Beware tax audit targets

The tax office does check claims, and data shows that more businesses are being caught out. TERRY HAYES scopes the likely targets.

By Terry Hayes

The tax office does check claims, and data shows that more businesses are being caught out. We scope the likely targets.

At his recent appearance before the Federal Parliamentary Joint Committee on Public Accounts and Audit, the Tax Commissioner revealed that, in 2007-08, the tax office:

• Reviewed 25,500 high risk refund returns, resulting in revenue adjustments of $38 million.
• Completed around 19,000 reviews or audits re work-related expenses, with revenue adjustments of $14.7 million. The tax office also wrote to over 200 tax agents, and visited another 300, about work-related expense claims.
• Completed around 7200 reviews or audits re rental expenses resulting in revenue adjustments of $9.2 million.
• Reviewed or audited 6690 people concerning capital gains tax (CGT), resulting in revenue adjustments totalling $51.5 million.

These figures give a clue to the major areas the tax office focuses on when reviewing the tax affairs of taxpayers and businesses.

The CGT figures are all the more interesting when it is considered that a new phone service offered by the tax office to tax agents concerning CGT queries showed that the top five most commonly asked CGT questions related to:

1. Shares.
2. Main residence exemption.
3. Rollovers.
4. Small business concessions.
5. Deceased estates and the disposal of assets.

It’s not surprising that the CGT small business concessions rated highly. They are important concessions, but are complex and not as widely understood as might be expected. I have flagged on more than one occasion the importance of SMEs getting good advice about the concessions as they can save tax, so they need to be properly understood.

The tax office is also continuing its review of rental property deductions claimed in income tax returns.

It is concerned that rental deductions are being over-claimed, especially as the growth in rental expenses continues to outweigh rental income. This has been on the taxman’s radar for some time, so should not surprise anyone.

Also, a tight rental market in many cities, especially Sydney, might suggest that more people now own rental properties so that rental deductions might be expected to be increasing.

CPA Australia’s senior tax counsel Mark Morris says that last year’s surge in rental deductions was 11.8% up from the previous year and was more than double the inflation rate. So no wonder the tax office is interested.

Morris says it is very easy for landlords to inadvertently over-claim deductions, given the complicated tax rules that apply in making rental property claims. The tax office is also concerned that rental income is being under-reported, and will use data-matching to identify rental property owners.

In the current year, the tax office will write to new property investors on how to report rental income and claim deductions, and remind identified “at risk” property owners to accurately prepare their own income tax returns.

Morris says that this year, the tax office will also focus on excessive claims for interest deductions and building depreciation. Reviews will examine initial repairs or renovations that are incorrectly claimed as repairs and maintenance, stamp duty acquisition costs incorrectly included in borrowing costs, and body corporate fees to the extent they cover the cost of capital improvements and capital works.

The stats show that the tax office does check claims. The tax law provides scope for claiming many deductions and concessions, but there are penalties for getting them wrong.

There is simply no substitute for good advice.

Read more on benchmarking and data-matching

Terry Hayes is the senior tax writer at Thomson Reuters, a leading Australian provider of tax, accounting and legal information solutions.