The Australian Taxation Office says it will remain “empathetic” to the plight of struggling SMEs still feeling the GFC hangover, but has warned it will be cracking down hard on tax abuses around trusts, the cash economy, the GST and fraudulent refunds.

The details of the ATO’s tax targets for the 2010-11 were revealed with the release of its official 2010-11 compliance program.

While the ATO and the Government has extended the Small Business Assistance program created at the height of the GFC to support business owners with tax debts, the Tax Office admits in its compliance program guide that the GFC “created an environment where some sought an unfair advantage” with the under-reporting or non-reporting of income.

“Some businesses, particularly small-to-medium enterprises involved in international markets, have reported difficult trading conditions in the past year. In talking with businesses and their agents, we have found that this tougher environment requires our empathy – and vigilance against emerging risks.”

That vigilance will see the ATO crackdown in a wide variety of areas across the small business space.

Here are the key areas the ATO will target:

Trusts

While the ATO has acknowledged the uncertainty created in the area of tax laws by recent changes to the way unpaid present entitlements are treated (they will now be seen as loans from a corporate beneficiary to a trust and taxed as such), it still unhappy with the way trusts are being used by SMEs.

“We are looking to see a marked improvement in the completeness and accuracy of reporting by trustees, both about the income of the trusts and how that income was distributed to beneficiaries.”

Division 7A

The crackdown on trusts feeds into the ATO’s continued crackdown on Division 7A, which covers shareholder loans. The ATO claims many SMEs still do not understand their obligations in this area, with common mistakes including not correctly repaying loans, not declaring loans as taxable income, and not amending tax returns when a deemed dividend is identified.

The ATO plans to make between 450-550 calls and letters on the topic, and is likely to perform 40 audits.

Cash economy

The ATO plans to review and audit the affairs of 26,000 micro businesses (turnover under $2 million) as part of its continuing cash economy crackdown. What the tax man is particularly looking for is instances where SMEs pay cash-in-hand wages, skim some or all of the cash takings or run part of their business “off the books”.

Another part of this effort will be the extension of the ATO’s business benchmarking program.  The ATO has developed benchmarks for 100 industries, such that they now have an idea of the sorts of income and deductions companies in those sectors should be lodging. Around 100,000 businesses who fall outside the benchmarks can expect to be contacted by the ATO.

Business Activity Statement fraud

The ATO says it will “verify” over 48,200 Business Activity Statement refund claims from micro enterprises in the next 12 months as it ramps up its monitoring of fraudulent BAS statements, with a particular focus on the incorrect reporting of property sales and issues with margin schemes.

“Our computerised checks are now expanded to identify possible fraudulent activity in BASs to stop those refunds from issuing. Where we identify fraudulent claims we will prosecute taxpayers.”

Employer obligations

The ATO says it will highlight concerns about employers not meeting their obligations to make tax and superannuation payments on behalf of the workers with employer groups and employers themselves in the wake of the GFC.

“Some employers deliberately avoid their obligations by paying cash wages and avoiding payment of superannuation guarantee.”

The ATO expects to act on 17,500 employee complaints about unpaid superannuation and will undertake 800 compliance reviews with particularly focus on the road freight transport, automotive repair and electrical services industries.

Companies with turnover of $100-250 million targeted

In 2008-09 the ATO was given the task of increasing their scrutiny of companies with $100-250 million in turnover over the following four years, and the program will continue into 2010-11.

“We are concerned that some entities may be demonstrating risks in areas such as international transactions, capital gains tax, trusts and tax-reconciliation items,” the compliance program guide states.

Claiming losses

The ATO says its research shows some small businesses are claiming losses they are not entitled to and any micro business that posted a loss for the first time in 2009 will be contacted and given information about “incurring and using losses.”

“We will also review the tax affairs of businesses using losses to ensure that tax payable is not incorrectly reduced in current or future years.”

Fringe benefits tax

The ATO remains concerned about problems in the area of fringe benefits tax and says many taxpayers are failing to indentify where FBT is actually payable, particularly in the area of motor vehicles. 
“Luxury car purchases are a particular area of focus. We have identified cases where closely‑held entities are claiming 100% or near 100% business usage for luxury cars but further investigation finds that the claims are not substantiated with valid log books.”

Capital asset sales

The ATO has warned “financial pressure flowing from the economic downturn” could increase the risk of tax problems in the area of capital asset sales.

“We will continue to provide guidance on the correct application of the law. We will also monitor incorrect allocation of capital losses as revenue losses, and vice‑versa, and the transfer of capital losses between entities or from offshore.”