Tax Commissioner Michael D’Ascenzo yesterday announced the Australian Taxation Office hit list, also known as the ATO Compliance Program for 2012/13. Focus areas identified by the ATO as significant risks to tax and superannuation compliance this year include:

  1. Occupations that have shown a pattern of relatively high levels of work-related claims, including IT managers, plumbers and defence force personnel
  2. High income earners involved in tax avoidance schemes
  3. Unreported cash transactions within the plastering and café industries
  4. Contractor arrangements, in particular in the construction industry
  5. The self-managed superannuation fund sector
  6. Employer obligations for superannuation in high risk industries.

“By openly setting out our focus areas for the year ahead we want to encourage people to make the right decisions,” DÁscenzo said.

From my reading of the program there will be significant attention paid to the building and construction industry and this coincides with a legislative measure that started at the start of this month, known as the Taxable Payments Reporting System. The new tax net will target contractors associated with 60 occupations in the building and construction industry, including bricklayers, plumbers, excavators, fence builders, electricians, architects and engineers.

The building and construction industry has long been seen by the Australian Taxation Office as a red-flag area for cash payments that rort the tax system. Even the Construction Forestry Mining and Energy Union have strongly backed the imminent crackdown. In a submission to the federal government, it notes that ‘there are approximately three ABNs for every contractor in the BCI”: pointing to “fraudulent misquoting of ABNs”.

The ATO has previously cited evidence that because builders engage subcontractors — rather than PAYG employees — to conduct much of the work on projects, it is easier to cheat on tax because there is no obvious trail of where cash has been paid.

From July, any contractor who pays another contractor in the industry must send details of their name, the size of the payment and their ABN to the ATO. At the end of the financial year, it is understood the ATO will “data-match” the income reports with the contractors’ tax returns to see if they are declaring all their income. Any discrepancies will almost certainly lead to audit action by the ATO.

Here’s a snapshot of the focus areas for individuals, small business and large business:

Individuals:

The ATO says that more than 600 million transactions are reported to them annually, providing an almost-complete picture of each individual’s financial dealings and through extensive data matching they will focus on incorrect or fraudulent refunds for both over claims and deliberate fraud.  They will continue a focus on occupations that have shown a pattern of relatively high levels of claims and this year if you are a plumber, an IT manager or a non-commissioned officer in the defence force — watch out.

DÁscenzo said many taxpayers in this segment went to bizarre lengths to convince the ATO of their tax deduction claims.  Apart from the actual receipts, the most popular way taxpayers try to substantiate refund claims are photographs. These have been used to support expense claims for items such as clothing and mobile phones, however one imaginative taxpayer provided a photo of a laundry basket and washing powder to substantiate a claim for laundry expenses.

In another example, to support a dependant spouse offset claim a photo of a Valentine’s Day card was provided as evidence of the existence of the claimant’s spouse. The ATO collected more than $1.2 billion as a result of compliance activity for this segment in the past 12 months.

Micro and small-to-medium enterprises:

The ATO will conduct reviews into the plastering and café industries with a focus on unrecorded and unreported cash transactions. There will be a crackdown on sham entities. Ensuring businesses are correctly registered in the tax and superannuation systems will be a focus, with 35,000 GST registration application reviews being conducted alongside 500 enterprise reviews.

The rich have not been forgotten. They will also complete about 120 reviews and 50 audits of wealthy Australians (net wealth of between $5 million and $30 million), and 200 reviews and 50 audits of highly wealthy individuals ($30 million or more in net wealth).

The ATO collected just over $4 billion dollars as a result of compliance activity for this segment in the past 12 months.

Large business:

The ATO will conduct 500 reviews and audits on mining, manufacturing, wholesale trade, and financial and insurance services industries in relation to GST business systems. They will continue a focus on multinational enterprises to ensure they pay the correct amount of tax, with 25 reviews and 29 audits being conducted and will  look closely at corporate restructures, mergers and acquisitions, conducting 20 risk reviews. The ATO collected $1 billion dollars from compliance activity in this segment last year.