Senior executives and directors

The Tax Office will expand its compliance activities of senior executives and directors to include

• senior executives of private companies; and
• resident senior executives of foreign-owned companies.

It will focus on remuneration packages and any failure to report equity benefit and cash or share bonuses. The Tax Office has stated that where compliance action with senior executives identifies significant issues that are relevant to other employees, it will extend its compliance work to the larger population.

Work-related expenses claims

The Tax Office will review and audit activities, particularly in relation to nurses, medical practitioners and chefs. The Tax Office said it would also focus on ‘out of pattern’ claims for self-education, car and travel expenses. Micro enterprises The term ‘micro enterprises’ refers to taxpayers (including SMSFs) with an annual turnover of less than $2 million. The key priorities that the Tax Office are focusing on include:

• assisting small businesses to stay on track with their tax obligations – the Tax Office has stated that its support and verification compliance activities will be structured around the business life cycle of a small business. It will be improving its assistance program to support micro enterprises at critical points in their business life cycle, with a particular emphasis on helping businesses get started and get back on track with their tax obligations, which includes meeting obligations in relation to cash transaction, and tax and superannuation debt.
• employer obligations, including superannuation guarantee — the Tax Office is increasing its audit coverage of employers. In particular, the Tax Office will focus on: businesses that are expected to have high tax liabilities (based on their history or third-party information); businesses that fail to lodge on time or only meet part of their lodgment obligations; and business operators with child support obligations.
• cash economy — the Tax Office is expanding its coverage with a more focused cash economy strategy that includes regional activities, business-to-consumer transactions and micro enterprises with conspicuous consumption or multiple obligations. Further, the Tax Office has said it will continue to use data-matching to detect unreported income and will also check for inconsistencies between household and personal assets and reported levels of income.
• international dealings — the Tax Office will focus on offshore income including dividends and interest, royalties and rental income. The Tax Office plans to match data on dividends, interest and royalties supplied by overseas revenue agencies with income tax return and AUSTRAC information to identify unreported foreign income.
• capital gains on sales of assets and investments — the Tax Office will focus on capital gains arising from the sale of real property and shares, the accuracy of capital losses reported and the correct application of the small business CGT concessions. It will also focus on ensuring that any capital gains tax is correctly reported when a business operator is exiting a business. Further, it will continue to ensure that any capital gains arising from an in-specie contribution to a superannuation fund, or where proceeds from the sale of assets have been transferred into the fund are reported. 
•  tax debt management — the Tax Office will use risk profiling to detect problems much earlier so it can identify the problem and offer assistance at an earlier stage.
• refund fraud — unusual and high value GST and income tax refund claims will become a focus for the Tax Office who has stated that it will undertake pre and post-issue verification checks by either telephone, visiting the business or by contacting third parties. 
•  small business owners and superannuation funds — the Tax Office is developing new tools for trustees and auditors to help them achieve high levels of compliance with superannuation and tax laws.
• partnership and trust distributions — the Tax Office said it is reviewing distributions from partnerships and trusts and beneficiary returns to check that the distributions have been correctly disclosed: see Compliance Matters on page 7.
• GST and property transaction — the GST treatment of property transactions remains a significant compliance issue. The Tax Office said it will continue to work with builders and developers through industry consultative forums to improve its understanding of the industry, consider the impact of current economic conditions and keep them informed of law changes in a timely manner.
• fuel tax credits measures — the Tax Office will embark on an education program to inform taxpayers of the expanded fuel tax credits measures which applied from 1 July 2008. This will be accompanied by work to build its own understanding of the industries and businesses new to fuel tax credit entitlements, so it can identify those that are outside of industry norms for claiming credits. The Tax Office has warned that firm action will be taken if deliberate non-compliance is identified.

Small to medium enterprises

Small to medium enterprises businesses refer to taxpayers with an annual turnover of between $2 million and $250 million, including highly wealthy people who with their associates, effectively control $30 million or more in net wealth. The key priorities that the Tax Office are focusing on include:

• loans to business owners — the Tax Office said its focus in 2008/09 will be on identifying and dealing with cases where businesses did not take advantage of the option to self-correct past loan or payment breaches (i.e. Division 7A). The Tax Office will also continue to monitor compliance with shareholder and associate loans and payments.
• highly wealthy individuals — the Tax Office will increase its focus on highly wealthy individuals and follow up where necessary by reviews and audits. The Tax Office reported that it had 400 reviews of wealthy people in progress as at 30 June 2008 compared with 38 at 1 July 2006. The Tax Office also expects to have at least 110 audits underway in 2008/09. In addition to undertaking more reviews and audits, the taskforce is developing a more sophisticated risk-assessment approach.
• tax planning around business exits — the Tax Office will be undertaking more targeted compliance activity by examining business restructures where the primary objective is to receive a tax advantage through the use of demergers, consolidation or trust cloning rather than for preparing a business for sale. 
•  international transactions — the Tax Office will examine transactions between related Australian and offshore entities that shift profits from Australia to other countries. It will also examine whether Australian residents are declaring capital gains from overseas assets and reporting their foreign income. The Tax Office has said that it will undertake reviews and audits in high-risk cases.
• trusts issues — the Tax Office will seek judicial clarification of a number of trust issues including the effectiveness of clauses in trust deeds that seek to equate trust income with trust taxable income. It said some clarification might also be provided by the outcome of the appeal to the Federal Court from the recent Tribunal decision in AAT Case [2008] AATA 322, Re Bamford & Ors and FCT. While awaiting clarification, the Tax Office said it does not propose conducting active compliance activities specifically in relation to these issues. The Tax Office will seek to identify cases of trust cloning involving the permanent deferral of tax, such as where there is a claimed increase in the cost base of the transferred asset.
• fuel tax credits measures — the compliance activities to be undertaken are similar to that of micro enterprises.

Superannuation

The Commissioner has highlighted several superannuation-related compliance priorities for 2008/09. The Tax Office will this year focus on supporting the implementation of the introduction of the new First Home Saver Accounts (FHSAs) from 1 October 2008. Key priorities include:

• employee superannuation — the Tax Office said it received around 20,000 complaints in 2007/08 from employees in relation to their employers not paying the correct superannuation guarantee contributions or not offering a choice of superannuation fund. Tax Office analysis suggests that employers in hairdressing and beauty, engineering design and consulting, and building and industrial cleaning are at a higher risk of not meeting their superannuation obligations. The Tax Office said it plans to make available by the end of 2008/09 an online tool for employees to allow them to check whether they are eligible for a superannuation guarantee and if they have received the correct contribution for each quarter. Where contributions are not correct, employees can lodge a complaint online.
• over-claiming deductions for superannuation contributions and excess contributions — the Tax Office will use its data matching processes to ensure the annual contribution caps have not been exceeded.
• lost members — the Tax Office will review a further 200,000 lost accounts and follow up with the account owners by telephone.
• early access to superannuation — the Tax Office will work closely with industry regulators to investigate superannuation funds that are accessed without authority.
• First Home Saver Accounts (FHSAs) — the Tax Office said it will manage the introduction of FHSAs from 1 October 2008. Its focus will be on ensuring that people have the information and advice required to understand the eligibility requirements and consequences of saving with the product. 
• self-managed superannuation funds (SMSFs) — the Tax Office will continue to focus on regulatory issues associated with protecting retirement investments, such as loans, in-house assets, borrowings and non-arm's length transactions, as well as ensuring funds are meeting income tax compliance obligations. Active compliance activities will cover at least 10% of all new funds. The Tax Office will also monitor approved auditors to ensure they are fulfilling their roles.

Bonuses and Superannuation Guarantee

In a recent AAT case, the Tribunal affirmed the Commissioner's decision that bonus payments by a corporate taxpayer to its employees are considered ordinary time earnings (OTE). Accordingly, the Tribunal held that the payments must be taken into account when calculating the prescribed level of superannuation guarantee contributions and/or the superannuation guarantee charge (SGC) for each employee: AAT Case [2008] AATA 762, Re Prushka Fast Debt Recovery Pty Ltd and FCT (AAT, Ref Nos VT200600274 and VT200600275, Fice M, 28 August 2008). The taxpayer had established a profit-share bonus scheme whereby they retained the discretion to make the payments. Following a superannuation guarantee audit by the Tax Office, the Commissioner determined that the taxpayer had not provided the minimum level of superannuation guarantee for its employees for the years ended 30 June 2000 and 30 June 2001. Therefore, the Commissioner held that the taxpayer was liable for the SGC. The taxpayer objected to the Commissioner's assessment, however the objection was disallowed. The issue in dispute was whether the bonus payments were considered OTE of the employees. The Tribunal said that the taxpayer's discretion to make the payments did not convert these payments into ex gratia payments. In determining the true nature of the payments, the Tribunal said that it must look at the substance of the payments and not the label that had been ascribed [emphasis added]. The Tribunal found that the bonuses paid by the taxpayer were paid in an employment context and by reference to the specific performance of its employees as a group. Further, the Tribunal also found that the payments could be properly regarded as over-award payments. Therefore, the Tribunal was satisfied that the payments were OTE and should be taken into consideration when calculating the SGC. 

Superannuation guarantee

The superannuation guarantee legislation requires employers to provide a minimum level of superannuation support for their employees. Currently, the prescribed level of support is 9% of an employee’s notional earnings base. However, where an employee’s salary or wages exceed the maximum contribution base, which is currently $38,180 per quarter, the excess above the threshold is not included in the calculation of the superannuation guarantee. Since 1 July 2008, an employee’s notional earnings base is the employee’s ordinary time earnings (OTE). Broadly, OTE are the total of earnings in respect of ordinary hours of work and earnings consisting of over award payments, shift loading or commissions. However, OTE do not include unused annual leave payments, unused long service leave payments made on termination of employment, or payments in lieu of unused sick leave made on termination of employment. Further, payments that are specifically excluded from salary or wages are not included in OTE. The article ‘Super Update’, which was published in the June issue, contained two tables detailing whether an earning is included or excluded from OTE. It is important to note that salary or wages are used in calculating an employee’s individual shortfall component for the purpose of the superannuation guarantee charge if an employer has failed to make the minimum level of superannuation contributions for the employee by the quarterly due date. While certain payments that form part of ‘OTE’ are also included in ‘salary or wages’, payments specifically excluded from OTE will not necessarily be excluded from the definition of salary or wages. In Superannuation Guarantee Ruling SGR 94/5, the Commissioner gives his view on the meaning and scope of ‘salary or wages’. The table below, which is adapted from the Ruling, states whether a payment is considered to be ‘salary or wages’ or ‘OTE’: