ATO Compliance: Next 5,000 program for private groups

In this article, we summarise the Australian Taxation Office’s (ATO’s) ‘Next 5,000’ review program, specifically, an update on the status of the program, the ATO’s finding to date and our experiences during these reviews.

The Next 5,000 is an expansion of the Top 500 private groups tax performance program and seeks to give the community confidence that Australia's largest privately owned and wealthy groups are paying the right amount of tax.

The Next 5,000 taxpayer groups comprise an individual, who together with their associates and connected entities, control net wealth of more than $50 million. Taxpayers that have already been captured under the Top 500 private group program will be excluded from the Next 5,000.

There are now over 7000 private groups in the Next 5000 population. As consequence, there are changes coming to the types of reviews that the ATO will conduct, largely determined on where the private group sits in the population, This is discussed in more detail below.

In performing their review, the ATO are applying their 'justified trust' methodology to obtain assurance that the group has paid the right amount of tax based on the following four pillars:

1. Effective tax governance

The approach to reviewing a group’s tax governance framework includes a tailored approach focusing on tax compliance processes, roles and responsibilities and post implementation review.

2. Tax risks flagged

The ATO seeks to understand whether any current Practical Compliance Guidelines (PCGs) or Taxpayer Alerts may apply to the group and any risks identified as a result of this. As an example, this may include reliance on PCG’s in relation to Division 7A arrangements within the group.

3. New and significant transactions

The ATO seeks to understand the current business activities, particularly significant or new transactions, and the tax outcomes of these. This will also include an assessment of ongoing transactions and specific industry issues which may impact on a particular taxpayer group.

4. Accounting and tax differences

The ATO seeks to identify certain differences between accounting and tax, which will include a review of tax reconciliations and trust distributions to understand the difference between business performance and tax performance.

The Next 5,000 program began on 1 July 2019, and up until 5 November 2021, over 250 streamlined assurance reviews have been finalised. During this period, more than 1,800 transactions worth nearly $7 billion have been reviewed.

The ATO have identified the below common issues during their reviews:

• loans or payments to shareholders and their associates not complying with the requirements of Division 7A of the Income Tax Assessment Act 1936
• using tax losses and capital losses incorrectly, including reclassifying capital losses as revenue losses and lack of record keeping regarding historical losses
• non-arms' length arrangements involving family members or related parties that are designed to reduce or avoid tax that would otherwise be payable
• tax treatment of disposals – incorrect characterisation of property sales on capital account when they should be treated as sales arising from a property development business
• significant variances, discrepancies and errors in reporting of income and expenses revealed between tax returns and business activity statements
• incorrect calculation of reduced input tax credit entitlements from acquisitions related to restructures, investments, and merger and acquisition activity.
  

During these reviews we have seen the ATO focus on the tax treatment of new and significant transactions and unexplained variances between accounting and tax results.

In recent reviews, we have seen the ATO increasingly request detailed records substantiate the cost base of CGT assets that have disposed of requiring taxpayers in some cases needing to find records dating back 20 years.  Similarly, taxpayer have been required to substantiate how carried forward losses were incurred.

The ATO have also taken particular focus on a Group’s tax governance framework to ensure that all policies have been documented and ‘lived’. This does not be as comprehensive as those that implemented in the Top 1000 and Top 5000 programs, with the most significant difference being that Next 5000 usually do not include details of controls or control testing. What the ATO is looking for is documentation to demonstrate that there is effective oversight of tax processes (i.e. tax return preparation and review process), identification of tax risks, professional tax advice is sought where appropriate, and tax compliance is timely and accurate.

Due to the increased number of taxpayers in the Next 5000 population the ATO will conducting two types of reviews for these private groups.  For taxpayers at the top end of the population we understand that they will continue to have a streamlined assurance review, which is focused on ensuring that private groups have and will continue to pay the correct amount of tax.

For private groups at the lower end of the population the ATO is more likely to conduct a comprehensive risk review. It is our understanding that these reviews will focus specific areas that the ATO identified could have resulted in the incorrect amount of tax being paid.  Good examples of what might focused on by the ATO during a comprehensive risk review would be significant international related party dealings, the use of complex trust structures and more recently claims made under the Temporary Full Expensing and Loss Carry Back measures that resulted in large refunds of tax or carry forward tax losses.  

Groups who believe they may fall into the Next 5,000 program should consider how they would address the four pillars outlined above. In our experience, the best outcomes are achieved when taxpayers are adequately prepared for their reviews.

Practical steps to ensure your readiness for review may include:

• Formally documenting your tax risk management and governance framework and/or tax processes with regard to the size and complexity of your group.
• Proactively assessing any tax risks flagged to the market and documenting how these risks have been managed where they apply to your group.
• Ensuring that all contemporaneous 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 tax risks are identified, advice should be sought on how best to manage this risk, including collating supporting documentation or potentially engaging with the ATO.

If you would like to discuss the Next 5,000 program and how KPMG can assist your group in preparing for this program, please contact us.