Financial year audit triggers: what businesses and individuals have to watch out for

Paul Brindle is the managing director ANZ of Thomson Reuters Tax and Accounting. He writes: 

At the start of each financial year, the ATO releases a report outlining the areas of tax regulation the organisation plans to focus on over the coming 12 months. Whatever party wins the Federal election, they will need to fund its policy initiatives in a slowing economy, so the ATO will continue to play a critical role in maximising tax collection and minimising tax avoidance.

The report effectively represents a subtle ‘warning shot’ to all Australian taxpayers – both individuals and businesses – to remind them of their tax obligations and the consequences of non-compliance. The four key areas the ATO will focus on over the coming 12 months are:

1.Data and information-matching capabilities – Ensuring income is reported correctly and claims are not overstated;

2.Tax crime – Dealing with those who seek to abuse the tax and/or superannuation systems;

3.Misuse of trusts – With the prevalence of trusts growing significantly each year, the ATO has established the Trusts Taskforce to target individuals and businesses that seek to misuse trusts to avoid paying tax (this includes profit extraction schemes, concealment of income and mischaracterised transactions);

4.Profit shifting – As one of the key topics in business today, it is not surprising the ATO will look to crack down on companies to ensure they pay their fair share of tax in the appropriate jurisdiction. Of particular focus will be the e-commerce sector, which continues to grow in importance and value in Australia.

What these focuses will mean for individuals

Approximately 12 million people lodge tax returns in Australia each year, most of whom are willing to comply with the necessary tax and superannuation obligations. However, as has been the case for some years now, the ATO will continue to place a focus on individuals in higher tax brackets who might try and use complex business structures to avoid tax. Authorities will also keep an eye on the broader base of taxpayers to ensure they correctly prepare their returns, particularly in relation to work-related claims.  Special attention will be placed on several sectors which have a growing incidence of reporting un-substantiated expenses, including the building and construction sector (where project managers, construction supervisors and labourers will come under the microscope) as well as those operating in the sales and marketing fields.

What these focuses will mean for employers

The focus on employers this year will remain relatively unchanged. Companies will need to ensure they are complying with PAYG obligations, the increased superannuation guarantee and particularly fringe benefits tax – a tax that continues to evolve, most recently around vehicle fringe benefits. This year, the ATO will be using third-party information to identify employers operating outside the FBT system.

What these focuses will mean for big business

The 1300 large or multinational businesses operating in Australia contribute 68% of company and superannuation funds income, so it will come as no surprise that the ATO will seek to ensure large businesses comply with all tax regulations.

Profit shifting remains the number one issue in tax reporting today, with the OECD and the G20 both calling for multilateral responses to stop companies from moving profits to jurisdictions where they are taxed more lightly. This focus will only grow as international governments work together to combat tax base erosion with more fervour than ever.

The responsibility to comply with all necessary regulations sits largely on the shoulders of large corporations. Failure to do so can result in a shortfall of government revenue – causing authorities to clamp down even further with stringent legislation. Government initiatives, such as the Treasury Specialist Reference Group, will continue to be supported by the ATO to address tax minimisation by multinational enterprises and to improve transparency.

Audits for businesses reporting capital gains tax (CGT) will be regular and a focus will remain on foreign residents disposing of Australian property.

What these focuses will mean for SMEs

Approximately 98% of small to medium sized companies are privately owned, putting onerous tax and superannuation compliance obligations on owners. The ATO has stated it is committed to actively supporting small businesses to meet their tax obligations, acknowledging the challenges faced by small businesses such as lack of time or resources or inadequate record-keeping.

The ATO’s focus this year will be on early intervention to help SMEs meet their obligations. This will include education around how to keep proper records through effective and efficient technology.

The role of technology in aiding tax compliance

Due to large scale change across many industries, the ATO’s focus will remain on education to ensure businesses better understand the issues around corporate governance and risk, as well as the integrity of their business systems. In all interactions, the ATO will stress how important it is that businesses invest in their tax and accounting functions, and in their IT and accounting systems.

Organisations operating in the mining, wholesale trade, manufacturing, financial and insurance services, government and retail trade industries will all be looked at more closely as each of these sectors have been undergoing significant change.

The ATO is also enhancing its own systems around superannuation by improving the SuperSeeker online tool and providing support on the new data and payment standards for electronic rollovers and contributions. SMSF will remain a focus, with the ATO stating it will not issue a new fund with a notice of compliance until the fund has lodged its first annual return.

While the ‘Compliance in Focus’ report is not exhaustive, it does help explain the areas the ATO will be directing their attention over the next 12 months.