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Updates to the ATO’s approach to reviewing the Top 1,000 taxpayers
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  • 7 minute read
  • May 03, 2024

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The ATO is making changes to the Top 1,000 program which include tangible incentives where taxpayers have strong tax governance and have previously received a medium or high overall assurance rating from the ATO. 

3 May 2024

In Brief

The Australian Taxation Office (ATO) recently released guidance on its intention to differentiate its approach in relation to the Top 1,000 Combined Assurance Review (CAR) program. The key changes the ATO have set out in their document Differentiating our approach with Top 1000 are: 

  • Recalibrating the metrics used to focus on the largest 1,000 taxpayers from the largest economic groups
  • Differentiating the approach between significant taxpayers (those that have total business income (TBI) over $1 billion) relative to general pool taxpayers (those with TBI between $350 million and $1 billion)
  • Adopting a lighter touch approach to subsequent reviews for taxpayers who have previously received a medium or high overall assurance rating in a Top 1000 review and obtained at least a stage 2 governance rating
  • Taxpayers in the $250 million to $350 million TBI category likely will be subject to a more risk-based review going forward as part of the Medium Public and Multinational Business Engagement Program.

In Detail

The CAR program was introduced in its current form in 2020 by the ATO targeted at the Top 1,000 taxpayer population providing the ATO with assurance across four key Justified Trust pillars: 

  1. Understanding a taxpayer's tax governance framework 
  2. Identifying tax risks flagged to the market 
  3. Understanding significant and new transactions 
  4. Understanding why the accounting and tax results vary

Since the introduction of the CAR program in 2020, the ATO has observed some key trends in respect of the income tax and goods and services tax (GST) compliance of taxpayers, with more taxpayers achieving and/or maintaining stage 2 or 3 in governance and overall medium or high assurance ratings. In addition, there has been an expansion of the number of economic groups sitting in the Top 1,000 population. With this in mind, and to ensure the ATO channels its resources in the right areas, shortly it will be introducing a number of changes to the CAR program which are detailed below. 

Redefining the Top 1,000

While TBI of at least $250 million was previously the key threshold to determine whether a taxpayer fell within the Top 1,000 population and in scope for a CAR, the ATO will be recalibrating the metrics to ensure its focus is on the largest 1,000 taxpayers from the largest economic groups. As a guide, the ATO has indicated these entities generally will have TBI of $350 million or more, while other factors may also be relevant (such as, industry, significant transaction(s) or risks). This approach will enable the ATO to direct its resources towards the key taxpayers, with the TBI threshold to be reassessed annually.

For those taxpayers in the Top 1,000 population going forward, the ATO will adopt a differentiated framework depending on whether the taxpayer constitutes a:

  • significant taxpayer or
  • general pool taxpayer, 

with the assurance approach to be adopted by the ATO then differing depending on which group the taxpayer sits in and, if applicable, their previous overall assurance and tax governance rating. Taxpayers will be notified at the commencement of their review whether they sit within the former or latter category. 

Significant taxpayers

Significant taxpayers will be those that have TBI over $1 billion and will comprise around 30 per cent of the Top 1,000 population. For these taxpayers, the ATO will continue with its current approach to seek assurance across four years for income tax and one year for GST, focusing on governance and understanding the tax positions adopted across all of their economic activity.

Importantly, for taxpayers in this category who have previously achieved at least a stage 2 governance rating and an overall medium or high assurance rating, the ATO will tailor its approach and generally leverage from the previous assurance obtained by only seeking objective evidence from the last year of the review period, as well as objective evidence in respect of any significant transactions, events or risks flagged to market in other years in the review period.

The key focus for these taxpayers should be the implementation of the ATO findings in the previous CAR. To the extent any of the ATO findings and recommendations have not been implemented, the ATO will expect an adequate explanation as to why. In our experience, business as usual or lack of resources are unlikely to be considered sufficient reasons for lack of improvement based on the ATO findings from a previous CAR.

In contrast. for taxpayers that have not obtained a stage 2 governance rating or otherwise received a low assurance rating, a more in-depth assurance review will take place across all four Justified Trust pillars. That is, the ATO will request objective evidence across all years of the review period.

General pool taxpayers

For the remaining taxpayers (circa 70 per cent) forming part of the general pool, the ATO will look to assure the economic activity in the last year of the review period, as well as any significant/atypical or new transactions or tax risks that arise in the four-year review period. The ATO will, however, adopt a differentiated approach in which those taxpayers that were previously reviewed and unable to reach stage 2 for governance or otherwise received a low assurance rating, a similar more in-depth assurance review will take place, which will include the full breadth of the CAR across the four Justified Trust pillars, as well as following up the ATO recommendations from the most recent CAR.

In contrast, taxpayers who received an earlier review and received a stage 2 or 3 governance rating and an overall medium or high assurance rating will benefit from a lighter touch review to refresh their assurance focused on the most recent year only and any significant or new transactions or changes to tax risks previously assured in the past four years.

For taxpayers in the general pool who have not previously been reviewed, the ATO will focus on the economic activity in the last year of the review period, as well as any significant or new transactions or tax risks that arise in the four-year review period.

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Next steps for significant and general pool taxpayers

Significant and general pool taxpayers should focus on the following as preparation for subsequent ATO review activity:

  1. Implementation of any next actions or recommendations included in previous ATO CAR reports
  2. If a CAR has not been received to date or a stage 1 governance rating or low assurance was obtained, preparation of the responses to the ATO standardised CAR questions to identify areas of focus
  3. Undertaking the ongoing board endorsements and updates of tax governance documentation
  4. Accuracy of tax treatment and documentation underpinning significant and new transactions
  5. Ongoing monitoring of tax risks flagged to market
  6. Further analysis of the variances between accounting and GST reporting in the GST Analytical Tool
Taxpayers with TBI between $250 million and $350 million

It also appears that taxpayers with TBI between $250 million and $350 million will, going forward, no longer be subject to a CAR, but rather a more risk-based review across both income tax and GST as part of the ATO’s “Medium and Emerging” program.

We understand further details will be released by the ATO in due course as to precisely what the risk-based approach will entail, but at this initial stage, it appears there will be an ongoing focus on significant and new transactions and tax risks flagged to market. 

For taxpayers in this TBI category who are currently subject to a CAR, the CAR will continue under the existing ATO framework. However, for those in this taxpayer population who are yet to receive the standardised CAR, the more risk-based approach likely will be applied by the ATO. 

Taxpayers in this category should focus on the following as preparation for subsequent ATO review activity:

  1. Accuracy of tax treatment and documentation underpinning significant and new transactions
  2. Ongoing monitoring of tax risks flagged to market
  3. Implementation of any next actions or recommendations included in previous ATO CAR reports
  4. Tax governance documentation and having effectively designed tax risk control frameworks

GST specific approach

Specifically for GST, the ATO will also adopt a differentiated approach to taxpayers in the Top 1,000 population, with taxpayers who have undergone an earlier review and attained stage 2 or 3 for governance and a medium or high overall assurance rating, any subsequent CAR will primarily focus on:

  • any GST governance improvements from the earlier review;
  • understanding variances between accounting and GST reporting through the use of the GST Analytical Tool (GAT) or, for taxpayers making predominantly making input taxed supplies, GST data testing; and
  • what taxpayers have done to address any concerns emerging from the initial review and then consider what further analysis and objective evidence is required to obtain assurance.

The ATO expectation will be in subsequent reviews that further investigation and improvements have been made to the GAT outcomes such that a better understanding has been developed of the variances between accounting and GST reporting.

In addition, the ATO will focus on controls for any system or changes to supplies and acquisitions made. 

Based on those considerations, the ATO will consider any areas that require further analysis and the objective evidence required to be assured in the CAR. This will also be informed by the previous assurance ratings the taxpayer attains in relation to these issues.

The ATO has stated it will balance the timing of GST requests with the level of intensity of the income tax assurance component of the CAR.

Key Takeaways

Tax governance continues to be a core focus of the ATO, and the expectation is clearly that taxpayers continue to develop their tax risk management processes, irrespective of which category the taxpayer is classified. While the ATO has indicated that further details regarding its differentiated framework will be released shortly, the key takeaways are as follows:

  • The ATO will differentiate between taxpayers who have robust tax risk management and governance frameworks in place and those who do not. Therefore, there are clear benefits and now more formalised incentives for taxpayers in the Top 1,000 population to be suitably prepared for a CAR. In particular: 
    • Taxpayers with a stage 2 or 3 governance rating will be differentiated by the ATO and can expect a reduced scope of review, as well as a lighter touch approach to follow up reviews.
    • Conversely, taxpayers who attained a stage 1 governance rating and overall low assurance in an earlier review, or those who have not to date had any assurance review, should expect a more detailed and thorough CAR and detailed questions around tax governance.
  • Taxpayers who have been previously undergone a CAR by the ATO, and remain in the Top 1,000 based on the $350 million TBI threshold, should ensure any recommendations or suggested areas for improvement have been appropriately addressed (or, if not addressed, ensure there is an appropriate narrative to explain why) prior to the commencement of a CAR as these will form part of the ATO’s starting point for follow up reviews. Taking action on any of these items could mean an improvement in the rating received as a result of the second review and a lighter touch approach during any future ATO engagement.
  • While taxpayers in the $250 million to $350 million TBI category likely will be subject to a more risk-based review going forward, the ATO's expectations in relation to tax governance would appear to remain unchanged. With this in mind, these taxpayers should continue to focus on implementing and/or enhancing their tax governance and risk control framework and ensuring there is appropriate documentation to reflect this and, in doing so, also ensure that any tax risks flagged to market, or significant and new transactions are treated and reported correctly for tax purposes.
  • In order for a taxpayer to enhance their tax governance framework, regard should be had to implementing or improving the following: 
    • Board endorsed tax policy documentation
    • Periodic internal control testing plan and/or commitment to periodic internal control testing that extends to testing both income tax and GST controls (and is signed off by the board)
    • Income tax and GST process manuals
    • GST systems architecture diagrams
    • Reconciliation processes between the Business Activity Statement (BAS) and audited financial statements
    • Documented procedures for manual processing controls for accounts receivable and accounts payable transactions that fall outside the system (e.g., manual journal entries)
    • Documentation for processes to undertake data and trend analysis and exceptions reporting as part of the BAS preparation process.
  • There are clear benefits for all taxpayers who seek to strengthen their tax governance framework, through lighter touch ATO engagement as well as broader benefits such as managing tax risk, facilitating compliance with tax laws and regulations and providing greater visibility over business systems and reporting.
Contact us

If you would like to further discuss this alert, reach out to our team or your PwC adviser.

Sarah Saville

Partner, Tax Reporting and Innovation, Sydney, PwC Australia

+61 421 052 504

Email

Chris Vanderkley

Special Counsel, Melbourne, PwC Australia

+61 412 170 744

Email

Matt Strauch

National Indirect Tax Leader, Melbourne, PwC Australia

+61 408 180 305

Email

Mark Simpson

Partner, Tax, Sydney, PwC Australia

+61 (2) 8266 2654

Email

Irene Kinkade

Director, GST, Sydney, PwC Australia

+61 401 427 629

Email

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