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Corporate governance and tax: The ATO is changing its approach
Dr Niv Tadmore , Partner, Taxation, Clayton Utz
What is the background of the ATO bulletin?
The ATO wants to change the rule of engagement with large business. Large business is any
group that turns over more than $250 million a year. The traditional model of the ATO was
to commence an audit two, three or four years after the transaction time. The ATO has concerns
that this may not be an efficient way to proceed with an issue or even to identify the issue.
Therefore the ATO has decided to change its approach and to focus on early engagement
and real-time risk assessment. What is the ATO intending to do?
The ATO is implementing its risk differentiation framework. Essentially what the ATO did is
to divide all of the large businesses in Australia into four groups, and this classification
now determines how the ATO engages with the company and what sort of compliance measures
may be put in place. For example, the ATO may request the company
to agree to a pre-lodgement compliance review which means that the ATO and the company will
be discussing the company's tax affairs before the company lodges the return. Alternatively
the ATO may ask the company to audit itself and to identify its own uncertain tax positions
and then lodge that with its tax return. On the other hand if you are in a low-risk
category there may be very little additional compliance activities that a company may be
required to engage with. So there is a clear message of the carrot and the stick that underpins
the ATO's program. And the ATO is not neglected its traditional audit activities and has identified
a number of major audit areas. The focus will be on private equity, transfer pricing, access
to tax losses and consolidation benefits. Is it good news for big business?
The new model is a game changer. I think that the concept of constructive engagement makes
good sense and in my experience when companies approach the ATO and deal with the ATO on
an upfront and proactive basis the ATO is more willing to be receptive to arguments
and the ATO is more reasonable and the outcome normally positive. So I think that the new
model is based on the same principles. Of course it is early days, it will take time
for the ATO and for large business to adapt and adjust and to fully understand the implications
of the new compliance products. However I believe that the landscape will change in
that we will see a real change in the way that ATO and business interact with each other
and I think overall the change will be positive. At the end of the day tax is complex enough.
It is in the interests of both the ATO and business to cut through the dead wood and
focus on their relations. And of course will be times when you agree to disagree but if
the dispute can be conducted in the context of a good and healthy relationship the difference
could be quite important. What are the implications for board members
of large companies?
Tax is a bit unique in terms of corporate governance and there are two reasons. First
tax work is complex and it can be uncertain and second the amount at stake can be quite
large. The ATO has stated a number of times that
it would expect board members to get more involved with the tax affairs of the company
and the courts have been saying that board members should be a bit more hands-on in terms
of the financial affairs of the company. For this reason companies have now adopted or
developed their own tax risk management solutions. Those solutions are sub-sets of the company's
broader corporate governance structure and policy.
Those tax risk management solutions have a number of aspects and a number of purposes.
As far as board members are concerned they have two important objectives, firstly they
define a set of circumstances where a tax risk is escalated and brought to the attention
of the board, and secondly they are there to ensure that the communication is effective.
Most board members have no special tax qualifications. It may be a little benefit to provide board
members with a highly tax-technical report that only a tax expert can fully understand.
Therefore what you want to do is to ensure that the communication is effective so it
is done in a way that board members are put in a position they can make an informed decision
and discharge their obligations.