Findings from the Next 5,000 program
Our observations and insights from the Next 5,000 tax performance program.
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About this report
The Next 5,000 tax performance program (Next 5,000 program) gives the community confidence that these privately owned and wealthy groups are paying the right amount of tax.
The Tax Avoidance Taskforce funds this program to ensure that Australia's wealthiest private groups are meeting their tax and superannuation obligations.
This report on the Next 5,000 program provides our observations and insights through the program so far. The findings and data in this report are current as at 31 August 2022. As we continue with the program, we will share further updates.
The Next 5,000 program began on 1 July 2019. To date it has focused on engaging with clients on a one-to-one basis. This has been generally through streamlined assurance reviews that are based on our justified trust methodology and specific reviews.
If you operate or represent a Next 5,000 private group, you can use these findings to:
- review your tax affairs and tax governance
- increase awareness of common tax issues
- understand how we are working with clients to resolve issues
- prepare for a review under the Next 5,000 program.
Latest findings from the Next 5,000 program
As at 31 August 2022, we have reviewed around 5,300 transactions, activities and events of Next 5,000 private groups that were worth over $22 billion. We have achieved this result through finalising around 640 streamlined assurance reviews.
In addition, we have commenced engagements with a further significant number of Next 5000 private groups under the program. Ongoing COVID-19 impacts mean that a number of streamlined assurance reviews for groups engaged during 2021–22 are still currently in progress.
Our key observations of Next 5,000 private groups reviewed to date are that:
- A high proportion have governance processes and procedures, but most are not documented.
- Clearly documented roles and responsibilities lead to good tax governance.
- Documentation of the tax return preparation, review process and identification of material transactions helps groups to recognise tax risks and avoid errors.
- Private groups that seek tax advice for material risks and issues are more likely to make correct disclosures and adopt correct tax treatments.
Documented tax governance framework
Whilst the proportion of Next 5,000 private groups without documented tax governance processes and procedures remains high, we are seeing some positive shifts in behaviour. Since our last report we have found increased attempts to improve documented tax governance processes and procedures.
For the 30% of groups with a documented tax governance framework, 69% documented their tax governance procedures either before or after the notification of a streamlined assurance review. As frameworks become operational, we expect to see a decrease in errors for these groups that we continue to observe.
Correctly reported activities
Through our finalised streamlined assurance reviews, we have confirmed that private groups have correctly reported amounts relating to significant activities, events and transactions totalling over $19.1 billion. This amount is made up of:
- $10.8 billion in verified income
- $4.6 billion in verified deductions
- $3.6 billion in other verified items, including
- $1.36 billion in loans to shareholders and their associates
- $557 million in additional balance sheet items, franking account balances, franked dividends paid and net foreign income
- $1.02 billion in tax reconciliation items
- $343 million in tax deductions and tax losses, both deducted and carried forward
- $184 million in capital losses, both applied and carried forward
- $22.7 million in tax offsets, rebates and credits
- $127 million in GST and other taxes.
Common tax issues
Common tax issues we have observed include:
- loans or payments to shareholders and their associates not complying with the requirements of Division 7A of the Income Tax Assessment Act 1936
- using tax losses and capital losses incorrectly, including reclassifying capital losses as revenue losses
- lack of record keeping in relation to carry forward tax losses and capital losses from prior years
- non-arm's length arrangements involving family members or related parties that are designed to reduce or avoid tax that would otherwise be payable
- tax treatment of disposals with incorrect characterisation of property sales on capital account that should be treated as sales arising from a property development business
- mischaracterisation of receipts and / or expenses as revenue or capital
- incorrect calculation of net capital gains tax reported
- significant variances, discrepancies and errors in reporting of income and expenses between tax returns and business activity statements
- incorrect GST treatment of face-value vouchers and deposits
- incorrect calculation of reduced input tax credit entitlements from acquisitions related to restructures, investments, and merger and acquisition activity.
Tax risks flagged to market
In addition, the most common tax risks flagged to market arising for review as part of streamlined assurance reviews are those described in:
- Taxation Ruling TR 97/25 Income tax: property development: deduction for capital expenditure on construction of income producing capital works, including buildings and structural improvements
- Practical Compliance Guideline PCG 2017/2 Simplified transfer pricing record keeping options
- Taxation Ruling TR 2006/7 Income tax: special income derived by a complying superannuation fund, a complying approved deposit fund or a pooled superannuation trust in relation to the year of income
- Taxpayer Alert TA 2012/7 Self-managed superannuation fund arrangements to acquire property which contravene superannuation law
- Taxation Ruling TR 2018/3 Income tax: tax treatment of long term construction contracts.
Voluntary disclosures
Since the program began, we have received over 217 voluntary disclosures from Next 5,000 private groups that total over $25 million in tax, penalties and interest from streamlined assurance reviews.
The most common tax issues resulting in a voluntary disclosure includes:
- loans or payments to shareholders and their associates not complying with the requirements of Division 7A of the Income Tax Assessment Act 1936
- unreported income, including trust distributions
- claiming deductions for non-deductible expenses, such as expenses relating to private use of assets, entertainment expenses and property related expenses
- non-entitlement of franking credits
- non-lodgment of fringe benefits tax return.
We observed that a high proportion of voluntary disclosures received during a streamlined assurance review correlate with the absence of or insufficiently documented tax governance frameworks. In these cases, we have made recommendations about improvements to avoid future errors. For example, record keeping requirements for loans or payments to shareholders and their associates.
Specific risk reviews
We have broadened our one-to-one engagements through undertaking specific reviews that consider one or two potential tax risks. We have completed 164 specific reviews at 31 August 2022 resulting in $29.6 million in liabilities.
Given our focus to date on governance, conducting specific reviews for non-lodgment of tax returns assisted us to gain a better understanding of the drivers and circumstances in this population.
We have completed 28 cases at 31 August 2022 where groups with multiple entities had not lodged their tax return. This has resulted in 41 entities lodging tax returns for multiple years, totalling 108 tax returns.
Common reasons for late lodgment include:
- tax agents waiting for information from clients
- waiting for information from third parties
- illness.
Tax issues arising from lodgment and other specific reviews include:
- beneficiaries not reporting trust distributions
- incorrect claiming of temporary full expensing (TFE), including
- ineligible assets being claimed
- incorrect valuation of assets
- incorrect calculation of TFE
- mischaracterisation of receipts or expenses as capital or revenue
- undisclosed foreign income.
Focus going forward
Based on our insights to date and broader understanding of emerging trends in this population, in 2023-24 we will be focussing our engagements on some identified key priority areas. These areas are a combination of client behaviours and transactions that we have observed in the Next 5,000 population.
We will focus on groups that are:
- experiencing rapid growth which may lead to incorrect reporting if the tax governance framework is not fit for purpose to support the expansion
- expanding offshore and / or engaging in cross-border transactions with related parties
- entering into arrangements such as intra-group transactions to inappropriately transfer domestic wealth
- undertaking wealth extraction including by the use of private equity funds
- considering tax efficient structures to pass on wealth to the next generation.
For more information about planned future engagement types that will be influenced by these key priority areas of focus, see What’s next.
Next 5,000 groups
The characteristics and attributes of Next 5,000 groups are explained below.
Overall demographics
There are about 7,300 private groups in Australia that are part of this program as they have net wealth of over $50 million. These groups hold around $1.3 trillion in net assets and contribute more than $10.1 billion in tax revenue each year.
Considering the economic size of these groups, even one error can have a big tax impact. The high profile of these groups also means that their level of participation can influence community confidence in and perceptions of fairness of the tax system.
A typical Next 5,000 group can contain around 13 entities, including a mix of:
- companies
- trusts
- self-managed super funds.
Some Next 5,000 groups have philanthropic interests and include an ancillary fund or charity.
Most are well established, multigenerational businesses that have been operating for many years. Many are family businesses or closely controlled groups.
These businesses often choose private structures because they allow for:
- more flexibility
- greater control over operations
- fewer reporting requirements.
As a business grows, structures become more complex. A typical Next 5,000 group includes:
- 13 entities made up of 7 companies, 5 trusts and another entity such as a self-managed super fund or private ancillary fund
- a group head aged 64 years old
- 38 employees
- total income of $6.9 million
- net wealth of $86.4 million
- income tax of $479,200
- net GST of $104,500
- PAYGW of $277,500.
Typical Next 5,000 group
Groups by location
The Next 5,000 population is predominately located on the east coast of Australia (over 80%) and is broken down as follows:
- New South Wales – 2,732
- Victoria – 2,095
- Queensland – 1,062
- Western Australia – 778
- South Australia – 441
- Australian Capital Territory – 132
- Tasmania – 76
- Northern Territory – 40.
Next 5,000 groups by location
Groups by entity type
There are over 117,700 entities associated with the Next 5,000 population. The group structures used by Next 5,000 groups can be complex with some groups being large in terms of numbers of entities involved.
They may contain any combination of company, partnership and trust structures operating both inside and outside of consolidated groups, and comprise:
- 53,470 companies
- 39,956 trusts
- 13,347 individuals
- 5,313 partnerships
- 5,527 superannuation funds.
Next 5,000 groups by entity type
Groups by industry
A great variety of different industries are represented in the Next 5,000 population. Over half are involved in at least one of the following industries:
- financial and insurance services – 24.7%
- construction – 9.3%
- rental, hiring and real estate services – 6.2%
- agriculture, forestry and fishing – 5.3%
- professional, scientific and technical services – 5.2%.
The remaining groups are involved in:
- wholesale trade – 4.9%
- manufacturing – 4.7%
- retail trade – 4.2%
- accommodation and food services – 2.7%
- health care and social assistance – 2.4%
- transport, postal and warehousing – 1.6%
- administrative and support services – 0.9%
- art and recreation services – 0.7%.
Next 5,000 groups by industry
How much tax they pay
The Next 5,000 population:
- own over $1.3 trillion in net assets
- earn $242 billion in total income
- pay over $10.1 billion in income tax
- pay over $4 billion in net GST
- employ 791,788 people, paying $7.2 billion in PAYG withholding.
For more information, see Who is covered by this program.
How we engage with Next 5,000 groups
We engage with Next 5,000 groups in a range of ways based on the:
- size of operations
- structural complexity
- consequence of tax issues
- risk of non-compliance.
We engage with groups that are large, have complex structures or multiple potential tax issues through a streamlined assurance review.
Streamlined assurance reviews are conducted one-to-one with representatives of the selected private groups.
For other groups, we engaged with them through:
- specific risk reviews
- one-to-many communication
- targeted guidance on significant risks.
For information about the introduction of comprehensive risk reviews from 2023-24, see What’s next.
Streamlined assurance reviews
The scope of a streamlined assurance review is generally limited to:
- reviewing the tax returns lodged for the last 2 years
- the entities in the group with significant activities, events and transactions.
Generally, reviews are completed over a 4-month period from when we receive the responses to our first request for information. However, in many instances this period has been extended as we have sought to provide tailored support to Next 5,000 groups and their advisers impacted during COVID-19.
We do not give an overall assurance rating in a streamlined assurance review because of the limited scope. Instead, at the end of the review we give the client a streamlined tax assurance report that outlines:
- where we agree with the tax treatment adopted
- where we have got assurance for income tax
- specific feedback based on what we observed during the review, which may
- highlight areas for improvement
- give guidance on what you can do to mitigate risks in the future
- any areas we have reviewed that have not been resolved and the next steps we intend to take.
Where we have been able to confirm that correct tax has been paid on reviewed transactions and have confidence in the level of tax governance demonstrated, we are unlikely to revisit the issues covered in the review. That is unless something new comes to our attention.
Assurance and justified trust methodology
Like our other assurance programs under the tax avoidance taskforce, such as the Top 500 tax performance program, the Next 5,000 program uses the justified trust methodology to assure that the group is paying the right amount of tax.
Under the justified trust methodology, we focus on 4 key areas:
- understanding a taxpayer's tax governance framework
- identifying tax risks flagged to the market
- understanding significant and new transactions
- understanding why the accounting and tax results vary.
Based on the population demographics and risk landscape, there are some key differences in the way we tailor the justified trust methodology for the Next 5,000 groups in our streamlined assurance reviews.
Assurance
Under our approach, we review the tax issues arising from significant activities, events and transactions. We only seek assurance over the tax issues that were reviewed. This happens when we are satisfied that the relevant amounts have been correctly reported for these tax issues based on the client’s explanation and the supporting evidence.
Tax governance
We limit the scope of our governance review to the existence and design effectiveness of a group's tax governance framework with a focus of the first 3 of the 7 principles of effective governance. Given the limited scope of this aspect of the review, we do not give governance ratings.
Good tax governance is essential
Effective tax governance means having clear processes and procedures to support decision making and ensure you meet your tax and super obligations.
Working with groups
In reviews of Next 5,000 private groups, we work with groups to ensure they understand their lodgment and payment obligations. This will continue to be a focus in 2022–23.
We encourage private groups to:
When assessing the design effectiveness of a group’s tax governance, we:
- look for documented policies and procedures
- focus on the effectiveness of policies and procedures.
While we don't give governance ratings, we do:
- give opinions on the effectiveness of your policies and procedures
- suggest ways tax governance can be improved.
Governance principles
The effective tax governance principles we look closely at in our review of Next 5,000 private groups include:
Clear roles and responsibilities
This principle relates to roles and responsibilities in the client's group and shared with advisors.
Comparatively, roles and responsibilities in the client's group are well documented.
However, where responsibility for tax compliance is shared with advisers, we have observed in several cases that an annual engagement letter clearly setting out the scope of work is not in place.
We encourage all tax agents to have an annual engagement letter in place clearly articulating the scope of work and accountabilities.
Recognise tax risks
This principle relates to the tax return preparation and review process as well as identification of material transactions.
We have identified several cases where there:
- is no documentation
- are errors in the tax return, including material transactions being omitted from the return or incorrectly reported
- are failures to meet lodgment and payment obligations.
Some of these cases have led to private groups making a voluntary disclosure to us and, in some cases, paying failure to lodge penalty and interest charges.
Seek advice
This principle relates to circumstances where the client would seek advice from trusted advisers or us.
Like accountable management and oversight, we have observed in several cases that engagement letters are not in place.
Tax risks flagged to market and significant or new transactions
Under the key areas of risks flagged to market and significant and new transactions, we seek to understand the group’s current business activities, particularly significant or new transactions and the associated tax result outcomes. These include new or significant transactions, ordinary business transactions and specific industry issues.
Alignment of tax to accounting
We look at the difference between business performance and tax performance so we can identify errors and see gaps in the group's governance process.
We have reviewed $1.02 billion worth of tax reconciliation items and $557 million of additional balance sheet items, franking account balances, franked dividends paid and net foreign income that were correctly reported.
We continue to identify errors in instances where clients have no or insufficient governance frameworks in place. Most errors relate to:
- miscalculations
- incorrect reporting or data entry
- incorrect information provided to tax agents for the preparation of the tax return.
Examples include:
- an intra-group loan being recorded for a different amount in the financial accounts of each entity
- calculation errors in the tax working papers for CGT events
- incorrect calculation of the adjustment for entertainment expenses
- incorrect calculation of income from taxation of financial arrangements
- miscalculation of capital works.
These examples illustrate that book-to-tax errors are commonly traced to tax governance failures, particularly incorrect and incomplete reporting.
From the groups we have reviewed, while we identified errors that we could explain we saw a very small number of unexplained variances. In most instances, clients are advised to self-correct and implement our recommendations to improve aspects of their tax governance.
What we have done so far
As we review the group’s activities and transactions, we seek evidence to prove that the risks communicated to the market are not present. We focus on tax risks flagged to market as published in Practical Compliance Guides and Tax Alerts.
If a risk is identified, we seek to:
- understand the transaction
- understand the tax treatment
- assure the correct reporting of the transaction and the correct amount of tax is paid.
Where a tax risk flagged to market is relevant to a Next 5000 group, we recommend that the taxpayer and their adviser review the relevant arrangements or transactions and, if required, seek further advice or support from us.
In addition to formal public advice and guidance, over the years we have had ongoing conversations with the market about these common issues affecting private groups through:
Issues we have highlighted in the past include:
- wealth extraction
- domestic structuring
- access to concessions
- related-party international dealings.
We have identified these issues in the streamlined assurance reviews completed so far. We have also seen that the most common issues are:
- loans or payments to shareholders, directors and associates
- tax deductions and tax losses
- trust distributions
- tax treatment of property and business disposals.
GST integration
In addition to reviewing income tax, we have conducted 114 streamlined assurance reviews that also include a GST focus. Although we do not seek to obtain assurance on GST, these reviews allow us to:
- gain an understanding of the Next 5,000 population from a GST perspective
- understand the GST consequences of the significant transactions, events and activities that case teams are seeking to assure from an income tax perspective
- identify any common or emerging GST issues and risks
- work with our clients to correct errors identified as part of the review and give client education.
From the GST integrated streamline assurance reviews undertaken to date, we have observed:
- in most instances, clients are correctly reporting GST on significant income tax transactions, events and activities that are being reviewed for income tax
- where we see significant omissions or errors at business activity statement (BAS) disclosure labels, the errors and omissions typically relate to
- export sales
- input taxed supplies
- related party recharges
- GST-free items more broadly
- there is a strong correlation between the BAS disclosure errors that we see and a lack of or insufficient governance frameworks
- some discrepancies in tax return to BAS reconciliations – while we do not review GST governance as part of these reviews, this finding does identify governance issues resulting in incorrectly reported disclosures in the business activity statements and sometimes identified an error in the GST reported
- in several reviews of retail business activities in private groups, increasing adjustments were not made on face-value vouchers where these were unredeemed or expired
- incorrect classification of GST on food items resulting in voluntary disclosures
- incorrect reporting of GST on related party transactions and charges such as management fees resulting in voluntary disclosures
- incorrect calculation of reduced input tax credit entitlements that arose from
- acquisitions from group restructures
- the recovery of GST incurred on expenditure from the acquisition or disposal of investments, and merger and acquisition activity.
We have been focussed on GST consequences of transactions that give rise to potential material income tax issues. We have now expanded the scope of our GST integrated engagements to look at a broader range of potential GST issues arising from significant activities, events or transactions. These GST integrated engagements are in progress and will be included in the next report.
Resolving issues with Next 5,000 groups
We are always looking for better ways to resolve issues for clients and find an easier, faster route to the same outcomes. We have adopted some new approaches to positively influence behaviours and mitigate risks to sustainably reduce the high wealth tax gap.
When we identify issues, we focus on improving the client experience by resolving issues early and by working collaboratively with the client where possible, rather than resorting to a traditional audit.
During a streamlined assurance review, there may be areas where we need to take further action because we are unable to obtain assurance. In these cases, we may:
- recommend corrective actions
- allow the client to self-review or self-mitigate the risk
- extend the review to allow resolution in a single interaction.
The action is determined by:
- our level of concern with the tax risks present
- the client’s level of engagement, tax posture and tax governance.
We openly discuss any concerns with the client as they arise rather than at the end of the review. This means there are no surprises at the conclusion of the review. This new approach helps us give:
- more timely outcomes for clients
- outcomes that are better tailored to their risks.
So far, most of these cases could be resolved with self-mitigation by the client rather than traditional audit or review. Of the cases with issues, around:
- 52% resulted in us asking the client to review the issue and, in some cases, we followed up to confirm that the appropriate action had been taken
- 19% involved recommendations for client action on tax governance that caused or were likely to cause identified errors
- 7% recommended that clients take self-mitigation about a transaction or arrangement that is likely to have significant tax impact on future income years
- 20% of tax issues were considered complex such as transfer pricing issues, or due to behaviour were escalated to comprehensive risk review
- 2% issues of tax issues escalated were considered high risk and escalated to audit.
Most issues that need to be resolved are a result of errors that are:
- easy to correct
- easy to avoid in the future with improved governance
- not because of tax planning or avoidance.
Some of the errors that have been able to be self-corrected by clients include:
- failure to make valid family trust elections
- incorrectly disclosing interest in all the affected entities to related party transactions
- FBT registration for motor vehicle use
- clerical errors affecting general tax deductions, carried forward losses balance or the tax fixed asset register.
Some clients have not taken adequate steps to satisfy Division 7A, such as written loan agreements or minimum yearly repayments and a lack of appropriate record keeping. This included loans made through interposed entities. We recommend that affected clients:
- review their group’s Division 7A compliance
- create a Division 7A checklist to ensure accurate and consistent reporting of these loans in ledger accounts, financial statements and tax returns.
The main issues that have been escalated to audit include:
- inappropriate revenue versus capital characterisation relating to the sale of property to access the 50% CGT discount
- sale of property to related parties for less than market value
- capital gains being reported that are less than they should be
- incorrect deductions claimed relating to bad debts
- trust distributions made without supporting trustee resolutions and that do not comply with the relevant trust deed
- arrangements that attempt to reduce or avoid tax and that section 100A of the Income Tax Assessment Act 1936 may apply to because a beneficiary of a trust is made presently entitled to the income of a trust but another person or entity enjoys the economic benefit of that income
- tax losses deducted in the current year that exceed the previous year’s carried forward tax losses and cannot be reconciled with relevant labels on the tax return.
Effects of COVID-19
Our Next 5,000 program launched in late 2019 just before COVID-19 affected Australian businesses.
To support Australian businesses and manage the effects of COVID-19, we:
- paused reviews for those most affected
- put new engagements on hold
- provided flexible timeframes
- continued to profile Next 5,000 groups throughout 2020, so we could be ready to restart reviews as circumstances allowed.
We restarted active casework in October 2020. Due to the variety of different effects COVID-19 had on clients and their advisors, we contacted them and discussed how we could work together to progress these reviews.
In some cases, this meant earlier than planned requests for information but with longer than usual timeframes for the client to respond. In other cases, advisors could not access information from their offices due to lockdowns and we delayed planned case commencements.
During the 2021–22 financial year we continued to work collaboratively with clients and their advisors impacted by COVID-19, such as illness and availability. This included providing additional time to provide requested information and also delaying commencement dates to assist in managing the capacity and workload of client's tax agents where they were experiencing resourcing impacts resulting from COVID-19.
What's next
This year we based our reviews upon the key insights from the program to date. In 2022–23 we will:
- continue to undertake streamlined assurance reviews on the larger and / or more complex Next 5,000 groups on key priority focus areas set out in Focus going forward
- expand our one-to-one engagements to include comprehensive risk reviews that target the key priority focus areas, together with any new emerging issues impacting private groups. Comprehensive risk review for selected Next 5,000 private groups will commence in early 2023
- consider other strategies such as letter campaigns and targeted advice and guidance.
Since the start of the program, we have:
- been meeting with advisors to provide them with an overview of the program and its processes and procedures
- sought feedback on their experiences in the engagements we have had with them and their clients.
In general, your feedback has been positive, especially around our notification process and how we have engaged with groups early to scope issues before sending any formal requests for information.
How we can better tailor our approach to the client’s situation is important. As the program matures, you can expect more consistent and streamlined engagements with us.
Our observations and insights from the Next 5,000 tax performance program.