxation will conduct this review, which will examine whether there are options to simplify this area of law while ensuring the integrity and fairness of the tax system. We will work with the Board of Taxation and Treasury to support the review. (See Focus on Division 7A generating compliance dividends)
Capital gains - non-disclosure and incorrect reporting
We continue to match third party information with tax returns to identify the omission or understatement of capital gains on real property and share transactions.
We will conduct reviews where we suspect taxpayers may have incorrectly reported capital gains or losses. We expect to undertake approximately 100 higher risk cases focusing on:
- incorrectly classifying ordinary income as a capital gain to obtain a more advantageous tax position
- creating a company structure to enable a back-to-back rollover to achieve a deferral of tax
- claiming small business concessions when not eligible or incorrectly calculating the claim
- incorrectly claiming or retaining carry-forward capital losses where the continuity of ownership or same business tests are not met.
We also see a continuing compliance risk arising from the sale of taxable Australian property by foreign residents and the claiming of exemptions (see Transactions involving taxable Australian property by foreign residents in the Large businesses section).
Fringe benefits tax (FBT)
We are concerned about the level of non-compliance by employers with FBT rules, including failure to lodge returns when required, failure to identify and correctly treat fringe benefits and the incorrect application of valuation, exemption and reduction rules. We will be contacting employers with potential FBT obligations as part of a broader employer obligations strategy.
Specific compliance risks include taxpayers mistakenly assuming their motor vehicle is exempt from fringe benefits tax without considering its private usage, and employers who have stopped lodging fringe benefits tax returns while continuing to provide fringe benefits to their employees. We will take firmer action against those employers that choose not to comply with their FBT obligations by conducting approximately 200 reviews and audits.
In last year's compliance program, we identified an increase in the use of living-away-from-home allowances (LAFHA) to remunerate employees. In the 2012-13 Budget, the Treasurer announced legislative reforms to stop individuals from being able to exploit the LAFHA tax exemption. We will support and assist the community to understand these legislative changes.
Integrity of business systems for GST and excise
SMEs that have poor tax governance, risk management frameworks and ineffective systems are more likely to make mistakes when reporting their tax obligations. All businesses should regularly review and update their business practices, controls, procedures and systems to ensure they meet their current needs. Taxpayers should also periodically review their lodged activity statements to identify and voluntarily disclose any errors.
The most common causes of errors are:
- misinterpretation of the GST treatment of a transaction
- insufficient staff training
- changes in business structure
- issues resulting from the maintenance, update or implementation of systems
- human error.
We plan to undertake 1,500 reviews and 100 audits to ensure that SME businesses have systems that adequately support the correct reporting of GST and excise.
Businesses should be able to identify and manage risks associated with events or transactions that are more likely to impact on their systems and result in incorrect reporting of GST, such as:
- unusual or one-off transactions
- changes in size or structure
- communication between related entities
- changes to GST law
- staff changes.
To help SMEs assess the effectiveness of their business systems, we will publish a governance and tax risk management checklist.
GST property transactions
There are continuing GST compliance risks associated with the sale, transfer and acquisition of real property, such as where taxpayers misclassify or dispose of real property and fail to report the transaction on their business activity statements. To detect this, we match information from external sources (such as state and territory property data) with information reported in business activity statements. In 2012-13 we will increase our focus on property developers with a history of non-compliance. By engaging with taxpayers at registration and throughout the property lifecycle, we will encourage them to correctly assess and report their liabilities and, where necessary, require them to provide security bonds against projected future tax liabilities.
Other continuing compliance activities include:
- expanding and improving the use of third party information to identify unreported sales, particularly in the case of one-off property transactions
- working with taxpayers and their tax agents to alert them to discrepancies before audit action
- identifying incorrect application of the margin scheme provisions to reduce the GST payable on property sales
- undertaking approximately 1,000 reviews and audits
- providing greater certainty for taxpayers on the treatment of transactions associated with commercial residential premises through the publication of the final commercial residential ruling in August 2012.
Sections within Small-to-medium enterprises
Last Modified: Thursday, 19 July 2012