We know most large businesses want to do the right thing and we're often asked how they can improve their assurance ratings.
This guide is for large public and multinational companies covered by the Top 1,000 tax performance program. It aims to help you:
- understand what attracts our attention
- prepare for engagement with us
- address recommendations made in assurance reviews
- improve confidence in your tax outcomes.
This guide is based on our observations from Top 1,000 assurance reviews and sets out the standard of information and documentation we typically look for to obtain assurance.
By following our guidance and recommendations in previous assurance reviews, taxpayers are less likely to experience protracted combined assurance reviews or follow-on compliance activity.
We will continue to update this information to address additional issues that attract our attention.
- Top 1,000 combined assurance program
- Top 1,000 next actions program
- Typical questions in a Top 1,000 combined assurance review
- What we look for to obtain assurance
From our engagements, the most common issues we find with capital allowances claims include:
Insufficient documentation or information
The most common reason for not achieving assurance for capital allowance claims is insufficient supporting information and documents to show the deductions claimed are correct.
This may result in us seeking further information or escalating the matter for further review.
The documents and information that we look for include:
- detailed fixed tax asset register, including for each asset
- asset description and name
- date the asset was installed ready for use
- cost (including additional costs for the assets)
- effective life
- rate of depreciation
- depreciation method used (diminishing value method or prime cost method)
- opening adjustable value
- written down value or closing value
- decline in value amount claimed for the year
- asset register summaries
- working papers to support specific capital allowances tax return disclosures
- reconciliations between capital allowances tax return disclosures and the fixed asset register
- internal policies and procedures for determining depreciation for tax, including how effective lives are determined and reviewed for each major class of assets
- evidence substantiating the original cost of assets such as invoices, contracts, supplier agreements, independent valuations and audit reports.
During a review, we may ask for a sample of this information to obtain assurance over the capital allowance deductions claimed during the review period. The size of the sample depends on the size of the claim, with larger claims requiring a larger sample to obtain assurance. When requesting information, our case team will advise you what an appropriate sample size is in your circumstances.
Maintain a detailed analysis to support any effective lives which you have self-assessed. This should include why you have chosen to use an effective life that is different to the Commissioner’s published effective life, and evidence to support your conclusions.
Documents and information that can help support our assessment of assurance relating to exploration expenditure include:
- project and tax level governance frameworks consistent with PCG 2016/17 – a governance process which highlights expenditure that may be considered high risk may indicate a more robust governance framework
- contemporaneous documentation that evidences the tax characterisation process and claiming of deductions.
- PCG 2016/17 ATO compliance approach – exploration expenditure deductions
- TR 2019/5 Income tax: effective life of depreciating assets
- Uniform capital allowance system – Changing a depreciating asset's effective life
- Record keeping for capital expenses
The most common issues we find with research and development (R&D) tax incentive claims include:
- Eligibility of R&D tax incentive activities – notional deductions
- Ineligible expenditure and inappropriate apportionment methodology
- Poor corporate governance
- Contract expenditure
- Salary expenditure
- Other matters.
Eligibility of R&D tax incentive activities – notional deductions
The R&D tax incentive is jointly administered by the ATO and AusIndustry.
For assurance of eligibility, we look at expenses claimed as a notional deduction under the R&D tax incentive to the extent that the expenditure is incurred on ‘R&D activities’ (section 355-205 of the ITAA 1997) and those activities are registered with AusIndustry.
In some cases, we may also refer activities for review to AusIndustry where concerns are identified.
You can only register eligible R&D activities. If you are unsure whether your activities constitute R&D activities, we strongly encourage you to contact AusIndustryExternal Link.
We check whether the notional deductions claimed by you under Division 355 of the ITAA 1997 are:
- actually incurred on one or more R&D activities (as defined), and
- allocated using a methodology that is reasonable (see Methods of apportionment).
Expenditure claimed must be incurred on registered R&D activities and not related to ordinary business activities. Claimants need to:
- distinguish between expenditure incurred on eligible R&D activities and expenses that relate to ordinary business activities
- demonstrate the required nexus exists between the registered R&D activities and expenditure claimed.
There must also be sufficient evidence to demonstrate that the methodology used to apportion expenses (such as overhead expenditure and fixed costs) between eligible R&D activities and non-eligible R&D activities is appropriate.
Due to a lack of adequate corporate governance, some taxpayers claim R&D offsets for activities that are not eligible R&D activities.
We recommend that good corporate governance include controls to:
- review your registered activities and the claims you make for the R&D tax incentive
- distinguish ordinary business activities from your eligible R&D activities
- identify when R&D activities have transitioned to ordinary business activities.
We may review a sample of ‘contract expenditure’. The contracts need to show the nature of the work and its relation to the R&D activities.
We may need to review further records to understand how work under the contract relates to the R&D activities. For example, we may ask for minutes of any meetings between the client and contractor and progress reports from the contractor. If certain activities undertaken by the contracting company were not eligible R&D activities (or specifically excluded activities), we will need to understand how the contracted amount is apportioned between eligible and ineligible expenditure and the basis of the apportionment methodology.
We review salary amounts to ensure that this expenditure is only claimed to the extent that it is incurred on eligible R&D activities.
If you have an employee working on eligible R&D activities, we will accept expenditure on the actual time spent on R&D activities as a proportion of the employee’s actual hours worked, and the employee’s actual salary.
Overinflated salary claims can also be a result of poor governance practices and apportionment methodologies.
The Research and Development Tax Incentive reforms announced in the 2020–21 Budget that will apply from the first income year commencing on or after 1 July 2021 are outlined in Better targeting the research and development tax incentive.
- Other R&D expenditure
- Keeping records and calculating your notional deductions
- TA 2017/5 Claiming the Research and Development Tax Incentive for software development activities
- TA 2017/4 Claiming the Research and Development Tax Incentive for agricultural activities
- TA 2017/3 Claiming the Research and Development Tax Incentive for ordinary business activities
- TA 2017/2 Claiming the Research and Development Tax Incentive for construction activities
- TA 2015/3 Accessing the R&D Tax Incentive for ineligible broadacre farming activities
- TR 2013/3 Income tax: research and development tax offsets: feedstock adjustmentsTD 2014/15 Income tax: when is Design Expenditure incurred by an R&D entity included in the first element of the cost of a tangible depreciating asset for the purposes of paragraph 355-225(1)(b) of the Income Tax Assessment Act 1997 (and therefore not able to be deducted under section 355-205)?
The most common issues we find with tax losses include:
- Continuity of ownership test
- Business continuity test
- Consolidated groups – transfers of tax losses and available fraction calculations
- Origin of tax losses.
The information below outlines strategies you can put in place to obtain assurance.
We frequently review the utilisation of carried forward losses. The continuity of ownership test (COT) is our primary test for the deduction of prior-year losses.
The most common reason for not obtaining assurance is that the COT analysis information and documents provided to us are incomplete, insufficient or cannot be verified.
Assurance often cannot be obtained due to the taxpayer’s inability to trace through the shareholdings of interposed entities to verify ultimate beneficial shareholders. This is a common issue when a nominee company has a stake in a taxpayer company and limited information has been obtained regarding the nominee company’s shareholders.
The documents and information we look for include:
- a detailed and complete COT analysis detailing the legislative provisions relied on to determine the ownership test period or ownership test times, as applicable
- contemporaneous supporting information and documents to substantiate your COT analysis, including
- working papers
- share registers
- Australian Securities & Investments Commission (ASIC) notices regarding changes to member and share structure details
- memoranda and agreements regarding corporate change events, as defined in Section 166-175 of the ITAA 1997 (if relevant)
- other relevant information or documents produced in, or relevant to, majority shareholdings during the applicable ownership test period or ownership test times
- additional information (including publicly available information) that will assist us in verifying your analysis, supporting documentation and underlying facts, and assumptions including annual reports, financial statements, industry reports.
If you have utilised any transferred losses, you will need to provide the analysis performed to transfer the losses into the tax consolidated or multiple entry consolidated (MEC) group and the working papers used to calculate the available fraction for each bundle of losses (see Consolidated groups – transfer of tax losses and available fraction calculations).
We review the application of the business continuity test (BCT) (formerly known as same business test) in connection with the utilisation of carried forward losses. Taxpayers may apply the BCT to deduct prior-year losses where the COT is failed, or it is not practicable for the taxpayer to meet the conditions of the COT.
The most common reason for not achieving assurance is that the BCT analysis information and documents provided to us are incomplete, insufficient or cannot be verified. It is difficult to obtain assurance that taxpayers have satisfied the BCT, as this requires a rigorous qualitative assessment of a taxpayer’s BCT analysis and verification of the facts or assumptions underlying the analysis.
When reviewing whether the BCT has been satisfied, we look for:
- a detailed and complete BCT analysis which has regard to the legislative provisions relied upon and the factors outlined in
- contemporaneous supporting information and documents (including publicly available information) to substantiate your BCT analysis, including
- working papers
- financial statements
- ASX disclosures
- ASIC documents
- investor relation announcements
- other information or documents relevant to your business operations.
If you have utilised any transferred losses, you will need to provide the analysis performed to transfer the losses into the tax consolidated or MEC group and the working papers used to calculate the available fraction for each bundle of losses.
We review whether the COT or BCT (or modified COT or BCT) has been satisfied in the context of the transfer of losses into tax consolidated groups and MEC groups.
For transfers of tax losses, it is difficult to obtain assurance where there is a significant period between the transfer of losses into a consolidated group and the utilisation of those losses. To achieve assurance, you need to provide sufficient analysis and corroborating information and documents to verify that the relevant transferred losses were in accordance with the relevant provisions.
We also review taxpayer’s available fraction calculations. The most common reason for not achieving assurance is deficiencies in or, an absence of, information and documents to verify a taxpayer’s calculations – for example, no analysis to support the joining entity’s market value.
The documents and information we look for include:
- the calculation of the available fraction for each bundle of losses transferred to the (provisional) head company of the tax consolidated or MEC group, including any adjustments to the available fraction after joining the consolidated or MEC group under subsection 707-320(2) of the ITAA 1997
- sufficient contemporaneous supporting information and documents to substantiate your available fraction calculation including working papers, valuation reports and advice
- additional information (including publicly available information) that will assist us in verifying your calculation, supporting documentation and underlying facts and assumptions including annual reports, ASIC disclosures, ASX announcements, financial statements and industry reports
- verification of any apportionment of the transferred losses which were utilised in the joining or formation year.
When reviewing how carried-forward losses are used, we may look for the origin of the losses.
The documents and information we look for include:
- a detailed explanation of the source of the relevant losses
- sufficient contemporaneous supporting information and documents to substantiate your explanation of the validity of relevant losses, including annual reports, financial statements, and other relevant information or documents produced in, or relevant to, the years the relevant losses were incurred.
- Keep records longer for losses
- Claiming business tax loses from previous years
- Loss carry back tax offset
We assess your compliance relating to issues that commonly arise in relation to tax consolidated groups and multiple entry consolidated (MEC) groups.
There are typically tax consequences when a tax consolidated group or MEC group:
- is formed
- acquires or disposes of the membership interests (for example, shares) in an entity resulting in it joining or leaving the group
- acquires another tax consolidated group or MEC group
- is restructured.
The most common issues we find with consolidated groups include:
- Tax cost setting on entry
- Tax cost setting on exit
- Valuations for calculating the entry ACA and TCSAs
- Restructures involving MEC groups.
The most common issues we encounter when obtaining assurance on the tax cost setting process on entry include:
- no entry allocable cost amount (ACA) calculation was provided
- no supporting documentation to verify the amounts included in the ACA calculation – for example, failure to provide the share purchase agreement disclosing the amount paid for the shares in the joining company or the completion accounts showing the accounting liabilities held at the joining time
- intangible assets that are not CGT assets, such as customer relationships and customer lists, being incorrectly recognised, or failure to recognise and value of other intangible assets that are CGT assets, such as trademarks or pre-1 July 2001 mining rights
- non-recognition of the goodwill of the acquired joining entity, without sufficient explanation or supporting documentation to support this position
- inadequate or no documentation provided to substantiate the market value of reset cost base assets.
To obtain assurance, we recommend that you provide:
- the entry ACA calculation and tax cost setting amount (TCSA) working papers supporting your allocation across retained and reset cost base assets
- the executed share purchase agreements and any purchase price adjustment working papers
- if you did not recognise goodwill in the joining entity, an explanation with relevant documentation to support this position
- financial statements (balance sheet) of the joining entity at the joining time
- ensure the financial statements contain sufficient information for us to verify every step (such as Step 2 accounting liabilities, including those that are deductible and excluded from Step 2) relevant to your entry ACA calculation
- ensure the values in the ACA calculation broadly align with the asset valuations in your financial statements.
The most common issues we encounter when obtaining assurance on the tax cost setting process on exit include:
- no exit ACA calculation was completed
- only a draft or incomplete exit ACA position was available
- when we can't verify the amounts included in the exit ACA, such as the terminating values of all the assets at leaving time, due to incomplete working papers and insufficient supporting documentation
- when we can't verify the amounts on exit due to being unable to assure the leaving entity’s initial entry ACA and TCSA calculations for its assets on joining the consolidated group.
In order to obtain assurance, we recommend you provide the final exit ACA calculation and TCSA working papers, including financial statements (balance sheet) for the leaving entity at the exit time.
The most common reasons we are unable to provide assurance in relation to valuations connected with entry or exit ACA, and TCSA calculations are:
- no contemporaneous valuation documentation was provided
- no valuation advice or documentation was provided to support the related party transaction.
To obtain assurance, we recommend that you provide:
- valuation documentation for all (significant) reset cost base assets of the joining entity (for which comparable sales evidence of the market value at the joining time is not publicly available), unless you are eligible to use one of the valuation short-cut options (see Market valuation for tax purposes)
- valuation documentation to support the entry or exit ACA calculations if a joining entity was acquired from, or an existing entity was sold to, a related party.
The most common reasons we are unable to provide assurance in relation to restructuring involving MEC groups include:
- the commercial rationale for the restructure, or relevant steps in the structure was not provided
- the commercial rationale provided for the restructure was not substantiated with contemporaneous analysis, information and documents
- the arrangements involved were complex and more information is required to understand the income tax implications
- we are unable to review the restructure holistically in the assurance review.
The documents and information that we look for include:
- a copy of the restructure step plan, including details of the date and the actual transactions undertaken in each step of the restructure
- documents outlining the potential tax implications and rationale for the structure or arrangement implemented
- copies of any advice, reports or documents produced in connection with the restructure
- group structure diagrams for the period before and after the restructure.
- TR 2004/13 Income tax: the meaning of an asset for the purposes of Part 3-90 of the Income Tax Assessment Act 1997 (taking into account the amendments made by Tax Laws Amendment (2012 Measures No 2) Act 2012 (the Prospective Rules)
- TR 2005/17 Income tax: goodwill: identification and tax cost setting for the purposes of Part 3-90 of the Income Tax Assessment Act 1997
- TR 2006/6 Income tax: Recognising and measuring the liabilities of a joining entity under subsection 705-70(1) of the Income Tax Assessment Act 1997 (taking into account the amendments made by Treasury Laws Amendment (Income Tax Consolidation Integrity) Act 2018 (the deductible liability amendments)
- TR 2007/7 Income tax: consolidation: errors in tax cost setting amounts of reset cost base assets
- TA 2020/4 Multiple entry consolidated groups avoiding capital gains tax through the transfer of assets to an eligible tier-1 company prior to divestment
- Market valuation for tax purposes
- Consolidation reference manual
The most common issues we encounter when obtaining assurance on valuations include:
- missing valuation reports
- valuation instructions
- valuation process
- valuation report detail and substantiation.
Missing valuation reports
A common reason for not achieving assurance on valuations is due to the absence of a valuation report to substantiate a value.
The absence of a valuation report may result in us seeking further information or escalating the matter for further review.
To ensure you don't receive a low assurance rating when a tax outcome has relied on a valuation, we recommend you provide complete valuation reports that have been prepared in accordance with relevant professional standards.
Inappropriate valuation report purpose and valuer instructions can reduce the level of assurance associated with valuations. From our engagements, we have identified the following common issues with valuation report purpose and instruction:
- incorrect valuation date (the 'as at' date of the valuation)
- incorrect valuation subject – the subject for which a value has been determined within a valuation report was inconsistent with the tax asset for which a value was required
- inappropriate restrictions to the scope of the valuation, including restrictions that
- impact the type of valuation service undertaken by a valuer
- reduce the valuer's freedom to employ the most appropriate valuation methodology
- erroneous valuation assumptions, including assumptions that don't accord with the provisions of the law under which the valuation is required
- insufficient verification of key valuation inputs.
From our engagements, we have identified the following common issues that restrict our ability to understand the process followed by the valuer:
- inadequately documented valuation process – a valuation should be replicable, in effect, this means the valuation should be documented and explained well enough that another person or valuer can understand how the value was determined
- insufficient use of supporting valuation methods (cross-checks)
- deviation from professional standards.
Valuation report detail and substantiation
From our engagements, we have identified the most common issues with valuation reports, as well as strategies you can put in place to avoid a low assurance rating.
The valuation report detail we look for can include:
- a clearly defined and characterised subject (or subject asset)
- detail of objective evidence relied upon by the valuer for the substantiation of key valuation inputs and assumptions, including
- sources relied on for cost estimates where a cost approach is utilised
- detail of any market-based evidence where a market approach is utilised
- basis and reasoning for assumed growth rates in forecast earnings
- relevant appendices, including
- valuer engagement letter
- schedule of market-based evidence where applicable
- relevant financial statements where applicable
- third-party advice relied upon in the valuation where applicable
- valuation calculations.
- Market valuation for tax purposes
Making a voluntary disclosure
We encourage you to review your tax affairs regularly and make a voluntary disclosure to us as soon as you identify any errors, omissions or false or misleading information in returns or statements you’ve lodged.
You can make a voluntary disclosure at any time but disclosing as soon as possible will reduce your penalty exposure.
If you make a voluntary disclosure before we have contacted you about an issue, we will generally exercise our discretion to remit any applicable shortfall penalty to nil, unless you have acted recklessly or intentionally disregarded the law.
We may recommend that you make a voluntary disclosure if we find potential errors or omissions or identify tax risks as part of a Top 1,000 assurance review.
When tailoring our engagement with you, we look at what steps you’ve taken to address our previous recommendations.
Reduced penalties during a review
We are likely to exercise our discretion to reduce any shortfall penalties by at least 80% if you voluntarily:
- disclose an error or omission to us during your Top 1,000 assurance review
- action the recommendations from your Top 1,000 review before a Next Actions review has commenced.
A penalty reduction may not be available once you’ve been notified that a Next Actions review or an audit will commence.
How to avoid a delay
To ensure that your voluntary disclosure is considered as quickly as possible, it should be provided in the approved form.
Avoid delays in having your voluntary disclosure assessed by providing:
- detail of any amendments to your income tax returns, schedules and activity statements to correct the error or omission, including
- relevant time periods
- original amount
- amount of the adjustment
- which label on the return, schedule or activity statement you are amending
- a detailed breakdown if a label is being amended for multiple issues
- detailed analysis of the original amount or omission, including
- how it was worked out
- why it is incorrect
- whether it impacts on related parties or entities
- supporting documentation
- how the new amount is worked out and supporting documentation to verify the new amount
- any information or documents to help us consider remitting penalties or interest charges.
How to submit a voluntary disclosure
To submit a voluntary disclosure:
- email Top1000NextActions@ato.gov.au using the approved form, or
- contact the tax officer conducting your Top 1,000 assurance or Next Actions risk review.
If you need to amend a return, see Objections and amendments (for large business).
- Make a voluntary disclosure
- Voluntary disclosures in the approved form
- Interest and penalties
- Request remission of interest or penalties
- Miscellaneous Taxation Ruling MT 2012/3 Administrative penalties voluntary disclosures