Issue 129, 16 June 2006

Welcome to the latest issue of Thomson’s Tax & Accounting Insight, your free news service for tax and accounting professionals.

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Articles in this edition include:

• Tax Office compliance activities — an update

• Consultations on anti-money laundering package in mid-June 2006

• ASIC tips for choosing a financial adviser

• Thomson special offers and product alert

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Tax Office compliance activities — an update

In a recent address to a City of Sydney Law Society tax seminar, Mr Michael Cranston, Acting ATO Deputy Commissioner, Case Leadership, Large to Medium Businesses, commented on some of the Tax Office’s compliance activities. He emphasised what he said were several key consistent messages the Commissioner had made in a number of speeches this year:

• it is important that the community believes that the Tax Office is fair, certain and legitimate because the success of any tax system depends on the willingness of people to voluntarily comply with their tax obligations;
• the self-assessment system is not without risk. Some taxpayers do not comply because they find it difficult or choose not to comply and others simply do not understand their obligations under the law;
• under the Tax Office’s compliance model, the Tax Office aims to understand the cause of non-compliance and develop proportional responses. The Tax Office differentiates its responses according to the causes of the risk. If there is a lack of understanding of a particular obligation, the Commissioner said the appropriate tax strategy is to provide education and advice. If however, there is intentional disregard of the tax laws, the Tax Office will use enforcement action;
• the Tax Office responsibility is to administer the law in a way that instils community confidence. It therefore must at all times be professional, honest and transparent, treating people fairly and with courtesy;
• tax professionals play an essential role in maintaining the integrity and efficiency of the tax system. The Commissioner says they provide a key leverage point to influence taxpayer behaviour to voluntarily comply with the tax law as intended.

Mr Cranston said the Tax Office encourages proactive behaviour (e.g. check with their accountant/lawyer before buying or selling an asset) on the part of taxpayers (including making voluntary disclosures) in order to minimise their exposure to a tax audit and its consequences. He said the Tax Office is looking to develop tools to help taxpayers be proactive and to help their advisers help their clients to do so.

Small to medium enterprise (SME) taxpayers

In addition to marketing and education activities, Mr Cranston said the Tax Office is also entering into extensive consultation with tax agents to more effectively address income tax compliance risks for SME taxpayers. The Tax Office conducts reviews and audits and is increasing its use of sophisticated intelligence collection, for example, using AUSTRAC reports and other data mining and matching. Specifically, Mr Cranston said the Tax Office’s profiling activities include its economists analysing economic and income tax performance data to identify regular patterns over time and examine inconsistencies in tax performance compared to business profitability, industry benchmarks and prevailing economic conditions. These help establish an industry picture or trend for comparison with individual SME taxpayers.

SME compliance issues

It is interesting to note that Tax Office research shows that the SME market (i.e. annual turnover of $2 million–$100 million) includes 94,500 business groups of which 94% are privately owned. Mr Cranston said Tax Office compliance activities over the past few years have detected patterns of non-compliance amongst some privately held groups and the individuals who control them. This includes:

• basics such as poor record-keeping and non-lodgment;
• more sophisticated tax planning around CGT, losses, shareholder loans and service trusts; and
• inadequate governance arrangements and internal controls relating to tax decision-making. Mr Cranston said the Tax Office encourages businesses to include tax risk management decisions in their governance processes.

Losses

According to Mr Cranston, the Tax Office has found that, while in many cases losses genuinely reflected the economic performance of a business, it also detected instances of profit shifting, over-claimed expenditure and aggressive tax planning. For example, inappropriately claiming deductions or omitting income to create a loss, misclassification of losses and utilising loss arrangements to minimise tax where such losses are artificial and have no economic basis.

Capital Gains Tax (CGT)

The Tax Office has come across the following issues concerning CGT:

• Some businesses appear to have misinterpreted the CGT provisions, often in relation to the value of assets and liabilities brought to account for the small business concession net asset value calculation.
• Other businesses failed to seek appropriate advice before re-arranging their financial and business affairs.
• Business structures have been manipulated to obtain CGT concessions or reduce exposure to CGT.
• Aggressive tax arrangements have been entered into before selling a business to inflate the cost base of assets in order to artificially reduce the CGT liability via the demerger, share buyback and consolidation provisions.

Consolidation

Regarding consolidation, the Tax Office has identified incorrect company memberships by comparing internal data and ASIC data with group notifications. It has also identified incorrect application of loss rules such as the continuity of ownership rules, same business tests and the use of old grouping rules by non-consolidated groups. The Tax Office has also seen the incorrect application of the cost setting rules, which has led to an uplift of asset values and manipulation of market values. This may result in inflated depreciation claims or reduced capital gains.

Division 7A (shareholder loans)

Due to the prevalence of privately owned companies in the SME market, Mr Cranston said the Tax Office’s compliance activities continue to focus on loans and payments by private companies that have the effect of distributing company profits to shareholders in a non-taxable form. He said that, despite recent legislative amendments allowing further time to correct non-complying shareholder loans, the Tax Office continues to detect significant numbers of private companies failing to meet the formal requirements of the provisions, for example, shareholder loans not documented even though they effectively distribute profits. The Tax Office has also seen the use of aggressive tax planning involving restructuring and the use of corporate limited partnerships to circumvent the application of this area of the law.

Tax risk management

Mr Cranston said large business is improving and building on linking tax risk management with good corporate governance. He said the Tax Office’s aim is to support large businesses in taking this approach by providing services that will help boards to make decisions about tax risk management. The Tax Office is focussing on three areas:

• Where a company board is considering major complex business events or transactions, subject to certain criteria being met, the Tax Office will work with the company to identify the issues and adopt a whole of Tax Office approach to resolving them within timeframes that meet the company’s business needs.
• For the largest company groups, the Tax Office is developing a forward-looking approach to compliance (e.g. forward compliance agreements, especially regarding GST issues), with the objective of achieving greater certainty for both the company and revenue collections.
• Mr Cranston said, following a review conducted by Mr Kevin Burges that was subsequently subject to consultation with corporate tax managers in the Corporate Tax Association, a number of initiatives have been identified and are currently under development. He said a key theme of these initiatives is that the Tax Office needs to improve the quality of its communication during its audit and advice processes. Mr Cranston said this involves the engagement of more senior tax officers at regular meetings to review progress and effectiveness of these relationships.

Mr Cranston said the Tax Office suggests that advisers encourage their clients to consider the following steps to ensure that tax decisions are an integral part of running their businesses:

1. Identify key exposure to tax risk: review the Tax Office’s published compliance program and conduct a prudential review if necessary.
2. Implement appropriate strategies to mitigate risk: get independent expert advice you can trust.
3. Take action to address unacceptable risks now. Mr Cranston said examples would include use of Tax Office products, and voluntary disclosures.

This article appeared in Thomson’s Weekly Tax Bulletin (Issue 23, June 2006).

Weekly Tax Bulletin is the most comprehensive and informative tax news service available in Australia. It provides, in clear terms, the most accurate record of tax and related developments. Weekly Tax Bulletin covers everything from cases, new legislation, tax rulings and major announcements to detailed practitioner articles. Special coverage is given to year-end tax planning, the Federal Budget and newly introduced tax legislation, as well as major tax developments.

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Consultations on anti-money laundering package in mid-June 2006

The Minister for Justice and Customs, Senator Chris Ellison, has announced that the proposed second period of consultation on the draft anti-money laundering reform package will now commence in mid-June 2006. He said that, following the extensive process of consultation between the Government, industry representatives and other interested parties, the Government had received more than 120 submissions. Senator Ellison said he had also had the benefit of a report from the Senate Legal and Constitutional Committee Inquiry into the Exposure Draft of the Anti-Money Laundering and Counter-Terrorism Bill 2005.

‘While we are close to an agreed position, a small delay in releasing the revised Bill will help to ensure that we get the balance right’, he said.

The Minister said the Government has reviewed the recommendations of the Committee, along with submissions from industry, and is ‘fine-tuning the Bill and Rules’.

To enable full consideration of the views of industry and the Senate Committee, Senator Ellison has delayed commencement of the second consultation period until mid-June 2006. ‘In the next 2 weeks I will be discussing first hand the experiences of the US and UK in implementing anti-money laundering reforms,’ Senator Ellison said. ‘The feedback I gather during my discussions will also inform the draft legislative package’, he said.

Source: Minister for Justice and Customs media release, 29 May 2006

This article appeared in Thomson’s Weekly Tax Bulletin (Issue 23, June 2006).

Weekly Tax Bulletin is the most comprehensive and informative tax news service available in Australia. It provides, in clear terms, the most accurate record of tax and related developments. Weekly Tax Bulletin covers everything from cases, new legislation, tax rulings and major announcements to detailed practitioner articles. Special coverage is given to year-end tax planning, the Federal Budget and newly introduced tax legislation, as well as major tax developments.

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ASIC tips for choosing a financial adviser

ASIC has provided some basic tips for people choosing a financial adviser, such as only dealing with professional financial advisers and planners who hold an Australian financial services licence (AFSL). Otherwise, ASIC says they must be employed by or authorised to represent a business that holds an AFSL.

ASIC says it is important to first consider an individual’s financial situation and goals and then shop around for a suitable adviser. ASIC suggests speaking to a few financial advisers from different firms before deciding who to get advice from. ASIC recommends asking each adviser to provide their financial services guide, which they must produce by law. Organisations such as the Financial Planning Association (FPA) or CPA Australia can also refer a person to a member financial adviser in the person’s local area.

The regulator also suggests asking about the financial adviser’s experience/qualifications and whether there are any restrictions on the financial products that the adviser can recommend. ASIC warns that advisers who receive commissions for investments in particular financial products have a potential conflict of interest. Even if the recommended product is suitable, there may be other less expensive alternatives that are just as good or even better, ASIC says.

ASIC’s Executive Director of Consumer Protection, Mr Greg Tanzer, urged anyone thinking about getting financial advice to get a copy of ASIC’s free booklet, ‘Getting Advice’, at <www.fido.asic.gov.au/fido/fido.nsf/byheadline/Getting+good+advice?openDocument>.

Source: ASIC media release No. 06–173, 31 May 2006

This article appeared in Thomson’s Weekly Tax Bulletin (Issue 23, June 2006).

Weekly Tax Bulletin is the most comprehensive and informative tax news service available in Australia. It provides, in clear terms, the most accurate record of tax and related developments. Weekly Tax Bulletin covers everything from cases, new legislation, tax rulings and major announcements to detailed practitioner articles. Special coverage is given to year-end tax planning, the Federal Budget and newly introduced tax legislation, as well as major tax developments.

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