Tax traps the ATO is watching

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The ATO often focuses on specific behaviours, characteristics and tax issues that are suspicious and can lead to investigations.

Due to enhancements in technology, the ATO has expanded its data matching capabilities which have improved the ability to identify incorrect reporting in tax returns.

The ATO has released a list of behaviours and characteristics that may attract their attention, which includes:

  • Tax or economic performance substantially differing from similar businesses.

  • Low transparency of tax affairs.

  • Large, one-off or unusual transactions, including transfer or shifting of wealth.

  • A history of aggressive tax planning.

  • Tax outcomes inconsistent with the intent of tax law.

  • Choosing not to comply or regularly taking controversial interpretations of the law.

  • Lifestyle not supported by after-tax income.

  • Treating private assets as business assets.

  • Assessing business assets for tax-free private use.

  • Poor governance and risk-management systems.

The ATO continues to concentrate on compliance issues associated with self-managed super funds. In particular, they are targeting:

  • Significant management and administration expenses.

  • Incorrect calculation of exempt current pension income.

  • Non-arm’s length transactions involving companies associated with members and SMSFs that may be intended to improperly redirect dividends to the SMSF.

Another area of focus is the incorrect claiming of franking credits or not applying appropriate governance to a franking credit balance.

The ATO is also concerned where there is a substantial increase in franking credits as this may indicate the taxpayer has entered into an inappropriate arrangement to take advantage of the imputation dividend system. Using an entity that has a concessional tax rate, such as a super fund, is often incorporated into these arrangements.

Finally, an area that the ATO is keeping a close eye on is with wash sales. A wash sale occurs when a shareholder disposes of a share and repurchases a significantly similar parcel of the same share purely with the intention of claiming a capital loss.

Cristy Houghton