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  • Findings report – Top 1,000 income tax and GST assurance programs

    We are publishing our findings from Top 1,000 income tax and GST assurance reviews.

    This will help you understand how we apply the justified trust methodology to:

    • obtain greater assurance that large public and multinational taxpayers are paying the right amount of tax, or identify areas of tax risk for further action
    • enable you to understand how your risk profile compares to your peers.

    We previously published Top 1,000 (income) Tax Performance Program Findings Reports. This report expands on these reports to include the Top 1,000 combined assurance review program and Top 1,000 GST assurance review program with:

    • updated statistics encompassing reviews completed from the inception of the programs to 30 June 2021
    • additional findings.

    We will continue to publish updated findings from the Top 1,000 assurance review programs in future findings reports.

    In this report

    Top 1,000 assurance programs

    Top 1,000 (income) tax performance program

    The Top 1,000 tax performance (SAR) program was established in July 2016 as part of the Tax Avoidance Taskforce to:

    • obtain greater assurance that large public and multinational economic groups are reporting the right amount of income tax, or
    • identify areas of income tax risk for further action.

    The program covers public and multinational groups and large superannuation funds with annual turnover above $250 million.

    The very largest public and multinational groups are continually monitored under the Top 100 Justified Trust program.

    The Top 1,000 program focusses on the next 1,000 largest public and multinational groups. We aim to review each group in the Top 1,000 population every four years.

    In 2020 we completed the first four-year cycle of tax performance reviews for the Top 1,000 population (TAT 1). In September 2020 we started the second cycle of four-year reviews for the Top 1,000 population (TAT 2).

    Building on the work, investment, and learnings from the initial cycle of reviews we have shaped our program to deliver a tailored experience for clients considering their ratings achieved in TAT 1. We have also expanded the program to include GST under a combined assurance review product.

    Top 1,000 combined assurance review program (income tax and GST)

    The Top 1,000 Combined (income tax and GST) assurance review program (TAT 2) was established in September 2020 as part of the Tax Avoidance Taskforce and GST Justified Trust program to:

    • obtain greater assurance that large public and multinational economic groups are reporting the right amount of income tax
    • better understand the taxpayer’s goods and services tax (GST) profile
    • identify areas of income tax and GST risk for further action.

    When we review a taxpayer a second time, we aim to build on the trust gained through the initial review. We also expect to see that they have implemented recommendations from their first Top 1,000 review (where applicable). We are looking for improvements in these second time reviews.

    Relevantly, we increased the tax governance requirements to obtain overall high assurance.

    • For TAT 1 a stage 1 rating was sufficient.
    • For TAT 2, a stage 2 rating for tax governance is required, reflecting the importance of having good tax governance frameworks that are designed effectively.

    The program provides:

    • an avenue for large corporates (and their boards) to gain certainty about their tax outcomes
    • an opportunity to improve assurance ratings obtained under their first Top 1,000 review – we review improvements and remediation activities undertaken following that first Top 1,000 review.

    Taxpayers are experiencing less intense reviews and are not likely to experience next actions activities where they:

    • follow our guidance and any recommendations arising from their first Top 1,000 review
    • provide information requested in a timely manner.

    As we are taking a 'top up' approach for both income tax and GST, we do not seek the same level of information in the second Top 1,000 review as for the first review unless there are significant changes in the taxpayer’s business. We will continue to publish guidance to help taxpayers prepare for these reviews and obtain higher assurance ratings.

    The GST component of the review seeks to increase our understanding of the taxpayer’s GST governance frameworks and identify areas of GST risk for further action. We focus on the latest income year for GST.

    If we have engaged with the taxpayer through an earlier GST assurance review, we leverage our understanding of their business and seek to ‘top up’ our understanding of their GST governance frameworks and GST risk profile. We also check that the taxpayer has addressed any recommendations from their previous review.

    We provide:

    • a combined assurance report to the taxpayer at the end of the review that covers income tax and GST
    • assurance ratings for income tax but not for GST.
    • a report that includes detailed next steps for the taxpayer to action to improve their tax control frameworks and address identified income tax or GST areas of concern. These are referred to as ‘client next actions’.

    Where we identify more significant income tax or GST risks that require us to work with the taxpayer to resolve, the taxpayer may be selected for our income tax or GST next actions programs. These are referred to as ‘ATO next actions’.

    Under TAT 2 about 20% of taxpayers reviewed were considered for GST next actions and 16% were considered for income tax next actions.

    Going forward, the taxpayer will know at the end of their review whether they are being considered for ATO next actions. We will also provide more detailed insights into our concerns and outline the steps you should take to help us resolve our concerns.

    Top 1,000 GST assurance review program

    The Top 1,000 GST assurance review (GST SAR) program was established in July 2019 to:

    • obtain greater assurance that large public and multinational economic groups are reporting the right amount of GST
    • identify areas of GST risk for further action.

    Our specialist GST teams engage with each taxpayer using streamlined assurance reviews. Each review includes:

    • a detailed review of tax governance frameworks
    • a systems and business activity statement (BAS) walk-through
    • data and transaction testing focusing on three consecutive BAS periods
    • the GST analytical Tool (GAT) approach to help us better understand why accounting and GST results vary.

    Where we identified areas of concern, we seek to address those concerns during the GST assurance review. Occasionally we escalate to a specific review or audit.

    The Top 1,000 population

    The Top 1,000 population:

    • consists of public and multinational businesses and super funds that have substantial economic activity related to Australia
    • is a large contributor to corporate income tax, excise, and petroleum resource rent tax collections
    • includes some of the largest remitters of GST
    • reported $23.8 billion or 35% of all corporate income tax for 2018-19 paid by public and multinational businesses.

    As the Top 1,000 can impact the health of our tax system, we engage with them on a periodic basis to manage their compliance and assure their tax performance.

    The Justified Trust Program benefits Top 1,000 taxpayers, their shareholders, key stakeholders, and the wider community.

    The program:

    • provides certainty about their tax outcomes and effectiveness of tax governance processes
    • ensures boards can be confident they are aware of and understand the tax profile of their organisations
    • provides an objective mechanism to understand how the tax profile of their organisation compares to their peers and others in the market.

    By disclosing their assurance ratings shareholders, key stakeholders and the community can gain insights and confidence about the Australian tax outcomes and contribution of the organisation.

    The Top 1,000 programs cover a diverse range of groups in terms of their ownership, business models, industries, and size.

    For income tax, where the economic group had more than one taxpayer, we usually reviewed those taxpayers with turnover above $250 million. In appropriate circumstances we reviewed smaller taxpayers within the group. Where we identified areas of concern these are addressed through our Next Actions Program.

    For GST, where the economic group has more than one GST group, we usually review the largest GST group. In appropriate circumstances we may review a different GST group. Where we identified areas of concern, we generally seek to address those concerns during the review. Occasionally we escalate to a specific review or audit.

    Our approach

    Each of our programs apply consistent, structured approaches in our reviews. A dedicated program team supports the consistent application of these approaches by specialist assurance teams that are located across Australia.

    Our teams engage with each taxpayer using streamlined assurance reviews. Typically, an income tax assurance review covers the last four income years while a GST assurance review covers the last complete financial year.

    We apply the justified trust methodology and seek to obtain assurance of the following four focus areas:

    1. appropriate tax risk and governance frameworks exist and are applied in practice
    2. none of the specific income tax or GST risks we have flagged to the market are present
    3. the tax outcomes of atypical, new, or large transactions are appropriate
    4. any misalignment between tax and accounting results is explainable and appropriate, and the right amount of tax on profit from Australia-linked business is being recognised in Australia. For GST this includes applying the GST analytical tool.

    This report outlines our findings for the four justified trust focus areas in relation to the reviews completed under the three Top 1,000 assurance programs.

    We have published various guidance to help taxpayers prepare for their reviews including:

    Income tax

    In this section

    Overall levels of assurance

    At the end of our review, we consider whether enough objective evidence has been obtained that would lead a reasonable person to conclude the taxpayer paid the right amount of Australian income tax according to the law. The overall level of assurance was based on an objective view of whether the taxpayer was considered to have paid the right amount of tax.

    Most taxpayers reviewed obtained an overall medium assurance rating that their income tax has been paid correctly. This demonstrates that most of the taxpayers reviewed are getting most of their income tax affairs correct.

    We set out in the taxpayer’s report the steps for the taxpayer to take to obtain high assurance next time we review their tax affairs. These are referred to as ‘client next actions’.

    We encourage taxpayers to initiate and action these recommendations. We will ask about the steps taken to address our recommendations next time we engage.

    Taxpayers will be considered for our Next Actions Program if:

    • they obtained an overall low assurance rating, or
    • we identified higher risk concerns during the review.

    These are referred to as ‘ATO next actions’. The Next Actions Program can include specific or comprehensive reviews of high-risk areas and may also result in some matters being escalated directly to audit. We advise the taxpayer at the end of the review whether they have been referred to the Next Actions Program.

    Ratings

    We apply consistent rating categories when considering the overall level of assurance.

    Green dot denotes High assurance rating

    High

    We obtained assurance that you paid the right amount of Australian income tax for the income years reviewed. This means we are unlikely to contact you again in relation to the income years reviewed unless something new comes to our attention.

    Yellow dot denotes medium assurance rating

    Medium

    We obtained assurance in relation to some but not all areas reviewed. For those areas not yet assured, further evidence and/or analysis will be required before we obtain assurance that you paid the right amount of Australian income tax.

    Orange dot denotes low assurance rating

    Low

    We have specific concerns around your compliance with the Australian income tax laws and the amount of Australian income tax paid for the income year(s) reviewed.

    The overall assurance ratings have not significantly changed over both programs. The reviews completed up to the end of June 2021 resulted in the following ratings.

    Overall income tax assurance ratings

    Graph comparing the overall assurance ratings for income tax for 926 TAT 1 taxpayers with 100 TAT 2 taxpayers. TAT 1 bar shows 26% of taxpayers with high assurance, 58% with medium assurance and 16% with low assurance. TAT 2 bar shows 22% of taxpayers with high assurance, 68% with medium assurance and 10% with low assurance.

    The ratings reflect that for most taxpayers it was their first income tax assurance review. 58 taxpayers were reviewed a second time under TAT 2 where we ‘topped up’ our assurance.

    In the TAT 1 program 84% of taxpayers achieved high assurance (or justified trust) or medium assurance overall. These are good outcomes. We are looking to assist taxpayers to improve their assurance ratings in TAT 2.

    • In the TAT 2 program we are observing: a reduction in the number of taxpayers obtaining overall low assurance
    • an increase in the number of taxpayers obtaining overall medium assurance
    • slight reduction in the number of taxpayers obtaining overall high assurance

    For TAT 2 we increased the requirements to obtain overall high assurance to include a Stage 2 rating for tax governance.

    In TAT 1 a Stage 1 rating for tax governance was sufficient to obtain overall high assurance. This change reflects both the maturity of the Top 1,000 assurance programs and the importance of having documented tax control frameworks that are designed effectively and will continue to operate effectively into the future.

    This change resulted in around one third of taxpayers reviewed under TAT 2 obtaining overall medium assurance due to their Stage 1 tax governance rating.

    This trend may continue over the short term as taxpayers adapt. We are concerned that some ‘top-up’ taxpayers may not update their tax governance documentation and processes since their last review and may not be able to obtain overall high assurance as a result.

    We will shortly publish tailored guidance to assist Top 1,000 taxpayers to obtain a Stage 2 governance rating.

    More ‘top up’ taxpayers obtained overall high assurance compared to ‘new entrants. 29% of ‘top up’ taxpayers obtained overall high assurance compared to 12% of ‘new entrant’ taxpayers. Most ‘top-up’ taxpayers maintained their overall high and medium assurance ratings.

    Some taxpayers increased their overall assurance rating. Factors influencing increased ratings for ‘top up’ taxpayers included:

    • improvements in their tax governance framework
    • taxpayers actioning recommendations outlined in their assurance report
    • additional information being provided that was not provided or available at the time of the first assurance review change in tax treatment of a transaction from TAT 1 to TAT 2.

    Some taxpayers decreased their overall assurance rating. Factors influencing decreased ratings for ‘top up’ taxpayers included:

    • Stage 1 rating for tax governance
    • new transactions being reviewed that were not present in earlier years
    • new tax risks or disclosures that were not present in earlier years
    • taxpayers failing to action recommendations outlined in their assurance report
    • change in tax treatment of a transaction (e.g., new legislation) from TAT 1 to TAT 2.

    Overall assurance ratings obtained by taxpayers in TAT 1 and TAT 2 varied between industry segments. The ratings received across the four key industries for the reviews completed up to the end of June 2021 are set out below.

    Overall assurance rating by industry

    Graph shows overall assurance ratings by industry for TAT 1 and TAT 2 programs.

    Note: The table shows the overall assurance ratings by the number of taxpayers for the following key industry groupings:

    • manufacturing, construction and agriculture (MCA)
    • financial services (FS) (banking, finance and investment, superfunds and insurance)
    • wholesale, retail and services (WRS)
    • mining, energy and water (MIN).

    Most taxpayers reviewed were in the wholesale, retail, and services industry making up 48% of taxpayers reviewed in TAT 1 and 53% in TAT 2. This industry segment achieved the highest levels of overall high assurance in TAT 1. Nearly half of these taxpayers were in the services sub-segment. This segment continues to be the largest for TAT 2.

    The high assurance results varied between 22% to 27% across all segments in TAT 1. The results are more varied in TAT 2, reflecting the smaller pool of taxpayers reviewed. We expect these variations to reduce as we increase our coverage. Our experience was that domestic groups, particularly ASX listed public companies, were often able to obtain higher assurance ratings. Groups with significant global operations were often only able to obtain overall medium assurance, reflecting in part the high proportion of international related party transactions.

    Most large APRA-regulated superannuation funds were reviewed under the TAT 1 program and obtained an overall medium assurance rating. Assurance over investment activities relies on superannuation funds’ tax risk management and governance, due to the number and complexities of these investments, and outsourcing nature of the industry and size of funds under management. Funds that achieved higher overall ratings were likely to have less complexity in their operations and investments.

      Last modified: 11 Jan 2022QC 67407