The Combined Assurance Review Program
In a CAR, the ATO will seek to obtain a level of assurance that appropriate tax risk and governance frameworks exist and are applied in practice.
The program initially targeted the Top 100 taxpayers and was extended in 2020 to the Top 1000 large business taxpayers. The Top 1000 CAR program will target large public and multinational companies with income tax and GST turnover above $250 million, and each review will have an income tax and GST component.
The ATO will be aiming to undertake 300 CARs per year.
Further to this, the ATO recently announced that it will be expanded to its Next 5,000 tax compliance review program, which targets Australian resident individuals, their associates and linked entities, controlling wealth of $50+ million.
What the ATO expect
Details published by the ATO about the CAR program indicate the ATO expects all Top 1,000 taxpayers to have a good understanding of the ATO’s approach to tax assurance and related guidance publications including the recently published GST Governance, Data Testing and Transaction Testing Guide and the Tax Risk Management and Governance Review Guide previously published.
It is clear taxpayers selected for a CAR will be in a more advantageous position if they can demonstrate to the ATO they have already used such guidance to self-review their tax governance and have addressed, or are addressing, gaps or risks identified.
The ATO has an expectation of review readiness. That is, review teams expect expect businesses will prepare in advance for any review given the ATO has previously disclosed the types of information it will seek and the likely focus areas of the reviews.
Taxpayers will only have a short window (typically about three months) to prove to the ATO that their tax affairs warrant a ‘high’ tax assured rating. Low or medium tax assurance ratings face the increased possibility of an ATO audit and ongoing scrutiny.
Areas of Focus – Tax Governance
A key part of the CAR will a review of your tax governance arrangements due to the higher level of assurance strong tax governance provides.
The ATO will focus on ensuring there is a tax risk framework in the first instance with improved ratings being given to taxpayers who are able to provide evidence to demonstrate:
- the presence of a documented control risk framework
- the design of the framework is effective
- the framework is operating effectively
Taxpayers who use the months ahead to prepare for that eventuality – by undertaking a self-review of their systems, processes and governance, documenting the outcomes, and addressing any gaps and areas of governance risk identified – could reap the very substantial benefit of a faster, lighter and more positive review experience with the ATO.
Areas of Focus – Income Tax
Review targets here will include:
- Capital allowances (e.g. insufficient documentation, inadequately detailed fixed tax asset register, inadequate reconciliations between tax return disclosures and the fixed asset register, and self-assessed effective lives with inadequate supporting analysis).
- Tax losses (incomplete or inadequate continuity of ownership documentation, particularly where a nominee shareholder exists, evidence of business continuity test analysis, transfer of losses and available fractions for consolidated groups, and the origin of tax losses).
- Consolidations (calculations of tax cost setting on entry and exit, evidence of contemporaneous valuations, evidence of the commercial rationale restructures involving MEC groups).
- R&D claims (e.g. the eligibility of notional deductions, ineligible expenditure and inappropriate apportionment methodologies, offsets claimed for ineligible activities, and contract and salary expenditure).
Areas of Focus – GST and the 36 data analytical tests
When reviewing your tax control framework for GST purposes, the ATO consider three GST controls to be fundamental, as the design of these controls directly influences the likelihood the correct amount of GST is remitted/ refunded. These three fundamental controls are:
- your periodic tax controls testing program
- data controls
- your documented GST control framework.
Data and transaction testing is also undertaken, focusing on three consecutive BAS periods, to determine whether GST outcomes are appropriate.
The ATO’s GST Governance, Data Testing and Transaction Testing Guide provides affected taxpayers with practical guidance about how to conduct a self-review of their GST governance framework, as well as for undertaking GST data and transaction testing. The Guide sets out 36 data analytical tests that it expects taxpayers to have undertaken in relation to their AP/AR and lodged BASs.
How to Prepare
In our experience, taxpayers who are adequately prepared for their reviews will obtain the best outcomes.
Practical steps to ensure your readiness for review may include:
- Formally documenting your tax risk management and governance framework and/or tax processes, and identifying any gaps that will need attention.
- Ensuring that all contemporaneous analysis, documentation and advice has been retained and collated, particularly in relation to the income tax risks the ATO have outlined.
- All material book to tax adjustments are easily explainable and documented.
- Proactively assessing any tax risks flagged to the market and documenting how these risks have been managed where they apply to your group.
- Undertaking your own data analytical testing in line with the ATO’s documented expectations for GST.
How We Can Help
ICGTAX is able to assist you prepare for all aspects of a CAR, ranging from reviewing your governance environment and documentation, all aspects of your income tax calculations, elections, analysis, and tax return preparation, as well as the design and operation of your GST systems, controls and processes.
The ATO accepts third party data testing undertaken on a taxpayer’s transactional data provided the tests are appropriately documented and scoped, the results recorded, and the third party is sufficiently independent. Our automated technology data analytical tool, RAMPARTTM allows us to undertake all the pre-determined tests prescribed by the ATO against your transaction data to gain quantitative insights and visibility over all accounts payable/ accounts receivable, vendor and product master files, and to iidentify any reporting errors that may need to be rectified.
RAMPARTTM also enable us to highlight:
- Unclaimed input tax credits
- Duplicate payments
- Overpaid tax where products are misclassified
- Overpaid tax where customers are incorrectly set up
- Anomalous transactions
- Opportunities to improve cashflow via accelerating input tax credits claimed
For further information about the CAR program, the expectations of the ATO during a CAR, our data analytical capabilities, including RAMPARTTM, or how we may assist you with preparing for or managing a CAR, please contact Don Green, Chris Gibbs, or Greg Hill at ICGTAX
+612 8599 8320