“ATO Next 5,000 review” - our experience and learnings

I thought I would talk about our experience so far with the Next 5,000 review program.


While not everybody will get a Next 5,000 review the takeaways for a “Privately Owned Wealthy Family” (a controlled wealth over $5m) are highly relevant. And our practice applies the same principals.


What is a “Next 5,000 review”

A “Next 5,000 review” is a review of Australia’s top 5,000 wealthiest families beyond the top 500 wealthy (so the top 5,500 so to speak). It applies to a family where they control wealth of more than $50m.


A top 500 family has wealth over $500m or wealth over $250m with a business turnover exceeding $100m.



1 The review process is relatively benign

When we have done our job properly the review has been quite quick and boring. As an advisor you do a lot of work for the “big day” and the ATO look at your preliminary response and leave you alone.


2 The organization chart is critical

You need to have a clear and well-designed organization chart to present to the ATO.

The organization should be backed up by tax advice on the purpose of each entity. It is incredible the number of people who do not fully understand why their structures are created.

And the more complex the structure the clearer the advice supporting it has to be.


3 Reconciling accounting income to taxable income is important

The financial statements or the tax return itself should have a clear and easily ready reconciliation of the accounting profits to the taxable income.


Sadly, we see many new clients who do not hold this. The tax return has “addbacks” but they are difficult to understand and opaque – if you cannot understand the differences the ATO will not. And if you do not have the schedule you are stuck hoping that your tax advisor has them.

Your tax returns and financial reports must be able to stand alone by themselves.


4 The trust resolutions must be on file and must be signed

They are asked for without exception.


In ugly tax reviews the ATO has requested evidence (by us) that the documents were signed prior to 30 June and we have been requested. Our practice has also been asked to verify the date we physically prepared the resolution – we normally support that question by electronic dating of documents or electronic dates documents were filed in our filing cabinets.


5 The trust deeds must be fully present

It is incredible the number of people who have lost the chain of trust deeds. And sadly some lawyers prepare a “one-off” deed without making sure the entire chain of deeds is accounted for. Our preferred option for trust deed amendments to attach the chain of former amendments to the new amendment being prepared.


6 The tax advice must be in one spot

Sadly a lot of tax advice is lost in the overall “ether”. This is more apparent when clients have chopped and changed advisors regularly or go to lots of different people for “one-off” advice pieces. Getting your tax strategy advice in one location that is sequential and logical is important to assist in an ATO review.


If you have had multiple small pieces advice for a single transaction make sure the advice is consolidated and put into one over-arching document. This is typical for a business sale of a property development.


The ATO cannot force you to hand over some type of advice. However - anectdotally – the ATO want you to give it to them and it will change the attitude of the review.


If you have verbal only tax advice you do not have advice. Advice is something that will support and sway your actions. Advisors will stop engaging with you if a negligence action is looming (the insurance companies demand this) so “you said this does not work”.


You must have documented advice to get somebody to stick to it.


Further your advisor must make sure that the advice they recommend is implemented properly. A lot of tax strategy is “easy” – but the implementation and execution of the advice is very difficult and costly. Get your tax advisor to remove the “assumptions” page and confirm they have reviewed the evidence to form their view. If they give strategy advice get them to confirm that you executed their strategy as intended when the deal is done.


7 The relationship with the tax advisor is important

For most clients in the Next 5,000 wealth group the tax advice role the tax advice function is almost exclusively outsourced to the tax agent (compared to the top 500). And if the tax agent has been “scoped down” so they only retype a bunch of numbers into a fancy-looking form the ATO will consider the tax risk of the family to be significantly higher.


As an example we had one client who approached us with a turnover of $22m. They paid the tax advisor $1,100 to prepare the financial statements, tax return and to provide tax advice. For that cost the client simply had some random junior type numbers into a form and lodge it – no tax advice or tax governance could have been applied for that price.


In our opinion the client was wasting their money. They would have been better off to lodge the form directly online and save the money. There was no tax governance or concern by the client about their tax obligations – and such an approach will impact a review.


If a business employs internal accountants as their tax governance piece the business owners will be required to demonstrate their commitment to tax governance by showing their expenditure in ongoing professional tax training for their staff. This would ordinarily only be done by a Top 500 family and not a Next 5,000 family due to cost.


Likewise the tax advisor needs to consider a whole of tax approach. A sign off on the income tax, fringe benefits tax, superannuation guarantee levy obligations, PAYG Withholding Tax, dividend and withholding tax, GST and payroll tax are but some of the factors a tax agent should consider and provide an opinion on. If it is not documented it is not done.


8 The tax agents workpapers and templates are important

Any competent tax advisor will have internal templates, checklists and a review process. For families in this wealth range the tax advisor’s quality control framework is often the families only tax governance framework.


Showing the ATO the tax advisors internal quality controls are an important part of providing comfort to the ATO for a review. I appreciate some advisors think this intellectual property belongs to them (and it does) but – in our view – the ATO staff are not going to steal the tax agen’ts property and sell it down the road.

Our practice workpapers are robust but ultimately are not that earthshattering. Every moderately capable firm would have something similar to what we are doing.


9 BAS reconciliation items are crucial

Every single reporting piece to the ATO must be coordinated. The STP reports must agree to the BAS which must agree to the annual income tax return.


The tax advisor must have a reconciliation of how all STP and BAS disclosure items on hand to show to the ATO. This work must also be documented and confirmed by the tax advisor.

If the tax advisor has “done the work but not told you about it” they may not as well have done the work. In a negligence action the tax advisor is prevented from talking to the client as the insurance lawyers move in.


10 Loan agreements must be on hand

All loan agreements between related parties must be signed and on hand. It is amazing how many of these loan agreements are “lost” when we talk to new clients or never prepared.


11 Explain the car use

The ATO already know what cars are held through the business entities and the structures.


You need to have clear guidance about how the private use of the cars was dealt with and where it was shown on the returns. This is often an error as the labelling of the private car use was done incorrectly – and owning upto that in advance is the correct course of action.


If the family all have 95% business use of their cars you are simply asking for a deeper and more prolonged review. That is not showing the ATO a genuine attempt to comply with your obligations.


12 Not doing everything is normal

The ATO understands that a lot of the questions asked by this wealth group will not have been done. If nothing has been done answer this truthfully – it is an acceptable answer.

The tax governance for a happily wealthy family would be vastly different to the Murdoch's or the Perron's.


13 You already have some governance in place

Some entities like a SMSF or a large reporting entity must already be audited. So you already have a governance framework to present to the ATO on that score. Even using programs like Xero with Hobdoc is a governance framework as the tax advisor has real time access to your affairs.


When you read the questionnaire it sounds a bit frightening. But the words ultimately break down to a commonsense approach.


13 Show second opinions upfront

A great advisor realizes that they are not that great. Every great advisor will need to engage outside specialists to assist on difficult transactions and this is a sign of strength – not weakness.


If you have second opinions, that sit within your overall tax advice, consider showing them up front. This is particularly important around high risk transactions like the small business CGT concessions, debt forgiveness, private use of assets, restructures and SMSF’s dealing with related parties.


Every competent tax advisor has somebody on tap for second opinions. Our practice, as an example, has a tax barrister on retainer for 20 hours a month. This is part of our clients tax governance and it should be mentioned to the ATO.


14 Consider a voluntary disclosure

It is almost impossible to get everything right. If you are answering the ATO questions and you identify a shortfall – make a voluntary disclosure of the error.


The reduction in penalties and interest can be significant.


15 You will not get a clean bill of health

The closure of an ATO review is very bland. If often ends with the ATO stopping questions or a one paragraph letter in the mail.


Anectdotally I have head of ATO reviews coming back with control recommendations that simply cannot be effected by a business family – they would need a team of lawyers and Chartered Accountants to run the family every day.


16 Prepare now

If your tax advisor has not been discussing a Next 5,000 review to you by now there is a chance that they are not even that they exist. Some advisors simply have no exposure to tax governance or wealthy families and it is OK - but start a conversation with them now so they are prepared. A relationship is important and it takes work.


Start reviewing your processes and systems now. A simple act of showing the ATO an org structure dated prior to the review starting can show a significant focus on tax governance compared to one prepared after the view has started.


If your tax advisor is out of their depth help them out. You can engage a temporary tax agent and then revert back to the former tax agent once the review is done.

If a family has been focused on overall governance and succession a lot of the above pieces naturally occur.

17 Change your attitude

Some taxpayers are focused on tax detection risk rather than compliance and engagement. And this attitude is the exact type of attitude the ATO wish to identify and focus their audit process.

If you are an emerging family with the asset over $5m and growing it could well be time to ask yourself what is really important. The pursuit of a few thousand dollars is typically not worth a couple of years of your life or your integrity - you do not need to be lazy with exploring tax opportunities - just not quick and dodgy.

 

Let me check online banking and get back to you. Hmmm its seems a bit short.

 

It make is easier....for the ATO to go away if they see you don't have multiple complex trust and company structures.

If you show your income...expenses and deductions are straightforward......they go to ground quickly. Make sure you have ALL records going back at least 5 years for individuals.

 

Sadly this is not possible for people of a certain wealth. The structures are not only there for tax - they exist for asset protection, business reasons, succession planning and sometimes reasons unknown.

Without exception every wealthy family wants to simplify their affairs - but the costs and business downside for doing so makes it impossible.

 

agree for any family group with a net worth over 10m the more simple the structures are the more tax is generally being paid. and that difference would be well into the hundreds of thousands if not millions.

most high net worth groups have extremely complex affairs. its just not possible to keep it simple.