Thinking | 12 October 2020

The ATO’s top 500 and 5,000 programs – our tips

By Peter Murray, Andrew O'Bryan and Adam Dimac 

Australia's largest high wealth private groups can expect to be contacted by the ATO as part of its Top 500 or Next 5,000 programs.

The Top 500 program, which is an extension of the ATO's Top 320 Program, involves tailored one-to-one engagements with the Top 500 private groups in Australia on an ongoing basis. The Next 5,000 program will involve streamlined assurance reviews with the 'next' 5,000 top private groups in Australia.

The ATO has run a small number of Next 5,000 tailored streamlined assurance reviews to obtain insights on its approach, and it is expected that this will now be expanded to the remainder of the Next 5,000.

We have set out below our top tips in relation to the ATO's Top 500 and Next 5,000 programs. In short, our best tips are to:

Check your client’s tax audit insurance policy; some policies are specific about coverage of fees. As advisors, your clients will groan about the time and money spent with you, but if your fees are covered by tax audit insurance their groans won’t be so loud.

The issue is that the ATO correspondence will refer to a ‘review’ rather than an ‘audit’. We have had recent experience where insurers have denied a claim for fees on the basis that the ATO had conducted a ‘review’ not an ‘audit’. Insurers also seem to question the level of fees claimed, on the basis that there is doubling-up of work between advisers. So you should ensure that fee narrations make it clear that there is no doubling-up of work and fees; or that the arrangement reflects an adviser taking specialist advice.

Prepare now, and collate all of your material (details below). Preparing now will mean that you are more likely to identify tax risk issues before the ATO, and the reality is that it is harder to convince the ATO that a tax risk issue was an honest mistake if the ATO find it first.

Engage with your accountant now, particularly where your tax governance practices rely heavily on external advisers (in which case you should be prepared to explain the nature of the relationship and engagement and why it is justified and appropriate).

Have your accountant engage with a specialist as soon as possible. We have seen numerous examples of parties attempting to address complex issues on their own and making matters worse.

Engage with the ATO early once you have been selected for review, don’t just respond to the ATO's information request once focus areas have been identified (ie after the first few interactions) and give the ATO the information it needs to establish 'justified trust'. This will help to narrow the issues under review and prevent a drawn-out, and redundant, information gathering process.

Identify risks early, and consider making a voluntary disclosure as, and when, necessary. This will result in a guaranteed remission of penalties, will assist in negotiating a remission of interest charges and will generally improve your engagement with the ATO.

We have experience working on numerous ATO reviews and audits, including Top 320 and Top 500 reviews, and can assist with early engagement and planning the response to any ATO review (either before or after receiving an information request). Generally, we will work with your existing accountant or tax adviser as dispute resolution experts, or if issues arise in specialist areas such as Division 7A, trust taxation, taxation of financial arrangements (TOFA), GST, CGT, consolidations and restructures.

Based on our experience to date, the ATO’s Top 500 and Next 5,000 programs overlay with existing audit team reviews (ie the programs propose to review taxpayers that are currently subject to review or audit). As frustrating as this is, it presents an opportunity to conclude existing reviews and audits.

The Top 500 program is an extension of the ATO’s previous Top 320 program, and it’s likely that most private groups that participated in the Top 320 program will be reviewed by the ATO under the Top 500 program.

The Top 500 program includes private groups:

    • with over $350 million in turnover, regardless of asset value;
    • with over $500 million in net assets, regardless of turnover;
    • with over $100 million in turnover and over $250 million in net assets;
    • that involve a company with total business income of over $250 million and are included in the large company tax gap population; and
    • that are market leaders or groups of specific interest.

The Top 500 program is underpinned by the concept of ‘justified trust’, which is based on four key areas; the effectiveness of tax governance, tax risks flagged to the market, significant and new transactions and why accounting and tax results may vary.

One of the issues with the Top 320 program was that the ATO would provide a ‘clearance letter’ following a review, and then immediately begin a review for subsequent years. This is where the concept of ‘justified trust’ becomes relevant - giving the community confidence that large businesses are paying the right amount of tax.

Private groups within the Top 500 program should engage with their accountants and tax advisers now to prepare. This will involve:

    • reviewing their tax governance practices including the roles and responsibilities of board management, tax and financial personnel (including ‘internal auditors’) and external advisers;
    • preparing or updating group structure diagrams and organisational charts;
    • collating all trust deeds, trustee distribution resolutions, company constitutions and other constituent documents;
    • collating financial accounts/materials, tax and accounting reconciliations and real property records; and
    • reviewing any recent significant transactions, related party transactions and restructures.

Preparing now will mean that you are more likely to identify tax risk issues before the ATO, and the reality is that it is harder to convince the ATO that a tax risk issue was an honest mistake if the ATO find it first.

Engage with the ATO early once you have been selected for review, don’t just respond to the ATO’s information request once focus areas have been identified (ie after the first few interactions) and give the ATO the information it needs to establish ‘justified trust’. This will help to narrow the issues under review and prevent a drawn-out, and redundant, information gathering process.

Identify risks early, and consider making a voluntary disclosure as and when necessary. This will result in a guaranteed remission of penalties, will assist in negotiating a remission of interest charges and will generally improve your engagement with the ATO.

Seek specialist advice if necessary, particularly where issues arise in areas such as Division 7A, trust taxation, taxation of financial arrangements (TOFA), GST, CGT, consolidations and restructures.

As part of the Next 5,000 program, the ATO will focus on Australian resident individuals who, together with their associates, control wealth of more than $50 million. The program doesn't cover private groups that are already part of the Top 500 program.

The Next 5,000 program is underpinned by the concept of ‘justified trust’, which based on four key areas; the effectiveness of tax governance, tax risks flagged to the market, significant and new transactions and why accounting and tax results may vary.

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

Accordingly, private groups within the Next 5,000 program should start to consider their tax governance practices now, and if necessary, implement appropriate procedures.

Where your tax governance relies heavily on external advisers, you should be prepared to explain the nature of the relationship and engagement and why it is justified and appropriate. In reality, this can’t be achieved without engaging with your accountant and tax adviser.

You will need to formalise the engagement with your external adviser so that you can show the ATO that there is a ‘process’. Notwithstanding the formalisation of the external engagement, the reality is that not all tax compliance issues will be covered by the external engagement. For example, what process is in place to check GST or SGC compliance? This may mean that you effectively need to have some form of ‘internal audit’ and ‘processes’.

It may be difficult for some private groups in the Next 5,000 to establish ‘justified trust’ unless the ATO is willing to accept that a tax governance practice that relies heavily on external advisers is appropriate. It may be the case that the ATO will expect some private groups to recruit an internal accountant or financial controller, and/or to prepare a tax governance ‘manual’. Unfortunately, this may not be practical for many private groups.

Private groups within the Next 5,000 program should engage with their accountants and tax advisers now to prepare. This will involve:

    • reviewing their tax governance framework including the roles and responsibilities of board management, tax and financial personnel, external advisers and reviewing control frameworks and control testing;
    • preparing or updating group structure diagrams and organisational charts;
    • collating all trust deeds, trustee distribution resolutions, company constitutions and other constituent documents;
    • collating financial accounts/materials, tax and accounting reconciliations and real property records; and
    • reviewing any recent significant transactions, related party transactions and restructures.

Preparing now will mean that you are more likely to identify tax risk issues before the ATO, and the reality is that it is harder to convince the ATO that a tax risk issue was an honest mistake if the ATO find it first.

Engage with the ATO early once you have been selected for review, don’t just respond to the ATO’s information request once focus areas have been identified (ie after the first few interactions) and give the ATO the information it needs to establish ‘justified trust’. This will help to narrow the issues under review and prevent a drawn-out, and redundant, information gathering process.

Identify risks early, and consider making a voluntary disclosure as and when necessary. This will result in a guaranteed remission of penalties, will assist in negotiating a remission of interest charges and will generally improve your engagement with the ATO.

Seek specialist advice if necessary, particularly where issues arise in areas such as Division 7A, trust taxation, taxation of financial arrangements (TOFA), GST, CGT, consolidations and restructures.

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