Low Docs & ATO

ATO eyes loans for cheat tips
Jason Clout (AFR)
2005/04/26

Small business has received a temporary reprieve over low-documentation loans but the taxman is still watching.

One of the Australian Taxation Office’s compliance programs has been to monitor the spread of “low-doc” loans.

These are generally provided to people in small business who are unable to secure normal loans for a variety of reasons, including being recent arrivals to the country, poor record keeping or having a patchy financial history.

Low-doc lenders look beyond those obstacles, instead concentrating their assessment on the person’s capacity to repay the debt. The loans usually carry a higher interest rate but they do enable a business to get on its feet, and there is the possibility to refinance at cheaper rates in later years once the business is established.

That’s all good. But a problem arose with the ATO.

It discovered there was a discrepancy with the income some businesses were declaring on tax returns compared with what low-doc lenders were being told.

From an initial sample of tax returns, it appeared either the ATO was being misled (income understated) or the lenders were (income overstated). So the ATO launched an investigation.

There were plans for that program to have reported by now. But for unspecified reasons it is still being compiled.

However, the ATO has found some cases that triggered its interest. At the Tribeca Fifth Annual Tax Planning Strategies Conference in Sydney earlier this year, ATO second commissioner Jennie Grainger said some taxpayers were making repayments on loans at levels that could not be serviced by them, according to the business income being declared.

“In one case, we have audited a taxpayer working in the motor vehicle repair industry. The taxpayer had acquired a substantial home in an upmarket Sydney suburb, as well as acquiring substantial business assets.

“Annual loan repayments of $70,000 did not equate with income tax returns showing an average annual taxable income of only $35,000 for the family unit.”

Some cases had already moved to prosecution. Grainger said the ATO had detected a significant number of income tax returns and business activity statements outstanding for clients and their associated business entities, some with substantial income declared to their lenders.

“We also have 30 taxpayers in the advanced stages of prosecution for non-lodgment. In one non-lodger case, there were six years of income tax returns and many BASs outstanding, with $650,000 being the income certified to the loan provider in the 2003 financial year.”

She said the cash economy was one of the biggest threats to the integrity of the tax system.

Industries dominated by cash, such as hospitality, motor vehicle dealers and horseracing, were being closely monitored.

The matching program on low-doc loans is just one such program undertaken by the ATO, Grainger says. Apart from lenders, it also matches Workcover insurance data, government grants, motor vehicle dealers, art and antique auction houses and barter exchanges to compare what small businesses are telling those organisations with information supplied to the ATO.