Every so often the Australian Taxation Office (ATO) sends a 'shot across the bow' warning taxpayers where their gaze is focussed. Last month in a speech to the National Press Club, Tax Commissioner Chris Jordan did exactly that. Part of the reason for this public outing is the gap between the amount of tax the ATO collects and the amount they think should be collected – a gap of well over 6% according to the Commissioner.
"The risks of non-compliance highlighted by our gap research so far in this market are mainly around deductions, particularly work related expenses. The results of our random audits and risk-based audits are showing many errors and over-claiming for work related expenses – from legitimate mistakes and carelessness through to recklessness and fraud. In 2014-15, more than $22 billion was claimed for work-related expenses. While each of the individual amounts over-claimed is relatively small, the sum and overall revenue impact for the population involved could be significant," the Commissioner stated.
Individuals – the hit list
· Claims for work-related expenses that are unusually high relative to others across comparable industries and occupations;
· Excessive rental property expenses;
· Non-commercial rental income received for holiday homes;
· Interest deductions claimed for the private proportion of loans; and
· People who have registered for GST but are not actively carrying on a business.
While small in value, the ATO are also concerned about the amount of people who appear to be claiming deductions by default for items such as clothing expenses. In 2014–15, around 6.3 million people made a claim for $150 for work related clothing - the level you can claim without having to fully substantiate your expenses. Those 6.3 million claims amounted to $1.8 billion in deductions.
Small business – the hit list
· Those deliberately hiding income or avoiding their obligations by failing to register, keep records and/or lodge accurately;
· Businesses that report outside of the small business benchmarks for their industry;
· Employers not deducting and/or not sending PAYG withholding amounts from employee wages;
· Employers not meeting their superannuation guarantee obligations;
· Businesses registered for GST but not actively carrying on a business;
· Failure to lodge activity statements; and
· Incorrect and under reporting of sales.
If your business is outside of the ATO's benchmarks, it's important to be prepared to defend why this is the case. This does not mean that your business is doing anything wrong, but it increases the possibility that the ATO will look more closely at your business and seek an explanation.
Private groups – the hit list
· Tax or economic performance not comparable to similar businesses;
· A lack of transparency in tax affairs;
· Large, one-off or unusual transactions, including transfer or shifting of wealth;
· A history of aggressive tax planning;
· Choosing not to comply or regularly taking controversial interpretations of the law;
· Lifestyle not supported by after-tax income;
· Treating private assets as business assets; and
· Poor governance and risk-management systems.
Property developers – the hit list
· Developers using their SMSF to undertake or fund the development and subdivision of properties leading to sale;
· Where there has been sale or disposal of property shortly after the completion of a subdivision and the amount is returned as a capital gain;
· Where there is a history in the wider economic group of property development or renovation sales, yet a current sale is returned as a capital gain;
· How profit is recognised where related entities undertake a development (i.e., on the development fees as well as sales of the completed development);
· Whether inflated deductions are being claimed for property developments;
· Multi-purpose developments - where units are retained for rent in a multi-unit apartment, to ensure that the costs are appropriately applied to the properties produced.
These are just a small sample of the ATO's area of focus. Other areas include tax and travel related expenses and self-education expenses.