In this third article in our series on where businesses should be heading to from here, we discuss the update which the Australian Taxation Office’s (ATO) Private Wealth Group recently provided KPMG regarding its Next 5,000 review program, scheduled to commence over the coming months.
What is the 'Next 5,000' review program?
The Next 5,000 is an expansion of the Top 500 private groups tax performance program and is intended to provide assurance to the community that these groups are paying the right amount of tax.
The ATO’s approach under the Next 5,000 will broadly mirror the Top 1,000 tax performance program approach that was applied to public and multi-national companies in the sense that the Next 5,000 program will involve streamlined assurance reviews. These reviews will be undertaken over an estimated 5 month period, with tailoring of the program to the private wealth market and the current COVID-19 environment.
The Next 5,000 program will commence over the coming months, with the ATO currently seeking feedback from groups on the exact timing, with particular regard to the impact of COVID-19 on the capacity of Next 5,000 taxpayers to be involved in the program.
The ATO has indicated that Next 5,000 taxpayer groups will comprise an individual who together with their associates and connected entities control net wealth of more than $50 million. Taxpayers that have already been captured under the Top 500 private group program will be excluded from the Next 5,000.
The ATO’s 'justified trust' methodology
In performing their review, the ATO will seek to apply their 'justified trust' methodology to obtain assurance that the group has paid the right amount of tax based on the following four pillars:
1. Effective tax governance
The approach to reviewing a group’s tax governance framework will include a tailored approach focusing on tax compliance processes, roles and responsibilities and post implementation review.
The ATO acknowledged that it does not necessarily expect to see the same level of formal tax governance documentation as those taxpayers under the Top 1,000 or Top 500 private group programs. However, as part of these reviews, the ATO will be looking for documentation to demonstrate that there is effective oversight of tax processes, identification of tax risks, professional tax advice is sought where appropriate, and tax compliance is timely and accurate.
2. Tax risks flagged
The ATO will seek to understand whether any current Practical Compliance Guidelines (PCGs) or Taxpayer Alerts may apply to the group and any risks identified as a result of this. As an example, this may include reliance on PCG’s in relation to Division 7A arrangements within the group.
3. New and significant transactions
The ATO will seek to understand the current business activities, particularly significant or new transactions, and the tax outcomes of these. This will also include an assessment of ongoing transactions and specific industry issues which may impact on a particular taxpayer group.
4. Accounting and tax differences
The ATO will seek to identify certain differences between accounting and tax, which will include a review of tax reconciliations and trust distributions.
Other points to note:
- The review period will generally cover the two most recent income years.
- GST will be integrated into some streamlined assurance reviews to understand GST consequences on significant transactions, events or issues and also identify any priority GST issues.
- There will be limited reviews of SMSFs. A review of a SMSF will usually only occur where a SMSF forms a material part of the group.
Timeframe of a review
The ATO has advised that all groups subject to the Next 5,000 program will be provided with three months advanced notice before commencement of the review, with the first round of request for information generally required within 28 days after commencement.
However, the ATO is providing a COVID-19 transition option where groups can elect to waive the three month advanced notice in exchange for being provided with an extended period to respond to the first round of request for information. This COVID-19 transition option is a welcome announcement and will provide groups with up to two and a half months to respond to the first request for information.
Groups who believe they may fall into the Next 5,000 program should consider how they would address the four pillars outlined above. In our experience, the best outcomes are achieved when taxpayers are adequately prepared for their reviews.
Practical steps to ensure your readiness for review may include:
- Formally documenting your tax risk management and governance framework and/or tax processes with regard to the size and complexity of your group.
- Proactively assessing any tax risks flagged to the market and documenting how these risks have been managed where they apply to your group.
- Ensuring that all contemporaneous documentation and advice has been retained and collated that supports the tax treatment of your significant or new transactions.
- All material book to tax adjustments are easily explainable and supported by applicable documentation (for example differences in depreciation deductions).
Where specific tax risks are identified, advice should be sought on how best to manage this risk, including collating supporting documentation or potentially engaging with the ATO.
If you would like to discuss the Next 5,000 program and how KPMG can assist your group in preparing for this program, please feel free to contact us.
Series: Where to from here?
KPMG's 6-part series on where businesses should be heading to from here.