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Asset Betterment and the Taxpayer Onus

INTERNATIONAL TAX FACTSHEET

Transfers of funds, particularly from overseas business interests, need to be substantiated and accurately reported to stay on the right side of the ATO

Australian small businesses are the backbone of the economy, supporting local jobs, economies and growth. With more than 210,000 SMEs across the country, many are family-owned enterprises that may consist of multiple businesses with shared resources. 

A recent case before the AAT has highlighted the importance of accurately documenting and reporting on the financial position, tax arrangements and transactions that occur with these types of structures, especially where the business may have international assets. 

The Australian Tax Office has amassed massive data-matching capabilities, with particular emphasis on foreign asset transfers, ownership and registration. 

Background: The Family Business

In the case mentioned above, a family business became the subject of an audit after inconsistencies were discovered between income disclosed to the ATO and the actual income, assets and transactions that were made in a 5-year period.

During the same period, the family acquired a number of properties, with one member having access to most family bank accounts and playing a central part in the transactions relating to property purchases. Large inbound transfers of cash from overseas business interests had not been reported and the pattern of income vs property acquisition led the ATO to look more closely at the family's activities. 

The case involved six taxpayers who were members of one family, involved in various businesses such as a supermarket, a bakery, a takeaway shop, fruit shops and an export business.  The family members had little interest in the family's finances, however the same family member was able to shift money between accounts and the taxpayers. 

Asset betterment analysis a 'blunt tool' … 

During the ATO audit, the Commissioner formed the view the family had access to much greater income, with expenses and asset acquisitions far and above the amounts disclosed in the relevant tax returns. He then issued amended assessments and default assessments to various family members based on asset betterment analysis.

An asset betterment analysis is one method used to determine the correct amount on which tax ought to be levied, however it is viewed as a blunt tool because of inherent flaws in the 'asset management test'. By comparing the entity's net worth at the end of each income year compared to its beginning, then it is possible - though can be inaccurate - to derive an assessable amount. 

Lack of documentation puts onus of proof on the taxpayer

The taxpayers argued that the funds were related to gambling wins, wedding gifts, and gifts or loans from other family members, however the family member responsible for the property acquisition also conceded he took money from the business on a regular basis for living expenses. The family were, however, unable to substantiate or prove how these large amounts were derived and used.

The AAT found that the taxpayers failed "individually and collectively" to discharge their burden of proving the relevant assessments were excessive. This was despite an acknowledgement by the AAT that the amended and default assessments were probably inaccurate in light of the shortcomings of the asset betterment methodology. 

With regard to the taxpayers' attempt to prove its case based on its own calculations, the AAT said "More should be expected of a taxpayer, even one who has lost records in a flood". 

While the Commissioner used this method in making his default assessments, the AAT commented that "the Commissioner has no choice but to make an informed guess and then put the taxpayer to proof".

Amended assessments were issued to various members based on the ATO's asset betterment analyses. The Commissioner also claimed that he was authorised to issue some of the assessments out of time due to fraud or evasion. Administrative penalties were imposed at the rate of 75% of the shortfall for intentional disregard, with a 20% uplift, let alone the interest charges backdated to the date the original returns were due to be lodged.

Data matching and sharing of information

The ATO has long made clear that it utilises data matching and that it shares tax related information with different tax jurisdictions. 

More information

If you are part of a family business, talk to our team about a review of your structures, documentation and tax planning.

Download PDF version: Asset Betterment & The Taxpayer Onus

Last updated November 2016. This factsheet is provided for information purposes only and is correct at the time of publishing. It should not be used in place of advice from your accountant. Please contact us on 02 9957 4033 to discuss your specific circumstances.

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