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  • Findings report Top 500 tax performance program

    The objective of our Top 500 program is to provide the government and the community with confidence that the wealthiest Australian private groups are correctly meeting their income tax, and more recently, GST obligations.

    To achieve the objective of the program we seek open and transparent one-to-one engagements with Australia’s wealthiest private groups. The aim is to shift our traditional review and audit-based approach of identifying and addressing risks, to an approach under which we assure whether the correct amount of tax has been paid. Increasingly our aim is to ensure future compliance by encouraging Top 500 groups to improve the effectiveness of their tax governance frameworks, processes and procedures.

    This report opens with an explanation of the Top 500 program and provides a profile of the median Top 500 group and the characteristics that define the population. We then outline how the Justified Trust methodology is applied in our tax assurance engagements and report our findings and observations from across those 403 groups within the Top 500 population who have been engaged to date.

    We also provide high-level observations about common tax technical issues whose treatments are frequently identified as requiring assurance; the concept of partial tax assurance as it applies to a Top 500 group; and note the risks we have identified as part of the tax assurance process.

    On this page:

    The Top 500 program

    The Top 500 program is an expansion of our Top 320 program and is a key program of work under the Tax Avoidance Taskforce. The Top 500 program seeks to provide the government and community with confidence that Australia’s largest private groups and high wealth individuals are paying the correct amount of tax.

    Our ability to provide the community with confidence that a Top 500 group has paid the correct amount of tax, and will continue to pay the correct amount of tax, is dependent upon the group’s adherence to four key areas that underpin the Justified Trust methodology, being:

    • effective tax governance
    • risks flagged to market are not present 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 can be explained in context.

    See Justified Trust for information on each of the four key areas.

    Equally important is the Top 500 group’s willingness to engage openly with us and to invest in the tax governance necessary for longer term compliance with the group's tax and superannuation obligations. We seek to partner with Top 500 groups who have achieved Justified Trust and who want to willingly engage with us.

    The inherent differences in reporting requirements, ownership structures and the operating models used in large private groups means there are some key differences in the way the Justified Trust methodology is applied in the Top 500 program. That is, although Private Wealth’s Top 500 program applies the same four areas of Justified Trust as are found in the Public Groups and Internationals client ownership programs (that is, the Top 100 and Top 1,000), we have identified that large private groups often have lower levels of corporate governance, and in turn investment in tax governance starts from a lower base. In addition, large private groups are subject to less stringent (and hence less transparent) regulatory reporting requirements which is frequently complicated by opaque group structures and intra-group and related party dealings that occur outside of tax consolidation.

    Although in some circumstances a Top 500 group may not be able to achieve Justified Trust, because we are not comfortable that the group as a whole has satisfied all of the four areas, we can tax assure at an entity level (that is, a company or a trust within a private group) where we have satisfactory evidence that the entity has reported correctly. At a group level this is referred to as ‘partial tax assurance’.

    For completeness, it should be recognised that achieving Justified Trust or a level of tax assurance for groups in the Top 500 population requires us not only to assure that the tax issues arising from the way wealth is created are being treated correctly, but also to assure that the tax issues arising from the way that wealth is extracted are also treated correctly.

    Our engagement approach is tailored and matched to:

    • the level of complexity of the Top 500 group’s business and tax affairs
    • the degree to which they are open and transparent with us, and
    • their commitment to demonstrating a willingness to participate in the tax and superannuation systems over the long term.

    The approach we take evolves as a client’s engagement relationship with us matures to a partnering position.

    Our engagement approach

    Our engagement approach continuum from influencing and encouraging to partnering. Influencing - taking firm action to improve the Top 500 group's compliance; Encouraging - encouraging Top 500 groups to address areas for improvement; Partnering - partnering with Top 500 groups to assist them to maintain good compliance (monitoring and maintenance approach).

    We will support those Top 500 groups who achieve Justified Trust with contemporary, client-oriented services. We also aim to deliver an integrated whole-of -ATO approach that covers services across a range of federally administered taxes. Several Top 500 groups have reciprocated by supporting fairness in the tax and superannuation systems through the provision of intelligence and commercial insights that have informed our industry-based guides to obtaining tax assurance in sectors of the economy where Top 500 groups commonly conduct business.

    Finally, it should be noted that the change in the ATO’s priorities as part of government’s response to the COVID-19 situation has slowed the number of additional engagements with Top 500 groups that we initiated in 2020. COVID-19 has also resulted in some current engagements being put on hold. However, work is now back underway with both existing and new assurance engagements having recommenced.

    The Top 500 population

    Broadly, the Top 500 population are Australia’s wealthiest family or closely controlled groups, including:

    • private groups with
      • > $350 million turnover, regardless of net asset value
      • > $500 million net assets, regardless of turnover
      • > $100 million turnover and >$250 million net assets
      • market leaders or groups of specific interest
       
    • private economic groups with
      • a total business income of >$250 million
      • that are included in the large company tax gap.
       

    'Typical’ Top 500 group

    The 'typical' characteristics as based on a median Top 500 group are as follows -

    Median Top 500 group

    Image showing median top 500 group – group head ages 71, 32 entities in a group (19 companies and 7 trusts), 365 employees, $295m total income and $271.8m net wealth.

    Groups by location and entity types

    The Top 500 population is predominantly located on the east coast of Australia (over 80%). A number of the wealthiest Top 500 groups by net assets are located in Western Australia.

    Top 500 by location of the controlling family or individual

    Image showing that out of a total of 403 groups, 159 have their head location in NSW, 116 in VIC, 63 in Qld, 36 in WA, 17 in SA, and 12 in ACT, Tas and NT combined.

    There are over 16,000 entities associated with the Top 500 program. The group structures used by Top 500 groups are complex, large in terms of the number of entities involved, and contain any combination of company, partnership and trust structures, operating both inside and outside of tax consolidated groups.

    Top 500 by entity type

    Image showing the entity breakdown by type - company 9,498, trust 4,973, partnership 684, individual 573 and super fund 279.

    Industries

    While 140 different industries are represented in the Top 500 population, over half of the population is involved in at least one of the following industries:

    • construction
    • financial and insurance
    • manufacturing
    • retail or wholesale trade
    • rental, hiring and real estate services industries.

    A portion of the Top 500 population also conduct their active businesses both onshore and offshore, often in direct competition with publicly listed companies and multi-national enterprises. In addition, numerous Top 500 groups derive some or all their income from extensive portfolios of passive assets (that encompass commercial property holdings, large shareholdings in listed or unlisted companies, venture capital activities including equity and debt financing of other Top 500 groups) and through licencing and royalty streams.

    Top 500 by industry

    Chart showing industries of the 403 groups – financial and insurance services 80, construction 71, retail trade 57, wholesale trade 41, rental, hiring and real estate services 35, manufacturing 32, professional, scientific and technical services 25, remaining industries 24, administrative and support services 9, accommodation and food services 8, transport, postal and warehousing 7, arts and recreation services 4, health care and social assistance 3.

    Tax and income characteristics

    The Top 500 population:

    • owns over $207 billion in net assets
    • earns $195 billion in total income
    • pays over $4.4 billion in income tax
    • pays over $2.3 billion in net GST.

    Image showing the population has over $207 billion in net assets, $195 billion in total income. The population pays over $4.4 billion in income tax and $2.3 billion in net GST.

    Tax payable

    To assess the impact of our direct, ongoing engagement approach we compared:

    • the change in tax payable from the 2015 to 2018 income years, of the previous Top 320 population
    • the change in tax payable by the additions to the population (now the Top 500) who had been exposed to little or no direct engagement over the same period.

    The increase in tax payable by the Top 320 population from the 2015 (the year before the Top 320 commenced) to 2018 years was 40% ($3.2 billion to $4.5 billion) versus 14% ($0.445 billion versus $0.508 billion) among the expected additions to the Top 500 program over the same period, and versus GDP growth of 9.7%.

    This percentage increase in tax payable by the original Top 320 versus the additions (our control group) is indicative that ongoing one-to-one engagements with the Top 320 population and early engagement in seeking confirmation that they are applying the correct tax treatments prior to lodgment, is having a positive impact on the amount of tax they report and pay.

    Our approach to establishing causation also considered other factors on tax payable, such as the:

    • impact of iron ore prices (income from which was derived by some large Top 320 clients but uncorrelated with the steady growth of tax payable by the Top 320 population over the period), and
    • relationship with other industry sectors where both the original Top 320 and additions to the population frequently conduct business (that is, property and construction).

    Top 500 tax payable trend

    Chart showing the trend of more net tax collected with direct engagement – top 320 (direct engagement) 2014 – $3.1b, 2015 - $3.2b, 2016 - $3.4b, 2017 $4b, 2018 $4.5b, compared with additional 180 (little or no direct engagement) 2014 – $0.44b, 2015 - $0.44b, 2016 - $0.46b, 2017 $0.48b, 2018 $0.51b.

    Effect of COVID-19

    COVID-19 has had a detrimental effect on many businesses run by the Top 500 population, as restrictions were imposed on domestic and international movement by state and federal governments. Businesses were forced to close for extended periods in some states with restricted trading hours in others.

    A COVID-19 check-in was conducted in September 2020, to gauge the impact of COVID-19 on Top 500 clients and assist them with stimulus measures, including the JobKeeper Payment and Cashflow boost schemes.

    The results informed our decision to temporarily modify our engagements. Using an industry and regional based approach, we helped Top 500 groups most impacted by COVID-19, giving them the necessary time to adjust to the altered economic conditions.

    We will continue to monitor the effects and ramifications of COVID-19 impacts on the Top 500 population and individual groups, so we can adjust our programs of work if needed. Flexibility on our part helps us to maintain and build good working relationships with the largest private groups.

    Justified Trust

    Justified Trust is a concept from the Organisation for Economic Cooperation and Development (OECD). For Top 500 clients, Justified Trust needs to be determined and achieved at the group (rather than entity) level.

    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.

    When engaging with a Top 500 client, we review the following four key focus areas:

    Effective tax governance

    Tax governance means having clear controls and processes within a corporate governance framework to support decision-making and ensure that the group is meeting its taxation and superannuation obligations. Tax governance is effective when the Top 500 group can demonstrate that the framework, processes and procedures that are in place will result in ongoing compliance with their lodgement, reporting and payment obligations. The tax governance area is particularly important because effective tax governance provides the foundations upon which a private group can demonstrate that they are achieving the other three key areas of Justified Trust.

    We have observed over the life of the program, that there has been a reluctance among many groups within the Top 500 population to meaningfully invest in tax governance, particularly over the numerous tax issues that arise in the process of wealth extraction. Whilst we have seen improvements in tax governance, often we find:

    • organisational knowledge around the Top 500 group’s tax affairs is concentrated in the hands of one or two individuals
    • policies and procedures are not documented
    • IT systems are not sufficiently reliable or 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.

    The absence of effective tax governance is the main reason why only 52 groups within the Top 500 population have reached Justified Trust with us.

    Generally, we advocate that adherence to good tax governance not only benefits a taxpayer’s relationship with the tax system but also contributes to strengthening an organisations overall corporate governance by improving accountability, transparency, and the reliability of controls.

    Activities are now under way to provide our Top 500 clients with meaningful suggestions about how they can demonstrate that they are making improvements to their:

    • tax governance framework
    • processes, and
    • procedures.

    Risks flagged to market are not present or appropriately mitigated

    Public Rulings, Taxpayer Alerts and Practical Compliance Guidelines are how we flag compliance risks to the market. We need to have comfort that these risks are not present within a Top 500 group, and to ensure that the likelihood of their arising in the future are appropriately mitigated.

    The process of identification of risks flagged to market under our Public rulings and Taxpayer alerts program that subsist within a group has generally occurred from our testing of the tax treatments applied to a Top 500 group’s ongoing and atypical transactions and captured as part of the Private Wealth business line’s broader risk narrative.

    There are examples of risks that have been flagged to market that subsist in the Top 500 population (for example, misuse of self-managed super funds and use of non-complying shareholder loans) that are captured under the broader ‘wealth extraction’ risk classification and which (sometimes in concert with other factors) have resulted in the Top 500 group not achieving Justified Trust. For more information, refer to ATO advice and guidance.

    Tax outcomes from both ongoing and atypical transactions are understood and agreed as correct

    We must have a high degree of confidence that the treatments that have been applied to the tax issues that arise from the ongoing income producing activities of a Top 500 group are correct. The correctness of the treatments applied to the tax issues arising from business as usual transactions is closely linked to the quality of an entity’s or Top 500 group’s tax governance. Similarly, we must have high levels of confidence that the treatments that have been applied to the tax issues that arise from any atypical transactions entered into by the group are also correct (for example, CGT consequences of asset disposals, restructures, acquisitions).

    With 140 different industries to cover, the economic activities, and hence the specific tax issues whose treatments require assurance across the Top 500 population, are wide ranging. At a high level, the five most common themes whose treatments have required assurance under the Top 500 program are as follows:

    • The general treatment of tax issues arising from ‘business as usual’ income generating activity. Such activity would include assuring that all business income is being captured and correctly treated as capital or revenue; or where relevant, as assessable versus non-assessable.
    • The general treatment of tax issues arising from ‘business as usual’ expenses. The assurance process would include assuring that immediate deductions are not being claimed for capital expenditure; that deductions for the decline in value of specified assets are calculated in accordance with the law; and that losses are being utilised correctly.
    • Assuring that the specific treatments applied to the capital gains tax issues arising from atypical transactions are correct. This assurance work would include examining the CGT ramifications of business restructures and asset sales.
    • Verifying that inter-entity transactions required to conduct business, including the making of payments by companies to shareholders and their associates, are being treated correctly. This assurance work would include reviewing the pricing of intra-group property leases and examining the methodologies used to internally finance the Top 500 group’s business operations.
    • Examining the treatment of trust distributions to ensure that wealth is not being extracted inappropriately or appointed in a manner that is contrived. Our assurance work regarding the use of trusts and self-managed super funds includes assuring whether the trustee’s actions in distributing income complies with the relevant trust deed, and/or result in the trustee meeting its obligations under the tax law.

    The process of assurance under the Top 500 program has illuminated the mistreatment of tax issues by some groups within the Top 500 population with the consequence (potentially in concert with shortcomings in the other three areas) that those groups have been unable to achieve Justified Trust with us.

    The tax issues where mistreatments have been identified include: the selective recharacterisation of assets and/or expenditure as revenue or capital; wealth extraction techniques that misuse trusts and self-managed super funds, or attempt to circumvent the shareholder payment or loans provisions in Division 7A; inappropriately accessing or applying concessions including research and development and capital allowances; and across a number of areas of international tax.

    Where we have been unable to resolve our differences of opinion regarding the treatment of a tax issue through collaboration, treatment of the issue has been escalated under our review and audit programs.

    For more detail, see Risks identified.

    Differences in accounting and tax results are complete and can be explained in context.

    To test whether an entity is reporting correctly, we must understand the adjustments on the Top 500 group’s tax reconciliation(s) and be satisfied that the material book-to-tax adjustments are complete and correct.

    The assurance exercise requires transparency for us to verify that the adjustments to the group’s accounting treatments appropriately reflect the correct tax principles. The process includes obtaining an understanding of the accounting treatments used by each relevant entity and conducting an in-depth reconciliation of the working papers supporting the tax return and the group’s accounting records (financials statements, trial balance, general ledger).

    Engagement teams are asked to report on anomalous book-to-tax differences in the group entities that are the subject of an assurance engagement. The completeness of the tax reconciliation is often determined by reference to the economic activities of the group during the year (that is, what adjustments are expected versus what adjustments have been made). Any differences between tax and accounting results must be reconciled and the reasoning for and the correctness of the treatments, must be narrated as part of the assurance process. Over the course of the Top 320/500 program problematic treatments of tax issues associated with the: misuse of concessions, recharacterisation of receipts and expenditure, and the omission of income, has occurred through the examination of Top 500 client’s tax reconciliations.

    Justified Trust ratings in the Top 500

    We classify Top 500 groups as those:

    • who have achieved Justified Trust based on satisfying the four key focus areas outlined above
    • who have shown a willingness to achieve Justified Trust and make significant progress towards achieving Justified Trust status (that is, Justified Trust is expected)
    • whose Justified Trust status has not yet been determined because we have not obtained sufficient evidence to progress towards Justified Trust (typically due to current gaps in the Top 500 group’s tax governance)
    • who are engaged but are uncertain about committing the Top 500 group to attain Justified Trust
    • who have stated that they are unwilling to work with us to obtain Justified Trust, or
    • who do not wish to willingly engage with the tax and superannuation systems.

    Justified Trust in the Top 500

    Chart showing 52 groups in justified trust, 121 engaged and progressing towards justified trust, 187 engaged but no evidence to support justified trust, 26 engaged but not yet committed to attaining justified trust, 6 unwilling to work towards justified trust, and 11 not engaged.

    While most groups within the Top 500 population have been reporting correctly, the majority that have been engaged still have some level of work to do in order to achieve Justified Trust with us.

    Top 500 groups who have achieved Justified Trust demonstrate that:

    • They have tax governance frameworks, policies and procedures that are documented, in place, and operate effectively.
    • Any tax risks flagged to the market in our rulings and alerts program have been shown not to subsist within the group or have been appropriately mitigated.
    • The tax treatments applied to the tax issues arising from business-as-usual (or ongoing) transactions are correct.
    • The tax treatments applied to the tax issues arising from non business-as-usual (or new or atypical) transactions are correct.
    • Differences between tax and accounting outcomes can be explained, are complete, and understood in context.

    Top 500 groups who have achieved Justified Trust are also cooperative and supportive of the program. They are transparent about their business and tax affairs and in collaboration with their advisors they engage with us early to obtain certainty about significant transactions, or issues that may affect their tax position.

    We acknowledge that achieving Justified Trust is not a simple process and requires a commitment to tangible investment, particularly in tax governance. We will continue to welcome engagements with Top 500 groups who commit to making incremental improvements with a view to achieving Justified Trust in the medium to long term.

    Monitoring and maintenance approach

    Reaching Justified Trust generates a tangible change in a Top 500 group’s experience. The resource investment for both the taxpayer and the ATO is scaled down as we move into what we now refer to as a ‘monitoring and maintenance’ period.

    While we have traditionally applied an informal mindset of ‘letting the group get back to business without the unnecessary disruption of our engagements’. Recently we have formalised an approach where Top 500 groups that have obtained Justified Trust benefit from a maximum of three years of ‘monitoring and maintenance’.

    During the three-year monitoring and maintenance period that follows the Top 500 group having achieved Justified Trust, we will only seek to:

    • verify significant new transactions that may have occurred, and
    • discuss any other material changes to the group and/or verify any changes in the approach they take to their tax affairs.

    At the expiration of the three years of monitoring and maintenance, we will undertake a more comprehensive analysis of the group. This will refresh our understanding of, and confidence in, the Top 500 group’s tax outcomes. This ‘refresh’ (in the fourth year) will ensure that we continue to have a robust and defensible basis to support our decision to tax assure the whole Top 500 group and confirm that we continue to have Justified Trust.

    In certain circumstances, it may be warranted to conduct a refresh earlier than the fourth year (that is, where there has been a fundamental change in business or where we have reason to consider that our Justified Trust should no longer be maintained).

    Tax assurance

    Tax assurance measures the amount of tax reported voluntarily that we determine to be correct and is used as a measure to engender confidence in Australia’s tax and superannuation systems.

    Where Justified Trust has been attained at the whole of group level, it would follow that all group entities would be tax assured in full. The process of tax assurance is then much less intensive once a Top 500 group has achieved Justified Trust (that is, during the monitoring and maintenance years).

    A Top 500 group can also receive partial tax assurance. Partial tax assurance can be provided where it has been determined that specific (or all) entities in the group are reporting correctly and (if relevant) have paid the correct amount of tax in an income year. This may be the case even though the Top 500 group as a whole has not achieved Justified Trust (for example, because the group does not have adequate governance in place to give us confidence that they will continue to report correctly).

    For tax assurance to be provided at the entity level, evidence is required that the entity has applied the correct treatments to the tax issues arising from its operational and transactional activities. Frequently, Top 500 groups have a large number of entities with tax lodgment obligations over which the process of tax assurance must be undertaken. The process of assurance can be further complicated by inter-group transactions that occur outside of tax consolidation. If these transactions are incorrectly treated or priced, they have the potential to lead to inaccurate reporting by one or more other entities within the Top 500 group.

    We do not provide an entity within a Top 500 group with assurance that it has paid the correct amount of tax, or is reporting correctly, if any of the following occur:

    • we have identified tax issues that have been treated incorrectly and which require an escalation to traditional review or audit
    • the entity has poor tax governance
    • there is uncertainty around the consequential effects for other group entities that arise from a related group entity having mistreated a tax issue
    • the group is disengaged.

    As our engagements mature with the Top 500 population, and more groups progress through to a partnering relationship with us, the number of entities and amount of tax we can assure will increase.

    Top 500 – Tax assurance

    The following table shows tax assured by date from the beginning of the program to 28 February 2021.

    Top 500 – Tax assurance by program year ($ million)

    Income year

    2016–17

    2017–18

    2018–19

    2019–20

    2020–21
    YTD

    Total tax assured to date

    2012 & 2013

    $615m

    $31m

    $2m

    n/a

    n/a

    $648m

    2014

    $633m

    $114m

    $129m

    $10m

    n/a

    $886m

    2015

    $920m

    $525m

    $135m

    $27m

    $8m

    $1,615m

    2016

    $274m

    $689m

    $550m

    $76m

    $76m

    $1,665m

    2017

    n/a

    $212m

    $1,151m

    $237m

    $154m

    $1,754m

    2018

    n/a

    n/a

    $140m

    $883m

    $176m

    $1,199m

    2019

    n/a

    n/a

    n/a

    $1m

    $180m

    $181m

    Total

    $2,442m

    $1,571m

    $2,107m

    $1,234m

    $594m

    $7,948m

    Risks identified

    'Risk' in an assurance context is the risk that a tax issue that arises from a Top 500 group’s income producing activities has not been treated correctly. The process of assurance under the Top 500 program should illuminate any such mistreatments that may have occurred during the process of reporting by a Top 500 group. Effectively, although we do not set out with the objective of discovering risk under the Top 500 program, the discovery of risk is a frequently occurring ‘by-product’ of our assurance process.

    Broadly, the assurance process conducted under the Top 500 program has shown that risk themes arising in the Top 500 population are largely the same as those identified across other Private Wealth populations. For example, the general risk theme of ‘wealth extraction’ that encapsulates the misuse of private companies, trusts and self-managed super funds, is present in the Top 500 population. Similarly, some Top 500 groups have sought to:

    • inappropriately access concessions such as research and development
    • claimed deductions for capital expenditure to which they are not entitled, or
    • entered into schemes to claim exemptions from capital gains tax that are intended for small business.

    Common tax risks

    The following list provides some further detail about the common tax risks that have been identified over the course of our Justified Trust and tax assurance engagements with the Top 500 population.

    Revenue versus capital

    Top 500 groups have a significant presence in the property and construction industry, where revenue versus capital re-characterisation arrangements are most common.

    Inappropriate characterisation of a property sale by a developer as an affair of capital can occur when special purpose trusts have been utilised to report business profits from the sale of a discreet property (or properties) on capital account. The purpose of the developer in treating the property sale on capital account is to access the 50% CGT discount.

    Wealth extraction – Division 7A and trusts

    Top 500 private groups are often closely held structures with multiple private companies, trusts and other entities. Extracting profits from the business structures, through transactions involving family members or related parties, can commonly occur.

    Top 500 shareholders and their associates have been found to access company funds or assets for private use and are not complying with the requirements of Division 7A of the Income Tax Assessment Act 1936. This includes transactions through interposed entities such as associated trusts and unitisation arrangements.

    Wealth extraction – Self-managed super funds

    Self-managed super funds (SMSF) are common in private group structures although they are of less significance as a vehicle to capture wealth among groups within the Top 500 population. However, SMSFs do attract various tax concessions during their life cycles and hence are relevant to the tax planning and asset protection considerations of some Top 500 groups.

    In the Top 500 program we have seen non-arm’s length transfers of high value assets into SMSFs. There are also instances where ordinary business income has been diverted into an SMSF using complex structures. The drivers behind the behaviours are to take advantage of concessions whilst navigating potential breaches of the non-concessional cap and other regulations.

    Research and development

    The research and development (R&D) tax incentive programme is administered by AusIndustry and us. As part of our co-administration, we have developed a joint risk strategy to cover particular areas of concern that have also been identified as issues in the Top 500 population. The areas of concern include:

    • claims that attribute business-as-usual expenses to eligible R&D activities, and
    • claiming R&D incentives where no evidence of experimentation having occurred, can be provided.

    In the Top 500 population we have focussed on incorrect R&D claims in the building and construction and agricultural industries. The joint risk strategy has also highlighted some R&D consultants as potential contributors to the risk.

    Misuse of tax concessions

    The small business capital gains tax concessions assist owners of small businesses by providing:

    • relief from CGT on the sale of assets related to their business
    • the opportunity to contribute to their retirement savings when the time comes to realise the value in their business.

    We have seen instances of Top 500 groups entering into tax planning arrangements that manipulate the turnover and control tests to take advantage of small business concessions. Top 500 groups have also been identified as having misused the effective life, project pool and ‘holder’ criteria in the capital allowance provisions to bring forward the deductibility of capital expenditure.

    Related party international dealings

    Australia's transfer pricing rules seek to manage the underpayment of tax in Australia by requiring businesses to price related party international dealings according to arm's length principles. Although the dominance of domestically focussed businesses in the Top 500 population reduces the instances of transfer pricing issues, there are some Top 500 groups who have significant overseas operations that give rise to cross-border dealings whose pricing requires assurance.

    Similarly, intellectual property, like other intangible assets is highly mobile. Tax benefits may be inappropriately obtained via the dynamic migration or artificial allocation of intangible assets, and rights in those assets, to offshore related parties in low taxing jurisdictions.

    We have seen arrangements involving inadequate compensation being attributed to Australia, or non-arm's length migration of intellectual property rights by Top 500 groups to offshore tax havens.

    In addition, other international dealings behaviours we have identified in the Top 500 program include:

    • the mistreatment of foreign sourced dividends as non-assessable non-exempt (NANE) income, and
    • the transfer mispricing of loans provided by offshore related parties.

    Trust leads to a better experience

    The Top 500 program has succeeded in changing the narrative around the relationship between the ATO and Top 500 groups that demonstrate that they are complying, and will continue to comply, with their tax and superannuation obligations. Where we have established trust we now engage with an informed, service-based mindset, that is designed to foster one-to-one working relationships that are characterised by openness and transparency. Relationships of this type also allow us to see the risk landscape in real time; and to improve the commercial and technical acumen of our people, which in turn makes for a positive client experience in engaging with us.

    The Top 500 program has helped us determine which of Australia’s largest private groups want to comply with their tax and superannuation obligations. It has also helped us identify a smaller number of Top 500 groups that do not wish to contribute to the health of the tax and superannuation systems. In those cases, we focus our resources on ensuring the right amount of tax is paid through traditional review and audit activity, the use of formal information gathering powers, and where necessary through debt recovery action.

    We are also on a journey with a larger group of Top 500 clients with a view to encouraging incremental investment in the frameworks, processes and procedures. This gives the community confidence that in the long run the vast majority of Australia’s wealthiest private groups are meeting their tax and superannuation obligations. That journey, while up until this point productive, still requires additional investment before it reaches its conclusion.

    See also:

    Last modified: 28 Jun 2021QC 65809