Audit uncovers holes in Tax Office’s CGT program for small business

A report published yesterday by the Australian National Audit Office (ANAO) has highlighted problems with the Australian Tax Office’s approach to collecting Capital Gains Tax.

The Administration of Capital Gains Tax for Individual and Small Business Taxpayers report found a “significant reduction” in revenue from CGT compliance activities for small business taxpayers.

This has fallen from $59 million in 2011-12 to $30.3 million in 2013-14 and in 2014-15 the ATO expects to raise only $13.1 million from 32 specific CGT small business cases.

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The ANAO found while the ATO considers that most taxpayers meet their CGT obligations, it has rated the risk of non-compliance with CGT requirements as ‘high’ for the individual taxpayer and small business market segments.

“This rating is largely due to the complex law design of CGT, the one-off nature of capital events and an absence of reliable data about those events,” it found.

Problems with the ATO’s administration of CGT

The ANAO found while the ATO’s general approach towards administrating CGT is “sound” there are the following issues:

• a heavy reliance on taxpayers’ voluntary disclosures of CGT liabilities in their annual tax returns;
• insufficient attention to addressing the limited effectiveness of compliance activities for individual and small business taxpayers that have not met their CGT obligations;
• despite “known problems” with third party data the ATO sends letters to thousands of taxpayers each year questioning the accuracy of their CGT declarations. The ANAO found 59% of letters sent did not result in further action by the ATO and almost half of the amended assessments were subsequently reversed. 

The ATO responds

The ATO’s response was that it welcomed the review and the finding that the ATO’s approach is “generally effective”.

But the ATO said the impact of the global financial crisis had hit asset values, meaning CGT revenue targets have not been met.

“Many of the potential gains that relate to assets that were disposed of were not able to be realised following the GFC in both the individual and small business markets,” the ATO said.

“We appreciate that you have recognised the volatile nature of CGT revenue due to market forces.”

The ATO also claimed it has made “significant improvements” to its CGT processes for individuals.

“Using a variety of new data-matching techniques, such as cross-matching against other data sources and reviewing prior year results, strike rates have improved over the three year period from 47% to 70%,” it said.

The ATO said it recognises the opportunities to further improve the effectiveness of its CGT compliance strategy.

The experts take

David McKellar, chartered accountant and director of accounting firm Allied Business Accountants, told SmartCompany CGT is “massively complicated”.

“There are a number of CGT concessions and determining the eligibility to get them is very complex,” he says.

McKellar says he expects those businesses using accountants and tax agents are “reasonably compliant”. “For those who are lodging it themselves I assume there is massive non-compliance as it would just be too complex for most small businesses to grasp what is a capital gain, when it can be triggered and the concessions available,” he says.

Grant Field, chairman of MGI Australasia, agrees the system is very complex.

“I think it is fair to say that most tax agents know that any small business taxpayer looking to claim any of the CGT small business concessions (when they sell their business), are going to get a query from the ATO,” he says.

Field says the CGT small business concessions were introduced by the former Howard government and are “extremely generous”. “However, the legislation to determine entitlement to the concessions can also be extremely complex, particularly if multiple structures are involved,” he says.

But Field gives some weight to the ATO’s argument that the revenue raised has been affected by the financial crisis. “Given the economic circumstances in recent years, it is not inconceivable that small business taxpayers are simply not making as large capital gains as they were several years ago,” he says.