ATO to data-match with banks

A couple of issues have come to attention that are relevant to SMEs. They involve more Tax Office data-matching and ATO concerns at small business errors on capital gains tax (CGT).

Data-matching

Tax Office data-matching is not new, but it seems to be expanding all the time.

In its latest announcement, the ATO says it will request and electronically match data relating to merchant card sales of entities within various cash economy industries from the four major banks. The ATO expects to match the records of about 300,000 individuals. This will cover the period October 1, 2007 to June 30, 2009.

Although the ATO announcement didn’t specify what industries would be targeted, cash economy industries have traditionally included industries like building and construction, and hospitality. The ATO has been concerned that the economic downturn might have increased the risk that more people will seek an unfair advantage by failing to record and report all their transactions, especially where cash payments are involved.

Among other things, the ATO has been conducting reviews and audits on regional cash economy hotspots and business-to-consumer transactions.

The ATO also looks out for indications of lifestyles that don’t match the income people report or whose businesses continue to operate with income levels below what would be expected.

In another data-matching exercise, the ATO will also request and collect details of individuals or entities that have purchased plasterboard and cornices in NSW from Boral Ltd, CSR Limited and La Farge Plasterboard Pty Ltd. Records of about 10,000 individuals will be matched.

Both data-matches will seek to identify non-compliance with tax lodgment and payment obligations.

ATO concerned about small business CGT errors

On a totally different tack to data-matching, the Tax Office says it is concerned that taxpayers are making errors in claiming some small business capital gains tax (CGT) concessions. Let me explain.

The small business CGT exemptions can reduce or eliminate a capital gain made on a CGT asset that has been used in a business. The four exemptions or concessions available are the 15-year exemption, the 50% reduction, the retirement exemption, and the roll-over concession, and I have discussed these in previous columns (they are valuable concessions but complicated for SMEs to deal with).

One of the two basic conditions that must be met for a capital gain to qualify for the concessions is that the taxpayer must satisfy a maximum net asset value test. In basic terms, under this test, the net value of all the CGT assets of the taxpayer, the taxpayer’s affiliates and entities connected with the taxpayer must not exceed $6 million.

The Tax Office is concerned that taxpayers are making mistakes in meeting this test. According to the Tax Office, taxpayers often incorrectly use the historical value or cost of the asset for the test, rather than the asset’s market value. Assets most likely to be undervalued are property and shares.

Under the tax law, the “net value” of the relevant CGT assets means the amount by which the market value of each of the assets exceeds both the liabilities that are related to the asset and various specified provisions.

The ATO says taxpayers should check they are correctly valuing the assets in question by:

• using the asset’s market value, not the historical value or cost of the asset;
• including all assets held by the entity, including any asset that was sold and any goodwill of the business.

The identification of connected entities and affiliates is also important. For example, an “affiliate” is defined as an individual or company that acts, or could reasonably be expected to act, in accordance with the directions or wishes of the taxpayer in relation to the business affairs of the individual or company. The ATO says it is important to:

• include all assets belonging to connected entities in the assets test, regardless of whether the are used in the first entity’s business;
• include any assets held by an entity’s affiliates or entities connected with the affiliates in the test, even if the are used or held ready for use in the first entity’s business or in the business of their connected entity;
• use the market value of the assets held by connected entities and affiliates just before the CGT event occurred.

These CGT concessions represent a valuable opportunity for SMEs to legally reduce capital gains – the law provides for that. But, they are complex to follow and errors are obviously being made. Sound advice should be sought.

Terry Hayes is the senior tax writer at Thomson Reuters, a leading Australian provider of tax, accounting and legal information solutions.

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