In 2012-13, our compliance program will continue to have a strong focus on highly wealthy individuals (HWIs) and wealthy Australians (WAs). We will ensure that these individuals understand and meet their tax obligations and that they pay their fair share of tax.
HWIs are defined as Australian residents who, together with associates, control $30 million or more in net wealth. WAs are resident individuals who, together with associates, control a net wealth of between $5 million and $30 million. Currently we actively monitor over 2,600 HWIs and have identified more than 70,000 WAs.
Wealthy individuals are more likely to have complex financial arrangements which can create opportunities for sophisticated tax planning.
In 2006, we significantly expanded our HWI compliance activities. Since that time, we have:
- completed over 3,700 reviews and over 270 audits
- raised over $3.2 billion in liabilities and over $1.2 billion in cash collections
- disallowed losses totalling over $490 million.
We are constantly improving data matching and risk modelling programs. This allows us to more effectively target high-risk taxpayers and reduces the resources required to maintain an effective compliance focus. As a result, fewer reviews and audits are needed to achieve the desired outcome.
While wealthy individuals are not necessarily less compliant with their obligations, the scale of their activities and potential impact of non-compliance on the revenue stream, means we have an obligation to invest in monitoring and managing compliance.
We have recently released Tax compliance for small-to-medium enterprises and wealthy individuals which sets out our compliance approaches.
Like HWIs and WAs, individuals with a high disposable income are targets for promoters of tax avoidance schemes. This year we will have a particular focus on medical practitioners and other higher income individuals who invest in widely-marketed financial products that promise substantial tax benefits.
We will conduct education campaigns to encourage investors to take sensible precautions when choosing financial products to invest in. For example, we recently worked with Paul Clitheroe, Chair of the government's Financial Literacy Board, to produce a short YouTube video that aims to help investors recognise when a tax-effective investment becomes a tax avoidance scheme.
We use the Risk-differentiation framework (RDF) approach to help assess the tax risk of businesses and individuals and to tailor the most appropriate compliance response.
The RDF is based on the premise that our risk management approach will be different based on our assessment of:
- the likelihood that a taxpayer will not comply with their tax obligations
- the consequences (dollars, relativities, reputation, precedent) of non-compliance.
Under the RDF, businesses and tax intermediaries are classified as falling into one of four broad risk categories for each tax type: higher risk, medium risk, key taxpayer and lower risk. A separate risk rating is made for each tax type: income tax, GST and excise. Our risk rating aids us in choosing whether to undertake a review and the type of review we conduct.
The RDF enables us to allocate our compliance resources in the most efficient and effective way and reduces the community's overall compliance costs. For example, our help and support services are primarily directed to those in a low risk category to assist them to comply, while most high intensity compliance activities will be directed towards those in a higher risk category.
Early action prevents potential $7.6 million loss in tax revenue
Our firm response to a tax avoidance scheme has prevented the loss of potentially millions of dollars in tax revenue.
The promoters of the scheme promised participants inflated tax deductions for charitable donations made with the stated purpose of providing pharmaceuticals to the needy in developing countries.
Under the scheme, participants were invited to pay for the purchase of pharmaceuticals from a low cost overseas supplier on the understanding that supplies would be donated to charity. The promoter advised the investors that they were entitled to a tax deduction for an amount higher than the cash outlay. Loans were provided from the promoter to investors but were found to lack commercial substance.
'Although the taxpayer got a receipt for the donation, the value of the pharmaceuticals was set by the vendor, not the charity,' Tax Commissioner Michael D'Ascenzo said.
'The receipts were then used to claim a deduction for the donation that far exceeded the actual amount paid. We saw examples where, for deposits of around $2,000, taxpayers were claiming $20,000 in deductions.
'We are of the view that these arrangements are not legitimate.'
We responded quickly to the threat, issuing a taxpayer alert to warn the community about this type of arrangement and contacting participants to alert them to our concerns. We also amended the assessments of those who had already been drawn into the scheme, stopping $6.9 million in false donations claims.
We have encouraged on-sellers of the scheme and deductible gift recipients to cease their activity. We have also investigated key promoters with a view to applying the promoter penalty laws where appropriate.
Our early intervention prevented the scheme from becoming more widespread. The promoter of the scheme projected that the scheme would have 3,600 participants by the end of the third year. This would have resulted in $256 million in deductions, a loss of up to $76.8 million in tax revenue had early action not been taken.