Capital Gains Tax (CGT) Audits

1. CGT Audit
2. Goods and Services Tax (GST) Audit
3. PAYG Audit
4. Company Tax Audit
5. Payroll Tax Audits
6. Land Tax Audits

1. CGT Audit

Individuals

Taxpayers that are identified as high risk because they have not disclosed a capital gain, significantly under-reported a gain or failed to lodge a return will be audited.

The ATO will compare tax returns with information from state revenue offices and other government agencies, the Australian stock exchange and share registries as well as information reported by managed funds.

The ATO will examine approximately 6000 at-risk cases this year.

Micro-businesses

ATO compares information from external sources with information provided in returns to ensure that capital gains and losses are being reported and claimed appropriately, particularly for transactions that involve:

• Property;
• Shares;
• The chartered boat industry; and
• The fishing industry.

The ATO monitor asset disposals and transfers particularly to superannuation funds. The aim is to identify cases that involve aggressive tax planning, inappropriate valuations or complex structures designed to avoid or minimise capital gains tax.

Small-medium Size Enterprises

The ATO will conduct reviews and, where necessary, audits to identify small to medium size enterprises that are deliberately manipulating their business affairs to minimise a capital gain or obtain a capital gain tax concession.

This year the ATO reviews are focusing on businesses that are:

• Setting up arrangements to reduce their capital gain when the business is sold;
• Claiming small business concessions when they do not satisfy the threshold requirement;
• Failing to report capital gains tax events;
• Using significant capital loss to offset capital gains; and/or
• Resetting the cost base of assets under consolidation, particularly where there have been significant capital gains or losses.

Large Businesses

The ATO is working to ensure that economic gains are reflected in taxable gains as appropriate. The ATO examines capital gains tax issues arising from mergers, acquisitions, divestments and capital rearrangements. When non-resident businesses dispose of their Australian assets and make a capital gain, the ATO takes action, where possible, to collect the appropriate amount of tax on that gain before sale proceeds are sent offshore.

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2. Goods and Services Tax (GST) Audit

Micro-businesses

This year the ATO will:

• Phone and/or visit micro businesses to check the accuracy of information submitted in 7,100 activities;
• Conduct 600 reviews and audits to deal with GST non-compliance in property transactions;
• Undertake approximately 780 comprehensive audits of businesses where the ATO believe there may be serious evasion and fraud; and
• Check 55,500 refunds to improve GST compliance.

Small-medium Size Enterprises

To improve GST compliance, this year the ATO will:

• Review businesses whose GST management practices have failed to keep pace with their growth;
• Check that public share floats and real property transactions have been properly reported; and
• Investigate small to medium enterprises that appear to have under-reported GST or over-claimed input tax credits.

Large Businesses

a. Refund Policy

The ATO will continue to monitor large GST refunds and undertake pre- and post- issue verification to ensure that the correct amounts are claimed.

b. Property and Construction

The ATO continues to look at claims that involve the use of the GST margin scheme to ensure that:

• Valuations for the GST margin scheme are not excessive and comply with the law; and
• Stamp duty, construction costs or other expenses are not used to inflate valuations for acquired property.

The ATO will examine transactions to ensure GST has been properly accounted for under the GST adjustment provisions such as:

• Adjustments for changes in credible purpose.
• Adjustment relating to the sale of a going concern and cessation of business.

c. GST Aggressive Tax Planning

In particular, the ATO is focusing on detecting aggressive tax planning arrangements designed to avoid or reduce GST payable, including:

• International arrangements, particularly where businesses restructure to artificially sever a connection with Australia;
• Financial supply arrangements designed to produce inflated input tax credit claims; and
• Second-hand goods arrangements that seek to circumvent the intended operation of the law.

d. Financial supplies

Specific areas that will attract the ATO attention this year are:

• Supplies of services to associated entities at less than market value;
• Recovery of GST on costs relating to mergers and acquisitions; and
• Recovery of GST using a fair and reasonable apportionment methodology.

e. Integrity of business systems

Some large businesses have failed to keep up to date their internal corporate governance processes and systems for GST. The ATO continues to help large businesses address this deficiency.

During the course of audits, the ATO will pay attention to:

• Transactions processed outside of the accounts payable or accounts receivable systems, classified incorrectly and not captured in GST control accounts;
• Incorrect GST formula defaults or GST codes;
• Failure to report GST control accounts for reconciliation with business activity statements;
• Failure to update GST capture and reporting systems when other business systems are changed;
• Inadequate exception reporting to detect process or system failure; and
• Failure to recognise an adjustment event – for example, early payment discounts for customers.

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3. PAYG Audit

Micro-businesses

This year the ATO will review approximately 3,700 cases where information reported against various employment benefit is inconsistent. For example: Where an employer is registered under a work’s compensation scheme but is not registered for PAYG withholding.

To improve compliance with superannuation obligations, this year the ATO is:

• Following up all employees’ claims that their employers have not offered them choice of superannuation fund or are not making superannuation payments on their behalf; and
• Auditing employers identified as being at high risk of not complying.

Small-medium Size Enterprises

This year the ATO will review approximately 440 cases where information reported against various employment obligations is inconsistent, for example:

• Where amounts claimed as credits by employees in their tax returns do not match the amounts reported by employers; or
• Where an employer is registered under a workers’ compensation scheme but is not registered for PAYG withholding.

The ATO will also review approximately 3,000 PAYG withholding cases where the ATO finds discrepancies between activity statements and payment summary statements.

Large Businesses

This year the ATO will review around 20 cases of inconsistent reporting by large employers.

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4. Company Tax Audit

Micro-businesses

Personal services income
The ATO is examining the status of personal services businesses to verify whether they legitimately pass one of the personal services business tests. The ATO pays close attention to deductions that are not allowed by the legislation. The ATO will review 270 taxpayers who may be subject to the alienation of personal services income legislation.

Losses
This year the ATO will:

• Review 200 claims for losses that may not be eligible to be claimed in the current year under the non-commercial losses rules;
• Complete the current reviews of a number of consolidated groups to identify incorrect consolidated memberships; and
• Continue the focus on the eligibility of participants in the boat charter industry to claim business losses.

Small-medium Size Enterprises

Losses
The ATO is continuing to review the large number of small to medium enterprises that generate and recoup losses as the ATO works to identify non-compliant practices such as:

• Claiming inappropriate and inflated deductions;
• Under-reporting income;
• Profit-shifting;
• Recouping losses but not taking into account changed ownership or the fact that a different business is being conducted;
• Misclassifying losses as capital or revenue;
• Using loss arrangements to minimise tax, where the origin of the losses is artificial and has no economic or legal basis;
• Attempting to use related-party losses outside of the consolidation regime; and
• Creating losses by incorrectly using the consolidation cost setting rules, or otherwise incorrectly applying the consolidation loss rules.

Large Businesses

Income and Deductions
The ATO is paying close attention to significant adjustments made to income and expenses, particularly in cases where profits are significantly reduced by tax reconciliation adjustments. The aim is to ensure that:

• Items of income are not improperly deferred or claimed as capital items; and
• Items of capital expenditure are not claimed as revenue deductions.

The ATO will also review large deductions for research and development, particularly in the banking and mining sectors.

Losses
This year the ATO is reviewing high-risk cases where businesses have declared losses, checking the:

• Validity of losses being carried forward;
• Origin of losses generated; and
• Origin of losses transferred into consolidated groups.

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5. Payroll Tax Audits

To ensure that employers are paying the appropriate premium, workers compensation law gives WorkCover and its licensed insurers a legal right to access an employer’s payroll records.

WorkCover uses advanced computer technology to review employers’ policy details, develop risk profile for identifying areas of high-risk for non-compliance, and target wage audits.

Employers must cooperate with these inspections. In particular, they must cooperate in making arrangements for the inspection to take place within a reasonable time after the initial request. If an employer does not comply with these requests they may be issued with an order under workers compensation law. If an employer still does not comply, they may be prosecuted and fined up to 500 penalty units (currently $55,000). Employers who have had payroll audits processed after January 2003 and have already paid additional premium and late payment fees in respect to deemed worker issues can apply to WorkCover to have their circumstances reviewed.

6. Land Tax Audits

The OSR has strategies to encourage landholders to register voluntarily if they become liable for land tax.

The OSR has a land record system that will be able to identify the owners of all landholdings in the state.

The OSR undertakes research and analysis of land records and other sources to identify landholders evading land tax.

The OSR takes enforcement action against landholders evading land tax and will impose back taxes and penalties to those landholders.

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