Tax risk management - a big issue for corporate Australia 

It is essential for all companies to be proactively aware of the tax obligations that they face in day to day operations and, in the long run, to achieve efficiencies by reducing the likelihood of unexpected tax liabilities.

In recent times we have noticed amongst the Grant Thornton client base, an increasing awareness of “tax risk management” as a process requiring director level recognition. This is reinforced by announcements in recent years by successive Commissioners of Taxation. The following public quote of the current Commissioner indicates the ATO’s attitude:

“The general consensus is that tax risk management should be managed like any other business risk with reference to the corporate law… This requires amongst other things, a rigorous analysis, consideration and communication of the tax risks within a corporate group, allowing the corporate group to consider and calibrate its appetite for tax risk.”

Large corporations with the infrastructure to deal comprehensively with tax risks need to follow a systematic process. Companies in the SME sector (with turnover of up to $250m) should address their tax planning and compliance by using the same tax risk management processes.
 

The importance of a broad awareness

The significant areas of taxation that must be managed include income tax, capital gains tax, goods and services tax (GST), fringe benefits tax (FBT), all forms of withholding tax (including PAYG withholding), and pay-roll tax, stamp duty and other state taxes and duties.

As far as Federal taxes are concerned, the ATO suggests the following of directors and senior management.

• Have a broad understanding, at least from a financial and business perspective, of the major tax issues that arise in the normal ongoing operations of the business.
• Make enquiries about or establish reporting procedures to identify material risks, so as to provide a level of confidence that corporate processes promote tax compliance.
• Consider, at least from a financial and business perspective, the tax implications of major transactions, business structures and strategies.
• Oversee the overall amounts of different taxes paid by the business and be aware of whether these amounts are increasing or reducing, as well as the trends for key indicators such as effective tax rates and the extent to which dividends can or cannot be paid and (if desired) franked.
• Be aware of the kind of relationship the company has with the ATO, the level of scrutiny of the business’s affairs and the stance the business and its advisers adopt in relation to tax compliance and tax planning.

Specific types of tax risks

Specific tax risks can be broken down into various categories. For instance, they may include.

• Operational risk – day to day risks such as making incorrect tax withholdings
• Compliance risk – such as making inadequate tax return disclosures
• Transaction risk – to do with potential taxes arising from, for example, asset sales
• Financial accounting risk – in disclosing tax assets and provisions for tax payable
• Personal risk – to directors from, for example, unremitted PAYG and GST

A program approach

Grant Thornton have developed a program that helps our corporate clients deal with, and manage, such risks. It extends our involvement with tax compliance to a more complete model for managing risk. The key objectives and outcomes of this program are for you to be able to manage your tax exposures in the following ways.

• Implement a framework for compliance, including internal controls
• Utilise appropriate external resources in a timely manner
• Reduce the risk of errors and compliance costs, enabling you to focus on more strategic issues
• Reduce your risk rating in the eyes of revenue authorities, helping you to minimise the chances and impact of an audit or investigation
• Prepare for a revenue authority audit or investigation, minimising the management time and cost that might be incurred

Importantly, the ATO and state taxation authorities actively audit and investigate companies for tax compliance. Extensions of reviews are often based on the revenue authority’s assessment of the taxpayer’s risk management. Ensuring internal controls are in place to manage risk should help limit the extent of such audits, and help minimise penalties for adverse assessments.

Please feel free to discuss our approach to managing tax risk with your local Grant Thornton corporate tax advisors.



Author: Peter Godber , June 2008

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