By Boris KresicDirector
16 December 2021
- Australian Tax Office
As a result of COVID, the ATO went a little easier on taxpayers and suspended a lot of its compliance activities in 2020/21. These activities are now well and truly restarting and one of those is the Next 5,000 Tax Compliance Program.
What is the Next 5,000 Program?
Off the back of the Top 500 Program, which focused a review of the 500 largest private groups, the Next 5,000 Compliance Program is extending that focus to the next 5,000 largest private groups. The exact cut-off criteria is not made available, but broadly speaking, the program will target Australian resident individuals who, together with their associates and connected entities, control net wealth of more than $50 million.
The Next 5,000 Program is not intended to be a detailed audit (although one may eventuate) but rather a streamlined assurance review, which will involve a process referred to as ‘justified trust’. The justified trust methodology requires private groups to address the following four areas:
- Effective tax governance.
- Mitigation and flagging of tax risks.
- Tax outcomes of new and significant transactions.
- Accounting and tax differences.
How do I know if I am part of the Next 5,000?
The ATO will notify all groups subject to the Next 5,000 program, three months before the commencement of their review. During this time, groups should consider how they would address the four key “justified trust” areas. Some practicalities include:
- Documenting the processes and controls in the preparation of your income tax return, including key roles and responsibilities.
- Reviewing potential tax risks and outlining strategies used to mitigate any risks identified.
- Retaining advice that explains and justifies the treatment of new and significant transactions.
- Collating supporting documentation to substantiate any tax adjustments made, ensuring differences between your accounting and tax results are appropriate.
The ATO will then issue the first information request, providing the group 28 days to respond. After reviewing the information, the ATO will engage in discussions with the group and request further information if required. A streamlined tax assurance report will then be issued, summarising the findings and outlining any further steps. The review process is intended to take approximately four months from when the ATO receives the initial information.
From our experience, the area that taxpayers in the Next 5,000 space are likely to find most challenging is a lack of documented tax policies and procedures. While most taxpayers in this space do engage professional tax advisors, the process for doing so is often not formally documented.
Over the ditch, New Zealand’s Inland Revenue (IR) is taking a similar approach, undertaking a review of the country’s top 400 high wealth family groups, with estimated net wealth in excess of $20 million. The objective of the IR research project is to assess the effective tax rate of these high wealth individuals, with a public report to be issued in June 2023.
What should I do now?
High wealth private groups should consider preparing for an engagement, in order to identify any potential risks early. The type of behaviours which are likely to attract the ATO’s attention, and which should ideally be addressed before the commencement of a review, include:
- Economic or tax performance that is inconsistent with the industry in which they operate in.
- Substantial, one-off or unusual transactions.
- Lifestyle not supported by after-tax income.
- Poor governance and risk-management practices.
Voluntary disclosures can be made for any mistakes that are identified and these will usually lead to better outcomes in terms of any penalties and interest. For this reason, if you are a group that is likely to be reviewed as part of the Next 5,000 Program, we recommend getting on the front foot and preparing for the ATO review.