The ATO’s Next 5,000 program

[lwptoc]

About the Next 5,000 program

The ATO’s ‘Next 5,000’ tax performance program is designed to give the community confidence that the privately owned and wealthy groups are paying the right amount of tax.

The Next 5,000 program is funded by the Tax Avoidance Taskforce. It began on 1 July 2019. To date it has focused on engaging with clients on a one-to-one basis. This has been generally through streamlined assurance reviews that are based on the ATO’s justified trust methodology.

The program focuses on prevention rather than correction by letting taxpayers know about potential tax risks specific to their business and providing public advice and guidance on relevant issues.

The Next 5,000 program runs for four years from 2019 onwards.

The Next 5,000 report (5 November 2021)

The Findings report for the Next 5,000 program, current at 5 November 2021 and published in early December, gives the ATO’s observations and insights into what it has seen through the program so far. The findings and data in this report are as of 5 November 2021.

If a taxpayer or tax professional operates or represents a Next 5,000 private group, they can use these findings to:

• review the group’s tax affairs and tax governance;
• increase awareness of common tax issues;
• understand how the ATO is working with taxpayers to resolve issues; and
• prepare for a review under the Next 5,000 program.

The report findings

The ATO has reviewed more than 1,800 transactions, activities and events of Next 5,000 private groups that were worth nearly $7 billion, through over 250 streamlined assurance reviews.

The ATO’s key observations are that:

• a high percentage have governance processes and procedures, but most are not documented;
• clearly documented roles and responsibilities lead to good tax governance;
• documentation of the tax return preparation, review process and identification of material transactions helps groups to recognise tax risk and avoid errors;
• private groups that seek tax advice for material risks and issues are more likely to make correct disclosures and adopt correct tax treatments.

The ATO has confirmed that private groups have correctly reported amounts relating to significant activities, events and transactions totalling nearly $5.8 billion. This amount is made up of:

• $2.75 billion in verified income;
• $1.77 billion in verified deductions; and
• $1.26 billion in other verified items, including:
• $619 million in loans to shareholders and their associates;
• $122 million in additional balance sheet items;
• $373 million in tax reconciliation items;
• $88 million in tax losses, both deducted and carried forward;
• $48 million in capital losses, both applied and carried forward; and
• $10 million in tax offsets, rebates and credits.

Common tax issues

Common tax issues the ATO has observed include:

• loans or payments to shareholders and their associates not complying with the requirements of Div 7A;
• using tax losses and capital losses incorrectly, including reclassifying capital losses as revenue losses;
• lack of record keeping in relation to carry forward tax losses and capital losses from prior years;
• non-arm’s 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 program began, the ATO has received over 30 voluntary disclosures from private groups that total over $16.7 million in tax, penalties and interest from streamlined assurance reviews.

Next 5,000 demographics

Who is covered by the program

There are about 5,000 private groups in Australia that are part of this program as they have net wealth of over $50 million. These groups hold around $825 billion in wealth and contribute more than $9.8 billion in tax revenue each year.

A typical Next 5,000 group can contain up to 16 entities, including a mix of:

• companies;
• trusts; and
• SMSFs.

Some Next 5,000 groups have philanthropic interests and include an ancillary fund or charity. Approximately 6.3 per cent of Next 5,000 groups have a private ancillary fund.

Most are well established, multigenerational businesses that have been operating for many years. Many are family businesses or closely controlled groups.

How participants are selected

The ATO uses data matching and analytic models to identify Australian resident individuals who, together with their associates, control wealth of more than $50 million. The ATO then looks at the whole group of entities.

The Next 5,000 program does not include private groups in the Top 500 private groups tax performance program.

Key demographic data

A typical Next 5,000 group includes:

• 16 entities made up of 7 companies and 4 trusts;
• a group head aged 65 years old;
• 39 employees;
• total income of $9.4 million;
• net wealth of $80.3 million;
• income tax of $700,500;
• net GST of $138,600; and
• PAYG withholding of $353,300.

Financial data

The Next 5,000 population:

• own over $825 billion in net assets;
• earn $237 billion in total income;
• pay over $9.8 billion in income tax;
• pay over $3.7 billion in net GST; and
• employ 690,235 people, paying $7.1 billion in PAYG withholding.

The ATO’s engagement with next 5,000 groups

The ATO tailors its approach, based on the group’s:

• size of operations;
• structural complexity;
• consequence of tax issues; and
• risk of non-compliance.

For groups that are large, have complex structures or multiple potential tax issues, the ATO engages with them through streamlined assurance reviews — which are conducted one-to-one with representatives of the group. The ATO aims to complete 800 to 1,000 streamlined assurance reviews each year. They are generally completed over a four-month period.

For other groups, the ATO engages with them through:

• specific risk reviews;
• one-to-many communication; and
• targeted guidance on significant risks.

The ATO may send the taxpayer information specific to their business risks, or provide certainty on significant commercial deals through early engagement and pre-lodgment agreements.

Where appropriate, audits may be undertaken.

Resolving issues

When the ATO identifies issues, it prefers to work with the taxpayer collaboratively rather than resorting to a traditional audit.

Where the ATO is unable to obtain assurance, it may:

• recommend corrective actions;
• allow the client to self-review or self-mitigate the risk; or
• extend the review to allow resolution in a single interaction.

What’s next?

This year the ATO:

• has started broader engagement on a one-to-one basis through specific reviews to address potential one-off tax issues;
• is considering other strategies such as letter campaigns and targeted advice and guidance; and
• is having preliminary discussions with taxpayers in streamlined assurance reviews about their eligibility to claim under the loss carry back (LCB) and temporary full expensing (TFE) measures and will review future high-risk claims under these measures.

In relation to TFE and LCB, the ATO may want to:

• discuss how these measures may impact future lodgments; and
• review any past claims.

When reviewing TFE and LCB claims, the ATO may request information outside of the usual two-year time period for streamlined assurance reviews.

The ATO will also undertake a limited number of GST-integrated reviews.

Reference
Also see the ATO’s guide What attracts our attention.