Record keeping and compliance in the age of ATO data-matching
Small to medium sized business owners need to be mindful of current ATO focus areas and data matching programs, particularly when accumulating private assets or other passive investments within existing business structures or as a result of the extraction of business profits.
Can you prove the source and use of your accumulated wealth as a private business owner?
Active management of records and clean accounting processes are a must to manage compliance obligations with the evolving data-matching technologies of the ATO and other regulatory bodies. With cloud accounting, digital receipt apps and shared document management systems, it’s fairly straightforward for accountants to help manage the documentation and record keeping requirements for clients. It shouldn’t be an overwhelming task to track loans, distributions and asset purchases within a business structure in order to demonstrate compliance with Division 7A and other tax areas relevant to wealth extraction. The problem is that this is often overlooked.
“If a tree falls in a forest and no one is around to hear it, does it make a sound?”
Being able to appropriately account for transactions and provide documentation to support compliance will be important when the ATO comes knocking, particularly where private wealth is being accumulated through the extraction of business profits. Business owners are starting on the back foot with the ATO if they are relying on verbal agreements or mere accounting entries booked by their accountant at year end that are not necessarily consistent with the flow of funds or substance of the transaction in question.
ATO data-matching programs
ATO targeted asset classes and value thresholds for data-matching
Data matching is an efficient and effective way for the ATO to examine thousands of taxpayers and narrow in on targeted areas of expected non-compliance. Business owners need to be aware of the expansion of these data-matching programs and profiling of taxpayer groups.
Lifestyle Assets
The ATO recently announced its new lifestyle asset data-matching program which is relevant to small to medium business owners. Under this data matching program, the ATO will acquire lifestyle assets data from insurance providers for the 2023-24 through to 2025-26 years. Insurance policy data will be collected for the asset classes listed in the adjacent table, where the asset value is equal to or exceeds the nominated thresholds.
The data will be acquired and matched for the ATO’s profiling of taxpayers and provide a holistic view of their assets and accumulated wealth and identify potential compliance issues with income tax, capital gains tax, fringe benefits tax, GST and super obligations.
The ATO says the lifestyle assets data-matching program will allow them to identify and address a number of taxation risks, including:
ATO are data-matching insurance details for boats and other assets
Omitted or incorrect reporting of income – taxpayers accumulating or improving assets with insufficient income reported in their tax returns to show how they have paid for the assets
Omitted or incorrect reporting of income and/or capital gains – taxpayers disposing of assets and not declaring the income and/or capital receipts on those disposals, or declaring them incorrectly
Claiming GST – taxpayers purchasing assets for personal use through their business or related entities and claiming GST credits they are not entitled to
Fringe benefits tax – taxpayers may be purchasing assets through their business entities and applying those assets to the personal enjoyment of an associate or employee giving rise to a fringe benefits tax liability
Use of assets by self-managed super funds (SMSFs) in breach of the law – SMSFs may be acquiring assets but applying them for the present day benefit of the fund's members or other related parties.
Examples of other current ATO data-matching programs
Other current data-matching programs relevant to the private business space include:
Crypto asset data-matching - Account identification and transaction data to be acquired from crypto designated service providers for the 2023-24 financial year through to the 2025-26 financial year inclusively. The ATO estimate that records relating to approximately 700,000 to 1,200,000 individuals and entities will be obtained each financial year. The data will be acquired and matched to ATO systems to identify taxpayers who failed to report a disposal of crypto assets in their income tax return.
Residential investment property loan data-matching - Investment property loan data acquired by the ATO with information about loan repayments, interest charged and borrowing expenses. This is intended to identify and address tax risk areas such as incorrectly apportioning loan interest costs where the loan was refinanced or redrawn for private purposes.
Property management data-matching - The ATO’s findings from a sample of audits of taxpayers identified undeclared rental income and incorrect reporting of rental property expenses as significant risk areas. The property management data-matching program is intended to address a number of tax risks, including: failure to lodge tax returns, incorrect reporting of income or deductions in rental property schedules, incorrect reporting of capital gains tax such as incorrect treatment of tax costs bases or losses claimed on rental properties.
Company officeholders data-matching - Officeholder data will be collected weekly and sourced from ASIC, ACNC and ABRS including: names, addresses, date of birth, contact information, officeholder type, roles, duration etc. The ATO expect to collect data on more than 11 million individuals during the 2024 to 2027 years.
Record keeping focus areas for private business groups
Record keeping (or lack there of) also features extensively throughout the ATO’s audit findings from their “Next 5,000 groups” audit program, which is targeted at private groups with $50m or more in assets.
The ATO’s stated focus areas for this compliance program are based on their taxpayer profiling and data analytics programs across private businesses that have typically undertaken one or more of the following transactions:
experiencing rapid growth, which may lead to incorrect reporting if the tax governance framework isn't fit for purpose to support the expansion
expanding offshore or engaging in cross-border transactions with related parties
entering into arrangements such as intra-group transactions to inappropriately transfer domestic wealth
undertaking wealth extraction including by the use of private equity funds
considering tax efficient structures to pass on wealth to the next generation
Insufficient documentation was of particular concern for related party transactions. Some examples include:
No documented management service agreements between related entities
Omitted or understated income where incomplete records were provided
Aggregate of related party deductions claimed by one related party exceeded income returned by the other related party
No formal lease agreement between related parties
Unable to assure related party rent as no lease agreement in place and no rental valuation conducted
Insufficient documentation to support compliance with the Division 7A shareholder loan rules (i.e no written loan agreements, no minimum yearly repayments and record keeping)
Summary
Small to medium sized business owners need to be mindful of these ATO focus areas and current data matching programs. Appropriate documentation and records will greatly assist with any review or audit by the ATO. This is particularly important when accumulating private assets or other passive investments within existing business structures or as a result of the extraction of business profits.
Contact us
Contact us for more information and to discuss your circumstances if you are unsure how the ATO’s current data-matching programs may impact you.