The ATO has revised its list of activities that may attract scrutiny, in the lead up to Tax Time 2022.
Tax or economic performance not comparable to similar businesses is amongst a range of behaviours that will raise a red flag, the ATO said in a revised list of what attracts attention.
The ATO said that as part of its commitment to “provide transparency and build trust and confidence in the tax and super systems”, it has updated the ATO website with information about the behaviours, characteristics and tax issues of privately owned and wealthy groups that may attract attention.
This includes information about:
• taxpayers who avoid or delay paying taxes by not lodging their tax returns when required or fail to report all of their income. The ATO has improved data matching processes to detect undeclared or disguised income (including foreign income),
• taxpayers who provide incomplete information or fail to disclose their interest in foreign entities or incorrectly report foreign income,
• incorrectly claimed tax exemptions, treaty relief, transfer pricing benefits or economic stimulus measures, and
• arrangements that mischaracterise transactions or incorrectly calculate turnover or income to obtain a tax benefit.
The ATO’s web page, “What attracts our attention”, also lists:
• low transparency of tax affairs,
• large, one-off or unusual transactions, including the transfer or shifting of wealth,
• aggressive tax planning,
• tax outcomes inconsistent with the intent of the tax law,
• choosing not to comply, or regularly taking controversial interpretations of the law, without engaging with the ATO,
• lifestyle not supported by after-tax income,
• accessing business assets for tax-free private use, and
• poor governance and risk-management systems.
Tax Avoidance Taskforce
The updated list targets the types of privately owned and wealthy groups that come under scrutiny by the ATO’s Tax Avoidance Taskforce.
The government announced in the 2022 Budget that the ATO will be given funding to extend the operation of the Tax Avoidance Taskforce by 2 years to 30 June 2025.
The taskforce was established in 2016 to undertake compliance activities targeting multinationals, large public and private groups, trusts and high wealth individuals. The taskforce also scrutinises specialist tax advisors and intermediaries that promote tax avoidance schemes and strategies.
Additional information provided by ATO
The ATO has also provided additional information on non-lodgment, business structures, transactions and taxes, tax crime, the shadow economy (formerly referred to as the “black economy”) and illegal phoenix activity.
Non-lodgment triggers ATO into action
As the end of financial year approaches, non-lodgment is a critical issue that attracts ATO attention with a focus that is “targeted by applying improved data matching processes across a range of sources that identify entities who have:
• received income and are required to lodge an income tax return or activity statement but haven’t done so, or
• lodged an income tax return or activity statement but haven’t reported all their income.”
Other things the ATO looks for are:
• outstanding business activity statements,
• entities that did not lodge a return for the year under review and where instalments are low compared to the previous year,
• directors with a number of outstanding lodgments, and
• directors who lodge a return not necessary.
Business structures and transactions that concern the ATO
The ATO says some risks relating to structure and transactions of privately owned wealthy groups that currently attract its attention are:
• Consolidation — inappropriate outcomes from CGT reporting, cost-setting rules, membership and loss utilization.
• Demergers — transactions and schemes that exploit the demerger provisions for a tax benefit.
• International transactions — failure to report or incorrect reporting of international transactions.
• Lower company tax rate — ineligible corporate tax entities claiming the concessional tax rate for base rate entities, including artificial or contrived arrangements implemented to access the lower company tax rate.
• Professional firms — individual professional practitioners redirecting their income earned from professional services to an associated entity such that they significantly reduce their tax liability.
• Property and construction — entities in the property and construction industry incorrectly classifying income and profits from property development activities in their tax returns.
• Research and development tax incentive — behaviours that result in incorrect research and development (R&D) tax offsets claims with a particular focus on certain industries such as agriculture, mining, software development and property and construction.
• SMSFs — transactions and schemes that aim to inappropriately take advantage of concessional tax rates that apply to complying super funds.
• Trusts — complex distributions, non-lodgment of trust and beneficiary tax returns, and trust and taxable income mismatches.
Transaction and taxes in ATO’s focus
Certain types of transactions and taxes attract ATO attention:
• Bad debts — correct application of the rules where deductions are claimed for bad debts
• Capital gains tax — certain capital losses, disposals and small business CGT concession claims
• Commercial debt forgiveness — situations where an entity has had a debt forgiven (whether formally or informally)
• Deductions — incorrectly claiming of deductions
• Economic stimulus measures — schemes to inflate or enable access to loss carry back, temporary full expensing and backing business investment, accelerated depreciation
• Excise and excise equivalent goods — licence and permission obligations, record keeping and releasing goods without the proper authority to deal
• Franking credits — incorrect claims, poor governance, a substantial increase in or refund of credits and accessing credits through an entity with a concessional tax rate
• Fringe benefits tax — issues around motor vehicles, employee contributions, entertainment and car parking valuation
• Private use of assets or private pursuits in business — if a taxpayer uses an asset purchased by a business for a mix of business and private purposes, only claim a deduction for the portion of the business-related expenses
• Private company benefits — arrangements that enable the extraction of wealth from private companies while avoiding the appropriate amount of tax
• Revenue losses — incurrence and utilization
• Taxation of financial arrangements — entities that are subject to TOFA, to ensure that they apply the TOFA rules correctly.
Tax crime
The ATO is strongly committed to deterring, detecting and dealing with people who deliberately avoid paying their fair share of tax or try to claim refunds or other payments they are not entitled to.
Examples of tax crime include illegal phoenixing activity, when a company is liquidated, wound up or abandoned to avoid paying its debts and a new company is then started to continue the same business activities without the debt.
The ATO says it is working with other government agencies through the Phoenix Taskforce to stamp out illegal phoenix activity.
Other forms of tax crime include refund fraud, identity crime and organised crime.
As part of its fight against tax crime, the ATO a member of a number of taskforces, including the:
• Joint Chiefs of Global Tax Enforcement (J5)
• Serious Financial Crime Taskforce (SFCT)
• Illicit Tobacco Taskforce (ITTF).
The shadow economy
The term “black economy” has now changed to “shadow economy”. This change has been made to reflect the Organisation for Economic Co-operation and Development’s (OECD) definition of unreported or dishonest economic activity.
The ATO says shadow economy activities are not victimless crimes. They have harmful consequences such as:
• workers missing out on their entitlements (for example, proper wages, leave or employee protection)
• honest businesses being undercut by dishonest businesses that don’t pay the tax or superannuation they’re supposed to
• criminals operating business models outside regulatory systems, and funding organised crime.
Shadow economy behaviours include:
• demanding or paying for work cash-in-hand to avoid obligations
• not reporting or under-reporting income
• underpayment of wages
• visa fraud and bypassing visa restrictions
• identity fraud
• ABN, GST, and duty fraud
• dealing in illegal drugs and tobacco
• sham contracting — presenting an employment relationship as a contracting arrangement
• illegal phoenixing — liquidating and re-forming a business to avoid obligations
• excise evasion
• money laundering
• unregulated gambling
• dealing in counterfeit goods.
Illegal phoenix activity
The ATO says phoenixing causes significant harm to the community:
• employees miss out on wages, superannuation and entitlements,
• other businesses are put at a competitive disadvantage,
• suppliers or sub-contractors are left unpaid, and
• the community misses out on revenue that could have contributed to community services.
The ATO advises taxpayers to look out for any of the following behaviours from a company they are working with:
• quotes that are lower than market value,
• company directors who have been involved with liquidated entities before,
• requests for payments to a new company, and
• changes to a company’s directors and name, while the manager and staff remain the same.
Conclusion
The ATO’s revised list of activities that may attract scrutiny in the lead up to Tax Time 2022 is broad ranging. It includes low transparency of tax affairs, large, one-off or unusual transactions, and lifestyle not supported by after-tax income. In addition, non-lodgment, particular business structures, certain types of transactions, tax crime, the shadow economy and illegal phoenix activity remain in the ATO’s sights.
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