Findings report Top 500 tax performance program – June 2022
Our Top 500 findings report shares insights about the tax affairs of Australia's largest private groups.
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Purpose of this report
The purpose of our current June 2022 report is to:
- provide an update to the community about the work that has been undertaken in the Top 500 program since the June 2021 report
- communicate our observations and insights from our engagements with the Top 500 population and provide our findings in the context of the 4 areas of justified trust
- highlight impediments that are preventing a significant number of Top 500 groups from achieving justified trust
- provide insights into some of the most common tax issues and risks that are present in the Top 500 population
- outline improvements and changes we are making to the program in response to
- feedback from Top 500 groups
- our own observations and insights to date
- what we have learned as the program has evolved.
Summary of changes
In June 2021 we published our first findings report (the June 2021 report) for the Top 500 tax performance program (the Top 500 program). This report provided an overview of the Top 500 program, a profile of the Top 500 population, and our observations about their approach towards engaging with the tax and superannuation systems.
In the June 2021 report we outlined how we applied the justified trust methodology in our tax assurance engagements. We provided high-level findings from our engagements with the 403 Top 500 groups we had engaged with up until that point.
We also provided high-level observations about common issues we frequently see when engaging with a Top 500 group which require assurance, including the:
- concept of partial tax assurance as it applies to a Top 500 group
- Top 500 population’s challenges with tax governance
- risks we have identified as part of the tax assurance process.
This year our client survey data (current as of February 2022) shows that most Top 500 groups are choosing to embrace the service-based aspects of the Top 500 program model. Although they think we can be more timely with our assurance and justified trust decisions.
The Top 500 clients' increasing level of engagement shows their interest in demonstrating to the community how they are contributing to the health of the tax and superannuation systems. It also confirms their interest in maintaining a service orientated relationship with us that is based on mutual trust.
The Top 500 program has also helped us identify a small number of Top 500 groups who do not see voluntary compliance as a priority. In response, we are adopting a firmer and more targeted compliance approach when dealing with this minority.
This report builds on last year’s report by providing more detailed information about the performance of the Top 500 population against each of the 4 areas of justified trust. We also give an update about our performance metrics under the Tax Avoidance Taskforce.
We highlight our activities under engagements designed to provide the Top 500 population with tax certainty through our commercial deals program, and assistance with accessing the COVID-19 stimulus measures.
The Top 500 program
Broadly, the Top 500 population consists of Australia’s largest family or closely controlled private groups. The criteria for inclusion requires the private group to have the following attributes:
- over $250 million turnover, regardless of net asset value. (Note: this has been reduced from $350 million to align with the large market turnover threshold used for engagements with large and multinational businesses operating in Australia)
- over $500 million net assets, regardless of turnover
- over $100 million turnover and over $250 million net assets, or
- be a market leader or group of specific interest.
In substance, the Top 500 program is a model of engagement. Its objective is to provide the Australian Government and the community with confidence that Australia’s largest private groups are paying the correct amount of tax.
The Top 500 program is one of several focus areas under the Tax Avoidance Taskforce. Increasingly we are shaping the program as an invitation for the largest private groups to engage with us. They can then demonstrate that they have been paying, and will continue to pay, the correct amount of tax.
Our ability to provide the community with confidence that a Top 500 group has and will pay the correct amount of tax is dependent upon the group’s adherence to the following 4 key areas underpinning the justified trust methodology:
- The group has effective tax governance in place in order to support current and future compliance.
- Risks flagged to market in our Public Ruling and Taxpayer Alerts programs are not present in the group or are appropriately mitigated.
- Tax outcomes from both ongoing and atypical transactions are understood and agreed as correct.
- Differences in accounting and tax results are complete and able to be explained in context.
Our engagement approach is tailored and matched to the:
- level of complexity of the Top 500 group’s business and tax affairs
- degree to which the Top 500 group is open and transparent with us
- Top 500 group’s commitment to demonstrating a willingness to participate in the tax and superannuation systems over the longer term.
Our approach will evolve as a client’s engagement relationship with us matures.
Top 500 client survey
In February 2022, we conducted a survey with the Top 500 population and their advisors to better understand the perspectives of the private groups covered by the Top 500 program. We wanted to hear directly about clients' experiences with the program and how we might improve our service and interactions with them. An overview of the feedback we received is published at Top 500 client survey summary – February 2022.
The feedback from participants indicated that Top 500 groups value early and ongoing engagement through a one-on-one direct relationship with us. They see benefit in discussing issues through open and regular communication. The program builds trust in their relationships with us and helps to facilitate early resolution of issues. They are increasingly understanding the importance of tax governance. This has been a focus area for us over the last 12 months.
Feedback also indicates that participation in the Top 500 program can be time consuming and costly. Participants would like to see more tailored and focused information requests with adequate timeframes to respond. They also desire timely feedback and communication from us on the information they submit.
We are continuing to assess the feedback received. We have been looking at ways to improve our processes and interactions to enhance the client experience. We are starting with the implementation of a simplified approach to assurance and tax governance for Top 500 groups who operate high volume, low margin businesses.
For more detail about improvements we are making see What we have learned and the way forward.
Top 500 population changes since the last report
We capture the changes to the Top 500 population and the updated tax assured amounts in 2022 below.
The composition of the Top 500 population changes over time as groups enter and leave the population based on the eligibility criteria. Private groups are included in the population when they meet the criteria.
Groups may also leave the population due to changes to the group controller or group restructures. For example, where private groups are divided or split after a family succession plan is implemented. In some instances, these changes may lead to the substitution of a current group or group head entity with a new one.
Since the June 2021 report, 125 groups have been added to the Top 500 population and 69 groups have been removed.
Of the groups removed, approximately:
- 20% had group head changes or were restructured and re-entered the population
- 80% didn’t meet the criteria or were reallocated for management by our Public Groups and International business line or by other programs of work within our Private Wealth business line (for example, as part of our Next 5,000 private groups tax performance program).
459 groups formed part of the Top 500 population at 30 June 2022. This is an increase of 56 groups since the June 2021 report with 403 groups.
Top 500 demographics
The following tables reflect the characteristics and attributes of the Top 500 population, based on tax returns lodged for the stated years.
Table 1: Top 500 group characteristics
Median group
|
2019
|
2020
|
2021*
|
Group head age
|
71
|
70
|
70
|
Number of entities
|
32
|
31
|
31
|
Number of companies
|
19
|
19
|
18
|
Number of trusts
|
7
|
8
|
7
|
Number of employees
|
365
|
346
|
346
|
Total income ($ millions)
|
$295 m
|
$251 m
|
$283 m
|
Net wealth ($ millions)
|
$272 m
|
$312 m
|
$333 m
|
Table 2: Top 500 population characteristics
Total population
|
2019
|
2020
|
2021*
|
Net assets ($ billions)
|
$207 b
|
$261 b
|
$310 b
|
Total income ($ billions)
|
$195 b
|
$218 b
|
$236 b
|
Income tax paid ($ billions)
|
$4.4 b
|
$5.9 b
|
$7.7 b
|
IT as a % of total income
|
2.26%
|
2.71%
|
3.26%
|
Net GST paid ($ billions)
|
$2.3 b
|
$2.3 b
|
$2.7 b
|
Net GST paid as a % of total income
|
1.18%
|
1.06%
|
1.14%
|
* Based on 2021 tax returns lodged by 2 August 2022.
Movements in the characteristics of a typical Top 500 group have been modest. Notable changes relate to financial attributes, with the median net wealth increasing year on year, despite fluctuations in median total income.
Total net assets and total income have also increased, and this reflects the expansion of the Top 500 program.
Tax assured since the last report
A summary of the details of the tax assured since the June 2021 report is displayed below.
Tax assured 2021–22
We assured 107 groups this financial year. Tax assured from the last report was $2,695 million (1 March 2021 to 30 June 2022). The total amount of tax that has been assured since the start of the program is $10,643 million (at 30 June 2022).
Table 3 below shows tax assured by date, from the beginning of the program in 2016–17 to 30 June 2022.
Table 3: Top 500 Tax assurance by program year ($ million)
Income year
|
2016–17
|
2017–18
|
2018–19
|
2019–20
|
2020–21
|
2021–2022
|
Total tax assured
|
2012 & 2013
|
$614.63
|
$31.02
|
$1.89
|
0
|
0
|
0
|
$647.54
|
2014
|
$633.10
|
$114.58
|
$128.56
|
$9.53
|
0
|
0
|
$885.76
|
2015
|
$919.99
|
$524.81
|
$135.53
|
$27.29
|
$23.65
|
$10.31
|
$1,641.57
|
2016
|
$274.02
|
$688.62
|
$549.66
|
$76.88
|
$120.62
|
$142.80
|
$1,852.60
|
2017
|
0
|
$212.33
|
$1,150.45
|
$237.41
|
$210.41
|
$249.28
|
$2,059.88
|
2018
|
0
|
0
|
$140.16
|
$883.07
|
$345.02
|
$734.90
|
$2,103.16
|
2019
|
0
|
0
|
0
|
$1.35
|
$369.99
|
$721.14
|
$1,092.47
|
2020
|
0
|
0
|
0
|
0
|
$12.34
|
$347.63
|
$359.96
|
Total
|
$2,441.74
|
$1,571.35
|
$2,106.25
|
$1,235.53
|
$1,082.02
|
$2,206.06
|
$10,642.95
|
Note:
- The combined total of total tax assured to date is approximately $10,643 million.
- Due to rounding, some of the total figures may not tally.
Engaging with the Top 500 population
As part of the Top 500 Program, we closely monitor Australia’s 500 wealthiest private groups. We engage with this population on an ongoing basis with a view to understanding and considering the tax implications that arise from their income-producing activities.
To achieve the objective of the program, we seek to have open and transparent, one-to-one engagements. We are shifting our traditional review and audit-based approach of identifying and addressing tax risks, to an approach where we assure whether a Top 500 group is paying the correct amount of tax in the most recent years lodged.
We then assist groups with ensuring that they will continue to pay the correct amount of tax going forward. Increasingly our aim is to help ensure future compliance by encouraging Top 500 groups to improve the effectiveness of their internal tax governance frameworks, processes and procedures.
The one-to-one engagements that we foster under the Top 500 program provide these private groups with the opportunity to engage with us early. This will help them obtain certainty that the tax they expect to pay on large commercial deals they undertake is correct.
In the 2022 income year, our teams commenced work on 25 Top 500 commercial deal engagements with an estimated $5.74 billion in deal value. During the year, we completed 5 commercial deal engagements (some having commenced in a previous financial year) representing a deal value of $1.59 billion. Certainty was provided on $465 million of economic activity reported with $430 million relating to CGT reporting.
Most of our commercial deals engagements with the Top 500 population result in an agreed position and correct lodgment. Thereby, reducing the likelihood of (sometimes unnecessary) audits or disputes in the future.
In addition, one-to-one engagements provide an opportunity for us and the representatives of the Top 500 groups to discuss the treatment of tax issues of concern. In some cases, these interactions have resulted in voluntary disclosures.
Several Top 500 groups have been proactive in seeking assurance about a transaction or tax position (or both) prior to lodging tax returns. The approaches have included, but are not limited to, transactions relating to:
- stimulus measures – JobKeeper Payment, temporary full expensing and loss carry back
- business restructures – including mergers and acquisitions
- loan arrangements – including entering into loan agreements, repaying loans, and unpaid present entitlements
- estate planning arrangements and restructures.
Since the June 2021 report, Top 500 groups have provided voluntary disclosures relating to:
- fringe benefits
- withholding tax on overseas payments
- capital gains tax on sale of shares and other investments
- trading stock calculation methodologies
- overstatement of deductions.
The Top 500 program is our preferred model of engagement from which we answer the question: ‘Are Australia’s 500 largest private groups paying the right amount of tax?’ But for completeness, we recognise that some members of the Top 500 population do not wish to collaborate with us in demonstrating that they are paying the correct amount of tax. In those circumstances we proceed to answer the question through our traditional, but more intrusive, review and audit processes.
Audits, reviews and voluntary agreements
During the 2021–22 financial year we finalised 19 reviews and 8 audits. At the end of the year, 18 audits and 15 reviews were in progress.
We have increased direct liabilities for the population by over $395 million for the 2021–22 financial year. This comes to a total of over $921 million since the commencement of the program.
Of the liabilities raised this financial year, over $15 million was from voluntary disclosures.
Audit yield (that is, cash collections) has also increased by over $138.6 million this financial year to date, to a total of $409 million since the commencement of the program.
Table 4: Direct results – liabilities ($ million)
Liability from
|
2016–17
|
2017–18
|
2018–19
|
2019–20
|
2020–21
|
2021–22
|
Total
|
Audit
|
8.37
|
39.06
|
50.93
|
40.36
|
253.13
|
372.48
|
764.33
|
Review
|
4.77
|
3.39
|
11.83
|
0
|
-0.31
|
2.31
|
21.99
|
Compliance engagement
|
0
|
39.89
|
7.03
|
12.24
|
55.25
|
21.13
|
135.54
|
Total
|
13.14
|
82.34
|
69.79
|
52.60
|
308.07
|
395.92
|
921.86
|
Table 5: Direct results – Audit yield (cash) ($ million)
Yield (collections) from
|
2016–17
|
2017–18
|
2018–19
|
2019–20
|
2020–21
|
2021–22
|
Total
|
Audit
|
4.48
|
13.7
|
35.27
|
1.27
|
96.92
|
63.08
|
214.72
|
Review
|
4.60
|
3.30
|
11.61
|
0.26
|
0.01
|
0.56
|
20.34
|
Compliance engagement
|
0
|
39.82
|
19.03
|
23.87
|
16.71
|
74.96
|
174.39
|
Total
|
9.08
|
56.82
|
65.91
|
25.40
|
113.64
|
138.60
|
409.45
|
Effect of the response to COVID-19
Australia's response to COVID-19 over the past two and half years has affected many businesses run by private groups within the Top 500 population. This includes restrictions imposed on domestic and international movement, and businesses forced to close for extended periods or restrict their trading hours (or both).
Initial COVID-19 outreach
We conducted a 'COVID-19 check-in' with our Top 500 clients during September 2020 to offer them assistance with accessing the Australian Government’s stimulus measures. These included JobKeeper Payment, cash flow boosts, instant asset boosts, instant asset write off, and accelerated depreciation measures.
The feedback from our check-in engagements helped guide our administrative approach. This included temporarily pausing or modifying our engagements with Top 500 groups who were most impacted. We did this so that those who were adversely affected had time to adjust to the operating environment. As with other market segments we provided temporary concessions such as short-term lodgment and payment deferrals. These allowed large private groups to focus on navigating the financial impacts of Australia's response to COVID-19.
We recommenced all our engagements with the Top 500 population by the end of 2021. All outstanding lodgment and payment deferrals that were granted have since been brought up to date.
We have continued to monitor the effect of COVID-19 on Top 500 clients on meeting their tax obligations. For the most part, these clients are able to meet their tax obligations. We will continue to remain flexible and adjust our work programs when needed so that we maintain trust and confidence in our administration.
Extending the outreach program
The suite of stimulus measures introduced by the Australian Government in 2020 included the temporary full expensing (TFE) and loss carry back (LCB) measures.
We developed a 3-phased approach to implementing the LCB and TFE measures in order to:
- provide support to Top 500 clients in understanding their entitlement to the measures
- provide the community and the government with confidence that Top 500 groups were accessing the measures appropriately.
From August to October 2021, our teams engaged early to provide tailored support and guidance to the Top 500 population. Our services included the provision of guidance materials, discussions about the measures, and an offer to engage with Top 500 groups to confirm their eligibility to access the TFE and LCB measures.
We also helped to verify that clients' claims were correct prior to them lodging their tax returns. Data from our outreach revealed that approximately 47% of the Top 500 population intended to claim TFE, 8% intended to claim LCB, and 5% intended to claim both.
Benefit of engaging early
By the end of the financial year, 40 entities in the Top 500 population had initiated engagements with us on a pre-lodgment basis in relation to TFE. Some of those engagements have concluded, with assurance provided over both eligibility and the amount of TFE claimed as a deduction. There have also been instances where early engagements have resulted in revisions to claims that had been proposed.
This highlights the benefit of engaging early and reducing the likelihood of post-lodgment amendments. It is evident and consistent with feedback received through this year's client survey, that those Top 500 groups who approached us on a pre-lodgment basis about TFE recognise the benefit of early engagement. Some of the Top 500 groups went on to ask us to verify the merits of additional TFE claims.
Our outreach initiative has also supported our work confirming that Top 500 groups are paying the right amount of tax and correctly making TFE and LCB claims. Where we identified proposed claims being incorrect, we have been able to reach resolution and agreement with most groups. There have been isolated instances where we have concerns that groups have sought to take advantage of the stimulus measures. These cases have escalated to audit.
Top 500 groups that accept, or have accepted, our offer to provide a pre-lodgment engagement service will obtain the benefit of having the certainty that they are eligible to access the LCB and TFE measures, and the amount of their claims is correct. Top 500 groups who have not opted to engage with us may be contacted post-lodgment where our analytical modelling suggests they have made a high-risk claim. The remaining LCB and TFE claims made by the Top 500 population will be considered as part of our ongoing engagements.
Achieving justified trust
The objective of a Top 500 assurance review is to form an evidence-based opinion, based on the 4 areas of justified trust. This is whether the Top 500 group has paid (determined by the tax assurance process) and will continue to pay (shaped by effective tax governance) the correct amount of tax. When the objective has been reached, the Top 500 group will be considered to have achieved justified trust with us.
To achieve justified trust, we seek objective evidence that would lead a reasonable person to conclude that the Top 500 group paid the right amount of tax. This is a higher level of confidence than confirming that certain risks do not arise. We tailor our approach based on the unique business profile of a Top 500 client.
In order to achieve justified trust, the Top 500 group must satisfy the following 4 key areas:
- The group has effective tax governance in place to support current and future compliance.
- Risks flagged to market in the ATO’s Public Ruling and Taxpayer Alerts programs are not present in the group or are appropriately mitigated.
- Tax outcomes from both ongoing and atypical transactions are understood and agreed as correct.
- Differences in accounting and tax results are complete and are able to be explained in context.
Achieving justified trust with a Top 500 group is a valuable end state with advantages for both the group and the tax system. However, continuing to have justified trust is an outcome that is tied to a client’s ongoing willingness to participate in the tax and superannuation system and to manage potential tax risks in partnership with us.
In the longer term, our ongoing Top 500 engagements with large private groups who seek to comply with their obligations are designed to:
- prevent disputes through early engagement on major transactions
- build mutual trust
- foster willing participation in the tax and superannuation systems.
Justified trust position and ratings
Justified trust positions 28 February 2021
As of 30 June 2021, 34 Top 500 groups had achieved justified trust with:
- 139 engaged and progressing towards justified trust
- 34 in justified trust
- 26 engaged but not yet committed to attain justified trust
- 187 engaged but no evidence to support justified trust
- 11 not engaged
- 6 unwilling to work towards justified trust.
Top 500 groups recorded as being in justified trust as of June 2021 will be subject to the 3-year monitor and maintain period. We will review them after that time to test whether they will continue to maintain justified trust with us.
Note: In our June 2021 report, we incorrectly reported that 52 Top 500 groups were in justified trust. The difference is attributable to the manner in which our internal reporting determined which Top 500 groups had achieved justified trust. That is, in our June 2021 report, Top 500 groups that were considered by our teams to be 'partnering' with us (or highly engaged in the program) were mistakenly recorded as having attained justified trust. Our own internal governance has now been strengthened to ensure that in future we correctly classify and report Top 500 groups who have achieved justified trust.
Justified trust positions 30 June 2022
As of 30 June 2022, 30 Top 500 groups had achieved justified trust with:
- 30 in justified trust
- 144 engaged and progressing towards justified trust
- 53 not yet assessed
- 185 engaged but no evidence to support justified trust
- 31 engaged but not yet committed to attain justified trust
- 6 not engaged
- 10 unwilling to work towards justified trust.
The difference is attributable to groups dropping out of the Top 500 population where they no longer met the eligibility criteria, and the introduction of a consistent standard in our approach to assurance and tax governance.
Under the standardised approach a small number of groups were unable to maintain their position in justified trust after having emerged from the monitor and maintain period. Whilst 4 groups achieved justified trust, most Top 500 groups were still experiencing challenges with satisfying all 4 key areas, particularly with tax governance. We will continue to advocate for strong tax governance within the largest private groups as discussed further in this report.
Areas for improvement
The key area of justified trust where most Top 500 private groups require improvement is in the implementation and maintenance of effective tax governance. As observed in our June 2021 report, there has been a reluctance among many groups within the Top 500 population to meaningfully invest in tax governance. Our most recent survey data shows that Top 500 groups are now recognising the importance of tax governance (84% agree with that proposition). What we are keen to see going forward is follow through with incremental increases in investment in tax governance frameworks, processes and procedures.
Whilst we have seen improvements in tax governance, often we still find that:
- Organisational knowledge of the Top 500 group’s tax affairs is concentrated in the hands of one or two individuals.
- Policies and procedures are not documented, or where they are documented, they are not optimally designed or not operating effectively in practice.
- Information technology (IT) systems are not sufficiently reliable or are non-existent.
Consequently, many Top 500 groups find it challenging to provide evidence to demonstrate that they have effective tax governance frameworks, policies and procedures in place.
Having recognised the difficulties Top 500 groups have had with implementing effective tax governance, we have a number of initiatives in train that are designed to help make engagement with the principles of tax governance easier whilst maintaining the integrity of the program, which is detailed below.
Performance against the justified trust framework
We assess a Top 500 group's performance against the following 4 areas of justified trust:
Tax governance
Tax governance is a key focus area in our engagements with the largest 500 privately owned and wealthy groups. It is an important aspect of their journey in achieving justified trust.
Ideally, we want the Top 500 population to adopt practices whereby they put a framework in place that addresses the main principles of effective tax governance prescribed by the framework. Good practices include accountabilities and sign-off points, and robust approaches to meeting the group’s lodgment and payment obligations, and how they shape, and when they seek, external tax advice.
Within an effective tax governance framework, there will be policies, processes or procedures present that identify and manage business as usual tax issues before they can become risks. The policies, processes and procedures will also ensure that entities within the group are correctly recognising the correct application of, and differences in, financial accounting and tax principles.
Our engagement teams encourage Top 500 groups to show us the tax governance frameworks, processes and procedures that the group has implemented. We assess the effectiveness of those controls with the assistance of our internal Tax Governance Tool. This tool provides a consistent method for our teams to assess the tax governance in place for the active trading entities and non-trading (passive investment) entities within the group. It also helps us to evaluate the effectiveness of tax governance that is in place over the way wealth is extracted from those entities (for example, via trust distributions, payments and dividends).
A focus for our engagement teams are the 4 main principles of effective tax governance. We look to provide feedback on those principles where there are deficiencies in how they have been applied and seek to make recommendations for improvement.
The table below provides a summary of the 4 principles and the number of groups where we have found deficiencies in the application of each principle. We display this as a proportion of the groups that have been assessed for tax governance.
Table 6: Summary of the 4 principles of effective tax governance and groups with deficiencies
Governance principle identified as being deficient
|
Proportion of groups* that had deficiencies for trading entities
|
Proportion of groups* that had deficiencies for non-trading entities
|
Proportion of groups* that had deficiencies for wealth extraction
|
Accountable management and oversight
|
44%
|
33%
|
45%
|
Recognise tax risks
|
48%
|
54%
|
55%
|
Seek advice
|
32%
|
36%
|
45%
|
Integrity in reporting
|
41%
|
41%
|
45%
|
Number of groups with deficiencies in all identified principles
|
18%
|
18%
|
24%
|
Number of groups with deficiencies in more than one identified principle
|
52%
|
54%
|
59%
|
*The percentages refer to proportions of the groups that were rated ‘low’ or ‘medium’ confidence.
Improving tax governance
We have observed the following areas in Top 500 groups with deficiencies in tax governance:
- Some Top 500 groups provide verbal explanations regarding their tax governance framework. Documentation is not provided to evidence that a framework exists, is designed well, or is actually operating in practice.
- Many Top 500 groups who resist investing in tax governance have not considered the importance of documented tax governance in ensuring the continuity of good practices. Documented governance is critical in supporting succession plans for key roles within the group’s finance or (internal or external) tax functions (or both).
- Some Top 500 groups operate decentralised business models with diverse management and control structures. This makes it difficult to implement effective and consistent tax governance at a group level.
Feedback from the Top 500 population indicates that 84% agree that effective tax governance helps them meet their tax and super obligations. However, they believe that our approach to tax governance should be more tailored due to the varied and diverse nature of private groups. This should include consideration of the appropriate level of documentation they require.
We have taken this feedback on board and we will take steps to provide further guidance. We will be publishing the features that we look for when assessing the effectiveness of a group's tax governance framework.
Tax risks flagged to market
Public Rulings, Taxpayer Alerts and Practical Compliance Guidelines are how we flag compliance risks to the market. We seek to obtain high levels of assurance that these risks are not present when undertaking assurance engagements with the Top 500 population.
As part of the engagement process, we seek objective evidence that the tax treatments applied in a Top 500 group accord with our public rulings and don’t exhibit risks flagged in our Taxpayer Alerts program.
We need to assure that the Top 500 group does not have arrangements in place that conflict with our published views and risks flagged to market.
The graph below provides a summary of the categories of Public Rulings, Taxpayer Alerts, and Practical Compliance Guidelines which present across the Top 500 population.
Summary of risk categories as a % of total risk
These risks as a percentage of total risk include:
- Trusts – 27%
- Income or deductions – 24%
- International – 10%
- Research & development – 7%
- Losses – 6%
- Residency – 5%
- Dividends – 4%
- Superannuation – 2%
- GST – 2%
- Other – 13%.
During our Top 500 program engagements we have identified over 500 instances where we have been required to verify whether risks flagged to market have been treated correctly. We have been able to obtain high or medium levels of assurance that those risks are being treated correctly in 95% of these.
Risks flagged to market assurance ratings
Risks flagged to market assurance ratings:
- 70% – high
- 25% – medium
- 5% – low.
Pleasingly, feedback from our clients indicates that approximately 80% of Top 500 groups know where to find information about tax risks which concern us.
Trusts
One of the main areas that we focus on arises in the context of the misuse of trusts to facilitate wealth extraction.
In particular, our engagement teams seek to ensure that trusts are not being used:
- as an inappropriate conduit in the making of private company loans
- to distort the tax form of a distribution from its economic substance
- to harbour unpaid present entitlements
- to minimise capital gains tax related obligations.
To give more certainty, we have developed advice and guidance on the use of trusts, including:
We have considered the application of section 100A in a small number of Top 500 engagements. While our concerns have been mitigated in some cases, there are other arrangements that we continue to have concerns about. For example where non-residents have been appointed income of a trust in order to reduce what would otherwise have been another beneficiary's tax liability. A small number of these matters are the subject of reviews or audits. We will continue to work with Top 500 groups in relation to the misuse of trusts.
Income and deductions
Also common are tax issues related to ordinary income and deductions, which may involve:
- bad debts
- tax treatment of long-term construction contracts
- the valuation of trading stock.
International transactions
We also see international transactions represented, including:
- transfer mispricing of intellectual property
- cross-border related party financing.
We continue to monitor situations that may be similar to arrangements set out in TA 2021/2 Disguising undeclared foreign income as gifts or loans from related overseas entities. This is where Australian-resident taxpayers derive income or capital gains offshore (foreign assessable income) but fail to declare it in their Australian tax returns.
Treatments of tax issues from ongoing and atypical transactions
As part of our tax assurance engagements, we seek to understand the tax issues that arise from ongoing income producing activities carried on by the Top 500 group. This includes income from both business and passive investments, and the tax treatments applied to significant and atypical transactions.
With the Top 500 population being engaged in business across 141 different industries, we continue to work with groups in assuring the array of tax issues that arise from the ongoing and atypical transactions they undertake.
We seek to obtain a high degree of confidence that the treatments applied to tax issues arising from ongoing and atypical transactions are correct. We apply a consistent rating system when assessing the treatments applied to these tax issues. The categorisations in this report are, as follows:
- High assurance – we have a high level of assurance that the treatment that has been applied to the tax issue is correct.
- Medium assurance – more evidence or analysis (or both) is required to obtain a high level of assurance that the treatment applied to the tax issue is correct.
- Low assurance – we have insufficient evidence to make an assurance decision about the treatment of the tax issue, or we have concerns that the tax issue has not been treated in accordance with the tax laws.
Assurance of ongoing and atypical transactions
Where the process of assurance has been completed, we have used information from those engagements to compile the following chart. This chart summarises the assurance ratings we have provided over the tax treatments applied to those Top 500 groups ongoing and atypical transactions.
Assurance of ongoing and atypical transactions
The information is presented in Table 6 below by level of assurance provided.
Table 6: Ongoing and atypical transactions by level of assurance (%)
Transaction
|
High
|
Low
|
Medium
|
Business as usual
|
74%
|
7%
|
19%
|
Capital gains tax
|
79%
|
9%
|
11%
|
Private company loans and benefits
|
75%
|
10%
|
16%
|
Related party transactions
|
56%
|
18%
|
26%
|
Trust distributions
|
76%
|
9%
|
16%
|
Division 40 and capital expenses
|
75%
|
8%
|
17%
|
Internationals
|
69%
|
3%
|
28%
|
Business restructure
|
66%
|
10%
|
25%
|
Work in progress / cost of goods sold
|
71%
|
7%
|
22%
|
Revenue losses
|
76%
|
3%
|
21%
|
Revenue recognition
|
77%
|
3%
|
20%
|
Superannuation
|
75%
|
10%
|
15%
|
Franking credits
|
88%
|
6%
|
6%
|
Business v private
|
57%
|
30%
|
13%
|
Other
|
72%
|
19%
|
8%
|
New measures
|
100%
|
0%
|
0%
|
R&D tax incentives
|
79%
|
7%
|
14%
|
Private ancillary fund
|
93%
|
0%
|
7%
|
Taxation of financial arrangements (TOFA)
|
67%
|
7%
|
27%
|
Goods and services tax (GST)
|
62%
|
15%
|
23%
|
Financing
|
64%
|
9%
|
27%
|
Fringe benefits tax (FBT)
|
100%
|
0%
|
0%
|
Professional firms
|
100%
|
0%
|
0%
|
Investment income
|
88%
|
0%
|
13%
|
Observations
The tax issues where Top 500 groups have tended to receive high levels of assurance include:
- recognition of income and deductions from ongoing transactions (that is, ‘business as usual’ tax issues)
- treatment of franking credits
- donations to private ancillary funds
- withholding (interest, royalty, or dividend)
- capital gains treatment of property disposals.
The tax issues where Top 500 groups receive lower levels of assurance or where we have concerns over the tax treatments adopted, often relate to:
- mischaracterisation of non-deductible private expenditure as business related
- mispricing of related party transactions
- aggressive approaches to the capital allowance provisions
- application of the CGT provisions to transactions that did not involve property disposals.
We have summarised our observations about the following tax issues:
Business as usual income and deductions
The largest categories of transactions whose tax treatments we seek to understand in Top 500 engagements are those related to ongoing (or ‘business as usual’) activities. Our focus on the basics reflects the underlying purpose of the Top 500 program to answer the question: ‘Are Australia’s largest private groups paying the correct amount of tax?’. Accordingly, it is important that we are committed to understanding the routine, regular, and ongoing transactions that Top 500 groups engage in, and the tax treatments they apply.
In cases where we have finalised our analysis, we have provided high levels of assurance to the tax treatments applied to approximately 74% of the ongoing transactions undertaken by Top 500 groups. This data indicates that they are getting the basics right.
We are continuing to work with Top 500 groups who have received medium or low assurance ratings to obtain comfort over the tax treatments they have applied. Where necessary, we encourage them towards better practices, particularly through ensuring effectively designed tax governance.
Capital gains tax (CGT)
Top 500 groups regularly engage in transactions which result in the application of the capital gains tax (CGT) provisions. A large proportion of these transactions involve the disposal of property. These include both real property assets as well as shares, units, and rights, amongst other assets.
Historically, the misapplication of the CGT provisions to large, atypical transactions has been a source of tax risk among large privately owned groups. Consequently, during engagements we often consider:
- accuracy of CGT calculations
- correct application of capital losses
- availability of CGT concessions
- rollovers and discounts
- pre-CGT status of assets
- whether the disposal of an asset should be reported on capital or revenue account.
By number of transactions, most Top 500 groups correctly apply the CGT provisions to the atypical transactions they undertake. A high level of assurance has been attained for approximately 79% of the transactions we have examined. We are also pleased with the interest Top 500 groups have shown in obtaining tax certainty under our commercial deals program.
We have identified concerns in a small number of cases involving the question of:
- whether the disposal of a CGT asset should be treated on capital or revenue account
- whether current or prior year capital losses have been correctly applied
- whether assets have retained pre-CGT status
- CGT consequences arising from changes in residency.
Our preference is to work with Top 500 groups as part of our engagement to obtain comfort over the CGT treatments that have been applied. However, in some instances it has become necessary to treat these risks through a review or audit.
Private company loans and benefits
As part of the Top 500 program we seek to ensure that benefits obtained from private companies by the controllers of private groups, and their associates, are correctly reported for tax purposes. That is, the value of consequent benefits are not taken to be deemed dividends.
Our analysis of these transactions include:
- verifying that the minimum yearly repayments on loans are correct
- considering transactions involving debt forgiveness
- examining whether company property has been used for personal purposes
- analysing whether unpaid present entitlements have been brought to account.
A high level of assurance has been provided in approximately 75% of instances where we have completed our analysis. Where we have identified concerns and provided a low or medium rating, the arrangements have related to:
- property being utilised by shareholders and associates for below-market value consideration
- contrived restructures and loan assignments which appear to artificially reduce loan balances or lead to the creation of new loans, to circumvent the operation of Division 7A of the Income Tax Assessment Act 1936.
Although there are instances where we have granted the Commissioner’s discretion to not treat some arrangements as deemed dividends, our view is that the largest private groups have access to the expertise to help them prevent honest mistakes or inadvertent errors.
Use of trusts
Trusts are commonly used within private group structures, including within Top 500 groups. Issues that have been considered as part of Top 500 engagements include:
- family trust elections
- differences between distributable and taxable income of a trust
- correct recognition of tax deferred distributions made by unit trusts
- restructures involving trusts
- reimbursement arrangements between beneficiaries
- unitisation.
As with other privately owned and wealthy groups, we see instances in the Top 500 population where the net income of a trust that should be assessed to one beneficiary is instead:
- converted into non-assessable capital
- appointed to another beneficiary for the purposes of utilising losses
- appointed to a second beneficiary who is subject to a lower rate of tax, whilst the economic benefit of the income is conferred upon the first beneficiary.
International-related transactions
The number of cross-border transactions and international arrangements entered into by the largest Australian privately owned groups continues to increase.
Tax issues arising from international transactions that require verification include:
- pricing of goods and services
- payment of withholding tax on interest
- royalties and dividends
- residency status of entities
- calculation of foreign exchange gains and losses
- correct application of provisions relating to controlled foreign entities
- identifying which entities within the group fall within the significant global entity (SGE) regime.
A number of groups have received a medium level of assurance in relation to their cross-border and international activities. This is usually an acceptable level of assurance given the complexities of international tax.
However, we have some concerns in relation to approaches taken by some Top 500 groups for:
- transfer mispricing
- intellectual property migration
- residency.
These are currently being addressed through audit.
Business v. private
As part of our engagement process with the Top 500 population, we seek to obtain confidence that private groups correctly report the extent to which business assets (such as artwork, aircraft, and marine vessels) are used for private purposes – and make the necessary adjustments.
As part of our assurance work, we focus on activities whose costs are expensed through a business, but lack a commercial flavour, or do not exhibit the characteristics of a business. For example, where a Top 500 group’s core business is absorbing the cost of owning horses whose only purpose is to provide personal enjoyment to the controller(s) through racing.
Arrangements and characteristics of concern include activities:
- for which there is no formal business plan
- where the prospect of making a profit is low, or where there has been a history of consistent incurrence of losses (or both)
- that are speculative in nature, either in their own right, or incidental to the core profit making activities
- where there does not appear to be a nexus between the cost of the activity borne by the group entity concerned, and the production of that entity’s assessable income
- in the case of horse racing, where the horse racing activities are not sufficiently integrated into a commercially viable breeding business.
This is an area where only a small proportion of Top 500 groups have obtained high assurance that the cost of activities that have the flavour of the use of ‘lifestyle assets’ is deductible.
Related party transactions
Private groups in the Top 500 population frequently include entities that are not tax consolidated. That is, with the consequence that intra-group transactions involving related entities are not ignored for tax purposes.
Accordingly, our engagements with the Top 500 population require us to obtain an understanding of the intra-group transactions that are carried on. We need to verify whether those transactions are reasonably priced and captured in the financial accounts of the parties to the transactions.
Related party transactions that are common across private groups include, but are not limited to:
- management fees
- cost allocations
- service and administration fees
- fees related to leasing or hiring property and equipment.
This is an area where there have been challenges in obtaining high levels of assurance across engagements. We are working with clients to bring them to a position that enables us to have a higher level of comfort over their related party arrangements.
Alignment of tax and accounting outcomes
We seek to ensure that Top 500 groups correctly recognise the differences in the accounting and tax treatments that are applicable to the income producing activities they undertake. The reconciliation adjustments they make must be correct and explained in context.
The process of assurance involves obtaining an understanding about the relevant entity’s activities and the tax issues that arise from those activities. This includes from both financing and passive investment activities, and then contrasting the accounting and tax treatments we think should apply. This informs our understanding of the adjustments that are required to ensure the entity’s tax position is reported correctly.
Recently, our assurance work has required us to consider the COVID-19 impacted economic environment and how the stimulus measures impact on the book-to tax-adjustments that Top 500 groups are required to make. Of particular focus is:
- the material differences between the accounting and tax treatments that are likely to arise for investment in depreciable assets
- verifying the quantum of carried forward tax losses available to entities within a Top 500 group that have availed themselves of the loss carry back measure. (For details about our forward-looking engagement approach to temporary full expensing and loss carry back, see Effect of the response to COVID-19).
The following chart provides a summary of the top 10 headline adjustments between accounting and tax that our engagement teams have sought to understand in their recent interactions with Top 500 groups.
Top 10 headline adjustments
The Top 10 headline adjustments from highest to lowest number of engagements included:
- Net capital gain – 61
- Depreciation expenses – 53
- Other non-deductible expenses – 32
- Other income not included in assessable income – 27
- Capital works deduction – 26
- TOFA income from financial arrangements not included – 22
- Temporary full expensing – 15
- Accounting expenditure subject to R&D – 14
- Foreign exchange taxable gains – 14
- TOFA deductions from financial arrangements not included – 14.
Book-to-tax adjustments
Underlying the headline data are several other items that are commonly the subject of adjustments and whose correctness we seek to understand. Those book-to-tax adjustments include but are not limited to:
- unrealised gains and losses on investments
- general provisions
- doubtful debts
- trading stock valuations
- verifying if reversals of amortisation and impairment expenses have been conducted.
Where we have concluded an examination of book-to-tax adjustments under a Top 500 assurance engagement, we have found that we have been able to successfully confirm our understanding and mitigate any concerns in a large proportion of engagements. This is particularly where:
- financial statements are prepared in accordance with accounting standards and are audited
- entities within the group have prepared detailed book-to-tax reconciliations between net profit or loss reported in the financial statements and taxable income or loss reported in their tax returns
- the Top 500 group’s representatives are forthcoming in providing documents and explanations regarding how their tax reconciliations are mapped to working papers and source documents to ensure they are complete and correct in context
- the Top 500 group has strong governance processes in place to support the preparation of financial statements and tax returns.
Where we are unable to mitigate our concerns during engagements, issues may be escalated to a review or audit. This has taken place in a very small proportion of cases. The adjustments of concern relate to the correct reporting of capital gains, or where the Top 500 group has adopted a technically unsustainable preference to claim immediate deductions instead of applying the capital allowance provisions.
Monitoring and maintenance – post justified trust engagements
When a Top 500 group attains an overall high assurance rating under our justified trust assurance program, we have confidence that they have complied, and will continue to comply, with Australia’s income tax laws. In recognition of the high levels of trust we have in the tax outcomes reported by these Top 500 groups, we scale down our engagement approach to focus on maintaining high levels of confidence that they are continuing to comply.
Under our ‘monitoring and maintenance’ approach, the Top 500 group will experience a scale down in engagement interactions for a 3-year period. During this time we largely rely on the effectiveness of the group’s tax governance framework to mitigate tax risks.
We continue to engage with the private group during this period. However, our engagements will be limited to:
- understanding any impacts from the group’s operating environment
- verifying the treatments applied to any new tax issues
- evaluating the impacts of other material changes to the group.
We also expect that representatives of the group will tell us in real time if the group:
- has made material changes to the design of its tax governance framework
- identifies that tax risks that have been newly flagged to market subsist within the group
- has experienced material changes to the nature of their ongoing transactions
- enters into new or atypical transactions of a type not previously assured
- has made material changes in their approach to book-to-tax treatments
- has taken new tax positions or changed tax positions that have previously been assured
- identifies disclosure issues or errors that should be corrected.
Those Top 500 private groups who have achieved an overall high assurance rating should experience a tangible decrease in the intensity of their engagement under our ‘monitoring and maintenance’ approach.
GST integrated engagements
Some Top 500 engagements consider a whole of tax approach, including goods and services tax (GST). Our Top 500 GST assurance program expands on our existing Top 500 one-to-one engagements to provide a level of assurance as to whether the largest privately owned groups are correctly reporting the right amount of GST.
All privately owned groups selected for inclusion in the Top 500 GST assurance program are the subject of fully integrated assurance engagements. These are designed to deliver a single decision around whether the group has achieved justified trust across income tax and GST.
We are also currently finalising non-integrated Top 500 GST assurance engagements. These are cases where the GST assurance engagement may not have been conducted concurrently with the income tax assurance engagement. In some of the non-integrated GST assurance engagements that we have finalised, we have noted weaknesses in clients’ GST governance frameworks. We have provided recommendations to address the following areas:
- improvements in documented business activity statement (BAS) procedures
- reconciliation of the statistical data between the activity statements, tax return and financial statements
- improved internal controls for unrestricted employee access to IT systems.
What we have learned and the way forward
The purpose of the Top 500 program is to provide the government and the community with a level of assurance about whether the wealthiest private groups are paying, and will continue to pay, the correct amount of tax. In the medium term our objective is to provide an evidence-based answer for the majority of the Top 500 population that is cast in the affirmative.
On the face of it, the objective seems quite simple, but the reality is that the Top 500 population is made up of a diverse number of groups that operate over multiple industries, structures and systems. The unique nature of each group requires a specific and tailored approach. It takes considerable effort on our part to understand the group and to develop the most appropriate approach to forming an assurance decision and in (desirably) providing justified trust. Our approach will also be influenced by the taxpayer's willingness to engage and embrace the Top 500 program.
The tax issues that require management, and the risk that those tax issues will not be treated correctly, are not unique to the Top 500 population but rather occur across the broader privately owned and wealthy groups client population. However, we have identified that by developing ongoing working relationships with those Top 500 groups who do want to comply with their obligations, we build mutual trust, understanding and transparency.
By engaging in this way, we develop a better understanding of the operations and structural characteristics of an individual group, which leads to a better experience for them. It makes us more efficient in ensuring that the right amount of tax is being paid and serves to avoid disputes and costly compliance action.
Going forward our focus will remain on helping those Top 500 groups who want to demonstrate that they are complying, and will continue to comply, with their tax and super obligations. That includes:
- introducing a more streamlined approach to tax assurance for those Top 500 groups who carry on high volume, low margin businesses, that encapsulate low levels of value adding activity.
- helping those Top 500 groups who are still in the process of implementing the effective tax governance frameworks, processes and procedures that are required to support future compliance.
It is the addition of effective tax governance that will provide the pathway to justified trust for a large segment of the Top 500 population.
We will also be providing more external guidance so that Top 500 groups who are engaged with the program understand what we expect around tax governance. The external guidance will include publishing the features that we look for when assessing the effectiveness of tax governance and providing guidance about how the 4 main principles of tax governance can be tailored.
In addition we will be publishing guidance about a streamlined approach to tax governance for Top 500 groups whose income is primarily derived from a narrow range of passive investments.
Our aim is to provide those Top 500 groups who are demonstrating a commitment to ongoing compliance with a low impact and service orientated experience when engaging with the tax system.
Conversely, whilst the intent of the Top 500 program is well understood by the Top 500 population, some Top 500 groups continue to leverage off the services we provide. However, they do not wish to demonstrate that they are complying, or do not engage with us on an open and transparent basis. Accordingly, over the next 12 months we will be increasing the firmer actions we undertake in determining whether Top 500 groups who fall into those categories are paying the right amount of tax.
Our Top 500 findings report shares insights about the tax affairs of Australia's largest private groups.