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.