Property developers to face increased tax scrutiny as ATO targets illegal “phoenix” arrangements

Property developers have been singled out for special attention as part of the Australian Tax Office’s (ATO) 2012-13 compliance program.

The compliance program identifies the most significant risks to compliance with the tax and superannuation systems.

In examining 2012-13 tax returns, the ATO says it will increase its focus on “property developers with a history of non-compliance”.

“By engaging with taxpayers at registration and throughout the property lifecycle, we will encourage them to correctly assess and report their liabilities and, where necessary, require them to provide security bonds against projected future tax liabilities,” says the ATO.

The ATO will also seek to clamp down on illegal “phoenix” activity having identified over 2,000 property developers who "placed companies in liquidation with outstanding GST obligations on multiple occasions".

Phoenix activity is when a company deliberately goes into liquidation, leaving its debts behind, while the assets are shifted into a new entity that begins trading again, often under a similar name.

The ATO plans to conduct over 200 reviews and audits as part of its efforts to reduce fraudulent phoenix activity.

“The most serious cases will be prosecuted. We will also be increasing the use of legal collection processes against phoenix company directors, including director penalties,” says the ATO.

“Fraudulent phoenix activity involves the deliberate liquidation of a business entity to avoid financial obligations, including tax and superannuation liabilities, without risking the operator’s assets and with the full intention of resuming business operations through a new entity,” says the ATO in its latest compliance program.

“Liabilities are ‘parked’ in the liquidated business and the underlying business activity is resumed free of liabilities.

In an earlier statement this year, the ATO said it would focus on property developers who “cheat the community by not reporting GST on property sales and pocketing the GST paid by consumers”.

The ATO says it has enhanced its intelligence-gathering and analysis capabilities to “more effectively identify and monitor fraudulent phoenix operators with the aim of deterring potential phoenix activity before it occurs”.

It has an additional $552 million at its disposal over the next five years (2011-16 financial years) to administer the GST voluntary compliance program.

The compliance program mentions that a referral from the Northern Territory Revenue Office (at the centre of surging property prices)  "initiated a series of audits on property developers disengaging from the tax system and thus evading payment of income tax and GST on property sales, resulting in revenue of approximately $5 million with potential compliance impacts for state stamp duty and land tax".

Other continuing compliance activities relating to property transactions include:

  • expanding and improving the use of third party information to identify unreported sales, particularly in the case of one-off property transactions
  • working with taxpayers and their tax agents to alert them to discrepancies before audit action n identifying incorrect application of the margin scheme provisions to reduce the GST payable on property sales
  • undertaking approximately 1,000 reviews and audits
  • providing greater certainty for taxpayers on the treatment of transactions associated with commercial residential premises through the publication of the final commercial residential ruling in August 2012.

Larry Schlesinger

Larry Schlesinger

Larry Schlesinger was a property writer at Property Observer


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