ATO “Next 5,000” Tax Performance Program – Our Top Tips
For some time, the Australian Taxation Office (ATO) has been issuing notices for a compliance program focussed on the “Next 5000” private groups in Australia (Next 5000 Tax Performance Program). The Next 5,000 Tax Performance Program (previously known as the high wealth private groups tax performance program) is a key element of the ATO’s Tax Avoidance Taskforce which seeks to provide community confidence that large privately owned and wealthy groups are paying the correct tax.
For those already under an audit as part of the Next 5000 Tax Performance Program it is important:
to understand the audit process;
be direct, articulate and clear in responses and communication with the ATO; and
seek professional advice to form a strong audit strategy.
For those yet to be subject to a review, the message from the ATO and many advisors is to prepare earlier rather than later. But what exactly does this involve? How can you be confident you are prepared for an ATO audit?
With a focus on the Next 5000 Tax Performance Program, here is our top tips for preparing for an ATO audit.
Outline and chart your current group structure
When gathering information, the ATO will first ask for a group structure. This is often an overlooked and basic tool for any group. The group structure should show all entities including companies, trusts, partnerships and superannuation funds.
To pre-empt ATO requests in an audit, taxpayers should ensure they have group structures for the past two financial years (demonstrating any changes) ready to provide the ATO.
You should ensure that you understand the structure of your companies, their shareholders and directors and that they are in line with government recordings by checking with ASIC. For trusts and partnerships - refer to deeds, unit registers and agreements (where necessary) and ensure you have reviewed any updates to these documents.
The ATO has highlighted that it has a particular interest in offshore entities, foreign branches or assets as part of the Next 5000 Tax Performance Program. If an entity in your group directly or indirectly owns, controls, or has an interest in, offshore entities, foreign branches or assets, careful analysis of the connection should be undertaken.
Ensure any difference between your accounting and tax results is clearly documented
As part of the Next 5000 Tax Performance Program, the ATO will look closely at the alignment between accounting and tax results. Taxpayers should ensure that their tax returns, schedules and disclosures are in order, as well as the working papers that support them.
It is important to consider that journal entries and workpapers do not create transactions. Through numerous audits we have advised on, we have found that where journal entries and working papers are the only record of purported transactions, it can be difficult for taxpayers to discharge the burden of proof to the ATO that the transaction happened.
In particular, where elections have been made or CGT roll-overs accessed, ensure they are clearly and properly documented. If you are unsure if your documentation is adequate, we can provide an assessment.
Check your Governance and Risk Processes and Controls are in Order
The Next 5000 Tax Performance Program is based on the concept of justified trust, which is having the confidence that taxpayers are paying the right amount of tax. To demonstrate that your business can be trusted in meeting its tax obligations, the ATO will look to understand the processes and controls you have in place to ensure compliance.
In preparation for an audit and to ensure that you are compliant, consider:
reviewing, preparing, and updating written manuals on compliance processes;
clearly identifying roles and responsibilities within your tax team to ensure there are no gaps;
undertaking an internal audit and implementing any improvement recommendations;
seeking an external independent audit of your processes to identify risk areas; and
where you identify risks, establish a process for when you should seek external advice on such areas.
Our team can assist in reviewing your governance and risk processes and the controls you have in place to help reduce tax leakage and exposure. Contact one of our specialists if you would like to discuss this further.
Review key transactions
The ATO has advised that a wide range of topics will be covered in their information requests under the Next 5000 Tax Performance Program. Prior to the commencement of an audit, consider whether in the past two years you have:
commenced a new business or made a new investment;
restructured your group;
accessed small business CGT concessions on the disposal of assets;
consolidated group entities;
received additional funding for your business;
operated whilst in an accounting loss;
had dealings with international related parties;
had entities in your group which advanced loans or made payments to shareholders or their associates of private companies within your group;
had unpaid present entitlements as at 30 June;
claimed the research and development tax incentive; or
made non-cash contributions to self-managed superannuation funds.
If you have undertaken any of the above transactions, you should start collating information related to the event (including supporting information).
Understand key risks
The ATO regularly communicate key tax risk areas via alerts, practical compliance guidelines, and interpretative decisions. It is important that any position you take do not conflict with clear guidance from the ATO, as doing so may expose you to increased penalties.
Address potential problems sooner rather than later
After a thorough review of your records, transactions, and events it is possible that errors may be uncovered. It is important to act quickly in these circumstances to rectify the issue. Generally voluntary disclosures made prior to an audit are viewed favourably and may result in lighter penalties.
Alternatively, your internal review may reveal uncertainties as to positions that have been taken. In these circumstances, it is recommended that you seek advice from a tax lawyer to assess the position against the legislation, ATO guidance and case law.
If you have identified issues or would like assistance in reviewing risks or uncertainties, contact one of our specialists:
Rob Warnock
Principal Lawyer
T: 03 5226 8541
E: rwarnock@ha.legal
Alexander Gulli
Lawyer
T: 03 5226 8573
E: agulli@ha.legal
