ATO targets developers using ‘mates rates’ to dodge tax
The Tax Office is targeting property developers who use self-managed superannuation schemes to unlawfully minimise costs and taxes via cheap loans or mates rates for construction work.
The ATO has warned developers that projects must be done at an “arm’s length”, which means capital growth and income should reflect the true market value and rate of return.
The mischief occurs when profits are diverted to an SMSF because they will be taxed at a lower rate of 15 per cent compared with 30 per cent for a company and up to 47 per cent for an ordinary taxpayer.
“We are concerned that some of the arrangements lack commerciality and result in diverting profits attributable to a property development project (that would otherwise be taxed at the corporate, or other applicable, rate) to an SMSF being a concessionally taxed entity,” the ATO said.
The Tax Office has also issued a taxpayer alert setting out its concerns about unlawful SMSF property development arrangements.
It says authorities are reviewing SMSFs that create or acquire an interest in a special purpose vehicle, which is a subsidiary created by a company to isolate its financial risks, that then undertakes property developments – typically residential properties.
It is concerned there could be a relationship or business affiliation between the various parties involved in the project that could generate bigger returns for the fund than if the parties had dealt with each other at arm’s length.
Tax experts say the ATO is “casting a very wide net” to identify breaches that might have occurred at any stage of the development process, from funding through to capital gains on sale.
Short-term benefits
“Those contemplating these arrangements may be at risk of significant adverse tax consequences,” a tax official said. “We want to prevent individuals putting their retirement savings at risk, based on a promise of short-term benefits from schemes that are unlawful.”
The push comes as state and federal governments pump billions of dollars into the housing market, including more social and affordable housing, to boost supply, ease costs and lower rents.
The tax authorities say they have identified only a few suspect arrangements to date but are upgrading surveillance as part of a broader strategy to attack property arrangements used to evade tax.
All forms of residential investment propertiesare under increasing scrutiny after tax authorities discovered that nine in 10 landlords filed their net income incorrectly, which is contributing to a $1.3 billion shortfall between the amount collected and what is due.
A recently decided case before the Administrative Appeals Tribunal involved a dispute between the ATO and a fund about whether interest payments to the fund of more than $7 million between 2015 and 2017 constituted a commercial transaction.
Despite the ATO losing the appeal, SMSF experts say its readiness to trawl through payments made about seven years ago highlights its determination to crack down on the schemes.
“If you are looking at a good idea to achieve a super outcome by dealing with related parties, be mindful that the ATO will have the same view,” said Peter Crump, a senior consultant in the private wealth division at tax and audit firm BDO. ATO targets developers using ‘mates rates’ to dodge tax
PwC lost track of number of client privilege claims allegedly used to stymie ATO investigations
Exclusive: Consultancy firm ran event at Department of Health and Aged Care in December, days before former PwC partner was banned by tax advice regulator
PwC Australia billed taxpayers to deliver a “risk management workshop” to a department that was subsequently forced to suspend the firm’s $2.3m contract in the aged care sector, pending an investigation into potential conflicts of interest.
The $36,000 engagement has been described as “frankly absurd” by the public sector union and criticised by legal academics given a Senate committee report released in June 2023 that confirmed the consultancy firm had been engaging in a “calculated” breach of trust.
The workshop was delivered to public servants at the Department of Health and Aged Care on 13 December last year, days before a regulator banned a former PwC partner who had breached confidentiality agreements and misused sensitive information. It occurred before the department was aware of the PwC breaches
The workshop took place years after senior Australian Taxation Office officials personally briefed PwC managers on “a range” of concerns about the risks posed by the firm’s own conduct, according to documents tendered to the Senate. A department spokesperson said it helped design the workshop and met with PwC three times before it was delivered.
“The purpose of the workshop was to discuss programs associated with the implementation of the Medicare Urgent Care Clinic program,” the spokesperson said. “The workshop was attended by a number of staff across a range of classifications from several areas across the department.
“This contract was finalised, and the workshop held, before the department became aware of PwC’s breach of confidential information.”
Weeks after the PwC workshop was delivered, the treasurer, Jim Chalmers, said he was “absolutely furious” at the firm over the tax information scandal and promised to “throw the book” at those responsible for what he labelled a “shocking breach of trust, an appalling breach of trust”.
University of Wollongong senior law lecturer, Dr Andrew Schmulow, also criticised PwC over the “risk management” contract given the firm had already breached confidentiality agreements and misused government information.
“It is presumptuousness for PwC to be billing for advice on how to avoid conflicts of interest when its entire business model is steeped in walking both sides of the street,” Schmulow said.
The term “walking both sides of the street” refers to consultants giving advice to government on how to best engage with the private sector, while also advising on how companies should interact with departments.
