ATO Advice

What does it mean to be in the crosshairs? The ATO’s targeted risk programs are explained by Sharon Grice and Tim Lyford, Directors in the Tax Services Division at William Buck.

The Australian Taxation Office (ATO) has increased its information and data gathering ability significantly in the last ten years. With this, the ATO is now using analytics to profile and target potentially highrisk taxpayers. To boost tax collections and reduce a large budget deficit, we are seeing an increase in ATO audit activity, with private companies in the firing line.

As the ATO review threshold for a Medium/Emerging business starts at an annual turnover of $10m, many more Australian businesses are affected by ATO assurance and risk review programs than might be expected. This represents around 97% of the total private group population.

The Next 5000 Program targets taxpayers where an individual and their associates control wealth of $50m or more. As part of this approach the ATO typically is keen to understand the group structure and the transactions within the group, as privately held groups enjoy lower levels of disclosure and publicly available information.

What attracts the ATO’s attention?

The ATO has extensive and increasing data-matching capabilities and there’s huge amounts of information available to the ATO, with over 600 million transactions reported annually. Organisations that report data to the ATO include AUSTRAC, State and territory rental bond registries, insurers, financial institutions and credit reporting bodies as well as the Australian Electoral Commission, Department of Foreign Affairs and Trade, the Higher Education Loan Program and the Foreign Investment Review Board. When data on a business or individual taxpayer’s spending does not add up with what’s being reported in their tax return, the ATO is likely to conduct an audit. Other general circumstances that attract the ATO’s attention include:

• large, one off / unusual transactions;

• non-lodgement particularly when previous tax returns have been up to date or the taxpayer has a high amount of incoming or outgoing cash;

• aggressive tax planning;

• lifestyle not supported by after-tax income;

• accessing business assets for tax-free private use;

• poor governance and risk management systems;

• tax or financial performance is not comparable to similar businesses, and

• low transparency of tax affairs.

Trusts

Trusts are widely used for asset protection and as a business structuring tool. There are several tax advantages associated with trusts and the ATO reviews these heavily to identify risk factors.

The treatment of luxury assets and capital corpus distributions within trusts are heavily scrutinised by the tax office. For example, trusts may be used to buy boats, cars and other expensive assets that beneficiaries use for personal use, and the trustees claim tax deductions for these assets without reporting any assessable income. Trustees may also seek to extract capital from trusts, by making payments to income tax-preferred beneficiaries or satisfying corpus entitlements using assets with unrealised gains.

The tax office also reviews property ownership within trusts and property developers operating under trust structures.

Business structure

Other business structures will invite ATO review if they are not being used in a commercial way.

Consolidation is on the ATO’s radar, with the tax office paying close attention to the way losses are used when transferred from new members, if the right members are included in the group and costsetting calculations when members join or leave the group.

Cross border transactions are reviewed to ensure they meet arm’s length transfer pricing principles, and if any withholding tax is due, for example on interest or royalties, it has been reported and paid so a tax deduction can be claimed.

Finally, even something as simple as the company rate of tax can be affected by the way your businesses are structured, particularly if you operate through a number of different entities. The ATO are on the look-out for arrangements where income is not aggregated to see if the $50m threshold has been met, or passive and nonpassive income has been shifted around the group to manipulate the company rates.

So, what is effective tax governance?

Between taxpayer to taxpayer, and business to business, effective tax governance can look very different. To assist taxpayers in putting effective tax governance policies in place, the ATO has seven broad principles it uses to assess these policies.

• Management: Who has oversight and are they accountable? Are roles clearly defined?

• Tax Risk: How are tax risks identified and quantified? Is there a process in place?

• Advice: When risks are identified by management, what is the process to seek advice?

• Integrity: Is our accounting and software system providing the correct data? For example, do we reconcile differences between the accounts and tax returns.

• Relationships: What is our relationship with the ATO like? Do we work closely with our advisers on tax matters?

• Lodgements: How do we manage our tax lodgement and payment cycle? Are we on time?

• Ethics: Do we act honestly and with integrity? Does our policy protect us against manipulation and tax avoidance?

What can I do now?

The ATO expects taxpayers, especially those within top 500 and next 5000 programs, to have documents in place that satisfy and ratify the above principles.

For nearly all other private groups the ATO expects a tax governance policy and procedure to be in place. Going forward, the ATO is likely to ask for copies of these policies and procedures during a review or audit.

Like all other documentation, the policy needs to be fit for purpose for the client, although not as comprehensive as for larger businesses or large corporates. Having such policies in place demonstrates to the ATO that the taxpayer is managing their tax risk and compliance obligations closely based on their economic activity, and associated risk.

Sharon Grice and Tim Lyford are both Directors in the Tax Services division at William Buck. William Buck is a leading firm of accountants and advisors. Ph: 03 9824 8555 williambuck.com