We often see press related to tax issues affecting large corporations, as well as issues unique to individual taxpayers. However, the Australian Taxation Office (ATO) is now devoting significant resources to assuring the taxation and superannuation obligations of private groups. These private groups include small to medium enterprises, family offices and high net worth individuals.

It is unsurprising that private groups are becoming a greater focus for the ATO, as they are often confronted by the same issues as larger businesses and corporations. In addition, private groups face a host of other issues arising from the private nature of their business and ownership. These issues include the complexities of family dealings and the consequences of employing different ownership structures, including the prevalent use of trust arrangements.

For business owners, directors and their advisers, it is important to be aware of the ATO's programs and the tax issues that are likely to attract the ATO's attention. There are important steps that all private groups and family offices should take to prevent, or prepare for, likely reviews. For those already under review, a clear strategy for resolution and objective advice based on an understanding of the ATO's processes is critical to ensuring an early and favourable resolution.

Top 500 Private Groups Program

An expansion of the ATO's former Top 320 program, the 'Top 500 private groups program' is aimed at identifying key areas of tax risk and ensuring private groups are reporting the right amount of tax. If identified by the Top 500 program, the ATO will apply a 'justified trust approach' to understand the income and wealth extraction activities of the private group through one-on-one engagement.

If the private group can satisfy the ATO that it has fulfilled its tax and superannuation obligations, they can then transition to a 3-year monitoring and maintenance phase. On a practical level, this may mean the ATO taking a more 'hands off' approach by conducting annual checks and only seeking to verify material changes to the business or tax outcomes of new significant transactions.

Most reviews under this program are already well underway. We expect to see a majority of these reviews identifying issues requiring further consideration and advice, based on the outcome of similar ATO programs in respect of large business and the early findings released by the ATO in relation to the Next 5,000 Review. Unfortunately, we are often only asked to assist clients when these reviews have gone wrong, or where a client has been unaware or underestimated the risk at this stage. It is critical for private groups to objectively assess the strength of their position, and collate the evidence available to support that position, when subject to an ATO review. This should then form the basis of an engagement strategy with the ATO.

Next 5,000 Review Program

In addition to the 'Top 500 private groups program', private groups should also be aware of the ATO's other compliance program – the 'Next 5,000 review program'. This program again applies a 'justified trust approach', but focuses solely on streamlined assurance reviews of Australian resident individuals – together with their associated companies, including trusts, partnerships, and superannuation funds – who control wealth of more than $50 million. The ATO recently released their early findings in relation to this program, indicating that they expect to complete up to 1,000 reviews. This suggests a significant increase in ATO activity, with one in five groups likely to be subject to review each year.

When conducting a Next 5,000 program review, the ATO may engage with private groups to:

• understand the group's tax governance framework in detail, its effectiveness, and how it is utilised in day-to-day business;
• identify potential tax risk areas to understand how risk areas are managed – see below for some common tax issues that the ATO may focus on);
• understand current business activities, particularly significant or new transactions, and their tax outcomes; and
• review documents and records to explain any variations in accounting results and tax obligations.

What are the potential tax risks?

The early findings released by the ATO indicate that, of the groups already reviewed, 80% had significant activities or issues that required further review. While most of these cases were resolved through self-mitigation by taxpayers, 20% of these issues were considered high-risk and escalated to audit. These early findings, and the high proportion of cases escalated to audit, highlight the ATO's increased activity in the private groups sector.

Some common tax issues that are likely to attract the ATO's attention, as highlighted in the ATO's early findings are:

• proper characterisation of property transactions as revenue and capital, and access to the 50% Capital Gains Tax (CGT) discount;
• sale of property to related parties for less than market value, or capital gains reported for less than they should have been;
• trust distributions made without supporting resolutions, or not in compliance with the relevant trust deed;
• non-arms' length arrangements, involving family members or related parties, that may be seen to result in a reduced amount of tax being paid;
• proper characterisation and deductibility of capital expenditure;
• wealth extraction activities, including compliance with Division 7A provisions and the self-managed super fund regime;
• eligibility of research and development claims, and adequate record keeping to support allocation of expenditure;
• misuse of tax concessions, including the small business CGT concession; and
• related party international dealings and cross-border transactions, including potential application of transfer pricing provisions.

We also consider the following tax risks to be potential areas of focus for the ATO:

• poor tax governance and inadequate record keeping;
• major commercial deals and restructures, and lack of contemporaneous evidence to support commercial drivers for one-off transactions;
• independent contractor arrangements;
• Superannuation Guarantee Charge shortfalls and penalties; and
• trust structures and wealth distribution arrangements.

What does this mean for private business owners?

The ATO's Top 500 and Next 5,000 programs mean that most substantial private groups are likely to be under scrutiny in the near future, if they not already under review. Business owners and advisers can expect questions addressing specific tax issues, as well as canvassing sensitive issues around governance and controls.

This means that private groups should use this opportunity to prepare in advance. They should ensure any potential issues are addressed and appropriate governance mechanisms are both in place and documented. Although complying with the ATO's programs can be time consuming and require significant resources, early preparation can reduce this burden and the potential for surprises.

What key steps can private business owners take now to prepare?

• Consider engaging with the ATO early to create transparency – Engaging proactively with the ATO can help to establish meaningful dialogue. This can assist you to identify the precise nature of information the ATO is seeking, in order to prevent future audit activity. By ensuring you are in a position to prepare and present clear evidence and information in support of your tax position, you can help provide the ATO with a level assurance that correct tax treatments are being adopted and tax obligations are being met.
• Identify any potential tax risk issues in advance of a review – Closely examine your business structure to identify the key areas that may attract the ATO's attention. By commencing preparation at the earliest opportunity, you can formulate a clear action plan to manage and mitigate any risks. This might include making voluntary disclosures to rectify any reporting errors.
• Review your tax governance practices – Ensure you have clear policies and procedures in place to manage your tax and super risks. You should ensure that appropriate tax governance processes and controls are applied, and that you have sufficient evidence of compliance to satisfy the ATO. This may involve verifying systems and processes to ensure any gaps are addressed and remediated.
• Seek objective independent advice – This is particularly the case in relation to tax positions that may not align with the current views of the ATO. In such cases, it is crucial that you present robust and comprehensive evidence as well as an explanation about how the tax law should apply to your particular circumstances, based on such evidence, in order to assist the ATO understand your position.
  

We can assist you in managing tax matters, tax risk and disputes from early review and audit, to objection and litigation. Our team has extensive experience in tax law, with a successful track record of applying an evidentiary and forensic approach to tax risk management. Our relationship of trust and mutual respect with the ATO, arising out of continuously acting for and against the ATO in a range of matters, including reviews in the Justified Trust regime, gives rise to unique insights, allowing us to facilitate the best outcomes for our clients.

If you would like further information or advice on any of the above issues, please reach out to our Tax team.