The tax risks facing private businesses, wealthy individuals, and Directors

The ATO reveals why they might target you for a tax audit

You may have missed it, but the ATO released its annual ‘What attracts our attention’ report in the privately owned and wealthy groups sector on 13 June 2017.

This announces, in plain and public language, what attracts their attention for a tax audit of privately owned businesses and wealthy individuals.  These include businesses turning over $2 million per year or individuals with a net wealth of more than $5 million.

They listed six key reasons why a tax audit might come your way:

  1. tax or economic performance not comparable to similar businesses
  2. low transparency of tax affairs
  3. large, one-off or unusual transactions, including shifting of wealth
  4. history of aggressive tax planning or regularly adopting controversial interpretations of the law
  5. lifestyle not supported by after-tax income
  6. accessing business assets for tax-free private use.

What does this mean for me?

Is your tax or economic performance comparable to similar businesses? The ATO has statistics on all businesses in all industries.  If there are changes in performances between years, they will know and compare it the performances and benchmarks for similar businesses. These changes need to be reasonably explained with reference to external and internal factors, if you want to avoid the risk of a tax audit.

How transparent are your tax affairs? You should ensure that all types of returns (tax, GST and FBT) are lodged on time.

Have you engaged in any large, one-off or unusual transactions, including shifting wealth? This may well be cause for the ATO to initiate the first steps of a tax audit. Maintaining documentation and ensuring that transactions are commercial and are on an arm’s length footing is crucial in this regard.

Is your lifestyle supportable by your after-tax income? Directors and shareholders of businesses should be mindful of what is reported in their tax returns as the ATO can cross check this with your asset holdings. They can do this using records held by ASIC, land titles office, motor registries, boat registries, and more. In other words, your lifestyle is evident to them, and such discrepancies are generally the most common triggers of tax audits.

There is also a huge list of more specific items that can attract the ATO’s attention. Don’t panic. To reduce the risks of a tax audit or to deal with the tax audit process, contact your tax accountants at Calibre Business Advisory.

Former Director liable for a company’s unpaid tax

Becoming the Director of a company brings its own set of tax risks. This is highlighted by the DCT v Smith Court Case.

What happened?

In the NSW Supreme Court, the Deputy Commissioner for Taxation argued that a former non-executive Director was liable under a Director Penalty Notice (DPN) for the company’s unpaid PAYG liabilities.

The non-executive Director had managed CCIA Employees Pty Ltd, which was incorporated as part of the ‘Medica’ group. He did not have any involvement in the day-to-day running of CCIA Employees, as he managed other companies in the group. But he did direct funds from the more profitable companies in the group to CCIA so as to pay wages, and was informed by the CFO that wages and tax liabilities were under control – that is, until just prior to April 2013, when the CFO informed him that the company was behind on payments and was making arrangements with the ATO.

A DPN was issued in April 2013. The Director resigned in August 2013. When the company did not pay its instalments under its arrangement with the ATO, a second DPN was issued in January 2014, and court proceedings then commenced.

What does it mean for me?

The NSW Supreme Court held that the Director was liable. This is a significant decision, because the Director was still liable even though he had relied upon assurances from the company’s officers that the company’s PAYG liabilities were ‘under control’ — he had not checked whether they had in fact been satisfied.

Moreover, the Director was still liable even though he had taken steps to cause the company to achieve a payment arrangement with the ATO — because ultimately the company did not pay any instalments.

Do you know how far your liabilities extend in you are a Director? They can indeed extend even after you have left the company. Put simply, you need to think twice if you are being asked to be a Director of a company, particularly at a non-executive level, despite the attractiveness of the position.  You need the most accurate advice.

Indemnities should be sought and insurance must be looked. In fact, often when a foreign company sets up in Australia, they will ask a person in Australia (their accountant or lawyer, for example) to act as a director because it is convenient for them – but are you aware of the potential risks and dangers?

Contact your business advisor at Calibre to assess the benefits and risks of being a Director.

Important Disclaimer: Readers should not act solely on the basis of the material on this page. Items herein are general comments only and do not constitute or convey advice. Legislation and proposals of legislation are also subject to constant change. We therefore recommend that formal advice be sought before acting in any of the areas. This news article is issued as a guide to the readers. Calibre Business Advisory Pty Ltd and its associated entities disclaims any losses that may be incurred as a result of the reader undertaking any action based on this article.