SME targets for ATO compliance

As it does around this time of year, the ATO recently released its 2012-13 Compliance Program outlining those it intends to target in the coming year. SMEs figure prominently.

While much has already been written about the program, it is worth exploring a little more deeply what the ATO will be looking at. It’s something of a roadmap for SMEs in the tax compliance cut and thrust.

There are around three million so-called micro enterprises i.e. businesses with an annual turnover of under $2 million or superannuation funds with less than $2 million in assets. They represent a significant part of the taxpaying population, employing 1 in 5 Australian workers.

Over the coming year, the ATO says it will focus particularly on the following compliance risks:

• unrecorded and unreported cash transactions;
• employer obligations e.g. super;
• GST refund integrity and GST evasion;
• ensuring businesses are correctly registered in the tax system;
• supporting businesses in meeting their lodgment obligations; and
• incorrect fuel tax credit claims following implementation of the clean energy measure.

The ATO said profiling is used to identify potential tax risks such as businesses operating outside industry or economic benchmarks.

Information matching forms a key part of the ATO’s arsenal. It matches information in tax returns and business activity statements (BASs) with details of transactions reported to it by a wide range of third parties, including:

• payments and grants by other government agencies;
• payments by businesses to contractors especially the new building and construction industry reporting system;
• income from investments and partnership and trust distributions;
• property and share transactions;
• cross-border transactions and international funds transfer.

Unrecorded and unreported cash transactions

The ATO said the plastering and cafe sectors have been selected for more intensive activity for 2012-13. In relation to the plastering sector, the use of cash along with historical weaknesses in tax compliance and high number of information referrals from the public has prompted the increase in ATO activity.

The ATO said it will review both business-to-business and business-to-consumer transactions, comparing information from hardware store accounts against their customers’ purchasing records to detect cases where businesses are skimming cash or are outside the system.

In relation to cafes, the ATO said it is expanding its compliance program of comparing information from coffee-supplier trade accounts against their customers’ purchasing records to detect cases where cafe businesses are skimming cash or are outside the system.

Employee vs contractor

The ATO will continue the compliance program on contractor arrangements. Trying to present an employment relationship as a contract between two businesses by, for example, forcing the worker to supply invoices and quote an ABN, does not in the ATO’s view override an underlying relationship of employment. The ATO is concerned this threatens the welfare and entitlements of workers and creates unfair competition for honest employers.

The statistics paint their own picture on this issue. In 2011-12, the ATO conducted approximately 1,100 audits on businesses where it suspected that the business may have incorrectly treated employees as contractors. From the resultant audits, the ATO collected details of approximately 51,000 payments made to around 41,000 contractors, about 18,000 of which were individuals. It found that 48% of businesses that engaged contractors were wrongly treating individuals as contractors.

This is an ongoing major issue for the ATO, and SMEs should also be aware that Fair Work Australia also looks closely at this issue of employee vs contractor.