The tax office knows more than you think

Big brother tax office now regularly conducts data-matching exercises with all sorts of agencies, federal and state. By TERRY HAYES of Thomson Legal & Regulatory.

By Terry Hayes

These days, the tax office is one of the largest, if not the largest, collector of financial information concerning Australian residents.

Superannuation is the hot topic on everyone’s lips at the moment. How many stories do we hear about people, including business people, selling assets (property, shares, art work, etc) to put the funds into super before 1 July 2007?

Nothing necessarily wrong with selling assets, but there could be a tax sting that might escape some sellers. And the taxman thinks so too. The tax office has for some time had a priority on monitoring asset disposals and transfers from small businesses to super funds, so it is aware of the potential problem of tax not being paid on these disposals.

At a recent Senate Estimates Committee hearing, ATO second commissioner Jennie Granger said the tax office will soon be alerting the community about things it will look at this year from its compliance program concerning individuals, particularly individuals in small business.

This will especially concern property sales, done to put the proceeds into superannuation. The tax office intends to remind people that if it is an investment property, they need to include the capital gain in their return. Granger said that is something the tax office has identified as a concern.

If there is a capital gain realised as a result of selling an asset, that needs to be factored into account in assessing the benefits of selling the asset to put the proceeds into super. Professional advice should be taken.

And SMEs shouldn’t think they might be able to sell a property, for example, and the tax office won’t know about it. In a recent case before the Administrative Appeals Tribunal, a husband and wife purchased a property in Queensland on 15 September 1999 for $800,000. They subsequently sold the property on 15 November 2003 for $1,440,000. The sale gave rise to a capital gains tax issue in respect of the income year ending 30 June 2004.

The date for lodgement of income tax returns for the 2003-04 financial year was 31 March 2005. However, on 14 March 2005, the tax commissioner wrote to the husband and wife suggesting they needed to consider the assessability of the property for capital gains tax purposes.

In his letter, the commissioner said: “Given you may soon be lodging your 2004 tax return, please consider whether you have made a capital gain through the disposal of this property .”

He also said: “If, after reading this letter, you believe that you have made a capital gain from the sale of property, you may need to include any gain in your income tax return for 2004 .”

How did the commissioner know about the sale? Simple. The tax office now regularly conducts data-matching exercises with all sorts of agencies, federal and state, including state land titles offices and property title transfers from many state and territory authorities. This information gives tax officials clues about when tax should be paid on various transactions, including property sales.

The tax office initially assessed the husband and wife to a capital gain of $320,000; or $160,000 each  – [$1,440,000 (sale proceeds) minus $800,000 (cost of the property)] divided by two, as they each qualified for the 50% capital gains tax discount having held the property for more than 12 months.

The message is simple enough. The tax office has a long reach. Don’t underestimate it, and know where you stand concerning the tax implications of selling an asset. It doesn’t necessarily mean you won’t sell, but at least you’ll know the tax consequences if you do, and you can make a reasoned decision.

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

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