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.
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.