Under the ATO’s spotlight? Compliance guide could help

Clearer view: The guide will go some way to clarifying what’s expected Louie Douvis

Small to medium businesses will now have a better idea of how and why the Australian Taxation Office (ATO) targets them – and what to do when it does.

The ATO has released a new guide, dubbed by some in the tax industry as an “SME bill of rights”, which not only sets out the ATO’s expectations of taxpayers but also gives business some ground rules on how the ATO should behave when dealing with business.

The guide, called Small-to-medium enterprises and wealthy individuals: Our compliance approach, is aimed at businesses with turnover between $2 million and $250 million and follows similar guides in the past for wealthy people.

“It’s really important in setting expectations that taxpayers can have of the Tax Office and vice versa,” says the Inspector-General of Taxation Ali Noroozi, who had recommended such a guide be developed to try to minimise disputes between business and the regulator.

The guide lists a number of “characteristics” that may attract the ATO’s attention, including “large, one-off or unusual transactions”, “performance varying significantly from similar businesses in the same industry”, “a history of aggressive tax planning” and “unexplained losses” (see “Tax Traps” for a full list).

SMEs and the wealthy contribute more than one-quarter of all revenue collected by the ATO. In 2010-11, it totalled $74 billion, making it an important group for the regulator to watch.

After a raft of problems in dealing with SMEs, Tax Commissioner Michael D’Ascenzo is optimistic the guide will go some way to “clarifying what the community can expect from us and what we expect of business taxpayers”.

The guide tells SMEs how to avoid or reduce the risk of penalties and what options are available in resolving disputes with the ATO. It also describes the code of conduct that ATO staff are bound by and tells taxpayers how they can escalate an issue to a senior officer if they are not satisfied with the ATO’s conduct.

CPA Australia’s head of business and investment policy, Paul Drum, says the guide helps lift a perceived veil of secrecy when dealing with the regulator. “To most small businesses, dealing with the Tax Office is a mystery,” he says. “So this is demystifying that relationship and what you can expect should the tax office come looking at your business.”

Others say it will improve transparency during audits. “An audit is never a pleasant experience but knowing the ground rules has the potential to help minimise costs and heartache for taxpayers,” the Tax Institute’s senior tax counsel, Robert Jeremenko, says.

The ATO’s treatment of SMEs and the wealthy was sometimes found overbearing by a review conducted last year by Noroozi.

His report says 85 per cent of the rich who receive a revised tax bill, dispute the ATO’s assessment and 60 per cent of them get the tax bill reversed, either in full or in part.

It attributes problems to “inexperienced” ATO staff who lack “commercial expertise” and it makes a number of recommendations – ranging from better training and resourcing to less time wasted on reviews and audits the ATO often ends up losing.

In this context, an area that will be of great help to SMEs and their tax advisers is the inclusion of a priority rulings process for SMEs. “Obtaining certainty from the Australian Taxation Office on the treatment of a transaction can be just as time critical for SMEs as it can be for large business,” Drum says.

The only criticism Drum has of the guide is that by trying to cover a broad segment of the market, it has sacrificed detail. “The profile of SME taxpayers and their particular compliance issues can be quite different depending on where they fall within the spectrum of $2 million to $250 million turnover,” he says.

And there’s another problem. While it’s hoped that setting clearer expectations will minimise disputes, tax experts say the ATO’s internal culture must change. Better training and more resources aren’t issues a guide can fix.

• Tweet