The ATO released its latest report on the Next 5,000 group that found among other things that a high proportion has governance processes and procedures, but most are not documented.
As of 31 August 2022, the ATO reviewed around 5,300 transactions, activities and events of Next 5,000 private groups that were worth over $22 billion.
There are about 7,300 private groups in Australia that are part of this program as they have a net wealth of over $50 million. These groups hold around $1.3 trillion in net assets and contribute more than $10.1 billion in tax revenue each year.
“Considering the economic size of these groups, even one error can have a big tax impact,” the ATO said.
“The high profile of these groups also means that their level of participation can influence community confidence in and perceptions of fairness of the tax system.”
A typical Next 5,000 group can contain around 13 entities, including a mix of companies, trusts, and self-managed super funds.
Some Next 5,000 groups have philanthropic interests and include an ancillary fund or charity.
Most are well-established, multigenerational businesses that have been operating for many years. Many are family businesses or closely controlled groups.
The report observed that many of Next 5,000 private groups had clearly documented roles and responsibilities that lead to good tax governance and that documentation of the tax return preparation, review process, and identification of material transactions helps groups recognise tax risks and avoid errors.
It also found that private groups that seek tax advice for material risks and issues are more likely to make correct disclosures and adopt correct tax treatments.
“Whilst the proportion of Next 5,000 private groups without documented tax governance processes and procedures remains high, we are seeing some positive shifts in behaviour,” it said.
“Since our last report we have found increased attempts to improve documented tax governance processes and procedures.
“For the 30 per cent of groups with a documented tax governance framework, 69 per cent documented their tax governance procedures either before or after the notification of a streamlined assurance review. As frameworks become operational, we expect to see a decrease in errors for these groups that we continue to observe.”
However, there were still a number of common tax issues the ATO observed including:
- Loans or payments to shareholders and their associates not complying with the requirements of division 7A of the Income Tax Assessment Act 1936
- Using tax losses and capital losses incorrectly, including reclassifying capital losses as revenue losses
- Lack of record-keeping in relation to carry forward tax losses and capital losses from prior years
- Non-arm’s length arrangements involving family members or related parties that are designed to reduce or avoid tax that would otherwise be payable
- Tax treatment of disposals with incorrect characterisation of property sales on capital account that should be treated as sales arising from a property development business
- Mischaracterisation of receipts and/or expenses as revenue or capital
- Incorrect calculation of net capital gains tax reported
- Significant variances, discrepancies and errors in reporting of income and expenses between tax returns and business activity statements
- Incorrect GST treatment of face-value vouchers and deposits
- Incorrect calculation of reduced input tax credit entitlements from acquisitions related to restructures, investments, and merger and acquisition activity
In addition, the most common tax risks flagged to market arising for review as part of streamlined assurance reviews are those described in the following:
- Taxation Ruling TR 97/25 Income tax: property development: deduction for capital expenditure on construction of income-producing capital works, including buildings and structural improvements
- Practical Compliance Guideline PCG 2017/2 Simplified transfer pricing record-keeping options
- Taxation Ruling TR 2006/7 Income tax: special income derived by a complying superannuation fund, a complying approved deposit fund or a pooled superannuation trust in relation to the year of income
- Taxpayer Alert TA 2012/7 Self-managed superannuation fund arrangements to acquire property that contravenes superannuation law
- Taxation Ruling TR 2018/3 Income tax: tax treatment of long-term construction contracts
Since the program began, the ATO said it had received over 217 voluntary disclosures from the Next 5,000 private groups that total over $25 million in tax, penalties and interest from streamlined assurance reviews.
The most common tax issues resulting in a voluntary disclosure include the following:
- Loans or payments to shareholders and their associates not complying with the requirements of division 7A of the Income Tax Assessment Act 1936
- Unreported income, including trust distributions
- Claiming deductions for non-deductible expenses, such as expenses relating to private use of assets, entertainment expenses and property-related expenses
- Non-entitlement of franking credits
- Non-lodgement of fringe benefits tax return
