With the CFO’s focus having shifted a great deal over the last decade, particularly during the pandemic, risk management has remained a key priority while tax governance has become increasingly relevant. Therefore, it’s critical that CFOs can support ATO audit risk mitigation strategies and ensure their organisations are tax compliant.
To boost tax collections and reduce a large budget deficit, we expect an increase in ATO audit activity, with private companies in the Top 500, Next 5000 and Medium/Emerging groups in the firing line.
As the ATO review threshold for a Medium/Emerging business starts at an annual turnover of $10 million, many more Australian businesses are affected by ATO assurance and risk review programs than might be expected.
Here, we discuss what the ATO’s targeted risk programs for private and wealthy groups entail, how they could impact your business and what the ATO is hoping to achieve from these programs. We will also highlight some of the main trigger points for an ATO review or audit that CFO’s should be aware of.
What are the ATO’s targeted risk programs?
The ATO has been running risk programs targeted at wealthy private groups for a number of years. This is in part because wealthy individuals tend to have a limited level of disclosure of publicly available information, yet they operate successful businesses and often have complex financial and legal arrangements. And, according to the ATO, it’s about dealing with the common perception that the largest organisations don’t pay the right amount of tax and providing the community with confidence that the ATO is dealing with these groups to identify any risks or non-compliance.
Having started with the largest companies in 2019, the tax office is now taking the principles and learnings to work through a much wider cross section of businesses and taxpayers.
The programs are based on the concept of ‘justified trust’ which means that if the ATO can trust the information provided by taxpayers in their reporting, those taxpayers should present less of a risk to the tax system. The government can then focus resources on those that don’t do the right thing and fall into the higher risk bracket. The ATO categorises these private groups so that it can tailor its engagement and resources and then assess the risks within each group.
Categorisation of ATO private groups
Top 500
This group was one of the first to be targeted in the private space in 2019. ATO assessment of the Top 500 involved one-on-one detailed engagements, extensive interaction and assessing tax governance and risk processes to reach a conclusion on the group’s overall tax risk ratio. A primary aim of the program is to increase willing participation through a focus on prevention rather than correction.
Groups covered by the program include those:
- with over $350 million in turnover, or over $500 million in net assets
- 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
- that are market leaders or in a group of specific interest.
Next 5000
Engagements are less intensive than Top 500 reviews, and focus on providing certainty for the tax treatment of significant transactions, activities or events. This can be through a ‘streamlined assurance review’ or reviewing transactions and restructures prior to lodgement of the tax return.
Often the ATO will focus on specific business risks, such as trust structures or unusual transactions, and a streamlined assurance review will follow.
Covered by the program are Australian resident individuals who, together with their associates, control wealth of more than $50 million who are not in the Top 500 program.
Medium and Emerging
This program supports medium and emerging private groups, which represent around 97% of the total private group population, to meet their tax obligations. The ATO’s approach to this sector is to understand better how these businesses operate, and tailor specific engagement programs to meet the tax risks identified.
Again, ATO engagement is a step-down from the Top 5000 programs, with a view to educating taxpayers on areas that are of concern, advising how to reduce tax risks, and pre-lodgement reviews of deals and transactions. Where appropriate the ATO will engage in traditional risk and audit reviews.
Those covered by the program include:
- private groups linked to Australian resident individuals, who, together with their associated control wealth between $5 million and $50 million, and
- businesses with an annual turnover of more than $10 million that are not public or foreign-owned.
What attracts the ATOs attention and why you should be worried
The ATO has extensive and increasing data-matching capabilities and there’s huge amounts of information available to the ATO, with over 600 million transactions reported annually.
Organisations that report data to the ATO include AUSTRAC, State and territory rental bond registries, insurers, financial institutions and credit reporting bodies as well as the Australian Electoral Commission, Department of Foreign Affairs and Trade, the Higher Education Loan Program and the Foreign Investment Review Board. When data on a business or individual taxpayer’s spending does not add up with what’s being reported in their tax return, the ATO is likely to conduct an audit.
Other general circumstances that attract the ATO’s attention include:
- large, one off / unusual transactions
- non-lodgement particularly when previous tax returns have been up to date or the taxpayer has a high amount of incoming or outgoing cash
- aggressive tax planning
- lifestyle not supported by after-tax income
- accessing business assets for tax-free private use
- poor governance and risk management systems
- tax or financial performance is not comparable to similar businesses, and
- low transparency of tax affairs.
Trusts
Trusts are widely used for asset protection and as a business structuring tool. There are several tax advantages associated with trusts and the ATO reviews these heavily to identify risk factors.
The treatment of luxury assets and capital corpus distributions within trusts are heavily scrutinised by the tax office. For example, trusts may be used to buy boats, cars and other expensive assets that beneficiaries use for personal use, and the trustees claim tax deductions for these assets without reporting any assessable income. Trustees may also seek to extract capital from trusts, by making payments to income tax-preferred beneficiaries or satisfying corpus entitlements using assets with unrealised gains.
The tax office also reviews property ownership within trusts and property developers operating under trust structures.
Business structure
Other business structures will invite ATO review if they are not being used in a commercial way.
Consolidation is on the ATO’s radar, with the tax office paying close attention to the way losses are used when transferred from new members, if the right members are included in the group and cost-setting calculations when members join or leave the group.
Cross border transactions are reviewed to ensure they meet arm’s length transfer pricing principles, and if any withholding tax is due, for example on interest or royalties, it has been reported and paid so a tax deduction can be claimed.
Professional practices have also been a hot topic for the ATO, especially as they can have complex structures and an ability to be more flexible with income recognition between entities. Read about the ATO’s detailed guidance on professional practices here.
Finally, even something as simple as the company rate of tax can be affected by the way your businesses are structured, particularly if you operate through a number of different entities. The ATO are on the look-out for arrangements where income is not aggregated to see if the $50m threshold has been met, or passive and non-passive income has been shifted around the group to manipulate the company rates.
Given the increase in ATO activity, it’s critical that CFOs support ATO audit risk mitigation strategies within their group and ensure it is tax compliant. This means having a thorough understanding of audit triggers particularly as they pertain to your group, robust governance processes, and transparent tax affairs.
For more information on preparing for an audit or advice tailored to your business and finance function, contact your local William Buck Tax Services specialist.
