Understanding the ATO’s approach towards Privately Owned and Wealthy Groups

22 November 2018

Recently we hosted a tax seminar with the Australian Taxation Office (ATO or Tax Office) to help BDO private wealth clients better understand the Tax Office approach towards Privately Owned and Wealthy Groups (POWG).

The event was comprehensive and attended by some of the most influential private wealthy family groups in Australia. The event featured a keynote address from Will Day, Deputy Commissioner of Taxation Private Groups and High Wealth Individuals, followed by presentations from Assistant Commissioners of Taxation Sarah Taylor and Peter Koit.

Key takeaways included insights around the Top 320 and Justified Trust Programs, which foster early engagement with tax governance. The event also explored the topic of some significant income tax risks that are currently attracting the attention of the Tax Office. The aim of the ATO Top 320 and Justified Trust Programs is to assist key decision-makers better prepare when embracing mutual transparency and a streamlined process towards tax compliance in Australia.

Another key message from the event was with Australia’s increasing economic private wealth (which is driven largely by mining services, property and construction activities) the ATO have increased the POWG population criteria, to include:

  • By net wealth – high wealth individuals and their associates who control net wealth of more than $10 million (formerly net wealth over $5M)
  • By annual income – companies and associated subsidiaries with annual turnover greater than $10 million that are not public groups or foreign owned (formerly annual turnover greater than $2M).

Top 320 Program

The Top 320 POWG tax performance program is an early engagement approach to providing the community as a whole with assurance that Australia’s high wealth individuals and their associated entities are paying the right amount of tax. It involves a rigorous one-to-one engagement with the Tax Office where the primary focus in on “prevention rather than correction” for these clients. The 320 program aims to deliver:

  • Real time early engagement
  • Tailored engagement
  • Whole of tax approach
  • Certainty for the client
  • Feedback loop.

What does it mean for our clients? The one-to-one focus of the program helps to improve the ATO understanding of business and risk detection systems including the ATO’s ability to identify emerging tax risks and promptly rectify non-compliant activities.

The Tax Office claim the Top 320 Program provides taxpayers, the Tax Office and the Australian community with greater certainty that the correct amount of tax is paid by POWG and allegedly this approach reduces compliance costs for all stakeholders though the early detection of tax risks and correcting or settling disputes pre-lodgement of tax records.

Justified Trust Program

Justified Trust is a concept from the OECD that lays the foundations for effective tax governance. It is a ‘lighter touch’ approach to compliance rather than lengthy annual risk reviews by the Tax Office. To establish Justified Trust across a private group the four elements to be satisfied are:

  1. Effective tax governance is demonstrated
  2. Risk mitigation i.e. tax risks not flagged to market are presented early to the ATO and appropriately mitigated
  3. Accounting and tax differences understood – tax outcomes from new and significant transactions are explained
  4. Significant transactions understood – differences in accounting and tax results are explained.

 The Tax Office assert Justified Trust builds and maintains community confidence that taxpayers are paying the right amount of tax at the right time. It also allows the Tax Office time to focus its resources in the right areas.

What attracts the ATO’s attention?

As Peter Koit observed at the commencement of his presentation “We are all in a marriage with the ATO and divorce is not an option so we just have to make the best of it.” BDO echoes this sentiment. 

At the invitation of BDO, Peter outlined some of the higher tax risk issues which are currently attracting the attention of the Tax Office. Residency and international tax risk issues continue to be a dominant theme for present purposes.

From an international perspective, as Australia continues to become part of the global economy and with a reduced corporate tax rate of 27.5% for active businesses with turnover of less than $25 million for FY18 and $50 million for FY19 (otherwise the corporate tax rate remains at 30% for present purposes), the reduced Australian corporate tax rate is still comparatively higher than our international competitors. Therefore it is not surprising the ATO are seeing an increase with tax risk issues associated with international transactions.

Set out below are a few examples of some international transactions which are attracting the ATO’s attention:

  • Restructures where assets are shifted out of Australia’s tax net and no tax is paid
  • Positions of residency are reversed
  • IP shifted offshore and no CGT paid and / or low royalty payments.

Similarly, intergenerational transfers of assets attract the attention of the ATO when say pre-CGT assets are transferred to the next generation and non-arm’s length loans arise in the hands of the founders which provide tax free distributions.

In addition, the large size of business restructures can attract the attention of the ATO if the intent is to take advantage of tax concessions meant for smaller businesses. The analogy given by Peter is when folk try to fit into clothing that clearly doesn’t fit them – the so called “skinny jeans” analogy.

The ATO event was harmonious and informative. BDO welcome the ATO’s early engagement and transparent approach for POWGs provided the engagement is conducted in a collaborative and commercial manner. We look forward to future collaborations with the Tax Office as we shift towards a more streamlined corporate governance framework within the Australian taxation system.

Should you have any queries with any of the above or related matters, please feel free to contact me at [email protected].