After two years of heavy spending amid the pandemic and no tax rate increases in sight, how will the government boost revenue and balance its budget? This is an important question to consider, regardless of the party (or parties) that may be successful on election day.
What we do know is that both major parties are intending to increase funding to the tax office, which likely means increased review activity, increased ATO guidance, and increased education campaigns.
Thinking about the ways in which the ATO will look to increase tax revenue in the coming years is useful in preparing your business for the future. Here are our thoughts on the key strategies the ATO might take:
- Better enforcement of the law that already exists
We expect there to be further crackdowns based on existing legislation. The most recent examples are the ATO guidance on Division 7A & unpaid present entitlements and family trust distributions. Both will have fundamental impacts on the tax positions of SME businesses and their owners.
- Targeting specific groups of taxpayers
There has been a focus on multinationals and large corporates in recent years, and we can expect this to continue. However, the ATO will also continue their review of private groups and high-wealth individuals through, for example, the Top 500 and Next 5000 programs. By targeting reviews in this manner, the ATO expects to hone in on the taxpayers most likely to have a significant tax shortfall.
- Focusing on the largest ‘tax gap’
The ATO has identified that the segments with the largest are individual taxpayers and small businesses. The tax gap is the difference between the tax actually paid by the group and the amount of tax the ATO estimates would be payable if the tax laws were correctly applied by all taxpayers in that group. The individual taxpayer segment has one of the greatest tax gaps in part due to the fact this is the largest group of taxpayers by number. We can expect further focus on this area as the ATO uses increased data matching processes to identify individuals to review, as well as an education approach.
With this in mind, what can you do to ready your business in case you are picked up for a review by the ATO?
One of the best things you can do to prepare yourself for an ATO review is to keep good records.
A few questions to ask yourself when reviewing your record keeping processes:
- Do you have good systems in place to show how you have reported and calculated your income?
- Do you have documentation to back up your expenses?
- Is there sufficient documentation to support a one-off or significant transactions? For example, signed contracts, bank documentation, legal agreements etc.
- Is your documentation contemporaneous?
The ATO is increasingly interested in the tax governance processes of taxpayers in the SME space and reviewing your tax governance framework now can put you ahead of the game in an ATO review.
Tax governance means the processes and procedures that the business has in place to identify and manage tax risks. Good tax governance should ensure that the business pays the correct amount of tax and meets all its obligations. Tax governance includes:
- robust decision-making and internal processes
- good record keeping
- systematic identification of transactions that give risk to tax risks, and
- obtaining proper tax advice where you need it.
Of course, the extent of the tax governance procedures that the ATO would expect to see in a small business is different from that of a large multinational corporate groups, but the expectation to have tax governance processes in place is still there.
Consider how you fit into the ATO’s risk frameworks
In recent years, the ATO has taken to releasing ’risk assessment frameworks‘ in relation to particular areas of the tax law to assist taxpayers in identifying tax risks.
Considering the risk assessment frameworks relevant to you before a knock on the door from the ATO is another way you can prepare yourself and reduce your chance of any surprises.
Without tax reform measures or increases to tax rates, the government will likely rely on increased ATO audits and reviews to boost tax collections. For SME businesses, the best form of defence is being adequately prepared for when the ATO knocks on the door.
For advice on how you can best prepare for an ATO review, please contact your local William Buck Tax Advisor.