Top 100 income tax assurance program

Obtaining high assurance for income tax

In the top 100 program, we apply a principled approach to reaching overall high assurance (justified trust). This is based on 2 elements:

1. a quantitative threshold of more than 90% tax assured and economic activity correctly reported
2. an objective assessment of 7 qualifying factors.

The quantitative threshold of element 1 must be met before the qualifying factors in element 2 can be applied.

The 7 qualifying factors are outlined below:

1. Governance

Governance has been rated at least a Stage 2 in the TAR.

2. Tax risks flagged to market

Any tax risks flagged to market (Practical Compliance Guidelines, Taxpayer Alerts, Public Rulings, including those set out in the Reportable Tax Position [RTP] Schedule Category C disclosures) have been rated at least a medium level of assurance in the TAR, and aren't of immediate concern or identified as necessitating further action based on the information provided.

3. International related party dealings and CFCs

International related party dealings, profit attribution to permanent establishments and Controlled foreign companies (CFCs) have received at least a medium level of assurance in the TAR and are not identified as necessitating further action based on the information provided.

4. Losses

Losses, if applicable, have received at least a medium level of assurance in the TAR. This includes the commerciality of tax losses that have been verified and we understand when a taxpayer expects to utilise carried forward balances and move into a tax payable position.

5. Effective Tax Borne

The ETB calculation in the TAR and any underlying assumptions or proxies have been verified with the taxpayer. The ETB calculation hasn't highlighted any new areas of concern that pose a potential tax risk, for example, holding overseas interests in jurisdictions where there is not a substantiated commercial purpose.

6. Reportable tax position (RTP) schedule

There are no inconsistencies in RTP Schedule disclosures which are identified between lodgment of the tax return and finalisation of the review.

7. Cooperative and collaborative behaviour

It has been a cooperative and collaborative process and when working with a taxpayer we haven't observed any non-cooperative behaviour.

An overall provisional high assurance rating may still be possible in limited circumstances. This may include where the taxpayer has provided an undertaking and is actively working on addressing a specific design gap in their tax governance framework or there is ongoing compliance activity. Where there is ongoing compliance activity, provided the quantitative threshold is met (inclusive of the unassured issue), the availability of a provisional rating will depend on the nature and stage of the compliance activity.

Ratings

We apply consistent rating categories when considering our overall level of assurance.

Rating categories

Colour indicator	Rating	Category description
	High	We obtained assurance that the taxpayer paid the right amount of Australian income tax or reported the right Australian income tax outcomes for the income year reviewed.
	Medium	We obtained assurance in relation to some but not all areas reviewed. For those areas not yet assured, further evidence or analysis will be required before we obtain assurance that the taxpayer paid the right amount of Australian income tax for the income year reviewed.
	Low	We have specific concerns around the taxpayer's compliance with the Australian income tax laws and the amount of Australian income tax paid for the income year reviewed.

Overall levels of assurance

As of 30 June 2024, over half (59%) of top 100 taxpayers have attained overall high assurance (justified trust). This means that we have obtained assurance that these taxpayers have paid the right amount of Australian income tax for the year reviewed.

The overall level of assurance is based on an objective view (having regard to objective evidence) of whether the taxpayer is considered to have paid the right amount of tax.

The reviews completed to the end of June 2024 resulted in the following ratings.

Graph 1 – Overall assurance ratings for the last income tax reviews completed as of 30 June 2024

Note: All outcomes data used in this report in relation to income tax is based on the last review completed, which can include:

• a standard justified trust review
• monitoring and maintenance review
• Annual Compliance Arrangement (ACA) review
• refresh year review.

Not rated is applied to taxpayers who are yet to complete a full Justified Trust review across all 4 focus areas.

Graph 2 – Overall assurance ratings for the last income tax reviews completed by industry as of 30 June 2021, 30 June 2022, 30 June 2023 and 30 June 2024

You can also view overall assurance ratings for the last income tax reviews completed by industry data in table format.

Note:

• These groupings align with the industry segments we use as part of the Corporate Tax Transparency Reporting except where we have amalgamated the Banking, Finance and Investment (BFI), Insurance (ISR) and Superannuation (SUP) segments into a Financial Services (FS) segment. The groupings are:
  • Banking, Finance and Investment, Superfunds and Insurance (FS)
  • Manufacturing, Construction and Agriculture (MCA)
  • Mining, Energy and Water (MEW)
  • Wholesale, Retail and Services (WRS).
• The population depicted in Graph 2 comprises taxpayers in the current top 100 population during each of the 2021, 2022, 2023 and 2024 income years.

Graph 3 Tax paid and Total Business Income (TBI) for the 2022 year by overall assurance ratings for the last income tax reviews completed

Graph 4 No Tax Payable for the 2022 year by Overall assurance ratings for the last income tax reviews completed

Observations

Of top 100 taxpayers reviewed up to 30 June 2024, 82% obtained either an overall high assurance rating or an overall medium assurance rating.

We've seen a marked increase in the number of taxpayers achieving overall high assurance with a shift from 6% in 2019 to 52% in 2023. During 2024 the number of overall high assurance taxpayers has further increased to 59%.

As shown by Graph 3, high assurance taxpayers accounted for 80% of TBI reported and 89% of tax paid by top 100 taxpayers for the 2022 year who have had an assurance review as at 30 June 2024.

Of the top 100 taxpayers who have had an assurance review as at 30 June 2024 28% paid no tax in the 2022 year. As shown by Graph 4 83% of those taxpayers achieved high or medium assurance.

For top 100 taxpayers who've had more than one TAR issued, over 58% have increased their overall assurance rating between the first and last TAR issued.

The number of taxpayers at overall low assurance has remained stable in 2024 at 13%.

The increase in the number of high assurance taxpayers shows the efforts taxpayers have made to resolve key disputes with the ATO as well as continuing to pro-actively engage with us during the year to progress and finalise assurance reviews. Taxpayers have also developed a better understanding of the justified trust principles (particularly those relating to governance) and continued to make efforts to provide objective evidence to support a higher rating.

This year we've seen overall assurance ratings drop for a small number of taxpayers, including from high assurance to a lower rating. These ratings were downgraded due to material areas of assurance that were rated low or medium assurance and require further action.

We encourage taxpayers to engage early with us and to make disclosures prior to lodging their return. This will provide confidence to taxpayers and the ATO that the tax outcomes underpinning the return are appropriate, or conversely, there is an informed understanding of where there may be a difference of view. We also encourage taxpayers to ensure that evidence supporting the tax treatment of significant transactions is readily available and provided to the ATO in a timely manner.

Our assurance findings are set out in the TAR. We clearly set out the areas of concern, governance gaps and enhancements and how taxpayers can practically improve their assurance ratings. These reports are complemented by the annual ADF letters where we highlight to senior executives what is working well and any areas of concern requiring attention. We also work with taxpayers to prioritise issues that can improve their overall assurance rating.

High assurance taxpayers

We've seen a further increase in 2024 in the number of top 100 taxpayers achieving overall high assurance, with a shift from 52% in 2023 to 59% in 2024. This reflects improved assurance ratings from taxpayers in the Banking, Finance and Investment (FS), Manufacturing, Construction and Agriculture (MCA) and Wholesale, Retail and Services (WRS) industries.

In limited circumstances, we may give an overall provisional high assurance rating. Such circumstances may include where the taxpayer has provided a written undertaking and is actively working on addressing a specific design gap in their tax governance framework, or there is ongoing compliance activity.

There were 16 taxpayers in the current top 100 population who had a provisional high assurance rating as of 30 June 2024. The main reason for a provisional rating is because the taxpayer had some areas that required further assurance, or they had other ongoing compliance activity. Another reason is because some taxpayers had committed to but not yet developed a periodic tax control testing plan in relation to their governance framework at the time of the rating. This is because the testing plan is usually developed closer to the time of the testing which may occur after the issuance of the TAR depending on the organisation’s internal review cycle.

Some taxpayers who had provisional high assurance have been able to complete the required work and improve their assurance rating to unqualified high assurance. In 2024, there are no taxpayers who've dropped from an overall provisional high assurance rating to a lower overall assurance rating.

Acknowledging the complexities of tax law, taxpayers may still achieve overall high assurance notwithstanding they are in dispute with us about a particular matter. For example, a difference in technical interpretation as to the correct tax treatment of a transaction entered in the ordinary course of their business. This assumes that all other areas have achieved an appropriate assurance rating. However, if the matter being disputed relates to a material systemic issue or features elements of profit shifting or tax avoidance, or we have concerns about behaviour, the taxpayer will rarely achieve overall high assurance.

During 2024 we completed 18 monitoring and maintenance reviews for taxpayers in the current population. We also completed 5 Annual Compliance Arrangement (ACA) reviews during 2024 for taxpayers who have an ACA and have attained overall high assurance. All these reviews resulted in the taxpayers maintaining their justified trust ratings.

Many taxpayers have completed or are currently into their second round of monitoring and maintenance reviews after a refresh review which resulted in their overall high assurance rating being reaffirmed.

We've further observed the following in relation to the monitoring and maintenance reviews:

• Taxpayers are proactively engaging with us and making disclosures of significant or new transactions, or where there are material changes.
• Additional work on governance is typically focused on reviewing the implementation of our recommendations (including enhancements), addressing any specific design gap that's the subject of a provisional Stage 2 rating, and reviewing the outcomes from an independent operational effectiveness testing to assess whether a Stage 3 rating is achievable.
• Further verification work was required in the 2024 year for most reviews in relation to significant new transactions or tax risks flagged to market, or both.
• The top 4 topics associated with significant transactions are related party financing issues, capital gains tax, related party distributions and general domestic tax risks. In 2023–24 requests for rulings on capital management and capital gains tax continued to be in the top 3 topics of our rulings program as outlined in the Public and multinational business advice and guidance program report. Requests for advice on capital management transactions continue to trend downwards following their 2021–22 peak, falling by a further 18% year-on-year in 2023–24.

We have also completed 14 refresh reviews for taxpayers in the current population during 2024. These reviews enabled us to refresh our understanding and evidence base and reaffirmed our confidence that these taxpayers continue to pay the right amount of tax.

The refresh reviews completed to date have resulted in most taxpayers maintaining their justified trust ratings.

For 2024 we've further observed the following in relation to the refresh reviews:

• Nearly a third of taxpayers increased their governance rating in the refresh review from a provisional Stage 2 to Stage 2 or from Stage 2 to Stage 3.
• Just over 50% had new transactions where a tax risk flagged to market applied. These were identified from the RTP schedule alongside other taxpayer information. Almost all these new risks were rated as high or medium assurance. We had low assurance over one new tax risk flagged to market for one taxpayer which contributed to a drop from their previous overall high assurance rating.
• Most of the reviews identified one or more new significant transactions that required review.
• A small number of assurance areas that had been previously reviewed attained a lower or higher assurance rating than in prior reviews.

We're refining our refresh review approach as we undertake and complete more cases. Our reviews will include following up with overall provisional high assurance taxpayers who haven't yet provided us with their periodic internal controls testing plans.

We've recently published guidance to assist taxpayers with their refresh reviews.

We expect that we'll continue to have more taxpayers attain overall high assurance in time. This assumes that these top 100 taxpayers provide the required objective evidence to support the high assurance outcome, and we don't identify any new or further issues in the reviews. However, we don't expect that the entire population will achieve high assurance due to ongoing concerns about systemic tax risk or behaviour of a small number of entities in the group.

This improvement will come from the cooperation of the ATO and taxpayers in achieving timely completion of the planned assurance reviews for the year. It also relies on taxpayers actively addressing the areas of concern set out in the future assurance plans contained in the TARs, including resolution of key disputes. This is also dependent on potential movements in the composition of the top 100 population (which is moderated each year), and taxpayers continuing to maintain their overall high assurance ratings in the refresh reviews.

Medium assurance taxpayers

In 2024, 23% of top 100 taxpayers attained an overall medium level of assurance. This means that we obtained assurance in most areas reviewed. This reflects, to some degree, the complexity of large businesses and signals there is still more to do in some cases. Further work can include actions by taxpayers to address areas of concern or information gaps identified. It can also include actions by us to conduct further assurance activities on specific issues or on a greater proportion of the taxpayer’s economic activities.

In practice, the main blockers to taxpayers achieving overall high assurance are:

• demonstrating design effectiveness of their governance framework
• the display of what we perceive to be non-cooperative behaviours
• non-assured matters relating to tax risks flagged to market
• significant transactions that require further information to be provided to us
• analysis to be conducted by us.

Low assurance taxpayers

In 2024 the percentage of top 100 taxpayers at overall low assurance remained stable at 13%. We consider most of these taxpayers to have a higher risk profile and to be typically involved in complex and numerous tax disputes. We generally have significant concerns around their compliance with the Australian income tax laws.

We will comprehensively and intensively review overall low assurance taxpayers and are more likely to use audits to progress the resolution of issues.

We have had a number of taxpayers over the years improve their assurance ratings from low to a higher rating, including in 2024. We continue to work with a number of taxpayers who have expressed a willingness to improve their overall assurance rating. We aim to prevent disputes where appropriate, however where disputes do arise we work to resolve them as early as possible. Resolution of disputes has been assisted by the ATO being transparent in our thinking across all aspects of our compliance activities and have tailored guidance products for specific areas of law which indicate our risk tolerances and expectations to the market.

Overall, low assurance taxpayers typically have a combination of low and red flag assurance ratings across the 4 justified trust focus areas that prevent them from attaining a higher level of overall assurance. Resolving the higher risk tax issues (such as those that go to the heart of their tax infrastructure), as well as making improvements to the design effectiveness of their tax risk management and governance frameworks, will likely see these taxpayers increase their overall assurance ratings.

Tax governance framework

Tax governance is a key focus area under the justified trust methodology for large public and multinational businesses.

We consider the existence, design and operation of a tax control framework for income tax and GST focusing on the 8 controls set out in the Tax risk management and governance review guide and the GST Governance, Data testing and Transaction Testing Guide (collectively, the Guides).

1. Board-level control 1: Formalised tax control framework
2. Board-level control 3: The board is appropriately informed
3. Board-level control 4: Periodic internal control testing
4. Managerial-level control 1: Roles and responsibilities are clearly understood
5. Managerial-level control 3: Significant transactions are identified
6. Managerial-level control 4: Controls in place for data
7. Managerial-level control 6: Documented control frameworks
8. Managerial-level control 7: Procedures to explain significant differences

The Guides:

• set out principles for board-level and managerial-level responsibilities, with examples of evidence that demonstrate the design and operational effectiveness of tax control frameworks
• focus on the processes and controls in place and may not necessarily reflect the tax risk appetite or capabilities and experience of the tax or finance team, or their advisers.

Ratings

We apply the following staged rating system when reviewing and assessing tax governance. For practical guidance about how we rate tax governance, see Reviewing tax governance for large public and multinational businesses.

Staged rating system

Colour indicator	Rating	System description
	Stage 3	Evidence was provided to demonstrate that a tax control framework exists, has been designed effectively and is operating effectively in practice.
	Stage 2	Evidence was provided to demonstrate that a tax control framework exists and has been designed effectively.
	Stage 1	Evidence was provided to demonstrate a tax control framework exists.
	Not evidenced or concerns	We have not been provided with sufficient evidence to demonstrate a tax control framework exists or we have significant concerns.

The reviews completed to the end of June 2024 resulted in the following ratings which have been grouped by industry.

Graph 5 – Overall governance ratings for the last income tax reviews completed as of 30 June 2024

Graph 6 – Overall governance ratings for the last income tax reviews completed by industry as of 30 June 2021, 30 June 2022, 30 June 2023 and 30 June 2024

You can also view overall governance ratings for the last income tax reviews completed by industry data in table format.

Observations

During 2024 we observed continued improvement in governance reflecting the efforts of many taxpayers to enhance their income tax control frameworks, provide objective evidence in support of their governance policies and processes, and undertake testing of their income tax control frameworks.

We observed a further increase in the number of taxpayers attaining the highest rating for tax governance (Stage 3) from 20% to 35%. This means that 78% of the top 100 population have at least a well-designed and effective tax governance framework because they have obtained a Stage 2 or Stage 3 rating. We expect that this will result in less incorrect reporting of income tax, and a greater alignment between an organisation’s tax risk appetite and their risk framework.

Stage 3

To obtain the highest rating (Stage 3), we look for evidence that the documented income tax control framework is both designed and operating effectively in practice. This stage requires evidence in the form of a detailed report of findings that demonstrates taxpayers have independently tested the operation of their framework in practice and should conclude that the documented tax control framework is operating effectively.

Where the report of findings recommends improvements or enhancements, we will seek to understand whether these have been (or will be) implemented before assigning a Stage 3 rating.

We've seen a significant increase from 20% in 2023 to 35% in 2024 in taxpayers being assigned an overall Stage 3 rating. Their boards, shareholders and other stakeholders can be confident that there is an independent assessment of the operating effectiveness of their income tax control frameworks.

We note that some taxpayers are testing their income tax controls over a 3-to-5-year period. These taxpayers are not expected to be assigned an overall Stage 3 rating until testing has been completed and the results have been provided to us at the conclusion of the 3-to-5-year period. Accordingly, whilst we expect the number of taxpayers that have achieved stage 3 to increase, this will occur over several years.

Stage 2

A minimum Stage 2 rating is required to achieve an overall high assurance rating or justified trust. This means taxpayers have provided objective evidence to demonstrate a tax control framework exists for income tax and has been designed effectively.

For income tax, 43% of taxpayers were assigned a Stage 2 rating for the year ended 30 June 2024.

When reviewing governance for Stage 2, we'll leverage existing processes or identify compensating controls where the better practice elements are either not present or only partially present.

An increasing number of top 100 taxpayers at Stage 2 are working with us to demonstrate that their income tax control framework is not only designed effectively but also operating effectively, to proceed to the next rating (Stage 3).

Stage 1

A Stage 1 rating recognises that an income tax control framework exists but reflects that further work is needed to demonstrate that the framework is designed effectively. Most top 100 taxpayers have provided objective evidence that a tax control framework for income tax exists.

For income tax, 19% of taxpayers were assigned a Stage 1 rating for the year ended 30 June 2024 compared to 26% for the year ended 30 June 2023. The decrease in the number of taxpayers at Stage 1 can be attributed to taxpayers providing us with objective evidence addressing their design gaps.

We continue to work with those top 100 taxpayers with a Stage 1 rating to progress to a Stage 2 rating as part of current and future reviews. In this regard, reporting tax risks to the board, tax provision procedures (relevant to procedures to explain significant differences between accounting and tax), and the periodic internal controls testing program were the main areas recorded with limited formal documentation in 2024.

We note that although some taxpayers have documented their income tax controls, they have not documented a plan as to when and how frequently, their income tax controls will be tested by an independent tester (rather than the control owner). This remains a key blocker to taxpayers achieving a Stage 2 rating.

Red flag

A red flag rating is only applied after careful consideration if we have:

• no evidence demonstrating that an income tax control framework exists
• significant concerns with the taxpayer’s income tax control framework as evidenced by the high level of errors identified
• fundamental concerns about the robustness of existing income tax controls.

There remains a small percentage (2% in 2024) of top 100 taxpayers that have been assigned a red flag rating for income tax governance.

Not rated

This rating is only applied in the top 100 program in limited circumstances for income tax governance. The reasons for this vary but include large scale mergers and acquisitions, and where the tax control framework was being substantially redesigned and the changes were so significant that it was appropriate to defer our assessment to the following review. In these circumstances, we typically review the income tax governance framework in the following assurance review.

Only 1% of taxpayers were assigned this rating in 2024.

Tax risks flagged to market, significant or new transactions and specific tax risks

We seek to understand, and review, the income tax treatment of the taxpayer’s business activities, particularly significant and new transactions. We also look for, and review, risks or concerns communicated to the market, and determine if they are present.

Ratings

We apply a consistent rating system when reviewing and assessing the income tax treatment of a taxpayer’s business activities, including significant and new transactions and tax risks communicated to the market.

Staged rating system

Colour indicator	Rating	System description
	High	With respect to this issue, we obtained a high level of assurance that the right Australian income tax outcomes were reported in the taxpayer's income tax return.
	Medium	More evidence and or analysis is required to establish a reasonable basis to obtain a high level of assurance.
	Low	More evidence and or analysis is required to determine whether a tax risk is present.
	Red flag	Likely non-compliance with the income tax law.
–	Not rated	We have not evaluated this item and not expressed a rating.

For some issues or transactions, we require more evidence or analysis, or both, to obtain high assurance. We work with top 100 taxpayers to identify the areas that require further evidence or analysis. In some cases, medium assurance ratings on specific transactions may be satisfactory and, depending on the area and the significance of the transaction, it may still be possible to achieve overall high assurance.

High quality information, relevant supporting documentation, and an open and transparent relationship with us are expected from taxpayers to be able to achieve high assurance.

The largest public and multinational companies are required to disclose information in the RTP Schedule on uncertain tax positions and arrangements that are considered to pose a systemic risk to the corporate tax base. These arrangements often involve tax avoidance or profit shifting (or both).

The latest Findings report Reportable tax position schedule Category C disclosures provides the aggregated disclosures made by companies for the 2022–23 income year. The report provides insights to the types of arrangements large companies are entering, including arrangements in addition to those outlined below.

Observations

The assurance areas covered in the analysis for tax risks flagged to market, and significant and new transactions often have material tax consequences if they've been incorrectly treated or calculated for tax. This also has a significant impact on the overall assurance ratings.

Many top 100 taxpayers have arrangements that are covered by a public advice and guidance product (such as a Practical Compliance Guideline, Taxpayer Alert or Public Ruling). Where a public advice and guidance product may be applicable, our approach is to seek to understand the arrangement to determine the presence of risk. Where risk is present, we work with the taxpayer to mitigate or address any risk.

As part of our top 100 assurance reviews, we check on an annual basis, the accuracy and completeness of disclosures made by top 100 taxpayers in tax returns, accompanying schedules (including the RTP Schedules), country-by-country (CBC) reporting statements and financial statements. We also follow up on disclosures in the RTP Schedules relating to unamended mistakes or omissions in tax returns.

We have observed that over time many taxpayers who have previously entered into multiple new high-risk arrangements that require resolution via audits now either have:

• no new tax risks flagged to market
• if there is a potential application of a public advice and guidance product, the new tax risks flagged to market either
  • fall in the low risk zone
  • have been given high assurance. 

This is consistent with our observations about taxpayers committing to long term behavioural change.

We expect that as more of our population reaches overall high assurance, the number of new tax risks flagged to market that are characterised as high-risk arrangements and require resolution via audits will also decrease. Where we continue to see high risk positions being taken by low and medium assurance rated taxpayers, we address these issues through comprehensive reviews and audits.

The following sections outline specific areas of concern and items that attract our attention. We do not see these in all cases.

Transfer mispricing

Transfer pricing is a natural feature of the international tax system, requiring entities to deal with related parties on arm's length terms. Our concern is transfer mispricing, which is where transactions are mispriced, resulting in the tax base being shifted from Australia. This is a particular risk in a country like Australia, being a net importer of capital with a high tax rate. As such, the appropriateness of transfer pricing is a common assurance area with approximately 89% of top 100 taxpayers reporting related party dealings in the 2023–24 income year. This area encompasses a substantially large number of dealings, the nature of which can range from simple to very complex.

The following is a breakdown of the key transfer pricing areas reviewed across a range of dealings.

International related party financing transactions including arm’s length conditions, related party derivatives, interest free loans (outbound and inbound), cash pooling arrangements and guarantee fees.

Assurance ratings as at 30 June 2024	% of Top 100 review outcomes
High	46%
Medium	28%
Low and Red flag	18% (14% and 4%)
Not rated	8%

We have observed that the proportion of high and medium assurance ratings have improved from 63% in 2022 to 74% in 2024. These improved assurance ratings reflect the efforts taxpayers have made to resolve key disputes with us as well as continued engagement to provide objective evidence to support higher levels of assurance.

Through our compliance programs we have coverage of over 80% of all inbound interest-bearing related party debt.

However, related party financing arrangements continue to be a key focus area and represent the highest proportion of unassured items that attract a red flag or low assurance rating for the top 100 population.

Offshore hubs (marketing or procurement)  

Assurance ratings as at 30 June 2024	% of Top 100 review outcomes
High	36%
Medium	36%
Low and Red flag	21% (9% and 12%)
Not rated	7%

• The majority (72%) of the offshore centralised operating models (hubs covering marketing and non-core procurement activities) that have been reviewed resulted in a high or medium assurance rating. We have observed that over time an increasing number (about 31%) of the marketing hubs and non-core procurement transactions reviewed have resulted in improved assurance ratings. This has corresponded with a reduction in the number of taxpayers who had a low assurance rating in relation to offshore hubs.
• We have focused on offshore hubs for a number of years. During this time we have been able to resolve a number of the disputes, including with the largest commodity exporters in Australia. In terms of materiality we have coverage over 94% of Australia's commodity exports.
• Notwithstanding the above, related party sales more broadly including the use of hubs remain a focus area and represents the second highest proportion of unassured arrangements for top 100 taxpayers in 2024.

Inbound distribution arrangements

Assurance ratings as at 30 June 2024	% of Top 100 review outcomes
High	14%
Medium	0%
Low and Red flag	57% (57% and 0%)
Not rated	29%

• We've reviewed a relatively small number of arrangements that potentially fall within PCG 2019/1 (less than 10). We continue to work with impacted taxpayers to improve our level of assurance in respect of those arrangements attracting a low assurance or red flag rating.

Common issues observed with transfer pricing arrangements

Common issues which continue to arise in relation to transfer pricing matters include the following:

• The inadequacy of information available to support transfer pricing positions.
• The size and complexity of the global value chain in the top 100 population – top 100 taxpayers often have very complex businesses and Australia can be a significant part of the value chain. We are finding it takes time to source relevant information to support the transfer pricing analysis particularly when the information is held offshore.
• Changes in transfer pricing policy or methodologies without an underlying change to the functional profile of a taxpayer, and inappropriate methodologies being selected given the taxpayer functional profile.
• Transactions that are covered by an APA or Bilateral Advance Pricing Arrangement (BAPA) or settlement agreement – we will review the arrangements and the annual compliance report that is required to be submitted for APAs and BAPAs to ensure that taxpayers are continuing to follow the terms of the arrangements. Where transactions are subject to settlement agreements or private rulings, we also review these to confirm that taxpayers are adhering to the terms of the settlement agreement or implementing the relevant transactions in accordance with the ruling.

Structured arrangements designed to reduce Australian tax

In some cases, we see arrangements that are structured to reduce or avoid Australian tax. In those cases, the low assurance ratings and red flags are generally associated with related party transactions or other structured transactions (including third party back-to-back transactions) promoted or designed to achieve Australian tax savings, such as the following:

• Contrived related party financing arrangements, including the use of financing transactions with special terms designed to
  • artificially defer or avoid interest withholding tax while having obtained annual Australian income tax deductions
  • avoid or reduce dividend withholding tax upon repayment/redemption of contrived related party financing arrangements
  • otherwise obtain deductions or avoid assessable income using arrangements designed to circumvent thin capitalisation, debt or equity classification and the hybrid mismatch rules.
• Intangibles arrangements designed to reduce or avoid Australian taxable income or reduce or avoid royalty withholding tax.
• Arrangements or variation of arrangements of the kind described in Taxpayer Alert 2020/4 – these arrangements broadly involve the transfer of assets to an Eligible Tier 1 (ET-1) and an ET-1 company leaving or anticipating leaving, the multiple entry consolidated (MEC) group.
• Arrangements designed to avoid income being attributable to an Australian permanent establishment.
• ‘Inversion’ or ‘top-hatting’ arrangements, or the interposition of partnerships or other entities, designed to
  • shift recognition of income or change or mischaracterise the nature of income
  • facilitate related party transactions to obtain Australian tax deductions
  • reduce or eliminate withholding tax
  • avoid the application of targeted or general anti-avoidance measures.
• Arrangements of the kind described in Taxpayer Alert TA 2020/5 – Structured arrangements that provide imputation benefits on shares acquired where economic exposure is offset through use of derivative instruments.

Common areas attracting our attention

Areas that continue to commonly arise in reviews that attract our attention.

Capital allowances

Assurance ratings as at 30 June 2024	% of Top 100 review outcomes
High	41%
Medium	35%
Low and Red flag	17% (17% and 0%)
Not rated	7%

Other than transfer pricing, this area represents the highest proportion of unassured items that continues to attract a low assurance rating for the top 100 population. This reflects that most case teams will assure these claims later in the justified trust review. Typically, uniform capital allowances that do not present material tax risk and differences of view are more likely to be effectively resolved. However, this can be a significant concern in capital intensive industries where material timing differences can provide tax shelters for longer.

When assuring capital allowances claims, we consider the systems and governance processes adopted, as well as the supporting evidence provided (including working papers).

Common areas of focus include the use of project pools, balancing adjustment calculations, self-assessed effective lives, and correct asset classification (particularly for composite assets and leasehold improvements). Where automated software tools are used to prepare claims, we also evaluate the level of ‘human intervention’ it took to confirm revised claims satisfied the law (particularly if they relate to reclassification of capital expenses to revenue or immediate deductions for repairs, or both).

When taxpayers review past claims, we expect a ‘two-way’ analysis – identifying capital items which could have been expensed and where expensed items might be more appropriately capitalised. About 41% of our reviews relating to capital allowances claims have resulted in high assurance. About 38% of ratings relating to capital allowances have improved over time.

Research and development (R&D) expenditure

Assurance ratings as at 30 June 2024	% of Top 100 review outcomes
High	10%
Medium	43%
Low and Red flag	31% (31% and 0%)
Not rated	17%

We have seen an improvement in assurance ratings for R&D over time. However, we continue to see some taxpayers unable to reach higher assurance ratings due to:

• a lack of contemporaneous documentation to evidence that notional deductions claimed by taxpayers are incurred on R&D activities and whether expenses (such as overheads and fixed costs) are appropriately apportioned between eligible and non-eligible R&D activities.
• delays in R&D amendments being made after the end of the income year. This may indicate inadequate contemporaneous documentation being available at the time of the review to properly identify eligible activities and the expenditure incurred on those activities. In 17% of cases reviewed the taxpayer did not claim the R&D incentive for the year reviewed but had indicated they would claim the incentive later via an amendment or in a subsequent income year.

We'll continue to work with taxpayers to address issues that are leading to lower assurance ratings. In many cases, taxpayers are required to provide further information to substantiate the amounts claimed. Additionally, taxpayers are expected to make improvements to their governance and record keeping. Where appropriate, we will refer activities for review to the Department of Industry, Science and Resources.

Thin capitalisation

Assurance ratings as at 30 June 2024	% of Top 100 review outcomes
High	69%
Medium	16%
Low and Red flag	13% (9% and 4%)
Not rated	2%

This area remains an ongoing focus for us. Most of our reviews of the thin capitalisation provisions attracted a high assurance or a medium assurance rating. About 20% of ratings relating to thin capitalisation have improved over time. Some of the issues we're seeing are asset revaluations and incorrect valuation of debt capital (that is, bifurcated instruments). Due to respective law change, neither of these issues will persist into subsequent income years.

The Treasury Law Amendment (Making Multinationals Pay Their Fair Share - Integrity and Transparency) Act 2024 applies to income years commencing on or after 1 July 2023 (except for the new debt deduction creation rules which apply to income years commencing on or after 1 July 2024). The new rules will be supported by changes to the application of the transfer pricing rules that may affect a taxpayer's quantum of debt.

The new thin capitalisation and debt deduction creation rules are likely to have a significant impact on top 100 taxpayers. This will be a key focus area in upcoming reviews.

Deductions

Assurance ratings as at 30 June 2024	% of Top 100 review outcomes
High	71%
Medium	22%
Low and Red flag	3% (3% and 0%)
Not rated	4%

Most of the general deductibility issues we're seeing relate to revenue or capital classification and the subsequent tax treatment of the expense. This includes capitalised labour, exploration expenses and repairs and maintenance. About 93% of reviews relating to deductions have been rated as high or medium assurance.

Consolidation

Assurance ratings as at 30 June 2024	% of Top 100 review outcomes
High	68%
Medium	23%
Low and Red flag	6% (6% and 0%)
Not rated	3%

Consolidation areas reviewed include the allocable cost amount process including some instances where the allocable cost amount has not been prepared at the time of the assurance review, asset recognition, valuation, reconsolidation events and MEC groups. Nearly 68% of reviews relating to consolidation issues have been rated as high assurance. About 16% of ratings relating to consolidation have improved over time.

Losses

Assurance ratings as at 30 June 2024	% of Top 100 review outcomes
High	58%
Medium	32%
Low and Red flag	11% (8% and 3%)
Not rated	0%

We holistically focus on generation, carry forward, transfer and utilisation of any losses. Our reviews consider not only the tax analysis, but we also look to understand the origin of the losses and the commercial environment of the business at the time the losses were incurred. We also seek to understand when top 100 taxpayers will use any carry forward losses and move into a tax payable position. About 58% of reviews relating to losses have been rated as high assurance. About 29% of ratings relating to losses have improved over time.

Revenue

Assurance ratings as at 30 June 2024	% of Top 100 review outcomes
High	86%
Medium	11%
Low and Red flag	3% (3% and 0%)
Not rated	0%

In some cases, we're seeing a need for more evidence and analysis of sales revenue and other material revenue amounts. These are needed to establish a reasonable basis to obtain a high level of assurance where we've been unable to reconcile revenue figures reported in the tax return with audited financial accounts. Over 80% of reviews relating to the derivation of revenue have been rated as high assurance.

Controlled foreign companies and Permanent establishments

Assurance ratings as at 30 June 2024	% of Top 100 review outcomes
High	68%
Medium	23%
Low and Red flag	3% (3% and 0%)
Not rated	6%

Controlled foreign companies (CFCs) and permanent establishments (PEs) are areas that commonly arise in our justified trust reviews. About 91% of reviews relating to CFCs and PEs have been rated as high or medium assurance. We continue to work with the small number of taxpayers where assurance has not been attained. This includes obtaining further objective evidence in relation to issues arising from CFCs and PEs including their entitlement to foreign tax offsets, CFC attribution amounts, and conduit foreign income balances.

Hybrid mismatch

Assurance ratings as at 30 June 2024	% of Top 100 review outcomes
High	23%
Medium	40%
Low and Red flag	20% (17% and 3%)
Not rated	17%

We have identified and reviewed circumstances where the hybrid mismatch rules apply, having regard to Law Companion Ruling LCR 2019/3 and accompanying Practical Compliance Guideline PCG 2019/6 and Practical Compliance Guideline PCG 2018/7.

Almost two-thirds of the arrangements reviewed were rated high or medium assurance.

Consistent with the above guidance, we expect top 100 taxpayers to engage with us if, having applied our risk assessment framework against their arrangement, they conclude there is a potential tax risk associated with the arrangement.

Alignment of tax and accounting outcomes

We analyse the differences between the accounting and tax results. This includes understanding the effective tax rates and ETB. We seek to understand, and be able to explain, any variances between tax and accounting outcomes. This provides an objective basis to obtain greater assurance.

Ratings

We apply a consistent rating system when reviewing and assessing the alignment of tax and accounting outcomes, which is outlined below.

Staged rating system

Colour indicator	Rating	System description
	High	We understand and can explain the various streams of economic activity and why the accounting and income tax results vary.
	Medium	Further analysis and explanation are required to understand the various streams of economic activity and why the accounting and tax results vary.
	Low	We identified concerns from our analysis of the various streams of economic activity and why accounting and tax results vary.
	Red flag	We do not understand and cannot explain the various streams of economic activity and why accounting and tax results vary.

The reviews completed to the end of June 2024 resulted in the following ratings.

Graph 7 – Alignment of tax and accounting ratings for the last income tax reviews completed as of 30 June 2024

Graph 8 – Alignment of tax and accounting ratings for the last income tax reviews completed as of 30 June 2021, 30 June 2022, 30 June 2023 and 30 June 2024

You can also view alignment of tax and accounting ratings for the last income tax reviews data in table format.

Observations

Most (98%) of the top 100 taxpayers have obtained a medium or high assurance rating with respect to the alignment of tax and accounting outcomes, with the proportion at high assurance increasing from 61% as of 30 June 2023 to 67% as of 30 June 2024.

We're generally able to obtain assurance over a significant proportion of reported income and expenses as most taxpayers have audited financial statements. This is supported by a book-to-tax reconciliation between net profit or loss reported in the financial statements and the total profit or loss disclosed in the relevant tax return. This can be more challenging for taxpayers with MEC groups, foreign branches, or stapled groups. However, in many cases, we've been able to overcome these challenges through active collaboration with top 100 taxpayers with these structures to deepen our understanding of these taxpayers’ various streams of economic activity and why the accounting and income tax results vary.

We're also generally being provided with detailed book-to-tax reconciliations which allow us to obtain assurance over the key adjustments from the accounting results to calculate the taxable income (and tax payable) figures. We have a particular focus on permanent differences.

The number of medium ratings (31%) and low ratings (1%) for this focus area had decreased since 2020. In some cases, further analysis is required and underway to understand the various streams of economic activity where the accounting and tax results vary for the top 100 population.

We've observed that where some taxpayers don't have effectively designed tax provision procedures in their governance framework, these taxpayers are also attaining a low or medium rating in relation to their alignment of tax and accounting outcomes.

Another component of this focus area is the ETB calculation, which we use to analyse the tax and economic performance of corporate groups.

We've observed that the ETB analysis provides a good cross-check or confirmation in relation to our analysis and assurance over related party dealings. The ETB offers a useful sense check on any transfer prices and whether they are giving plausible, common-sense outcomes, or conversely if they are having the effect of skewing profits to low tax jurisdictions. This is done by identifying the economic group’s worldwide profit from Australian-linked business activities and the Australian and offshore tax paid on that profit.

Boards and tax representatives of corporate groups should understand their ETB calculation and discuss the results with us (including underlying proxies and assumptions). We particularly encourage taxpayers to provide information around their global value chains and foreign taxes paid on Australian-linked activities and continue to work with us to refine and enhance their ETB analysis.

To further streamline reviews, for high assurance taxpayers that are wholly or substantially domestic in operations and ownership with predominantly domestic transactions, we will no longer be undertaking the ETB calculation in our monitoring and maintenance reviews and refresh reviews (unless there's exceptional or changed circumstances).