Top 500 Program
Scott Parkinson and Kasey Macfarlane, Assistant Commissioners Private Wealth, ATO, Angela Hucker, Senior Director, Private Wealth, ATO
The ATO provided an overview of the findings from the recent Top 500 client experience survey.
The survey was conducted in order to understand clients' and advisers’ experiences with the Top 500 program. The survey was sent to all private groups that are a part of the Top 500 program.
36% of all survey recipients responded.
Key outcomes of the survey included:
- 73% of participants were satisfied with the program.
- Top 500 program participants value early and ongoing one-on-one direct engagement with the ATO.
- Private groups and their advisers see benefit in discussing issues through open and regular communication to enable early resolution of tax issues and prevent disputes.
- The program assists the Top 500 private groups understand how effective tax governance helps them meet their tax obligations and the ATO teams rated well in terms of their understanding of Top 500 clients’ groups.
- Survey participants, however, noted that participation in the program, particularly in relation to ATO requirements and expectations about tax governance, is time consuming and resource intensive.
- The need for continued improvement of communication was a key theme of the survey responses. noting in particular that
- the ATO should ensure that requests for information are tailored and take the taxpayer’s circumstances into account
- it is important that the ATO communicates its view of the effectiveness of governance frameworks implemented by Top 500 taxpayers and provides information about any potential tax risks identified.
- It can take time to respond to requests for information, and regular updates and communication from the ATO about the progress of a private group’s Top 500 engagement is important.
The Top 500 program is intended to be a model of engagement that provides Top 500 groups who want to comply with the opportunity to demonstrate that they are complying and will continue to comply with their tax obligations.
Engagement with private groups under the Top 500 program is premised on a mutually open and transparent relationship whereby both the private group and the ATO understand the activities of the Top 500 private group, the tax issues that the private group has to manage, and how those issues are managed.
A statement of agreed principles is now being shared and discussed when a Top 500 group and the ATO first engages under the Top 500 program. The agreed principles explain the mutual obligations for the engagement. The ATO intends to publish the mandatory items required for a Top 500 private group to demonstrate that they have tax governance framework that operates effectively shortly.
Details of the tax governance mandatory items will be provided to Private Groups Stewardship Group members together with the statement of agreed principles.
If advisers or Top 500 clients are concerned about the manner in which a Top 500 engagement is progressing, or that the ATO’s activities do not accord with the statement of agreed principles, they should raise their concerns with the case team in the first instance and then escalate to the relevant Regional Director or Assistant Commissioner if the matters remain unresolved.
Members’ comments
There are at times instances of inconsistency in approach across different ATO teams undertaking Top 500 engagements, and the intention of the program and the nature of engagement is not always practically achieved.
Open communication is very important, and it is vital to keep Top 500 clients and their advisers informed, particularly if an engagement is not progressing well.
Members would like to see appropriate ATO escalation points for clients and advisers to raise concerns about the progress or direction of a Top 500 engagement when appropriate.
It is important that the ATO is clear about expectations in relation to tax governance. There is the threshold question for Top 500 clients about how much more they should invest in tax governance once they have reached a point of diminishing returns on that investment.
Open communication is very important. This is expected to continue where a group has achieved Justified Trust. Changes, events and any questions need to be raised by Top 500 groups and discussed with the ATO in a timely manner. This includes clear and open communication with a Top 500 group where it is considered that they no longer satisfy the elements of Justified Trust, including consideration of a transition period to allow the group to address any issues or concerns.
Action item |
20220607-1 |
Due date |
As soon as possible |
Responsibility |
Scott Parkinson |
Action item details |
ATO to provide members with the agreed principles for Top 500 engagements for review and to provide feedback. |
Cross border transactions and arrangements
Karen Price and Jamie De Clifford, Assistant Commissioners, Private Wealth, ATO
The ATO discussed what we are seeing in relation to cross border transactions and arrangements in the private group market.
The ATO has observed a range of features of cross border activities and transactions in the private wealth market that present challenges from a tax perspective:
- There is often a lack of commercial documentation supporting both the purpose of the cross border transaction or arrangement and how the pricing of offshore supplies and acquisitions has been determined.
- Private groups often fail to disclose international dealings and transactions as required.
- Because the terms and conditions of overseas dealings undertaken by private groups are often not documented, including transfer pricing considerations, compliance costs increase as considerable time is spent by the ATO in sourcing information to determine the nature of the underlying transaction and establishing the nature of relationships between domestic and international parties to a transaction or arrangement.
Areas of focus for the ATO in relation to international and cross border transactions in the private wealth market include:
- related party financing
- intangibles migration, including domestic businesses expanding or moving offshore
- large service fees paid by domestic businesses to low tax jurisdictions, as well as the mischaracterisation of service fees paid between domestic and international entities
- changes in residency for individuals and companies.
Members’ comments
Effective communications are the key to increasing awareness for advisers and practitioners and to ensure private groups know what their obligations are in relation to international transactions and so that they know very early on what documentation and evidence is required.
Property and construction
Scott Walker, Assistant Commissioner, Private Wealth, ATO
The ATO discussed practical challenges in the characterisation of income and expenditure on revenue and capital account for property and construction projects, including whether practical guidance from the ATO would help.
There is often a lack of contemporaneous evidence to prove intention in respect of the land. At times, there is conflicting documentation.
Growth in property value over the last 20 years means uncertainty about capital versus revenue considerations and presents some real risks in the tax system.
Transactions can have common factors but are highly personalised and the correct tax treatment is reliant on specific facts and circumstances in individual cases.
Taxpayers are encouraged to seek private advice where circumstances are not clear or there is uncertainty about the correct tax treatment.
Draft guidance on the principles of revenue versus capital is being considered and will extend to GST capital and revenue implications.
Members’ comments
More comprehensive examples in guidance will assist taxpayers self-assess.
Future guidance should include details around the interaction with the Victorian Government’s windfall gains tax that applies from 1 July 2023.
The 2018 ATO property and construction guide that is now withdrawn was useful, and it would be helpful if planned guidance could take a similar form.
Action item |
20220607-2 |
Due date |
15 August 2022 |
Responsibility |
Scott Walker |
Action item details |
ATO to provide members with a draft communications plan for the planned release of guidance on the principles of revenue versus capital to review and provide feedback. |
Division 7A loans and repayments
Kasey Macfarlane, Assistant Commissioner, Private Wealth, ATO, David Hall and Moira Merrick, Senior Directors, Private Wealth, ATO
The ATO discussed concerning practices we are seeing which are non-compliant with the repayment integrity rule in Division 7A.
The ATO is seeing a range of cases where Division 7A requirements may not be being met because loans are not effectively being repaid due to further funds being lent by a company to the same recipient year-on-year to fund the purported repayment of the loan or to satisfy minimum yearly repayment requirements.
The ATO believes that section 109R operates to disregard the purported repayments in many of the cases that we are seeing.
Section 109R is an integrity provision in Division 7A that disregards certain repayments of loans to companies in certain circumstances. Section 109R is intended to prevent ‘round-robin’ in and out payments from being applied to repay loans or to meet minimum yearly repayment requirements.
The ATO is seeing a spectrum of arrangements where section 109R may apply. Less complex arrangements include those where further loans are provided directly to a borrower to satisfy minimum yearly repayments. More complex arrangements involve the provision of further loans through one or more interposed entities, which then also raises issues about the application of section 109T.
The ATO is planning to publish some messages and guidance to the market to raise awareness about section 109R and the issues that we are seeing.
The discretion under section 109RB that allows the Commissioner of Taxation to disregard deemed dividends under Division 7A will not apply in all cases where section 109R applies, particularly where there are repeat instances of further loans being provided by a company to fund the repayment of an existing loan or to satisfy minimum yearly repayment obligations.
Members’ comments
It will be important that the ATO’s messaging and communication about these issues is appropriately pitched and directed through the appropriate channels to ensure that they reach the right audience, including a broad range of advisers in the smaller and medium private business market.
Professional associations, including Chartered Accountants Australia and New Zealand (CAANZ) and CPA Australia, are keen to work with the ATO in the design and approach to communication of these issues, as well as broader issues impacting the smaller and medium private business market. Exercise of the Commissioner’s discretion under section 109RB may be appropriate in cases where issues have arisen due to lack of knowledge and awareness of section 109R.
Action item |
20220607-3 |
Due date |
Ongoing |
Responsibility |
All |
Action item details |
Professional association representatives, including CAANZ and CPA Australia will provide the ATO with insights and feedback about the best way to ensure planned ATO messages about Division 7A and section 109R obtain optimal coverage. |
Base rate entities
Kasey Macfarlane, Assistant Commissioner, Private Wealth, ATO, David Hall, Senior Director, Private Wealth, ATO
The ATO discussed what we are seeing in relation to private companies incorrectly self-assessing as base rate entities and paying tax at the lower tax rate.
The ATO is finding a number of private companies that have incorrectly self-assessed as base rate entities and incorrectly paid a lower rate of tax.
There appears to be several contributing factors to the issues that the ATO is seeing, including:
- incorrect application of the aggregated turnover test
- failure to take into account levels of base rate passive income
- lack of awareness or misunderstanding that private companies are required to assess their base rate entity status against the specified criteria every year.
The ATO has also identified that in some cases accounting and tax software is automatically carrying over base rate entity information and tax rates from prior years, and this may be leading to some of the errors seen. The ATO is discussing this with digital service providers.
The ATO has started issuing key messages and communications to the market about key considerations that need to be addressed when companies are self-assessing their eligibility as a base rate entity, including the flow-on impacts of lower tax rates on franking account entries and balances.
The ATO understands that the incorrect payment of tax is predominantly a tax deferral issue.
Members’ comments
There is a need for targeted guidance for advisers of smaller and medium sized private companies about aggregated turnover and the practical application of the aggregated turnover threshold.
Considerations relevant to base rate entity eligibility criteria is something that could be included, together with a range of other issues, in a broader marketing and communications campaign for small and medium companies.
Income Tax, Public Advice and Guidance
Kasey Macfarlane, Assistant Commissioner, Private Wealth, ATO
The ATO provided a summary of key guidance products in the pipeline that are relevant to the private wealth market.
- Updating Practical Compliance Guideline PCG 2017/13 Division 7A - PS LA 2010/4 sub-trust arrangements maturing in or after the 2016-17 income year to extend our administrative approach to trust entitlements arising on or before 30 June 2022 that are under sub-trust arrangements in accordance with PS LA 2010/4 and which are maturing in the 2022 or a later income year. Publication is planned in June 2022.
- Finalising Taxation Determination TD 2022/D1 Income tax: Division 7A: when will an unpaid present entitlement or amount held on sub-trust become the provision of 'financial accommodation' on when an unpaid present entitlement or amount held on sub-trust becomes the provision of ‘financial accommodation’ for Division 7A of Part III of Income Tax Assessment Act 1936 purposes. The ATO is working towards publication in mid-July 2022.
- Finalising Taxation Determination TD 2019/D6 Income tax: does Subdivision 855-A (or subsection 768-915(1)) of the Income Tax Assessment Act 1997 disregard a capital gain that a foreign resident (or temporary resident) beneficiary of a resident non-fixed trust makes because of subsection 115-215(3)? and Taxation Determination TD 2019/D7 Income tax: is the source concept in Division 6 of Part III of the Income Tax Assessment Act 1936 relevant in determining whether a non-resident beneficiary of a resident trust (or trustee for them) is assessed on an amount of trust capital gain arising under Subdivision 115-C of the Income Tax Assessment Act 1997? to confirm that the capital gains flowing to foreign resident beneficiaries via resident trusts are not disregarded under Division 855 of the Income Tax Assessment Act 1997 and the source rules in the trust provisions are not relevant in determining whether those capital gains are assessable to foreign resident beneficiaries. Publication is likely to be in July 2022.
- A draft Taxation Determination that outlines the Commissioner’s preliminary view on the meaning of ‘control’ when the Commissioner determines that an entity does not control another entity under subsection 328-125(6) of the Income Tax Assessment Act 1997. Publication is currently planned for July 2022.
- The ATO is also developing guidance in the form of a Decision Impact Statement and some key messages following the High Court’s decision Commissioner of Taxation v Carter [2022] HCA 10 (Carter) PDF 220KB.External Link
Environmental scan
The group discussed their observations and insights about current issues relevant to the private wealth market, including economic factors and priority policy and legislative advocacy items for professional associations.
Attendees
Organisation |
Attendees |
|---|---|
ATO |
Louise Clarke (Co-chair), Private Wealth |
ATO |
Emma Rosenzweig, Superannuation and Employer Obligations |
ATO |
Jenny Lin, Private Wealth |
ATO |
Kasey Macfarlane, Private Wealth |
Arnold Bloch Leibler |
Paul Sokolowski |
Chartered Accountants Australia and New Zealand |
Michael Croker |
CPA Australia |
Elinor Kasapidis (Co-chair) |
Deloitte Private |
Michael Gastevich |
Greenwoods & Herbert Smith Freehills |
Andrew White |
Independent Member |
Paul Brassil |
KPMG Australia |
Belinda Cheesewright |
Law Council of Australia |
Angela Lee |
Lowy Family Group |
John Fanning |
Oatley Family Group |
Sharon Clark |
PwC |
Michael Dean |
Tax Bar Association |
Terry Murphy QC |
The Tax Institute |
Chris Wookey |
7-Eleven Group |
Kenny Cheong |
Apologies
Organisation |
Member |
|---|---|
Fox Private Group |
Garry Voigt |