About streamline assurance reviews
The scope of a streamline assurance review is generally limited to:
- reviewing the tax returns lodged for the last 2 years
- the entities in the group with significant activities, events and transactions.
Generally, reviews are completed over a 4 month period from when we receive the responses to our first request for information. However, in many instances this period has been extended as we have sought to provide tailored support to Next 5,000 groups and their advisers.
We do not give an overall assurance rating in a streamlined assurance review because of the limited scope. Instead, at the end of the review we give the client a streamlined tax assurance report that outlines:
- where we agree with the tax treatment adopted
- where we have got assurance for income tax
- specific feedback based on what we observed during the review, which may
- highlight areas for improvement
- give guidance on what you can do to mitigate risks in the future
- any areas we have reviewed that have not been resolved and the next steps we intend to take.
Where we have been able to confirm that correct tax has been paid on reviewed transactions and have confidence in the level of tax governance demonstrated, we are unlikely to revisit the issues covered in the review. That is unless something new comes to our attention.
Assurance and justified trust methodology
The Next 5,000 program uses the justified trust methodology to assure that the group is paying the right amount of tax when undertaking streamline assurance reviews.
Under the justified trust methodology, we focus on 4 key areas:
- 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.
Based on the population demographics and risk landscape, there are some key differences in the way we tailor the justified trust methodology for the Next 5,000 groups in our streamlined assurance reviews.
Under our approach, we review the tax issues arising from significant activities, events and transactions. We only seek assurance over the tax issues that were reviewed. This happens when we are satisfied that the relevant amounts have been correctly reported for these tax issues based on the client’s explanation and the supporting evidence.
Tax governance
We limit the scope of our governance review to the existence and design effectiveness of a group's tax governance framework with a focus of the first 3 of the 7 principles of effective governance. Given the limited scope of this aspect of the review, we do not give governance ratings.
Good tax governance is essential
Effective tax governance means having clear processes and procedures to support decision making and ensure you meet your tax and super obligations. We have observed a correlation between no documented processes and procedures, voluntary disclosures and next actions.
See:
Working with groups
In reviews of Next 5,000 private groups, we work with groups to ensure they understand their lodgment and payment obligations. This will continue to be a focus in 2023–24.
We encourage private groups to:
- include details of lodgment and payment obligations in their tax governance framework
- review their tax governance framework against our principles of effective tax governance.
When assessing the design effectiveness of a group’s tax governance, we:
- look for documented processes and procedures
- focus on the design effectiveness of processes and procedures.
While we don't give governance ratings, we do:
- give opinions on the effectiveness of your processes and procedures
- suggest ways tax governance can be improved.
Governance principles
The effective tax governance principles we look closely at in our review of Next 5,000 private groups include:
Clear roles and responsibilities
This principle relates to roles and responsibilities in the client's group and shared with advisors.
Comparatively, roles and responsibilities in the client's group are well documented.
However, where responsibility for tax compliance is shared with advisers, we have observed in several cases that an annual engagement letter clearly setting out the scope of work is not in place.
We encourage all tax agents to have an annual engagement letter in place clearly articulating the scope of work and accountabilities. This is important for instances where it is not being documented, we have observed that there is no clear understanding of the roles and responsibilities contributing to errors in the income tax return.
Recognise tax risks and issues
This principle relates to the tax return preparation and review process and identification of material transactions.
We have identified several cases where there:
- is no documentation
- are errors in the tax return, including material transactions being omitted from the return or incorrectly reported
- are failures to meet lodgment and payment obligations.
Some of these cases have led to private groups making a voluntary disclosure to us and payment failure to lodge penalty and interest charges.
Seek advice
This principle relates to circumstances where the client would seek advice from trusted advisers or us.
Like accountable management and oversight, we have observed in several cases that engagement letters are not in place.
Observations
While the number of Next 5,000 private groups without documented tax governance processes and procedures remains high, we are seeing some positive shifts in behaviour. We continue to observe increasing attempts to improve documented tax governance processes and procedures.
Of the Next 5,000 groups with a documented tax governance framework, a high proportion documented their tax governance procedures either before or after the notification of a streamlined assurance review. As frameworks become operational, we expect to see a decrease in errors for these groups that we continue to observe.
The most common recommendations provided to clients relating to governance, include:
- Implementing an annual engagement letter or annual scope of work with advisors to ensure that the roles and responsibilities are clear and any out-of-scope items that are still required to be reported on the income tax return are not missed.
- Where the engagement letter articulates the out-of-scope items, we expect that the Next 5,000 groups to have appropriate processes and procedures for those issues. This is because it will ensure that the accountabilities in relation to those items are clear and reduce the risk of these items being incorrectly reported or omitted.
- Implementing processes and procedures to ensure complete and accurate documentation, information or data is provided to tax agents where they are engaged to prepare the income tax return and accompanying schedules.
- Implementing or updating existing data entry manuals and income tax return processes and procedures to ensure they include the reporting of related party transactions.
- Improving record keeping processes and procedures particularly in relation to loans between related parties and expenditure in relation to private use assets.
Tax risks flagged to market and significant or new transactions
For risks flagged to market and significant and new transactions, we seek to understand the group’s current business activities, significant or new transactions and the associated tax result. These include new or significant transactions, ordinary business transactions and specific industry issues.
The common tax issues and tax risks flagged to market that we identified in the past have not changed. This has been confirmed by our findings from the streamline assurance reviews to 31 August 2023. This may change in the next findings given our focus on undertaking streamline assurance reviews on the larger and more complex Next 5,000 groups.
What we have done so far
As we review the group’s activities and transactions, we seek evidence to prove that the risks communicated to the market are not present. We focus on tax risks flagged to market as published in Practical Compliance Guides and Tax Alerts.
If a risk is identified, we seek to:
- understand the transaction
- understand the tax treatment
- assure the correct reporting of the transaction and the correct amount of tax is paid.
Where a tax risk flagged to market is relevant to a Next 5,000 group, we recommend that the taxpayer and their adviser review the relevant arrangements or transactions and, if required, seek further advice or support from us.
In addition to formal public advice and guidance, we have had ongoing conversations with the market about these common issues affecting private groups, including:
- what attracts our attention
- engagement with tax agent firms and industry groups
- other communication channels.
See Findings in detail.
Alignment of tax to accounting
We look at the difference between business performance and tax performance to identify errors and gaps in the group's governance process.
We continue to identify errors where clients have no or insufficient governance frameworks in place. Most errors relate to:
- miscalculations
- incorrect reporting or data entry
- incorrect information provided to tax agents for the preparation of the tax return.
Examples of these errors include:
- An intra-group loan being recorded for a different amount in the financial accounts of each entity.
- Calculation errors in the tax working papers for CGT events.
- Incorrect calculation of the adjustment for entertainment expenses.
- Incorrect calculation of income from taxation of financial arrangements.
- Miscalculation of capital works.
These examples illustrate that book-to-tax errors are commonly traced to tax governance failures, particularly incorrect and incomplete reporting.
From the groups we have reviewed, while we identified errors that we could explain, we saw a very small number of unexplained variances. In most instances, clients are advised to self-correct and implement our recommendations to improve aspects of their tax governance.
GST integration
In addition to reviewing income tax, we have conducted 178 streamline assurance reviews which were finalised at 31 August 2023 with a GST focus. Although we do not seek to obtain assurance on GST, these reviews allow us to:
- gain an understanding of the Next 5,000 sub-population from a GST perspective
- identify any common or emerging GST issues and risks
- work with our clients to correct errors identified as part of the review and give client education.
For our detailed findings in relation to GST integrated streamline assurance reviews, see Goods and services tax (GST).
Resolving issues with Next 5,000 groups
We are always looking for better ways to resolve issues for clients to the same outcomes. We have adopted some new approaches to positively influence behaviours and mitigate risks to sustainably reduce the high wealth tax gap.
When we identify issues, we focus on improving the client experience by resolving issues early and working collaboratively with the client where possible, to avoid a traditional audit.
During a streamlined assurance review, there may be areas where we need to take further action because we are unable to obtain assurance. In these cases, we may:
- recommend corrective actions
- allow the client to self-review or self-mitigate the risk
- extend the review to allow resolution in a single interaction.
The action is determined by:
- our level of concern with the tax risks present
- the client’s level of engagement, tax posture and tax governance.
We openly discuss any concerns with the client as they arise rather than at the end of the review. This means there are no surprises at the conclusion of the review. This new approach helps us give:
- more timely outcomes for clients
- outcomes that are better tailored to their risks.
So far, most of these cases could be resolved with self-mitigation by the client rather than a traditional audit or review. Of the cases with issues:
- 52% resulted in us asking the client to review the issue. In some cases we had to confirm that the appropriate action had been taken in the form of specific risk reviews.
- 17% involved recommendations for the client to action on tax governance that caused or were likely to cause identified errors.
- 5% involved recommendations for the client to take self-mitigation about a transaction or arrangement that is likely to have significant tax impact on future income years.
- 18% of tax issues were considered complex, from transfer pricing issues or to behaviour and escalated to comprehensive risk review.
- 8% of tax issues were considered high risk and escalated to audit.
We have expanded our data set to include any escalation to audit whereas previously we only included escalations to complex audit.
Most issues that need to be resolved are errors that are:
- easy to correct
- easy to avoid in the future with improved governance
- not because of tax planning or avoidance.
Some of the errors that have been able to be self-corrected by clients include:
- updating Division 7A loan agreements to ensure they are compliant
- preparing transfer pricing documentation
- obtaining an independent valuation for real property transactions between related parties
- correcting CGT events where the capital gain has been calculated correctly however claimed in the wrong income year
- correcting cost base calculation where no adjustments have been made for deductions previously claimed
- omission of related party interest and rental income.
Our findings show the issues being escalated to audit generally relate to:
- non-lodgment of income tax return where significant activities, events and transactions have occurred
- complex issues
- evidentiary issues heavily dependent on the facts
- interpretational issues that cannot be resolved in a review.
The main issues escalated to audit include:
- incorrect characterisation of the sale of property as capital in nature to access the 50% CGT discount
- failure to substantiate expenses for which tax deductions have been claimed such as trading stock, interest and expenses relating to personal use assets
- sale of property to related parties for less than market value
- capital gains being reported that are less than they should be
- incorrect deductions claimed relating to bad debts
- trust distributions made without supporting trustee resolutions and that do not comply with the relevant trust deed
- arrangements that attempt to reduce or avoid tax and that section 100A of the Income Tax Assessment Act 1936 may apply to because 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
- 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
- transactions between SMSF and related parties giving rise to reporting of non-arm's length income (NALI).