Compliance, although always an issue, has been honed by the taxman to three points of interest for businesses this year. TERRY HAYES reports.
By Terry Hayes
Compliance, although always an issue, has been honed by the taxman to three points of interest for businesses this year.
This year the tax office is focused on three areas for compliance by small and medium businesses:
- Reducing small business tax debt – small businesses with a turnover of less than $2 million account for about two-thirds of outstanding collectable debt.
- A continued focus on the cash economy with new strategies including more effective follow-up of information from third parties and identifying those “whose lifestyles are out of step with their reported income”.
- A key change this year is a significant increase in compliance activities focusing on self-managed super fund regulatory issues such as in-house assets and loans to members.
Small and medium business tax debts
Collecting outstanding tax debts from smaller businesses is a very “big ticket” item on the tax office’s compliance program. The tax office is trying to get small business tax debt down by expanding its automatic dialler technology, referring some debts to external debt collection agencies, and by allocating more staff to recovering superannuation guarantee charge debts owed to employees.
The tax office is also using risk modelling to better tailor its treatment of taxpayers who have a debt by applying different strategies depending on their individual circumstances.
By using this capability, the tax office seeks to identify taxpayers who benefit from early contact, helping them to avoid problems further down the track. The tax office obviously doesn’t want business to “stew” over a tax debt – the earlier businesses make contact with the tax office, the better the chance of being able to work out a solution that is acceptable to both sides.
The Taxation Commissioner says the tax office will take individual circumstances into account and seeks to be “as fair and reasonable as possible”.
Ignoring a tax debt will certainly not make it go away and, in the extreme, can result in dire consequences.
An Adelaide man was recently sentenced to three years and nine months jail by the Adelaide District Court for tax fraud totalling over $400,000.
He will serve two years and 10 months jail before being eligible for parole. In 2004 and 2005, the man failed to pay $91,673 GST for a labour hire business he operated. During the same period, he also failed to pay the tax office $277,241 of tax for his employees and $42,050 in income tax when he didn’t lodge an income tax return for 2004-05.
The tax office is continuing its focus on the cash economy. This includes new strategies including more effective follow-up of information from third parties and identifying those “whose lifestyles are out of step with their reported income”. For instance, the tax office has been data matching owners of luxury boats, aeroplanes, cars, etc.
These checks regularly reveal that those involved have not lodged tax returns. So they are used by the tax office to get people back into the tax system and to collect any outstanding tax.
As part of the data-matching process, where tax returns have been lodged, the tax office also checks the income figures in the tax returns to see if they support the purchase of such assets. Where there is doubt, a tax audit can result.
The tax office is also paying special attention to business-to-consumer cash transactions; for example, retail businesses where non-reporting of cash transactions is facilitated by high-volume, low-value cash transactions.
Others that are attracting tax office attention are those where there is a high risk of non-disclosure of cash income, such as tradespeople and sub-contractors in the building and construction industry, and operators of restaurants and cafes.
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The tax office is in the process of refining its benchmarks or industry ratios for some trades and industries where there is a high volume of cash transactions. The benchmarks will be used to communicate to taxpayers what income levels might be expected, based on their business activity and the activity of those in their industry. The new benchmarks will be regularly updated.
These benchmarks are a guide. They can be used by the tax office to ask questions about turnover, cost of sales, depreciation, wages paid and so on.
If the figures in question are out of step with others in its industry, and the business can satisfactorily explain this to the tax office, that should be the end of the matter. If not, the tax office may conduct a more detailed review, or even an audit.
The tax office is in the process of looking at around 6000 cases to check compliance with the capital gains tax laws. It is primarily focused on small and medium sized businesses and individuals, and particularly real estate transactions. The tax office has a concern that compliance levels are not good.
The main residence exemption is a problem area, with the tax office saying that many people simply do not understand it. It is common for people to think that their home is exempt from tax – end of story. That is not necessarily correct; especially for business owners where their home life is often interconnected with their business.
If a small business owner uses any part of his or her residence for any activity connected with the business, a potential capital gains tax liability arises. The rules are complex and your accountant should always be consulted about this. This warning is exemplified when you consider the tax office says it has a “quite healthy” strike rate on this issue.
Data-matching features prominently in the tax office arsenal in this area (as well as with the cash economy as noted above).
With the co-operation of all state registries, the tax office now checks where there has been a sale of property. If there has been a sale, it checks the tax return to see if a capital gain has been returned. The tax office does a direct data match with its tax return data, including name and address, to check if the sale is likely to be of a principal residence.
Another technique used by the tax office is to send letters to people saying it is aware they have sold a property and to make sure that sale is reflected, where appropriate, in their tax return. The message the tax office is sending is that it knows about the sale, and the person “had better do something about it”.
Of course, where these property data checks reveal names that do not appear on the tax office tax return database, they potentially show people who have not lodged tax returns.
Terry Hayes is the senior tax writer at Thomson Legal & Regulatory , a leading Australian provider of tax, accounting and legal information solutions.
For more Terry Hayes features, click here .
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