Audits Experts believe asset stripping, offshore wealth transfers and governance are top of the hit lists for investigators, writes Duncan Hughes.

About 940 of the nation’s super rich are the target of deep-dive audits into their finances by the Australian Taxation Office due to suspected tax avoidance or non-compliance.

An ATO spokesman says additional funding announced in the federal budget and the development of a specialist group to target wealthy individuals and their associated private groups ‘‘allows us to have more visibility of, and apply scrutiny to, more of the largest and wealthiest private taxpayer groups than ever’’.

Clint Harding, a partner with leading commercial law firm Arnold Bloch Leibler, says: ‘‘Many taxpayers do not appreciate that the onus of proof is on them to prove [their returns] are correct. They can no longer just sit back and hope they’ll stay off the ATO’s radar, which has very sophisticated analytical and data capabilities to monitor tax affairs.’’

Paul Huggins, a director of investment group Hamilton Chase, says the government will also be seeking more tax receipts after billions of dollars in handouts during COVID-19. He adds: ‘‘There has never been a better time for the government to repair its balance sheet.’’

The ATO launches an audit when issues and concerns that are not resolved during a compliance review are escalated for deeper examination. More than 4700 audits have been undertaken in the past six years, which can involve ATO officers visiting a taxpayer’s premises and undertaking more intensive and longer reviews.

Offshore money payments, distributions from trusts and the ‘‘black economy’’ (estimated to be worth $30 billion and costing the nation about $2.5 billion in foregone tax revenue a year) are expected to be among the ATO’s prime targets, say tax experts.

Simultaneous probes are being undertaken into the nation’s wealthiest 500 (who with their associates, trusts, partnerships and super funds control assets worth more than $500 million) and the ‘‘Next 5000’’ privately wealthy, who have more than $50 million. The wealthiest 500 annually pay more than $4.4 billion in income tax and over $2.3 billion in net GST, according to ATO analysis.

In the federal budget the government allocated the ATO an additional $652 million to extend the tax avoidance taskforce by another two years and increase tax receipts from the nation’s richest by $2.1 billion.

Mark Molesworth, tax partner at global consultancy BDO, says the top 500 involves ongoing, one-to-one engagements with the nation’s wealthiest.

The Next 5000 program uses a ‘‘justified trust approach’’, in which it attempts to obtain an understanding of a taxpayer’s governance and risk management practices. ‘‘The ATO is giving the taxpayer an opportunity to prove that its trust in them is justified,’’ says Molesworth.

The ATO is likely to continue probing the use of trusts for unlawful cash distributions and tax-saving arrangements under the guise of family business, according to Arnold Bloch Leibler’s Harding.

Family trusts are required to detail distributions to beneficiaries, including adult children, to ensure they comply with rules on family dealings.

The ATO is expected to continue targeting trust stripping and reimbursement arrangements, which can happen when trustees distribute money to individuals or entities with low or zero tax obligations which is then repaid by the beneficiary back to the trust or another family member for the purposes of tax minimisation.

Undeclared international money transfers of more than $10,000 are another primary target. Transfers of money into and out of Australia are monitored by AUSTRAC and data is shared with the ATO. The combined value of cash in local or foreign currency needs to be declared if it is equivalent to $10,000 or more.

The types of international money transfers likely to be relevant to an individual’s tax returns in Australia are:

Any payments received from rental properties or property sale;

Income generated from an overseas business or sale of a business;

Money earned as an employee overseas; and

Funds received as an overseas pension or superannuation.

The ATO will seek to prevent private companies being used as a tax-free personal piggy bank for owners and their associates. This happens when owners, or associates, receive tax-free benefits from companies, such as cheap or unpaid loans.

Loans are deemed to be a dividend payment to the recipient and assessable. They are ordinarily ‘‘unfranked’’, which means the recipient does not get a franking credit that would reduce tax liability.

Hamilton Chase’s Huggins says cryptocurrency transactions will also be closely monitored. The ATO says it will target users’ record-keeping to ensure expenses claimed for using cryptocurrencies, such as software, commission or brokerage costs, are accurate.

BDO’s Molesworth says: ‘‘In this case, the ATO is not looking at specific transactions but at the systems and processes in place to get the tax payments right.’’

Publicly listed companies typically have well-defined structures of control, such as audit committees, to ensure everything should be done by the book. ‘‘For many private groups this process is not as well documented,’’ Molesworth says.

Issues likely to attract the ATO’s attention include tax payments or financial performance that is unusual when compared to other businesses, low transparency and large one-off or unusual transactions, such as the transfer or shifting of wealth.

Other red flags include aggressive tax planning and extravagant lifestyles that are not supported by after-tax income.