Benchmarks and other tax matters

As a postscript to our November 2011 newsletter article on the use by the Australian Taxation Office (ATO) of industry benchmarks as a tax audit selection tool, the Inspector General of Taxation (IGT) has now announced a review of this practice.

The IGT states that concerns have been raised by both taxpayers and tax agents as to whether:

a large number of compliant taxpayers are unnecessarily being targeted and thereby are being subjected to unnecessary compliance costs;
the benchmarks adequately account for variations among businesses in the same industry, with some taxpayers expressing the view that no two businesses are alike;
it is appropriate for the ATO to use these benchmarks as a basis to issue amended or default assessments or should the ATO, before taking such action, examine taxpayer specific information such as unexplained asset accumulation or personal expenditure; and
the ATO’s expectations in relation to small business record keeping are reasonable and clearly communicated.

The IGT is seeking submissions from taxpayers who have been subject to compliance activities involving the use of industry benchmarks.

Director’s Personal Liability for Tax Debts

In another backflip, the proposed expansion of the Director Penalty Regime (September 2011 newsletter) has been put on hold as a Parliamentary committee review found that the proposed legislation gave the Commissioner of Taxation powers that were never intended.

The basis of the proposed expansion was that the Commissioner could make a director personally liable for a company’s PAYG withholding and superannuation guarantee contributions where such liabilities remain unpaid and unreported for a period of three months after the due date.

The concern was, while the proposed legislation was designed to stop fraudulent phoenix company activity, it also caught honest directors who had acted in good faith.

The Government intends to reintroduce the legislation to Parliament after further industry consultation.

Contractor v Employee

As reported in our July 2011 newsletter, taxpayers who operate under contract arrangements were to be the subject of an ATO test case program. This was in response to the proliferation of contracting arrangements particularly in the building industry.

A recent case involved a company which engaged contractors to provide interpreting and translating services to clients. The company treated the interpreters and translators as independent contractors rather than employees and accordingly, did not make superannuation contributions under the superannuation guarantee provisions. The Commissioner of Taxation disagreed with the company and contended that the contractors were employees within the meaning of the term under the relevant superannuation legislation.

A single judge of the Federal Court agreed with the Commissioner and concluded that the contractors were employees for superannuation guarantee purposes and that the company had an obligation to make mandatory superannuation contributions on their behalf.

A person who is an independent contractor at common law may still be considered an employee under the superannuation guarantee provisions.

The Commissioner’s view is that an individual will be an employee for superannuation purposes where the conduct of the parties to a contract arrangement indicates that:

the individual is remunerated (either wholly or principally) for personal labour and skills;
the individual must perform the work personally (ie there is no right of delegation); and
the individual is not paid to achieve a result.

It is also worth noting that independent contractor/employee cases are also being heard by the Fair Work Australia tribunal. If the tribunal rules that a person is an employee then this will have implications for an employer in respect of PAYG withholding and superannuation guarantee obligations.

High Net Worth Individuals

For a number of years the ATO have had an ongoing audit program targeting high net worth individuals. On 7 December 2011 the ATO gazetted a notice that it will request and collect information from 13 marine insurance companies on the ownership of pleasurecraft.

The exercise will identify individuals who have insured a pleasurecraft with a value of $25,000 or more. Owning a pleasurecraft valued at $25,000 does not ordinarily mean that the owner is highly wealthy. However, according to the ATO it may be an indicator of wealth which when combined with other wealth indicators will identify individuals whose affairs should be reviewed under the “wealthy Australians” program.

A wealthy individual was originally defined by the ATO as an Australian resident who, together with associates effectively controls $30 million or more in wealth. In a sign of the tough economic times, the ATO is now targeting individuals with $5 million or more in wealth.