ATO assurance program challenges companies to justify our trust

Phil Beswick, Director, Deals, Tax, Legal

The Australian Taxation Office is now well into its program of compliance reviews of the country’s top 1,100 companies checking they have the right systems in place to ensure they are paying appropriate levels of tax.

It’s shared some results from the first 200 plus reviews – and the overall conclusions are that most companies are on the right path, but there is much still to be done.

The initiative, called Justified Trust, is a central plank of the ATO’s implementation of the Organisation for Economic Cooperation & Development’s (OECD) long-running Base Erosion and Profit-Shifting (BEPS) agenda.

It divides the program into two key segments. Firstly the ATO gives the top 100 taxpayers Tax Assurance Reports (TARs). More than half have now been completed with the balance due by the end of this year. This involves continuous monitoring, and specific review of risks identified by the ATO. There is one-to-one engagement with these companies.

Secondly, companies from 101-1100 by contrast undergo shorter ‘Streamlined Assurance Reviews’ (SARs) which typically last about four months. Some 200 of these have now been completed.

There are a few elements to the Justified Trust model, one of the most distinctive however is the formal review by the ATO of tax governance measures put in place by businesses.

What do these reviews look for when it comes to tax governance?

Earlier this year the ATO issued guidance on what it expects from companies’ tax governance frameworks. The reviews then give each company its rating.

The ATO looks for:

  • Presence of a Board-endorsed and documented tax control framework to identify and manage tax risk.
  • Evidence that the design of the framework is effective (alignment with the ATO Guide through undertaking a gap analysis)
  • Evidence to demonstrate that the framework is operational (that it is ‘lived’ by the company, not just a document that sits on the shelf).

More broadly the ATO also looks closely at issues such as how significant transactions have been managed, how they have responded to tax risks flagged to the market and any difference between tax and accounting treatments.

An important theme that runs through the Justified Trust framework as developed and applied by the ATO is the expectation of evidence; of documents and other evidence of controls existing and operating. In this sense, by emphasising the need for documentation (to ‘justify’ our trust) it is instilling best practice. This should not be regarded as unreasonably onerous.

So, how are the results so far?

At recent seminars, the ATO has said that almost two-thirds of the top 100 visited so far have received a ‘medium’ rating in their assurance reports, with one–third ‘high’ or ‘very high’ – and just 4 percent with a ‘low’ rating.

For the top 1000, with fewer resources, perhaps not surprisingly, ratings were lower – just over half were ‘medium’, nearly ‘one-third’ high but 16 percent were rated ‘low’.

Interestingly, in the top 1000 sector, a larger proportion of Australian-owned taxpayers received high ratings than foreign-owned companies. This may say something about the complexity of Australia’s tax system.

I believe the Justified Trust program is an innovative approach by the ATO, compared with how other jurisdictions’ tax authorities have tried to implement this part of the BEPS agenda. It is tailored to different company sizes and the guide is clear.

The results so far show there is much still be to be done. The lesson for companies is to take steps to enhance their tax governance frameworks to be relevant and support their business outcomes – in addition to satisfying the ATO reviews.

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