Terry Hayes

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GUEST OBSERVATION
The Australian Tax Office regularly flags tax compliance issues it has under the microscope.
But don't think if an issue is not on that list, the ATO is not looking at it. The ATO's administration of the tax system doesn't work that way.
Take <a href="https://www.smartcompany.com.au/finance/tax/32726-ato-rules-for-tax-deductions-for-work-related-expenses-in-australia">work-related tax deductions</a>, a big ticket item in the deduction stakes.
Tax deductions claimed for work-related expenses are a "tax 101" item. The vast majority of taxpayers claim them – in fact, in 2011-12, some 8.5 million individual taxpayers claimed some work-related expenses. The claims have steadily increased over recent years. In 2009-10, they totalled $17.1 billion, while in 2011-12, they were $19.3 billion, a $2 billion increase over two years. Those expenses represent a significant cost to the revenue so it is not surprising the ATO has a particular focus on them as part of its compliance activities. And there are specific rules surrounding claiming such expenses.
This year, the ATO says it is using extensive data analysis to identify areas requiring attention across all work-related expense claims, regardless of occupation. However, the ATO says it is paying particular attention to work-related expense claims relating to:
<ul>
<li>overnight travel;</li>
<li>transporting bulky tools and equipment – the recent Ford AAT case on this issue  involving a train guard transporting equipment essential to his work from his home to work highlighted the kinds of issues involved in making such claims. The taxpayer lost the case essentially because his employer provided a secure locker at his work place for the equipment, so he did not need to transport it to and from work;</li>
<li>the work-related use of computers, phones or other electronic devices.</li>
</ul>
Last year, the ATO paid particular attention to high work-related expenses claims made by: (i) building and construction labourers, construction supervisors and project managers; and (ii) sales and marketing managers.
Specific rules in the tax law specify the written evidence that an individual must obtain to substantiate deductible work-related expenses.
The ATO stresses that taxpayers claiming work-related expense deductions need to satisfy several basic requirements:
<ul>
<li>they must have spent the money;</li>
<li>the expense must be related to their job;</li>
<li>they must have a record to prove it.</li>
</ul>
If that seems like "stating the bleeding obvious", ask yourself why the ATO feels it necessary to remind taxpayers about it.
Rental property deductions
The current hot property market also has the ATO's attention. The ATO says it is increasing its focus on rental property deductions. It says common errors made by rental property owners include:
<ul>
<li>claiming rental deductions for properties not genuinely available for rent;</li>
<li>incorrectly claiming deductions for properties only available for rent part of the year such as a holiday home;</li>
<li>incorrectly claiming structural improvement costs as repairs when they are capital works deductions, such as re-modelling a bathroom or building a pergola; and</li>
<li>overstating deduction claims for the interest on loans taken out to purchase, renovate or maintain a rental property.</li>
</ul>
Story continues on page 2. Please click below.
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Data-matching programs
In its drive to enforce tax compliance, the ATO's use of data-matching programs is ever-expanding, as I have mentioned before.
Offshore bank accounts
Most recently, the ATO has announced it will request and collect account details of bank customers from various financial institutions (see below) to identify Australian resident taxpayers with offshore bank accounts which may evidence undeclared income and/or gains for the years ended 30 June 2012 to 2015. The financial institutions concerned include:
<ul>
<li>Australia and New Zealand Banking Group Limited</li>
<li>Bank of China (Australia) Limited</li>
<li>Bank of China Limited</li>
<li>Credit Suisse AG</li>
<li>Deutsche Bank Aktiengessellschaft</li>
<li>HSBC Bank Australia Limited</li>
<li>Hongkong and Shanghai Banking Corporation Limited</li>
<li>Investec Bank (Australia) Limited</li>
<li>Macquarie Bank Limited</li>
<li>Rabobank Australia Limited</li>
<li>Rabobank Nederland</li>
<li>UBS AG</li>
<li>Citibank, N.A.</li>
<li>Citigroup Pty Limited</li>
</ul>
The program is designed to help the ATO identify Australian resident taxpayers who may be outside the tax system and increase transparency of the worldwide dealings of Australian resident taxpayers. The program will also assist the ATO to build an understanding of taxpayer behaviour in international dealings, develop compliance profiles and improve fraud detection models. The ATO estimates that approximately 50,000 offshore records will be obtained under the program.
Taxable government grants and payments
In another data-matching program, the ATO will also acquire details of entities receiving taxable grants and payments from various Federal, State and Territory and Local Government departments, agencies and authorities. The program is designed to enable the ATO to:
<ul>
<li>identify and test the correct taxation reporting by recipients of taxable Government grants and payments from agencies across the Federal, State and Local levels of government; and</li>
<li>identify areas that require improved educational and compliance strategies to encourage voluntary compliance for recipients of Government payments and grants.</li>
</ul>
Records matched under the program will exceed 5,000 individuals throughout Australia.
Music royalty payments
The ATO will acquire details of entities collecting and distributing music royalty payments for the 2011, 2012 and 2013 financial years from the following sources:
<ul>
<li>Australasian Performing Right Association (APRA) and APRA New Zealand Limited;</li>
<li>Australasian Mechanical Copyright Owners Society (AMCOS) and AMCOS New Zealand Limited.</li>
</ul>
Among other things, the ATO aims to detect instances of potential non-compliance, especially with omitted income and alienation of personal services income. The ATO also aims to develop a profile of the industry, including any risks and trends of non-compliance with taxation and superannuation obligations, and tailor educational strategies specifically for participants in the music industry. It is estimated that records for more than 15,000 entities will be obtained, of which most will be individuals.
Building sector – phoenix operators
And just to finish off, the security regulator ASIC says its surveillance program aimed at weeding out illegal phoenix operators has been widened to look at the<a href="https://www.smartcompany.com.au/legal/43425-asic-and-ato-cracking-down-on-phoenix-companies-in-construction-industry"> use of false statutory declarations in the building and construction sector</a>. The campaign follows feedback from small businesses, industry bodies and other government agencies about the use of false statutory declarations in the sector to falsely claim payments for work.
"There is concern that some company officers of larger companies have falsely declared that they have paid small businesses contracted to work on commercial and residential projects when this is not the case", ASIC Commissioner Greg Tanzer said.
Terry Hayes is the editor-in-chief of tax news reporting at <a href="https://www.thomsonreuters.com.au/" target="_blank">Thomson Reuters</a>, a leading Australian provider of tax, accounting and legal information solutions.
Thomson Reuters <a href="https://www.propertyobserver.com.au/https://www.thomsonreuters.com.au/the-australian-tax-handbook-tax-return-edition-2014/productdetail/121906" target="_blank">Australian Tax Handbook 2014 – Tax Return Edition</a> provides information on claiming all kinds of tax deductions, including the rules relating to claiming rental properties and work-related expenses.
This article first appeared on <a href="https://www.smartcompany.com.au/" target="_blank">SmartCompany</a>.
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ATO targets work expenses, rental properties and more

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GUEST OBSERVATION
Husband and wives often regard themselves as jointly owning the assets each possesses. "What's mine is yours" and vice versa. In a happy relationship, that's all well and good, but unfortunately, the tax law can intervene to take some of the shine off such scenarios.
In a recent case before the Administrative Appeal Tribunal (AAT), a husband inherited 200 Telstra shares and 1,315 Commonwealth Bank shares from his father's estate. He transferred the shares into the names of himself and his wife to reflect his wife – who he considered at all times as a joint owner of the shares – as an owner of these shares.
However, the transfer of the shares to joint names produced a capital gain of over $19,000 which was included in his tax return for the 2013 tax year. Under the tax law, the share transfer caused a "CGT event" to occur.
The AAT confirmed the husband was liable for CGT (capital gains tax) on the transaction. It did so on the basis of finding that the taxpayer had disposed of a 50% interest in his shares and that this triggered CGT event A1. After the transfer, the husband and wife were treated by the system of taxing capital gains as each owned a 50% share of each of those shares, and before the transfer the husband was recognised as the sole owner of those shares. As a result, the husband was assessable on the capital gain made on the transfer.
The husband argued he and his wife regarded themselves as joint owners of all that they collectively owned. He believed from the outset that, in equity and morally, the shares transferred were owned "jointly". He also claimed he did not make any capital gain because he had not received anything and if he knew he would be subject to tax on the transfer, he would not have transferred the shares. All a very neat logical argument, but unfortunately the tax law does not operate that way.
The tribunal said it might well be, "and in some cases understandably so", that partners to a marriage or a marriage-like relationship regard his or her assets as "our assets". And it might also be the case for family law purposes, regarding the practical effect of ownership of assets by individual partners to those relationships.
But the AAT said Australian income tax law does not recognise these sorts of joint asset ownership arrangements. The transfer of the shares fell squarely within the terms of CGT event A1 (a disposal of an asset) and shares were clearly a CGT asset.
The tax law as applied to the facts in this case could only result in the outcome found by the AAT.
However, the AAT took the opportunity to issue a salutary caution: "Unless there is reason to do otherwise, partners to a marriage or marriage-like relationship who hold the assumption that his or her assets are our assets, would be well advised to continue with that assumption, without taking the step of formalising any joint ownership arrangements, as there will be a taxing point if they do if the transferred assets have increased in value".
To a seasoned tax practitioner, this might be Tax 101, but it is not difficult to appreciate that the views held by the husband and wife in this case, unversed in the ways of the tax law, might indeed be held by many in the community. In this case, their tax agent properly ascertained the situation and correctly lodged the tax returns.   
Terry Hayes is the editor-in-chief of tax news reporting at <a href="https://www.thomsonreuters.com.au/">Thomson Reuters</a>, a leading Australian provider of tax, accounting and legal information solutions.
This article first appeared on <a href="https://www.smartcompany.com.au/" target="_blank">SmartCompany</a>.
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Husband and wife, sharing and caring, until tax law do us part

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In general terms, in order to claim input tax credits (ITCs) under the GST system, an enterprise must be carried on. This can be a tricky issue when property developments are concerned, as two taxpayers recently found out to their detriment before the Administrative Appeals Tribunal (AAT).
A business needs to be carried on before claims for ITCs can be made and this is where the taxpayers ran into trouble before the AAT.
In that case, the two taxpayers failed before the AAT in a matter concerning a number of ITC claims in respect of purported acquisitions made in relation to two property developments.
The first taxpayer (a company that was the trustee of a trust) and the second taxpayer (a partnership of two individuals) claimed to have made acquisitions in relation to a 4900 acre property development near Goulburn in NSW. The first taxpayer also claimed to have made acquisitions in relation to another property development in Grenfell NSW.
Both taxpayers were registered for GST. However, the Tax Commissioner issued to both taxpayers amended assessments denying ITCs claimed on those purported acquisitions – in the first taxpayer's case, for the tax periods April 2010 to June 2011, and in the second taxpayer's case, for the tax periods April 2009 to December 2010.
The Commissioner's position was that neither taxpayer carried on an enterprise at all, so that neither of them could be entitled to any ITCs. The Commissioner also imposed a 50% administrative penalty.
The tribunal dealt mainly with the arrangements of the first property development as it was of the view the arrangements did not differ materially from the second development. The tribunal noted there had been some work done on the property; however, the parties disputed what that work consisted of, how much of it was done, who it was done for, and whether it had been paid for.
The taxpayers said they were "principal contractors to the project". The project was presumed by the tribunal to be the development of the property for eventual subdivision. However, the tribunal noted that exactly what the "principal contractors" did in respect of the property remained the subject of "quite profound mystery". It also said the same observation applied in respect of what the "principal contractors" were supposed to have acquired from various entities, described by the taxpayers as the "subcontractors", who were said to have undertaken some of development activities.
The tribunal understood the case put by the taxpayers as follows: the owner of the property engaged the principal contractors to get certain work done on the property; the principal contractors in turn engaged subcontractors to do the physical work; the subcontractors did the work and charged the work to the principal contractors; and the principal contractors bundled up the charges with a 20% mark-up and on-charged the owner of the property.
The total amount invoiced to the first taxpayer by the subcontractors (in relation to both property developments) was over $250,000. The total amount invoiced to the second taxpayer was over $820,000. However, the tribunal said the invoices themselves were "short on detail". The tribunal also noted that the Commissioner had notified the taxpayers his doubts concerning the work undertaken on the property after he was informed by the relevant council authority that approval to subdivide the property had been refused.
The tribunal said each taxpayer's claim for ITCs failed "at the most basic level". It said that an entity is not a "project manager" simply because someone says it is, and it was important that, to carry on an enterprise (thus enabling the ITC claim to potentially succeed), "an entity must do something".
The tribunal was unable to identify the "activity" that the taxpayers were undertaking in respect of the properties. It was also not satisfied that either of the taxpayers, in relation to the relevant property developments, carried on any activities "in the form of a business". A key issue identified was the difficulty the taxpayers had in articulating the arrangement between themselves, landowners and subcontractors. The AAT said it could not see that either taxpayer did much at all, beyond receiving invoices from the subcontractors and it rejected any notion that receiving invoices is relevantly an “activity”.
The tribunal member (Deputy President Frost) said the taxpayers "could not take me to any document that set out an agreement, between either of the landowners and either of the applicants, that the applicants would perform services or tasks, engage or co-ordinate third parties, or even make arrangements of any kind in relation to the development of the properties".
That, to say the least, was not helpful to the taxpayers' cause.
The tribunal was of the view the "true arrangement" was work was done for, and the supplies were made to, the owners of the properties, and that at most, the taxpayers agreed to pay for some of the supplies. The tribunal found, on the balance of probabilities, that there were "supplies" by the subcontractors; however, it was of the view that any supplies were not made by the subcontractors to the taxpayers. It said it could not see any indicators of a business being carried on. Accordingly, it held the claims for ITCs were not sustainable.
Although not required to, the tribunal also rejected the taxpayers' argument that "promissory notes" issued by them to the subcontractors for work done constituted consideration at the time of the supplies. The tribunal also affirmed the penalty at 50% of the shortfall amount.
The tribunal said the arrangement involved multiple entities, many of them not at arm's length, and that given the type of arrangement involved and its size, independent advice should have been obtained.
This case is a clear demonstration of the need to properly and fully document the operations of a business. The need to obtain clear and independent advice on any business proposition, be it property development or something else, is also a "take-away" message from this case.
Terry Hayes is the editor-in-chief of tax news reporting at <a href="https://www.thomsonreuters.com.au/" target="_blank">Thomson Reuters</a>, a leading Australian provider of tax, accounting and legal information solutions.
This article first appeared on <a href="https://www.SmartCompany.com.au" target="_blank">SmartCompany</a>.
Photo courtesy of Chris Tolworthy/Flickr/<a href="https://creativecommons.org/licenses/by/2.0/" target="_blank">Creative Commons</a>.
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The tricky business of property development and GST credits

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GUEST OBSERVATION
Despite what you may think, that is not a rhetorical question.
The <a href="https://www.smartcompany.com.au/finance/tax/41486-ato-data-matching-targets-online-selling">Australian Tax Office</a> is a large federal government agency that comprises about 15% of the Australian Public Service, and has around 24,000 people in more than 60 locations around Australia. It’s a large organisation by any measure. Reinventing any entity that large is no mean feat – and it won't happen quickly.
Some may question why a country of 23 million people needs a tax agency that large. Well, our tax system is complex (way too much so), and the ATO has many taxes to administer. However, while the size itself of the ATO is one thing, how it operates is a whole other issue.
Tax Commissioner Chris Jordan is looking at how the ATO can reinvent itself to make it simpler and easier for people to comply with their tax obligations and to make the ATO a more responsive and “user-friendly” agency. These are not platitudes from the Commissioner; he means it.
In a recent speech, the Commissioner said that with the Coalition government's "open for business" mantra, the push for productivity increases and de-regulation, the ATO must be able to show improvements in efficiency and reductions in red tape. Jordan said he has promised government he will do everything he can "to improve the tax and super experience in Australia – making it simpler and easier to comply". He said he has also promised to change the culture of the ATO and is required to report back to the Assistant Treasurer regularly on that front.
The Commissioner said that building trust in tax administrations was critical to the success of tax systems.
Jordan said that when he was asked to take on the role, he was aware of feedback that despite best intentions, the ATO had become isolated from some of its key stakeholders and segments of the community. Jordan said he knew that trust and confidence needed to be lifted and he was asked to work on relationships with government, other agencies, and, SMEs will be glad to hear, the business community.
The Commissioner said his "fundamental belief is that in order to deliver to government, the ATO must use its power legitimately, build trust in its judgment and demonstrate fairness and integrity". He said the ATO has to design and operate a system for the majority of taxpayers who do the right thing,rather than for the few who don't [Commissioner's emphasis]. Jordan said the ATO was asking itself "how do we design the system so that it suits the 95%, rather than a system designed for 5%?"
The Commissioner said the ATO’s answer to this complex situation is to reinvent itself, transform how it goes about its core business, and make it a contemporary and service-oriented organisation. He acknowledged that reinventing the ATO is a long-term journey — recognising that building trust in a tax administration is not a simple or quick effort.
Jordan said the ATO has to build on the positives of its culture like commitment to its role, to service and taxpayers, integrity and ethics, but, in a frank assessment, he said the ATO also has to “acknowledge the negative aspects of our culture like risk aversion, righteousness, silo mentality and bureaucracy”. SMEs and their advisers would certainly agree.
Jordan said the ATO's approach to accountability needs to change – "to be simpler, clearer and connected to reward and consequence". He said the ATO's measures "have to include views from others and be related to effectiveness and outcomes…We must put a much greater emphasis on how others judge our performance."
Integrity is about character, Jordan said. In terms of the ATO and the tax system, he said  it is about doing the right things consistently by all of the ATO’s stakeholders (e.g. government, business, taxpayers generally) — “safeguarding and future-proofing the system on behalf of the Australian community and dealing with taxpayers in a way that is fair and right in the long run”.
The Commissioner said these thoughts have helped shape the ATO’s strategic directions.
Recognising that time is money for all businesses, Jordan said the ATO is focusing on early discussions between the taxpayer and relevant tax officers responsible for making decisions. These early, face-to-face talks, he said, aim to get to the core issues more quickly and short-circuit unproductive paper wars between the parties. SMEs will no doubt be delighted if the paper war can be won!
The ATO is also seeking to bring to a sensible close unnecessarily long running cases and audits — “recognising when we reach the point of diminishing returns or an impasse”, the Commissioner explained. Of course, if agreement or settlement cannot be reached, the courts will need to decide. In a refreshing stance, the Commissioner said that continuing dialogue for five years or more is not productive, prevents closure and damages trust.
The ATO is at the centre of the tax world in Australia. It deals with millions of taxpayers and their tax issues every day. Overshadowing all of that is the tax law. The Commissioner said it is important to him that the ATO is able to influence law design. He said the ATO has the advantage of seeing what works and doesn’t in practice and can use those insights to advise Treasury. The ATO’s new Integrated Tax Design Unit seeks to ensure requests to Treasury are prioritised and presented from a whole-of-system perspective. Jordan said there is limited capacity to change law and the ATO is looking at other ways to resolve issues.
Seeking the community’s perspective through consultation – knowing what problems exist and their ideas for possible solutions is, in the Commissioner’s view, vital in order for the ATO to provide the right advice to Treasury.
SMEs and businesses generally have avenues to make their views known, for example as I explained in my recent article about the Inspector-General of Taxation’s new work program. And the ATO itself is asking small business owners to join its new small business consultation panel to help boost the ATO’s small business expertise. In addition, the government has asked the Board of Taxation to identify features of the tax system that are hindering SMEs.
There is a lot happening at the ATO and in the tax system. The Commissioner says he is “going to do what I can to make improvements to the tax and super experience by reinventing the ATO”.
“I want the ATO to be trusted and respected…where people choose to comply and we make it as painless as we can. In the end, I want confidence in the ATO and the tax system so that there is conscious willing participation, hopefully higher than the current 95%.”
Can the ATO reinvent itself? The sceptics may have doubts, but the Commissioner is clearly serious and appears intent on giving it “a red hot go”. He has already got some runs on the board, so watch this space.
Terry Hayes is the editor-in-chief of tax news reporting at <a href="https://www.thomsonreuters.com.au/" target="_blank">Thomson Reuters</a>, a leading Australian provider of tax, accounting and legal information solutions.
This article first appeared on <a href="https://www.smartcompany.com.au/" target="_blank">SmartCompany.</a>
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Terry Hayes

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