Voluntary tax compliance? Taxman's preferred option

High risk areas of concern

Risk areas of concern to the tax office include pre-consolidation restructures, losses, and international tax issues (especially dealings involving tax havens, banking secrecy and low tax jurisdictions).

Some issues uncovered by these reviews included:

Motor retailers and the GST hold back payment. The tax office said it issued letters across the industry advising its position, resulting in approximately 300 voluntary disclosures worth approximately $15 million. The tax office also found that a number of retailers had also performed poorly over a period of time compared to others in the industry. It said these will be reviewed.
In the meat processing industry, the tax office said it came across cash payments and accounting for trading stock as primary issues.
The tax office also found individuals behind a number of the groups led a lifestyle not commensurate with the income they derived. For instance, the tax office said it came across examples of people buying property without sufficient capital or income to service loans. In such instances, the tax office said it has sought to have a focus beyond merely the corporate group, recognising that the risk may be at the individual level.

Transactions giving rise to a tax benefit that exceeds the real expenditure will also attract the attention. The tax office has, for example, “seen deductions claimed for investment in films where no film was ever made”.

On a broader scale, the tax office closely examines tax performance that varies substantially from business performance. For example, non-disclosure of capital gains, although this does not necessarily mean there is non-compliance (that is, the asset could be pre-CGT in nature).

Other cases that will arouse the tax office’s attention include:

Where payments of tax are not consistent with economic indicators and there is no reasonable explanation. For example, the tax office said a website of a group stated that sales had been considerable but the group’s effective tax rate was not in line with the purported sales.
Where businesses have consistently made losses over a number of years.

Different compliance strategies

The upshot of all this is that the tax office is seeking to develop different compliance strategies based on the considered level of risk. These strategies may include:

For taxpayers who comply with basic obligations, have good economic and tax performance within industry norms, and are considered low risk, the tax office is looking at how it can provide some level of certainty about their tax affairs.
For those taxpayers with medium risk based on poor economic and/or tax performance outside the industry average, or have potential multiple risks identified, the tax office says it is currently exploring the use of a dynamic expanded return form to provide additional information on the specific risks.

Among other things, this is designed to help tax taxpayers identify areas of risk and, if necessary, take action. For SMEs, this approach would provide an indicator from the tax office that additional scrutiny is being undertaken and therefore provide the opportunity for the business to consider contacting the tax office to resolve matters.