ATO case files highlight pitfalls

More than a thousand people were convicted of tax and superannuation offences last year, according to an Australian Taxation Office report.

A significant number of prosecutions were for failure to lodge returns, making false statements, failure to disclose cash income and goods and services tax fraud.

Nine companies and 41 individuals were prosecuted for not reporting cash income. The amount involved was $3.22 million.

Illegal schemes involving GST were prominent last year.

An accountant in Townsville was found to have set up a property development company with the sole purpose of committing tax fraud. He lodged 32 false business activity statements, claiming GST refunds worth $580,000.

A senior assistant commissioner at the ATO, Katie Welsh, says the ATO is introducing new data-matching initiatives that will target people using the cash economy to hide income.

"Existing data-matching programs that are used to detect cash-economy activity focus on credit- and debit-card transactions and motor vehicle purchases," Welsh says. "New data programs focus on the building and coffee shop industries.

"Coffee-supplier and building-industry data has been obtained to identify businesses not correctly reporting their sales, operating off-the-books or underground."

The deputy commissioner of aggressive tax planning at the ATO, Tim Dyce, says the ATO's focus is also on financial products with high-risk features and structured loans.

"Some of these products are designed to offer significant tax benefits with little or no commercial purpose by containing artificial or contrived features, such as complex dividend swap arrangements, franking credit trading, synthetic investment structures and deferred purchase agreements," he says. "We encourage investors to ensure complex arrangements are covered by an ATO product ruling to gain certainty about the tax consequences or entering into the arrangements."

Cases before courts and tribunals during the past year highlight where taxpayers run into trouble.

Recurrent matters involve trusts, problems with substantiating claims, residency status disputes and claims for losses on "non-commercial" investments.

Trust issues

In March the High Court ruled that the trustee of a charitable trust had not complied with the requirement for tax exemption, because the trust fund had not been fully applied for the purpose for which it was established.

A husband and wife, Graham and Melinda Bargwanna, set up a trust for "public charitable purposes" in 1997. Since then the trust paid out more than $250,000 to charities.

However, trust money was paid into the trust administrator's account, where it was mixed up with other money. In 2004 the trustees used money from the trust as security for a home loan.

The trust was denied tax-exempt status as a result of the misapplication of the trust funds.

In another case, a private company, Ambassador, set up a trust to give employees equity-based benefits. Employees were invited to apply for units and would forgo salary or bonuses.

The employees had "cancellation entitlements" that allowed them to get their money out of the trust.

The ATO and the company got into a fight about whether the trust contributions were ordinary income and taxable.

The Administrative Appeals Tribunal held that the contributions to the trust were assessable income.

Substantiate claims

The AAT ruled in March that a property developer, who had claimed costs associated with purchasing properties, failed to substantiate claims. The AAT confirmed that the onus is on the taxpayer to substantiate claims for deductions.

Last October the AAT held that a long-haul truck driver could not claim travel expenses. It said the driver had an entitlement but did not have the evidence.

The driver claimed the cost of meals he consumed at roadhouses on his routes but was unable to provide any documents of any kind to substantiate the costs.

Check residency rules

Increasing employment mobility means more Australians are working overseas for what can be long periods. The tax consequences of this can be confusing and have led to a number of disputes.

An employee of the Department of Defence left Australia in 2009 to work as a contractor for the Australian Embassy in the Philippines. He has since married a Filipina and given evidence that he does not intend to return to Australia. The ATO ruled that he was still an Australian resident for tax purposes while he remained a member of an Australian superannuation scheme.

In March the AAT ruled that the ATO was correct.

In another case before the AAT, a man employed to sell Meriton apartments to Indonesian investors claimed he was a not a resident in the years 2002 to 2006 because he spent more than 183 days a year overseas. The ATO said he was a resident and the AAT agreed the man had his "settled place of abode" in Australia and he drew income from an Australian source.

In a third case, a Perth engineer was employed by Maersk Oil Qatar and left Australia in 2007 to work on a two-year contract in Dubai and then Doha. The engineer's income tax returns for the 2007-08 and 2008-09 tax years stated that he was non-resident for tax purposes and did not include any assessable income.

The ATO said his foreign source income was assessable. The AAT found that the engineer was a resident for tax purposes because he had a "continuity of association" with Australia his family remained in Perth while he was overseas and almost all his income was sent to Australia. In addition, his contract with Maersk was for a fixed period.