19 August 2010
The Tax Office has successfully obtained records from eBay and The Trading Post that will enable them to data match income declared by taxpayers to their income generated online.
Targeting those with earnings of $20,000 or more in any of the last three financial years, the ATO crackdown is looking for online operators who are effectively running a business but not declaring the income. The Tax Office also expects to catch existing businesses that are generating additional income through the trading sites but not declaring or understating the income.
The Tax Office will match data from the trading sites to Tax File Numbers, ABNs, addresses and dates of birth. The data matching program identifies a list of taxpayers 'of interest' to the Tax Office who are then contacted for review or audit.
For many, sites like eBay offer a distribution channel for home or start up businesses without the expense of a shop front or developing a retail network where margins can be squeezed and profits reduced. It's a way of 'dipping your toe' in the retail market to gauge a product lines appeal without many of the overhead costs associated with traditional business. The Tax Office focus means that they suspect there are a host of eBay business entrepreneurs who are not declaring income earned.
So, at what point do you have to declare income you have earned to the Tax Office? The Tax Office will be looking to see if your activity online could be deemed to be a business. There is no one test for what qualifies you as a business versus a hobby but factors such as the regularity of your transactions, whether or not you are promoting yourself as business (developing a brand name etc), if you engage in marketing activities, whether you intend to develop a business and make a profit (or have the capacity to generate a profit over time), the size, scale and permanency of your activities and whether you operate in a business-like manner all go toward determining whether what you are doing is a business or merely a hobby. If your activities are just a hobby then the income is not assessable, and the expenses are not deductible. If you are a business then you need to declare the income earned but you also get to claim deductions for the cost of the business activities.
If you think you might be affected by the ATO's data matching program, contact us today. The ATO is offering reduced penalties to taxpayers who voluntarily disclose income earned from the online trading sites.
Most businesses will be finalising their June BAS at the moment. Extra care needs to be taken with this BAS to ensure that you have everything correctly recorded for the year. Increasingly, the ATO are matching data provided in your income tax return with the total of information returned in your business activity statements over the same year. Where they find material differences in the key numbers these differences can trigger an audit. Final revenue figures and inter-entity charges are key risk areas. Decisions about these charges and reconciled numbers should have been made by June 30. You don't have the luxury to wait until you finalise your tax return for the year. When you lodge your June BAS you have provided the ATO with a summary of your business income and expenses for the year.
One of our end of year accounts preparation processes is to reconcile, within the bounds of materiality, the combined BAS income totals to the financial statements.
The ATO are fairly up front. Every year they tell you what they are targeting and why. That's why when the Tax Commissioner released his compliance program for 2010/2011, we took a keen interest in what he had to say.
The way the tax office catch tax evasion is more sophisticated and far reaching than ever. Last year, they utilised over 500 million transaction records from third parties. That is, bank details, international transactions, investments, welfare data, super fund information, luxury car and boat purchases, employee share scheme details and property data are all used to make sure that the income you declare on your tax return is an honest assessment.
• Details of employee share schemes
• Executive salaries and access to executive perks
• Lifestyles that don't match income declared
• Claims for home office expenses
• Claims for business travel (particularly mistaken claims for travel between the office and home)
• Claims for rental and share investment expenses not entitled to or can't be substantiated
• Breach of superannuation caps
• International transactions - Project Wikenby is credited with reducing the flow of cash to international tax havens - Vanuatu, Switzerland, Lichtenstein – by 20 to 30%!
• Transfer pricing issues
• High level of GST credits
Quote of the month
"An election is coming. Universal peace is declared, and the foxes have a sincere interest in prolonging the lives of the poultry." George Eliot
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This Newsletter, of necessity, has dealt with matters of a technical nature in general terms only. Clients should contact us for detailed information on any of the items in the Newsletter. No responsibility for loss occasioned to any person acting or refraining from acting in reliance upon any material in this Newsletter can be accepted by any member or employee of the firm.