The Australian Taxation Office (ATO) is launching its next major compliance initiative into private groups in Australia, called the ‘Next 5000’ program.
Under this program, the ATO will be undertaking Streamlined Assurance Reviews of the approximate 5,000 private groups and high wealth individuals who control wealth of more than $50 million.
Similar to the ATO’s ‘Top 1,000’ review of Australia’s largest multinational listed companies, the intention of this program is to provide confidence that reviewed groups are paying the right amount of tax through a process known as ‘justified trust’.
The ATO estimates that the net income tax gap (that is, the difference between the amount of income tax that was paid versus what should have been paid) is $772 million, or 7.7%.
The ATO’s justified trust process
To establish justified trust across a private group, the ATO expects that the following key pillars are met:
- Effective tax governance is demonstrated
- Risks identified by the ATO and flagged to market are either not present or are appropriately mitigated
- Tax outcomes from new and significant transactions are explained
- Differences in accounting and tax results are explained
The existence and effectiveness of tax governance policies, an effective tax risk management framework, and the correct application of the law are likely to be a challenge for many private groups.
Other expected focus areas under a Streamlined Assurance Review are:
- Loans and/or payments to shareholders and/or associates
- Trust distributions, including the tax treatment for unpaid present entitlements
- The use of lifestyle assets by company owners
- Property disposals treated as being on capital account (CGT)
- Business restructures, such as consolidation, demergers, sale/acquisition of businesses, and unusual transactions
- Franking credits and tax losses
- International related party dealings
- Tax compliance history, tax performance, and dealings (including the manner of those dealings) with the ATO
- GST will be integrated into the process to understand the GST consequences on significant transactions, events or issues, and to also identify any priority GST issues.
Commencement of the program
The Next 5,000 program is to commence immediately and the ATO is expected to notify the first round of affected taxpayers in the coming months.
Generally, taxpayers can expect the ATO to provide them with three months advanced notice before commencement of the review. Once the review commences taxpayers will only be provided with 28 days to respond to any information requests.
What you need to do
Taxpayers who are well prepared for these reviews generally achieve better outcomes.
Groups who believe they may fall into the Next 5,000 program should take practical steps to address the four pillars outlined above. These include:
- Reviewing your tax governance and risk management framework and formally documenting your existing processes and procedures, enhancing them where possible and documenting a plan (and timing) on how you plan to meet the ATO’s expectations going forward.
- If you have not done so, proactively assessing any tax risks flagged to the market and documenting where they apply to your group and how these risks have been managed.
- Ensuring that all documentation and advice has been retained and collated that supports the tax treatment of your significant or new transactions.
- All material book to tax adjustments are easily explainable and supported by applicable documentation (for example differences in depreciation deductions).
Where specific issues are identified, willful blindness is not an option and steps should be taken to manage the risk, including: obtaining advice, collating supporting documentation, and/or potentially engaging with the ATO.
If you would like to discuss the Next 5,000 program and how our expert team at Calibre Business Advisory can assist your group in preparing for review, feel free to contact us on 02 9261 2177.