As previously reported the Australian Taxation Office (ATO) has begun issuing notices for its compliance program focusing on the “Next 5000” private groups in Australia (Next 5000 Program). For those already under an audit as part of the Next 5000 Program it is important to understand the audit process, be direct, articulate and clear in responses to the ATO and seek professional advice to form a strong audit strategy.
For those yet to be subject to a review the message from the ATO and many advisors is to prepare early. But what exactly does this entail? How can you prepare for an audit from the ATO? In this article we discuss our top tips for preparing for an ATO audit, with a focus on the Next 5000 Program.
1. Chart your Current Group Structure
As a first step in the information gathering process the ATO will ask for a group structure. Often an overlooked basic tool for any group, the group structure should show all entities including companies, partnerships, trusts and superannuation funds.
To pre-empt requests in an audit, taxpayers should ensure they have group structures for the past two financial years (to demonstrate any changes) ready to provide the ATO.
Bonus Tip: Ensure that your understanding the structure of companies, their shareholders and directors is in line with government records by checking with ASIC. For trusts and partnerships refer to deeds, unit registers and agreements as appropriate and ensure you have reviewed any updates to these documents.
The ATO has highlighted that it has a particular interest in offshore entities, foreign branches or assets as part of the Next 5000 Program. If an entity in your group directly or indirectly owns, controls, or has an interest in, offshore entities, foreign branches or assets careful analysis of this connection should be undertaken. We can assist in reviewing the nature of the connection, the degree of connection and control and whether a voluntary disclosure ought to be made if income has not been reported in Australia in respect of these offshore entities, foreign branches or assets.
2. Ensure the difference between your accounting and tax results are clearly documented
As part of the Next 5000 Program the ATO will be looking closely at the alignment between accounting and tax results. Taxpayers should ensure not only are their tax returns, schedules and disclosures in order but so are the working papers that support them.
Bonus Tip: Journal entries and workpapers do not create transactions. Further, through numerous audits we have advised on, we have found that where journal entries and working papers are the only record of purported transactions, it is difficult for taxpayers to discharge the burden of proof to the ATO that the transaction happened. Taxpayers and advisors should review transactions to ensure legal documents are in place of the transactions that the working papers and journals record.
Where elections have been made or CGT roll-overs accessed these should be documented. If you are unsure if your documentation covers transactions undertaken contact one of our specialists who can review the documentation and provide an assessment accordingly.
3. Check your Governance and Risk Processes and Controls are in Order
The Next 5000 Program is based on the concept of justified trust. Justified trust is having the confidence that taxpayers are paying the right amount of tax. To demonstrate that your business can be trusted in meeting its tax obligations the ATO will look to understand the processes and controls you have in place to ensure correct compliance.
In preparation for an audit and to ensure that you are compliant, consider:
reviewing, preparing, and updating written manuals on compliance processes;
clearly identifying roles and responsibilities within your tax team to ensure there are no gaps;
undertaking an internal audit and implementing any improvement recommendations;
seeking an external independent audit of your processes to identify risk areas; and
if you identify risk areas, establish a process for when you should seek external advice on such areas.
Sladen Legal’s tax team can assist in reviewing your governance and risk processes and the controls you have in place to help reduce tax leakage exposures. Contact one of our specialists if you would like to discuss this further.
4. Review Key Transactions
The ATO has advised that a wide range of topics will be covered in their information requests under the Next 5000 Program. Prior to the commencement of an audit, consider whether in the past two years you:
commenced a new business or made a new investment;
restructured your group;
accessed small business CGT concessions on the disposal of assets;
consolidated group entities;
received additional funding for your business;
operated whilst in an accounting loss;
had dealings with international related parties;
had entities in your group which advanced loans or made payments to shareholders or their associates of private companies within your group;
had unpaid present entitlements as at 30 June;
claimed the research and development tax incentive; or
made non-cash contributions to self-managed superannuation funds.
These types of transactions are some of the many that capture the ATO’s attention. If you have undertaken any of the above transactions, you should start collating information related to the event and in particular supporting the positions taken. If you require help in reviewing these transactions and confirming your positions, contact one of our specialists.
5. Understand Key Tax Risks
The Commissioner and the ATO regularly communicate key tax risk areas via alerts, practical compliance guidelines, and interpretative decisions. It is important that positions taken do not directly conflict with clear guidance from the ATO in these areas as they may expose you to increased penalties. If you have undertaken a transaction and are concerned it may not be in line with ATO guidance or have not previously sought advice on a transaction to confirm the position taken, contact one of our specialists for assistance.
Final Thoughts: Address problems now
After a thorough review of your records, transactions, and events it may be that errors are uncovered. It is key to act quickly in these circumstances to rectify the issue via a voluntary disclosure to the ATO. Voluntary disclosures made prior to an audit are generally viewed more favourably and may result in lighter penalties.
Alternatively, your internal review may have highlighted uncertainties as to some positions taken. In these situations, it is recommended that you seek advice from a tax lawyer to assess the position against the legislation, ATO guidance and case law.
If you have identified issues or would like assistance in reviewing risks or uncertainties, contact one of our specialists:
Federal Tax:
Daniel Smedley
Principal | Accredited Specialist in Tax Law
M +61 411 319 327| T +61 3 9611 0105
E: dsmedley@sladen.com.au
Rob Jeremiah
Principal l Accredited Specialist in Tax and Business Law
M +61 418 500 363 l T +61 3 9611 0103
E rjeremiah@sladen.com.au
Neil Brydges
Principal Lawyer | Accredited Specialist in Tax Law
M +61 407 821 157 | T +61 3 9611 0176
E nbrydges@sladen.com.au
Rob Warnock
Principal Lawyer
M +61 419 892 115 | T +61 3 9611 0155
E: rwarnock@sladen.com.au
Laura Spencer
Senior Associate
M 0436 436 718 | T +61 3 9611 0110
E: lspencer@sladen.com.au
Edward Hennebry
Senior Associate
T +61 3 9611 0113
E: ehennebry@sladen.com.au
Lucy Liang
Lawyer
T +61 9611 0131
E lliang@sladen.com.au
Superannuation:
Phil Broderick
Principal
T +61 3 9611 0163 l M +61 419 512 801
E pbroderick@sladen.com.au
Philippa Briglia
Senior Associate
T +61 3 9611 0173
E pbriglia@sladen.com.au
Edward Morcombe
Lawyer
T +61 3 9611 0165
E emorcombe@sladen.com.au
