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You’re wealthy and we know it

Tax Telegraph, September Issue

You’re wealthy and we know it

On 19 July 2012 the Australian Taxation Office (ATO) released the Compliance Program for the financial year 2012-13. The compliance program provides an insight into the ATO’s issues of concern and focal points for the coming financial year. The program also details how the ATO plans to address these issues

Wealthy Individuals and in particular the individuals that the ATO defines to be High wealth individuals (HWI) need to be aware of where the ATO will focus in the upcoming year and ensure that they as taxpayers (and if relevant their family groups and businesses) are across their compliance obligations.

The ATO defines a HWI as an Australian resident taxpayer who, together with their associates, effectively controls more than $30 million in net worth. A wealthy individual is defined as a taxpayer who effectively controls $5 million to $30 million in net worth. While HWIs and wealthy individuals have been on the ATO’s watch list for a long time, the 2012-13 Compliance Program demonstrates the Commissioner’s continued focus and determination to ensure that these individuals comply with the tax system and pay their fair share of tax.

The compliance program is split into four types of taxpayers: individuals, micro enterprises, small-to-medium enterprises and large businesses. This article focuses on the prominent issues that are likely to impact on HWIs and wealthy individuals.

Participation of wealthy individuals

The ATO will be launching a program to continue to identify HWIs and engage with them to ensure they understand the ATO’s compliance approach. This program will focus on a review of major business transactions and changes to financial ratios to ensure correct treatment in both tax returns and activity statements. The ATO is currently monitoring 2,600 HWIs and in the 2012-13 year they expect to complete around 200 reviews and 50 audits of HWIs. For wealthy individuals the ATO expects to complete around 120 reviews and 50 audits.

Use of Trusts and the establishment of a trust tax force

The ATO is concerned how trusts are being used by taxpayers with in respect of non-compliance and schemes which actively set out to avoid or defer the payment of tax. The ATO will use information matching and relationship mapping systems to focus reviews and audits on groups involved in potentially manipulative practices.

Tax file Number (TFN) matching will also be used to link distributions with the trust and their respective beneficiaries. What is of particular concern though to HWIs and wealthy individuals is the establishment by the ATO of a ‘Trust Tax Force’ together with Project Wickenby to respond to aggressive trust-related tax avoidance and evasion schemes.

The ATO aims to contact approximately 1,000 trustees and beneficiaries about issues including compliance with TFN withholding rules, reporting of trust tax file numbers, correct distributions and lodgement. Further, they expect to undertake around 30 reviews and at least 15 audits of aggressive trust arrangements.

Division 7A

Division 7A of Part III of the Income Tax Assessment Act 1936 deems a dividend to have been paid to a shareholder of a private company when one of the following events occurs in relation to a shareholder or their associate:

  • An amount is paid
  • An amount is lent or
  • A debt is forgiven.

The focus on this year’s compliance program will be to engage in a more active verifications strategy through letter and phone correspondence to ensure appropriate loan agreements and documentation are in place. There is also a continuing focus on Division 7A with respect to Unpaid Present Entitlements in light of Tax Ruling 2010/3 and Law Administration Practice Statement 2010/4 and the use of other types of entities such as the use of corporate limited partnerships to avoid the private company definition.

Capital gains

This year’s compliance program will focus on the following issues:

  • Incorrect classification of gains as capital instead of ordinary income to obtain tax advantages
  • Company structures which are created purely for back-to-back rollovers which achieve a deferral in tax
  • Ensuring small business concessions are correctly claimed
  • Ensuring that the Same Business Test and Continuity of Ownership Test are appropriately complied with to ensure any carry-forward losses are correctly claimed.

Tax Avoidance Schemes

The ATO has noted that it is the higher income individuals that are more likely to be caught up in tax avoidance schemes. The ATO aims to address this issue by focusing on widely-marketed financial products that promise substantial tax benefits.

The ATO encourages investors in this regard to take the same precautions as they would with other major financials decisions and to check if the ATO has a product ruling that will affect the investment.

Further, investors are encouraged to seek advice from someone not selling the product and if they have a genuine concern that the tax benefits promised are not available under the law to contact the ATO.

Overseas interests and international tax compliance

HWI and Wealthy individuals should be aware that the ATO is focusing on the following issues:

  • Foreign sourced income derive by Australian residents
  • Transactions involving Australian taxable property by foreign residents
  • Payments subject to non-resident withholding taxes
  • The use of secrecy jurisdictions and preferential tax regimes.

Closing Remarks

It is evident from the ATO’s 2012-13 Compliance Program that HWIs and Wealthy Individuals are again on the ATO’s radar. Any HWI or Wealthy Individual who uses trusts within their existing structures should be particularly concerned with the launch of the new ‘Trust Task Force’ and ensure that if any aggressive positions are taken in the 2012-13 income year that they seek the appropriate advice.

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