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

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.