Tax risks that attract ATO attention
A number of so-called “tax risks” may attract the ATO’s attention, including:
- tax performance varying substantially from business performance;
- inconsistencies in activity statements or spikes in refund claims;
- large, one-off or unusual transactions;
- tax and economic performance varying significantly from similar businesses in the same industry – the use of benchmarks comes into play here;
- unexplained losses;
- a history of aggressive tax planning by individuals or their advisers (including aggressive trust-related tax avoidance and evasion);
- weaknesses in compliance structures, processes and approaches;
- tax outcomes inconsistent with the intent of tax law;
- lifestyle not supported by after-tax income;
- treating private assets as business assets;
- accessing business assets for tax-free private use;
- transactions where the tax and economic outcomes are inconsistent;
- poor governance and risk-management systems;
- distortions and inconsistencies in market valuations and apportionments; and
- business performance falling outside small business benchmarks (for businesses with turnover of up to $15 million).
During the course of ATO compliance activities, the ATO expects that both parties will:
- have ongoing, open and frank discussions and a plan for completing the compliance activity;
- participate in upfront meetings to identify any issues with the process that could delay or disrupt progress and to agree on contingencies;
- agree on realistic timeframes;
- provide facts and evidence in a timely manner;
- clarify issues as they arise so that they can be resolved efficiently;
- seek to minimise costs – in particular, where the taxpayer changes adviser or the ATO changes officers, the incoming adviser or ATO officer is to gain familiarity with the facts and issues involved, and the status of the compliance activity;
- provide prompt and ongoing access to key personnel and escalation points;
- agree in advance on how to handle relevant documents covered by legal professional privilege or the accountant’s concession.
What the ATO expects
At an operational level, the ATO expects to see effective accounting systems and controls that help a business meet its day-to-day compliance and reporting obligations.
When considering an SME’s approach to tax management, the ATO says it may ask questions including:
- Does the SME use a tax adviser? If so, what types of transactions does it seek advice on?
- Does the SME know its adviser’s stance on risk, and does it align with the SMEs business stances?
- Does the SMEs business have any major points of disagreement with the ATO? If so, is the SME satisfied with the way the disagreement is being managed?
- Are the amounts of tax the SME is paying in line with its business results?
- Does the SME have transactions or arrangements that could be viewed as not making commercial sense or are carried out for the dominant purpose of obtaining a tax benefit?
- Is there anything to indicate the SME’s business results and tax payments are lower than economic conditions would indicate?
- >Is the business consistently reporting losses? If so, are these economic losses, and can they be explained in terms of overall performance?
The new publication is a very useful insight for any SME into how the ATO will conduct its compliance activities and the sorts of things it is looking for. As such, it represents something of a roadmap for SMEs in their dealings with the ATO, and provides valuable pointers for SMEs.
Terry Hayes is the Editor-in-Chief of tax news reporting at Thomson Reuters, a leading Australian provider of tax, accounting and legal information solutions.
