The Australian Tax Office (ATO) has operated successful tax assurance programs for private groups for a number of years now and has devoted significant resources to ensuring targeted taxpayers are meeting their tax, GST and superannuation. The term, private groups includes small to medium enterprises, family offices and high-net-worth individuals.
It’s important to be aware of the ATO’s current compliance programs and the tax issues that may attract attention, as outlined below.
Top 500 private groups program
The ‘Top 500 private groups program’ includes private groups:
- with over $350 million in turnover, regardless of asset value
- with over $500 million in net assets, regardless of turnover
- with over $100 million in turnover and over $250 million in net assets
- that involve a company with total business income of over $250 million and are included in the large company tax gap population, and
- that are market leaders or groups of specific interest.
The ATO is taking a one-to one approach to ensuring those in this group are meeting their tax obligations. If identified by the program, the ATO applies a ‘justified trust approach’ to understand the income and wealth extraction activities of the private group. If the private group can satisfy the ATO that tax and superannuation obligations have been met, they will transition to a three-year monitoring and maintenance phase. This means the ATO takes a more ‘hands off’ approach, reviewing only material changes and significant transactions.
Most reviews under this program are already in progress.
Next 5000 private groups program
This program focusses on Australian residents who, together with their associates including trusts, partnerships and superfunds, control wealth of more than $50 million. It is expected that one in five private groups in the program will be reviewed this year.
Medium and emerging private groups program
The medium and emerging private groups include:
- private groups linked to an Australian resident individual who, together with their associates, control wealth between $5 million and $50 million, and
- Australian businesses with annual turnover of more than $10 million that are not public or foreign-owned and not linked to a high wealth private group.
The majority of total private groups fall under this program.
What does the ATO focus on?
When conducting reviews, the ATO engages with private groups to:
- understand the group’s tax governance framework
- identify tax risks flagged to the market
- understand significant and new transactions and their tax outcomes, and
- understand why accounting and tax results vary.
Generally, reviews are completed over a four-month period.
Tax issues that attract attention
Statistics released by the ATO reveal that of the groups already reviewed, 80% had a significant issues or activities that require further review, with 20% being considered high risk and resulting in an ATO audit.
Some of the more common issues that will attract the ATO’s attention include:
- Inaccurate characterisation of property transactions as revenue and capital
- Inaccurate characterisation and deductibility of capital expenditure
- Sale of property or non-arms’ length arrangements to family or related parties for less than market value
- Misuse of tax concessions, including the small business CGT concession including the reporting of capital gains for less than value
- Eligibility of R&D claims, and adequate record keeping
- Related party international dealings and cross-border transitions, including potential application of transfer pricing provisions
- Poor tax governance and inadequate record keeping
- Superannuation Guarantee Charge shortfalls and penalties
- Unusual trust structures and wealth distribution arrangements
- Wealth extraction activities, including non- compliance with Division 7A provisions and the self-managed super fund regime, and
- A lifestyle that cannot be supported by your after-tax outcome.
Your Next Steps
Unfortunately, many taxpayers only seek advice when they are already under review. Early identification of any tax risks can minimise the potential of being caught in the ATO’s compliance program and avoid costly disruption to the business. To prepare, you should:
- Identify your tax risk issues in advance of an ATO review
- Ensure you have tax governance processes in place and review these regularly, and
- Take independent advice to back up the tax lodgement positions you have taken.
Those under review should engage with the ATO early and follow a strategy for resolution based on clear and open dialogue to provide the assurance sought through the review process. Substantiating your tax lodgements with evidence is key to avoiding a lengthy audit.