Findings in the ATO’s Next 5,000 report

The ATO has released its report for the Next 5,000 tax performance program, which looks at the tax obligations of privately owned and wealthy groups.

The Next 5,000 program began on 1 July 2019. It engages with taxpayers on a one-to-one basis, through streamlined assurance reviews. The findings in the report are based on the outcomes of 1,078 reviews covering 7,198 transactions, activities and events.

The data and findings in the report are current as at 31 August 2023.

Advisers to private groups should take heed of the common errors and tax risks raised in the report when reviewing their clients’ tax affairs – including the observation that poor governance and documentation processes is correlated to compliance errors. 

The below is a short summary of key findings. For more detail refer here.

Key observations

Key observations include that:

• A high proportion 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 risks and issues to 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.

There is a correlation between no documented tax governance processes and procedures, and

• disclosure errors
• late lodgment
• no lodgment of accompanying schedules to the income tax return.

ATO recommendation

Documenting tax return procedures, including a tax return review process, which could also include a lodgment calendar.

Common tax issues

The common issues where the ATO was unable to obtain assurance include the following.

Business as usual — expenditure

The ATO was not able to obtain assurance in relation to tax deductions in certain circumstances due to a lack of governance processes, procedures and poor recording keeping. Certain expenditure could not be substantiated and a nexus between the expense and assessable income could not be evidenced. A high proportion of these expenses are related party transactions where the reported income derived by a related party was less than the deductions claimed by the other related party.

ATO recommendation

Having clear processes and procedures setting out record keeping requirements for related party transactions.

Intra-group transactions — loans or payments to shareholders and their associates

The ATO found a correlation between poor record keeping, lack of documented governance processes and procedures and not taking enough steps to satisfy Div 7A rules. In these reviews, the ATO identified no written loan agreements or minimum yearly repayments and a lack of appropriate record keeping.

ATO recommendation

• • review the group’s Div 7A compliance
  • create a Div 7A annual end of year checklist to ensure accurate and consistent reporting of these loans in ledger accounts, financial statements and tax returns.

Sale of significant assets

The ATO was unable to obtain assurance over a range of property disposals for the following reasons:

• Insufficient evidence supporting the valuation of capital proceeds and elements of the cost base.
• Miscalculation of cost base including amounts omitted or inclusion of amounts that do not form part of the cost base such as development costs.
• Timing of disclosure of CGT events resulting in the capital gain being reported in the wrong year.
• Mischaracterisations of the sale of property as revenue or capital.
• Incomplete documentation provided to the tax agent resulting in miscalculation of the CGT event.

ATO recommendation

Implementing processes and procedures to identify material transactions and ensure that these transactions are communicated to the tax agent where applicable.

Trust distributions

The ATO was unable to obtain assurance over trust distributions where there were concerns over beneficiary entitlement to trust distributions, such as distributions paid to the incorrect beneficiary and s. 100A.

In relation to family trusts the ATO was unable to obtain assurance in the following circumstances:

• distributions made outside of the family group
• inconsistency of documentation regarding individuals set out in the family trust deed and the interposed entity election forms.

In some cases a lack of governance processes and procedures resulted in omitted trust distributions for some beneficiaries.

Related party transactions

The ATO was unable to obtain assurance over revenue recognition relating to related party transactions. A lack of governance processes and procedures potentially resulted in poor record keeping. Some examples include:

• No documented management service agreement.
• Omitted or understated income where incomplete records were provided.
• Aggregate of related party deductions claimed by one related party exceeded income returned by the other related party.
• No formal lease agreement between related parties.
• Unable to assure related party rent as no lease agreement in place and no rental valuation conducted.

GST

From the GST integrated streamline assurance reviews undertaken to date, ATO observations include:

• Significant omissions or errors at BAS disclosure labels typically relate to export sales, input taxed supplies, related party recharges and GST-free items.
• A strong correlation between the BAS disclosure errors and a lack of or insufficient governance processes.
• Sales reported in BAS were materially higher than sales reported in income tax returns and insufficient explanations provided for the variance.
• Incorrect reporting of GST on related party transactions and charges such as management fees

Tax risks flagged to market

The most common tax risks flagged to market arising for review as part of streamlined assurance reviews include those related to:

• cross-border related party financing arrangements and transactions — PCG 2017/4
• Div 7A — unpaid present entitlements and amounts held on sub-trusts — the provision of ‘financial accommodation’ — TD 2022/11
• simplified transfer pricing record-keeping options — PCG 2017/2
• tax loss or net capital loss — record retention — TD 2007/2
• long term construction contracts — TR 2018/3

About the Next 5,000 groups

Within the Next 5,000 sub-population there are about 7,899 private groups with net wealth of over $50 million. These groups hold around $1 trillion in net assets. Most are well established, multigenerational businesses.

A typical Next 5,000 group:

The industries in which the Next 5,000 groups operate:

For more information about the Next 5,000 demographic, refer here.

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