When to expect a call from the taxman

It’s as though the taxman has a trigger-point list for putting businesses under the microscope. So what are the triggers? By TERRY HAYES of Thomson Legal & Regulatory.

By Terry Hayes

The tax office has lots on its plate. Millions of taxpayers and millions of tax returns to keep tabs on, as well as making sure lodgements are on time and that tax returns are correct.

The tax office can’t do everything all the time, so it prioritises what it does, and establishes a level of risk to different taxpayers and industries based on information and intelligence it gathers. The level of risk determines what the tax office does next – phone a taxpayer, send a letter, or go straight to an audit.

There are a number of issues to look out for that the tax office has flagged for attention concerning micro-businesses – those with annual turnover up to $2 million.

Record keeping

The tax office virtually continually reviews business record-keeping practices. Record keeping underpins the tax system, even more so since the introduction of the goods and services tax. But if a business gets it wrong, there will likely be tax consequences, and maybe even penalties.

But the tax office does offer an olive branch here. Where it identifies poor record keeping, it will offer advice to a business and help to improve. Depending on the circumstances, the tax office may schedule another visit to check that practices have improved.

While the offer of help is genuine (and should be considered as such), it is not indefinite. Where the tax office offers help but business owners do not make a genuine attempt to change their practices, and their record keeping remains unsatisfactory, the tax office says it applies a graduated approach to penalties, extending to prosecution for those who consistently fail to meet their obligations.

Business expenses

The tax office is also examining the records of micro-businesses to determine whether they are correctly claiming business expenses. This wide-ranging review involves:

• Reviewing and seeking more information from “higher risk” taxpayers about their business expenses so it can determine whether their claims are correct.
• Encouraging voluntary disclosure throughout a review (with potentially much lower tax penalties as a “carrot”), but moving to audits where the tax office considers it necessary to further investigate the deductibility of business expenses claimed.
• Visiting tax agents whose clients have very high business expenses, and reviewing their claims.
• Educating businesses (and their advisers) where the tax office finds a common misunderstanding about the deductibility of business expenses.

Lodge those returns on time

Not all businesses lodge their tax and related returns on time. And this can hurt a business, not only from the penalties that may subsequently apply, but, perhaps even more importantly, from the black mark such late lodgement places on the tax compliance history of the business. The taxman has a long memory!

To identify businesses that pose the highest risk of not lodging returns or lodging late, the tax office compares information from its internal and external sources. It then tailors its response to the level of risk and the compliance history of each business. It’s a logical approach that a business operator needs to be aware of.

The tax office says it deals with failure to lodge by contacting businesses by letter or phone, undertaking field reviews, making assessments based on information available, or imposing statutory penalties and taking prosecution action.

This year, the tax office will have a particular focus on the following:

• Self-managed superannuation funds.
• Businesses with outstanding tax or superannuation guarantee debts.
• Businesses that fail to lodge on time.
• Business operators with child support obligations – so, don’t forget that it’s not just income tax or GST that matters.
• Cash-based businesses that display “conspicuous consumption” – once again, the tax office’s data-matching capabilities come to the fore.
• Businesses identified through major tax office enforcement projects.

Non-lodgement is a big issue, especially when it is considered that in 2006-07 the tax office finalised outstanding lodgements for micro-businesses concerning 82,000 income tax and FBT returns, plus 395,000 activity statements.

Disposal of assets

In a business context, the disposal of an asset invariably has a tax consequence, but that consequence is not always appreciated by the business owner. In this regard, the tax office plans to increase compliance activity in this area in 2007-08 by reviewing a wider range of transactions by micro-businesses that may result in a capital gain.

These kinds of transactions tend to be relatively infrequent for many small businesses, and the tax office is concerned that micro-businesses are not always aware of the capital gains tax and GST implications.

Therefore, in 2007-08, the tax office says it will send letters to taxpayers who have:

• Purchased a property during the year, outlining their record-keeping requirements and advising of potential capital gains tax implications.
• Sold a property during the year, explaining the potential capital gains tax implications.

In verifying compliance with the tax laws, the tax office uses data from third parties, such as financial institutions and property registries, matched with return information to identify taxpayers who fail to disclose or significantly under-report a capital gain.

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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