Show download pdf controls
  • Findings from the Next 5,000 program

    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. This report gives our observations and insights into the program. The Tax Avoidance Taskforce funds this program to ensure Australia's wealthiest private groups meet their tax obligations.

    On this page

    Purpose of report

    This report on the Next 5,000 program gives our observations and insights into what we have seen through the program so far. The findings and data in this report are as of 5 November 2021. As our coverage of Next 5,000 groups continues to expand, we will continue to share further observations and insights.

    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.

    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

    To date, we have reviewed more than 1,800 transactions, activities and events of Next 5,000 private groups that were worth nearly $7 billion. We have achieved this through finalising over 250 streamlined assurance reviews.

    Our key observations of Next 5,000 private groups reviewed to date are that:

    • a high percentage 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 risk 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.

    Through finalised streamlined assurance reviews, we have confirmed that private groups have correctly reported amounts relating to significant activities, events and transactions totalling nearly $5.8 billion. This amount is made up of:

    • $2.75 billion in verified income
    • $1.77 billion in verified deductions
    • $1.26 billion in other verified items, including
      • $619 million in loans to shareholders and their associates
      • $122 million in additional balance sheet items
      • $373 million in tax reconciliation items
      • $88 million in tax losses, both deducted and carried forward
      • $48 million in capital losses, both applied and carried forward
      • $10 million in tax offsets, rebates and credits.
       

    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 a carry forward tax losses and capital losses from prior years
    • non-arms' 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 - incorrect characterisation of property sales on capital account when they should be treated as sales arising from a property development business
    • significant variances, discrepancies and errors in reporting of income and expenses revealed 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.

    Since the program began, we have received over 30 voluntary disclosures from Next 5,000 private groups that total over $16.7 million in tax, penalties and interest from streamlined assurance reviews.

    Next 5,000 groups

    In this section

    Overall demographics

    There are about 5,000 private groups in Australia that are part of this program as they have net wealth of over $50 million. These groups hold around $825 billion in wealth and contribute more than $9.8 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 up to 16 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. Approximately 6.3% of Next 5,000 groups have a private ancillary fund.

    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:

    • 16 entities made up of 7 companies and 4 trusts
    • a group head aged 65 years old
    • 39 employees
    • total income of $9.4 million
    • net wealth of $80.3 million
    • income tax of $700,500
    • net GST of $138,600
    • PAYGW of $353,300.


    Groups by location and entity type

    The next 5,000 population is predominately located on the east coast of Australia (over 80%).

    There are over 107,000 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, and contain any combination of company, partnership and trust structures operating both inside and outside of consolidated groups.

     Graph of next 5,000 population by state. New South Wales 2,241, Victoria 1,806, Queensland 815, Western Australia 256, South Australia 353, Australian Capital Territory 112, Tasmania 61, Northern Territory 40


    Graph of number of entities involved Companies 49,877, Trusts 36,498, Individuals 10,877, Partnerships 5,116 Superannuation funds 4,924  

    Groups by industry

    A great variety of different industries are represented in the Next 5,000 population, with over half involved in at least one of the following industries:

    • financial and insurance services
    • rental, hiring and real estate services
    • professional, scientific and technical services
    • construction.

    Graph of industry groups Financial and insurance services 27.8% Rental, hiring and real estate services 13.9% Construction 11% Professional, scientific and technical services 5.7% Agriculture, Forestry and Fishing 5.9% Wholesale Trade 6% Retail Trade 5.6% Manufacturing 5.3% Accommodation and Food services 3.4% Health Care and Social Assistance 2.5% Transport, Postal and Warehousing 1.9% Administrative and Support Services 1.1%  Remaining industries 9.3%

    How much tax they pay

    The Next 5,000 population:

    • own over $825 billion in net assets
    • earn $237 billion in total income
    • pay over $9.8 billion in income tax
    • pay over $3.7 billion in net GST
    • employ 690,235 people, paying $7.1 billion in PAYG withholding.

    See also

    How we engage with Next 5,000 groups

    We engage with 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 engage with them through:

    • specific risk reviews
    • one-to-many communication
    • targeted guidance on significant risks.

    Streamlined assurance reviews

    We aim to complete 800 to 1,000 streamlined assurance reviews each year.

    The scope of a streamlined assurance review is generally limited to:

    • reviewing the tax returns lodged for the last two years
    • the entities in the group with significant activities, events and transactions.

    Generally, reviews are completed over a four-month period from when we receive the responses to our first request for information.

    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 unless something new comes to our attention.

    Assurance and justified trust

    Like our other assurance programs under the tax avoidance taskforce, such as 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 four 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 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 groups tax governance framework with a focus of the first three of the seven 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 your group meets its tax and super obligations.

    In this section

    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 2021–22.

    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.

    The effective tax governance principles we look closely at in our review of Next 5,000 private groups are to:

    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 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.

    Seeking 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 and 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 results outcomes. This includes new or significant transactions, ordinary business transactions and specific industry issues.

    In this section

    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 $373 million worth of tax reconciliation items and $741 million of balance sheet items that were correctly reported.

    Where we have identified errors, we generally seem to find them in clients with no governance framework in place. Most errors we've seen relate to:

    • miscalculations
    • incorrect reporting or data entry.

    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.

    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 on how to improve aspects of their tax governance.

    What we have done so far

    We have seen in the private groups we have reviewed that approximately:

    • 35% had significant acquisitions, disposals or business restructures in last two years
    • 80% had other significant activities or issues that required review.

    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.

    The Next 5,000 program builds on our previous work with high wealth individuals by introducing an assurance approach based on our justified trust methodology. From our previous experience with this population, we have identified broad risk themes and behaviours that often give rise to tax issues for private groups.

    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:

    • What attracts our attention
    • engagement with tax agent firms and industry groups
    • our other communication channels.

    Issues we have highlighted in the past include:

    • wealth extraction
    • domestic structuring
    • access to concessions
    • related party international dealings.

    We have identified these 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 disposals.

    We anticipate that these issues will continue to be a focus in during 2021–22 through future streamlined assurance reviews and other engagement with clients.

    GST integration

    In addition to reviewing income tax, we have conducted 39 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 that:

    • in most instances, clients are correctly treating GST on significant income tax transactions, events and activities that are being reviewed for income tax
    • tax return to business activity statement reconciliations for a number of clients have not reconciled – 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
    • 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 calculation of reduced input tax credit entitlements 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 focused on GST consequences of transactions that give rise to potential material income tax issues; however, we are now looking to expand the scope of our GST integrated engagements to look at a broader range of potential GST issues arising from significant activities, events or transactions.

    Resolving issues with Next 5,000 groups

    We are always looking for better ways to resolve issues for clients and finding 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, where possible, by working collaboratively with the client 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:

    • 50% 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
    • 25% involved recommendations for client action on tax governance that caused or were likely to cause identified errors
    • 5% recommended that clients take self-mitigation about a transaction or arrangement that is likely to have significant tax impact on future income years
    • 20% 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 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. 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 what they should be
    • trust distributions made without supporting trustee resolutions and that do not comply with the relevant trust deed
    • non-arms' length arrangements involving family members or related parties that are designed to reduce or avoid tax that would otherwise be payable.
    • 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.

    What's next

    This year we:

    • have started broader engagement on a one-to-one basis through specific reviews to address potential one-off tax issues
    • are considering other strategies such letter campaigns and targeted advice and guidance
    • are having preliminary discussions with clients in streamlined assurance reviews about their eligibility to claim under the new Loss Carry Back and Temporary Full Expensing measures and will review future high-risk claims under these measures.

    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, feedback has been positive, especially around how we have engaged with them early to scope issues before any formal requests for information are sent. How we can tailor our approach to the client’s situation was important and as the program matures, more consistent and streamlined engagements are expected. In the future, we will provide best practice examples of good tax governance for clients to compare against their current practices.

    Effects of COVID-19

    Our 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.

    Last modified: 07 Dec 2021QC 67382