Australia: ATO crackdown – wealthy Australians on the Tax Office hit list

In his next push to combat tax avoidance and strengthen tax governance, the Commissioner of Taxation is allocating significant resources and will be giving close attention to the business activities of 'High Wealth Private Groups' (HWPG).

This week the Australian Taxation Office's (ATO) Tax Avoidance Taskforce will launch a four year review program into Australia's top 500 Australian HWPG.

Who are High Wealth Private Groups?

Australian resident private groups who, along with their associated entities, control over $500 million of net assets, or have businesses with a gross annual turnover of $350 million (irrespective of assets).

What you need to know?

HPWGs are in the cross hairs and high on the Commissioner of Taxation's hit list. Members of these groups should act now in preparation. If you are within this particular group it is not a matter of 'if' but 'when' there will be a knock on the door.

Initial request for information

Over the next four years the Commissioner of Taxation will be requesting general information from HWPGs about their intergroup dealings and general business conduct. The response to these information requests will generally be synthesised by the ATO and assigned a 'risk rating' – and 'triage' the order in which the ATO will escalate the results of the 'Risk Reviews' – to a full "Audit".

HWPGs should carefully consider their responses to the ATO as this will generally determine whether you will be subject to a more rigorous audit regime in the future. Once audit activity is undertaken, amended assessments and penalties may follow. It is uncommon for the ATO to progress through that stage without seeking to recover.

The program is intended to promote early engagement and participation with the ATO so that they can gain a better understanding of HWPGs businesses and their operations. This allows the ATO to assess the group's tax compliance and pick up on any potential tax avoidance risks early on.

The ATO will be looking for any unusual behaviour or activity which may require them to investigate further.

The Commissioner will be looking at:

  • whether the group's tax or economic performance is comparable to similar businesses
  • low transparency of tax affairs
  • large, one-off or unusual transactions, including the transfer or shifting of wealth
  • aggressive tax planning
  • tax outcomes inconsistent with the intent of the tax law
  • choosing not to comply, or regularly taking controversial interpretations of the law, without engaging with ATO
  • lifestyle not supported by after-tax income
  • accessing business assets for tax-free private use
  • poor governance and risk-management systems.

Streamlined assurance reviews

If in the initial review the Commissioner comes across unusual activity and considers that there are potential risks, the ATO will initiate a 'streamlined assurance review'.

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This is a less formal approach than an audit and is aimed at encouraging participation and early disclosure. The Commissioner will assess all the information available and consider group's current corporate governance arrangements before coming to a decision on the issue.

At the end of the review, the Commissioner will either:
  • outline the events and transactions where the Commissioner agrees with the group's tax treatment and have tax assured;
  • give specific feedback based on observations made during the review (this may highlight areas for improvement and provide guidance on what you can do to mitigate risks in the future); or
  • outline any risks the Commissioner is not satisfied with and what next steps the Commissioner intend to take.

Have you caught their attention?

As part of the review program, the ATO are specifically targeting HWPGs where there is activity falling within the following categories:

  • international related party dealings:
    • thin capitalisation
    • dividend withholding and royalty withholding tax
    • transfer pricing.
  • significant tax deductions and losses
  • related party transactions:
    • Division 7A loans
    • use of private company assets
    • unpaid present entitlements from trusts to private company beneficiaries
    • payment from trusts.
  • disposal of assets:
    • capital vs revenue accounts
    • small business Capital Gains Tax (CGT) concessions
  • tax consolidations and corporate restructures
  • self-managed super fund (SMSF) dealings.

International related party dealings
If any member of the group is a foreign resident for tax purposes, the Commissioner will be looking to see if all arrangements and transactions with that entity are made at 'arm's-length' or on commercial terms.

Of particular interest will be loan agreements, royalty arrangements, distribution arrangements as well as management and other service arrangements. Transfer pricing issues are featuring highly in and dominating the international tax scene.

Thin capitalisation
Thin capitalisation is relevant for groups or entities who have a high debt to equity ratio (groups who are funded by a high level of debt and relatively little equity). The thin capitalisation rules aim to limit the amount of debt deductions claimed by entities operating in Australia who also have a foreign member in their group.

The Commissioner will be interested in the HWPG's thin capitalisation calculations and workings.

Tax deductions and tax losses
If the group has been in a revenue net loss position for several years the Commissioner will be interested in the circumstances and the HWPG's strategy in making the business profitable.

For significant net capital losses the Commissioner will also consider whether the group is entitled to offset their future capital gains under the continuity of ownership test or the same business test.

Division 7A loans
The Commissioner will be looking to see if payments made to shareholders and associates by private companies are correctly documented and have been treated correctly for tax purposes. The Commissioner would expect to see loan agreements, minimum annual repayments and interest charges and a general ledger detailing the movements in account balances of each loan.
Small business CGT concessions
If these concessions have been applied, the Commissioner would expect to see calculations and working papers that the group satisfies all the basic conditions to be able to utilise these concessions.
Tax consolidation or deconsolidation
Tax consolidation allows for a group of entities who otherwise operate on their own, to operate as a single entity for income tax purposes. If the HWPG consolidates during the year, the Commissioner would expect to see all work papers and calculations relating to consolidation entry allocable calculations and transferred losses.
Self-managed superannuation funds
The Commissioner will be interested in any of the following transactions:

  • if the SMSF received any non-cash distributions from the member or associates
  • if the SMSF lent money of provided financial assistance to a member or associate
  • income derived from or distributions received from a company or trust within the group
  • transactions entered into with a related trust such as investments, asset acquisitions or leasing arrangements.

Importance of strong tax governance

The ATO creates a tax profile for all taxpayers which is essentially a rating of the effectiveness of their tax governance arrangements.

When determining the tax profile of private groups, the ATO will take into consideration the controls and process that have been put in place for decision making and managing tax risks. In essence, the existence and effectiveness of a tax governance policy framework.

If the ATO is satisfied that the group's tax governance arrangements is effective in ensuring compliance, they will have more confidence going forward that the group is correctly managing their tax risks and will remain compliant in future.

What can be done now?

We recommend that you undertake a review and obtain legal advice (under privilege) on any historical positions which you feel might attract undue attention. We also suggest that these be reviewed independently. In the event 'voluntary disclosures' are made prior to audit – and notwithstanding the announcement of this program – taxpayers can generally access an 80 per cent penalty discount on penalties.

If you are able to have your lawyer carry out the review, any discussion or communication around the particular issue won't be subject to compulsory disclosure to the Commissioner or to the court, in any subsequent proceedings.

This publication does not deal with every important topic or change in law and is not intended to be relied upon as a substitute for legal or other advice that may be relevant to the reader's specific circumstances. If you have found this publication of interest and would like to know more or wish to obtain legal advice relevant to your circumstances please contact one of the named individuals listed.

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