The wealthy un­der the tax­man’s scru­tiny

The com­bi­na­tion of a new govern­ment look­ing to prune the budget deficit and some key changes in the way the ATO or­gan­ises it­self could spell trou­ble for the wealthy across Aus­tralia writes Mark Chap­man.

Business First - - CONTENTS - By Mark Chap­man

With very lit­tle fan­fare, new Com­mis­sioner of Taxation Chris Jordan changed the names of var­i­ous busi­ness lines within the ATO. In­cluded in the change, the for­mer Small and Medium En­ter­prise’s busi­ness line is now called Pri­vate Groups and High Wealth In­di­vid­u­als. As part of the change, up to 7000 smaller pub­lic com­pa­nies and for­eign owned en­ti­ties have been moved to an­other busi­ness line but no staff ap­pear to have moved with them. This means that there will be more re­sources avail­able to tar­get the wealthy.

With the Ab­bott govern­ment look­ing for un­paid taxes as an easy route to fill­ing the hole in the govern­ment’s budget, this can only mean more re­views and more au­dits for the well-off.

The ATO cat­e­gorises a tax­payer as wealthy if they have more than $5m in as­sets. There are more than 70,000 tax­pay­ers who meet this cri­te­ria and the ATO has com­mit­ted to au­dit­ing or re­view­ing at least 1000 of them in the cur­rent year. If you have more than $30m in as­sets, you would be categorised as highly wealthy.

So, if you meet the ATO’s def­i­ni­tion of wealthy, what are the fac­tors which will de­ter­mine whether the ATO will ex­am­ine your af­fairs in more de­tail or whether they will leave you alone? Ba­si­cally, this is a ques­tion of like­li­hood and con­se­quence.

How likely are you to be non-com­pli­ant?

In de­ter­min­ing its pri­or­i­ties, the ATO first of all takes into ac­count the per­ceived like­li­hood of non-com­pli­ance posed by a tax­payer. In com­ing to this judg­ment, the ATO is able to scan a mass of in­ter­nal and third party data look­ing for sources of in­come which have not been fully dis­closed (or dis­closed at all), sources of in­come which have been treated in­cor­rectly and tax obli­ga­tions – around on-time lodge­ment or pay­ment of tax debts – which have not been met

Of par­tic­u­lar in­ter­est will be trans­ac­tions such as these: 1. Ev­i­dence of share or property trans­ac­tions where tax dis­clo­sure does not align with in­for­ma­tion pro­vided by third par­ties. 2. Un­ex­plained losses. 3. Af­ter tax in­come which does not ap­pear suf­fi­cient to sup­port life­style. 4. Ev­i­dence of per­sonal use of busi­ness as­sets (in­clud­ing loans from pri­vate com­pa­nies to share­hold­ers ei­ther di­rectly or through other struc­tures). 5. Use of per­sonal ser­vice com­pa­nies to chan­nel in­come of an em­ploy­ment-type char­ac­ter to an in­di­vid­ual. 6. Use of com­plex struc­tures to min­imise tax out­comes, par­tic­u­larly where eco­nomic and tax out­comes do not align (for ex­am­ple, trans­ac­tions pro­duce a tax loss but no eco­nomic loss). 7. In­flows or out­flows of cash from over­seas, par­tic­u­larly where there is ev­i­dence of tax haven ac­tiv­ity or ev­i­dence of undis­closed off­shore busi­ness ac­tiv­ity.

In es­tab­lish­ing the ex­is­tence of these trans­ac­tions, the ATO has ac­cess to a mine of in­for­ma­tion. This in­cludes in­for­ma­tion from other sources within the ATO (for ex­am­ple cross-match­ing GST dis­clo­sures with in­come tax ones or match­ing trust dis­tri­bu­tion records with per­sonal in­come tax lodge­ments) and in­for­ma­tion re­ceived from third par­ties, which might in­clude other govern­ment agencies, banks and credit card com­pa­nies, em­ploy­ers, car reg­is­tra­tion records and records of share and property trans­ac­tions. In ad­di­tion, the ATO re­ceives sub­stan­tial num­bers of com­mu­nity tip-offs from dis­grun­tled em­ploy­ees, neigh­bours, ex-spouses, etc, many of which ul­ti­mately feed into au­dit or re­view ac­tiv­ity.

The ATO also as­sid­u­ously scans me­dia re­ports for ev­i­dence of trans­ac­tions in­volv­ing wealthy in­di­vid­u­als. Thanks to the In­ter­net, the amount of lo­cal and over­seas in­tel­li­gence about the ac­tiv­i­ties of wealthy in­di­vid­u­als has ex­ploded in re­cent years, to the ex­tent that the ATO of­ten has some level of knowl­edge about a trans­ac­tion as soon as it hap­pens and long be­fore any dis­clo­sure is made

through a tax re­turn. This makes data match­ing much eas­ier and has trig­gered a num­ber of au­dits of wealthy in­di­vid­u­als caused by the fail­ure to dis­close a trans­ac­tion which had pre­vi­ously been picked up by the ATO through a me­dia re­port, some­times with an over­seas source.

What’s the con­se­quence of your non-com­pli­ance?

The other fac­tor which will in­flu­ence whether a re­view or au­dit will be un­der­taken, hav­ing es­tab­lished the like­li­hood of a tax risk ex­ist­ing, is to as­sess the con­se­quence of that non-com­pli­ance. So, if a tax­payer trig­gers one or more risk fac­tors, the ATO will at­tempt to de­ter­mine whether the con­se­quence of that tax­payer’s ac­tions war­rants fur­ther at­ten­tion. In an ideal world, all in­stances of non-com­pli­ance would be in­ves­ti­gated but in the real world, re­source con­straints mean that some form of pri­ori­ti­sa­tion needs to take place. Typ­i­cally, this judg­ment will be driven by the rev­enue at stake. Quite sim­ply, the larger the dol­lars at risk, the more likely the ATO is to in­ves­ti­gate.

The de­ci­sion isn’t purely driven by dol­lars how­ever. The ATO will also con­sider the ex­tent to which ei­ther the tax­payer or the trans­ac­tion in ques­tion poses a threat to the in­tegrity of the tax sys­tem over­all. For this rea­son, par­tic­u­larly high-pro­file people (such as well­known busi­ness fig­ures or fig­ures from the world of the me­dia, show busi­ness, sport, pol­i­tics or the ju­di­ciary) will be given pri­or­ity, as will trans­ac­tions such as po­ten­tially mass-mar­ketable schemes or ones which ap­pear to suc­cess­fully cir­cum­vent key pieces of tax law.

What the shift in re­sourc­ing within the ATO will en­able them to do is to set that con­se­quence bar­rier just a lit­tle lower, to take a look at more cases which pre­vi­ously their re­sourc­ing wouldn’t have per­mit­ted them to ex­am­ine.

Given the state of the pub­lic fi­nances, the fo­cus on the wealthy is likely to con­tinue into fu­ture years. Look­ing crit­i­cally at your tax af­fairs and, if nec­es­sary, seek­ing pro­fes­sional help to deal with any is­sues should be a vi­tal step for any wealthy in­di­vid­ual not yet con­tacted by the ATO. How to man­age any sub­se­quent chal­lenge from the ATO is the next ques­tion and this will be cov­ered in a fu­ture ar­ti­cle. Mark Chap­man is Head of Tax with Tax­pay­ers Aus­tralia, a not-for-profit or­gan­i­sa­tion com­mit­ted to a fairer and more trans­par­ent taxation sys­tem for ev­ery Aus­tralian tax­payer.

Mark Chap­man is Head of Tax with Tax­pay­ers Aus­tralia.

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