Unsure of what may cause the Tax Office’s spider senses to tingle? Small and medium-sized enterprises (SMEs) can unravel the mysteries of the Tax Office’s compliance regime now that it has released detailed information that confirms what they should and should not do.

The Tax Office’s attention may be drawn to your business if there are:

• substantial differences between tax performance and business performance
• inconsistencies in activity statements
• spikes in refund claims
• large, one-off or unusual transactions (international transactions, financial supplies or property-related transactions)
• significant differences between the tax and economic performance of one business to similar businesses in the same industry
• unexplained losses
• histories of aggressive tax planning by individuals or their advisers
• weaknesses in compliance structures, processes and approaches
• tax outcomes inconsistent with the intent of tax law
• lifestyles not supported by after-tax income
• treatment of private assets as business assets
• access of business assets for tax-free private use
• non-disclosure of offshore dealings with overseas entities, especially in low-tax jurisdictions and tax havens that allow banking secrecy
• usage of complex structures and intra-group transactions to minimise tax
• transactions where the tax and economic outcomes are inconsistent
• poor governance and risk management systems
• distortions and inconsistencies in market valuations and apportionments, and
• business performances falling outside small business benchmarks.

The Tax Office uses a risk differentiation framework to assess the threat of each taxpayer. By using the framework, the Tax Office has categorised all taxpayers in the SME segment into four risk categories:

• lower-risk taxpayers – includes the majority of businesses in the SME market. These taxpayers can expect periodic monitoring from the Tax Office, information requests, and internal reviews, but as a whole they are less likely to have significant matters of concern
• medium-risk taxpayers – are subject to periodic reviews and compliance-verification activities. These taxpayers typically partake in a practice the Tax Office has taken an interest in, such as making unusually large claims
• key taxpayers – includes, more often than not, taxpayers that approach the Tax Office for a ruling on a controversial or contentious tax matter. They may be subject to ongoing monitoring
• higher-risk taxpayers – includes highly wealthy individuals but depends on the nature of their transactions, their effective tax rate and their compliance history. Can expect close scrutiny, audits and a higher level of intensity in interactions with the Tax Office.

On a related note, the Tax Office’s 2011-12 prosecution program showed that 514 businesses were nabbed for lodging false business activity statements (BAS), making false fuel tax credit claims, incorrectly using an Australian Business Number and participating in the illegal transfer of money into offshore accounts.

Below are a few case studies which demonstrate how exactly businesses erred in 2011-12:

• Lodgements of false BAS: A Queensland-based woman lodged BAS for multiple businesses and claimed fraudulent refunds on her activity statements over 18 months. She was sentenced to two years imprisonment and had to pay the $55,000 equivalent to the amount of refunds she had received.
• Theft of personal details to submit false BAS: A NSW man stole the identities of seven businesses and registered ABNs for them. He then submitted BAS forms and claimed false GST refunds for these businesses. The refunds were paid into bank accounts he set up in the names of the stolen identities. He was convicted and sentenced to three years jail.
• False fuel tax credit claims: Queensland man claimed a total of $1.5 million false fuel tax credits by claiming he purchased diesel fuel for a number of transport vehicles which he owned and hired to transport goods. The Tax Office’s sleuthing revealed that many of the vehicles he claimed for were not transport vehicles, but instead normal sedans, and that his businesses were for storage of goods rather than transportation – removing his need to buy diesel fuel. The man was convicted and sentenced to six years jail and ordered to pay reparation of $1.37 million.
• Offshore fraud: Three NSW co-directors of an air conditioning business used illegal “round-robin” schemes, where money labelled as “company expenses” was transferred to a Vanuatu account and returned “tax-free” to the co-directors’ personal accounts. They were all sentenced to varying periods of jail.