The Australian Taxation Office (ATO) is presently rolling out its ‘Next 5,000 tax performance program’ (the Program). The Program is part of the ATO’s Tax Avoidance Taskforce, which runs until the 2024 financial year. Clients and their advisors should expect closer scrutiny of their tax governance policies and risk control procedures as part of any engagement with the ATO under the Program.
Who is covered by the program?
The Program targets high net worth clients who own or control net assets of between $50 million and $500 million (approximately). The ATO focuses on the tax affairs of a client’s private group, including associated companies, trusts, partnerships and superannuation funds, and covers both Australian and foreign assets. Generally, a review will also focus on the tax affairs of immediate family members.
What is the ATO looking for?
Under the Program, the ATO looks for tax risks that have not been effectively managed by a client and/or their advisors. The risks generally include:
- Tax performance which is not commensurate with an entity’s economic performance or the performance of similar businesses;
- Large, one-off or unusual transactions, including restructures and transactions which do not have a clear commercial objective;
- Tax outcomes which are inconsistent with the policy intent of the law;
- Lifestyle which is inconsistent with a client’s income;
- Accessing assets held within the client’s economic group on a tax free or low tax basis; and
- International transactions which do not have a clear commercial objective, including establishing or using business structures in low tax or no tax jurisdictions (i.e. – tax havens).
The ATO also reviews a client’s tax governance policies and risk control procedures. It does so by applying its ‘justified trust methodology’. Under this approach, the ATO generally asks clients for evidence of:
- Tax governance, which includes the processes and controls which are in place for the preparation and lodgement of income tax returns and activity statements;
- No published tax risks existing in the client’s group;
- Large, one-off or unusual transactions meeting all requirements under the tax law; and
- Differences between tax performance and economic performance. This is sometimes referred to as ‘book to tax’ and aims to understand the differences which are present in tax reconciliation statements.
How long does a review law and what happens at the end of a review?
Clients and their advisors can expect a review under the Program to last between 4 to 9 months (approximately). The duration of a review can depend on many factors, including the complexity of a client’s tax affairs and whether the ATO identifies any tax risks.
Generally, at the end of a review, the ATO will tell you:
- Whether it agrees with a client’s income tax returns and activity statements, including the transactions or events that have been tax assured;
- If it considers there are areas which need to be corrected or improved; and/or
- That it has decided to escalate a client’s group to an audit.
What can I do now to reduce the risk of an audit?
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 any activity under the Program. 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 respond confidently to any review. This includes identifying and documenting all tax governance policies and risk control procedures.
Please get in touch for a copy of our high net worth client review and audit checklist.
HWL Ebsworth Lawyers has specialist teams of lawyers who can assist in all aspects of tax investigations, including Top 500 reviews, next 5,000 tax performance program, tailored engagements, reviews, audits and litigation. Members of our team have acted for both private clients and the ATO in these cases.
This article was written by Yan Li Wang, Partner and Vincent Licciardi, Special Counsel.