The Australian Taxation Office might be cracking down on high-profile tax evasion cases, but experts say SMEs are still being treated leniently and that approach will continue until the economy hits full speed. A number of high-profile names have hit out at apparently aggressive tactics used by the ATO, including actor Paul Hogan, who was banned from leaving the country last week and faces a $37.6 million tax bill, which he has disputed. This morning in The Australian, property developer Craig Gore has also lashed out at the ATO, with whom he is currently engaged in a number of disputes. He says he has received $70 million in tax bills, but has described most as “”fictitious tax liabilities”.

But experts say more attention is being given to long-term tax fights rather than SMEs, who still have significant facilities available to them for assistance. Tax Institute senior counsel Robert Jeremenko says the ATO is cracking down on high-profile cases, but there is still leniency available for SMEs and the office has taken a softer approach to smaller, struggling companies. “The tax commissioner has been quite clear about this, in public messages to small businesses over the past couple of years, that he will be taking a lenient approach to small business in these economic circumstances. That was a welcome approach.”

Sue Prestney, MGI Australia chairperson and SME spokesperson for the Institute of Chartered Accountants, says SMEs are still being approached quite leniently. “We did see during the GFC the ATO has been quite lenient, in arranging payment terms and reducing the general interest charge. They have shown leniency in difficult times, and that has been a good approach.”

“Really that leniency is welcomed, because what’s the point of sending a business to the wall if it can actually continue to trade by arranging some payment options?” Earlier this year, ATO commissioner Michael D’Ascenzo extended the small business assistance package until June 30, 2011, with companies under $2 million in revenue able to access 12-month interest free payment arrangements and deferrals for activity statement payments.

Last year, D’Ascenzo said in a speech it was more important for the ATO to “”differentiate between businesses likely to remain viable, if given reasonable latitude, and those that show little prospect of surviving the present downturn”.

A report in The Australian today claim small business debt has increased over the past 18 months, with the small business share of overall tax debt hitting $8 billion at June 30, well over the usual amount of between $2-2.7 billion. However, the more lenient approach won’t last forever. There are growing concerns about how small businesses are managing their finances and debt, especially considering the extension of the interest-free payment program.

The ATO has also said this year it is cracking down on a number of specific tax evasion issues, including phoenix arrangements, offshore financing and DIY super funds. It also set aside several million over the next four years to target GST evasion in small business.

Jeremenko says while the leniency program has been extended until June 30, 2011, the softer approach will disappear as the economy improves. “I imagine the tax office will soon enough be moving to a business-as-usual approach, now that the treat of an Australian recession has passed to some degree. I believe the ATO is being very economically-minded in taking that approach.”

He points to the ongoing Wickenby investigation, which received an extra $122 million earlier this year, and says SMEs will still need to watch their compliance even though the ATO is giving smaller companies some breathing room. “The ATO’s aim is simply to make sure people are complying with the tax laws, and that applies from the small end of town to the big end of town. The Tax Institute supports that project.”

Prestney also believes the attitude of the ATO will change as the economy recovers and more businesses start delivering better results. “I think this approach is changing. It won’t last forever, and my recollection is that they’ve said it won’t last forever. The approach will change as the overall economic situation improves.”

CPA Australia spokesman Paul Drum says the ATO will be “raising the stakes” in its audit program. “Leniency in payments are being maintained, but we expect the compliance program in 2011 will have a bigger emphasis on SMEs.”

Directors of struggling companies need to keep a tight rein on payments to the Australian Tax Office because of personal liability for the debt if the company does not pay or becomes insolvent. The recent introduction of new laws to fight Phoenix activity has strengthened the power of the Tax Office to fight payment avoidance. Directors of companies can be personally liable for tax payments –“existing and future tax liabilities” which could also cover other amounts such as GST, company income tax and superannuation. And while these new laws will curb Phoenix activity, there are still legitimate businesses struggling to pay their taxes.

Contrary to commentary that all sectors survived well during the global financial crisis, many medium and small businesses have suffered and are still suffering. The ATO allowed businesses to enter into payment arrangements during the global financial crisis. But the amount currently owed to the ATO as of December 31, 2009 by businesses and households is a staggering $12.27 billion – up by $1.3 billion in just 18 months, of which $10.18 billion is owed by business, according to the ATO’s annual report. And total debt (debt holdings) owed by all taxpayers – including businesses, disputed debt, tax owed by insolvent businesses and bankrupt individuals was $24.5 billion. Cases (businesses and non-businesses that could not pay) increased from 1.31 million to 1.34 million to June 30, 2009.

While the ATO has been lenient towards struggling businesses, particularly during the height of the financial crisis, this will not always be the case. The Commissioner of Taxation Michael D’Ascenzo recently told the Council of Small Business Organisations of Australia summit in Brisbane that firmer action will be taken with those who have escalating tax debts or are unable to meet their outstanding tax or Superannuation Guarantees.

As of December 31 2009, there were 147,599 payment arrangements in place for businesses. The ATO was only responsible for 5.6 percent of wind-ups and bankruptcies in 2008, and two per cent in 2009, he said. While much of this can be attributed to the global financial crisis, Mr D’Ascenzo explained, the danger is a further worsening of the economic outlook, which would increase debts to the ATO and put directors under more pressure.

The ATO will also be under pressure from Treasury to chase tax debts owed. And this is not good news for companies already in financial trouble. ATO Deputy Commissioner Steve Vesperman affirmed this by stating “in balancing our assistance and support for those who are willing to engage with us, we are taking firmer action with those businesses who demonstrate an unwillingness to work with us, have escalating debts or who are unable to meet their outstanding tax or superannuation guarantee debts”.

 Treasury Secretary, Timothy Geithner, has reiterated that the US administration’s policy is to let the tax cuts introduced by President Bush lapse for the wealthiest families, when they expire at the end of this year. He said that the question is “whether to extend tax cuts for the middle class, which are due to expire at the end of the year; and whether to allow tax cuts for the top 2% of Americans, those with annual household incomes of at least USD250,000, to expire, as scheduled.”

“This decision,” he continued, “is about more than the impact on our future deficits and debt, although that is critically important. It’s a decision that will impact economic growth and the faith of Americans in the fairness of our tax policies.” He confirmed President Obama’s belief that “extending middle class tax cuts is an essential part of that commitment, and essential to continued economic recovery. These tax cuts save more than USD2,000 per year for a typical middle class family.”

“But given the size of the deficits and debt that we inherited, we must provide that tax relief in a fiscally responsible way,” he concluded. “We believe the best way to do that is by allowing the tax rate for the top 2% to go back to levels seen at the end of the 1990s.”

Permanently extending those top-end tax cuts would require the administration to borrow over USD700bn more over the next decade, adding significantly to an already unsustainable level of debt, according to Geithner.

He pointed out that the President has proposed to terminate or reduce some government programmes, and discretionary spending. As this would require “difficult choices and even painful spending cuts”, he said that “asking the top earners in our society to forgo an extension of recent tax cuts must be part of the compact that restores fiscal responsibility in Washington.”

The debate on the Bush tax cuts is, however, developing into a full-scale battle between the Democrat and Republican parties as the mid-term elections approach. The Republican party, and a number of Democrats, are taking the view that all of the tax cuts should be extended, including the top-end tax cuts, as they say that a tax increase for the more wealthy could affect the recovery.

Under a headline reading, “Democrats’ 2011 Tax Hikes to Hit Families Hard”, the top Republican on the House of Representatives Ways and Means Committee, Dave Camp, said that “raising taxes is the last thing that Congress should be doing right now – not on families and not on small businesses.”

A fellow Republican in the House, Mike Pence, said that he knew no-one “who thinks that raising taxes on job creators in this recession is a pathway towards recovery.” He added that “House Republicans will fight this tax increase with everything that we’ve got.”

Hong Kong-based banking giant HSBC has announced it will begin targeting Australian SMEs with turnover between $1-10 million, with a focus on businesses that do business internationally. While HSBC has previous concentrated on the middle market ($10 million to $200 million in turnover) and corporate ($200 million plus) segments of the Australian banking sector, the company’s local head of commercial banking, Noel McNamara, says the growing global focus of Australian SMEs make the market attractive.HSBC says 97,000 Australian SMEs do some form of international business, with 14% exporting and 14% doing some form of business with China. HSBC will also tap into an existing customer base from its high-net-worth Australian business, called HSBC Premiere. It estimates 20% of these customers are also business owners. Trade finance, foreign exchange and payments and cashflow management products will be a focus for the bank.

“We think there is an enormous opportunity here for us. There is an ever-growing number of companies that are going into Asia,” McNamara says. “We think we are one of the few, if not the only player, here in the market of the internationals that will actually be targeting this segment.”

While HSBC is known in Australian commercial banking circles for its focus on the top end of town, the company’s global chairman of personal and commercial banking and insurance, Sandy Flockhart, says over three million of the banks 3.6 million customers are SMEs. However, Flockhart says HSBC is not setting out to go to war with the big banks to try and take a big chunk of the SME market.”This is not a head-to-head clash with any of the Australian banks”, he said.

“This is an area where we believe we have a competitive advantage in terms of the connectivity with other parts of the world that commercial customers want to transact with.” McNamara has also questioned whether SME access to finance has been as big a problem as some parts of the SME community have suggested.

He says many SMEs are not actually looking to borrow immediately, but want the comfort that funds will be available at some point in the future. “We haven’t seen anything to say the industry has taken a substantially different view of the market [through the GFC].”

A new report by the Society of Trust and Estate Practitioners (STEP) has highlighted a “worrying lack of basic measures to protect taxpayers from abuse” when governments exchange tax data under Tax and Information Exchange Agreements (TIEAs). STEP notes that there are already well over 300 tax information exchange agreements (TIEAs) in place between countries and the number is growing rapidly. The report warns of the increasing risk that, as the TIEA network grows, countries with poor human rights records and weak data security will gain access to detailed personal financial data on individuals.

The report concludes that a lack of strong data protection provisions in OECD standard TIEAs could leave law abiding taxpayers and their families vulnerable to issues such as threats from criminal gangs who have gained access to tax data. STEP has proposed a set of minimum standards that countries must meet before getting access to tax data from other countries, including minimum standards of good governance, basic data protection measures and a right of redress for taxpayers if things go wrong.

The current OECD review for TIEAs only look at a coutries performance in providing more data on tax information. There is no check whatsoever to ensure countries receiving data on taxpayers’ financial affairs protect that data and respect personal confidentiality.”The sensitive data on tax information exchanged between countries without safety measures can lead to many problems. the threat of online theft and leakage of persoanl financial records is the basic initial loss.

As an example of how things might go wrong when detailed personal information is shared with other governments, the report highlights a recent court case in the UK where the Zimbabwean authorities seized USD300m of assets after they became aware that the UK was making anti-money laundering checks on a large - but legitimate - transaction for someone based in Zimbabwe.

The Assistant Treasurer, Senator Nick Sherry, and Minister for Financial Services, Superannuation and Corporate Law, Chris Bowen MP, announced on July 12 the Terms of Reference for a review by the Board of Taxation into the taxation arrangements that apply to collective investment vehicles (CIVs).

CIVs, currently holding an estimated $1.3 million in investments, are widely held investment vehicles that usually has long-term portfolio investors undertaking primarily investment activities.  “Collective investment vehicles are a critical part of our investment landscape and this is the first ever comprehensive review of all aspects of their tax treatment,” according to Senator Sherry.

The review which was announced by the Assistant Treasurer and Minister Bowen in May 2010, will undertake to:

-    Assess the tax treatment of CVs, having regard to the new managed investment trust (MIT) tax framework including whether a broader range of tax flow-through vehicles should be permitted;

-    Consider the nature and extent of, and reasons for, any impediments to investment into Australia by foreign investors through CIVs;

-    Consider the benefits of extending tax flow-through treatment for CIVs, including the degree to which a non-trust CIV would enhance industry’s ability to attract foreign funds under management in Australia;

-    Consider whether there are critical design features that would improve certainty and simplicity and enable harmonisation, consistency and coherence across the various CIV regimes, including by rationalisation of regimes where possible;

-    Examine the treatment of venture Capital Limited Partnership vehicles in a way that recognises its policy objectives;

“This review forms part of the Labor Government’s commitment to position Australia as a leading financial services center,” said Senator Sherry.

“It responds to a recommendation by the Australian Financial Center Forum that the Board of Tax review the scope for a broader range of collective investment vehicles,” Mr. Bowen said.

“The Government firmly believes that the design features of CIVs should be, wherever possible, simple, clear and harmonized – this will help Australian investors, make the sector more efficient and also mean international investors will find investing in Australia an easier proposition.”

A full CIV review is requested of the Board to be completed by December 31, 2011. (With reprint from TheGovMonitor.com)

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Labor government, on Friday, radically gave new hopes to the smaller players in the mining industry by overhauling the so-called “super profits” tax by reaching a deal with miners which shall only see the biggest exports of iron ore and coal, along with oil and gas projects, subject to the tax. Here are the highlights:

• Tax rate for iron ore and coal was reduced to 30 per cent from 40, and the threshold where the tax will take effect was lifted from five to 12 per cent;
• Tax for onshore oil and coal-seam gas at 40 per cent, the same level as offshore resources;
• Agreement would lose the federal government $1.5 Billion in revenues in first two years and fund only one per cent tax cut in company tax instead of two per cent;
• Petroleum tax rate remains at 40 per cent
• New tax will apply starting July 1, 2012 as earlier and originally proposed.

Gillard said the Minerals Resource Rent Tax is an important breakthrough deal that would ensure all Australians receive their fair share of the country’s mineral resources. With the new compromise, Gillard may be seen calling an election this year, within days or weeks.

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In a recent report about excess super contributions paid by your clients, ATO discussed the processes you can do to comply with excess contributions tax (ECT) obligations.  The office also pointed at the penalties that may apply should you not meet release authority obligations:

1.    An ECT Notice of Assessment and a release authority should be mailed separately to individuals at their address for service of notices held by the Australian Taxation Office (ATO).  This release of authority is what enables each member to fulfill a condition of release and gives the authority to a super fund to release the same amount equal to the excess contributions tax payable.  A release authority is then sent out to individuals within days after issuing the assessment.

2.    The assessment has a maturity date of 21 days in which it must be paid.
-    If your clients have excess non-concessional contributions tax, they are required to use the compulsory release authority and deposit it to their funds within 21 days after the release authority date.  You may then give your client two options, have the money paid to a) them or, b) the ATO.  Should a client choose to have the money paid to him/her, the client must make other arrangements to pay their excess contributions tax debt.

-    If your clients have an excess non-concessional contributions tax, you can have them choose between using the voluntary release authority to withdraw up the liability’s amount, or not.

3.    When a release authority from the member had been released to a fund, they are obliged to release the amount equivalent to the excess contributions tax shown on the form within 30 days of receipt.  However, if they were only able to receive the release authority more than 90 days after date of issue, the client must not act on it as it will have expired.

A fund must complete the release authority statement and send it to the ATO, and a coy to their member, within 30 days of releasing the money.

4.    The ATO has the discretion to send a release authority directly to a fund should a member not comply with the compulsory release authority obligations.  If the ATO does send it, the obligations in the fund will not be changed.  However, in such instance, the fund must send the release amount directly to the ATO.

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Politics aside, as our practice does not comment on political matters, the Resources Super Profits Tax seems to be iniquitous .

Taxing one particular Industry because they are currently  successful is not the Australian way of fair play. What about other industries that might become profitable in the future —will they be subject to this tax?  Maybe the Agricultural Industry will be next when they have a good year .

This tax has the potential to affect many families who have invested in the Share market and expected their mining stocks to give them a decent return.  Read more on Taxation here.

Tax Commissioner Michael D’Ascenzo today reminded people to start thinking about preparing and lodging their 2010 tax return.  “From 1 July, people can prepare and lodge their return online using e-tax, which is secure and easy to use,” Mr D’Ascenzo said.

He continued to say that “Nearly 2.4 million people used e-tax last year – the quickest and easiest way to lodge.  People who use e-tax will receive their notice of assessment and any refund due more quickly than paper returns.”

E-tax also allows you to download information from a range of government departments and third party organisations directly into your tax return, including:

• pensions and allowances
• payment summaries
• bank interest
• private health
• insurance details

You can also download net medical expenses from Medicare and Higher Education Loan Program (HELP) fees information.  “The ATO website has plenty of information for those lodging their own tax return and e-tax has built-in calculators, guides and a check list to help people lodge correctly,” Mr D’Ascenzo added.

E-tax will be available to download free of charge from 1 July 2010 from www.ato.gov.au.  Government and third party information, to pre-fill your return, will be available to download progressively starting 1 July.  You can subscribe to an alert service within e-tax which will let you know when your personal information becomes available.

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