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  • Top 1,000 program – what attracts our attention

    We know the majority of large businesses want to do the right thing and we are often asked how you can improve your assurance ratings.

    This guide aims to help large public and multinational companies covered by the Top 1,000 Tax Performance Program:

    • understand what attracts our attention
    • prepare for engagements with us
    • improve your (and our) confidence in your tax outcomes.

    This guide is based on our observations from Top 1,000 streamlined assurance reviews and sets out the standard of information and documentation we typically look for to obtain assurance.

    We will continue to update this information to address additional issues that attract our attention in Top 1,000 program engagements.

    On this page:

    See also:

    Capital allowances

    From our engagements we have identified the most common issues we found with the capital allowance rules and have suggested strategies you can put in place to obtain assurance. These include:

    Insufficient documentation or information

    The most common reason for not achieving assurance for capital allowance claims is insufficient supporting information and documents to show the deductions claimed are correct.

    This may result in us seeking further information or escalating the matter for further review.

    The documents and information that we look for include:

    • detailed fixed tax asset register, including for each asset  
      • asset description and name
      • date the asset was installed ready for use
      • cost (including additional costs for the assets)
      • effective life
      • rate of depreciation
      • depreciation method used (diminishing value method or prime cost method)
      • opening adjustable value
      • written down value or closing value
      • decline in value amount claimed for the year
       
    • asset register summaries
    • working papers to support specific capital allowances tax return disclosures
    • reconciliations between capital allowances tax return disclosures and the fixed asset register
    • internal policies and procedures for determining depreciation for tax, including how effective lives are determined and reviewed for each major class of assets
    • evidence substantiating the original cost of assets such as invoices, contracts, supplier agreements, independent valuations and audit reports.

    During a review we may ask for a sample of this information to obtain assurance over the capital allowance deductions claimed during the review period. The size of the sample is dependent on the size of the claim, with larger claims requiring a larger sample to obtain assurance. When requesting information our case team will advise you what an appropriate sample size is in your particular circumstances.

    Self-assessed effective lives

    Maintain a detailed analysis to support any effective lives which you have self-assessed. This should include why you have chosen to use an effective life that is different to the Commissioner’s published effective life, and evidence to support your conclusions.

    Exploration expenditure

    Documents and information that can help support our assessment of assurance relating to exploration expenditure include:

    • project and tax level governance frameworks consistent with PCG 2016/17: ATO compliance approach – exploration expenditure deductions – a governance process which highlights expenditure that may be considered high risk may indicate a more robust governance framework
    • contemporaneous documentation that evidences the tax characterisation process and claiming of deductions.

    See also:

    Research and development

    From our engagements we have identified the most common issues we find with research and development (R&D) tax incentive claims and provided information on how to obtain assurance. These include:

    Eligibility of R&D tax incentive activities – notional deductions

    The R&D tax incentive is jointly administered by the ATO and AusIndustry.

    For assurance of eligibility, we look at expenses claimed as a notional deduction under the R&D tax incentive ‘to the extent that’ the expenditure is incurred on ‘R&D activities’ (section 355-205 of the ITAA 1997) and those activities are registered with AusIndustry.

    In some cases, we may also refer activities for review to AusIndustry where concerns are identified.

    You can only register eligible R&D activities. If you are unsure whether your activities constitute R&D activities, we strongly encourage you to contact AusIndustryExternal Link.

    Ineligible expenditure and inappropriate apportionment methodology

    We check if the notional deductions claimed by you under Division 355 of the ITAA 1997, are actually incurred on one or more R&D activities as defined and are allocated using a methodology that is reasonable. See Methods of apportionment.

    Expenditure claimed must be incurred on registered R&D activities and not related to ordinary business activities. Claimants need to distinguish between expenditure incurred on eligible R&D activities and expenses that relate to ordinary business activities and demonstrate the required nexus exists between the registered R&D activities and expenditure claimed.

    There must also be sufficient evidence to demonstrate that the methodology used to apportion expenses (such as overhead expenditure and fixed costs) between eligible R&D activities and non-eligible R&D activities is appropriate.

    Poor corporate governance

    Due to a lack of adequate corporate governance, we've found that some taxpayers claim R&D offsets for activities which are not eligible R&D activities.

    We recommend that good corporate governance will include controls to:

    • review your registered activities and the claims you make for the R&D tax incentive
    • distinguish ordinary business activities from your eligible R&D activities
    • identify when R&D activities have transitioned to ordinary business activities.

    Contract expenditure

    We may review a sample of ‘contract expenditure’. The contracts need to show the nature of the work and its relation to the R&D activities.

    We may need to review further records to understand how work under the contract relates to the R&D activities. For example, we may ask for minutes of any meetings between the client and contractor and progress reports from the contractor. Where certain activities undertaken by the contracting company that were not eligible R&D activities (or specifically excluded activities) we will need to understand how the contracted amount is apportioned between eligible and ineligible expenditure and the basis of the apportionment methodology. See Expenditure you incur under contract to other parties.

    Salary expenditure

    We review salary amounts to ensure that this expenditure is only claimed to the extent that it is incurred on eligible R&D activities.

    If you have an employee working on eligible R&D activities, we will accept expenditure on the actual time spent on R&D activities as a proportion of the employee’s actual hours worked, and the employee’s actual salary. See Amounts you can claim – Salary expenditure.

    Overinflated salary claims can also be a result of poor governance practices and apportionment methodologies.

    Other matters

    When current matters, new law or amendments are enacted that affect R&D tax incentive assurance we will update this page. Check for updates.

    The Treasury Laws Amendment (Research and Development Tax Incentive) Bill 2019External Link, was introduced into Parliament on 5 December 2019. See Better targeting the research and development tax incentive for further information.

    See also:

    Tax losses

    From our reviews we have identified the most common issues we find with tax losses and provided information on how to obtain assurance.

    These include:

    Continuity of ownership test

    We frequently review the utilisation of carried forward losses. The continuity of ownership test (COT) is our primary test for the deduction of prior year losses.

    The most common reason for not obtaining assurance is the COT analysis, information and documents provided to us are incomplete, insufficient or cannot be verified.

    We have found that assurance often cannot be obtained due to a taxpayer’s inability to trace through the shareholdings of interposed entities to verify ultimate beneficial shareholders. This is a common issue when a nominee company has a stake in a taxpayer company and limited information has been obtained regarding the nominee company’s shareholders.

    The documents and information that we look for include:

    • a detailed and complete COT analysis which has regard to the legislative provisions relied upon to determine the ownership test period or ownership test times, as applicable
    • sufficient contemporaneous supporting information and documents to substantiate your COT analysis including  
      • working papers
      • share registers
      • Australian Securities & Investments Commission (ASIC) notices regarding changes to member and share structure details
      • memoranda and agreements regarding corporate change events as defined in Section 166-175External Link of the ITAA 1997 (if relevant)
      • other relevant information or documents produced in, or relevant to, majority shareholdings during the applicable ownership test period or ownership test times
       
    • additional information (including publicly available information) that will assist us in verifying your analysis, supporting documentation and underlying facts, and assumptions including annual reports, financial statements, industry reports.

    If you have utilised any transferred losses, you will need to provide the analysis performed to transfer the losses into the tax consolidated or multiple entry consolidated (MEC) group and the working papers used to calculate the available fraction for each bundle of losses. See Consolidated groups – transfer of tax losses and available fraction calculations.

    Business continuity test

    We review the application of the business continuity test (BCT) (formerly known as same business test) in connection with the utilisation of carried forward losses. Taxpayers may apply the BCT to deduct prior year losses where the COT is failed, or it is not practicable for the taxpayer to meet the conditions of the COT.

    The most common reason for not achieving assurance is that the BCT analysis, information and documents provided to us are incomplete, insufficient or cannot be verified. It is difficult to obtain assurance that taxpayers have satisfied the BCT, as this requires a rigorous qualitative assessment of a taxpayer’s BCT analysis and verification of the facts or assumptions underlying the analysis.

    When reviewing whether the BCT has been satisfied, we look for:

    • a detailed and complete BCT analysis which has regard to the legislative provisions relied upon and the factors outlined in TR 1999/9External Link Income tax: the operation of sections 165-13 and 165-210, paragraph 165-35(b), section 165-126 and section 165-132and LCR 2019/1 The business continuity test – carrying on a similar business, as applicable
    • sufficient contemporaneous supporting information and documents (including publicly available information) to substantiate your BCT analysis including  
      • working papers
      • financial statements
      • correspondence
      • reports
      • ASX disclosures
      • ASIC documents
      • investor relation announcements
      • other information or documents relevant to your business operations.
       

    If you have utilised any transferred losses, you will need to provide the analysis performed to transfer the losses into the tax consolidated or MEC group and the working papers used to calculate the available fraction for each bundle of losses.

    Consolidated groups – transfers of tax losses and available fraction calculations

    We review whether the COT or BCT (or modified COT or BCT) has been satisfied in the context of the transfer of losses into tax consolidated groups and MEC groups.

    For transfers of tax losses, it is difficult to obtain assurance where there is a significant period between the transfer of losses into a consolidated group and the utilisation of those losses. To achieve assurance, you need to provide sufficient analysis and corroborating information and documents to verify that the relevant transferred losses were in accordance with the relevant provisions.

    See Continuity of ownership test and business continuity test for information and documentation required to substantiate the application of the modified COT and BCT in respect of transferred losses.

    We also review taxpayer’s available fraction calculations. The most common reason for not achieving assurance is deficiencies in or, an absence of, information and documents to verify a taxpayer’s calculations. For example, no analysis to support the joining entity’s market value.

    The documents and information that we look for include:

    • the calculation of the available fraction in respect of each bundle of losses transferred to the (provisional) head company of the tax consolidated or MEC group including any adjustments to the available fraction after joining the consolidated or MEC group under subsection 707-320(2)External Link of the ITAA 1997
    • sufficient contemporaneous supporting information and documents to substantiate your available fraction calculation including working papers, valuation reports and advice
    • additional information (including publicly available information) that will assist us in verifying your calculation, supporting documentation and underlying facts and assumptions including annual reports, ASIC disclosures, ASX announcements, financial statements and industry reports
    • verification of any apportionment of the transferred losses which were utilised in the joining or formation year.

    Origin of tax losses

    When reviewing how carried-forward losses are used, we may look for the origin of the losses.

    The documents and information that we look for include:

    • a detailed explanation of the source of the relevant losses
    • sufficient contemporaneous supporting information and documents to substantiate your explanation of the validity of relevant losses including, annual reports, financial statements, and other relevant information or documents produced in, or relevant to, the years the relevant losses were incurred.

    See also:

    Consolidations

    We assess your compliance relating to issues that commonly arise in relation to tax consolidated groups and multiple entry consolidated (MEC) groups.

    There are typically tax consequences when a tax consolidated group or MEC group:

    • is formed
    • acquires or disposes of the membership interests (for example, shares) in an entity resulting in it joining or leaving the group
    • acquires another tax consolidated group or MEC group
    • is restructured.

    From our engagements we have identified the most common issues we find with consolidated groups. These include:

    Tax cost setting on entry

    The most common issues we encounter when obtaining assurance in respect of the tax cost setting process on entry relate to:

    • no entry allocable cost amount (ACA) calculation was provided
    • no supporting documentation to verify the amounts included in the ACA calculation – for example, failure to provide the share purchase agreement disclosing the amount paid for the shares in the joining company or the completion accounts showing the accounting liabilities held at the joining time
    • intangible assets that are not CGT assets, such as customer relationships and customer lists, being incorrectly recognised, or failure to recognise and value of other intangible assets that are CGT assets, such as trademarks or pre-1 July 2001 mining rights
    • non-recognition of the goodwill of the acquired joining entity, without sufficient explanation or supporting documentation to support this position
    • inadequate or no documentation provided to substantiate the market value of reset cost base assets.

    To obtain assurance, we recommend that you provide:

    • the entry ACA calculation and tax cost setting amount (TCSA) working papers supporting your allocation across retained and reset cost base assets
    • the executed share purchase agreements and any purchase price adjustment working papers
    • if you did not recognise goodwill in the joining entity, an explanation with relevant documentation to support this position
    • financial statements (balance sheet) of the joining entity at the joining time
      • ensure the financial statements contain sufficient information for us to verify every step (such as Step 2 accounting liabilities, including those that are deductible and excluded from Step 2) relevant to your entry ACA calculation
      • ensure the values in the ACA calculation broadly align with the asset valuations in your financial statements.
       

    Tax cost setting on exit

    The most common issues we encounter when obtaining assurance in respect of the tax cost setting process on exit relating to:

    • no exit ACA calculation was completed
    • only a draft or incomplete exit ACA position was available
    • when we can't verify the amounts included in the exit ACA, such as the terminating values of all the assets at leaving time, due to incomplete working papers and insufficient supporting documentation
    • when we can't verify the amounts on exit due to being unable to assure the leaving entity’s initial entry ACA and TCSA calculations for its assets on joining the consolidated group.

    In order to obtain assurance, we recommend you provide the final exit ACA calculation and TCSA working papers including, financial statements (balance sheet) for the leaving entity at the exit time.

    Valuations for calculating the entry ACA and TCSAs

    The most common reasons we are unable to provide assurance in relation to valuations connected with entry or exit ACA, and TCSA calculations are:

    • no contemporaneous valuation documentation was provided
    • no valuation advice or documentation was provided to support the related party transaction.

    To obtain assurance, we recommend that you provide:

    • Valuation documentation for all (significant) reset cost base assets of the joining entity (for which comparable sales evidence of the market value at the joining time is not publicly available), unless you are eligible to use one of the valuation shortcut options. See Market valuation for tax purposes.
    • Valuation documentation to support the entry or exit ACA calculations if a joining entity was acquired from, or an existing entity was sold to, a related party.

    Restructures involving MEC groups

    The most common reasons we are unable to provide assurance in relation to restructuring involving MEC groups, include:

    • the commercial rationale for the restructure, or relevant steps in the structure was not provided
    • the commercial rationale provided for the restructure was not substantiated with contemporaneous analysis, information and documents
    • the arrangements involved were complex and more information is required to understand the income tax implications
    • we are unable to review the restructure holistically in the assurance review.

    The documents and information that we look for include:

    • a copy of the restructure step plan including, details of the date and the actual transactions undertaken in each step of the restructure
    • documents outlining the potential tax implications and rationale for the structure or arrangement implemented
    • copies of any advice, reports or documents produced in connection with the restructure
    • group structure diagrams for the period before and after the restructure.

    See also:

    • TR 2004/13 Income tax: the meaning of an asset for the purposes of Part 3-90 of the Income Tax Assessment Act 1997 (taking into account the amendments made by Tax Laws Amendment (2012 Measures No 2) Act 2012 (the Prospective Rules)
    • TR 2005/17 Income tax: goodwill: identification and tax cost setting for the purposes of Part 3-90 of the Income Tax Assessment Act 1997
    • TR 2006/6 Income tax: Recognising and measuring the liabilities of a joining entity under subsection 705-70(1) of the Income Tax Assessment Act 1997 (taking into account the amendments made by Treasury Laws Amendment (Income Tax Consolidation Integrity) Act 2018 (the deductible liability amendments)
    • TR 2007/7 Income tax: consolidation: errors in tax cost setting amounts of reset cost base assets
    • Market valuation for tax purposes
    • Consolidation reference manual
      Last modified: 13 Jul 2020QC 63069