Findings report top 100 income tax and GST programs

This report explains the key findings and observations from the top 100 income tax and GST assurance programs for the income year ended 30 June 2022.

• About this report
• Top 100 engagement
• Top 100 income tax assurance program
• Tailored high assurance engagement
• Top 100 GST assurance program
• Future GST engagement after initial GST assurance review

About this report

This is the fourth year we are publishing our findings report for the top 100 assurance program for income tax. It's also the second year we are including insights from the top 100 Goods and Services Tax (GST) assurance program.

For income tax and GST assurance reviews completed to 30 June 2022, this report:

• outlines our key findings and observations
• explains how we apply the justified trust methodology to  
  • obtain greater assurance that large public and multinational taxpayers are paying the right amount of income tax or GST
  • identify areas of tax risk for further action
• explains what it means to achieve high assurance.

Top 100 engagement

The top 100 population:

• consists of public and multinational businesses and superfunds that have substantial economic activity related to Australia
• consists of the largest contributors to corporate income tax, excise, and petroleum resource rent tax (PRRT) collections
• also includes some of the largest remitters of GST.

Based on 2020 tax returns, top 100 taxpayers paid about $35.3 billion or 40% of all corporate income tax. The largest 10 top 100 taxpayers paid about $26.2 billion or 74% of corporate income tax paid by the top 100 population, or about 30% of all corporate income tax.

Given Australia’s highly concentrated corporate tax base and the significant impact top 100 taxpayers can have on the health of our tax system, we engage with them on an ongoing basis to manage their compliance and assure their tax performance.

We review and moderate the top 100 population annually. Top 100 taxpayers are initially identified based on the size of their Australian operations. Other factors we consider include the amount of income tax, excise and GST reported, and the influence the taxpayer may have on their market segment.

Our engagement with top 100 taxpayers is tailored based on the Action Differentiation Framework (ADF). Our understanding is informed by:

• their size
• the transparency of their engagement with us
• the choices and behaviours evidenced in their tax affairs
• the level of risk they exhibit
• the level of assurance we have previously obtained.

Note: In 2022 there were 82 economic groups in the top 100 population. This number varies year-on-year and some groups have more than one taxpayer in the top 100. Accordingly, the annual number of entities reviewed under the justified trust program does not equal 100.

Since the commencement of the justified trust program in 2016, our justified trust ratings have provided a credible and objective mechanism for organisations to test and assess the effectiveness of their own tax governance processes. It also helps organisations understand how our assessment of their tax profile compares to their peers in the market.

Top 100 taxpayers that obtained overall high assurance ratings can achieve reduced compliance costs and are less likely to have intensive tax disputes with us. Taxpayers can also rely on our high assurance rating to mean that we will generally not apply compliance resources to those issues over which we have justified trust, unless in exceptional circumstances.

Our one-to-one engagements with the top 100 population have resulted in an increase in the income tax assured and the economic activity assured in 2022. As of 30 June 2022 we have assured approximately $29 billion in income tax for top 100 taxpayers for the 2019–20 income year. These results reflect our growing confidence over an increasingly larger portion of the corporate tax base, and both reflect and contribute to the sustainable reduction of the large corporate groups tax gap over time.

Our focus in the 2022 income year was to work with the taxpayers at overall low assurance to improve their assurance ratings. This has resulted in a continued reduction in taxpayers attaining overall low assurance to 15% in 2022. This filtering of the top 100 population ultimately enables us to focus our resources in the right areas and provides taxpayers with certainty about their tax outcomes.

A justified trust rating cannot be ‘set and forget’. In recognition of the level of trust we have in the reported tax outcomes of taxpayers, we continue to monitor (under the income tax Monitoring and Maintenance approach) top 100 taxpayers’ disclosures and tax outcomes over the 2 income years following an overall high assurance rating to maintain the level of justified trust obtained. The Monitoring and Maintenance review is followed by a more comprehensive justified trust review to refresh our confidence in the taxpayer’s tax outcomes every third year. To date, we have completed a substantial number of Monitoring and Maintenance reviews, and a small number of refresh reviews. These reviews have been encouraging in that they demonstrate that taxpayers are keeping up their standards in the years after a high assurance rating.

We have recently published information about our future engagement approach for GST once an initial review has been completed. This engagement includes a tailored engagement approach for top 100 taxpayers who attained overall high or medium assurance in their initial GST review. While it is intended that such taxpayers will be reviewed on a periodic basis at least once every 4 years, we will continue to actively monitor GST compliance and use our data and analytics capability to safeguard against non-disclosure or non-compliance during the interim years.

Justified trust and transparency

Tax compliance is becoming an important part of the increasing focus among boards, investors, customers and consumers, suppliers, community groups and other stakeholders of how organisations contribute to the communities in which they operate, with many seeing this as an important component of Environmental, Social and Governance (ESG) performance indicators. Societal attitudes and expectations in Australia and globally are increasingly encouraging organisations to make more transparent and sustainable business decisions that can lead to long-term growth benefiting all stakeholders. There continues to be calls for organisations to be more transparent about their operations and tax contributions, and to demonstrate that they are participating fairly in the economy.

Our justified trust ratings are expected to be increasingly used and leveraged by organisations to demonstrate their community and ESG credentials as part of their broader social licence to operate. The objective principles used in the justified trust initiative also serve to enhance the community’s understanding about large market compliance, and their ability to differentiate good corporate tax citizens from others. Although there remains a level of non-compliance by some in this population which we continue to robustly address, the overall level of compliance is very high, and probably much higher than the current broader community understanding. Sharing these ratings can help address this gap for those organisations which have achieved high assurance.

Our results to date demonstrate that most large businesses do, and want to do, the right thing. We have a high level of willing participation in the large corporate groups. This is shown by 4 out of 5 top 100 taxpayers having obtained either a high or medium overall assurance rating. There are also examples of companies that have committed to long-term behavioural change, including restructuring, changing their business practices, and settling long-standing disputes with us.

We increasingly see justified trust assurance ratings disclosed together with other contextual information to assist the community’s understanding of the tax contributions of the largest participants in the Australian economy. We encourage the continued adoption of tax transparency practices (including the disclosure of assurance ratings) which builds and maintains community confidence that the largest taxpayers are paying the right amount of tax.

Our approach

In 2016 we introduced the justified trust initiative starting with the income tax affairs of the top 100 population. In 2019 we expanded the initiative to include the GST affairs of the top 100 population.

We apply the justified trust methodology and seek to obtain assurance of 4 focus areas.

1. That appropriate tax risk and governance frameworks exist and are applied in practice. This includes the design and operational effectiveness of business systems to create, capture and report transactions correctly for GST purposes.
2. That none of the specific income tax or GST risks we have flagged to the market are present.
3. That tax outcomes of atypical, new or large transactions are appropriate.
4. That we understand why the accounting and tax results vary. We analyse the various streams of economic activity and how they are treated for taxation purposes. For example, we analyse the Effective Tax Borne (ETB) to understand whether the right amount of tax on profit from Australian-linked businesses is being recognised in Australia. We also analyse the sales, acquisitions and other data, and compare this to net GST paid.

The justified trust program has reached maturity in relation to the assurance reviews of the income tax affairs for top 100 taxpayers. Over the past few years, we have worked closely with the top 100 taxpayers to detail in their tax assurance reports (TARs):

• the criticality of a good, lived, tax governance framework, and encouraging self-assessment against our ‘better practices’
• the areas of their economic and tax affairs over which we have a high level of assurance
• areas where we have concerns, and how a higher level of assurance can be obtained
• how the ETB of the Australian channel is critical to our understanding of their tax risk profile (in particular, transfer pricing matters)
• our future engagement approach
• where a rating is provisional, how that issue resulting in the provisional rating has been addressed
• how the taxpayer has addressed governance gaps and ATO recommended enhancements, and other client next actions detailed in the TAR
• where the Monitoring and Maintenance approach is applied, whether we have been able to verify the tax outcomes from significant new transactions or significant changes to the taxpayer’s business activities.

We continue to work towards integrating our reviews, where appropriate, for income tax and GST.

This report outlines our findings for the 4 justified trust focus areas for income tax and GST, as well as insights from our engagement once a top 100 taxpayer attains overall high assurance for income tax.

Top 100 income tax assurance program

In this section

• Overall levels of assurance
• Tax governance framework
• Tax risks flagged to market / Significant and new transactions and specific tax risks
• Structured arrangements designed to reduce Australian tax
• Other common areas attracting our attention
• Ratings and engagement
• Alignment of tax and accounting outcomes

Overall levels of assurance

As of 30 June 2022, over half (51%) of top 100 taxpayers have attained overall high assurance (justified trust). This means that we have obtained assurance that these taxpayers have paid the right amount of Australian income tax for the year reviewed.

The overall level of assurance is based on an objective view (having regard to objective evidence) of whether the taxpayer is considered to have paid the right amount of tax.

Ratings

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

	High	We obtained assurance that you paid the right amount of Australian income tax or reported the right Australian income tax outcomes for the income year reviewed. You can therefore rely on a high assurance rating to mean that we will not initiate any review (including assurance) or audit activity for the income year reviewed in relation to the relevant issues in the return reviewed (other than any issues listed in the future assurance plan or similar work plan, as requiring further review) unless in exceptional circumstances.
	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 for the income year reviewed.
	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 reviewed.

The reviews completed to the end of June 2022 resulted in the following ratings.

Graph 1 – Overall assurance ratings for the last income tax reviews completed as of 30 June 2022

Note: All outcomes data used in this report in relation to income tax is based on the last review completed which can include a standard justified trust review, Monitoring and Maintenance review, Annual Compliance Arrangement (ACA) review or refresh year review.

Graph 2 – Overall assurance ratings for the last income tax reviews completed by industry as of 30 June 2019, 30 June 2020, 30 June 2021 and 30 June 2022

Note:

• These groupings align with the industry segments we use as part of the Corporate Tax Transparency Reporting except where we have amalgamated the Banking, Finance and Investment (BFI), Insurance (ISR) and Superannuation (SUP) segments into a Financial Services (FS) segment. The groupings are:
  • Banking, Finance and Investment, Superfunds and Insurance (FS)
  • Manufacturing, Construction and Agriculture (MCA)
  • Mining, Energy and Water (MEW)
  • Wholesale, Retail and Services (WRS).
• The population depicted in Graph 2 comprises taxpayers in the current top 100 population during the 2021 and 2022 income years, and does not include those that have exited the population as of 30 June 2022. The data for the 2019 and 2020 income years however includes all top 100 reviews completed during those years, including reviews relating to taxpayers who have exited the population as of 30 June 2022.
• The ‘Medium-High’ and ‘Low-Medium’ ratings are unique to the top 100 program and were only used prior to 2020. From 2020 we reverted to the 3 main rating categories of ‘Low’, ‘Medium’ and ‘High’, and these mid-point ratings are only used in very limited circumstances. 

Observations

During 2021 we saw a marked increase in the number of taxpayers achieving overall high assurance with a shift from 29% to 49%. During 2022 the number of overall high assurance taxpayers increased to 51%.

The number of taxpayers at overall low assurance has continued to decrease from 21% in 2019 to 15% in 2022. This means that 85% of top 100 taxpayers reviewed (or 4 out of 5 of the top 100 population) have obtained either an overall high assurance rating or an overall medium assurance rating.

Taxpayers continued to pro-actively engage with us during the year to progress and finalise the assurance reviews. Taxpayers have also developed a better understanding of the justified trust principles (particularly those relating to governance) and continued to make efforts to provide objective evidence to support a higher rating.

We have also been much more deliberate in setting out our assurance findings succinctly in the TAR. We clearly set out the areas of concern, governance gaps and enhancements, and how taxpayers can practically improve their assurance ratings. These reports are complemented by the annual ADF letters in which we highlight to senior executives any areas of concern requiring resolution. We also work with taxpayers to prioritise issues that can improve their overall assurance rating.

For top 100 taxpayers who have had more than one TAR issued, over 58% have increased their overall assurance rating between the first and last TAR issued.

High assurance taxpayers

We saw a smaller increase in 2022 in the number of top 100 taxpayers achieving overall high assurance than in prior years with a shift from 49% to 51%. We observed continued improvement in ratings in the Manufacturing, Construction and Agriculture (MCA) and Mining, Energy and Water (MEW) industries, while the ratings in the Banking, Finance and Investment, Superfunds and Insurance (FS) and Wholesale, Retail and Services (WRS) industries have remained largely consistent.

In limited circumstances, we may give an overall provisional high assurance rating. Such circumstances may include where the taxpayer has provided an undertaking and is actively working on addressing a specific design gap in their tax governance framework, or there is ongoing compliance activity.

There were 14 taxpayers in the current top 100 population who had a provisional high assurance rating as of 30 June 2022. A main reason for a provisional rating is because the taxpayer had not yet developed a periodic tax control testing plan in relation to their governance framework at the time of the rating. This is because the testing plan is usually developed closer to the time of the testing which may occur after the issuance of the TAR depending on the organisation’s internal review cycle. Another main reason is because of ongoing compliance activity.

To date, there are no taxpayers who have dropped from an overall provisional high assurance rating to a lower overall assurance rating. However, some taxpayers have been able to complete the required work and improve their assurance rating.

Acknowledging the complexities of tax law, taxpayers may still achieve overall high assurance notwithstanding they are in dispute with us about a particular matter. For example, a difference in technical interpretation as to the correct tax treatment of a transaction entered into in the ordinary course of their business. This assumes that all other areas have achieved an appropriate assurance rating (see ‘Obtaining high assurance’ below). However, if the matter being disputed relates to a material systemic issue or features elements of profit shifting or tax avoidance, or we have concerns about behaviour, the taxpayer will rarely achieve overall high assurance.

During 2022, we completed 21 Monitoring and Maintenance reviews. We have completed a total of 42 Monitoring and Maintenance reviews in the program to date. We also completed 4 Annual Compliance Arrangement (ACA) reviews during 2022 in relation to taxpayers who have attained overall high assurance. These reviews resulted in all the taxpayers maintaining their justified trust ratings.

Additionally, during 2022, we completed 4 refresh reviews. These reviews enabled us to refresh our understanding and evidence base, and resulted in the reaffirmation of our confidence that these taxpayers continued to pay the right amount of tax.

We expect that we will continue to have more taxpayers attain overall high assurance. This assumes that these top 100 taxpayers provide the required objective evidence to support the high assurance outcome, and we do not identify any new or further issues in the reviews.

This improvement will primarily come from the cooperation of the ATO and taxpayers in achieving timely completion of the planned assurance reviews for the year, and taxpayers actively addressing the areas of concern set out in the future assurance plans contained in the TARs. This is also dependent on potential movements in the composition of the top 100 population (which is moderated each year), and taxpayers continuing to maintain their overall high assurance ratings in the refresh reviews.

Medium assurance taxpayers

In 2022 34% of top 100 taxpayers attained an overall medium level of assurance. This means that we obtained assurance in relation to the majority of the areas reviewed but not all areas. This reflects, to some degree, the complexity of large businesses and signals there is still more to do in some cases. Further work can include actions by taxpayers to address areas of concern or information gaps identified. It can also include actions by us to conduct further assurance activities on specific issues or on a greater proportion of the taxpayer’s economic activities.

In practice, the main blocker to taxpayers achieving overall high assurance is demonstrating design effectiveness of their governance framework. Other key blockers include the display of what we perceive to be non-cooperative behaviours, as well as non-assured matters relating to tax risks flagged to market or significant transactions that require further information to be provided to us, or analysis to be conducted by us.

Low assurance taxpayers

In 2022 the number of top 100 taxpayers at overall low assurance continued to drop to 15%. We consider the majority of these taxpayers to have a higher risk profile and to be typically involved in complex and numerous tax disputes. We generally have significant concerns around their compliance with the Australian income tax laws. A small number of overall low assurance taxpayers are new entrants to the top 100 population and received their first year TAR in 2022.

We will comprehensively and intensively review overall low assurance taxpayers and are more likely to use audits to progress the resolution of issues.

A focus in 2022 was to work with the overall low assurance taxpayers to improve their ratings. This resulted in 5 top 100 taxpayers moving from overall low to medium assurance. This was a positive outcome for the taxpayers and the justified trust program. It demonstrates that where the ATO and taxpayers are fully engaged and transparent, it can lead to the efficient resolution of even the most complex issues or disputes to the benefit of both the taxpayer and the administrator.

Overall low assurance taxpayers typically have a combination of low and red flag assurance ratings across the 4 justified trust focus areas that prevent them from attaining a higher level of overall assurance. Resolving the higher risk tax issues (such as those which go the heart of their tax infrastructure), as well as making improvements to the design effectiveness of their tax risk management and governance frameworks, will likely see these taxpayers increase their overall assurance ratings.

Tax governance framework

Tax governance is a key focus area under the justified trust methodology for large public and multinational businesses.

We consider the existence, design and operation of a tax control framework for income tax and GST focusing on the 8 controls set out in the Tax risk management and governance review guide and the GST Governance, Data testing and Transaction Testing Guide (collectively, the Guides).

1. Board-level control 1: Formalised tax control framework
2. Board-level control 3: The board is appropriately informed
3. Board-level control 4: Periodic internal control testing
4. Managerial-level control 1: Roles and responsibilities are clearly understood
5. Managerial-level control 3: Significant transactions are identified
6. Managerial-level control 4: Controls in place for data
7. Managerial-level control 6: Documented control frameworks
8. Managerial-level control 7: Procedures to explain significant differences

The Guides:

• set out principles for board-level and managerial-level responsibilities, with examples of evidence that demonstrate the design and operational effectiveness of tax control frameworks
• focus on the processes and controls in place and may not necessarily reflect the tax risk appetite or capabilities and experience of the tax or finance team, or their advisers.

Ratings

We apply the following staged rating system when reviewing and assessing tax governance. For practical guidance about how we rate tax governance, see Reviewing tax governance for large public and multinational businesses.

	Stage 3	You provided evidence to demonstrate that a tax control framework exists, has been designed effectively and is operating effectively in practice.
	Stage 2	You provided evidence to demonstrate that a tax control framework exists and has been designed effectively.
	Stage 1	You provided evidence to demonstrate a tax control framework exists.
	Not evidenced or concerns	You have not provided sufficient evidence to demonstrate a tax control framework exists or we have significant concerns with your tax risk management and governance.

The reviews completed to the end of June 2022 resulted in the following ratings which have been grouped by industry.

Graph 3 – Overall governance ratings for the last TAR issued as of 30 June 2022

Graph 4 – Overall governance ratings for the last income tax reviews completed by industry as of 30 June 2019, 30 June 2020, 30 June 2021 and 30 June 2022

Observations

During 2022 we observed continued improvement in governance reflecting the efforts of many taxpayers to enhance their tax control frameworks, provide objective evidence in support of their governance policies and processes, and undertake testings of their tax control frameworks.

A notable shift in 2022 is in the number of taxpayers attaining the highest rating for tax governance (Stage 3) from 8% to 12%. This means that 68% of the top 100 population have at least a well-designed and effective tax governance framework because they have obtained a Stage 2 or Stage 3 rating. We expect that this will result in less incorrect reporting of income tax, and a greater alignment between an organisation’s tax risk appetite and their risk framework.

Stage 1

A Stage 1 rating recognises that a tax control framework exists but reflects that further work is needed to demonstrate that the framework is designed effectively. Most top 100 taxpayers have provided objective evidence that a tax control framework for income tax exists.

For income tax, 29% of taxpayers were assigned a Stage 1 rating for the year ended 30 June 2022 compared to 67% for the year ended 30 June 2019. The decrease in the number of taxpayers at Stage 1 can be attributed to taxpayers providing us with objective evidence addressing their design gaps.

We continue to work with those top 100 taxpayers with a Stage 1 rating to progress to a Stage 2 rating as part of current and future reviews. We anticipate about a further 10 percentage point increase of taxpayers achieving a Stage 2 rating by 30 June 2023. This assumes that these taxpayers provide the required objective evidence to support the design effectiveness of their frameworks. In this regard, tax return preparation procedures, tax provision procedures (relevant to procedures to explain significant differences between accounting and tax), and the periodic internal controls testing program are the common areas with limited formal documentation. On the other hand, we note that there has been a significant improvement in the frameworks relating to the process for reporting tax risks to the board (which had been a key blocker, together with the periodic internal control testing program, to taxpayers achieving a Stage 2 rating in 2021).

Stage 2

A minimum Stage 2 rating is required to achieve an overall high assurance rating or justified trust. This means taxpayers have provided objective evidence to demonstrate that a tax control framework exists for income tax and has been designed effectively.

For income tax, 56% of taxpayers were assigned a Stage 2 rating for the year ended 30 June 2022 which is consistent with the year ended 30 June 2021. This result (together with the numbers at Stage 3) aligns with the total number of taxpayers who have achieved an overall high assurance rating for income tax, and who are benefiting from our Monitoring and Maintenance approach.

When reviewing governance for Stage 2, we will look to leverage existing processes or identify compensating controls where the better practice elements are either not present or only partially present.

An increasing number of top 100 taxpayers at Stage 2 are working with us to demonstrate that their tax control framework is not only designed effectively but also operating effectively to proceed to the next rating (Stage 3). Some taxpayers choose to maintain a Stage 2 rating.

Stage 3

To obtain the highest rating (Stage 3), we look for evidence that the documented tax control framework is both designed and operating effectively in practice. This stage requires evidence in the form of a detailed report of findings that taxpayers have independently tested the operation of their framework in practice and should conclude that the documented tax control framework is operating effectively.

Where the report of findings recommends improvements or enhancements, we will seek to understand whether these have been (or will be) implemented before assigning a Stage 3 rating. We are unable to rely on exception-based reports prepared by independent testers when considering a Stage 3 rating as these reports do not contain enough detail on the tests undertaken on each control (including the methodology and sampling size applied) to inform us as to whether each control is operating effectively.

We have seen a noticeable increase from 8% in 2021 to 12% in 2022 in taxpayers being assigned an overall Stage 3 rating this year. Their boards, shareholders and other stakeholders can be confident that there is an independent assessment on the operating effectiveness of their tax control frameworks.

We note that some taxpayers are testing their income tax controls over a 3 year period and are not expected to be assigned an overall Stage 3 rating until testing has been completed and the results provided to us at the conclusion of the 3 year period. We anticipate that the number of taxpayers achieving a Stage 3 rating will increase by about 10 percentage points by 30 June 2023 having regard to the timetable of these activities. This assumes that these taxpayers will provide us with detailed testing results to support the operating effectiveness of their frameworks.

Red flag

A red flag rating is only applied after careful consideration if we have:

• no evidence demonstrating that a tax control framework exists
• significant concerns with the taxpayer’s tax control framework as evidenced by the high level of errors identified
• fundamental concerns about the robustness of existing tax controls.

There remains a small percentage of top 100 taxpayers that have been assigned a red flag rating for income tax governance. The number has shifted from 3% in 2021 to 2% in 2022.

Not rated

This rating is only applied in the top 100 program in a very small number of cases for income tax governance. The reasons for this vary but include large scale mergers and acquisitions, and where the tax control framework was being substantially redesigned (and the changes were so significant that it was appropriate to defer our assessment to the following review). In these circumstances, we typically review the governance framework in the following year.

Tax risks flagged to market / Significant and new transactions and specific tax risks

We seek to understand, and review, the income tax treatment of the taxpayer’s business activities, particularly significant and new transactions. We also look for, and review, risks or concerns communicated to the market, and determine if they are present.

Ratings

We apply a consistent rating system when reviewing and assessing the income tax treatment of a taxpayer’s business activities, including significant and new transactions, and tax risks communicated to the market.

	High	With respect to this issue, we obtained a high level of assurance that the right Australian income tax outcomes were reported in your income tax return. You can therefore rely on a high assurance rating to mean that we will not initiate any review (including assurance) or audit activity for the income year(s) reviewed in relation to this issue in the return reviewed (other than any issues listed in the future assurance plan or similar work plan, as requiring further review) unless in exceptional circumstances.
	Medium	More evidence and or analysis is required to establish a reasonable basis to obtain a high level of assurance.
	Low	More evidence and or analysis is required to determine whether a tax risk is present.
	Red flag	Likely non-compliance with the income tax law.
	Out of scope	We have not evaluated this item and not expressed a rating.

Observations

The assurance areas covered in the analysis for tax risks flagged to market, and significant and new transactions often have material tax consequences if they have been incorrectly treated or calculated for tax. Typically, other than governance, this is where most of our time during the review is spent to obtain higher levels of assurance. This also has a significant impact on the overall assurance ratings.

Many top 100 taxpayers have arrangements that are covered by a public advice and guidance product (such as a Practical Compliance Guideline, Taxpayer Alert or Public Ruling). Where a public advice and guidance product may be applicable, our approach is to seek to understand the arrangement to determine the presence of risk, and to work with the taxpayer to mitigate or address any risk. We expect the ratings for these areas to improve over time as the assurance review is completed or, if there is a dispute underway, when that dispute is resolved.

The largest public and multinational companies are required to disclose in the Reportable Tax Position (RTP) Schedule information on uncertain tax positions and arrangements that are considered to pose a systemic risk to the corporate tax base. These arrangements often involve tax avoidance or profit shifting (or both).

The latest Findings report Reportable tax position schedule Category C disclosures provides the aggregated disclosures made by companies for the 2020–21 income year. The report provides insights to the types of arrangements large companies are entering, including other arrangements which are not outlined below. In 2020–21, arrangements which were not subject to a risk assessment or tax impact calculation in accordance with the relevant Practical Compliance Guideline were separated from the high-risk category and captured under a new category, ‘PCG not applied’.

As part of our top 100 assurance reviews, we check, on an annual basis, the accuracy and completeness of disclosures made by top 100 taxpayers in tax returns, accompanying schedules (including the RTP Schedules), country-by-country (CBC) reporting statements and financial statements. We also follow up on disclosures in the RTP Schedules relating to unamended mistakes or omissions in tax returns.

The following sections outline specific areas of concerns and items that attract our attention. We do not see these in all cases.

We have also included, where applicable, information on the RTP Schedule disclosures made by top 100 taxpayers for the 2020–21 income year under Category C in relation to these areas of concern or items that attract our attention.

Consistent with our observations about taxpayers committing to long-term behavioural change, we have further observed that many taxpayers who have previously entered into multiple new high-risk arrangements that require resolution via audits now either have no new tax risks flagged to market or, if there is a potential application of a public advice and guidance product, the new tax risks flagged to market either fall in the low-risk zone or have been given high assurance. We expect that as more of our population reaches overall high assurance or overall medium assurance, the number of new tax risks flagged to market that are characterised as high-risk arrangements and require resolution via audits will also decrease.

Transfer mispricing

Transfer pricing is a natural feature of the international tax system, requiring entities to deal with related parties on arm's length terms. Our concern is transfer mispricing, which is where transactions are mispriced, resulting in the tax base being shifted from Australia. This is a particular risk in a country like Australia, with large cross-border capital and transactional flows. As such, the validity of transfer pricing is a common assurance area with approximately 85% of top 100 taxpayers reporting related party dealings. This area encompasses a substantially large number of dealings, the nature of which can range from simple to very complex.

The following is a breakdown of the typical transfer pricing areas reviewed across a range of dealings.

• International related party financing transactions including arm’s length conditions, related party derivatives, interest free loans (outbound and inbound), cash pooling arrangements and guarantee fees.
  • Related party loans continue to be a key focus area and represent the highest proportion of unassured items that attract a red flag rating for the top 100 population. Over 15% of the related party financing transactions reviewed attracted a red flag rating, with a further 13% attracting a low assurance rating. Despite this, we have observed that over time about 15% of the related party financing transactions reviewed have resulted in improved assurance ratings.
  • Category C RTP Schedule disclosures by all public and multinational businesses from 2017–18 to 2020–21 on related party financing arm’s length conditions show a positive trend that taxpayers are entering into fewer arrangements or transitioning from high risk to low-risk arrangements. Similarly, the number of high-risk arrangements pertaining to related party financing derivatives has decreased since 2018–19.
  • From 2019–20 to 2020–21, the number of high risk and medium risk Category C RTP Schedule disclosures for related party financing transactions as self-assessed by top 100 taxpayers has reduced, with the majority of transactions rated as low risk (about 61%). About 9% fell within the white zone. While high risk disclosures relating to derivatives have remained about the same from 2019–20 to 2020–21 (about 10%), 50% of the disclosed derivatives transactions in 2020–21 did not include a risk zone assessment. Where taxpayers need to self-assess their risk rating against Practical Compliance Guideline PCG 2017/4 and they are unable to (or choose not to) self-assess, they can expect us to closely review their related party financing arrangements.
   
• Offshore hubs (marketing or procurement) or service centres
  • Most of the offshore centralised operating models (hubs covering marketing and non-core procurement activities) reviewed attracted a high assurance rating or medium rating. We have observed that over time about 8% of the marketing hubs and non-core procurement transactions reviewed have resulted in improved assurance ratings.
  • Category C RTP Schedule disclosures by all public and multinational businesses from 2017–18 to 2020–21 relating to marketing hubs show that the proportion of self-assessed risk ratings has remained relatively stable for the low risk and white zone categories. The medium risk disclosures have increased with a corresponding reduction in high-risk disclosures. In 2020–21 high risk disclosures halved due to the introduction of the new category, ‘PCG not applied’. Unless a taxpayer contacts us to explain why they are unable to apply the ATO risk benchmarks set out in Practical Compliance Guideline PCG 2017/1, their hub will generally be rated as being in the red zone, meaning it will be rated as being 'very high risk'.
  • Category C RTP Schedule disclosures for 2019–20 and 2020–21 by top 100 taxpayers relating to marketing hubs have remained relatively consistent over the 2 years, with a high proportion (52%) disclosing low risk ratings pursuant to Practical Compliance Guideline PCG 2017/1. About 21% fell within the white zone.
  • There were no high-risk disclosures for non-core procurement transactions by top 100 taxpayers in 2020–21. The large number of high-risk disclosures for non-core procurement transactions in 2018–19 and 2019–20 was due to one top 100 taxpayer who did not apply Practical Compliance Guideline PCG 2017/1. In 2020–21 the previous high-risk disclosures made by the top 100 taxpayer who did not apply the PCG were moved to the new ‘PCG not applied’ category. This resulted in the balance of the disclosures being at low risk or within the white zone.
  • The high proportion of disclosures of low-risk ratings for marketing hub arrangements reflects the efforts that have been made by us and top 100 taxpayers (who are responsible for the majority of Australian exports sold through marketing hub arrangements) to resolve our concerns through Advance Pricing Arrangements (APAs) or settlements. A small number of material arrangements are subject to ongoing compliance action.
   
• Inbound distribution arrangements
  • Category C RTP Schedule disclosures by all public and multinational businesses from 2019–20 to 2020–21 relating to inbound distribution arrangements show a decrease in high risk and medium risk arrangements, but an increase in disclosures in the categories of ‘PCG not applied’ and ‘Not disclosed’. Where the risk framework in Practical Compliance Guideline PCG 2019/1 applies to a taxpayer's inbound distribution arrangement, and they are unable to (or choose not to) self-assess, they can expect us to closely review their arrangement.
  • From 2019–20 to 2020–21, there has been a slight decrease in Category C RTP Schedule disclosures for high-risk inbound distribution arrangements as self-assessed by top 100 taxpayers under Practical Compliance Guideline PCG 2019/1. Disclosures relating to medium and low risk transactions have remained relatively consistent. About 61% did not indicate a risk zone rating or did not involve the application of the PCG.
   
• Intangible assets and non-arm’s length arrangements
  • We continue to observe that the performance of the development, enhancement, maintenance, protection and/or exploitation (DEMPE) activities is not well documented or evidenced.
  • There were 3 Category C RTP Schedule disclosures by top 100 taxpayers in 2020–21 relating to deductions for expenses incurred under an arrangement with offshore parties using intangible assets held by an offshore party as described in Taxpayer Alert TA 2018/2. Two disclosures indicated that the taxpayer had considered the arm’s length principle in determining the appropriate consideration for the use of the intangible asset, but the arrangement was not otherwise covered by compliant transfer pricing documentation due to the low materiality. One taxpayer had considered the arm’s length principle but did not disclose whether the transaction was subject to transfer pricing documentation.
  • There was one top 100 disclosure for non-recognition or mismatch of activities connected with the DEMPE of intangible assets as described in Taxpayer Alert TA 2020/1.
   
• Inbound and outbound supplies of goods and services
  • Related party sales is a focus area for us and represent the third highest proportion of unassured items that attracted a red flag rating for the top 100 population in 2022.
   
• Management, administrative and technical services
  • We continue to observe that the beneficial nature of services and the appropriateness of allocation keys are not well documented or evidenced.
   
• Insurance or reinsurance
• Research and development (R&D) performed on behalf of overseas related party.

Common issues which continue to arise in relation to transfer pricing matters include the following.

• The inadequacy of information available to support transfer pricing positions.
• The size and complexity of the global value chain in the top 100 population – top 100 taxpayers often have very complex businesses and Australia can be a significant part of the value chain. We are finding this takes time to source relevant information to support the transfer pricing analysis.
• Changes in transfer pricing policy or methodologies without an underlying change to the functional profile of a taxpayer, and inappropriate methodologies being selected given the taxpayer functional profile.
• Transactions that are covered by an APA or Bilateral Advance Pricing Arrangement (BAPA) – we will review the arrangements and the annual compliance report that is required to be submitted annually for APAs and BAPAs to ensure that taxpayers are continuing to follow the terms of the arrangements. Where transactions are subject to settlement agreements or private rulings, we also review these to confirm that taxpayers are adhering to the terms of the settlement agreement or implementing the relevant transactions in accordance with the ruling.

Structured arrangements designed to reduce Australian tax

In some cases, we see arrangements that are structured to reduce or avoid Australian tax. In those cases, the low assurance ratings and red flags are sometimes associated with related party transactions (including third party back-to-back transactions) promoted or designed to achieve Australian tax savings, including the following.

• Contrived related party financing arrangements, including the use of financing transactions with special terms designed to  
  • artificially defer or avoid interest withholding tax while obtaining annual Australian income tax deductions
  • avoid dividend withholding tax upon repayment/redemption of contrived related party financing arrangements, and/or
  • otherwise obtain deductions or avoid assessable income using arrangements designed to circumvent specific anti-avoidance rules such as thin capitalisation and the hybrid mismatch integrity rule, and debt/equity classification rules.
• Migration of Australian generated intangible assets to overseas related parties to reduce Australian taxable income or withholding tax.
• Arrangements or variation of arrangements of the kind described in Taxpayer Alert 2020/4 – these arrangements broadly involve the transfer of assets to an Eligible Tier 1 (ET-1) and an ET-1 company leaving, or anticipating to leave, the multiple entry consolidated (MEC) group. No top 100 taxpayer made a disclosure in their RTP Schedule in 2020–21 in relation to the use of MEC groups to avoid CGT as described in Taxpayer Alert TA 2020/4.
• Arrangements designed to avoid income being attributable to an Australian permanent establishment.
• ‘Inversion’ or ‘top-hatting’ arrangements, or the interposition of partnerships or other entities, designed to  
  • shift recognition of income and/or change or mischaracterise the nature of income
  • facilitate related party transactions to obtain Australian tax deductions
  • reduce or eliminate withholding tax
  • avoid the application of targeted anti-avoidance measures.

Other common areas attracting our attention

Other areas that continue to commonly arise in reviews that attract our attention include the following.

Uniform capital allowances

This area represents the highest proportion of unassured items that continues to attract a low assurance rating for the top 100 population. This reflects that most case teams will assure these claims later in the justified trust review. Typically, uniform capital allowances do not present material tax risks and differences of view are more likely to be effectively resolved.

When assuring capital allowances claims, we consider the systems and governance processes adopted, as well as the supporting evidence provided (including working papers).

Common areas of focus include the use of project pools, balancing adjustment calculations, self-assessed effective lives and asset classification (particularly for composite assets and leasehold improvements). Where automated software tools are used to prepare claims, we also evaluate the level of ‘human intervention’ that confirmed revised claims satisfied the law.

When taxpayers review past claims, we expect a ‘two-way’ analysis – identifying capital items which could have been expensed, and also identifying where expensed items might be more appropriately capitalised. About 40% of our reviews relating to capital allowances claims have resulted in high assurance. About 32% of ratings relating to capital allowances have improved over time.

Research and development (R&D) expenditure

This area represents a high proportion of unassured items that continues to attract low assurance and red flag ratings for the top 100 population. We have concerns about whether notional deductions claimed by taxpayers are actually incurred on R&D activities and whether expenses (such as overheads and fixed costs) are appropriately apportioned between eligible and non-eligible R&D activities.

In some cases, we have referred activities for review to AusIndustry where concerns have been identified. We have observed in some cases significant delays in R&D amendments being made after the end of the income year which may indicate that there are issues with sufficient contemporaneous documentation being available as required by law to properly identify eligible activities and the expenditure incurred on those activities.

About 13% of top 100 taxpayers did not receive an assurance rating for R&D as these taxpayers did not claim the R&D tax incentive for the year reviewed but had indicated that they will claim the incentive later via an amendment or in a subsequent income year. About 28% of ratings relating to R&D expenditure have improved over time.

Thin capitalisation

This area remains an ongoing focus area for us. Most of our reviews of the thin capitalisation provisions attracted a high assurance or a medium assurance rating. About 9% of ratings relating to thin capitalisation have improved over time. Some of the issues we are seeing are asset revaluations and not including some arrangements as debt (such as preference shares and notes).

In 2020–21, 2 top 100 taxpayers made Category C RTP Schedule disclosures which are covered by Taxpayer Alert TA 2016/9 and Taxation Determination TD 2020/2. In 2020–21 the RTP Schedule included a new question relating to the application of the arm’s length debt test and self-assessment of disclosures on Practical Compliance Guideline PCG 2020/7. Eight percent of disclosures in relation to this new question by the top 100 population were high risk, with 50% indicating that the PCG was not applied. About 16% involved a low risk or white zone assessment. Where taxpayers are unable to (or choose not to) self-assess their risk rating against Practical Compliance Guideline PCG 2020/7, they can expect us to closely review their arm's length debt amount.

Deductions

Most of the general deductibility issues we are seeing relate to revenue or capital classification and the subsequent tax treatment of the expense. This includes capitalised labour, exploration expenses and repairs and maintenance. About 87% of reviews relating to deductions have been rated as high or medium assurance.

Consolidation

Consolidation areas reviewed include the allocable cost amount process (we have seen some instances where the allocable cost amount has not been prepared at the time of the assurance review), asset recognition, valuation, reconsolidation events and MEC groups. Nearly 64% of reviews relating to consolidation issues have been rated as high assurance. About 16% of ratings relating to consolidation have improved over time.

Losses

We holistically focus on generation, carry forward, transfer and utilisation, of any losses. Our reviews consider not only the tax analysis, but we also look to understand the origin of the losses and the commercial environment of the business at the time the losses were incurred. We also seek to understand when top 100 taxpayers will utilise any carry forward losses and move into a tax payable position. Over 43% of reviews relating to losses have been rated as high assurance. About 17% of ratings relating to losses have improved over time.

Revenue

We are seeing that in some cases we need more evidence and/or analysis of sales revenue and other material revenue amounts to establish a reasonable basis to obtain a high level of assurance where we have been unable to reconcile revenue figures reported in the tax return with audited financial accounts. About 76% of reviews relating to the derivation of revenue have been rated as high assurance.

Controlled foreign companies, related party derivatives and attribution of profits to permanent establishments

These are areas that commonly arise in our justified trust reviews.

Hybrid mismatch

We have identified and reviewed circumstances where the hybrid mismatch rules apply, having regard to Law Companion Ruling LCR 2019/3 and accompanying Practical Compliance Guideline PCG 2019/6 and Practical Compliance Guideline PCG 2018/7. Consistent with this guidance, we expect top 100 taxpayers to engage with us if, having applied our risk assessment framework against their arrangement, they conclude that there is a potential tax risk associated with the arrangement. Several taxpayers have made Category C RTP Schedule disclosures with regards to hybrid arrangements in the 2020–21 income year, and all disclosures were rated as low risk.

Diverted Profits Tax (DPT)

During our assurance reviews, we may consider the application of the DPT concurrently with other provisions of the income tax law, including the transfer pricing rules in Division 815 of the Income Tax Assessment Act 1997. We have considered, or are considering, the potential application of DPT in a small number of top 100 cases.

Ratings and engagement

For some issues or transactions, we require more evidence and/or analysis to obtain high assurance. We are working with top 100 taxpayers to articulate the areas that require further evidence or analysis. In some cases, medium assurance ratings on specific transactions may be satisfactory and, depending on the area and the significance of the transaction, it may still be possible to achieve overall high assurance.

High quality information, relevant supporting documentation, and an open and transparent relationship with us are expected from taxpayers to be able to achieve high assurance.

Alignment of tax and accounting outcomes

We analyse the differences between the accounting and tax results. This includes understanding the effective tax rates and ETB. We seek to understand, and be able to explain, any variances between tax and accounting outcomes. This provides an objective basis to obtain greater assurance.

Ratings

We apply a consistent rating system when reviewing and assessing the alignment of tax and accounting outcomes, which is outlined below.

	High	We understand and can explain the various streams of economic activity and why the accounting and income tax results vary.
	Medium	Further analysis and explanation are required to understand the various streams of economic activity and/or why the accounting and tax results vary.
	Low	We identified concerns from our analysis of the various streams of economic activity and/or why accounting and tax results vary.
	Red flag	We do not understand and cannot explain the various streams of economic activity and/or why accounting and tax results vary.

The reviews completed to the end of June 2022 resulted in the following ratings.

Graph 5 – Alignment of tax and accounting ratings for the last income tax reviews completed as of 30 June 2022

Graph 6 – Alignment of tax and accounting ratings for the last income tax reviews completed as of 30 June 2019, 30 June 2020, 30 June 2021 and 30 June 2022

Observations

Most (96%) of the top 100 taxpayers have obtained a medium or high assurance rating with respect to the alignment of tax and accounting outcomes, with the proportion at high assurance increasing from 58% as of 30 June 2021 to 60% as of 30 June 2022.

We are generally able to obtain assurance over a significant proportion of reported income and expenses as most taxpayers have audited financial statements, supported by a book-to-tax reconciliation between net profit or loss reported in the financial statements and the total profit or loss disclosed in the relevant tax return. This can be more challenging for taxpayers with MEC groups, foreign branches or stapled groups. However, in many cases, we have been able to overcome these challenges through active collaboration with top 100 taxpayers with these structures to deepen our understanding of these taxpayers’ various streams of economic activity, and why the accounting and income tax results vary.

We are also generally being provided with detailed book-to-tax reconciliations which allow us to obtain assurance over the key adjustments from the accounting results to calculate the taxable income (and tax payable) figures.

The number of medium ratings (36%) for this focus area demonstrates that further analysis is required, and underway, to understand the various streams of economic activity where the accounting and tax results vary for the top 100 population. It is also reflective of the significance and complexity of the transactions that are still being reviewed and have not yet been rated as high assurance.

The number of low ratings for this focus area has remained at 4% from 2021. We have observed that where taxpayers do not have effectively designed tax provision procedures in their governance framework, these taxpayers are also attaining a low or medium rating in relation to their alignment of tax and accounting outcomes.

Another component of this focus area is the ETB calculation, which we use to analyse the tax and economic performance of corporate groups. We consider that an income tax ETB should be part of a taxpayer’s governance systems. Boards and tax representatives of corporate groups should understand their ETB calculation and discuss the results (including underlying proxies and assumptions) with us. We particularly encourage taxpayers to provide information around their global value chains and foreign taxes paid on Australian-linked activities and continue to work with us to refine and enhance their ETB analysis.

We have observed that the ETB analysis provides a good cross-check or confirmation in relation to our analysis and assurance over related party dealings. By identifying the economic group’s worldwide profit from Australian-linked business activities, and the Australian and offshore tax paid on that profit, the ETB offers a useful sense check on any transfer prices and whether they are giving plausible, common-sense outcomes, or conversely if they are having the effect of skewing profits to low tax jurisdictions.

Tailored high assurance engagement

In this section

• Obtaining high assurance
• What a high assurance rating means for income tax
• Monitoring and Maintenance approach
• Annual Compliance Arrangement taxpayers
• Refresh year

Obtaining high assurance

In the top 100 program, we apply a principled approach to reaching overall high assurance (justified trust). This is based on 2 elements:

1. a quantitative threshold of more than 90% tax assured and economic activity correctly reported
2. an objective assessment of 7 qualifying factors.

The quantitative threshold of element 1. must be met before the qualifying factors in element 2. can be applied.

The 7 qualifying factors are outlined below:

1. Governance

Governance has been rated at least a Stage 2 in the TAR.

2. Tax risks flagged to market

Any tax risks flagged to market (Practical Compliance Guidelines, Taxpayer Alerts, Public Rulings, including those set out in the RTP Schedule Category C disclosures) have been rated at least a medium level of assurance in the TAR, and are not of immediate concern or identified as necessitating further action based on the information provided.

3. International related party dealings and CFCs

International related party dealings, profit attribution to permanent establishments and CFCs have received at least a medium level of assurance in the TAR and are not identified as necessitating further action based on the information provided.

4. Losses

Losses, if applicable, have received at least a medium level of assurance in the TAR. This includes that the commerciality of tax losses has been verified and we understand when a taxpayer expects to utilise carried forward balances and move into a tax payable position.

5. Effective Tax Borne (ETB)

The ETB calculation in the TAR and any underlying assumptions or proxies have been verified with the taxpayer. The ETB calculation has not highlighted any new areas of concern that pose a potential tax risk, including for example, holding overseas interests in jurisdictions where there is not a substantiated commercial purpose.

6. Reportable tax position schedule

There are no inconsistencies in RTP Schedule disclosures which are identified between lodgment of the tax return and finalisation of the review.

7. Cooperative and collaborative behaviour

It has been a cooperative and collaborative process and whilst working with a taxpayer we have not observed any non-cooperative behaviour.

An overall provisional high assurance rating may still be possible in limited circumstances. Such circumstances may include where the taxpayer has provided an undertaking and is actively working on addressing a specific design gap in their tax governance framework or there is ongoing compliance activity. Where there is ongoing compliance activity, provided the quantitative threshold is met (inclusive of that unassured issue), the availability of a provisional rating will depend on the nature and stage of the compliance activity.

What a high assurance rating means for income tax

An overall high assurance rating for income tax means that we have obtained assurance that you paid the right amount of Australian income tax or reported the right Australian income tax outcomes for the income year reviewed.

Where you have high assurance for a significant or new transaction, a transaction with respect to a tax risk flagged to market, or a specific tax risk, this means that with respect to this issue, we obtained assurance that the right Australian income tax outcomes were reported in your income tax return.

You can therefore rely on a high assurance rating to mean that we will not initiate any review (including assurance) or audit activity for the income year reviewed in relation to the relevant issues in the return reviewed (other than any issues listed in the future assurance plan or similar work plan, as requiring further review) unless in exceptional circumstances. Note that 'similar work plan' includes a taxpayer specific justified trust maintenance plan, issues register or annual review plan.

It will only be in exceptional circumstances that we will apply compliance resources to review any of the relevant issues in the income year reviewed. The following circumstances are likely to constitute exceptional circumstances:

• legislation is enacted, a final decision of the court or tribunal is made, or there is a precedential ATO view that applies retrospectively to the income year(s) reviewed
• where a review is required to complement compliance activity, or give effect to a determination, of another government agency or regulator
• there is a self-amendment/objection to the return for the income year reviewed (we will review the return in relation to the issue covered by the self-amendment/objection and related issues)
• you have subsequently notified us of a disclosure issue or error that should be corrected (relevant factors for consideration include materiality, potential risk to revenue, likely proliferation in the market or consistency with the policy intent)
• there is a change of tax treatment or position by you or a related taxpayer in that year or in subsequent years (other than due to a retrospective change in law or a precedential ATO view), particularly where the change in treatment means that some amounts are never taxed or double benefits will be obtained for expenditure
• it becomes apparent to us that full and true disclosure was not made
• there is potential application of the general or specific anti-avoidance rules
• fraud or evasion becomes evident to us.

Monitoring and Maintenance approach

When a top 100 taxpayer attains an overall high assurance rating under our justified trust assurance program, this means that we have confidence that they have complied with Australian income tax laws. In recognition of the level of trust we have in the reported tax outcomes of these taxpayers, we tailor our engagement approach to focus on maintaining our high level of confidence.

The nature of our engagement with taxpayers under a pre-lodgment compliance review (PCR) following an overall high assurance rating is known as the Monitoring and Maintenance approach. We have published guidance on this approach for taxpayers and their advisors.

Under the Monitoring and Maintenance approach, we will monitor the taxpayer’s disclosures and tax outcomes over the 2 income years following an overall high assurance rating to maintain the level of justified trust obtained. During this period, we will seek to leverage the high assurance already obtained in relation to ongoing business activities.

We will continue to meet with taxpayers on a regular basis throughout the year to maintain a contemporary understanding of business performance, key transactions and areas of focus. We may request supporting evidence to be provided throughout the year to assist our enquiries.

Taxpayers will be expected to proactively engage with us and make disclosures of significant or new transactions, or where there are material changes, before these occur. We expect the following to be disclosed on a real time basis or as part of the annual review (as relevant):

• significant or new transactions
• material business changes
• change of tax treatments or positions that have previously been assured as part of the current or prior review
• change of reporting of uncertain tax positions as reflected in current and deferred tax balances in the financial statements
• details of any new tax risks flagged to market (note these should align with disclosures in the RTP Schedule)
• disclosure issues or errors relating to information reported in the tax return or accompanying schedules that should be corrected
• material changes to the design of the tax governance framework
• outcomes of independent operational effectiveness testing of the tax governance framework completed.

Where the taxpayer makes a disclosure or notifies us of any of the above circumstances, or where our review detects a significant change or potential tax risk, we will request further evidence from the taxpayer to determine if verification is required. Where an item requires verification, our assurance activities in relation to these transactions or events will generally be targeted to areas not previously assured. At the end of the review, the taxpayer will receive a Monitoring and Maintenance assurance report.

While most taxpayers should experience a tangible decrease in the intensity of their review under the Monitoring and Maintenance approach, this is very much dependant on whether (and the extent to which) transactions need verification.

To date we have completed 42 Monitoring and Maintenance reviews with 21 of these reviews completed in the 2022 income year. Nineteen of the top 100 taxpayers have had at least 2 Monitoring and Maintenance reviews completed to date. One top 100 taxpayer is currently into their second round of Monitoring and Maintenance review after a refresh review (which resulted in their overall high assurance rating being reaffirmed).

The Monitoring and Maintenance reviews completed to date have resulted in all the taxpayers maintaining their justified trust ratings.

We have further observed the following in relation to the Monitoring and Maintenance reviews.

• Taxpayers are proactively engaging with us and making disclosures of significant or new transactions, or where there are material changes.
• Additional work on governance is typically focused on reviewing the implementation of our recommendations (including enhancements), addressing any specific design gap that is the subject of a provisional Stage 2 rating, and reviewing the outcomes from an independent operational effectiveness testing to assess whether a Stage 3 rating is achievable.
• Any issues listed in the future assurance plan or similar work plan as requiring further review in the latest TAR are followed up and/or reviewed.
• Where further verification work is required, it has typically been in relation to significant new transactions with 74% of reviews looking at new transactions or tax risks flagged to market (the balance of the reviews generally considered governance and issues flagged as requiring further review such as significant transactions, capital allowances claims, related party transactions, TOFA gains and losses, and R&D expenditure).
• The top 4 topics associated with significant new transactions related to capital gains tax, deductions, consolidation and related party financing issues. We note that in 2021–22 requests for rulings on capital management and capital gains tax significantly increased. Requests for advice on capital management transactions increased 40% from 2019–20 to 2020–21, and a further 11% from 2020–21 to 2021–22 (mainly relating to off-market share buybacks). This increase is almost entirely attributable to rulings requested by the top 100 and top 1000 populations. Capital gains related rulings (specifically relating to demerger transactions) increased 233% from 2020–21 to 2021–22.
• The Book-to-Book, Book-to-Tax and ETB analyses are generally undertaken based on our internal data sources, external data sources, the Statement of Taxable Income (SOTI), relevant balance sheet tax accounts and any other information provided by the taxpayer (additional information will generally only be sought where there are significant changes in adjustments and/or transactions).

Annual Compliance Arrangement taxpayers

Annual Compliance Arrangements (ACAs) were historically entered into with a small group of qualifying taxpayers and established mutual rights and obligations. In light of the increased justified trust ratings, we have started to work with the small remaining group of top 100 ACA taxpayers to transition them out of the ACA program and into the PCR program. This means that ACA taxpayers will have the benefit of the Monitoring and Maintenance approach when they reach overall high assurance.

Prior to fully transitioning into the PCR program, ACA taxpayers who have obtained an overall high assurance rating will revert to an annual ACA review in accordance with the ACA terms of arrangement.

A few taxpayers have completed reviews in accordance with the terms of the ACA. We have observed that all ACA taxpayers reviewed to date have had significant new transactions in the relevant income year. In addition, where governance was reviewed, 50% of the ACA taxpayers shifted from Stage 2 to Stage 3.

Refresh year

The Monitoring and Maintenance reviews and ACA year reviews are followed by a more comprehensive justified trust review to refresh our confidence in the taxpayer’s tax outcomes every third year.

The assurance activities for the refresh year will resume a whole-of-business approach, covering the tax outcomes of the entirety of the taxpayer's economic activities and applying the 4 pillars of justified trust.

We will seek to 'top up' our assurance where appropriate. In ordinary circumstances, it is expected that the refresh review will require less resource investment by taxpayers and the ATO as existing information, evidence and knowledge are able to be leveraged. At the end of a refresh year, the taxpayer will receive a full TAR.

There may be circumstances where a refresh year may be required to be conducted earlier than the third income year, for example:

• where there has been a fundamental business change such that there is a new business operation, we need to obtain assurance over
• where we have reason to consider that our trust should no longer be maintained.

As of 30 June 2022, we have completed refresh reviews for 4 taxpayers. Refresh reviews are currently underway for 15 taxpayers.

We are refining our refresh review approach as we undertake and complete more cases. Our reviews will include following up with overall provisional high assurance taxpayers who have not yet provided us with their periodic internal controls testing plans.

Top 100 GST assurance program

The top 100 population is a significant contributor to total GST collections. In 2020–21 the top 100 population contributed about $8.8 billion in GST collections, which was about 13% of total GST collections.

The top 100 population is not only a significant contributor to GST. These large companies can have a direct impact on the supply chains across Australia by setting the GST treatment for others down the chain. In addition, community perceptions of compliance at the ‘top end of town’ sends a clear signal to other taxpayer groups about fairness, and directly influences the willingness of other taxpayers to voluntarily participate in the tax system.

In 2019 we expanded the top 100 assurance program to include GST. The top 100 GST assurance program seeks greater assurance that top 100 taxpayers are reporting the right amount of GST. This supports and expands on existing compliance approaches, including justified trust reviews for income tax. The program has a strong focus on tax control frameworks for GST purposes.

Under the top 100 GST assurance program, we will complete a GST assurance review for each top 100 taxpayer by 30 June 2023. The review will generally focus on the last complete financial year.

GST and income tax teams are working collaboratively to deliver justified trust assurance reviews and we continue to work towards integrating our approaches to implement the justified trust work program from a whole-of-client and multiple tax perspective where appropriate.

As above-mentioned, a key development in 2022 was in relation to our publication of the future engagement approach for GST once an initial review has been completed. Under this engagement approach, taxpayers who obtained overall high assurance or medium assurance in their initial review can expect a tailored engagement and be reviewed at least once every 4 years. Taxpayers are also expected to continually review their GST control frameworks and undertake robust and regular data and transaction testings to ensure that their business systems are creating, capturing and correctly reporting GST on an ongoing basis. They are also expected to make real-time disclosures of a range of matters, including new or significant transactions, material business changes, and changes in GST positions taken.

We expect that there will be some taxpayers whose tailored engagement with us will still require some form of an annual targeted review. This can be due to the complexity of the application of the GST law to the taxpayer, the number of new significant transactions or issues arising, and/or the need to smooth-out our engagement over the interim period to maintain our understanding of the taxpayer’s business/processes and making the refresh review much more manageable for both the taxpayer and the ATO.

In this section

• Overall levels of assurance
• Tax risk management and governance
• GST risks flagged to market / Significant and/or new transactions / Specific tax risks
• Understanding the alignment between accounting and GST

Overall levels of assurance

The overall level of assurance is based on an objective view (having regard to objective evidence) of whether the taxpayer is considered to have reported the right amount of GST.

Ratings

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

	High	We obtained assurance that the taxpayer reported the right amount of Australian GST for the period reviewed. You can therefore rely on a high assurance rating to mean that we will not initiate any review (including assurance) or audit activity for the period reviewed in relation to the relevant issues in the activity statement reviewed (other than any issues listed in the future assurance plan or similar work plan, as requiring further review) unless in exceptional circumstances.
	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 the taxpayer reported the right amount of Australian GST.
	Low	We have specific concerns around the taxpayer’s compliance with the Australian GST law and the amount of Australian GST paid and GST refunds claimed for the period reviewed.

The GST assurance reviews completed to the end of June 2022 resulted in the following ratings.

Graph 7 – Overall assurance ratings for all GST reviews completed as of 30 June 2022

Graph 8 – Overall assurance ratings for all GST reviews completed by industry as of 30 June 2022

Note:

• These groupings align with the industry segments used by us as part of the Corporate Tax Transparency Reporting except where we have amalgamated the Banking, Finance and Investment (BFI), Insurance (ISR) and Superannuation (SUP) segments into a Financial Services (FS) segment. The groupings are
  • Banking, Finance and Investment, Superfunds and Insurance (FS)
  • Manufacturing, Construction and Agriculture (MCA)
  • Mining, Energy and Water (MEW)
  • Wholesale, Retail and Services (WRS).
   
• The population depicted in Graph 8 comprises taxpayers who have had a GST assurance review completed and may have subsequently exited the top 100 population as of 30 June 2022.

Observations

COVID-19 caused delays in the top 100 GST assurance program in 2020 with several GST assurance reviews deferred and delayed for top 100 taxpayers. In 2021 the number of GST assurance reviews finalised represented about 23.5% of the top 100 population. In 2022, this number rose to almost half of the population at 47.5%. Most of the reviews for the balance of the current top 100 population (other than some new entrants) are underway.

Most top 100 taxpayers who have had a GST assurance review finalised have attained an overall medium level of assurance (68%). This means we obtained assurance in relation to most areas reviewed but not all areas. The remaining 32% of taxpayers reviewed have attained an overall high level of assurance meaning that we have assurance these taxpayers have reported the right amount of GST for the period reviewed.

There are several reasons why taxpayers did not attain an overall high assurance rating.

These reasons include the following.

• In the majority of the cases, the inability to attain an overall Stage 2 rating for governance due to the absence of objective evidence to demonstrate that a tax control framework exists and has been designed effectively with respect to GST.
• The inability to attain assurance for other focus areas for assurance, including the presence of GST risks flagged to market, issues with correct reporting and insufficient evidence to assure significant transactions.
• Due to the size of the GST economic group, a divisional or business segment approach was undertaken which meant that there was insufficient coverage over the whole group and a further review is required to obtain sufficient coverage.

Where a taxpayer is unable to attain an overall Stage 2 rating for governance in the initial review but has nevertheless attained an overall medium assurance rating, we will address the GST governance gaps either through the annual income tax PCR product, or in a targeted review in accordance with our future engagement approach.

Over 60% of the top 100 taxpayers who have had a GST assurance review finalised have revised their activity statements to correct errors identified. Importantly, these taxpayers have implemented, or have plans to implement, improvements to their controls, processes and procedures to prevent the reoccurrence of these errors. Some taxpayers have further undertaken to continue to review their activity statements in relation to periods outside of the review periods to ensure compliance, and to correct any GST errors identified.

Tax risk management and governance

Tax governance is a key focus area under the justified trust methodology. As outlined previously, we review governance by requesting objective evidence of the design of tax controls. We review the design of controls based on documentation given to us and look for evidence in the form of approved policies and procedures demonstrating the existence and design of a tax control framework (for example, work instructions, templates and process maps).

The GST Governance, Data Testing and Transaction Testing Guide outlines how we apply the justified trust methodology in our top 100 GST assurance reviews when reviewing the existence, design and operation of a taxpayer’s GST controls as part of an effective tax control framework.

We consider the 8 controls outlined previously. There are 3 controls that are fundamental because the design of these controls directly influences the way in which GST is reported. These fundamental controls are:

• Board-level control 4: Periodic internal control testing
• Managerial-level control 4: Controls in place for data
• Managerial-level control 6: Documented control frameworks.

We also consider the other 5 controls as these are common controls and the design is equally as critical for both income tax and GST. There are common features in the way these controls are evidenced for both taxes.

Ratings

We apply the same standard ratings system as outlined previously for income tax when considering the existence, design and operation of a tax control framework for GST purposes.

The GST assurance reviews completed to 30 June 2022 resulted in the following ratings.

Graph 9 – Overall GST governance ratings for all GST reviews completed as of 30 June 2022

Graph 10 – Overall GST governance ratings for all GST reviews completed by industry as of 30 June 2022

Observations

The governance ratings for the GST assurance reviews to date are evenly split with 50% of top 100 taxpayers attaining Stage 2 (up from 47% in 2021) and the other 50% attaining Stage 1.

Poor governance that includes gaps in procedures and/or controls often leads to incorrect reporting of GST obligations. Taxpayers may inadvertently underpay GST or over-claim input tax credits due to a breakdown in a part of their processes or systems that capture, collate, report and reconcile the data that determines their GST liability. For instance:

• systems issues can arise due to coding errors and issues with the flow of information through the business system
• controls issues can arise due to the failure to undertake reconciliations and testings of controls
• processes issues can arise due to deficiencies in documented procedures and having unstructured manual interventions or workarounds.

Where errors are identified (through voluntary disclosures or the assurance review), we have focused on understanding how these errors have occurred and reviewing the taxpayer’s processes and procedures to ensure that they are designed effectively to prevent the same errors from re-occurring when assigning ratings to GST controls. Through improved governance, we expect to see fewer system type errors resulting in amendments lodged or corrections made in subsequent periods.

We have also identified links between GST errors made in applying the GST special rules and the design of GST controls. Some examples include the application of the reverse charge provisions, financial acquisitions threshold (FAT) and input tax credit (ITC) estimators where we have observed inadequate system controls and missing detailed steps in BAS preparation procedures.

Periodic independent governance control testing continues to be a control that top 100 taxpayers find most challenging for GST. Some taxpayers and their advisors are designing GST testing plans which cover only the 3 fundamental controls and not the common controls. Controls in place for data is another fundamental control for GST with limited formal documentation.

We strongly encourage taxpayers to develop procedures to explain significant differences between BAS reporting and financial statements. We are increasingly using the GST analytical tool (GAT) or similar top-down methods to determine whether reported GST outcomes are plausible. We continue to observe in practice that GST errors occur because there are no natural systems to check outcomes as taxpayers continue to rely on bottom-up systems. We are of the view that procedures to explain significant differences should be part of taxpayers’ governance systems.

Systems and BAS walkthroughs performed in top 100 assurance reviews help inform us of aspects of our governance review, however, we also require source documents to evidence the tax control framework. Teams will leverage from the walkthroughs to identify systems and BAS controls, and request evidence during these meetings, to help to generate overall efficiencies with our governance reviews.

Based on the number of reviews completed to date, the overall GST governance ratings generally align with the overall income tax governance ratings assigned to top 100 taxpayers. In the few instances where the overall assurance ratings did not align, the taxpayers did not achieve Stage 2 ratings for all the 3 fundamental GST controls (relating to controls in place for data for GST purposes, documented GST control frameworks, and periodic controls testing program covering the testing of GST controls).

We continue to consult with stakeholders where appropriate and refine our approach when rating GST controls to ensure that the better practices set out in the Guides are practicably achievable and able to be sustained in light of current business practices.

Stage 1

A Stage 1 rating recognises that a tax control framework for GST exists but reflects that further work is needed to demonstrate that it is designed effectively. We continue to work with taxpayers to improve their tax governance framework for GST as part of our future engagement approach.

Stage 2

A Stage 2 rating is required to achieve overall high assurance or justified trust for GST. This means taxpayers have provided objective evidence to demonstrate that a tax control framework exists and has been designed effectively.

We have observed that top 100 taxpayers are highly committed to investing in GST governance, in particular the 3 fundamental GST controls. This is reflected in our findings to date.

We are currently working with a number of top 100 taxpayers to proceed to a Stage 3 rating. Some taxpayers choose to maintain a Stage 2 rating.

Stage 3

To obtain a Stage 3 rating for GST, we look for evidence that the documented GST control framework is both designed and operating effectively in practice.

This stage requires evidence in the form of a detailed report of findings that taxpayers have independently tested the operation of their GST control framework in practice and should conclude that their GST controls are operating effectively.

Although we did not assign any Stage 3 ratings during the 2022 year, some top 100 taxpayers are working with us to demonstrate that their GST control frameworks are operating effectively to achieve a Stage 3 rating. We anticipate an increase in the number of taxpayers with a Stage 3 rating over the coming years.

GST risks flagged to market / Significant and/or new transactions / Specific tax risks

We seek to understand that the GST outcomes of atypical, new or large transactions are appropriate. We also review GST risks or concerns we communicated to the market and determine whether these risks may be present.

Ratings

We apply a consistent rating system when reviewing and assessing the GST reporting and GST treatment of a taxpayer’s business activities, particularly significant and new transactions, and GST risks or concerns communicated to the market.

	High	With respect to this issue, we obtained a high level of assurance that the right Australian GST outcomes were reported in your Business Activity Statements. You can therefore rely on a high assurance rating to mean that we will not initiate any review (including assurance) or audit activity for the period reviewed in relation to this issue in the activity statement reviewed (other than any issues listed in the future assurance plan or similar work plan, as requiring further review) unless in exceptional circumstances.
	Medium	More evidence and/or analysis is required to establish a reasonable basis to obtain a high level of assurance.
	Low	More evidence and/or analysis is required to determine whether a tax risk is present.
	Red flag	We have concerns there is non-compliance with the GST law.
	Out of scope	We have not evaluated this item and not expressed a rating.

Observations

The following sections outline areas of concern and items that attract our attention. We do not see these in all cases.

Incorrect reporting

The risk of top 100 taxpayers incorrectly reporting their GST obligations continues to be a key focus area.

We continue to see a material number of errors in GST reporting with nearly 50% identified through data and transaction testings undertaking during the reviews, and self-reviews following the data and transaction testings. The remainder relate to taxpayer initiated self-reviews conducted prior to the commencement of an ATO assurance review.

Governance and systems-related issues are significant drivers for errors in GST reporting. Other common drivers include:

• the implementation of, or migration to, new business systems
• new or one-off transactions where internal controls are not in place to handle events outside of the core business activities
• personnel issues (such as staff turnover or leave) leading to resourcing and capability gaps
• incorrect interpretation of the law through lack of knowledge or capability.

Voluntary disclosures are typically not material in dollar terms.

Our assurance reviews ensure that top 100 taxpayers who have made voluntary disclosures implement improvements or safeguards in their controls, processes and procedures to prevent or mitigate the risk of the same or similar errors occurring in the future.

Data and transaction testings are used to assess correct reporting in the top 100 GST assurance program. Data testing involves running a number of pre-determined tests against a defined data set to identify reporting errors and exceptions for further investigation and/or correction. Transaction testing involves tracing an identified transaction from its source documentation through to the financial reports to confirm the accuracy of the GST treatment, calculation and reporting of the transaction. Where errors and exceptions are identified, further investigation will be necessary and/or correction may be required.

In assessing the correct reporting of a taxpayer’s GST obligations, we expect that taxpayers undertake robust and regular assurance and verification procedures that align with their business, and that are tailored to their own operating environment. We are increasingly seeing taxpayers embedding the data and transaction testings or aspects of the testings into their own systems. Our expectations on data and transaction testings are set out in the GST Governance, Data Testing and Transaction Testing Guide.

We continue to refine our data testing methods, including focusing on specific or bespoke data tests based on the attributes of the taxpayer and industry specific risks. As we continue to refine and enhance the GAT or book-to-tax analysis, we expect to rely on that analysis (where applicable) to provide an informed basis to drive the work program across the assurance review.

We are seeing an increasing number of top 100 taxpayers engaging the services of a third-party advisor to undertake independent data testing with respect to a notified top 100 GST assurance review. As of 31 July 2022, 25% of completed and ongoing reviews involved data testing by a third-party advisor. Of these completed reviews, we have observed that about 86% resulted in the making of voluntary disclosures and consequential improvements to taxpayers’ controls, processes and procedures.

In some cases involving third-party advisor data testing, we have seen quite significant delays due to a range of reasons. They include:

• the time taken to setting the scope
• instances of misalignment between the agreed scope and the findings report
• requests for extension of time to complete the testing and finalise the report
• the need to address information gaps in the findings report.

We are continuing to work closely with taxpayers and their advisors on the data testing to ensure that the outcomes are sufficiently robust to provide relevant stakeholders with the intended degree of confidence with respect to correct reporting. We have published the Guide to Independent Data Testing by Third Party Advisors. This guide will assist taxpayers by providing practical guidance on our expectations and the conditions that must be met for a taxpayer’s third-party advisor to undertake the independent data testing that can be relied upon in a GST assurance review.

Other critical GST risks

We have also seen other key GST risks in the reviews completed and existing reviews in progress that can be grouped broadly as follows.

• GST food classification – GST classification of food supplies is a well-known and very prominent risk.
  • We are seeing classification of products by suppliers/wholesalers and retailers that are not consistent with our view.
  • Errors are generally attributable to
    • gaps in governance controls around onboarding of new products
    • taxpayers not undertaking regular reviews of their product master data
    • taxpayers’ reliance on a supplier’s classification without undertaking due diligence to determine the correct GST classification of the products being supplied.
     
  • The Public Groups and International business line has recently established a product classification cluster or strategy team to
    • monitor and better understand the food classification risk
    • ensure that there is consistency in the ATO’s approach.
     
   
• Financial services and investment – We have seen specific issues relating to the following.
  • Where businesses engage in mergers, demergers, company acquisitions or other similar activities, these activities may give rise to input taxed financial supplies. As such, there is a need to consider restricting input tax recovery on attributable costs where the FAT is exceeded and if so, to also consider whether any reduced input tax credits (RITCs) are available.
  • The most common error we have identified in this area relates to the failure to undertake the FAT test monthly. There is a risk that taxpayers are recovering input tax credits to which they are not entitled. In addition, we have observed taxpayers seeking to recover RITCs on all related costs without fully considering whether those costs align to those eligible for a RITC.
  • Another key area is in relation to the application of the reverse charge provisions to cross-border transactions. These provisions are relevant to a range of entities, including banks, financial technology entities, life insurers, superannuation funds and other funds. We have published guidance, Application of the reverse charge provisions – findings of reviews, which draws on our observations to provide examples of what errors we have seen, as well as examples of best practice. The guidance provides our expectations and a set of recommendations that can help financial suppliers to reduce their GST compliance risk in this area.
   
• Recipient created tax invoices – In reviews across a range of industries, we have observed that recipient created tax invoices (RCTI) are being issued in situations where
  • valid agreements are not in place to support the RCTIs issued
  • RCTIs have been issued to the incorrect supplier
  • RCTI have been issued to suppliers who are no longer GST-registered, or in some cases were never GST-registered.
   
• International GST risk – This risk is associated with GST treatment of goods or services that cross Australia’s border.
  • We have observed that top 100 taxpayers in the digital economy have related offshore entities which are registered for GST (either as a Limited Registration Entity or full registration) as a result of making inbound intangible consumer supplies and/or sales of low value imported goods. One issue we have observed for these businesses is in relation to the correct application of the business-to-business exemption for inbound digital products/services under section 84-100 of the A New Tax System (Goods and Services Tax) Act 1999. In particular, the issue is in relation to the evidence required to demonstrate the inbound intangible supplies have been made to businesses which are outside the scope of GST.
   

Other common areas attracting our attention

Other areas that commonly arise in reviews that attract our attention include the following:

• with respect to property
  • eligibility and application of the margin scheme where taxpayers have chosen to use this methodology
  • incorrectly claiming of GST credits due to misclassification of supplies in relation to residential accommodation and/or commercial residential premises
  • other issues, including supplies of a going concern, unreported sales of real property, agency issues in relation to who is making the supply, and failure to take into account adjustments due to adjustment events
   
• ABN and GST registration/ unregistered vendors
• sharing economy (platforms)
• incorrectly treating an acquisition as creditable (e.g. non-deductible entertainment expenses)
• incorrectly treating supplies with related parties that are not part of the GST group
• attribution errors (e.g. periodic/progressive supplies, non-standard tax periods)
• GST joint ventures and the incorrect GST treatment on transactions between and within joint ventures
• ITC estimators
• absence of Subdivision 153-B (principal and agent) agreements but treating supplies and acquisitions as if there is a (valid) Subdivision 153-B agreement in place.

Understanding the alignment between accounting and GST

We seek to understand and explain the various streams of economic activity and how they are treated for GST, which may include applying the GST analytical tool (GAT).

Ratings

We apply a consistent rating system when reviewing and assessing the alignment of accounting figures to amounts reported on the BAS. This includes also understanding the reasons for any variances.

	Stage 3	We understand and can explain the variance between accounting figures and the amounts reported on the BAS. As a result of applying the GAT, we understand why accounting and GST results vary and this understanding is sufficiently supported by objective evidence.
	Stage 2	Further analysis and explanation are required to understand the variances between accounting figures and the amounts reported on the BAS. As a result of applying the GAT, we do not fully understand why accounting and GST results vary and/or this understanding is not sufficiently supported by objective evidence.
	Stage 1	We do not understand and cannot explain the variances between accounting figures and the amounts reported on the BAS.
	Red flag	We identified concerns from our analysis of the variances between accounting figures and the amounts reported on the BAS.
	Not rated	We have not assessed the various streams of economic activity and/or why accounting and GST results vary using the GST analytical tool.

Observations

The GAT is applied under this focus area. We apply the GAT in each top 100 GST assurance review except in relation to taxpayers who are predominately input taxed.

The GAT uses a standard method statement applying a ‘top down’ approach to identify and understand key variances between accounting figures reported in audited financial statements and GST reported on BAS’. The GAT is a useful tool for taxpayers to check how their various streams of economic activity are treated for GST purposes.

The application of the GAT is an important component in respect of assuring the GST outcomes of taxpayers in the top 100 GST assurance reviews. As we continue to refine and enhance the GAT analysis, it is helping to provide an informed basis to drive the work program and areas of focus across the assurance review. This is because identifying the key variances between accounting and tax is helping the ATO to understand the various streams of economic activity of a taxpayer and how they are treated for tax purposes. This in turn helps us identify and target our reviews to the most important or critical GST risks.

We have published the GST Analytical tool (GAT) FAQ, and top 100 and top 1000 examples to support taxpayers and their advisors with their GST assurance reviews. There is an expectation as part of good GST governance that a taxpayer has a process in place to explain BAS reporting of GST payable and receivable compared to business outcomes, as well as to explain the key variances in comparison to financial statements.

Graph 11 – GAT ratings for all GST reviews completed where the GAT has been applied as of 30 June 2022

We have observed that 25% of taxpayers who have had the GAT applied in their assurance review attained the highest rating for this focus area (Stage 3). This means that there is sufficient objective evidence to support our understanding why accounting and GST results vary. In most of these cases, the GAT was completed by the taxpayer and then reviewed by the ATO.

Most of the taxpayers (65%) who have had the GAT applied attained a Stage 2 rating. This means that we do not have sufficient objective evidence to fully understand why accounting and GST results vary. For many taxpayers, a Stage 2 rating will be a satisfactory rating for the alignment between accounting and GST focus area.

The remainder of the taxpayers (10%) attained a Stage 1 rating. We will continue to work with these taxpayers to see how they can develop an approach to be able to practically explain the key variance between their accounting and GST results.

One of the early challenges associated with the application of the GAT related to reconciling complex grouping variances. We have since developed solutions which have resulted in greater ease when making adjustments for grouping variances.

We have observed that most GAT calculations have resulted in small overall variances when comparing the adjusted revenue and expenses to the 1A and 1B labels. The key difference between a Stage 3 and a Stage 2 rating rests with how well those adjustments can be explained and the extent to which they can be supported by objective evidence. We note however that whilst in some cases the overall variances may be low, there can also be significant unexplained variances between adjustments, in particular for exports and the G2 (export sales) label disclosures, and for capital acquisitions and the G10 (capital purchases) label disclosures.

While we can make best efforts to seek to understand the basis of adjustments by relying on financial statements and its supporting data (i.e. detailed trial balances), additional taxpayer input can significantly enhance our understanding, resulting in a higher rating.

During 2022 we focused on working closely with taxpayers to apply the GAT to demonstrate how understanding the variances between accounting and tax can be practically achieved. This involved meeting with taxpayers to explain the rationale of this focus area, the methodology, and the type of information that can be used to conduct the GAT analysis in order to explain the key adjustments. This approach was welcomed by many top 100 taxpayers and has resulted in an increasing number of taxpayers performing their own GAT analysis and the majority of taxpayers who had had the GAT applied achieving either a Stage 3 or Stage 2 rating.

We have received feedback from top 100 taxpayers who see the GAT as an important and useful tool to incorporate into their own governance systems.

We are continuing to work with general insurers to develop a methodology to understand why accounting and tax results vary.

Future GST engagement after initial GST assurance review

What a high assurance rating means for GST

An overall high assurance rating means that we obtained assurance that you paid or reported the right amount of GST for the period reviewed.

Where you have high assurance for a significant or new transaction, a transaction with respect to a tax risk flagged to market, or a specific tax risk, this means that with respect to this issue, we obtained assurance that you reported the right amount of GST in your activity statement.

You can therefore rely on a high assurance rating to mean that we will not initiate any review (including assurance) or audit activity for the period reviewed in relation to the relevant issues in the activity statement reviewed (other than any issues listed in the future assurance plan or similar work plan, as requiring further review) unless in exceptional circumstances. Similar work plan includes a taxpayer specific justified trust maintenance plan, issues register or annual review plan. It also extends to our general issues registers available on our website.

It will only be in exceptional circumstances that we will apply compliance resources to review any of the relevant issues in the period reviewed. The following circumstances are likely to constitute exceptional circumstances:

• legislation is enacted, a final decision of the court or tribunal is made, or there is a precedential ATO view that applies retrospectively to the period reviewed
• where a review is required to complement compliance activity, or give effect to a determination, of another government agency or regulator
• there is a self-amendment/objection to the activity statement for the period reviewed(we will review the statement in relation to the issue covered by the self-amendment/objection and related issue) or the issue is impacted by you correcting an error in relation to that issue in a later tax period
• you have subsequently notified us of a disclosure issue or error that should be corrected (relevant factors for consideration include materiality, potential risk to revenue, likely proliferation in the market or consistency with the policy intent)
• there is a change of tax treatment or position by you or a party to a supply in which are you are a participant in that period or in subsequent periods (other than due to a retrospective change in law or a precedential ATO view), in particular where it means that no GST is ever payable on a supply, there is a double input tax credit benefit (such as 2 entities claiming the same input tax credit on a supply), or that an input tax credit is available for one entity with no GST being payable by the other
• it becomes apparent to us that full and true disclosure was not made
• there is potential application of the anti-avoidance provisions
• fraud or evasion becomes evident to us.

Tailored engagement

We have recently published a guidance document, the Future GST engagement after initial GST assurance review, which outlines how we will engage with top 100 taxpayers after they have had an initial GST assurance review. Once a taxpayer has completed their initial review, it is intended that the program will provide a tailored assurance approach that seeks to leverage, as far as possible, from previous assurance activities.

Taxpayers who attain overall high assurance in their initial review generally can expect to be reviewed on a periodic basis at least once every 4 years.

In the period between reviews, we expect taxpayers to make real-time disclosures of a range of matters. We will also actively monitor taxpayers to safeguard against non-disclosure or non-compliance and conduct targeted follow up and assurance activities as considered appropriate.

Taxpayers who attain overall medium assurance in their initial review will have a tailored GST engagement. These taxpayers can generally expect to be reviewed at least once every 4 years but with the possibility of targeted assurance activities being conducted in the period following the initial review to address areas of concern identified in the review, including any governance gaps.

Similar to taxpayers with overall high assurance, relevant real-time disclosures will be expected from overall medium assurance taxpayers, and we will conduct active monitoring.

We expect that there will be some overall high and medium assurance taxpayers whose tailored engagement with us will still require some form of an annual targeted review during the 3 years.

Taxpayers with an overall low assurance rating will be subject to an annual comprehensive justified trust review.

Taxpayers will generally have a refresh year review in the fourth year after the initial review, unless there are efficiencies to conduct the refresh review earlier.

This report explains the key findings and observations from the top 100 income tax and GST assurance programs for the income year ended 30 June 2022.