Strings attached to the ATO's help

Strings attatched for ATO help The Tax Office has for many months been offering various forms of help to businesses that are suffering in the economic downturn. That help has ranged from things like offering 12-month interest-free payment arrangements for tax debts to the deferral of payment dates for activity statements. The Tax Commissioner also uses various discretions he has under the law to help out – for example, through remission of the general interest charge, and entering into payment arrangements with businesses.

In the current environment, the Tax Commissioner says he will adopt an open-minded (some might say flexible) approach when looking to enforce the tax laws and to collect tax due, and will take into account where taxpayers have a good compliance record.

But as I have said before, it is a two-way street.

The Commissioner is also able to compromise on a taxation liability to achieve the result of collecting the revenue. This compromise solution will not happen in every case, but may occur, in the words of ATO Second Commissioner Bruce Quigley, “where good management or administrative commonsense lead the ATO to conclude that the most efficient way in which to achieve the purpose of collecting taxation liabilities correctly payable is to reach a compromise”.

In other words, the Tax Office considers there is a balancing act at play in ensuring it is “fair but firm”. If a business is having difficulty managing its tax debts, and demonstrates a good compliance record, and if it has worked with the ATO to meet payment obligations, the Tax Office says it will help.

However, if a business is not demonstrating (and has not demonstrated) good compliance (for example, lodging returns or activity statements on time and paying past tax debts on time) and has been unwilling to work with the ATO, the Tax Office will take action to collect debt.

“We don’t want to punish taxpayers who are doing the right thing by rewarding those who are not,” Quigley said.

A case in point recently came before the Administrative Appeals Tribunal (AAT). A partnership was in the business of developing and selling residential units. Times were tough and it had trouble making sales, which meant its revenues were down. The partnership failed to disclose the sales of residential apartments in its Business Activity Statements (the sales were taxable supplies for the purposes of the GST Act) because it did not have the money to pay the GST. The Tax Commissioner imposed penalties totalling nearly $195,000 and the taxpayers sought review before the AAT.

The Tribunal upheld the penalties. It said that while it understood the partnership was in financial hardship (and the partners were trying to keep the business, which supported two families, viable), it had a poor compliance record as it had been audited twice before and found to have made other undisclosed taxable supplies.

The Tribunal’s message is a telling reminder to those who may find themselves in a similar situation. It found the taxpayers “… had made a deliberate decision to give false information to the [Tax] Commissioner. No mitigating factors exist. In particular they could have always negotiated with the Commissioner regarding the payment of tax. Plus, they had a prior history of making false and misleading statements.”

Don’t let unpaid tax debts fester

It’s not rocket science, but as the above case shows, letting a tax debt stew away and grow, while the business frantically tries to get funds together to pay it, can have disastrous consequences – a much bigger tax debt and a black mark on its tax compliance record. The Tax Office is constantly telling businesses to let it know early if the company is having difficulties.

The message is that addressing tax debts earlier in the debt cycle, before they escalate and become unmanageable, is the preferable way to go. Besides actually securing an acceptable way to pay off the debt, this can also improve the prospects for the ongoing viability of the business.

While the Tax Office says its efforts are aimed at keeping businesses viable, it draws the line at those it considers have no capacity to survive. “Providing extra assistance to a business that is dead in the water isn’t doing anyone any favours.”

Limits on ATO help

SMEs should however, be aware that the Tax Commissioner’s ability to help a business out (under his so-called powers of general administration) is subject to a number of limitations. Those powers for example:

Cannot, under the Acts Interpretation Act 1901, be used to extend, confine or undermine Parliament’s intentions. Quite a formal limitation but one that the ATO must observe.
Cannot be used to remedy defects or omissions in the law. The ATO says it has on occasions been asked to overlook what a taxpayer claims is an “obvious” defect or omission in the law, but it has no power to do so, however well-intentioned or seemingly “logical” the outcome might be.
Should not confer an advantage on a taxpayer or a group of taxpayers.

The Tax Office recognises (and indeed says its experience has shown) that difficult financial times result in some people taking more risks. The ATO has found the temptation to engage in risky or fraudulent activity increases as people and businesses struggle to stay in operation.

The Government has recognised this risk and has committed $302.1 million over four years to the ATO to address known risks in the tax system that could further erode Australia’s revenue base and to address risks that will emerge as Australia’s economy recovers from the economic downturn. Areas for additional ATO compliance attention include data matching to identify compliance anomalies, and non-compliance by individuals with high net wealth.

It’s not only in difficult times that risks to tax revenue may emerge. The Tax Office says it is alive to the possibility that, as the economy recovers, revenue risks will emerge or magnify as companies seek to maximise competitive advantage, possibly via tax minimisation strategies, particularly in the large and medium business market.

In this regard, the Government has also committed $70.9 million over four years to the ATO to help ensure that small business and others continue to meet taxation and other superannuation obligations. The ATO intends to use this funding to identify at an early stage small businesses that may engage in cash economy activities, tax minimisation schemes and serial insolvency practices.

In 2009-10 for instance, the ATO plans to conduct around 3,700 audits, and visit 8,000 businesses it believes are at risk of cash economy activity to check they are meeting their obligations. The Tax Office will also send 35,000 letters to businesses that it considers could be at risk of participating in the cash economy. Where the ATO identifies taxpayers in the cash economy who deliberately evade tax, it says it will “respond vigorously” by working closely with law enforcement agencies to investigate and prosecute those who cheat.

Businesses which will be attracting ATO attention are:

The home renovations sector.
Some sections of retail industry such as small value, high turnover retailers.
Sections of the hospitality industry offering lower cost products.

Paying bills on time

All businesses in the current economic climate are keen to ensure they get paid for the goods and/or services they provide as quickly as possible. Of course, this doesn’t always happen. However, in a positive note for the Tax Office, it says that its figures for the year to 30 June 2008 show it paid 96% of the invoices it received from small businesses within 30 days. The average time taken to make the payments was in fact 26 days. That’s not a bad result for the SMEs concerned!