The Australian Tax Office says this year it will target the use of contractors by business and businesses’ use of trusts to minimise tax, according to its 2012/13 compliance program published this morning.
Robert Jeremenko, senior tax counsel at The Tax Institute, told SmartCompany the compliance program acted as a useful warning to business of the ATO’s focus for the year.
“The reality is that the Tax Office isn’t trying to scare anyone; they are being very upfront about it. It is like a tax speed camera on the side of the road and the ATO is putting a sign up the front saying speed camera ahead,” he says.
The ATO’s focus for “micro enterprises” – turnover of less than $2 million
The ATO’s focus for what it defines as “micro enterprises” over the next year will be on unrecorded and unreported cash transactions, employer obligations, GST, tax and superannuation systems registrations, lodgement obligations and incorrect fuel tax credit claims following implementation of the clean energy measures.
“The ATO is very much highlighting the obligations of that micro business as an employer. They are concerned with superannuation laws being complied with and making sure employees do not exceed excess super contribution caps,” says Jeremenko.
Jeremenko also highlights the GST as a big focus for the ATO, as many industries are subject to the GST. He warns that micro businesses will need to be sure their GST is in order and BAS filled out.
An ATO audit of 1,100 micro businesses that employed individuals in 2012 found nearly half were employees and not contractors.
CPA Australia senior tax counsel Mark Morris told SmartCompany the ATO is “very worried about contractors and the whole issue of contractors”.
“For example, from July 1, 2012, in the building industry if you are making payments to contractors you have to report the payments and they will be audited. Another measure the ATO is using is benchmarks and field audits.”
The ATO is increasing its use of profit benchmarks to determine whether micro businesses are declaring income, focusing especially on cafes and plasterers.
“One thing the ATO is doing this year is looking at raw material supplies and comparing them to the sales you make, so for a cafe they look at the amount of coffee you buy,” says Morris.
“If you are a cafe, you are buying 90 kilos of coffee and you need to look at what that would equate to in sales and whether the profit margin is kosher compared to competitors. It shows the level of sophistication the ATO is using now.”
Jeremenko says while plasterers and coffee shops may appear to be “two unlikely bedfellows”, both are very cash-based business areas and so attract ATO scrutiny.
The ATO’s focus for 2012 for SMEs ¬– turnover of $2 million to $250 million
During 2012, the ATO’s focus in the SME sector will be on the following areas: participation of wealthy individuals in the tax and superannuation systems; the use of trusts to inappropriately minimise tax; Division 7A and the treatment of private company profits; capital gains; employer compliance with fringe benefits tax rules; the integrity of business systems for GST and excise obligations; and GST and property transactions.
To police this focus, the number of SME audits is set to rise, with the ATO planning to conduct 250 site visits to SMEs.
“We are seeing much more audit activity in the marketplace than we have for some years, for example, there is talk about fringe benefit tax audits and a lot more field activity across the board,” says Morris.
“There are 200 fringe benefit tax reviews in the SME market and there will be 1,500 GST reviews and 100 audits mainly looking at one-off transactions or if you change your business structure in some way.”
Trusts are a key area of concern for the ATO this year and Morris says the Tax Office will be linking the amount trustees are distributing to beneficiaries using tax file numbers.
“That is something the ATO will start to police. They are saying they will contact 1,000 trustees to check tax file audits,” he says.
The ATO is also expected to ensure that all trustees have complied with new requirements to complete a minute or audit by June 30, 2012, which sets out how trust income would be distributed through beneficiaries.
The ATO’s focus on Division 7A and the treatment of private company profits also ties in to its emphasis on trusts as the payments are often made to trusts.
“The Division 7A provisions were designed to ensure you couldn’t make distributions from a company tax free; you can’t pay your holiday expenses from a private company. Basically those rules have become progressively tightened and they will be reviewed,” says Morris.
The ATO plans to use data matching to collect debt, with a focus on the construction industry.
“There is continued emphasis on attacking the cash economy… If they find out you are omitting income in comparison to your competitors it might indicate you are involved in the cash economy,” says Morris.
In comparison to micro businesses, SMEs are more likely to be involved in property transactions, another area of focus for the ATO, according to Jeremenko.
“They may well be involved in more property transactions and the ATO is having a close look at the treatment of GST in these transactions mainly because GST is so complex in this area,” he says.