In the 2019-2020 Federal Budget, the government announced that it intended to give the ATO more than $1 billion to expand the Taskforce over the next four years. In the past two weeks, the ATO announced that this work is now well underway, and that private clients should expect closer and more intense scrutiny of their tax affairs throughout 2020 and beyond.
Read this article to find out more about who and what the ATO will target, and the steps you can (and should) take now to prepare for an ATO review and audit.
Who will the Taskforce be targeting?
The ATO have announced that it intends to focus on the tax affairs of the following clients over the next four years:
- Top 500 groups: these groups are the largest private client groups in Australia by wealth and turnover, and include some of Australia’s most well-known and wealthiest families. Under this program, the ATO is broadening its reach beyond the top 320 groups which it targeted last year. Groups can expect the ATO to scrutinise their tax compliance and governance framework and to review the group’s significant recent transactions and tax structures, with a likely focus on any offshore investment structures, residency issues, trust arrangements, Division 7A and debt forgiveness;
- High wealth individuals: these groups are controlled by Australian individuals who own, with their associates, more than $50 million in net assets. The ATO estimates that there are approximately 5,000 individuals in Australia who fit into this category. Based on our experience, international high wealth families with an Australian resident relative, assets or business interests could find themselves drawn into an ATO audit, which could include overseas arrangements also being heavily scrutinised (in co-operation with foreign revenue authorities); and
- Medium business and emergent wealth: these are groups controlled by Australian individuals who own, with their associates, between $5 million and $50 million in net assets. It also includes businesses with an annual turnover above $10 million. For families in this group, a tax audit might be a new (and particularly stressful) experience. If the emergent wealth is the result of recent business transactions, the ATO will not be time barred from reviewing the underlying transactions, and taxpayers should expect very close scrutiny of these transactions.
The category which a client fits in is significant because it determines the type of response that they can expect from the ATO and its intensity. Accountants can expect to receive information about the ATO’s view of their clients who fit into these categories over the coming weeks.
What will the ATO target when it contacts clients?
The ATO operates sophisticated algorithms, data-matching and information-gathering programs to identify tax risks and non-compliance with the law. You can expect the ATO to target tax risks such as (not an exhaustive list):
- Accessing assets held in companies and trusts tax-free or without paying ‘top-up tax’;
- The transition of family wealth from one generation to another, or the transfer of control of businesses from one generation to another, including partial and complete business exits;
- International movements of money and foreign assets, repatriation of assets to Australia, and tax residency. This is particularly significant given the ATO’s international reach through tax treaties and information sharing agreements;
- Generating losses, in particular given the availability of more generous tax concessions to ‘small business entities’ and ‘base rate entities’; and
- Poor tax governance and record-keeping.
It isn’t a matter of if, but when the ATO contacts your clients
The Government’s additional funding for the ATO means that more reviews, audits and tax disputes are inevitable over the coming years. We strongly recommend that clients, in conjunction with their accountant or tax agent, conduct their own internal review of their tax affairs before the ATO initiates an audit. A review should be completed to identify and quantify potential tax risks to ensure that clients are fully informed of any exposure and able to better respond when faced with a tax audit.
Please contact one of 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.
HWL Ebsworth Lawyers has specialist teams of lawyers who can assist in all aspects of tax investigations, including Top 500 reviews, tailored engagements, reviews, audits and litigation. Members of our team have acted for both taxpayers and the ATO in these cases. Contact one of our partners below to find out more.
This article was written by Shaun Cartoon, Partner and Vincent Licciardi, Senior Associate.