Taxman announces four-year crackdown on SMEs

The Australian Taxation Office will examine every company with an annual turnover of $100 million to $250 million in an effort to determine their risk profile as tax dodgers.

The new crackdown, which was announced as part of the tax office’s 2008-09 Compliance Program, will also result in an increase in the number of audits on SME companies this year and a bigger effort by the tax office to work more closely with SMEs and their advisers to avoid tax problems.

The Compliance Program chapter on small and medium businesses (which can be viewed here) sets out a number of specific areas that the taxman will target. These include:

Lodging returns. The tax office believes some SMEs are not lodging tax returns or lodging incomplete returns as a way of dodging its compliance programs. It will specifically target sectors with higher rates of late lodgement, including financial and insurance services; property, building and construction; and self-managed super funds.
Capital management. The tax office will continue to focus on business owners who try to extract value from their private companies without paying the correct tax using methods such as loans, payments, debt forgiveness, share buy-backs, capital reductions and the sale of shares to exit from businesses.
International transactions. The tax office will examine transfer pricing and profit shifting transactions that move profits out of Australia and will also focus on the use of tax havens.
Tax planning around business exits. Last year the tax office spent a lot of time educating business owners and tax agents about this issue and this year they will be stepping up its efforts to find cheats. They will particularly be examining business restructures where the primary objective is to receive a tax advantage through the use of demergers, consolidation or trust cloning rather than for preparing a business for sale.
Phoenix arrangements. As the economy slows, the tax office is spending a lot of time looking a phoenix arrangements, whereby companies attempt to evade tax through the deliberate, systematic and sometimes cyclical liquidation of related companies. The tax office will be trying to increase its emphasis on early intervention by indentifying, tracking and warning phoenix operators.

On top of this, the taxman will be looking at issues around trusts, prescribed private funds, the reporting of losses (mainly in larger companies) and issues and superannuation.

While the chances of getting audited by the taxman remain fairly slim – the tax office completed around 600 audits out of 130,000 eligible businesses last year – Peter Bembrick, a tax partner from HLB Mann Judd, says companies that transgress in the tax office’s target areas can expect scrutiny.

“They are becoming much more targeted in what they do and the chances of getting a letter or phone call are becoming much, much higher.”

Bembrick says smart companies will look closely at the Compliance Program and try to predict potential trouble spots.

“If you are aware the issues and can deal with them before the tax office gets to you, obviously you are going to be a lot better off.

“There are a lot of traps in some of these areas and you need careful planning and good advice to ensure your strategy is right. You definitely need to be aware of what the tax office is looking at.”

Read more on phoenix arrangements and tax office compliance