Established in July 2016, the ATO's Top 1,000 Tax Performance Program is in its fourth year of establishing greater assurance that large public and multinational taxpayer groups are paying their ‘fair share of tax’.
Reportedly, the ATO has raised over $15bn in additional tax liabilities from streamlined assurance reviews and funding has been secured until 30 June 2023 to expand the focus of the Tax Avoidance Taskforce.
Following ATO release of key observations from the Top 1,000 assurance reviews, would you get the ATO’s seal of approval on these tax matters?
Key high-risk areas of non-compliance have revealed a common negligence in identifying and adequately addressing tax critical issues, events or tax positions.
This non-compliance appears indiscriminate across taxpayer and industry sectors.
Of note is the regularity with which the ATO cites incomplete information, insufficient supporting documentation and inappropriate tax conclusions as common themes across non-compliers.
A lack of support to justify deductions is a key finding in relation to issues with capital allowances.
Specifically, the ATO have noticed insufficient evidence supporting the application of self-assessed effective lives and an absence of analysis for determining whether exploration expenditure deductions meet the eligibility requirements.
The ATO recommends taxpayers consistently monitor and maintain a detailed tax fixed asset register that reconciles to the disclosures made in the annual Income Tax Return.
Further, it is highly advised taxpayers have contemporaneous documentation that supports their determination of effective lives and a detailed analysis of exploration expenditure that supports deductions claimed for eligible exploration.
Research and development (R&D)
High-risk matters for taxpayers with R&D tax incentive claims include:
- Eligibility concerns
- Inappropriate methodology allocation
- Ineligible contract and salary expenditure claims
Taxpayers accessing the R&D Tax Incentive are advised to establish strict internal controls governing project classifications, expenditure identification and apportionment processes.
With the impact on the Governments revenue base, notional deductions afforded under the R&D tax incentive continue to be a key area of scrutiny and audit activity by the ATO.
When talking tax losses, the most common issue with non-compliance relates to the incorrect application or analysis of The Continuity of Ownership Test (COT).
The ATO concludes that issues have arisen as a result of incomplete or unverifiable data inputs when identifying ultimate beneficiaries through interposed or nominee entities.
From the Business Continuity Test perspective (BCT), formerly the ‘Same Business Test’, the ATO identify a lack of accuracy, rigor and contemporaneous supporting documentation to support taxpayer’s facts and assumptions that form the base of their BCT analysis.
Transferred losses, in the context of consolidated and multiple entry consolidated (MEC) groups are similarly under-supported with insufficient analysis and corroborating evidence available to verify the eligibility of transferred losses.
Available fraction calculations are also identified as commonly lacking information and documentation to support the market value of the joining group, in addition to general deficiencies with the mechanics of the calculation.
Consolidations and MEC Groups
Thus far, the ATO have encountered non-existent, incomplete or inappropriately supported entry and exit allocable cost amount calculations, with inadequate information to substantiate the classification and/or market values of reset cost base assets.
In relation to MEC Groups, restructures are proving under-substantiated with the common theme of lack of support for the commercial rationale driving the restructure, and minimal or no detailed tax analysis addressing the complex tax issues arising on multi-step restructures.
What you can do...
All taxpayers, not just those subject to review under the Tax Avoidance Taskforce performance programs, should be conscious of the high-risk matters identified here and reflect on their own behaviours and circumstances.
These observations clearly indicate that even highly sophisticated taxpayers with internal tax functions and the means to access external advisers, can experience difficulties with understanding, applying and supporting complex areas of tax law.
Those who have invested considerable time and expense in producing and implementing tax governance policies and procedures will find their efforts wasted if they fail to execute accurate and well-supported tax positions.
Should similar findings continue across the broader tax performance programs, the ATO will have no option but to considerably change their rules of engagement.
How can RSM help?
If assistance is required in relation to any of the matters discussed above, please do not hesitate to contact your local RSM office to chat with one of our experienced team.