How to avoid unwanted ATO attention

Nobody wants to attract unwanted scrutiny from the ATO. Tax audits can be stressful and potentially costly. They are also increasingly well targeted, now that the ATO’s data matching capabilities are making it easier to pick up discrepancies. The best way to avoid an audit is to know how to stay out of trouble in the first place.

Whether it’s not declaring foreign or business income, claiming too much for work-related deductions, or not paying your employees’ superannuation, some activities are likely to attract the tax man’s interest.

Here are some simple steps you can take to reduce the likelihood of the ATO taking a closer look at your personal or small business return.

Declare all your income

For individuals, it’s important that you include all your taxable income in your return. Ultimately, the responsibility for including all your income rests with you, so ensure you report everything as the Tax Office will use a wide variety of information sources to cross check.

Common mistakes are not including capital gains you received when selling shares or property or forgetting income from overseas sources such as a business, rental property or shares.

When it comes to tax deductions, the ATO is particularly interested in your work related expenses. If your deduction claims are unusually high compared to other people in similar industries, the ATO will want to know more. A good tip is to check out the ATO’s guides to deductions for specific industries.i

Take care with property investments

Tax deductions claimed on your rental property are another red flag for the ATO, so it’s important to follow the rules.

Ensure you understand the difference between claims for depreciation and capital works, and only claim expenses for periods when the property is rented, or genuinely available to tenants. And don’t forget you can no longer claim travel expenses for inspecting your property or undertaking maintenance.

The ATO is also interested in any noncommercial rental income received from a holiday home, so if you let your property at a discounted rate to relatives or friends, you need to limit the amount of deductions you claim to avoid problems.ii

If you have a loan for an investment property and are claiming for the cost of interest on the loan, you need to split your deduction into private and business purposes.

Watch your business reporting

When it comes to small business, the ATO looks for enterprises that incorrectly or under report their sales (both cash and electronic payments) or fail to register, so ensure you keep good business records and lodge accurate business activity statements.

Another warning signal for the ATO is businesses that report outside the normal small business benchmarks for their industry.iii These benchmarks are helpful for comparing your business’s financial performance against similar businesses, but they also provide the ATO with a useful tool for comparing tax payments and deductions claimed by businesses across the industry.

As more customers pay electronically, the ATO is also increasingly interested in cash-only businesses which it views as more likely to be avoiding tax. If your business operates and advertises as being ‘cash-only’, or does not accept electronic payments, you will need to keep detailed records of your takings and payments, as the ATO will be extremely interested in your tax returns.

Pay your staff correctly

If your business employs staff, ensure you are deducting Pay As You Go (PAYG) withholding from their wages and regularly forwarding it to the ATO. Making regular Superannuation Guarantee (SG) contributions to your employees’ super funds is also important if you want to avoid ATO scrutiny.

Not paying the correct amount of Fringe Benefits Tax or incorrectly accessing FBT concessions are also red flags, so ensure you are complying with the rules.iv

If you are registered for Goods and Services Tax (GST), ensure you are actively carrying on a business or you may find yourself talking to an ATO auditor.v

The key to ensuring your tax return is correct is to get professional help. We can help you to maximise your tax return, while ensuring that it is correct and compliant.

https://www.ato.gov.au/Individuals/Income-and-deductions/ Deductions-you-can-claim/Deductions-for-specific-industriesand- occupations

ii https://www.ato.gov.au/law/view/document?DocID=ITR/ IT2167/NAT/ATO/00001&PiT=99991231235958

iii https://www.ato.gov.au/business/small-businessbenchmarks/

iv https://www.ato.gov.au/business/privately-owned-andwealthy- groups/what-you-should-know/transparency/whatattracts- our-attention/?anchor=Fringebenefitstax&anchor=Fri ngebenefitstax#Fringebenefitstax

https://abr.gov.au/for-business,-super-funds—charities/ applying-for-an-abn/abn-entitlement/#Whatcarryingonanenter prisemeans

Taking philanthropy to the next level

Australians are generous when it comes to opening their wallet for a good cause. But you may have reached a point in life where you want to make a more substantial contribution with control over how your money is spent. You may also wish to get your children involved to instill shared values.

While it hasn’t received much publicity, increasing numbers of Australians are using charitable trusts to give in a more planned and tax-effective way.

The turning point came in 2001, when the Howard Government introduced the Private Ancillary Fund (PAF) with the aim of encouraging more individual and corporate philanthropy. PAFs are charitable trusts that can be used by an individual or family for strategic long-term giving.

Since then, the number of PAFs and the amount of money contained in them has grown steadily. In early 2018, there were 1600 PAFs, housing $10 billion and distributing $500 million a year.i

Claiming a tax benefit

According to Philanthropy Australia, in the 2015-2016 financial year 14.9 million Australians collectively donated $12.5 billion to charities and not-for-profits (NFPs).ii

Though donations to accredited charities and not-for-profits are tax deductible, the figures indicate two-thirds of taxpayers don’t bother to claim. It’s well worth keeping track of receipts so you can claim when you think that, for example, a single donation of $5000 to a charity or NFP in a financial year will reduce your taxable income by $5000.

A core principle of tax-deductible philanthropy is that the giver shouldn’t stand to receive any material benefit. For example, if you buy tickets in a raffle run by a charity you can’t claim a tax deduction on the cost of the tickets. In order to receive a tax deduction for your donation, the recipient must also be registered as a deductible gift recipient (DGR).

There are many ways to be charitable but the impact on your tax bill will vary depending on how you go about it.

A more sophisticated approach

These days, people who want to take philanthropy to the next level with an ongoing, tax-effective approach have a variety of trusts to choose from.

The Private Ancillary Fund

PAFs are the best-known of the new breed of trusts. The money placed in a PAF is tax-deductible and assets in the fund aren’t subject to income or capital gains tax (but do qualify for franking credits).

Let’s say a dentist sets up a PAF and gifts half his $500,000 annual income into the fund. The dentist’s taxable income now drops to $250,000. What’s more, no tax is paid on the returns made on the $250,000 that has been invested in the PAF. The dentist must distribute a minimum of five per cent of their PAF’s net asset value annually, or a minimum of $11,000. After meeting that requirement, the dentist has a relatively free hand about which charities to support and how much they receive.

The Public Ancillary Fund (PuAF)

PuAFs work the same way as PAFs but operate on a larger scale. For example, 10 dentists may set up a PuAF to finance the building of dental hospitals in Africa. As well as gifting part of their incomes, the 10 dentists can (in fact, are obliged to) invite the general public to make tax-deductible donations to their PuAF.

Testamentary Trust (or Will Trust)

These are used by individuals wanting to leave money in their will to charity. The two advantages of this type of trust are that the trustee(s) can distribute the income generated by the trust in a way that minimises the tax burden of beneficiaries, and the assets in the trust can’t be accessed by parties such as creditors.

Few people give to get a tax deduction but by supporting good causes in a tax-effective manner you can achieve a bigger bang for your philanthropic buck. If you would like to know more about tax-effective giving, give us a call.

https://www.strategicgrants.com.au/au/free-resources/blog/19-blog-kate/280-grantseeking-donor-giving

ii http://www.philanthropy.org.au/tools-resources/fast-facts-and-stats/