Taxman to crack down on tax losses

The Australian Taxation Office is bracing for a sharp rise in the number of taxpayers claiming tax losses as a result of the financial crisis, but has warned that it is on the lookout for people trying to claim losses to which they are not entitled.

Tax Commissioner Michael D’Ascenzo yesterday released a series of alerts warning the taxman will be paying attention to three specific areas:

• The tax office will be looking closely at people who attempt to claim they are share traders so that they can deduct sharemarket losses against regular income.
• It will be scrutinising losses claimed by investors in managed investment schemes, which are typically associated with agribusiness companies such as the collapsed Great Southern and Timbercorp.
• The taxman will examine arrangements whereby a taxpayer attempts to create or claim a capital loss arising from the artificial receipt and surrender of an interest in a discretionary trust as a default beneficiary.

 “In the current economic environment, we’re expecting to see an increase in tax losses,” D’Ascenzo says.

“However, this means that we will be carefully scrutinising claims to ensure taxpayers only claim losses to which they are entitled.

“These alerts are a timely reminder for people who may be tempted to artificially create losses or to transfer them inappropriately as tax time approaches. It also reminds people to take care in claiming genuine losses; for example capital losses can only be claimed against capital gains.”

The downturn is likely to make life tough for the tax office, which has already seen a sharp rise in the level of applications for release from tax debts. In the nine months to 31 March 2009, it received 2448 applications for release of tax debts worth $100.2 million, an increase of 59.5% over the same period in the previous year.

D’Ascenzo says the tax office is also stepping up its efforts to target phoenix activity (whereby a dodgy business owner avoids paying debtors by liquidating a company and then carrying on business through a new company vehicle) during the downturn.

“By the end of April, this financial year, we had finalised 54 audits and raised $39.2 million in tax and penalties in relation to phoenix arrangements. A further 59 audits, in progress, are expected to raise a further $45 million in tax and penalties by the end of this financial year,” he said yesterday.

Related stories:

ASIC steps up surveillance of phoenix companies

Taxman takes aim at phoenix tactics