The Tax Office Looks into Low Doc Loans
Low Documentation loans are a flexible solution for self-employed people who have income and assets, but are unable to provide the required financial statements or tax returns at the time of application. The Australian Tax Office is concerned that small businesses using low doc loans may have tax compliance issues.
Initial investigations by the ATO suggest many people using these products had either understated their income or failed to lodge income tax returns.
Around 350 taxpayers were selected randomly from eight lenders to get a picture of the broader population using these products. This information was obtained using the access powers in the tax law. It identified failure to lodge tax returns as a primary concern.
Around 50 per cent of these people had not lodged returns – the average was three years outstanding.
The ATO has already taken action to enforce lodgement from these individuals, including eight court convictions. Most of these groups are now up to date and more than $1.3 million in tax has been raised. Prosecution action is continuing for those who have not yet lodged. They are also currently reviewing the accuracy of the returns that have been lodged.
In a second initiative the ATO undertook a risk based approach that showed that, for certain low documentation loan users, concealment of income is a significant concern.
These high risk cases were identified using Tax Office and other information including complaints made against some mortgage brokers to the Offices of Fair Trading. This led to the ATO focusing more closely on the clients of certain mortgage brokers. Around 400 high risk clients were identified.
140 of these were selected for the first round of audit activity. These cases were chosen because the broker involved was also a tax agent who had been identified as high risk as part of the ATO’s profiling of tax agents. The broker/tax agent was also subject to audit.
These audits raised over $23 million in tax and penalties.
In the coming year the ATO will systematically check the lodgement status of people obtaining finance through low documentation loans, and potentially other sources.
They will also continue to refine their risk profiling process to identify cases for audit action.
Although the findings indicate concerning levels of non-compliance amongst the users of low documentation loans, many users of these products are fully meeting their tax responsibilities. Many are funding repayments from legitimate sources like inheritances and capital gains, often derived from investments in property.
Where income has been omitted most of it has been derived from cash economy business activities predominantly in the building and construction industry.
If you have, or are considering using a Low Doc loan product, please contact this office. We can ensure that your records are up to date and tax compliant.
