Identifying key priority areas
The Next 5,000 tax performance program considers a wide range of environmental and economic factors to understand the commercial and business pressures which may impact the behaviour of Next 5000 groups in respect of their obligations.
We have identified key priority areas for the Next 5,000 sub-population. These key priority areas are based on our insights to date and upon a broader understanding of emerging trends in this sub-population within the privately owned and wealthy groups.
Over the last year we have continued our focus on these areas and have selected reviews based on indicators of our key priority areas being present.
We will continue to focus on these key priority areas in 2024–25.
Experiencing rapid growth
This key priority area focuses on groups that are experiencing rapid growth which may lead to incorrect reporting if the tax governance framework is not fit for purpose for a growing business. Our findings continue to reinforce our concerns that tax governance has not been updated in accordance with the growth or evolution of the business. The lack of appropriate governance can have material tax consequences because errors and incorrect reporting can arise as a result. This has been evidenced in recent material dollar value voluntary disclosures which could have been avoided through effective tax governance.
Cross-border transactions
This key priority area focuses on groups that are expanding offshore or entering into cross-border transactions with related parties. Our reviews selected on this basis are currently in progress and included in the most common tax risks flagged to market as part of streamlined assurance reviews.
For more information, see:
- Practical Compliance Guideline PCG 2017/4 ATO compliance approach to taxation issues associated with cross-border related party financing arrangements and related transactions
- Practical Compliance Guideline PCG 2017/2 Simplified transfer pricing record-keeping options.
We received 6 requests for tailored technical assistance relating to cross-border transactions between September 2022 and June 2024. This shows that only a small number of Next 5,000 groups have proactively engaged with us to obtain certainty on how these transactions should be treated for tax purposes.
Domestic wealth transfer
This key priority area focuses on groups entering arrangements involving intra-group domestic transactions which may result in the transfer of wealth. Our insights from streamlined assurance reviews are that related party transactions and trust distributions are not being recorded correctly or recorded at all. We are finding:
- mismatches between the reported income and expenses between related parties
- lack of independent valuations to support the pricing of transactions between related parties particularly transactions involving real property
- omission of related party income such as rent
- distributions outside of a family group where a family trust election has been made
- loans or other payments from private companies to shareholders or associates without regard for the requirements in Division 7A of the Income Tax Assessment Act 1936.
While the proportion of reviews which escalate to secondary reviews or audits is low, we're still observing that domestic wealth extraction tax issues are being escalated. For example, we are still escalating matters where section 100A of the Income Tax Assessment Act 1936 may apply. That is, we are reviewing matters where there may be a reimbursement agreement arrangement where a beneficiary of a trust is made presently entitled to the income of a trust but another person or entity enjoys the economic benefit of that income.
We're also escalating to secondary reviews or audits matters involving transactions between an SMSF and a related party potentially giving rise to non-arm's length income (NALI). Additionally, we're seeing expenditure being claimed as a deduction in respect of private use assets.
Some Next 5,000 groups are proactively engaging with us to obtain certainty on domestic related party transactions. We received 63 requests for tailored technical assistance requests between September 2022 and June 2024. Of these, 19 requests related to Division 7A of the Income Tax Assessment Act 1936.
Succession planning
This key priority area focuses on tax risks arising from group restructures or other arrangements designed to transfer wealth to the next generation. While most of our reviews that were selected on this basis are still in progress, we note that out of the 63 requests for tailored technical assistance in relation to wholly domestic group restructures received between September 2022 and June 2024, 30 related to succession planning. The requests included issues such as:
- whether there has been a trust resettlement giving rise to a CGT event
- whether one or more CGT rollover applied in respect of the group restructure
- where a CGT event happened in respect of an assets transferring to the next generation.
We also received requests for technical assistance from recipients of a wealth transfer.
Wealth extraction by use of private equity funds
This key priority area focuses on wealth extraction by participants in the Private Equity (PE) industry, such as investors in PE funds and owners of domestic PE firms. We are also focussing on tax risks arising from transactions and activities of other entities involved in PE, such as PE firms, funds, target entities and entities undertaking PE like activity. We'll continue to monitor this focus area and provide insights in future reports.