The ATO is coming no matter your size – are you ready?

When the ATO released its updated Tax Risk Management and Governance Review Guide, it set the benchmark in terms of the accountability for tax it expects from the directors of all Australian businesses – whether large or small.

[This article was first published in Accountants Daily in October 2017.]

Mark Griffiths & Vince Tropiano

This is on top of the myriad of changes over recent years, aimed at widening the transparency around tax information and the level of income tax paid by organisations.

We have both worked with clients for some 50 years between us – Mark in helping clients determine their risk appetite and to implement robust risk management policies and frameworks; Vince working with clients on their complex tax governance requirements, with a large focus on the ATO’s audit activities. We both rarely recall ‘tax’ featuring in the risk registers of many businesses – especially capturing such a wide range of businesses.

This is because the era of confidentiality in tax affairs is well and truly over. Businesses should expect greater demands on them in terms of justifying their tax performance, and managing these ever-increasing expectations by revenue authorities. The ATO will want greater clarity around how businesses look at tax and how they consider and manage their have robust tax risk and governance. It will also expect to see tax being discussed at the board level, as well as greater interaction between management, the board and advisors on tax risk management.

It also provided a further indication of the way in which the ATO now administers tax and underpins the ATO’s notion of ‘Justified Trust’ – its attempt at reinstating the public’s trust in the corporate tax system through demonstrable governance and transparency.

While certain ATO programs are targeted at the larger organisations – this focus is now more than just the big end of town. While the expectation on tax risk management is not as strong on smaller organisations, the ATO will not exclude them from reviews and audits.

No longer is it acceptable for businesses to fully rely on their accountant or tax advisor to manage their tax risks – it is now considered to be a directors’ duty. Management and boards must work hand-in-hand to ensure that their organisations have robust tax risk and governance processes prepared, documented and applied.

So, what exactly are the changes? Well, there have been five major changes in recent times:

1. The latest: the ATO will be undertaking a risk review of the top 1,000 companies in the country. These risk reviews are scheduled to take around four months each, primarily focused at what tax governance processes the businesses have in place, so the ATO can undertake a risk rating, as a guide to selecting companies for a more detailed review or tax audit. More on that later in this article.
2. The ATO’s release of information around tax paid (or in some cases, not paid) by public companies and internationals with turnovers of over $100 million, and over $200 million by private companies.
3. A new requirement for companies with turnover of more than $250 million to lodge a particular schedule with future income tax returns, detailing tax positions taken by the company which may have some form of tax risk (assumed to be taken with the approval of board and management).
4. The push by the ATO and the Board of Taxation to encourage companies to adopt a voluntary tax transparency code is to, again, make companies’ tax affairs more visible.
5. The introduction of further rules around disclosure of global and local financial and tax information of multinational companies. The life of a SGE (a Significant Global Entity – companies where the global group has over a $1 billion turnover in size) has become increasingly more complex with the introduction of Country-by-Country reporting rules, Multinational Anti Avoidance Rules, Deferred Profits Tax regulations, and a frightening massive increase in penalties for the late lodgement of any tax document (potentially reaching an eye-watering amount of over $500,000). Even more challenging, these requirements will capture all local subsidiaries, regardless of their size.

Back to the latest change and the focus on tax risk. The Guide firmly demonstrates ATO’s expectation that boards are accountable for tax overall, and moves the burden of proof from the ATO identifying risks, to taxpayers being able to demonstrate, through a formal, operational and well-evidenced tax control framework, that tax risks are identified and managed proactively across the business, regardless of a taxpayer’s risk rating or fact pattern.

More specifically, the Guide sets the following expectations: 

• It splits practices specifically into board and management considerations.
• The board is explicitly responsible for setting a tax risk appetite and a testing framework. 
• The tax risk appetite is to be articulated from both a strategic and operational perspective. 
• The framework covers all taxes, including transaction taxes such as GST with operational and interpretive risks, together with those dealt with by state revenue authorities. 
• A focus on data, IT controls and information flows between entities, systems, and reports. 
• Preparation of a board-endorsed tax transparency report is recommended.

What are companies being asked by the ATO to evidence? Here is just a snapshot:

• The company’s strategic and operational tax governance processes and framework. 
• The company’s tax risk management policy, including its corporate and/or tax risk registers and/or documents evidencing how the company manages tax risk. 
• The company’s decision-making committees, including a discussion of their role in the approval of transactions and where they fit within the overall corporate governance process and details of those that are responsible for tax governance.

It is likely that the ATO will be sending directors a letter seeking this evidence and providing limited timeframes to respond. The remainder of Australia’s Top 1000 companies are currently subject to a review by the ATO at some point over the next four years.

With tax laws undergoing unprecedented changes and expansion into areas previously uncovered, will your business be able to demonstrate a robust tax risk management and governance framework? If not, the ATO will be visiting for a four-month period and to asking ‘why not?’.

Those businesses who are able to demonstrate a robust tax risk management framework will be able to readily respond to the ATO requests and be looked upon favourably from a tax risk perspective.