Beware the latest ATO warnings

taxrecords250 The Tax Office never sleeps, or so it seems! It is constantly obtaining, analysing and reviewing data on a myriad of areas. The result could be a tax audit or a friendly call from the tax man pointing out where the problems are.

From time to time, the Tax Office also highlights problem areas it comes across. This can often be an early warning for SMEs on at least some of the issues they need to take particular care on. Here’s a sample of some of the latest ATO warnings (and reminders).

CGT, property and shares

Capital gains tax (CGT) issues are never far from the ATO’s attention – it really is a sleeper tax that, over time, will capture more and more transactions and assets. The ATO says that, from December this year to February 2010, it will trial what it describes as a “call campaign” to verify SME’s property and share transactions in relation to CGT. Tax agents may be contacted to check their clients have disclosed all their property and share transactions.

The Tax Office said the impetus for the campaign came from analysis it undertook last year that showed it could sort out some problems with a single phone call, instead of involving taxpayers and their advisors in a longer review process.

Partnership and trust distributions

The Tax Office said that, in 2008-09, it matched distributions from partnerships and trusts with amounts partners and beneficiaries returned. It found mistakes where some tax agents didn’t know their clients were partners and beneficiaries. Many of these agents lodged voluntary disclosures on their clients’ behalf.

Other mistakes detected by the ATO included:

incorrect tax file numbers (TFNs);
TFNs not quoted in the statement of distribution;
distributions reported at the wrong tax return label.

Trading stock

The ATO says it has noticed that many micro businesses (turnover under $2 million) are recording their trading stock incorrectly. Opening value of stock should equal its closing value the year before. Many micro businesses have lodged tax returns where their opening trading stock figures don’t match the closing trading stock amounts from the year before, meaning sales and taxable income might be wrong.

The deemed dividend rules

Rules in the tax law (the Div 7A rules) can deem certain advances, loans and other credits made by private companies to shareholders and associated persons to be assessable dividends. This can be a problematic area for many taxpayers, including SMEs, and is not always properly understood.

SME owners dealing with end-of-year tax responsibilities should consider their obligations under Div 7A, and options to correct any past Div 7A mistakes. Consultation with their adviser or tax agent is essential here.

In addition, they should review transactions that have taken place between the private company and its shareholders (and their associates) before the private company’s tax return lodgment day. Specific transactions should be examined, such as payments a private company made and loans and debts a private company forgave.

Tax payment problems

The Tax Office encourages businesses having trouble with their tax payments to contact it early so the problem can be discussed and a solution worked out. The alternative is to have a defaulted payment arrangement imposed on them.

For tax debts less than $25,000, SMEs can now use the ATO’s 24-hour self-help phone service to arrange a late payment or to pay by instalments. The self-help phone number for businesses is 13 72 26. The ATO also has an online calculator that enables SMEs to work out a payment arrangement that suits their circumstances. Once a business has calculated a suitable payment arrangement, it can use that as a guide to propose a payment deal to the ATO.

FBT compliance issues

The FBT year might be well under way, but the Tax Office has reminded tax agents and employers of a number of FBT issues and problem areas of concern, including:

Employers not understanding aspects of the FBT law. If a car is garaged at or near an employee’s home, it is available for the employee’s private use, regardless of whether the employee has permission to use the car privately. This has FBT consequences. The ATO highlighted a recent AAT case where the employer in question was not aware of this (and other matters) and was required to pay over $87,000 plus penalties.
FBT and motor vehicles generally. The Tax Office says it has now acquired new motor vehicle data which allows it to: address FBT non-compliance regarding car fringe benefits – the data has a $10,000 threshold which means the ATO can capture lower valued vehicles provided as fringe benefits; and continue its focus on taxpayers “whose lifestyles appear at odds with their reported income”.
FBT employee contributions – these may reduce or eliminate an employer’s FBT liability, and are frequently recommended as an efficient remuneration packaging practice for many employees. The Tax Office says it is using improved data matching and looking at the income returned at the employee contributions label of the employer’s income tax return. It says employee contributions must be included in the Fringe benefit employee contributions label in the income section of the employer’s income tax return.
Payment summaries. The Tax Office reminds employers that the reportable fringe benefits exclusion threshold is $2,000.
Income tax returns. The Tax Office has warned that some employers incorrectly reduce company income tax deductions by the private use of cars instead of accounting for FBT or applying employee contributions to eliminate the FBT liability.

Terry Hayes