Purpose of this guide
As part of the Top 500 program the ATO has developed this guidance to help private groups who undertake passive investment with developing tax governance over the material tax issues they have to manage. In particular, this guide will help with principle 2 of the 7 principles of effective tax governance – recognise tax issues and risks.
We recognise that there are many industries in which Top 500 private groups operate, and that the business structures and operational models exhibit high levels of differentiation. In turn, we look for improvements that will reduce the cost and intensity of our engagements.
We are aware that many Top 500 private groups derive income from passive investment activity. This guidance is designed to help private groups to show that they are complying, and will continue to comply, with their tax obligations. The purpose is to help:
- Top 500 private groups who want to develop and apply tax governance policies and procedures to manage the tax issues that arise from passive investment activity
- provide a simplified pathway towards achieving justified trust for Top 500 private groups whose income is mainly derived from passive investment activity.
Differentiated (simplified) approach
Engagements between the ATO and Top 500 private groups whose income from regular activities is derived mainly from passive investment activity ( greater than 90%) will be simplified under the differentiated approach as follows:
Top 500 private groups that haven't achieved justified trust will enter provisional justified trust if:
- all material tax issues arising from the group’s income earning activities have been assured
- (if applicable) the tax treatments that have been applied to the way wealth has been extracted are sound – for example from any investment company or trust that carries out passive investment activity
- the Top 500 private group doesn't have an effective tax governance framework in place.
The Top 500 group will have 12 months from entering provisional justified trust to develop an effective tax governance framework, including over any wealth extraction activities and material related-party transactions. During this 12-month period, no assurance activities will be carried out.
The Top 500 private group must produce a draft tax governance framework across the 4 key principles of tax governance within 6 months of entering provisional justified trust. Effective tax governance criteria for Top 500 private groups and the following content provides guidance regarding the criteria for achieving a high level of assurance for tax governance.
The ATO case team will have 2 months to provide the group with feedback.
The Top 500 private group will have a further 2 months to make any required amendments, and then return the framework to the ATO case team for final assessment.
For tax governance, only the effectiveness of the design of the Top 500 private group’s tax governance framework will be assessed by the ATO case team. Operational effectiveness testing is not required as part of our case team’s assessment. This is due to the timing of when newly developed governance documentation can be assessed.
If the Top 500 private group doesn't develop an effective tax governance framework within 12 months, they will be removed from provisional justified trust and assurance activities will restart from the last assured financial year.
If they design an effective tax governance framework, they will enter justified trust. The 3-year monitor and maintain period will start from the financial year following the year that provisional justified trust was provided.
At the end of the 3 years of monitoring and maintenance, we may ask the Top 500 group to show us they have tested the operational effectiveness of their tax governance framework. This is to assure that the group has been following the prescribed processes and procedures.
Tax governance guidance for passive investment activity
This guide is not intended to identify every tax issue that might arise from the passive investment activities carried out by Top 500 private groups. For the purposes of this guide, the term ‘passive investment activity’ may have a different meaning to the ordinary meaning of ‘passive investment’.
The 3 classes of passive investment activity that are considered in this guide are:
This guide provides an example of what tax governance could look like for groups who take a simple approach to investing in each of the 3 asset classes, and an example of what tax governance could look like for more complex approaches to managing investments in listed shares.
We recognise that this guide may have limited application to groups who have large portfolios of diversified investments and sophisticated controls in place to govern their investment activities.
These examples are not reflective of any specific private group. Its purpose is only to highlight the tax issues that arise and level of detail that should be considered when developing effective tax governance.
Although the attached guidance is intended to help by showing how well designed (and tailored) tax governance processes and procedures can be put into place, Top 500 private groups also need to ensure that those well-designed processes and procedures are carried out.
The list of tax issues is not exhaustive and the processes and procedures required by each Top 500 group may be different depending on their circumstances.