Lifestyles of the rich can raise a red flag, says ATO

Lifestyles out of sync with after-tax income are among a range of behaviours by wealthy individuals that will raise a red flag, the ATO said in a revised list of trigger warnings.

The ATO web page, “What attracts our attention”, also cited large or unusual transactions as well as “controversial interpretations of the law” and opaque tax affairs as other signals that it should get involved.

The updated list, which aims to “provide transparency and build trust and confidence”, targets the sort of privately owned and wealthy groups that have been subject to special scrutiny by the ATO’s Tax Avoidance Taskforce.

The taskforce was given an additional $652 million in the recent budget to extend its operations until 2025.

The ATO said its database now includes information on:

- Taxpayers who avoid or delay paying taxes by not lodging their tax returns when required, or fail to report all of their income

- Taxpayers who provide incomplete information or fail to disclose their interest in foreign entities or incorrectly report foreign income

- Incorrectly claimed tax exemptions, treaty relief, transfer pricing benefits or economic stimulus measures

- Arrangements that mischaracterise transactions or incorrectly calculate turnover or income to obtain a tax benefit

Improved data-matching processes now allow the office to detect undeclared or disguised income, including income from overseas, it said.

Its list of suspicious activity now takes in:

- Tax or economic performance not comparable to similar businesses

- Low transparency of tax affairs

- Large, one-off or unusual transactions

- Aggressive tax planning

- Tax outcomes inconsistent with the intent of the law

- Choosing not to comply, or regularly taking controversial interpretations of the law

- A lifestyle not supported by after-tax income

- Accessing business assets for tax-free private use

- Poor governance and risk-management systems

It supplied further details under specific topics ranging from business structures and transactions, to the shadow economy and phoenix activity.

As the end of financial year looms, non-lodgment is one headline issue that can attract attention, the ATO said, especially when there are large cash flows or inconsistency in filing returns.

“We focus on occasions when taxpayers avoid or delay payment of tax by non-lodgment of their tax return, fringe benefit tax return or activity statement,” the ATO said.

“We also look at:

- outstanding business activity statements.

- entities that did not lodge a return for the year under review and where instalments are low compared to the previous year.

- directors with a number of outstanding lodgments.

- directors who lodge a return not necessary.”