Small businesses under ATO compliance microscope: Terry Hayes

As it does around this time of year, the ATO recently released its 2012-13 Compliance Program outlining those it intends to target in the coming year. Small and medium-sized enterprises (SMEs) figure prominently.

While much has already been written about the program, it is worth exploring a little more deeply what the ATO will be looking at. It's something of a roadmap for SMEs in the tax compliance cut and thrust.

There are around three million so-called micro enterprises i.e. businesses with an annual turnover of under $2 million or superannuation funds with less than $2 million in assets. They represent a significant part of the taxpaying population, employing 1 in 5 Australian workers.

Over the coming year, the ATO says it will focus particularly on the following compliance risks:

• unrecorded and unreported cash transactions;
• employer obligations eg. super;
• GST refund integrity and GST evasion;
• ensuring businesses are correctly registered in the tax system;
• supporting businesses in meeting their lodgment obligations; and
• incorrect fuel tax credit claims following implementation of the clean energy measure.

The ATO said profiling is used to identify potential tax risks such as businesses operating outside industry or economic benchmarks.

Information matching forms a key part of the ATO's arsenal. It matches information in tax returns and business activity statements (BASs) with details of transactions reported to it by a wide range of third parties, including:

• payments and grants by other government agencies;
• payments by businesses to contractors especially the new building and construction industry reporting system;
• income from investments and partnership and trust distributions;
• property and share transactions;
• cross-border transactions and international funds transfer.

Unrecorded and unreported cash transactions

The ATO said the plastering and cafe sectors have been selected for more intensive activity for 2012-13. In relation to the plastering sector, the use of cash along with historical weaknesses in tax compliance and high number of information referrals from the public has prompted the increase in ATO activity.

The ATO said it will review both business-to-business and business-to-consumer transactions, comparing information from hardware store accounts against their customers' purchasing records to detect cases where businesses are skimming cash or are outside the system.

In relation to cafes, the ATO said it is expanding its compliance program of comparing information from coffee-supplier trade accounts against their customers' purchasing records to detect cases where cafe businesses are skimming cash or are outside the system.

Employee vs contractor

The ATO will continue the compliance program on contractor arrangements. Trying to present an employment relationship as a contract between two businesses by, for example, forcing the worker to supply invoices and quote an ABN, does not in the ATO's view override an underlying relationship of employment. The ATO is concerned this threatens the welfare and entitlements of workers and creates unfair competition for honest employers.

The statistics paint their own picture on this issue. In 2011-12, the ATO conducted approximately 1,100 audits on businesses where it suspected that the business may have incorrectly treated employees as contractors. From the resultant audits, the ATO collected details of approximately 51,000 payments made to around 41,000 contractors, about 18,000 of which were individuals. It found that 48% of businesses that engaged contractors were wrongly treating individuals as contractors.

This is an ongoing major issue for the ATO, and SMEs should also be aware that Fair Work Australia also looks closely at this issue of employee vs contractor.

Small business benchmarks

The ATO has developed benchmarks for over 900,000 small businesses in over 100 industries. According to the ATO, approximately 90% of businesses in benchmarked industries fall within a benchmark range.

The benchmarks can be a two-way street. While they are a valuable tool for the ATO to check tax compliance, they can be useful for SMEs too. For example, where a business is reporting significantly more net income than its industry peers, this can alert the business to consider if it has forgotten to claim all of its business tax deductions. It isn't always that simple, but the potential exists for these benchmarks to actually help some SMEs.

On the flip side, where a business is reporting significantly less income than the benchmark range for its industry, the ATO may ask a few questions. However, if the business had good evidence to explain all its income and expenses, the ATO says it will not be subject to tax adjustments.

Employer obligations

For the 2012-13 year, the ATO expects to:

• review the tax affairs of more than 20,000 businesses across all markets to ensure they are reporting the correct amounts of PAYG withholding;
• conduct a range of education and assistance activities regarding reporting of payments to contractors in the building and construction industry;
• use third-party data to income match taxable government grants and payments with reported amounts in tax returns;
• conduct an outbound phone campaign and 500 enterprise reviews with the aim of ensuring that businesses register for PAYG withholding when they take on staff for the first time and register for GST when their turnover exceeds the $75,000 threshold.

GST refund integrity and GST evasion

With the recent passage of new laws that give the Commissioner a discretion to retain high risk refunds, the ATO may stop a small percentage of BASs for verification where anomalies, discrepancies, unusual behaviour, or change in patterns occurs. It said to minimise the number of businesses having refunds delayed, it may also check some refunds after they have been paid.

In addition, the ATO said it will review 35,000 GST registration applications to ensure that new registrants are legitimate. It will review around 500 serious cases of fraud involving identity theft and groups of entities established with no intention of undertaking an enterprise.

The ATO will monitor and investigate taxpayers who dispose of real property and fail to report the transaction on their BASs or misclassify the transaction for GST purposes.

The ATO said it has recently identified cases of fraud involving groups of entities established with no intention of undertaking an enterprise. Stolen identities were used to falsely register ABNs and make fraudulent refund claims on 1,670 activity statements totalling more than $17.5 million. An additional 600 entities associated with this fraud were detected before lodgement and subjected to enhanced registration check processes preventing additional claims being lodged. The ATO expects to review around 500 of these more serious cases in 2012-13.

Fuel tax credit claims

While this does not affect all SMEs, the ATO said incorrect or ineligible fuel tax credit claims continue to be made as a result of taxpayers misunderstanding their entitlements or poor record keeping.

In 2012-13, it will continue to provide claimants with information and assistance. However, in cases of serious breaches, it said it will consider cancellation of registration, prosecution and debt recovery.

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.

This article first appeared on SmartCompany.