On the 13 August 2008, the Tax Commissioner, Michael D’Ascenzo, launched the Australian Taxation Office’s (ATO) Compliance Program for the 2008-2009 financial year. In his speech, he reiterated that the ATO’s approach to the compliance is one of prevention rather than cure by educating taxpayers to meet their tax and superannuation obligations with lower compliance cost. With additional funding from the government, the ATO is expanding their compliance program for this year while continuing with programs from prior years. What can taxpayer’s expect from this compliance program? For one, expect more reviews of tax matters and audits to be escalated from the review program. We can expect the ATO to be more diligent and pro-active to new entrants in different industries. A brief summary of the compliance program is outlined below.

Individuals

Landlords and property owners are again the subject of the compliance program where the focus would be on interest deductions, undeclared rental income, claims for capital works deductions, initial repairs, borrowing costs and claims for body corporate fees that relate to cost of capital improvements or capital repairs. Rental property owners who have unusual rental incomes and claims will be looked at as well.

With data matching capabilities, the ATO would be looking into asset sales by individuals from information acquired from the Land Titles Office, Councils, Australian Securities Exchange, share registries and managed funds. At the same time, the ATO will also review assets sales by individuals for investment into superannuation funds.

The ATO will continue the review of the tax affairs of publicly listed directors and company executives in respect of shares and options that they acquire. The review will be expanded to include senior company executives of private and foreign owned companies.

Employees with work related deductions continue to be the subject of the ATO’s compliance program with more emphasis this year on nurses, medical practitioners and chefs.

Superannuation contribution deduction claims will be matched with reports received from all superannuation funds for verification and review of the contribution limit. If an excess contribution is identified, the ATO will be issuing assessments for excess contributions tax.

Small business

For this year, the ATO with focus on the lodgement of various returns for businesses who have high tax liabilities, who fail to lodge on time or partly meet obligations and businesses with child support obligations. Furthermore, the ATO will increase audits of businesses for compliance with superannuation guarantee charge and capital gains tax issues.

Distributions from partnerships and trusts will be cross checked with each partners’ and beneficiaries’ tax return disclosures. Should there be errors detected, the ATO will be requesting the concerned parties for them to review and avail of the voluntary disclosure opportunity.

GST related matters for property owners in respect of margin schemes applications, unreported property sales will be targeted by the ATO.

Small and medium enterprises

There will be renewed efforts in monitoring and checking income tax, fringe benefits tax, business activity statement lodgements and compliance for businesses with turnover of $100 million to $250 million. In line with these efforts, private companies have to review their records for loans to shareholders or their associates. Share buy-backs, capital reductions and sale of shares by exiting shareholders will be under the ATO’s scrutiny.

In relation to international transactions, transfer pricing and profit shifting arrangements will be examined in more details including the use of tax havens.

Legal and accounting firms whose structures include service trusts need to review the arrangements in line with the ATO’s pronounced guidelines.

Large Enterprises

As large enterprises generally are highly compliant with their tax obligations, the ATO will look more closely at the reported accounting profit as compared to the taxable income and examine permanent differences and timing differences as disclosed by large enterprises. Tax losses claimed by large enterprises will also be examined for compliance with recoupment and deductibility tests.

Corporate restructures, mergers and acquisitions transactions will be examined more closely in line with the capital gains tax legislation including the use of Part IVA general avoidance provisions.

In relation to international issues, tax havens, transfer pricing issues, non-resident withholding tax issues and cross-border transactions are still on the target focus.

In order to reduce the compliance costs of large enterprises, the ATO plan to ‘establish a large business advisory group to address technical and administrative issues’. With an increased usage of Advance Pricing Arrangements (APA), the ATO will co-design with industry a more streamlined process for APAs.

Large superannuation funds do not escape the scrutiny of the ATO as investment and contribution income will be examined. New rules regarding the use of funding credits will be monitored to ensure compliance.

Non for Profit organisations

Education on GST matters especially the classification of GST –free transactions and grants will be the main focus for non-profit organizations. The ATO will check carefully all new applications for charity endorsements and provide the new applicants with educational materials.

The ATO expects to review organizations for tax concession eligibility and also private funds for their compliance with ongoing requirements.

Tax practitioners

The ATO will continue to consult with tax professionals including the National Tax Liaison Group. Approximately 900 self managed superannuation funds will be reviewed including audits of approved auditors. Tax agent compliance will be continued to be monitored and will include reviews and audits of their clients activities.

Johnny Ching, Sydney West
jching@moorestephens.com.au