The ATO is currently undertaking “Next 5,000 reviews” on our client base and those wealthier families across Perth generally.
Who is the focus of an ATO Next 5,000 review?
The review is targeted primarily at the families in Australia whose wealth is from the Top 500 to the top 5,500 (hence the name “Next 5,000”). It is a review of families (generally) with a wealth exceeding $50m .
A “Top 500” family has a wealth exceeding $500m. Our client base does not have any families in this wealth range (yet! – we are working on helping our clients fix this).
1. The review process is not as painful as you think.
The review process (in our experience) has been relatively easy. In saying that the tax governance applied to date by our clients has been quite strong – so that might be more indicative of the focus and tax strength of our clients chosen than a wider position.
2. Get your organization chart in order
The family organization chart is a critical piece in understanding the overall tax structure and purpose of the tax structure. And it is incredible how many families do not yet have a clear organization chart – it is either not present or it is so poorly presented it looks like a bowl of spaghetti.
The organization chart should then be supported by the tax governance documents behind the chart. This should include trust deeds, constitutions, loans, employment contracts, SMSF investment strategies, leases and also a discussion of why an entity exists and how it came into creation.
3. Get everything signed
It might sound ridiculous – however the volume of unsigned documentation to support a tax position is incredible. Ensure the documentation trail you have is clear, ordered, linear and signed.
4. Reconciling profits to taxable income
The profits of your business and investment structures rarely equates to the assessment of your taxable income. The government uses tax to stimulate certain parts of the economy and to discourage other activities – and your profits are how much money you made in the marketplace.
Make sure your special purpose financial reports contain a reconciliation of the profits made to the taxable income contained within the tax return. This will highlight and raw attention to the ATO any significant positions made and why.
5. Show tax governance
In this wealth range ($50m+) most tax governance that a family engages in is almost exclusively provided by the incumbent tax agent. So make sure that all of the advice prepared is ordered and potentially available for review if needed.
At this level the ATO is concerned about families that are cavalier, indifferent or lazy with their attitude to tax management. So the written advice and evidence of an engaged relationship with your tax advisor will make a significant difference to the approach of the ATO.
In some rare instances wealthy families have engaged tax agents for a very low price point. And the end game is that those families (and family businesses) simply cannot have a tax focus on their affairs – the tax relationship is simply have a junior retype some numbers. And it is these cavalier families that might find a Next 5,000 review difficult.
6. BAS reconciliations
The communication flow with the ATO is now almost real time. Every time you pay staff you report to the ATO, every time you pay employee super the super funds report to the ATO, every time you lodge BAS you report to the ATO and you do the same with income tax returns, fringe benefits tax returns and also a raft of other taxes.
All of the tax reporting systems need to agree. And you should have a reconciliation of how they agree – because they often do not and there are legitimate reasons why they do not.
If you have reconciliations on hand you will be able to not only explain the reason for the differences – but also show the ATO a genuine commitment to managing your tax affairs.
For families who have a considered and structured approach to tax management the Next 5,000 review should not be of significant concern. It is not a case of taking a conservative approach to your tax affairs – but your approach should be well thought, intelligent and clear. The main difficulty families will have with a Next 5,000 review is if their approach on managing their tax affairs is lazy, quick and dodgy.
At Westcourt we approach every client with an “audit ready” framework. Our tax advice, ranging from the tax return itself to our detailed arguments, is always documented in anticipation of a review from another advisor or the ATO.
If you are subject to a Next 5,000 review and the process is not going well – call us. We can help.