Next 5,000 Streamlined assurance reviews

Background

A streamlined assurance review enables us to resolve issues quickly and cooperatively in a transparent way. These reviews apply the justified trust methodology to obtain assurance that your group has correctly reported and paid the right amount of tax in respect of the main trading entities, including any significant transactions, events or activities within the group.

Review process

A printable version is also available – Next 5,000 Program Client Experience Streamlined Assurance Review Roadmap (PDF, 619KB)This link will download a file.

If we expect any of the steps to take longer, we will discuss this with you.

In most cases, streamlined assurance reviews will be completed within 4 months of us receiving the information we request from you in our initial RFI. We usually request information relating to the last 2 tax returns (lodged prior to the commencement of the review) and review the entities in the group with significant activities, events and transactions.

Steps in the review process

Generally, through this review process we'll:

• notify you in writing
• meet you to understand your business
• write to you to request information
• contact you to discuss next steps

Notify you in writing

We'll notify you in writing that we plan to start a streamlined assurance review. Commencement of any streamlined assurance review will be no earlier than 3 months from us notifying you in writing (or less as agreed).

Providing documents you should already have (for example, financial statements and tax reconciliations) to help us better understand your circumstances when we commence our review will greatly assist us.

Meet you to understand your business

We'll meet with you to get a better understanding of your business and to discuss timeframes and the information we'll need from you.

Write to you to request information

We'll write to you setting out the information we need you to provide. The evidence we gather will help us to assure that you are correctly reporting and paying the right amount of tax in respect of the main trading entities, including any significant transactions, events or activities within the group.

If you aren't willing to work with us in an open and transparent way in responding to our requests for information, we'll use our formal information gathering powers.

Contact you to discuss next steps

After we receive your response and consider the information you have provided, we'll contact you to discuss our analysis and next steps. We may organise a meeting to discuss areas of concern we have identified.

How the justified trust methodology is applied to your review

In a streamlined assurance review, we apply the justified trust methodology to the significant transactions, events and activities of your group and trading entities, by reviewing the following 4 key areas of our justified trust approach. Given our scope is limited to the significant transactions, events and activities of your group, while we apply the justified trust methodology, we do not determine if a group has attained justified trust.

Assessing tax governance for the Next 5,000

Effective tax governance means having clear processes and procedures to support decision making and ensure your group meets its tax and super obligations.

For streamlined assurance reviews involving Next 5,000 private groups, we review the existence and design effectiveness of a group's tax governance framework with a focus on the first 3 of the 7 principles of effective governance.

The 3 principles we focus on are:

• Accountable management and oversight
• Recognise tax risks
• Seek advice

When assessing the design effectiveness of a group’s tax governance, we:

• look for documented policies and procedures that are practical and tailored to the taxpayer’s group, business, size, and industry
• focus on the design 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.

A private group's tax governance is effective when the processes and procedures it has in place, consistently result in the correct tax outcomes and in ensuring that the private group is meeting its obligations.

Effective tax governance will help avoid common errors, including:

• clerical and transposition errors
• outstanding lodgment obligations
• incorrect reporting of ordinary business transactions
• incorrect reporting of significant transactions
• poor record keeping
• not taking adequate steps to satisfy Division 7A.

We have generally found that issues 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.

How to prepare for a streamlined assurance review

We encourage privately owned and wealthy groups to prepare for a streamlined assurance review by gathering evidence we will need. You can prepare for a review by considering the questions and documents we will typically ask for outlined below.

This list is not exhaustive, and we may ask additional or tailored questions.

You should have many of the documents we typically request, such as:

• information used to prepare your tax return
• your company’s group structure
• tax governance documents.

Our streamlined assurance reviews generally focus on the latest 2 tax returns (lodged prior to the commencement of the review), so we're likely to request information for this time period.

Voluntary disclosure

Before receiving the request for information, we encourage you to review your records and recent significant transactions or business events and correct any mistakes by making a voluntary disclosure.

When reviewing your records you may wish to contact your adviser and discuss any tax risks you identify. You can make a voluntary disclosure at any time during a streamlined assurance review.

Group structure

The topics and evidence we typically cover in our request for group structure information are:

• chart or similar
• changes to structure
• details of group members
• offshore entity, foreign branch or asset

Chart or similar

We typically ask you to provide a chart or similar document that shows the structure of the group, including:

• companies
• partnerships
• trusts
• superannuation funds.

It needs to be as at 30 June (or as at the end of your SAP year).

Changes to structure

Advise us of any changes to the structure during the last 2 income years, including:

• all entities within Australia and related foreign entities
• a description of their role and business activities.

Details of group members

We typically request other details relating to group members, including:

• names of the beneficial and non-beneficial owners
• classes of shares and rights attached and the percentage ownership for each class of share
• the trustee name and ABN or ACN (if a corporate trustee)
• a copy of the trust deeds and minutes of trustee resolutions.

Offshore entity, foreign branch or asset

Your group in the last 2 income years may have had an offshore entity, foreign branch or asset that you:

• directly or indirectly own
• control or have an interest in at any time.

If so, provide the following:

• details of the type of asset such as
  • bank account
  • shares
  • investment portfolio
  • real property
• if shares, the name and activities of the entity and percentage of the interest held by the Australian entity
• when the asset was acquired and disposed of, if applicable
• the value in Australian dollars and rationale for valuation (book value, cost or latest market valuation)
• the details of the entity that owns the asset, including
  • the name
  • the jurisdiction or location
  • where it earns its income
• the annual amount of revenue in Australian dollars that has been earned from each asset
• an explanation of any amount of income that has not been included in Australian assessable income
• details of all intangible assets used or transferred by the taxpayer during the last 2 income years
• details of the employee organisational structure for offshore entities including any changes to it over the last 2 income years.

For more information go to Alignment between accounting and tax results.

Alignment between accounting and tax results

The following evidence assists us when reviewing this justified trust key focus area.

Financial information, tax reconciliation and working papers

For entities we are reviewing, provide the following documents relating to the last 2 income years:

• a statement of comprehensive income with notes
• a statement of financial position with notes
• the detailed calculations reconciling accounting profit to taxable income
• the working papers which support the calculation of any capital (CGT) gain or loss, including details of
  • the applicable CGT event
  • whether a roll-over has been chosen
  • any CGT discount or concessions that have been claimed.

For more information go to Tax governance.

Tax governance

The following evidence assists us when reviewing this justified trust key focus area.

Evidence of effective tax governance

We typically request documentary evidence setting out the following:

• end-to-end tax return preparation processes including names and versions of accounting software and tax systems used for
  • record keeping
  • preparing tax returns and schedules
• your processes to identify material transactions and potential tax risks
• your arrangements for escalating tax issues and seeking tax advice
• key tax administration roles and responsibilities for internal and external personnel, including where tax governance is shared with external advisors.

Where responsibility for tax governance is shared with external advisors, we may also request engagement letters, agreed scope of work and lodgment calendars.

We will ask for supporting evidence of these processes and controls. This may include documented policies or written guidance available to key decision makers and employees such as:

• instructional manuals
• exception reports
• internal governance reviews
• written procedures such as flowcharts, checklists and templates
• the role of external advisors from engagement letters, agreed scope of work and lodgment calendars.

If you have no written documents, you should state this.

For more information on implementing effective tax governance practices and principles see Tax governance guide for privately-owned groups.

For next step, go to Transactions, acquisitions and disposals.

Transactions, acquisitions and disposals

The following evidence assists us when reviewing this justified trust key focus area.

Information that we may request can include:

• restructures and significant changes
• international tax issues
• concessions and tax losses.

Significant new business and transactions

This applies if during the last 2 income years, you commenced any significant new business or investment activities.

Also, if during the last 2 income years, you undertook any significant new transactions that do not form part of your normal business activities.

If either of the above occurred, then provide:

• details of the entities involved
• an explanation of the significant activities and transactions
• a brief description of how these were financed.

Restructure – acquisitions

Your group may have acquired an interest in an entity or business (including foreign) during the review period. If so, provide the following for each acquisition:

• details of any restructure that occurred within your group leading up to or at the time of the acquisition (including relevant ABN and TFN)
• the name and ABN of the vendor and the name of the entity that was acquired
• details of the rights attached to the classes of shares and ownership percentages acquired
• the acquisition price and the form of consideration provided
• the name of the purchaser within your group and date of acquisition
• an explanation of how the acquisition was financed, including
  • the provider of the finance
  • whether the provider is a related party.

Restructure – disposal

Your group may have disposed of an interest in an entity or business (including foreign) during the review period. If so, provide the following for each disposal:

• details of any restructure that occurred within your group leading up to or at the time of the disposal (including relevant ABN and TFN)
• the name of the entity that was disposed of and the name and ABN of the purchaser
• details of the rights attached to the classes of shares and ownership percentages disposed of
• the amount of consideration and the date that it was received
• the relevant sale agreement or other transaction document, however described
• an explanation of how any deferred consideration (for example, earn-out arrangement) has been treated for income tax purposes.

Funding

Provide an overview of the funding structure of your group during the review period, including:

• composition of funding (debt versus equity), the entities involved and whether it is a related party or third party
• if it relates to debt, the purpose and cost of funding, including details of          
  • the fees and charges to set up the finance arrangement
  • the ongoing costs including interest
• changes to the funding arrangements during the last 2 income years
• whether the treatment of debt or equity is different for tax and accounting purposes
• use of cryptocurrency, including the type, how much, when and which entities were involved
• details of any cross-border related-party financing arrangements
• all related party financing risk assessments you have performed as outlined in PCG 2017/4 (including risk rating and associated workpapers).

PCG 2017/4 is Practical Compliance Guideline 2017/4 ATO compliance approach to taxation issues associated with cross-border related party financing arrangements and related transactions.

Also, if any entity has used cryptocurrency, outline the type, how much, when and which entities were involved.

International related-party dealings

This applies if during the last 2 income years, you or any entity in your group have any arrangements with international related parties. These include your subsidiaries, branches and other entities.

Examples include:

• loans or other financing arrangements
• arrangements concerning intangible property
• distribution arrangements
• management or other service arrangements
• derivative transactions
• transactions involving no or non-monetary consideration.

If so, provide:

• a copy of the agreements covering the international related party arrangements – if a written agreement is not available, provide details of the terms and conditions in relation to these arrangements
• documents to substantiate that you did not obtain a transfer pricing benefit in connection with your international related party dealings, such as transfer pricing documentation, including
  • appendices and annexures
  • benchmarking analysis
  • valuation reports
• a diagram of the global supply or value chain.

If you elected to apply an option from PCG 2017/2, we may ask you to provide documents substantiating your eligibility for that option.

PCG 2017/2 is Practical Compliance Guideline 2017/2 Simplified Transfer Pricing Record Keeping Options.

Significant global entities

From 1 July 2019, the definition of significant global entity (SGE) has been expanded to include members of large business groups headed by individuals, proprietary companies, trusts, partnerships and investment entities. When applying the SGE rules, exceptions to consolidation and rules on materiality that may permit an entity not to consolidate with other entities are disregarded.

You are required to self-assess your SGE status annually to determine your reporting requirements.

In addition, the definition of a country-by-country (CBC) reporting entity has been introduced to define the subset of the SGE population that may have CBC reporting obligations and general purpose financial statement (GPFS) lodgment obligations.

Based on the SGE and CBC reporting definitions, we may ask you to:

• confirm whether you have assessed the effect of these rules on your group
• let us know if there has been a change in your SGE or CBC reporting entity status and provide evidence to support your self-assessment.

Interest, dividend and royalty withholding tax

Where your group has paid interest, dividend or royalty deductions to a non-resident during the review period, you may need to meet certain withholding tax requirements that include:

• lodgment of a pay as you go (PAYG) annual report (PAYG withholding from interest, dividend and royalty payments paid to non-residents – annual report) or annual investment income report
• payment of withholding tax.

You may still have a withholding tax obligation even if the interest amount has not been actually paid.

We may ask you to provide:

• a brief description of what the amount relates to
• the name of the entity the amount was paid to and its country of tax residence
• the date of payment and the amount paid
• a reconciliation of the amount paid during the review period with amounts expensed for accounting purposes (if there is a difference in any income year)
• an explanation where either the
  • withholding tax rate is less than 10% for interest or 30% for a dividend or royalty, or
  • payment is not subject to withholding tax.

Thin capitalisation

Where your group and its associates have debt deductions of at least $2 million during the review period, we may ask you to provide the thin capitalisation calculations and working papers, including supporting rationale for the application of any exemption from the thin capitalisation regime.

For the income years up to 30 June 2023, you may ask you to provide:

• the relevant calculation of
  • adjusted average debt
  • safe harbour debt amount
  • arm’s length debt amount
  • worldwide gearing amount
• supporting statements of financial position with notes or trial balances
• revaluation reports for any asset revaluations undertaken for thin capitalisation purposes
• signed elections if there has been a recognition or revaluation of intangible assets undertaken for thin capitalisation purposes
• arm’s length debt test analysis and supporting documents taking PCG 2020/7 into consideration if the arm’s length debt test has been applied.

For income years commencing on or after 1 July 2023, in addition to the above, we may also ask you to provide the relevant calculation of the:

• fixed ratio test
• group ratio test
• third party debt test.

PCG 2020/7 is Practical Compliance Guideline 2020/7 ATO compliance approach to the arm's length debt test.

For more detail on the thin capitalisation rules, which entities they affect and how to apply the rules see Thin Capitalisation.

Loans or payments to shareholders, directors or associates

During the last 2 income years, identify if any entities advanced a loan or made a payment to the shareholders (or their associates) of any private company within your group. If so:

• ascertain if the loan or payment was not fully repaid before lodging the most recent tax return
• identify if there are existing shareholder loan accounts (including any loan accounts arising from an unpaid present entitlement).

If either of the above apply, then for the largest loans and payments, provide:

• an explanation and details of payments and interest both applicable and paid
• details of any debt forgiveness
• copies of the relevant loan agreements, if available
• general ledgers detailing movements in loan accounts
• details of any offset payments made and/or copies of any offset agreements
• details about how these have been treated for tax purposes.

If the group extinguished any unpaid present entitlement by implementing an arrangement where a private company in your group has subscribed for or was issued units in a unit trust within the group, provide:

• an explanation of the arrangement
• copies of the relevant deeds and agreements.

If shareholders or associates have used any of the assets owned by a private company in the group, provide details of:

• relevant entities and assets
• details of any consideration paid for the use of these assets
• how this use was treated for tax purposes.

For information about how Division 7A applies to loans made by private companies to shareholders and associates of shareholders, see Loans by private companies.

Trust distributions

If you have unpaid present entitlements (UPE) as at 30 June (or at the end of your SAP year) during the review period, provide:

• an explanation of how the UPE was treated for tax purposes
• details of the 5 largest UPEs made by private companies within the group, including explanations of why the present entitlement was not repaid
• a copy of the investment agreement entered into by the corporate beneficiary if the UPE has been placed in a sub-trust.

Provide a breakdown of the largest 5 deductions you or your associates have claimed against discretionary trust income during the last 2 income years. For each deduction item, provide a brief description of the nexus between the discretionary trust income and the beneficiaries’ expense.

You may have had an entitlement to trust income conferred to a non-resident beneficiary during the review period. If so, provide an explanation of how the trustee has satisfied or proposes to satisfy the entitlement.

You may have had a trust estate that had a nil liability under subsection 98(3) of the Income Tax Assessment Act 1936 for the net income referable to the non-resident beneficiary’s entitlement. If so, explain why this liability is nil.

If any entitlement to trust income was conferred to a tax-exempt entity during the review period, provide:

• documents relating to the satisfaction of any of the entitlement or explain why the entitlement has not been satisfied
• evidence that the beneficiary has been notified of the entitlement if full payment has not been made.

Accounting losses

You may have had a net accounting loss position for the last 2 income years. If so, explain how you have funded your business and investment activities given its net loss position.

You may have provided an itemised description in the statement of comprehensive income with notes relating to this entity at an earlier question. If you haven't provided this, indicate on the trial balance or similar documents which expenses you have included in the 'All other expenses' tax return label.

With losses (capital or revenue) utilised during the last 2 income years explain what caused these losses.

For companies, provide the working papers and analysis performed to demonstrate that you have satisfied either the:

• continuity of ownership test
• business continuity test.

For trusts, provide the working papers and analysis performed to demonstrate that the relevant trust loss tests were satisfied.

If excess franking tax credits have affected losses, provide details and a reconciliation of losses carried forward.

Research and development tax incentive

For the research and development (R&D) tax incentive claimed in the last 2 income years, provide the following:

• working papers such as those supporting the completion of the R&D tax incentive schedule with
  • a breakdown of the expenditure, including entities and amounts for each of the registered R&D activities
  • the calculation of notional R&D deductions
  • the calculation of any feedstock adjustments made to assessable income
  • the calculation of any assessable government recoupment that was received
  • a description of how expenditure is distinguished and apportioned between eligible and non-eligible R&D activities.

If any expenditure incurred involved an associate, affiliate or connected entity, for each payment explain the:

• amount paid
• work conducted
• source of funds.

If any R&D results (for example, intellectual property, feedstock outputs) were disposed of, or payment received for the results of the R&D, provide an explanation of the transactions.

Small business CGT concessions

You may have claimed a small business CGT concession for the disposal of a CGT asset. If so, provide the working papers, analysis and supporting documents confirming that you met the specific conditions required by the:

• 15-year exemption concession
• retirement concession
• rollover concession.

Loss carry back tax offset

Loss carry back provides a refundable tax offset that eligible corporate entities can claim in their 2020–21, 2021–22 and 2022–23 company tax returns.

If you have already claimed the refundable tax offset, we may ask you for information to verify that you are eligible and have calculated the claim correctly (including your franking account information).

For more information see Eligibility for the tax loss carry back tax offset.

Temporary full expensing

Temporary full expensing allows eligible businesses to immediately deduct the business portion of the cost of eligible assets in the 2020–21, 2021–22 and 2022–23 income years.

You may have claimed a deduction under temporary full expensing or chosen to opt out of temporary full expensing.

If you have already claimed a deduction, we may ask you for information to verify that you are eligible and have calculated the deduction correctly.

For more information see Temporary full expensing.

Self-managed superannuation fund

The self-managed superannuation fund (SMSF) may have received non-cash contributions from the members or their associates. If so, provide an explanation of:

• the nature and market value of the non-cash contributions
• how the contributions were treated for tax purposes by both the transferor and the SMSF.

The SMSF may have loaned money or provided any financial assistance to a member of the fund or an associate of a member of the fund. If so, provide a copy of the agreement governing the money lent or the financial assistance provided.

If the SMSF derived any income or receive any distributions from a company or a trust within your group:

• explain whether any of the income or distribution is non-arm’s length income
• provide documents confirming whether the SMSF has a fixed entitlement to the income
• provide the most recent market value calculation for the units held by
  • the SMSF in related trusts
  • any related party investments if applicable.

The SMSF may have entered into transactions such as investments, asset acquisitions or leasing arrangements with a related trust. If so, provide:

• an explanation of the nature of the transactions and any written agreements in relation to these transactions
• calculation of the in-house assets tests (where an exception applies, provide reasons to support the exception).

We may also ask the SMSF to provide its investment strategy.

Private ancillary fund

If you operate a private ancillary fund (PAF), provide the following:

• trust deed
• a document outlining the fund's investment strategy
• documents supporting any asset revaluations.

The fund may have entered into any agreements or transactions with:

• associates
• any of the parties referred to in Guideline 22 of the Taxation Administration (PAF) Guidelines 2019External Link
• any entities it has an ownership interest in.

If so, provide the relevant names and a copy of the agreements or documents related to the transaction, and an explanation of whether the transaction was undertaken on arm's length terms.

The fund may have received donations from related parties, associates or employees (for example through a workplace giving program). These donations may be cash, unlisted shares or property. If so, provide:

• names and identifications of the donors
• the value of each donation
• the valuation methodology used if the donation is not in cash.

Also, provide a list of the distributions made by the PAF for the period under review to associated entities. Include the ABN and the amounts distributed.

Tax consolidation

Provide working papers for the consolidation entry calculations (both the allocable cost amount calculation and the tax cost setting amounts) if any entities in your group:

• formed a tax consolidated group or a MEC group within the review period
• joined the consolidated group during the review period.

Transferred losses – capital or revenue – may have been used during the review period or carried forward to later income years. If so:

• explain how the losses were eligible to be transferred into the tax consolidated group
• provide working papers for the calculation of the available fraction for each bundle of loss transferred to the head company.

Entities may have exited the consolidated group during the review period. If so, provide working papers for the exit calculations including the date of exit.

Taxation of Financial Arrangements

Some financial arrangements may have existed during the review period that are subject to the Taxation of Financial Arrangements (TOFA) rules. If so, provide a brief summary. Also, for each financial arrangement, explain:

• what each financial arrangement involves
• the treatment adopted under the TOFA rules
• the accounting treatment (initial recognition and over the life of the arrangement).

For each financial arrangement, provide working papers supporting the calculation of amounts reported at relevant TOFA labels on the tax return.

Fringe benefit tax

If your group has motor vehicles used by employees for private purposes, for all relevant vehicles, provide:

• the calculations of the car fringe benefit
• amounts of any employee contributions paid
• details of where any employee contributions received were reported in the tax returns.

Tax treatment of property disposals – property development business

Our records may indicate that one of your companies reported disposals of property on capital account during the review period. If so, for each disposal explain:

• how it was treated for tax purposes
• why the underlying property was not sold as part of a property development business
• how the underlying property was treated for accounting purposes (for example, non-current asset or trading stock)
• the purpose of acquiring the underlying property
• the details of any development activities that were undertaken with the land (for example, applying for planning permits, subdivision, construction) before the sale
• how the acquisition or construction of the property was funded.

Construction contracts

You may have construction contracts. If so, provide a brief description of:

• your tax policy about recognising long-term contracts
• in what situations the relevant entity can deviate from that policy.

For the largest current contract (in terms of revenue) that has been in operation over the review period, provide:

• a brief description of the contract and what it relates to
• parties to the contract
• detail about whether the contract is with a related or third party
• a copy of the contract
• an explanation of when revenue is recognised for both tax and accounting purposes
• a brief description of the book-to-tax adjustments to reflect the tax treatment.

Tax risks flagged to the market

The topics and evidence we typically cover in our request for information on tax risks flagged to the market are:

• Taxpayer alerts and practical compliance guidelines
• Rulings or advice

The following evidence assists us when reviewing this justified trust key focus area.

Taxpayer alerts and practical compliance guidelines

When we review your group, we want to be assured that none of the risks or concerns we have communicated are present in your circumstances. This includes our communication through taxpayer alerts and practical compliance guidelines.

For the review period, we may ask you to explain an arrangement or a variation of an arrangement described by a specific taxpayer alert or covered by a practical compliance guideline.

For more information see Taxpayer alerts and Practical compliance guidelines.

Rulings or advice

You may have relied upon a private binding ruling or another form of our advice such as general or preliminary advice during the last 2 income years. If so, confirm:

• that you entered into the arrangement as you described it to us
• the facts and circumstances you described to us has not changed
• whether additional facts and circumstances have occurred that are relevant to the technical position that we provided to you
• that the assumptions, if any, have occurred
• that the technical position we provided to you has been adopted.

What to expect at the end of the review

At the end of the streamlined assurance review we do not give an overall assurance rating because of its limited scope. We will share our findings and Next Action approaches with you in the following ways.

• Outlining the transactions, events and activities where we agree with the tax treatment you adopted and have tax assured.
• Giving specific feedback and recommendations, which may highlight areas for improvement and provide guidance on what you can do to mitigate future risks. This may include
  • self-corrective actions to improve tax governance and record keeping
  • self-corrective actions to mitigate a tax risk or correct an error with future limited follow up to ensure you have taken action
  • discussing risk mitigation options including early engagement on events which have future tax implications.
• Outlining where we're unsatisfied with your risk approach and detailing the steps to mitigate these risks. This may include
  • extending our review to resolve the issue collaboratively
  • further review the risks in a risk review or commence an audit.

If there are no outstanding concerns, we will conclude the review.

Any future risk-based reviews will only be based on:

• issues or years that have not been assured as part of the streamlined assurance review
• new information or significant changes in your tax situation
• issues where risk mitigation or early engagements options were not adopted
• where it was determined that your group did not have effective tax governance in place, and we have concerns that you may not meet your future tax obligations correctly.