ATO scrutiny of tax advoidance


24th May, 2021

Here’s what the ATO is likely to be looking at this EOFY

The ATO was preparing to ramp up its oversight of privately owned and wealthy groups before COVID-19 arrived. Now it’s moving back to more traditional tax time behaviour.

2020 saw Australia enter an almost entirely new economic landscape following the nation-wide lockdowns and border closures caused by COVID-19.

The ATO paused much of its business-as-usual work, including audit and compliance activities, as the focus turned to keeping individuals employed and small to medium businesses operational. This pivot helped keep Australia in a strong economic position, and so in 2021 the ATO will return its focus to traditional tax time activities.

These include the reinstatement of audits and the continuation of their new tax performance programs aimed at Australia’s largest companies and high wealth individuals.

Originally announced in March 2020, the ATO has expanded the scope of its Tax Avoidance Taskforce by introducing three new oversight and support programs called ‘Top 500’ (previously Top 320), ‘Next 5000’ and ‘Medium and Emerging Private Groups’.

These programs were created with the primary intent of giving the community confidence that those taxpayers the ATO terms as ‘privately owned and wealthy groups’ are paying the appropriate amount of tax and not engaging in tax avoidance activities.

They are also designed to provide tailored tax governance support so these groups can identify and correct any issues before they lodge their tax return, thereby mitigating future risks and avoiding the need for the traditional review and audit.

Involvement with the programs is not required by law, however refusal to work with the ATO in a transparent and open manner may result in enhanced scrutiny.

Top 500 Program

The ATO defines the Top 500 as private companies who:

  • have over $350 million in turnover, regardless of asset value
  • have over $500 million in net assets, regardless of turnover
  • have over $100 million in turnover and over $250 million in net assets
  • involve a company with total business income of over $250 million and are included in the large company tax gap population
  • are market leaders or of specific interest

The Top 500 represent 0.2 percent of Australia’s private groups, yet are responsible for 10 percent of tax. However, a report found that there was a shortfall of $772 million in expected tax in 2016/17, prompting the increased interest and scope of this program.

Next 5000 Program

The ATO defines this group as:

‘Resident individuals who, together with their business associates, control net wealth over $50 million.’

This program offers a Streamlined Assurance Review which uses the ‘justified trust’ methodology to assess whether an appropriate tax governance framework is in place. If the ATO is satisfied that one exists, future reviews will be reduced.

Medium and Emerging Private Groups

These groups are defined as:

‘Private groups linked to Australian resident individuals who, together with their associates, control wealth between $5 million and $50 million, and businesses with an annual turnover of more than $10 million, that are not public or foreign owned and are not linked to a high wealth private group.’

As this group represents about 97 percent of the total private group population, the ATO will primarily focus on larger businesses or those considered higher risk, and those experiencing rapid growth or considering offshore expansion.

As well as offering support and risk mitigation advice, the ATO will use this program to better understand the different types of operating environments, and to identify trends and tax risks.

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How does the ATO choose who to audit?

While the majority of businesses do the right thing, research by the ATO has shown that a small portion of high wealth groups and tax advisors engage in risky and potentially illegal behaviour by entering into aggressive tax planning arrangements.

To counteract this, recent years have seen the ATO increase its data-matching capabilities, drawing information from sources including banks, financial institutions and other government agencies.

This data is then compared to the information the ATO already has on file and can identify if an individual or business is not reporting all their income.

Besides data-matching, other behaviours that can trigger the attention of the ATO include:

  • Unusual or large one-off transactions
  • Reported financial performance is not comparable to similar businesses
  • Individual lifestyles not supported by after-tax income
  • Complex business structures
  • Regular reporting of operating losses

These triggers do not automatically mean that a business is intentionally doing the wrong thing, but could indicate that mistakes are being made.

Common mistakes that the ATO sees during tax time include:

  • Poor bookkeeping, such as incomplete cash register records or missing invoices
  • Not paying superannuation and leave entitlements to subcontractors that are engaged under similar circumstances to employees
  • Inconsistent measuring and valuing of inventory
  • Not understanding what deductions can be claimed

READ: Top 10 common GST mistakes in BAS reports

Fun fact: Our invoicing software turns quotes into invoices, calculates GST and pre-fills customer details

Regardless of the size of your company, the best way to avoid an audit is to make sure you get your record keeping right from the start and can readily explain any inconsistencies, shore up your tax governance framework, and if you are unsure about anything — including whether you or your business falls within the scope of the ATO’s three programs — get advice from your accountant.

You can search for an accountant in your locality by using MYOB’s Find an Advisor search directory.