As Australia moves towards a new “business as normal” with COVID-19 in the community, the Australian Taxation Office (ATO) has begun to reignite the engines of its large-scale compliance machine.
As we have already started to witness through the ATO’s top 500 and next 5000 tax performance programs, the compliance net is being cast far and wide. We anticipate that the ATO will expand the tax performance programs downward and engage with taxpayers at lower thresholds.
Along with more compliance activity, the ATO has also signalled its long-term intentions to hold private groups to a high standard of internal tax governance, an approach based on “justified trust” that looks certain to continue into the future.
What exactly is “justified trust”?
The concept of justified trust was originally quoted by the Organisation for Economic Cooperation and Development (OECD) and adopted by the ATO. It is seen as a benchmark level of community confidence sought from revenue authorities that taxpayers are consistently paying the right amount of tax. The ATO utilises the justified trust methodology to determine where to focus their resources and to assess how to approach future monitoring and review of specific taxpayers.
There are four key areas of justified trust:
- tax governance
- tax risks flagged to the market
- verify treatments of ongoing and atypical transactions
- alignment between accounting and tax.
We focus on tax governance in this article.
What is the ATO looking for?
The ATO expects businesses to demonstrate that the appropriate governance frameworks are in place and state the intention of management to pay the correct amount of tax. The ATO also expects that the day-to-day business processes reflect this intention and incorporate tax risks into decision making on a regular basis, rather than matters only becoming a focus at tax-time.
The ATO are making judgements based on a taxpayer’s willingness to escalate risks to their advisors when required, inclination to engage with the ATO on specific transactions and events when it is appropriate, and the taxpayer’s general attitude and willingness to cooperate with the ATO.
In some circumstances, the ATO is likely to make evaluations of tax advisors, particularly where they believe that risky advice is given, and make determinations on how this may impact on the compliance risk profile for businesses in their client base.
Effective tax governance should:
- Promote accountability and transparency;
- Document processes and rules to understand tax risks, support tax decision making and manage tax and super risks, including seeking professional advice where needed;
- Ensure systems and controls are in place and reviewed regularly to assist with accurate reporting;
- Consider timeframes of relevant tax and super obligations; and
- Promote ethical and responsible behaviour.
How can effective tax governance help my business?
Tax governance together with evidence showing the frameworks are implemented provides objective evidences that the taxpayer pays the right amount of tax. This effectively assists the ATO in determining whether or not the taxpayer is able to achieve justified trust.
Where justified trust is achieved, the ATO relies on an organisation to manage their obligations independently together with their advisors, without onerous compliance checks.
By having the appropriate governance frameworks and processes in place, your business may benefit from lower compliance costs overall, resulting from fewer and less intensive interactions with the ATO.
Together with a broader business governance framework, an appropriate and effective tax governance regime may also add value to your business in the event of a sale by assisting to evidence strong systems and processes in attending to regulatory obligations.
Looking into the future
Going forward, we expect the ATO to place an even heavier reliance on risk-based measures to direct their compliance focuses. With the ever-evolving suite of data-matching capabilities and technological tools, the ATO have the capability to target a higher volume of smaller-sized taxpayers and place under the compliance microscope.
We encourage businesses to think beyond the normal parameters of tax compliance, and how their activities fall within the ATO’s compliance framework based on the concept of “justified trust”.