Provisional justified trust for Top 500 groups

What is provisional justified trust

Provisional justified trust is a pathway to justified trust for Top 500 groups that are tax assured but are yet to implement a tax governance framework.

Provisional justified trust provides eligible groups with a pause in assurance activities so that the group can dedicate their resources to implementing effective tax governance.

Eligibility for provisional justified trust

Top 500 groups that haven't achieved justified trust will be eligible for provisional justified trust if:

• all material tax issues arising from the group’s income earning activities and the ways in which wealth has been extracted have been assured up to the penultimate year lodged (for example, the group has achieved full tax assurance)
• the Top 500 group commits to implementing an effective tax governance framework within 12 months.

When a Top 500 group has achieved full tax assurance for the first time, they will have the option to enter provisional justified trust. Top 500 groups in the general category that have previously achieved full tax assurance, and had one year of monitoring and maintenance, will have the option to enter provisional justified trust at the end of each assurance refresh engagement.

Approach to provisional justified tax

There are 2 approaches to provisional justified trust for Top 500 groups: one that applies to predominantly passive investment groups and another for all other groups.

Passive investor groups, in general, tend to treat their tax issues correctly, so the provisional justified trust approach for passive investor groups doesn't require operational effectiveness testing of the group’s tax governance before the group can achieve justified trust.

For all other groups, the provisional justified trust approach maintains the requirement to test the group’s tax governance for operational effectiveness, including extending timeframes where necessary to allow for the group’s lodgment cycle, before the group can achieve justified trust.

Passive investor groups

The Top 500 program defines a passive investor group as groups that generate 90% or more of their income from passive income sources, with limited to no business activity done by the group.

This may include investments:

• held with banks (such as term deposits)
• in securities such as shares, funds, and bonds (whether held directly, through a family office, or managed externally)
• in commercial and residential property assets
• that involve certain rights to income (such as mining royalties).

Eligible passive investor groups 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. Our passive investor guide for Top 500 groups provides examples that may help groups with passive investments to develop tax governance over their material tax issues.

The 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.

Guidelines for passive investor groups

The ATO case team will have 2 months to provide the group with feedback on their draft tax governance framework.

The 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 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.

If the Top 500 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 monitoring and maintenance 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.

Non-passive investor groups

Unlike Top 500 groups that are considered passive investors, non-passive investor groups require effectiveness testing of the tax governance framework before being placed in justified trust. The following procedure is to be followed.

Guidelines for non-passive investor groups

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 group must produce a draft tax governance framework across the 4 key principles of tax governance within 6 months of entering provisional justified trust. Our effective tax governance criteria for Top 500 groups 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 on their draft tax governance framework.

The Top 500 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 practical reasons around timing, groups may be granted a further 6 months of provisional justified trust (with scope to extend by an additional 6 months where necessary to cover the group’s lodgment cycle) to provide evidence that their tax governance framework is operating effectively.

If the Top 500 group doesn't develop an effective tax governance framework within the stipulated timeframe, they will be removed from provisional justified trust and assurance activities will restart from the last assured financial year.

If the Top 500 group implements an effective tax governance framework, and provides evidence that the framework is operating effectively, they will enter justified trust. The 3-year monitoring and maintenance period will start from the lodgment year following the year that provisional justified trust was provided.