Newsletter November 2021

It’s November and we’re off with the race that stops a nation. While this is normally a given, the fact that the Spring Carnival is going ahead, and overseas travel is back on the agenda, is a welcome sign that Australia is getting back to business.

All eyes were on the September quarter inflation figures in October, as speculation mounted that the Reserve Bank may be forced to raise interest rates sooner than planned. The Consumer Price Index (CPI) rose 0.8% in the September quarter while the annual rate eased from 3.8% to 3%, although this was distorted by the end of free childcare in the September quarter last year. A more accurate measure is underlying inflation, which rose to a 6-year high of 2.1% in the year to September.

Rising fuel and construction costs were the main culprits, as global supply chain disruptions pushed import prices up 6.4% over the year to September. Australia’s national average petrol price hit a record 169.5c a litre in October, as rising demand and supply constraints pushed the price of Brent Crude to a three year high. Inflation fears lifted the Australian dollar to US75.2c, up 4% over the month, while the interest rate on 3-year Australian government bonds lifted 82 basis points over the month to 1.14%.

Inflation fears also dented consumer confidence in the final week of October, but the ANZ-Roy Morgan rating still ended the month higher at 106.8. Rising business optimism saw the NAB business confidence index lift from -5.5 to +13 points in September.

We are unlikely to get a clear picture on inflation until supply pressures ease. The Reserve Bank has stated it won’t lift rates until inflation is ‘’sustainably” within its 2-3% target band and wages growth is above 3%.

How to avoid unwanted ATO attention

Nobody wants to attract unwanted scrutiny from the ATO. Tax audits can be stressful and potentially costly. They are also increasingly well targeted, now that the ATO’s data matching capabilities are making it easier to pick up discrepancies. The best way to avoid an audit is to know how to stay out of trouble in the first place.

Whether it’s not declaring foreign or business income, claiming too much for work-related deductions, or not paying your employees’ superannuation, some activities are likely to attract the tax man’s interest.

Here are some simple steps you can take to reduce the likelihood of the ATO taking a closer look at your personal or small business return.

Declare all your income

For individuals, it’s important that you include all your taxable income in your return. Ultimately, the responsibility for including all your income rests with you, so ensure you report everything as the Tax Office will use a wide variety of information sources to cross check.

Common mistakes are not including capital gains you received when selling shares or property or forgetting income from overseas sources such as a business, rental property or shares.

When it comes to tax deductions, the ATO is particularly interested in your workrelated expenses. If your deduction claims are unusually high compared to other people in similar industries, the ATO will want to know more. A good tip is to check out the ATO’s guides to deductions for specific industries.

Take care with property investments

Tax deductions claimed on your rental property are another red flag for the ATO, so it’s important to follow the rules.

Ensure you understand the difference between claims for depreciation and capital works, and only claim expenses for periods when the property is rented, or genuinely available to tenants. And don’t forget you can no longer claim travel expenses for inspecting your property or undertaking maintenance.

The ATO is also interested in any noncommercial rental income received from a holiday home, so if you let your property at a discounted rate to relatives or friends, you need to limit the amount of deductions you claim to avoid problems.

If you have a loan for an investment property and are claiming for the cost of interest on the loan, you need to split your deduction into private and business purposes.

Watch your business reporting

When it comes to small business, the ATO looks for enterprises that incorrectly or under report their sales (both cash and electronic payments) or fail to register, so ensure you keep good business records and lodge accurate business activity statements.

Another warning signal for the ATO is businesses that report outside the normal small business benchmarks for their industry. These benchmarks are helpful for comparing your business’s financial performance against similar businesses, but they also provide the ATO with a useful tool for comparing tax payments and deductions claimed by businesses across the industry.

As more customers pay electronically, the ATO is also increasingly interested in cash-only businesses which it views as more likely to be avoiding tax. If your business operates and advertises as being ‘cash-only’, or does not accept electronic payments, you will need to keep detailed records of your takings and payments, as the ATO will be extremely interested in your tax returns.

Pay your staff correctly

If your business employs staff, ensure you are deducting Pay As You Go (PAYG) withholding from their wages and regularly forwarding it to the ATO. Making regular Superannuation Guarantee (SG) contributions to your employees’ super funds is also important if you want to avoid ATO scrutiny.

Not paying the correct amount of Fringe Benefits Tax or incorrectly accessing FBT concessions are also red flags, so ensure you are complying with the rules.

If you are registered for Goods and Services Tax (GST), ensure you are actively carrying on a business or you may find yourself talking to an ATO auditor.

The key to ensuring your tax return is correct is to get professional help. We can help you to maximise your tax return, while ensuring that it is correct and compliant.

The new Director ID: Do you need one?

It’s been a busy year for Australia’s two million plus directors dealing with the pandemic and lockdowns and there’s now a new task on their to-do list.

From 1 November 2021, if you’re a director or want to become one, you will need to apply for the new Director Identification Number (Director ID) being rolled out by the Federal Government.

Directors of businesses and entities of all sizes – including directors and corporate trustees of self-managed super funds (SMSFs) – will all need to apply. If you run your business as a sole trader or partnership, however, you won’t need a Director ID.

Director ID: what is it?

The new Director ID is a unique 15-digit identifier most directors will need before they can take up a directorship.

Before you join a board, you will need to apply for your own Director ID which you will keep forever, even if you change boards, stop being a director, change your name or move interstate or overseas.

This new identifier is part of a broader registry modernisation project combining the Australian Business Registry Service (ABRS) with numerous ASIC registers to form a single system overseen by the ATO.

According to the government, unique director identifiers will create a fairer business environment by preventing the use of false and fraudulent director identities.

Who needs a Director ID?

The new regime casts a pretty wide net and will catch most business entities and organisations.

You will need a Director ID if you are an eligible officer of a company, Aboriginal and Torres Strait Islander corporation, corporate trustee, charity or not-for-profit organisations limited by guarantee, or a foreign company registered with ASIC and conducting business in Australia.

Directors of registered Australian bodies (such as incorporated associations registered with ASIC that trade outside the state or territory in which they are incorporated) also need to apply.

If your organisation has an Australian Business Number (ABN), you can use the ABRS LookUp tool to check whether it is registered with ASIC.

Officers outside the ID regime

Some company officers are not required to apply for the new identifier.

If you are a company secretary but not a director, act as an external administrator of a company, or are called a director but haven’t been appointed as a director under the Corporations Act, you won’t need a Director ID.

Neither will directors of charities not registered with ASIC to operate throughout Australia.

The officers of an unincorporated association, cooperative or incorporated association established under state or territory legislation (unless the organisation is also a registered Australian body), are also exempt.

Applying for your Director ID

From November 2021, you will need to apply for your Director ID on the ABRS website and log in using the myGovID app. The myGovID app is downloaded on your smart device to verify your digital identity and is different to your existing myGov account.

When applying for your Director ID, you are required to personally make the application so you can verify your identity.

There are varying application deadlines for the new identifier, with current directors (on or before 31 October 2021), having until 30 November 2022 to obtain their Director ID.

While existing directors have plenty of time, if you become a director between 1 November 2021 and 4 April 2022, you must apply for your Director ID within 28 days of your appointment to the board.

Directors appointed after 5 April 2022, must apply prior to taking up their directorship.

If you are unable to apply for your Director ID by the relevant deadline, you can apply for an extension.

Once you receive your new Director ID, you will need to pass it on to your company recordholder who is usually the company secretary or authorised agent. The ABRS is not permitted to disclose Director IDs to the public without consent and your details won’t be searchable on the register.

If you would like more information about Director IDs, whether you need one and how to go about applying, please get in touch.

How the ATO mines your data

It was hard to miss the media splash about international tax evasion when the Pandora Papers were released, with local interest focussing on what Australian tax authorities would do with this massive trove of information.

But it seems the ATO is relaxed. Deputy Commissioner and Serious Financial Crime Taskforce Chief Will Day responded that the tax man doesn’t “rely on data leaks to do our job. We detect, investigate and deal with offshore tax evasion year-round.”

So where does the ATO get its data from and how is it being used?

Information from many sources

As some of the most powerful computers in the country are matching data from just about every facet of a taxpayer’s financial life, the ATO doesn’t miss much. Every year it receives reams of data from share registries, banks and financial institutions, allowing it to identify most of the financial transactions occurring in Australia. In 2020, more than 600 million transactions were reported to the ATO.

Property and lifestyle assets are also key areas of interest, with data from state and territory title offices and revenue agencies covering real property transactions, rental bond payments and property management all flowing to the ATO.

Data is also exchanged with tax agencies in other countries to ensure correct reporting of overseas income and income earned by foreign residents.

Current data-matching programs by the ATO cover credit and debit cards, ride-sourcing providers, sharing economy accommodation platforms and cryptocurrency service providers. Information on online sales over $12,000 also end up with the tax man.

Government departments data sharing

Government agencies are also a major source of data for the ATO, with detailed protocols on information sharing in place with the Australian Electoral Commission, Services Australia (Centrelink and the Child Support Program), and the Department of Home Affairs’ visa and passenger movement records.

Motor vehicle registrations from the states and territories provides data on all motor vehicles sold or registered where the value is over $10,000.

The new Single Touch Payroll (STP) system for businesses is also used to confirm employment income, deduction reporting, payments to contractors and superannuation contributions.

Even tips from other businesses and individual taxpayers can be used in specific data-matching activities.

Matching and analysing the data

Once all this information is received, it’s validated against the ATO’s internally collected data. Algorithms and other analytical tools are used to refine the data and match it against information reported in tax returns.

Although the ATO uses some of the data it receives to pre-fill sections of your tax return, much of it is used to identify discrepancies in taxpayers’ returns.

You are then contacted and provided with details of the discrepancy so you can check your records. Discrepancies can be as simple as omitted interest, employment income or government payments; CGT from the sale of an asset; payments to contractors in the building and construction industry; or distributions from partnerships, trusts and managed funds.

Data-matching is also undertaken on taxpayers purchasing expensive consumer items (such as boats, racehorses, antiques and luxury cars) to determine whether they can afford the items based on their declared income.

Helping businesses operate

Data-matching programs help the ATO identify businesses that may not be reporting all their income, operate outside the system, or operate but fail to lodge a tax return.

Careful analysis of financial data helps businesses to operate on a level playing field. Running part of a business ‘off the books’ and not reporting all the income received provides an unfair advantage.

By data-matching, the ATO can also better understand trends and patterns in specific industries. This is used to create performance benchmarks (or financial ranges) for each industry, particularly in relation to tax and activity statements. These benchmarks cover turnover comparisons with your cost of sales, total expenses, rent, labour and motor vehicle expenses.

The ATO also develops a key benchmark range for an industry. If data analysis shows your business operates outside this range, it’s a red flag raising the possibility that your business may be avoiding its tax obligations by not reporting some of its income. The benchmark range may also be used to determine how much tax a business should have paid if there are insufficient or no records available.

If you would like help with understanding your tax obligations and preparing your tax records, please contact our office today.

Important Dates November 2021

Business

Company Tax

31 October: 2021 Tax returns were due for lodgment for many individuals, companies & trusts. Contact me for assistance in lodging overdue returns & potentially avoiding ATO late fees & penalties.