The GST Margin Scheme and Multiple Titles
The decision in Landcom vs FCT [2022] FCA 510 may present an opportunity to revisit…
The current data-matching program by the Australian Taxation Office targeting luxury assets has put alI owners on notice – the tax man is coming, and he’s just made it even easier to find you.
The job of collecting Australia’s AU$620 billion-plus in Commonwealth taxes each year falls to the Australian Taxation Office (ATO), an organisation guided by the Commissioner of Taxation. It goes without saying, the job is enormous and to do it effectively requires someone who is resourceful, inventive and smart – attributes that are all on display in the Commissioner’s latest deployment of his data-matching weapon against the incorrect tax treatment of luxury (or, as he calls them, lifestyle) assets.
The term lifestyle assets used by the Commissioner probably gives away his primary focus in undertaking this compliance activity – identifying undeclared income from those with a lifestyle exceeding that of the reported income and expenditure on their tax return. There’s no upper limit on the value of the assets the Commissioner is chasing, so these will also include luxury assets such as yachts, jets, artwork, motor vehicles and collectables. In these asset classes, it’s not commonly the lifestyle matching that’s an issue but the treatment of these assets for tax purposes.
The reasons luxury assets attract the Commissioner’s attention are threefold.
High value
Luxury assets often represent significant value, so the potential tax revenue involved is substantial. For instance, paying GST on the commercial activities of a yacht is one thing but claiming back the GST paid on the purchase or importation of a multi-million-dollar vessel quickly becomes a much more substantial amount of tax at risk for the ATO.
Misuse
In terms of tax risk, the Commissioner considers there’s a higher risk of misuse, where owners might claim personal use assets as business expenses to gain tax advantages.
Complexity
Determining the legitimate business use of luxury assets can be complex and subjective, leading to disputes between taxpayers and the Commissioner.
Data matching is a technique used by the ATO to compare information from different sources to identify discrepancies and potential areas of non-compliance. While some view it as a type of fishing exercise, the courts have upheld the Commissioner’s authority to gather information from a variety of sources without having the name of a particular taxpayer under review (that comes later).
The information obtained can also be exchanged with Australia’s international treaty partners to ensure correct reporting of income earned overseas by Australian residents and income earned in Australia by foreign residents.
Under the current data-matching program, the Commissioner is collecting data on policies held from over a hundred insurers for classes of assets over a certain value, including caravans and motorhomes (AU$65,000), motor vehicles (AU$65,000), thoroughbred horses (AU$65,000), fine art (AU$100,000 per item), marine vessels (AU$100,000) and aircraft (AU$150,000). Further, the Commissioner expects to access nearly eight million records over the 10-year lifespan of the project, which covers all financial years from 2015-16 to 2025-26.
Once armed with this information, the ATO can move quickly to identify taxpayers of concern or those who may be issued with a request for more information. Commonly, information requests are handled through correspondence,however for matters considered to be higher risk, an in-person review or audit is often preferred.
It is also open for the Commissioner to cross-verify other sources of data to determine risk. For example, he might check travel logs, business meeting records or GPS data to confirm the usage of a private jet. Automatic Identification System (AIS) or port movement records of yachts is also another source of information at the Commissioner’s disposal. The Commissioner can also access websites or social media for gathering evidence about the actual use of luxury assets.
In addition to the time and expense associated with being audited by the ATO, there can also be significant financial penalties for under-reporting taxes or making false claims. This can include having to pay the tax assessed, penalties of up to 75 percent of that tax, and interest charges should the Commissioner’s assessments go back over time, which can be four years or more – all of which can quickly add up given the high-value nature of these assets.
Further, there may be reputational risk for a business or individual from being involved in tax disputes with the Commissioner. While details of audits and reviews remain confidential, corporate tax transparency reporting or litigating matters through the Administrative Review Tribunal or the Federal Court can place many of the details squarely in the public domain and open to media scrutiny.
Like any good tax-compliance management strategy, it’s best to be well-prepared. Commonly, this includes the following.
Accurate record-keeping
Maintaining detailed and accurate records of how luxury assets are used for business purposes is important to justify and support claims. Records should be more than just details of transactions – decision making, marketing, advice sought and financial models, for example, may all be relevant to demonstrate a commercial purpose, if required.
Clear policies and guidelines
Be sure to have clear policies and guidelines on the use of luxury assets for business purposes. Where there’s some crossover between commercial and private use, being able to follow a guide that ensures appropriate decision-making, relevant information is gathered, taxes are paid and supporting documents are held reduces the risk of issues arising if the ATO comes knocking.
Consult professionals
Work with tax professionals to ensure compliance with tax laws and regulations, preferably the earlier the better. Tax laws are complex and the financial risks of getting it wrong are high, so seeking appropriate advice not only helps get it right but can mitigate any later penalties should the ATO disagree with the approach taken.
Luxury assets have always been a focus for the Commissioner, it’s just that with the help of data matching, he’s now so much better and smarter at identifying where the assets are and who he should talk to about them. For taxpayers, this means the days of playing tax lotto – taking the chance the ATO will not find you as your tax-compliance management strategy – are numbered.
This article appeared in Ocean Magazine, Issue 116 – November/December 2024.
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