Next 5,000

The program involves streamlined assurance reviews with the 'next' 5,000 top private groups in Australia. The review period will generally cover the two most recent income years. GST will be integrated into some streamlined assurance reviews to understand GST consequences on significant transactions, events or issues and also identify any priority GST issues.

The Next 5,000 program does not cover private groups that are already part of the Top 500 program and is also underpinned by the concept of ‘justified trust’.

While the level of tax governance expected by the ATO will be well understood by many in the Top 500 program, this may not be the case for those in the Next 5,000 program. The reality is that private groups within the Next 5,000 program will rely almost entirely on external advisers for their tax governance.

Accordingly, these groups should start to consider their tax governance practices now and, if necessary, develop and implement appropriate procedures. Where their tax governance relies heavily on external advisers, they should be prepared to explain the nature of the relationship and engagement, and why it is justified and appropriate.

Private groups will need to formalise their engagement with external advisers so that they can show the ATO that a formal process is in place. This may require some form of internal audit.

Next 5,000 ATO findings report

In the report, the common tax issues observed by the ATO include:

• loans or payments to shareholders and their associates not complying with the requirements of Division 7A of the Income Tax Assessment Act 1936
• using tax losses and capital losses incorrectly, including reclassifying capital losses as revenue losses
• lack of record keeping in relation to a carry forward tax losses and capital losses from prior years
• non-arms' length arrangements involving family members or related parties that are designed to reduce or avoid tax that would otherwise be payable
• tax treatment of disposals - incorrect characterisation of property sales on capital account when they should be treated as sales arising from a property development business
• significant variances, discrepancies and errors in reporting of income and expenses revealed between tax returns and business activity statements
• incorrect GST treatment of face-value vouchers and deposits, and
• incorrect calculation of reduced input tax credit entitlements from acquisitions related to restructures, investments, and merger and acquisition activity.

Since the commencement of the program, the ATO has received over 30 voluntary disclosures from Next 5,000 private groups that total over $16.7 million in tax, penalties and interest from streamlined assurance reviews.

To find out more about the Next 5,000 findings report, click here.

According to the ATO, the Next 5,000 tax performance program is a key element of the Tax Avoidance Taskforce.

The program seeks to give the community confidence that the Next 5000 largest private groups are correctly treating the activities, transactions and events that have the highest impact on the amount of tax they pay.

There are four key areas of the justified trust methodology for Next 5,000 reviews, which include:

• Governance: The ATO seeks to understand the design of your tax governance framework. This includes:
  
  • the processes and controls in the preparation of your income tax return
  • the key roles and responsibilities related to recognising and managing tax risks
  • how your governance controls are tested. 
• Tax risks flagged to the market: The ATO seeks to prove that the risks communicated to the market are not present. Tax risks flagged to market includes PCGs and Tax Alerts. If a risk is identified, the ATO seeks to:
  • understand the transaction
  • understand the tax treatment
  • assure the correct reporting of the transaction and the correct amount of tax is paid. 
• New and significant transactions: The ATO seeks to understand your current business activities and the tax outcomes. This includes:
  • new or significant transactions
  • ordinary business transactions (cost of goods sold, revenue, depreciation, expenses, etc.)
  • specific industry issues. 
• Book to tax: The ATO seeks to understand the difference between business performance and tax performance. This includes:
  • statement of taxable income for main trading entities
  • trusts distributions. 

The Next 5,000 program runs for four years from 2019–20 and the focus in on the last 2 years lodged. It is expected that each streamlined assurance engagement will last approximately 6 months.

The ATO has advised that all groups subject to the Next 5,000 program will be provided with three months advanced notice before commencement of the review, with the first round of request for information (RFI) generally required within 28 days after commencement.

Depending on the response provided to the initial RFI, there may be further ongoing discussions with the ATO or an additional RFI. Once complete, the ATO will issue the taxpayer group with a streamlined tax assurance report. In most cases, reviews will be completed within 4 months.

The ATO is providing a COVID-19 transition option where groups can elect to waive the three-month advanced notice in exchange for being provided with an extended period of up to two and a half months to respond to the first round request for information.

The ATO has acknowledged that it does not necessarily expect to see the same level of formal tax governance documentation as those taxpayers under the Top 1,000 or Top 500 private group programs. However, as part of these reviews, the ATO will be looking for documentation to demonstrate that there is effective oversight of tax processes, identification of tax risks, professional tax advice is sought where appropriate, and tax compliance is timely and accurate. With this in mind, private groups within the Top 5000 program should engage with their accountants and legal advisers to undertake the following preparatory activities:

• Review their tax governance framework including the roles and responsibilities of board management, tax and financial personnel (including internal audit) and external advisers, as well as control systems and testing. 
• If there is no formally documented tax risk management and governance framework, then ensure one is implemented.
• Ensure that all contemporaneous documentation and advice has been retained and collated that supports the tax treatment of your significant or new transactions.
• Prepare or update group structure diagrams and organisational charts.
• Collate all trust deeds, trustee distribution resolutions, company constitutions and other constituent documents.
• Collate financial accounts/materials, tax and accounting reconciliations and real property records.
• Review any recent significant transactions, related party transactions and restructures.
• Consider whether there is a requirement to complete a reportable tax position schedule.

The risk of not preparing properly is that you will not be in a position to provide the ATO with the requisite assurance to place you into the low risk category. This could result in the review transitioning to an audit, and becoming a costly and drawn out process.

General

• Inter-generational family wealth transfers, or the transfer of control of businesses from one generation to another, including partial and complete business exits.
• Poor tax governance and record-keeping.
• Tax or economic performance dissimilar to comparable businesses.
• Low transparency of tax affairs and aggressive tax planning.
• Large, one-off or unusual transactions, including the transfer or shifting of wealth.
• Tax outcomes inconsistent with the intent of the tax law.
• Choosing not to comply, or regularly taking controversial interpretations of the law, without engaging with the ATO.
• Lifestyle not supported by after-tax income.
• Accessing business assets for tax-free private use.

Specific

• Transfer pricing.
• 100A. 
• 99B.
• Market valuation exercises and non-arm’s length dealings.