Background

The ATO's Annual Compliance Program for 2007-08 was released on 16 August 2007. Each year, the ATO's Compliance Program details the practices and patterns of activity that attract the ATO's attention, how the ATO plans to respond to them and how the ATO will help those trying to comply.

The key themes — with more information below

Big business faces the familiar themes of:

• taxation as a corporate governance matter for the Board;
• mismatch between business performance and tax performance as a "red light" issue for the ATO, and
• the ATO's continued interest in corporate restructures and international dealings.

High net wealth individuals can expect continued scrutiny as the ATO devotes more resources to monitoring them.

Promoters face the ATO taking a "get tough" approach under the new Promoter penalty laws.

The headline issues

The ATO's headline issues in 2007-08 are:

1. Managing tax risk in a global economy;
2. Promoting good governance and sound practices for business;
3. Even closer scrutiny of the wealthy; and
4. Dealing with cash transactions and tax evasion.

Individuals

For individuals the ATO will focus on:

• Capital gains made on disposals of property;
• Activities of high-income individuals, especially public company executives;
• Superannuation affairs, including deductions claimed for the cost of funding contributions (this was common in the lead-up to the introduction of Simpler Super on 1 July 2007); and
• The use of data matching — to detect non-reported interest and dividends, non-reporting of capital gains on disposal of property and non-disclosure of income from employee share schemes, especially by public company executives.

Micro enterprises (annual turnover less than $2 million)

For enterprises turning over less than $2 million the ATO will focus on:

• Employer obligations including PAYG and superannuation guarantee obligations;
• Debt collection;
• Cash economy;
• Refunds of GST;
• Property transactions; and
• Aggressive tax planning.

Small to medium enterprises (annual turnover between $2 million and $100 million)

For enterprises turning over between $2 million and $100 million, the ATO will focus on:

• Increased resources and scrutiny for individuals who control $30 million or more;
• Division 7A of the ITAA 1936 (deemed dividends as a result of loans made by private companies to shareholders);
• Transfer pricing;
• Use of tax havens;
• Examination of withholding tax arrangements for the remittance of interest, royalties and dividends;
• Service trust arrangements — especially for professional partnerships typically used by law and accounting firms but also for other professions including architects, doctors and consultants;
• GST on property transactions including unreported sales and aggressive use of the margin scheme to minimise GST;
• Aggressive tax planning, including the use of corporate limited partnerships to arbitrage the different tax treatment of these entities in different jurisdictions (double dip deductions etc); and
• Promoter penalty laws — to penalise individuals and entities who earn profits by designing aggressive tax structures and then marketing them.

Large enterprises (annual turnover in excess of $100 million)

For enterprises which turn over more than $100 million, the ATO will focus on:

• Good governance, including by promoting the need for boards to have a high level of awareness of tax risk;
• Aligning tax and economic performance — including by investigating the characterisation of income and expenses and the failure to account for GST on unique transactions;
• Evolving capital markets, including more closely monitoring merger and acquisition activities: particularly those involving private equity syndicates;
• International tax arrangements, including by sharing information with foreign jurisdictions and taking a coordinated compliance approach; and
• GST, including by investigating major infrastructure projects and the use of the GST margin scheme.

Tax practitioners

For tax professionals, the Compliance Program emphasises:

• That the ATO will provide improved services to this sector; and
• The importance of tax agent integrity — especially in view of the recently introduced promoter penalty laws.

Tax crime

On the topical issue of tax crime, the Compliance Program raises the following issues:

• Cross-border crime (evasion) — especially channelling funds to tax havens and using fraudulent expenses from offshore jurisdictions to reduce tax in Australia — project Wickenby is discussed; and
• Identity crime — typically used by individuals who lodge multiple business activity statements to fraudulently obtain GST refunds to which they are not entitled.

Lessons

The ATO's move to 'real time parameters' for monitoring taxpayers

Although the ATO has maintained its broad approach to compliance activities, it is aiming to reduce the gap between the time of a transaction and the time the Commissioner reviews that transaction. Indeed, the ATO aims to operate "in real time parameters".

In large part, this reflects the reduced time limits the Commissioner now has to amend returns to correct errors. However, there has also been a fundamental shift from reviewing past transactions to actively monitoring current activities. The Commissioner has convinced Parliament to pass laws enabling him to target people designing aggressive tax structures.

Tax risk is an issue for the board

The Commissioner's continued attempts to get Boards to consider tax risk, and his focus on private equity and merchant banks, increase the chance that complex, tax effective structuring is likely to attract the Commissioner's attention.

The ATO also aims to be more current in company tax compliance — perhaps through pre-lodgement discussions. So the ATO will always be interested in current financial year transactions and companies and their boards will need to assess those transactions for tax risk.

Focus on cross border transactions

The Commissioner's focus on cross border transactions continues to be a significant part of his compliance activities. He clearly believes they pose considerable risk to taxation revenue.

Significant transactions need independent advice

The ATO's increased focus on tax effective structuring and the possibility of pre-lodgement reviews of major transactions should sound a warning to taxpayers. More than ever, it will be worth obtaining a second opinion from independent advisors before implementing any major transaction involving tax risk.

"Advice first" helps deliver safety later

The best time to consider the risks and to implement a transaction in a way likely to withstand ATO scrutiny is before the "deal is done".

Questions?

To speak with us, contact Maddocks on (03) 9288 0555 and ask for the Cleardocs Help Desk: the person there will put you through to the relevant Tax Disputes team member.

You can view the profile of our Tax Disputes partners at our website.