One in three rich people and private companies targeted by ATO
One in three wealthy people who may be dodging tax will get a call or personal visit by the Australian Taxation Office as it moves to ensure the richest Australians and private companies pay their fair share of tax.
The ATO wants to beat its 2013-14 rate of raising $1.1 billion in liabilities from high-wealth individuals (HWIs), and says it will be going after baby boomers who try to avoid paying capital gains tax when they pass their wealth on to their children.
The man at the ATO who says his job is to ensure wealthy Australians pay tax, ATO deputy commissioner Michael Cranston, said the Tax Office had noticed lots of examples of people passing down assets to their children that they then recorded at an artificially inflated price. Then years later, they would sell it and avoid paying CGT by having inflated the value.
Mr Cranston said the ATO estimated about 30 per cent of almost 300,000 HWIs it monitors were assessed as being at “high risk” of being non-compliant.
It puts high-wealth individuals into three categories. This includes 155,000 privately owned groups with turnover of more than $2 million, more than 114,000 people with net wealth of between $5 million and $30 million, and more than 4600 “high-wealth individuals” who control net wealth of $30 million or more.
“We want to make sure these rich and very wealthy people also pay their fair share of tax,” Mr Cranston said. “We’re trying to engage with them more.”
Last year the Tax Office had sent almost 3000 high-wealth individuals letters seeking information about their tax structures. Now it will be calling and visiting them and/or their tax advisers to get further information, and this could result in an official review or audit, Mr Cranston said. But as an initial point, it wanted to engage constructively rather than end up in drawn-out legal disputes.
To help the rich understand their tax obligations, the ATO has released an online publication detailing behaviours that attracts its attention. Some of the “characteristics” that raise alarm bells include low transparency of an individual or group’s 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, lifestyles not supported by after-tax income, treating private assets as business assets, accessing business assets for tax-free private use and poor governance and risk-management systems.
During the past four years the Tax Office has raised $4 billion in liabilities from wealthy people. But often tax bills are disputed and the ATO often settles cases with companies and wealthy people. According to the ATO’s annual report, in 2013-14 it settled with 61 highly wealthy individuals on money totalling $632 million. This varied (by $980 million) from the original tax bills amounting to $1.6 billion.
In addition Project Wickenby has raised more than $2 billion in liabilities since its inception in 2006. Mr Cranston said the ATO would continue to work with other law enforcement agencies to hunt down taxpayers using secrecy jurisdictions and illegal overseas schemes.
He estimated 70 per cent of HWIs were compliant, and so its publication was about helping the remaining 30 per cent, that may not be, understand their tax obligations.
The Tax Office was trying to develop a system of “willing participation”. “We want to get that 70 per cent compliant figure to 95 per cent,” Mr Cranston said. “If taxpayers have made us happy and done the right thing we will send them letters and close off their matter.”
He said the ATO was also in discussion with individuals with more than $5 million in assets and private businesses with turnover of more than $1 billion, in the same way it had been with multinationals, to try to identify issues before they lodge tax returns.
Most of these are companies linked to individuals. He said there were 175 individuals controlling more than 6000 entities, trusts or companies.
“We’re generally going to go out and meet them and their advisers and share what we know about them,” he said. “We will discuss how we risk assess them and why it concerns us.” After all that, if individuals and companies were still doing the wrong thing, they would be audited and issued with tax bills.
At last week’s corporate tax avoidance inquiry hearings, former senior ATO officer Martin Lock criticised the agency for letting multinationals and wealthy tax cheats off the hook. Mr Lock said the framework the ATO uses to assess taxpayer risk – known as the Risk Differentiation Framework – was flawed and ineffective in detecting tax evasion by large companies and private groups. A recent ANAO report had also raised problems with this framework.
The inquiry also heard evidence from the Uniting Church that it was complete nonsense that naming private companies would increase cases of kidnapping. The Abbott government plans to exempt 700 private companies from new disclosure rules introduced by the former Labor government that would make it easier for this group to avoid paying tax.
The Tax Office will be given the opportunity to formally respond to Mr Lock’s assertions to the inquiry in coming weeks. Mr Cranston said their risk assessment was getting “more sophisticated” and that they would continue to take a “heavy-handed” focus where necessary.
He said last year there were about 100 audits a year in the high-wealth individuals category and 78 per cent of cases resulted in an amendment post-audit. This was up from 68 per cent of cases in 2013. “This tells us our risk differentiation model is effectively identifying high-risk task payers,” he said.
Mr Cranston also defended the ATO’s recent amnesty for people hiding assets and income overseas, rejecting assertions by academics and Greens senators that it gave rich tax cheats a signal that they could get away with evading tax.
He estimated more than 50 per cent of those who had come forward under the amnesty had inherited the tax issues from their parents or grandparents, and wanted to get these affairs cleaned up.
