The Commissioner of Taxation, Mr Michael D'Ascenzo, has released the annual ATO compliance program for the 2011-12 year, promising a strong focus on deterring, detecting and dealing with non-compliance.
The program sets out areas and industries where the ATO plans to focus further attention, including audit activity, during the coming year. The ATO promises an increase in audit activity, particularly in the areas of sham contracting arrangements, cash economy transactions and superannuation guarantee compliance. The Commissioner also expects that over 400,000 people will be contacted because the information in their tax return is inconsistent with data collected independently by the ATO.
The Commissioner makes it clear that he sees willing compliance as an important aspect of the tax system and will differentiate between the different attitudes of taxpayers in addressing compliance, while also highlighting the numerous tools available to the ATO to track income earned and transactions entered into by taxpayers.
Mr D'Ascenzo added "We foster an environment that encourages willing participation and ensures those who do participate appropriately are not disadvantaged", while noting that those who blatantly fail to comply can expect to feel the full force of the law.
Areas of focus
Some of the many areas the ATO will focus on include:
- Sham contracting arrangements
- Cash economy
- Superannuation guarantee compliance
- Self managed superannuation funds
- Businesses operating outside of industry benchmarks
- Wealthy individuals
- Overseas dealings
- Good tax governance
Sham contracting arrangements
Since the introduction of the Personal Services Income (PSI) rules, the ATO has had stronger ammunition with which to attack so called "sham" contracting arrangements, where an individual may be more correctly classified as an employee.
This area of the law has long been on the ATO's radar, particularly as it could provide the opportunity for the individual to split income with other family members.
Also of major concern to the ATO is the potential for taxpayers to operate outside of the PAYG withholding system and consequently increase the risk of income not being reported. The Commissioner even goes as far as identifying the risk that these taxpayers may unfairly access welfare benefits.
The Commissioner also addresses this from a different angle by warning that the individual may miss out on leave entitlements, employer superannuation and workers compensation as a result of these arrangements.
An attack on the cash economy is another perennial favourite for the ATO. This includes businesses failing to record all transactions, paying cash-in-hand wages, or those operating outside the system.
The Commissioner has used the opportunity to highlight the tools available to monitor compliance, stating that "these businesses are becoming more visible to us as a result of increased and more sophisticated data-matching activities", while also identifying a link between tax compliance and good record keeping.
Compulsory employer superannuation contributions appear to be an issue the Commissioner is keen to highlight this year, particularly for the small to medium business sector.
In doing so, he has highlighted the risk to employers of their employees making complaints to the ATO about non-compliance, with around 14,000 complaints being followed up last year and around $1.3b being correctly directed into member accounts over the past five years as a result of ATO activity.
The Commissioner also relates this area of compliance to his attack on sham contracting arrangements.
Self-managed superannuation funds (SMSF)
There are almost 500,000 SMSFs currently in operation, with about 30,000 new funds established annually.
The Commissioner warns trustees of the risk that their fund may be deemed non-complying, which will result in the loss of access to the concessional tax treatment generally enjoyed by superannuation funds, or possibly prosecution.
Part of the focus will include attention towards trustees illegally providing early release of benefits to members, while the in-house asset restrictions will be another area closely monitored.
The ATO will also rely on auditor contravention reports, to help highlight areas of non-compliance.
The ATO is able to capture a significant volume of financial information from tax returns lodged, which it uses to collate industry benchmarks.
Those businesses operating outside of these benchmarks can therefore be "flagged" and potentially subject to review, with 46,000 businesses highlighted as potentially under reporting cash income last year.
The Commissioner does state that individual circumstances will always be taken into account, in an attempt to overcome criticism that the somewhat generic nature of the data collected by the ATO may impact on the reliability of the benchmark data collated.
The ATO defines a highly wealthy individual as one who controls $30m or more in net wealth, while also referring to highly paid individuals as those earning over $1m.
The ATO sees this group of people as those who are likely to have complex tax structures and identifies risks in areas such as arrangements involving trusts, Division 7A, overseas dealings and failure to disclose capital gains.
There are over 2,500 individuals the ATO claims are currently on their compliance radar, with the ATO having raised approximately $103m from over 500 reviews from this sector in the last year.
The Commissioner has again used this area to highlight the data available to the ATO, including information available under tax treaties, automated exchange-of information-requests and from AUSTRAC.
Transfer pricing and thin capitalisation compliance also come under the spotlight, as does the use of preferential tax regimes, with the continuation and past success of Project Wickenby also highlighted.
GST compliance will also be monitored, including a review of the findings of the Australian Customs and Border Protection Services in relation to the low value import threshold.
Record keeping and a willingness to comply are highlighted regularly throughout the Commissioner's compliance program.
Special mention of this is also made in reference to large businesses, being those with a turnover of greater than $250m, with the Commissioner warning that these businesses can expect a review of their corporate tax governance procedures, with GST particularly highlighted.
Corporate restructures, including mergers and acquisitions, are also identified as an area of risk and the Commissioner encourages businesses and their advisers to engage with the ATO during the process.
Numerous other risk areas are identified by the Commissioner in the program, with the overriding message that tax compliance helps promote a level playing field for all businesses and a strong emphasis on the sophisticated tools available to the ATO to monitor the activity of taxpayers.
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