A privately owned and wealthy group is defined by the ATO as companies and associated subsidiaries with an annual turnover greater than AUD$10 million that are not public groups or foreign owned; or resident individuals who, together with their business associates, control net wealth of over AUD$5 million. The ATO has already reviewed the top 500 private groups in recent years and under this new program are now targeting the next largest 5,000 private groups ranked by size who control wealth of more than $50 million.
Under this program, the ATO’s focus is on establishing justified trust that each entity has paid the right amount of tax. Establishing justified trust involves a review of the following four key areas:
- Understanding the taxpayer’s tax governance framework;
- Identifying whether tax risks flagged by the ATO in their public pronouncements are present;
- Understanding significant and new transactions undertaken by the group within the review period, together with the associated tax outcomes; and
- Understanding differences between accounting profit/loss and taxable income/loss
Private group reviews have a particular focus on:
- Group structure including financial connections between companies, trusts and individual taxpayers;
- Tax governance framework (including design and documentation);
- Reconciliations of taxable income to accounting profit; and
- Extraction of wealth for personal consumption.
While a detailed tax governance framework is commonplace among public groups, they are less common amongst private groups. The ATO has made it clear that they wish to see a detailed tax governance framework implemented and consistently applied by all private groups. An effective framework demonstrates:
- Understanding of tax obligations;
- Appropriate controls and processes to identify, assess and mitigate tax risks;
- Obtaining of proper advice;
- Systems and controls to maintain integrity in reporting;
- Effective record keeping and documentation;
- Timeliness of tax lodgements and payments; and
- Ethical and responsible behaviour.
The tax governance framework will be one of the first things that the ATO will ask about at the commencement of a review of a private group.
Good preparation and effective implementation of a tax governance framework can result in a streamlined ATO review, saving a significant amount of time and cost.
As part the preparation process, we also recommend that you review your tax audit insurance arrangements and consider taking out appropriate cover where such a policy is not already in place. In order to ensure the tax audit insurance policy covers the review, the policy must be in place before the tax agent receives the letter from the ATO notifying which groups will be subject to a Next 5,000 Program review.
For assistance preparing for the Next 5000 program review or to source competitive tax audit insurance, please contact your usual Mazars advisor or alternatively one of our tax specialists below:
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