The ATO expects taxpayers to comply with the tax laws. That’s fine as a general proposition, but in many instances, that’s a whole lot easier said than done. Believe it or not, the ATO does understand that the tax laws are complex and is constantly releasing materials to help taxpayers, including SMEs, understand how those laws apply to them.
Most recently, the Tax Commissioner released the first edition of Small-to-medium enterprises and wealthy individuals: Our compliance approach. It outlines the ATO’s approach to managing tax compliance risks for SMEs and wealthy individuals, and explains the behaviours they can expect from the ATO in its dealings with them. It also outlines the ATO’s expectations of those taxpayers and informs SME market taxpayers of their key rights and obligations. The new publication is available on the ATO website.
Among other things, the ATO expects taxpayers to establish sound risk-management processes. This includes asking questions when receiving tax planning advice.
If an SME uses an adviser, the ATO suggests they ask whether their advice is likely to result in significant amounts of unpaid tax, or in taking a position that is not reasonably arguable (there are tests in the law that determine whether this is so).
The ATO also suggests that SMEs obtain advice commensurate with the complexity of their business dealings. In all cases, the ATO suggests that taxpayers:
- make an effort to understand the tax consequences of material issues;
- ensure valuations are done in good faith and able to withstand independent scrutiny;
- be alert to any potential problem areas in relation to their tax affairs;
- seek advice or clarification where doubt exists about the application of the law.
The ATO uses a Risk Differentiation Framework (RDF) to assess the level of risk each taxpayer presents. The RDF is split into four risk categories, from lower-risk taxpayers and medium-risk taxpayers through to key taxpayers and higher-risk taxpayers. It allows the ATO to determine the amount of resources and the responsive activities required for each category.
The RDF for the SME segment goes one step further as each category also contains the approximate total number of SMEs (annual turnover of $2m to $250m), Highly Wealthy Individuals (net wealth more than $30m), and Wealthy Australians (net wealth between $5m to $30m) in that category.
The four risk categories from the RDF are as follows:
>Higher-risk taxpayers – The ATO says it categorises “a relatively small number of taxpayers as higher risk”. ATO activities may include audits and other intensive approaches to deter non-compliant behaviours. The taxpayer population includes 5,500 SMEs.
- · Key taxpayers – Key taxpayers can expect consistent monitoring from the ATO. The ATO may issue “compliance notification letters” to taxpayers indicating that it will not undertake compliance activities on the taxpayer for the year stated. The taxpayer population includes 13,400 SMEs.
- · Medium-risk taxpayers – Medium-risk taxpayers can expect periodic reviews from the ATO. The taxpayer population includes 18,100 SMEs.
- Lower-risk taxpayers – The majority of businesses in the SME market are lower-risk taxpayers. The ATO says it is less likely to contact lower-risk taxpayers as they are less likely to have significant matters of concern that require ATO attention. The taxpayer population includes 146,000 SMEs.