ATO ramps up its Top 1,000 Program

Key points

• On 29 June 2020, the ATO published its tax guide called ‘Top 1,000 program – what attracts our attention’ (Guide). The Guide sets out the tax risks of particular focus for the ATO during reviews under the ‘Top 1,000 Program’ (Program);
• The ATO intends to commence the next round of Top 1000 reviews in October 2020;
• In our experience, the ATO treats tax compliance as an evolving journey, with an expectation that regardless of where on the spectrum a taxpayer might start, there is always an opportunity to improve compliance moving forward; and
• We recommend that clients and their advisors proactively conduct their own internal review of their tax affairs before the ATO initiates contact.

Overall, the Guide is designed to assist clients to identify and mitigate their tax risk exposures and improve their assurance ratings under the Program. In this Tax Insight we explore what the ATO is likely to focus on, and what you can (and should) do to improve your assurance ratings under the Program.

Who does the ‘Top 1,000 Program’ cover?

The Program is part of the Tax Avoidance Taskforce (Taskforce) announced by the Australian Government in the 2016 – 17 Federal Budget. The Program is carried out by the ATO’s Public Groups and Internationals division and focuses on large public and multinational companies with an annual turnover of above $250 million. Under the Program, clients will be subject to a four-month streamlined assurance review administered by a specialist ATO team that is dedicated exclusively to that review. The aim of the Program is to assure the ATO that clients are reporting and paying the correct amount of tax.

What tax risks will the ‘Top 1,000 Program’ focus on?

The ATO has identified four ‘risk areas’ that it intends to focus on under the Program. These risks are based on the ATO’s observations from previous reviews. We outline the risks below, including a high-level summary of what you can do to limit the risk of adverse tax outcomes:

1. Capital allowances: Before making capital allowance claims:
   • clients need to have sufficient supporting documents to verify that the deductions claimed are correct. These documents can include fixed asset registers and internal policies that calculate tax depreciation;
   • clients should be able to justify why they have chosen to not use the ATO’s published method in calculating the effective life of their depreciating assets; and
   • in relation to exploration expenditure, clients should establish project and tax level governance frameworks that are consistent with the ATO’s preferred approach in ‘ATO compliance approach – exploration expenditure deductions‘.
2. Research and development (R&D): In respect of R&D tax incentive claims, clients should ensure that:
   • expenses claimed as a notional deduction under the R&D tax incentive are only in relation to R&D activities and that those activities are registered with AusIndutry;
   • they have sufficient evidence to demonstrate the methodology used to apportion expenses between eligible R&D activities and non R&D activities; and
   • they cease to claim the offset as soon as the R&D activities transition to ordinary business activities.
3. Tax losses: The ATO is concerned with how clients are utilising carried forward losses or transferring losses into tax consolidated groups (including multiple entry consolidated or ‘MEC’ groups). Accordingly, clients should be prepared to provide the ATO with:
   • a detailed analysis of how they satisfy either the ‘continuity of ownership’ test or ‘business continuity’ test, with particular regard to the legislative provisions and contemporaneous documents that substantiate this analysis (this could include financial statements, Stock Exchange disclosures and ASIC documents);
   • a detailed explanation of the source of the relevant tax losses. Clients should be able to provide documents that substantiate the validity of the losses, including annual reports produced in the years the relevant losses were incurred; and
   • a robust calculation of the available fraction in respect of each bundle of tax losses that is transferred to the head company of the group. For example, clients should be able to provide analysis to support the joining entity’s market value. Clients should also be able to point to contemporaneous documents to substantiate their calculation, including working papers, valuation reports and relevant accounting advice.
4. Consolidation: In respect of tax consolidated groups or MEC groups, clients should take steps to ensure that:
   • when an entity enters or exists the group, an allocable cost amount (ACA) calculation is carried out. Clients should also ensure that incomplete and ineligible assets are not recognised on consolidation entry, and that the goodwill of an acquired entity is not ignored. Clients should be able to provide evidence to support these issues to the ATO, such as complete entry/exit ACAs and executed share purchase agreements;
   • where a related party is entering the group, there is sufficient valuation documentation for the reset cost base assets of the joining entity; and
   • there is a detailed commercial rationale for any restructure of a MEC group. This rationale should be substantiated by sufficient analysis and contemporaneous documentation (such as copies of the restructure step plan).

How to prepare for the ‘Top 1,000 Program’?

Although the Guide is a useful starting point to enable clients to commence their own internal review and risk mitigation program, we recommend a holistic review of clients’ tax risks. Ultimately, the aim of such exercise should be to stay in (or work towards achieving) the ‘green zone’ to protect shareholder value.

Our National Tax Group can assist clients by working with finance, tax and audit functions to provide robust and independent legal advice in a confidential and privileged setting. Please contact a member our team for a confidential discussion if you or your clients are under investigation by the ATO, or receive a notification as part of its Taskforce activities.

This article was written by Shaun Cartoon, Partner, Vincent Licciardi, Special Counsel and Ellis Rigby, Associate.