The ATO is the Size of a Small City.
The Australian Tax Office is one of Australia’s largest employers, with approximately 20,000 permanent employees and 5,000 contractors . The city of Goulburn in NSW has the same number of people. It could be argued this is necessarily so, given the ATO’s critical task of raising Federal Government revenues.
It could also be argued that there is plenty of capability when it comes to policing the tax affairs of the country, so it’s never a good idea to assume that less than careful income reporting and expense claiming will go unnoticed forever. At the very least, someone will look into some of your affairs at some time or other.
Some of the latest and greatest – and most effective – methods by which the ATO detects less than ideal record keeping are:
• Income averaging and outlier detection, by using an automated computer-based process where claims from taxpayers with the same or similar occupations are compared, and those making irregular or excessive claims are identified.
• Information matching, where data is matched across various government agencies including Medicare, Centrelink, the Child Support Agency and Department of Veterans’ Affairs to ensure not only that taxpayer contact information is up to date, but also to that information on financial positions and transactions is consistent across government departments.
• Manual scanning of the latest social media platforms -used in more advanced stages of audits, where information is gathered on individuals with income declared that doesn’t match their lifestyles.
So how to do we keep some peace of mind, knowing that the ATO is so large and exercises so much ingenuity? It’s not as complex as you might think. Keeping your affairs in order in an effective and efficient manner means observing three key principles:
1. Report all income. This is the most basic, important rule. Nothing gets the taxman a-hunting more than the hypothesis that many Australians are tempted to not report the full picture of their earnings.
2. Know your evidence requirements. When claiming expenses, not all expenses require written evidence, but all require logical explanations. Knowing when you need all the little chits and dockets, and when you just need a word doc with a few sentences of rationale and maybe a screenshot of some photos, helps keep the management of your affairs timely and efficient. Really important to keep all tax receipts;
3. Check the rumours. We often find unhelpful rumours circulating amongst our contractors and clients, often leading them astray at tax time. Classic falsehoods include the one that setting up a company means that they can avoid individual income tax rates and split money with their partners. This demonstrates a misunderstanding of the Personal Services Income (PSI) rules. If you are providing your personal services as a medical professional then you should be declaring that income as PSI. This income is taxed at your normal individual tax rate, not at a company tax rate.
And on that last point, there are also certain deductions you are unable to claim when your income falls within the PSI rules. The ATO was recently audited by the Australian National Audit Office, which found that PSI was not being properly policed and that even many accountants didn’t understand PSI. The ATO has since started education process, while also tackling the area with much more vigour, with several test cases swinging their way. IT professionals in particular have been pursued, as many of their work arrangements are classic examples that generate PSI.
So, it’s critical that PSI is well understood by professionals and that they have access to the latest and most accurate advice and guidance, such as that provided by us at Specialialized Medical Services.
Another well-worn rumour is that a private practice does not have to declare the payments made to any medical professional working as a contractor on their payroll tax reporting. If the medical professional is a contractor working with an Australian Business Number (ABN), or even within a company or trust, however, then the payments to these medical contractors must be included on payroll tax reporting. The fact is that in a clinic environment, reporting both employees and contractors for payroll tax purposes is unavoidable.
Finally, I always recommend to our medical professionals that they carefully consider any foreign income they may have, as most of them have spent a lot of time overseas and many of them were born and raised overseas. As H&R Block remind us, “…if you have income producing assets (such as a business or a rental property) outside Australia, or you receive investment income from overseas shares or bank accounts, [or] you have overseas employment income, you must declare all of that in your tax return.”
Following these fundamental principles will ensure you’re off to a good start at tax time and avoid falling foul of closer inspection by the tax man’s eyes.
The other option you have is to utlise Specialized Medical Services’s contractor management solution. This allows you to work as an employee and enjoy all of the benefits of salary packaging. In most situations you would be able to pocket at least an additional $15,000 per year. The most effective way to minimise tax for medical professionals is through structured, effective salary packaging with Specialized Medical Services.
A medical contractor management solution can help you ensure your practice is compliant with ATO rules for employees (including paying super and workcover) and provide salary packaging support in the core areas from which medical professionals can draw most benefit.
by Nick Davies CPA Company Accountant
