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16 July 2013 Compliance in focus 2013

2013/17

Profit shifting, tax crime and misuse of trusts are key areas of focus for the ATO this year while providing more contemporary services to help people with their tax and super affairs. The ATO today released its Compliance in focus program, to inform the community of key risks and issues in Australias tax and superannuation systems and how the ATO will address them. We know most Australians do the right thing and our focus is on helping people comply, Second Commissioner Bruce Quigley said. This year, we have a range of new contemporary services for individuals and businesses, including phone apps and interactive online help and support. However, we take firm action against people who cheat the system. Compliance in focus sets out whats attracting our attention and how we intend to deal with it. Mr Quigley said the community, government and the ATO were concerned about multinational businesses using complex structures to shift profits to low tax jurisdictions. As a result we will be undertaking a greater number of risk reviews and audits than ever before, Mr Quigley said. The ATO will continue to work closely with other tax jurisdictions and law enforcement agencies to combat tax crime in Australia and internationally. Tax crime is committed by a small minority, but affects the whole community through lost revenue, Mr Quigley said. We are also getting results through close cooperation with other international tax agencies, as seen recently with our work with the US and UK on tax haven data, Mr Quigley said. "With countries working together and sharing data, the world is becoming a smaller place and it is getting very hard to hide. Trusts will also come under scrutiny with the ATO setting up a Trust Taskforce to work with other agencies to tackle the misuse of trusts. We will work with other agencies where necessary to ensure the full force of the law is used against those involved in schemes aimed at avoiding or evading tax obligations, Mr Quigley said. Data matching is a key activity the ATO undertakes to identify tax avoidance. Each year we improve our systems and expand the range of data and information we can match against claims. This year we expect to match over 640 million transactions, Mr Quigley said.

Our data matching program helps us uncover people understating or omitting income. We also automatically provide some of the data in tax returns as part of our pre-filling service to help people get their tax right. Our compliance activities cover the full spectrum, from supporting and educating those willing to do the right thing to using the full force of the law on those who deliberately choose to avoid their obligations.

For further enquiries from members of the media: 02 6216 1901 or 0401 147 127

Compliance in focus highlights Incorrect work-related expenses claims This year we will pay particular attention to high claims made by: building and construction labourers, construction supervisors and project managers, and sales and marketing managers.

Data matching More than 640 million transactions are reported to us annually from sources such as banks, share registries, employers, merchants, states and territories and other government departments. We use this to pre-fill returns and detect people trying to avoid their tax and superannuation obligations. In the last financial year, we used our data and information matching to raise $973 million in revenue adjustments from some 450,000 reviews and audits. Wealthy individuals The community rightly expects us to ensure wealthy Australians pay their share of tax. We will contact people where their wealth seems at odds with what they are reporting on their income tax returns. We will undertake 500 income tax reviews and audits of highly wealthy individuals (those controlling net wealth greater than $30 million) and contact 750 to check claims or provide advice. Last financial year, we completed 291 income tax reviews and audits on highly wealthy individuals raising $1.1 billion in liabilities. We will undertake 1,000 income tax reviews and audits of wealthy Australians (those controlling net wealth between $5 and $30 million) and contact 8,000 to check claims or provide advice. Last financial year, we completed 386 income tax reviews and audits of wealthy Australians, raising $281 million in liabilities. Tax havens The ATO recently obtained data revealing extensive use of complex structures by wealthly individuals and companies and their advisers. Using this data and other information, we will undertake 680 reviews and 115 audits of people who may be using secrecy jurisdictions to avoid paying tax. Tax Commissioners from Australia, the US and UK worked on a substantial data set that identified more than 100 Australians involved in complex offshore structures in a number of jurisdictions including Singapore, British Virgin Islands, Cayman Islands and Cook Islands. Reporting of PAYG withholding We will use intelligence gathering and information-matching to detect employers not meeting their obligations. We will review 17,700 businesses to ensure they are meeting employer obligations.

Contractor arrangements We will investigate employers who intentionally try to avoid their tax and super obligations by improperly treating workers as contractors rather than employees. We will undertake 950 reviews of employers to ensure they are meeting their obligations. Activity statement refunds We will review 41,000 activity statement refunds to ensure businesses are correctly reporting their GST transactions and to identify instances of fraud. Large and international businesses (large business generally has an annual turnover of more than $250 million) We are seeing some of the 1,300 large and international businesses adopt aggressive tax structures to avoid their obligations including: profit shifting using service hubs in lower taxing countries, and thin capitalisation loading debt into high tax countries and profits to low tax jurisdictions.

We will undertake 250 risk reviews and 70 audits covering tax consolidation issues, capital gains and complex structures. Last financial year, we raised $2,192 million in liabilities after 519 income tax reviews and audits of large businesses. Our GST compliance work including reviews and audits raised $310 million in GST liabilities from large businesses. Small business (generally with annual turnovers of less than $2 million) Help and assistance is a big focus in the small business market we actively try to support the majority who make an honest attempt to comply. We have concerns with some small businesses: overclaiming concessions attempting to hide income and operate in the cash economy, and claiming capital gains tax concessions they are not entitled to.

Medium-sized businesses (annual turnover between $2-250 million) We will focus on: making sure businesses lodge their outstanding returns, particularly trusts, partnerships and companies and entities with privately owned groups misuse of trusts and omitted income capital gains tax non-disclosure and under-reporting, and fraudulent phoenix behaviour.

We will undertake more than 1,000 income tax reviews and audits and contact 2,500 to verify information or provide advice. Last financial year, we completed 931 income tax reviews and audits in the small and medium business market raising $696 million in liabilities. Our GST compliance work including reviews and audits in the small and medium business market raised $587 million in GST liabilities.

Fraudulent phoenix activity Fraudulent phoenix activity refers to the deliberate liquidation of a business entity to avoid financial obligations including PAYG withholding, income tax, GST and superannuation liabilities. This is widespread in the labour intensive industries, and we also regularly see property developers engaging in this behaviour. Some property developers deliberately disengage from the tax system at the point of sale and fail to meet their GST obligations. They then create new entities for future property developments. We have found over 2,000 property developers who have placed companies into liquidation with outstanding GST obligations on multiple occasions. This is a red flag for potential phoenix activity. Well address this by demanding lodgment, enforcing payment and applying penalties. Super guarantee We investigate every time an employee tells us that their employer has not paid their superannuation guarantee entitlement. In the coming year we expect to contact around 19,500 employers as a result of these complaints. Some industries present a higher risk of employers not complying with their superannuation guarantee obligations. We will audit employers in the following industries: cafes and restaurants carpentry services, and real estate services.

Employers may be held accountable for their companys unpaid superannuation guarantee debt under the new director penalty regime. Last financial year, we transferred more than $275 million of employer super contributions to member accounts after compliance action. Self-managed super funds We continue to focus on self-managed super funds that misuse the concessional tax environment deliberately or unintentionally. We will review: 1,100 to check they comply with income tax obligations 15,100 for compliance with regulatory obligations, and 160 approved auditors.

Last financial year, we reviewed more than 9,000 funds, raising $16.4 million and made 132 funds noncompliant due to serious breaches of their obligations.