The Australian Taxation Office (ATO) has identified several common errors in capital gains tax (CGT) reporting following its engagements with the Next 5,000, a group comprising privately owned and wealthy entities.
Its recent engagements have uncovered a variety of mistakes, including incorrect cost base calculations, misreporting of transaction years or not reporting them at all.
Other issues included incorrectly characterising ordinary income as capital income, beneficiaries failing to gross up discounted shares of capital gains from trusts, unsubstantiated carried forward capital losses, and the inability to substantiate assets sold to related parties.
These errors often stem from the mischaracterisation of information and inadequate recordkeeping, the statutory agency said.
The ATO noted: “Failing to correctly prepare tax returns can lead to audits and amendments. These can be time-consuming and costly, highlighting the importance of accurate CGT reporting and recordkeeping.”
The ATO provided an example involving a Next 5,000 group that mischaracterised a transaction as ordinary income instead of capital income when filing its tax return.
This resulted in additional tax liabilities exceeding A$5m ($3.14m), along with penalties and interest surpassing A$1m.
The ATO further said: “To avoid these type of issues, you should note that certain capital losses, disposals, and business CGT concession claims will attract our attention.”
It also emphasised on the importance of understanding the nature of transactions and assets and maintaining records to accurately determine capital gains or losses.
It also recommends obtaining independent valuations for asset sales between related parties to ensure compliance and accuracy in CGT reporting.
In February 2025, the ATO responded to the Australian National Audit Office’s report on the Governance of Artificial Intelligence.
The Tax Office has agreed to implement all seven recommendations to enhance ethical decision-making and data integrity.
