The ATO has revised its list of activities subject to scrutiny, ahead of Tax Time 2022.
Fiscal or economic performance not comparable to similar companies is among a range of behaviors that will raise red flags, the ATO said in a revised list of what grabs attention.
The ATO said that as part of its commitment to “providing transparency and building trust in tax and super systems”, it has updated the ATO’s website with information about behaviors, characteristics and tax problems of private and wealthy groups that may attract attention.
This includes information on:
• Taxpayers who avoid or delay the payment of tax by not filing their income tax return when required or by failing to declare all 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 declare foreign income,
• tax exemptions, treaty relief, transfer pricing benefits or economic stimulus measures have been wrongly claimed, and
• agreements that misrepresent transactions or incorrectly calculate turnover or income to obtain a tax advantage.
The ATO’s web page, “What catches our attention”, also lists:
• low transparency of tax affairs,
• significant, one-off or unusual transactions, including the transfer or transfer of assets,
• aggressive tax planning,
• tax results 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,
• access company assets for private use on a tax-free basis, and
• Poor governance and risk management systems.
Tax Evasion Task Force
The updated list targets the types of private and wealthy groups that are being scrutinized by the ATO’s Tax Evasion Task Force.
The government announced in Budget 2022 that the ATO will receive funding to extend the operation of the Tax Avoidance Task Force by 2 years until June 30, 2025.
The task force was established in 2016 to undertake compliance activities targeting multinationals, large public and private groups, trusts and high net worth individuals. The task force also examines specialist tax advisers and intermediaries who promote tax avoidance schemes and strategies.
Additional information provided by the ATO
The ATO also provided additional information on non-housing, business structures, transactions and taxes, tax crime, the underground economy (formerly referred to as the “underground economy”), and illegal phoenix activity.
Non-filing triggers ATO action
As we approach the end of the fiscal year, non-filing is a critical issue that is capturing the ATO’s attention with a focus that is “targeted by applying improved data matching processes across a range of sources that identify entities that have:
• have received income and are required to file a tax return or declaration of activity, but have not done so, or
• have filed a tax return or a declaration of activity but have not declared all their income.
The other elements sought by the ATO are:
• declarations of current activity,
• entities that have not filed a declaration for the year under review and whose deadlines are short compared to the previous year,
• admins with a number of pending filings, and
• Directors filing an unnecessary declaration.
Corporate structures and transactions that concern the ATO
The ATO says that some of the risks associated with the structure and transactions of wealthy private groups that are currently attracting its attention are:
• Consolidation — inappropriate results of CGT reports, costing rules, buy-in and use of losses.
• Spin-offs — transactions and schemes that exploit spin-off provisions for a tax advantage.
• International transactions — non-reporting or incorrect reporting of international transactions.
• Lower corporate tax rate — ineligible corporate tax entities claiming the preferential tax rate for base rate entities, including contrived or contrived arrangements made to access the tax rate on lower societies.
• Professional Firms — individual professional practitioners redirecting their income from professional services to an associated entity to significantly reduce their tax liability.
• Real estate and construction — entities in the real estate and construction industry that incorrectly classify income and profits from real estate development activities in their tax returns.
• Research and Development Tax Incentive — behaviors that result in incorrect claims for research and development (R&D) tax offsets, with particular emphasis on certain industries such as agriculture, mining, software and real estate and construction.
• SMSF — transactions and schemes that seek to improperly take advantage of the preferential tax rates that apply to compliant super funds.
• Trusts — complex distributions, non-filing of tax returns for trusts and beneficiaries, and mismatch of trust and taxable income.
Transaction and taxes at the center of ATO’s concerns
Certain types of transactions and taxes attract the attention of the ATO:
• Bad debts – correct application of rules when deductions are claimed for bad debts
• Capital gains tax – certain capital losses, disposals and CGT concession applications for small businesses
• Commercial debt forgiveness – situations where an entity has obtained debt forgiveness (formal or informal)
• Deductions: incorrect request for deductions
• Economic stimulus packages – programs to inflate or provide access to loss carryback, temporary comprehensive spending and business investment support, accelerated depreciation
• Excise and Excise Equivalent Goods – licensing and authorization requirements, record keeping and release of goods without proper authorization to trade
• Franking credits: incorrect claims, poor governance, substantial increase or refund of credits, and access to credits through an entity with a preferential tax rate
• Employee benefits tax: motor vehicle, employee contribution, entertainment and parking valuation issues
• Private use of private assets or activities in a business: If a taxpayer uses an asset purchased by a business for business and private purposes, only claim a deduction for the portion of the expenses related to the business.
• Benefits for private companies – arrangements that extract wealth from private companies while avoiding the appropriate amount of tax
• Revenue losses – incidence and use
• Taxation of financial arrangements — entities subject to TOFA, to ensure that they correctly apply the rules of the TOFA.
The ATO is strongly committed to deterring, detecting and addressing individuals who deliberately avoid paying their fair share of tax or attempt to claim refunds or other payments to which they are not entitled.
Examples of tax crimes include illegal phoenix activity, when a business is liquidated, dissolved, or abandoned to avoid paying its debts and a new business is then created to continue the same business activities without the debt.
The ATO says it is working with other government agencies through the Phoenix Task Force to root out illegal Phoenix activity.
Other forms of tax crime include refund fraud, identity crime and organized crime.
As part of its fight against tax crime, the ATO is a member of several working groups, including:
• Joint Heads of Global Tax Enforcement (J5)
• Serious Financial Crimes Task Force (SFCT)
• Illicit Tobacco Task Force (ITTF).
The underground economy
The term ‘underground economy’ has now become ‘underground economy’. This change has been made to reflect the Organization for Economic Co-operation and Development (OECD) definition of undeclared or dishonest economic activity.
The ATO asserts that underground economy activities are not victimless crimes. They have harmful consequences such as:
• workers do not take advantage of their rights (for example, adequate pay, holidays or employee protection)
• honest companies are undermined by dishonest companies that do not pay the tax or the pension they are supposed to pay
• Criminals operating business models outside of regulatory systems and funding organized crime.
Behaviors of the underground economy include:
• demand or pay cash for work to avoid obligations
• not declaring or underdeclaring income
• underpayment of wages
• visa fraud and circumvention of visa restrictions
• identity theft
• ABN, GST and customs fraud
• trafficking in illegal drugs and tobacco
• fictitious contracts – presenting an employment relationship as a contractual agreement
• illegal phoenixing – liquidation and reformation of a company to avoid obligations
• tax evasion
• money laundering
• unregulated gambling
• trafficking in counterfeits.
Illegal activity of Phoenix
The ATO claims that the phoenix is causing significant harm to the community:
• employees are deprived of wages, retirement pensions and rights,
• other companies are at a competitive disadvantage,
• suppliers or subcontractors are unpaid, and
• the community loses income that could have contributed to community services.
The ATO advises taxpayers to watch for any of the following behaviors of a company they do business with:
• quotes below market value,
• company directors who have been involved in previously liquidated entities,
• requests for payment to a new company, and
• Changes of leaders and name of a company, while the manager and staff remain the same.
The revised list of ATO activities that could come under scrutiny heading into Tax Time 2022 is extensive. This includes low transparency of tax affairs, large, one-time or unusual transactions, and a lifestyle not supported by after-tax income. In addition, non-filing, particular business structures, certain types of transactions, tax crime, underground economy and illegal phoenix activity remain in the ATO’s sights.
Explore more in CCH iKnow’s tax preparation topic guide.