Thus the ATO’s recently released “Guidance for Top 1,000 taxpayers preparing for a combined assurance review” comes as welcome support for businesses that are expecting to be reviewed in the near future by the ATO, whether it be under the Streamline Review program or otherwise.
Of note, although this publication focusses on the Top 1,000 taxpayers (i.e. turnover of $250M or more), the ATO review program will progressively cascade downwards, thus all (non-small) businesses should consider the released guidance.
The guidance largely focusses on the importance of having an operational tax risk management and governance (“tax governance”) framework, and provides more tangible examples of what this looks like for different types and sizes of businesses, acknowledging the framework must be “fit for purpose”. This is beneficial given that the ATO’s previous publications have focussed more on “best practice” frameworks, which was simply not practical for many businesses.
The “Guidance for Top 1,000 taxpayers preparing for a combined assurance review” publication is over 20 pages in length and not something those outside of the world of tax are likely to read cover-to-cover. As such, we thought it beneficial to highlight the keys themes of the publication and combine it with practical experience we have had through our involvement in ATO Streamline Reviews.
Documentation is key
Tax governance is a key measure by which the ATO measures “justified trust,” being the trust the ATO has that a business is paying its appropriate amount of tax.
In the absence of a robust tax governance framework existing, even if no tax issues are identified as part of a historical review, the ATO does not have any “justified trust” that the business will capture and pay the appropriate amount of tax going forward.
Importantly, having a tax governance framework in place increases the likelihood of the ATO undertaking a “controls based” review of a business, and reduces the likelihood of a “transaction based” review. This is a critical distinction for businesses with “transaction based” reviews often taking two to three times longer than “controls based” reviews, and provides significantly increased pressures on the business’ finance/tax team’s resources.
How the ATO assesses Tax Governance
Firstly (and obviously), the ATO need to understand if a documented tax control framework exists.
Secondly, it seeks objective evidence that the framework is not only effectively designed, but is also embedded in the operations of the business. This may be through the inclusion of tax controls embedded within the business’ IT systems, processes and policies. An example if this may be requiring tax manager/advisor sign off for all transactions greater than a prescribed risk threshold embedded within a system for an internal process to progress.
What are the key areas the ATO expects to be included as part of a robust tax governance framework?
Although there is not a “one-size-fits-all” approach to tax governance, there are a few key areas the ATO considers should be included in most tax governance frameworks for listed and international businesses. They are as follows:
- Board endorsement of the tax governance document;
- Levels of tax risk that are clearly defined, and associated processes in place for these different levels of risk;
- Tax roles and responsibilities appropriately allocated and clearly stated;
- Controls in place to ensure that the Board’s direction on tax risk and management is clearly communicated to Management, and Management’s identification of daily tax issues and tax risks are clearly communicated to the Board;
- Controls in place to identify tax risks flagged to the market by the ATO that may be applicable to the business;
- Controls in place to ensure that significant transactions are identified and tax is appropriately considered;
- Inclusion of, or reference to end-to-end procedures for tax compliance obligations such as income tax returns; and
- A commitment to on-going period internal testing of the controls included in the tax governance document.
ATO are more prescriptive about expectations for different types of taxpayers
The ATO have historically produced a “best practice” tax governance guide, albeit acknowledging that it is impractical for most companies to apply all the controls included in this guide.
The recently released guidance provides more specific ATO expectations of a business’ tax control framework based on the businesses size and complexity to ensure it is “fit for purpose”.
Specifically, the ATO sets out its differing expectations of the following type of businesses:
- An ASX listed business headquartered in Australia with multiple business segments;
- A private Australian business that is foreign owned by a private group;
- An Australian group that forms part of a listed multinational group; or
- Standalone Australian entity that forms part of a multinational group, whose Australian activities are relatively minor and uncomplicated.
Although the purpose of the ATO publication is not to revisit the ATO’s recommended controls, it is critical that the controls are appropriate, functional, and operate in practice within the business.
Periodic testing
As stated above, it is the ATO’S expectation that a tax framework is periodically tested for its effectiveness and operational use.
The ATO provides additional clarity in respect to testing expectations for the control framework, noting it expects testing outcomes to outline:
- Testing methodology;
- Sample sizes selected;
- Source documents relied upon by the tester; and
- Final test results.
Further, when establishing a testing framework, the ATO’s expectation is that it includes:
- Taxes to be reviewed;
- Controls to be reviewed;
- Frequency of testing;
- Details as to who should conduct the testing; and
- Testing methodology.
The ATO has not been explicit in terms of its expectation regarding testing frequency. However, we are seeing most taxpayers adopting periods between 12 to 24 months.
Other areas of focus
Although not specifically mentioned in the ATO publication, we have found some areas are of particular interest to the ATO, and we recommend businesses sufficiently document their tax positions including:
- Tax treatment for significant events or transactions, ideally evidenced by tax advice or an internal memo;
- Substantiation basis for the use of tax losses;
- The rates/pricing used for cross-border related party transactions (i.e. transfer pricing documentation);
- The treatment of tax technical matters identifiable in the lodged tax return (i.e. tax consolidation calculations, TOFA and hybrid mismatch analysis); and
- Appropriate support for any research and development claims made.
We have considerable experience in assisting businesses be ATO review ready, in establishing a documented tax governance framework and guiding them through the review process. We are here to help.
