In Australia, there are approximately 5,000 high wealth private groups encompassing 9,000 individuals and 18,000 companies, whilst providing employment for around 780,000 people. A high wealth group consists of interlinked companies and individuals with net wealth greater than $50m. Individuals are usually considered to be linked to a company if they have an ownership percentage of greater than 40%.
The ATO estimates that in 2016-17 around 90% of high wealth private groups’ income tax was paid voluntarily or with little intervention. This shows that a majority of these taxpayers are performing well in terms of compliance with the tax gap for that year hovering around 7.7%. Whilst 7.7% may not seem like a large figure, in absolute monetary terms, it works out to be around $770m.
According to the ATO, a majority of tax compliance issues in relation to high wealth private groups relate to genuine errors and honest mistakes resulting from misunderstandings in applying tax law or miscalculations. It notes that most taxpayers will self-correct once they are made aware of these errors. However, like in any population, a small number of high wealth groups have been observed by the ATO to deliberately engage in risky behaviour. This includes seeking to engage in artificial and non-commercial arrangements that are intentionally designed to avoid paying tax.
This is why from 1 July 2020, the ATO will be expanding the work of the Tax Avoidance Taskforce by introducing a new program focusing on high wealth private groups. In 2018-19, the taskforce mostly focused on multinational and public groups while starting an engagement program for the top 320 private groups.
In terms of statistics, at the end of June 2019, the taskforce had 63 audits in progress covering 59 multinational corporations, and there were a further 694 taxpayers under audit or review as a part of its focus on wealthy individuals, including trusts and aggressive tax planning. Overall, it generated around $3.4bn in tax liabilities from its compliance activities and collected $2bn from large public groups and multinational corporations, wealthy individuals and private groups.
A part of this new program will be tackling tax avoidance from high-risk taxpayers in high wealth private groups and their agents that enable such behaviour by using analytical tools to match data. Although the primary focus of the program will be supporting these taxpayers with advice and guidance as well as early engagement to avoid enforcement action. Nevertheless, the ATO states that it knows of a small number of tax advisors that intentionally do the wrong thing by placing their high wealth private groups’ clients into risky and even illegal tax avoidance arrangements. These tax advisors and others that promote aggressive tax arrangements, risk being subject to significant financial penalties and face the prospect of prosecution, it says.