Ever wondered what sends up red flags with the ATO?
Knowing what attracts the ATO’s attention can help keep your eyes open for specific issues or areas of risk so you can think ahead and ensure a smooth tax year.
As part of their commitment to transparency with the public, every year the ATO publishes topics and specific behaviours / characteristics they look for that could draw their attention to your activities.
The following behaviours and characteristics are example of activities that could attract the ATO’s attention:
- Tax or economic performance not comparable to similar businesses;
- Low transparency of your tax affairs;
- Large, one-off or unusual deductions;
- A history of aggressive tax planning;
- Tax outcomes inconsistent with the intent of tax law;
- Choosing not to comply or regularly taking controversial interpretations of the law;
- Lifestyle not supported by after-tax income;
- Accessing business assets for tax-free private use; and
- Poor governance and risk-management systems.
The following are some of the things the ATO is on the lookout for with regards to specific tax areas.
Deductions
The ATO has taken a particular interest in the over-claiming of deductions recently, including things such as:
- High deductions compared to businesses or individuals in similar industries or occupations.
- Excessive or un-substantiated work-related expenses for individuals.
- Large amount of undefined expenses in proportion to total expenses.
- Lower valuations of closing stock by use of the trading stock election rules.
Capital Gains Tax (CGT)
Capital gains that could have been underreported in order to reduce the amount of tax payable on the gain:
- Entities that disposed of high value assets but returned small capital gains or capital losses.
- Entities that inappropriately access the small business CGT concessions.
Capital losses that could be exaggerated, fabricated or misclassified in order to reduce their taxable income:
- Utilising capital losses where other information indicates that the appropriate tests have not been satisfied.
- Entities that classify capital losses as revenue losses in order to offset income earned.
- Deliberately triggering a CGT event in order to realise an unrealised loss in a year a capital gain is derived.
Franking Credits
- Incorrectly claiming franking credits.
- Companies not governing their franking credit balance appropriately.
- Substantial movements in a company’s franking account (particularly large increases).
- Arrangements to access franking credits through the use of an entity that has a concessional tax rate.
- Dividend washing (buying and selling shares with specific timing to receive franking credits).
Fringe Benefits Tax
- Failing to lodge a fringe benefit tax return where required.
- Failure to identify that a fringe benefit has been provided.
- Incorrect calculation of benefit values or reduction amounts.
- Exemptions being applied incorrectly or inappropriately.
- Failure to declare employee contributions correctly and in full (on the FBT return and income tax return).
Private Company Profit Extraction (Division 7A)
Withdrawing profits from a company without paying tax on those withdrawals – examples/indicators include:
- Companies that don’t disclose any shareholder loan accounts.
- Companies where the directors take low levels of salary and wages with no other source of income.
- Private use of company assets.
- Minimum yearly repayments not being made for companies with Division 7A loan agreements in place.
- No interest income declared in the company income tax return.
- Attempts to avoid application of Division 7A to transactions between a private company and a shareholder or their associate.
Property and Construction
Property and construction are areas that attract a great deal of attention due to the vast differences in tax resulting from treating developments as either investment activities or business activities. The following attract the ATO’s attention:
- Where there has been sale or disposal of property shortly after the completion of subdivision and the amount is returned as a capital gain (rather than as business income).
- 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.
- Inconsistent timing or amounts of profit recognised when related entities undertake a development together.
- Inflated deductions being claimed in regards to property developments.
- Multi-purpose developments that have both a revenue and capital purpose, such as retaining some units for rent in a multi-unit apartment that you have developed. The ATO will look to ensure that income is appropriately classified and that costs are appropriately applied to the properties produced.
Trusts
Trusts in general have always drawn a great deal of attention from the ATO. Some particular flags include:
- Where a trust’s taxable distribution is less than its accounting income.
- Distributions to tax-preferred or concessionally taxed entities (such as superfunds or tax-exempt entities).
- Distributions of capital.
- Distributions from a family trust to an outside entity.
- Incorrect reporting or distributions.
Other things generally
- Failing to meet lodgement obligations or pay tax on time.
- Dealing with related parties in non-arms-length arrangements.
- Trading in the cash economy.
- Treatment of contractors for tax purposes (whether as independent contractors vs deemed employees).
Data matching
The ATO has access to a huge amount of data from external sources, including:
- financial institutions;
- other government bodies (such as the Department of Human Services and the Department of Immigration);
- employers;
- superannuation funds;
- private health funds; and
- cross-border organisations (such as AUSTRAC).
They regularly conduct data matching procedures which compare income and transactions reported by taxpayers to their external information. Where there is a mismatch, the ATO can choose to investigate further, which they frequently do.
If any of the above indicators strike a chord with you, it is imperative to be able to provide explanations and substantiation to the ATO if requested. As always, documentation and vigilance are key!
Sorry, comments are closed for this post.