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.
What is the 'Next 5,000' review program?
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.
The ATO’s 'justified trust' methodology
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.
Program status and findings to date
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; and.
- incorrect calculation of reduced input tax credit entitlements from acquisitions related to restructures, investments, and merger and acquisition activity.
Our experiences during the reviews
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. Upon their review of these transactions, the ATO have been requesting detailed supporting documentation, specifically considering the integrity and accuracy of the accounting and tax data used.
The ATO have also taken particular focus on a Group’s tax governance framework to ensure that all policies have been documented and ‘lived’. The ATO acknowledged that it does not necessarily expect to see the same level of formal tax governance documentation as those taxpayers under the Top 1,000 or Top 500 private group programs. However, as part of these reviews, the ATO have been looking for 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.
How can you prepare for these reviews?
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.