The taxman’s targets: 2008-09

Each August, the tax office publicly releases its targets for the year. It’s a valuable guide for taxpayers – forewarned is forearmed. By TERRY HAYES

By Terry Hayes

Each August, the tax office publicly releases its targets for the year. It’s a valuable guide for taxpayers – forewarned is forearmed.

While it’s not yet August, tax office Second Commissioner Jennie Granger has recently given an “early bird” view of some of the areas that the tax office’s compliance program for 2008-09 will be addressing, and an overview of its tax time focus for individuals and small business.

For tax time this year, the tax office will be paying particular attention to investors (with key areas of risk including the sharemarket (46% of people now own shares), and capital gains events, particularly the following areas.

Rental properties. The tax office notes that more than 1.5 million people claimed more than $24 billion in rental deductions in their tax returns last year, with almost 170,000 people claiming for the first time.

Rental properties are a long-time problem area for the tax office. Common errors are regularly being made, and Granger says the tax office will soon be writing to people who claimed rental deductions for the first time last year with information on the “do’s and don’ts”.

The tax office will also be writing to people who have been selected because they have some of the following characteristics: Unusually high claims for rental deductions; low rental income in relation to rental deductions; high claims for interest expenses’; and high claims for borrowing expenses.

The Second Commissioner warned that a letter from her office “is a big hint”. She said if a tax agent client receives a letter from the tax office in relation to rental property deductions, the agent should encourage the client to check carefully about all the information they provide, “as we’ll be checking carefully too”.

Dividends and interest. Data-matching is a major tax office weapon here. This might seem like an obvious target, but it is one taxpayers can easily overlook. Accounts closed or money moved during the year can lead to amounts of interest earned being overlooked, but the tax office’s data-matching process will show this up.

Sale of investments and CGT. Granger says the tax office has “reason to believe that compliance with capital gains tax is improving, but we also think there is still room for further improvement”.

As an indication of the scale of the CGT issue, she said that as at 31 October 2007 approximately 1.2 million people declared around $16.26 billion in capital gains in their 2006 tax returns. The number of taxpayers who declared net capital gains rose by 3.8% in the 2006 tax year, mainly from shares and property sales. The tax office heavily uses data-matching with the states and territories regarding sales of investments.

Avoiding dodgy tax schemes. Again, obvious; but SMEs and others should be wary of schemes promoted to them that claim what seem to be too-good-to-be-true tax outcomes.

Saving for retirement. Don’t forget about the new superannuation caps. Those who have sold assets to invest in superannuation may have a CGT liability that will need to be disclosed correctly.

Other target areas identified include:

Salary packages of executives and directors. The tax office will expand its review of highly paid executives and directors, generally people with income over $1 million. The majority of adjustments made by the tax office relate to benefits acquired under employee share schemes.

Employees and their work expense claims. The tax office will look at the growth in work expense claims, particularly by nurses (with a focus on self-education), medical practitioners (travel and entertainment expenses) and chefs (expenses for travel between home and work, and for pre-vocational courses). More generally (not just in the above occupations), the tax office will be looking at anomalous or “out of pattern” claims for self-education, car and travel expenses. The common adjustments made relate to car expenses, travel expenses, self-education, and ambit claims for clothing and laundry expenses.

Small business. The tax office will be expanding its coverage of income tax issues this year. This includes; sale of assets and investments, foreign source income, and employer obligations (including superannuation).

Offshore income. The tax office has been writing to some taxpayers encouraging them to make, if required, a voluntary disclosure of undeclared income held offshore. So far, 3339 letters have been sent out, and 733 people have made disclosures involving income of over $31 million.

These disclosures have mainly been investment income from interest and dividends, wages and pensions. The tax office is also conducting 80 audits linked to Vanuatu with over $90 million in allegedly false deductions. In addition, it is writing to another 500 Australians with apparent links to Vanuatu seeking more information on their tax affairs.

Revenue results so far

Just in case you were wondering if all this activity by the taxman actually produces any results, the following table shows the tax office audit and review activity and the tax revenue that has flowed from that.

Read more on tax planning, data matching and tax deductions

Terry Hayes is the senior tax writer at Thomson Reuters, a leading Australian provider of tax, accounting and legal information solutions.