ato logo
Search Suggestion:

Key findings

A summary of our observations for income tax and GST up to 31 August 2023 and what this report covers.

Published 26 November 2023

Summary of our observations

Since the Next 5,000 program began, we have observed that most Next 5,000 groups and their advisers engage collaboratively and proactively with us. This is evidenced by the engagement throughout the streamlined assurance reviews and the requests we receive for tailored technical assistance across a range of areas, including our key priority areas.

Our findings from our streamline assurance reviews indicate that many Next 5,000 groups have a lack of documented governance processes and procedures. This includes a lack of clearly defined roles and responsibilities between the Next 5,000 group and their adviser. Where Next 5,000 groups do not have documented processes and procedures, we have observed this has resulted in incorrect reporting of significant events, transactions, and activities.

While we only review tax governance in our streamline assurance reviews, our key observations can be applied more broadly. We strongly recommend that all Next 5,000 groups and their advisers consider our findings and whether our recommendations may be appropriate to implement and improve their governance to provide a greater level of confidence in correctly reporting and complying with their tax obligations in the future.

Our findings in relation to the Next Actions Strategy shows that Next 5,000 groups are generally willing to resolve incorrect reporting issues (including GST) during the streamline assurance review through the lodgment of voluntary disclosures. This has resulted in a decrease of escalation to secondary reviews and low escalation rate to audits.

In this report, while the common tax issues have generally remained consistent to our findings as at 31 August 2022, we have obtained more detailed insights. See Findings in detail.

Privately owned and wealthy groups

Privately owned and wealthy groups operate some of Australia's largest and most successful businesses and have complex financial and legal arrangements. We view privately owned and wealthy groups as Australian resident individuals who, together with their business associates, control net wealth over $50 million. See also Tax performance programs for privately owned and wealthy groups.

Generally, private groups have limited disclosure and less publicly available information. The structures of private groups are often complex or opaque, and the mobility of private groups enables quick, fluid, and easy group structural changes. By engaging early with each other, we can build transparency and prevent mistakes.

We are seeing an ageing demographic for controlling individuals of privately owned and wealthy groups, which is leading to an increased focus on succession planning and wealth transfer arrangements for these groups.

With environmental changes particularly driven by digital technology, we are also seeing rapid growth bringing new entrants into the population, including owners of digital and technology companies or market disruptors in other industries. This rapid business growth further highlights the need for corresponding growth in associated governance processes to continue to meet taxation obligations.

Next 5,000 key priority areas

The Next 5,000 privately owned and wealthy groups sub-population includes entities linked to Australian resident individuals who, together with their associates, control wealth of more than $50 million. The Next 5,000 tax performance program considers wider environmental and economic factors to understand commercial and business pressures which may impact tax behaviours.

In 2022–23 we identified key priority areas within the Next 5,000 sub-population. These key priority areas were based on our insights to date and broader understanding of emerging trends in this sub-population within the privately owned and wealthy groups described above. Over the last year we have continued our focus on these areas and have selected reviews based on indicators of our key priority areas being present. These reviews are still in progress, however, in the interim we have continued to obtain further insights on these areas from our finalised streamlined assurance reviews which we provide below.

Experiencing rapid growth

This key priority area focuses 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. Our findings continue to reinforce our concerns that tax governance has not been maintained and updated in accordance with the growth or evolution of the business. The lack of governance can have material tax consequences because errors and incorrect reporting can arise as a result. This has been evidenced in recent material $ value voluntary disclosures which could have been avoided through effective tax governance.

Cross-border transactions

This key priority area focuses on groups that are expanding offshore or engaging in cross-border transactions with related parties. Our reviews selected on this basis are currently in progress and included in the most common tax risks flagged to market as part of streamlined assurance reviews. See Practical Compliance Guideline PCG 2017/4External LinkATO compliance approach to taxation issues associated with cross-border related party financing arrangements and related transactions and Practical Compliance Guideline PCG 2017/2External Link Simplified transfer pricing record-keeping options.

We received 4 requests for tailored technical assistance relating to cross-border transactions between September 2022 and August 2023. This shows a small number of Next 5,000 groups proactively engaging with us to obtain certainty on how these transactions should be treated for tax purposes.

Domestic wealth transfer

This key priority area focuses on groups entering arrangements involving intra-group domestic transactions which may result in the transfer of wealth. Our initial insights from streamlined assurance reviews are that related party transactions and trust distributions are not being recorded correctly. We are finding:

  • common mismatches between the reported income and expenses between related parties
  • lack of independent valuations to support pricing of transactions between related parties such as involving real property
  • omission of related party income such as rental income
  • issues with family trust elections
  • loans which are not compliant with Division 7A of the Income Tax Assessment Act 1936.

While the proportion of matters which escalate to secondary reviews or audits are low, we are observing that domestic wealth transfer issues are included. For example, section 100A of the Income Tax Assessment Act 1936 may apply to certain reimbursement arrangements 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. We are also seeing secondary reviews or audits involving transactions between SMSF and related parties giving rise to reporting of non-arm's length income (NALI). Additionally, we are seeing expenditure being claimed as a deduction in relation to private use assets.

Some Next 5,000 groups are proactively engaging with us to obtain certainty on domestic related party transactions. We received 53 requests for tailored technical assistance requests between September 2022 and August 2023. Nine of these requests related to Division 7A of the Income Tax Assessment Act 1936.

Wealth extraction by use of private equity funds

This key priority area focuses on undertaking wealth extraction including the use of private equity funds. We continue to monitor this focus area and will provide insights in future reports.

Succession planning

This key priority area focuses on groups that are considering tax efficient structures to pass on wealth to the next generation. While our reviews that have been selected on this basis are still in progress, we note that out of the 53 domestic restructuring requests for tailored technical assistance received between September 2022 and August 2023, 30 related to succession planning. The requests included tax issues relating to:

  • trust resettlements
  • proposed restructures
  • asset transfers to pass businesses and assets onto the next generation.

Requests were also received by the beneficiaries of the wealth transfer.

We will continue to focus on these key priority areas in 2023–24.