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Tax governance and key issues for Top 500 groups

Tax governance principles explained, key findings, observations and tax issues that attracted our attention.

Published 3 December 2024

Tax governance

The first key area of justified trust focuses on ensuring effective tax governance is in place to support current and future compliance. Our engagement teams encourage Top 500 groups to show us their documented tax governance frameworks, processes and procedures. We assess the effectiveness of those controls with the assistance of our internal tax governance tool.

This tool provides a consistent method for our teams to assess the tax governance in place for the group's active trading entities and non-trading (passive investment) entities. It also helps to evaluate the effectiveness of tax governance processes in place for wealth extraction from those entities (for example, via trust distributions, payments and dividends).

Each group’s tax governance framework is assessed against 7 principles of effective tax governance for privately owned groups, with an emphasis on the first 4 principles:

  • accountable management and oversight
  • recognise tax risks
  • seek advice
  • integrity in reporting.

Note: In GST assurance engagements, only the 2 principles of ‘recognise tax risks’ and ‘integrity in reporting’ are considered for assessing GST governance.

The 3 remaining principles are not considered on a stand-alone basis, rather their qualitative aspects remain important to how we view each Top 500 group’s engagement with the tax system.

These are:

  • professional and productive relationships
  • timely lodgments and payments
  • ethical and responsible behaviours.

Our assessment and rating of the group’s tax governance is based on the evidence provided to demonstrate the 3 core elements of existence, design effectiveness and operational effectiveness.

Our key findings and observations on the effectiveness of tax governance across Top 500 groups is outlined below.

114 Top 500 groups had tax governance over their trading activities which were rated:

  • 46% highly effective
  • 34% medium effectiveness
  • 20% low effectiveness.

Figure 1: Tax governance ratings for trading entities across 114 groups

Image is a pie chart. It repeats the same data just listed about tax governance ratings for trading entities across 114 groups.

111 Top 500 groups had tax governance over their non-trading activities which were rated:

  • 45% highly effective
  • 31% medium effectiveness
  • 24% low effectiveness.

Figure 2: Tax governance ratings for non-trading entities across 111 groups

Image is a pie chart. It repeats the same data just listed about tax governance ratings for non-trading entities across 111 groups.

104 Top 500 groups had tax governance over their wealth extraction activities which were rated:

  • 50% highly effective
  • 28% medium effectiveness
  • 22% low effectiveness.

Figure 3: Tax governance ratings for wealth extraction across 104 groups

Image is a pie chart. It repeats the same data just listed about tax governance ratings for wealth extraction across 104 groups.

Observations

Over one third of Top 500 groups have implemented some level of documented tax governance. This proportion is increasing with a 20% increase in the number of groups with tax governance across trading, non-trading and wealth extraction activities compared to last year. Our data also shows most groups that have recently implemented tax governance, or that have not previously had their tax governance assessed, are achieving medium or high ratings. This is a positive reflection of our published tax governance guidance.

While most Top 500 groups have some tax governance in place, the majority don't document it. This raises doubts about its effectiveness, particularly if there is reliance on a key person and there are no safeguards to mitigate the key person risk. While the majority of those groups have not had instances of poor tax compliance, our findings show past performance is no guarantee of future results.

The cost of implementation and questions on necessity are often reasons for not having documented tax governance. We encourage groups to consider the scale and needs of their group. Groups with simple affairs do not need elaborate tax governance procedures, and, in most cases, simply documenting their internal processes is sufficient and the most cost-effective approach.

For groups with documented tax governance, the primary area for improvement relates to the second principle of recognising and managing tax issues and risks. Many groups tell us their tax agents are responsible for this aspect, but we find the group is responsible for providing figures for the tax return, and there are minimal or no checks done by the tax agent to ensure their integrity. In those instances, groups should have an internal process or procedure for ensuring the integrity of the financial data provided to the tax agent. Our expectation is that Top 500 groups have a documented end-to-end process in place for recognising and managing tax issues. This includes:

  • a register of material and tax sensitive issues and procedures for ensuring the correct tax treatment of significant transactions
  • instructions for preparing tax reconciliations and disclosures (or extracting and checking the data provided to tax agents)
  • the process of checking and signing-off the tax return.

Other areas for improvement include the following.

  • Where a tax agent is used, have a detailed engagement letter and scope of works to ensure clear lines of responsibility.
  • Have a lodgment and payment calendar to ensure obligations are met on time. Our published guidance includes an example of a lodgment and payment calendar that can be adapted by Top 500 groups.
  • Have effective controls for data and information used internally to prepare the return and provide to external tax agents. For example, procedures for checking that accounting profit in the return matches closed and finalised accounts.
  • Procedures that specify when advice should be sought, including clear quantitative and qualitative thresholds when advice will be sought, who is responsible for seeking that advice and the process for engaging external advisors and the ATO.

There have also been weaknesses observed in GST governance frameworks for some Top 500 groups. Our recommendations for improving GST governance includes:

  • documenting BAS procedures
  • regular processes to verify GST registration of suppliers subsequent to initial setup
  • periodic internal control testing and regular data testing processes
  • reconciliation of data between the BAS, income tax return and financial statements

Tax issues for Top 500 groups

There are 3 remaining key areas of justified trust:

  • tax risks flagged to the market
  • treatment of tax issues from ongoing and atypical transactions
  • alignment of tax and accounting outcomes.

These areas are addressed by the Top 500 program through assuring material tax issues for each Top 500 group.

For certain tax issues, such as income from business-as-usual activities, most groups are achieving high assurance. However, other tax issues, particularly those related to wealth extraction, tend to get lower levels of assurance and in some cases result in amended assessments. The following sections outline specific tax issues that attracted our attention during the year ended 30 June 2024.

Business as usual income and deductions

Most transactions where we seek to understand the tax treatment in Top 500 engagements are related to ongoing (or ‘business as usual’) activities. Our focus on the basics reflects the purpose of the Top 500 program, to assure that Australia’s largest private groups are paying the correct amount of tax. Accordingly, we need to understand the routine, regular, and ongoing transactions that Top 500 groups engage in, and the tax treatments applied.

In engagements where we have finalised our analysis, most groups achieved high assurance for business-as-usual income and deductions issues, with only 5% having a low assurance rating requiring further investigation.

Private company loans and benefits

Compliance with Division 7A continues to feature in many Top 500 engagements to ensure that benefits obtained from private companies by the controllers of private groups, and their associates, are correctly reported for tax purposes. In engagements where we finalised our analysis in respect of Division 7A issues, more than 25 per cent raised red flags that required escalation to a review or audit.

Our analysis of a group’s compliance with Division 7A includes:

  • confirming that payments to shareholders or their associates have been recorded and disclosed
  • verifying that the minimum yearly repayments on loans are correct
  • considering transactions involving debt forgiveness
  • examining whether company property has been used for personal purposes
  • analysing whether unpaid present entitlements have been brought to account.

Although there are instances where we have granted the Commissioner’s discretion to not treat some arrangements as deemed dividends, our view is that the largest private groups have access to the expertise to help them prevent honest mistakes or inadvertent errors.

Trusts issues

Many Top 500 groups have entities that have made Family Trust Elections (FTEs) or Interposed Entity Elections (IEEs). During the 2023–24 financial year, we observed that some private groups have multiple specified individuals in elections made by group entities. This will typically mean that there are multiple family groups for the purposes of the Family Trust Distribution Tax (FTDT) provisions, which may result in FTDT exposure.

We encourage private groups to have effective tax governance to ensure that distributions are kept within the relevant family group, including the following annual checks:

  • reviewing all elections in place, including checking records held by current or previous advisors
  • whether the specified individual remains the most suitable person and if not, whether the specified individual can and should be varied
  • the timeframes to vary or revoke elections – noting these are limited and that outside these periods, the elections and the specified individuals can’t be changed.

We continue to have audit cases on hand where we are considering the application of the integrity rules in section 100A of the Income Tax Assessment Act 1936. These rules may apply when a trustee makes trust distributions to beneficiaries on low marginal tax rates whilst the economic benefits of the trust income is provided to individuals who would otherwise pay the top marginal rate of tax.

Private ancillary funds

Many Top 500 groups have a link to not-for-profit (NFP) entities, with a high proportion taking the form of private ancillary funds (PAF), to facilitate philanthropic pursuits.

The prevalence of NFPs in the Top 500 population is encouraging, however it is important for those groups to be mindful of the integrity rules that apply to NFPs due to their concessional tax status. For example, arrangements that can contravene the integrity rules include where a private group establishes a PAF and the founder gifts funds to the PAF (for which they claim a tax deduction), and the PAF then reinvests these funds back into the private group. This allows the founder to retain access to and use of the gifted funds. These arrangements can result in funds being diverted from a PAF pursuing its charitable purpose.

In these circumstances, the PAF may lose its concessional tax status and the trustee of the PAF and its directors may incur penalties. In some circumstances, the founder may also be denied a tax deduction as the gift to the PAF fails the gift criteria.

Top 500 groups with NFPs should ensure they are aware of and comply with the obligations and responsibilities attached to NFPs.

Capital gains tax

Top 500 groups regularly engage in transactions that result in the application of the capital gains tax (CGT) provisions. These transactions involve the disposal of assets, for example real property, shares in a company, units in a trust and rights.

In assuring the tax treatment of an asset disposal, we often review:

  • the accuracy of CGT calculations, including the application of capital losses and the availability of CGT concessions, rollovers and discounts
  • the pre-CGT status of assets
  • whether the disposal of an asset should be reported on capital or revenue account.

Based on the assurance engagements finalised during the 2024 financial year, most Top 500 groups correctly applied the CGT provisions to the atypical transactions they undertook. A high level of assurance was attained for approximately 94% of the transactions we examined. Many Top 500 groups also have significant asset disposals examined under our commercial deals program to provide tax certainty pre-lodgment or in some cases shortly after lodgment.

 

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