In recent years, the ATO have increased its review activity to ensure that taxpayers are complying with the tax law. If the ATO think you may not be complying with your obligations or do not believe a review can investigate the issues sufficiently, they will conduct an audit.
During the audit and review process, the ATO have a preferred cooperative approach. They do try to maintain an open dialogue. However, of late, their responsive time has lagged, and in our experience, audits are taking much longer to close. This has been one of the more frustrating aspects as taxpayers are requested to respond in a timely manner, however, the response may not be considered by the ATO for years. We have been told this is a result of higher levels of quality control and assurance checks imposed, along with the complicated changes in Parliament.
Despite this short coming it is encouraged that you:
- be truthful and honest in your dealings;
- communicate openly and advise of any delay;
- provide complete, accurate and timely responses to requests for information; and
- provide complete access to records and documents. However, this does not pertain to records and documents that are in‑confidence (legal professional privilege) between you or your professional adviser and your barrister, solicitor.
We have also noticed more regular use of computer assisted verification methodologies to assist in analysing electronic records. These include scrutinizing time stamps and audit trails. This, along with other contentious issues, should have already been discussed with your advisor and if mistakes are found, voluntary disclosure would be considered along with formulating appropriate strategies to rectify any issues and compliance with the law.
Once the ATO finish their review or audit, they will tell you if you are not complying with your obligations and that an adjustment will be made. Where an adjustment is made, the basis, reasons and written notification will be presented. The ATO are also committed to help you to understand and meet your obligations in the future and the further exchange of views may continue to ensue.
An area of ATO scrutiny is understanding taxpayers’ processes, advice, and systems, particularly those of high Net Wealth Taxpayers. In July 2019, the ATO commenced the “Next 5,000” streamline assurance review program which specifically targets private groups connected to individuals with net wealth more than $50 million. The Top 500 private groups tax performance program is another key initiative examining private groups with turnover of $350 million, $500 million in net assets (regardless of turnover) or $100 million turnover and over $250 million in net assets.
These ATO assurance programs adopt “the justified trust methodology”, focusing on four key areas to ensure that taxpayer groups are paying the correct amount of tax:
- understanding a taxpayer’s tax governance framework
- identifying tax risks flagged to the market
- understanding significant and new transactions
- understanding why the accounting and tax results vary.
Some key observations noted from these ATO engagements are as follows:
- a high percentage have governance processes and procedures, but most are not documented
- clearly documented roles and responsibilities lead to good tax governance
- documentation of the tax return preparation, review process and identification of material transactions helps groups to recognise tax risk and avoid errors
- private groups that seek tax advice for material risks and issues are more likely to make correct disclosures and adopt correct tax treatments.
Common tax issues that escalate the reviews to audit are as follows:
- loans or payments to shareholders and their associates not complying with the requirements of Division 7A of the Income Tax Assessment Act 1936
- inappropriate revenue versus capital characterisation relating to the sale of property to access the 50% CGT discount
- sale of property to related parties for less than market value
- capital gains being reported that are less than what they should be
- trust distributions made without supporting trustee resolutions and that do not comply with the relevant trust deed
- non-arms’ length arrangements involving family members or related parties that are designed to reduce or avoid tax that would otherwise be payable.
- tax losses deducted in the current year that exceed the previous years carried forward tax losses and cannot be reconciled with relevant labels on the tax return.
The ATO will continue to find innovative channels to correspond with taxpayers and ensure compliance with the law. Heavy reliance will be placed on Tax Advisors to support their client’s position on many technical issues and compliance with the law. If you are subject to a review, however, lack of timeliness in its resolution by the ATO is our current direct experience.
Accru Felsers provides a full range of taxation services, from tax return preparation to tax planning strategies and can assist in managing a ATO review/audit process. Please contact your local Accru Felsers advisor to discuss any taxation concerns you may have.