ATO’s data matching ramps up and focuses on SME reporting

This article was current at the time of publication.

The Australian Taxation Office (ATO) is increasing its scrutiny of small businesses’ tax affairs through the tax gap random audit program and its wider efforts to eradicate the black economy.

The regulator has an ever-growing bank of information at its fingertips and is actively investing in its data capability. 

It is increasingly able to crosscheck and risk assess the flow of funds within closely held groups.

This includes matching data from the taxable payments reporting system (TPRS), Single Touch Payroll (STP), land titles, motor vehicles and bank accounts against group structures to better identify incorrect reporting and unexplained wealth.

Data matching has highlighted that small business owners operating through companies and closely held structures may not be correctly reporting the use of company funds and assets by company directors, shareholders and their associates.

Compliance landscape evolves

The compliance landscape is changing for small businesses with the removal of deductions for unreported directors’ fees and increased reporting visibility through the TPRS and STP. 

We expect that the Modernising Business Registers program will also improve the quality of company and director information held by the federal government. 

In addition, the JobKeeper and Cash Flow Boost stimulus packages also resulted in many taxpayers bringing their lodgment and reporting obligations up to date.

These growing connections between different tax and transfer policies, reporting requirements and government agencies mean that the environment is hardening against those who seek to hide or extract income tax-free.

5 ways to comply

In its general guidance, the ATO outlines five ways to properly use company money or assets for private purposes:

1. salary, wages, or directors’ fees
2. repayments of a loan previously made to the company
3. a fringe benefit
4. dividends
5. a loan from the company.

The ATO’s detailed business record-keeping requirements can also assist in educating clients about its expectations for small business records and which can be used to develop good practices for your clients to make tax time easier.

The Tax Practitioners Board guidance on reasonable care requires that registered agents ascertain the client’s state of affairs and ensure taxation laws are applied correctly. 

The complexity of transactions and the client’s circumstances, including their level of sophistication and tax knowledge should be top-of-mind for practitioners.

Tax return time

It is also important to remember tax agents’ responsibilities and obligations when co-signing a taxpayer’s annual tax return for lodgment with the ATO. 

The tax return declaration requires that the return be prepared under information supplied by the taxpayer and that the taxpayer has provided a declaration stating that the information provided is true and correct.

The annual tax return appointment is a prime opportunity for tax agents to discuss the correct reporting and tax treatment of funds used across clients’ closely held groups. 

The goal is to ensure that money taken out of the company or use of its assets is properly accounted for as salary or wages, a fringe benefit, dividend or complying loan as required. 

Getting the basics right

Often, getting the basics right can help small business owners manage their funds. 

This can include setting up a separate bank account exclusively for the company’s income and expenses and keeping proper records to explain all company transactions, including all income, payments and loans to and from shareholders and their associates.

Finessing the situation

Other items to consider are:

• reviewing the company’s constitution and general meeting resolutions for any issuance of special classes of shares or payments to directors
• repaying any loans taken from the company or converting them into a complying loan before the company tax return is due or lodged
• ensuring complying Division 7A written loan agreements between the shareholder or associate and the company are in place and properly executed
• reviewing whether pre-Division 7A loans have been updated and may be captured by Division 7A where the terms are varied by extending the term of the loan or increasing the amount of the loan borrowed 
• determining the reasonableness of management or service fees for services rendered paid to a past or present shareholder or director or an associated person.

Helpful checklists

CPA Australia’s Division 7A and unpaid present entitlement (UPE) checklists provide public practice members with support to:

• determine if there is a current year deemed dividend
• check prior year complying loans
• assess interposed entities, guarantees and refinancing
• determine whether Subdivision EA of Division 7A applies.

Elinor Kasapidis is senior manager of tax policy at CPA Australia