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Regulatory Roundup – July 2015

The Tax Office may soon audit businesses at random

Companies could be in line for random audits as soon as next year under advice being considered by the Tax Office.

The plan, proposed by Australia’s counterparts in the UK and US, is said to provide more credible estimates of revenue.

Inspector-General of Taxation Ali Noroozi told parliament’s standing committee on tax and revenue it is “actively considering” the benefits of such a program, but that it would not be popular with taxpayers.

“If they are perfectly compliant, then they are not going to appreciate somebody knocking on their doors and wanting to go through everything,” Noroozi said.

He conceded the program could help minimise the “tax gap” between the amount of tax payable by companies and individuals and the sum of tax actually collected.

Deputy Inspector-General of Taxation Andrew McLoughlin told the committee the Tax Office might consider compensating those picked for audits who were found to be compliant.

“Obviously you do not want people feeling as though they are being shaken down when they are not doing anything wrong whatsoever,” he said.

The GST tax gap is estimated to be $3.1 billion.

Lisa Greig, tax products and services manager at Taxpayers Australia, said the changes will not shock the majority of taxpayers.

“Currently, tax reviews can be triggered based on benchmark data abnormalities or specific tax disclosures. Even then taxpayers can still be complaint. For example, any taxpayer claiming a small business CGT exemption is more likely than not get a ‘please explain’ letter from the Tax Office. It is just the norm,” she said.

“However, if a taxpayer has a squeaky clean business and operates year on year without any abnormal activity and gets a review letter, then, of course they are going to be miffed. The taxpayer should have the right to a reimbursement claim for any outgoings due to the Tax Office’s fishing expedition.”

Greig said insurance is the best approach for businesses and individuals going forward.

“Our members usually advise their clients to take out audit insurance to cover the costs involved by them in preparing the response to the Tax Office.  Sometimes these costs can be up to $10,000, but at least they have an idea to expect the letter.”

Here’s how the changed employee share schemes rules will work

Employees who receive options and other employee share schemes (ESS) interests as remuneration will be taxed under rules introduced today.

Under the changes, employees who receive options on or after 1 July 2015 will now be generally taxed when they exercise those options.

And if an employee chooses to let an option lapse, the tax rules previously attached will not apply and the tax already paid for that option will be able to be refunded.

Small business minister Bruce Billson this week the ESS framework will create the right conditions for entrepreneurs to innovate.

The Tax Office has released documentation to help businesses with reportage and safe harbour valuation methods.

Any business scheme that falls under the ESS tax rules is subject to annual reporting requirements. The rules mandate employers report ESS events when a taxing point occurs for at least one employee during the relevant financial year.

Employees need to have an ESS statement by 14 July 2015 and employers must provide an ESS annual report to the Tax Office by 14 August 2015. The Tax Office matches the data provided in the ESS annual report to the information in individual tax returns.

Tax Office criticised over CGT administration of small businesses

The Tax Office needs to improve the way it administers small businesses that do not meet their capital gains tax (CGT) obligations, the Auditor-General has said in a report.

The Australian National Audit Office (ANAO) report said the Tax Office’s use of problematic mail-out systems and its excessive focus on real property has contributed to a revenue drop of almost 50% in the past two years.

The report said the Tax Office’s general administration of CGT was sound, but it had relied too heavily on taxpayers voluntarily disclosing CGT liabilities in their annual tax returns.

“Insufficient attention has been given to addressing the limited effectiveness of compliance activities for individual and small business taxpayers that have not met their CGT obligations,” the report said. “As a consequence, there has been a considerable reduction in the revenue raised from specific CGT compliance activities directed at individual and small business taxpayers in recent years. This aspect of CGT administration requires closer consideration.”

It said the Tax Office’s mail-out systems, which use third-party data to send letters to taxpayers questioning their CGT declarations, lack accuracy and can result in unnecessary correspondence.

“The outcome of this correspondence can be that the taxpayer contacts the Tax Office and clarifies their situation to the satisfaction of the Tax Office, or the Tax Office amends their assessment,” the report said.

“This largely reflects a lack of accuracy of information in these letters, which impacts on the taxpayer’s experience and the Tax Office’s prospects of securing appropriate revenue. On this basis, the Tax Office would benefit from evaluating the effectiveness of its CGT bulk letter compliance strategy for individual taxpayers.”

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