Tax and the ATO’s Justified Trust Reviews

Ajay Ravi, Special Counsel at McInnes Wilson Lawyers shares information regarding what to expect in a Australian Taxation Office (ATO) Justified Trust review, and how to prepare for one.

INTRODUCTION

‘Justified Trust’ is a concept the Australian Taxation Office (ATO) uses to get confidence that taxpayers are paying the right amount of tax. Whilst compliance programs have been in effect for a while now (and have targeted a number of larger taxpayers), there will be a particular focus on the top 5000 private groups and medium and emerging private groups in Australia over the next few years.

As the Justified Trust program has been in progress for a few years, the ATO’s expectations in terms of what taxpayers have been doing to prepare for a Justified Trust review has increased in recent times.

There is also the potential for a ‘refresher’ review as frequently as annually, depending on the ATO’s findings as part of the initial Justified Trust review.

WHO IS AFFECTED?

Under the Top 500, Next 5000 and medium and emerging private group compliance programs, taxpayers and private groups with greater than $5 million of income and/or wealth control are at risk of getting a review. Larger taxpayers are covered by the Top 100 and Top 1000 combined assurance programs.

Activities, themes and behaviours that can initiate a review (or bring forward a review) for you or your client may include:

• Levels of complexity of business affairs of the group;
• Complexity of taxation arrangements including GST treatment, CGT concessions, etc;
• Recent transactional activity including IPOs, share activity, acquisitions/disposals, shifting of wealth, etc;
• Inability to reconcile tax reported amounts to broader financial data or similar profile organisations;
• Complex, unusual and/or material transactions;
• Taxpayer history;
• Adequacy of systems, processes and controls;
• Poor tax governance and risk management controls.

FOCUS AREAS OF THE ATO

Whilst the exact engagement and review strategy and level of detail of the review will be tailored to the nature and size of the business, the general focus areas of the ATO remain:

• The existence and operational effectiveness of appropriate tax risk and governance frameworks;
• No tax risks that have been flagged to market are present in the business;
• Appropriateness of the tax outcomes associated with atypical, new or large transactions;
• Inability to explain discrepancies (if any) between tax performance and broader financial performance.

HOW CAN YOU PREPARE?

Whilst there is no single formula to get a strong rating or feedback in an ATO Justified Trust review, there are preparatory activities that can assist with engaging with the ATO in a positive manner and minimising the risks of the review progressing to an audit. These activities could include:

• Review tax governance and risk management frameworks in place;
• High level gaps analysis against the ATO’s board-level and managerial controls and associated expectations;
• Periodic internal and external audits of systems, controls and testing processes from a tax lens;
• Have reasonably supportable positions for all tax positions adopted (and amounts reported to the ATO);
• End-to-end review of income tax return and Business Activity Statement preparation processes;
• Ensure you have up-to-date group structures and organisational charts;
• Analysis of tax performance against financial/accounting performance and developing reasonable explanations for unexpected variances;
• Undertake mock interviews;
• Early engagement and voluntary disclosures where issues are identified.
• Where there is a Refresher Review, undertake any recommendations made as part of the initial Justified Trust process to evidence progress.

Ajay is a Special Counsel within the firm’s Taxation and Revenue practice, with a particular focus on Goods and Services Tax, State Taxes (including duties and payroll tax) and tax governance. He has more than 14 years of experience in taxation and revenue matters and has worked with a range of clients, from large Australian and multinational companies to small to medium enterprises, private clients and Government organisations. Ajay is a Chartered Tax Advisor. Prior to joining McInnes Wilson Lawyers, Ajay worked for a Big 4 professional services organisation and brings across valuable experience in the areas of technical indirect tax advisory and consulting, due diligence, transactional structuring and agreement drafting, ATO engagement and dispute resolution, and indirect tax technology and governance matters. Connect with Ajay via LinkedIn.