In recent times, tax transparency and tax avoidance have been key areas of discussion in the international tax arena, including in Australia, where there has been considerable focus on whether Australia’s largest corporate groups are paying the right amount of tax.
When determining how to manage tax risks amongst Australia’s largest taxpayer, the ATO adopts a tailored approach - a risk differentiation framework.
The ATO uses a risk differentiation framework to tailor its strategies so that that it can focus their resources on the highest risks to the tax system and the largest contributors.
Under this framework, the ATO categorises public and international groups into four risk categories based on the size and likelihood of non-compliance. This framework assists the ATO with its strategy around client engagement and the management of tax risks.
Four quadrant model
Key taxpayer and high risk
There are only a small number of taxpayers in Australia who are considered higher consequence across both direct and indirect taxes. The taxpayers in this category are Australia’s largest businesses and largest contributors to direct and indirect taxes.
The ATO’s strategy for managing tax risks for key taxpayers is continuous review and monitoring and regular contact and engagement.
Lower consequence - lower risk and medium risk
Most public and international groups and privately owned and wealthy groups fall into these categories.
The ATO’s strategy for managing risks for taxpayers that are lower consequence is one-on-one activities. Where a risk is identified, the ATO will work with the taxpayer to assure or confirm the risk.
The risk differentiation framework plays an important role in the ‘Justified Trust’ initiative that the ATO rolled out in 2017.
The notion of ‘Justified Trust’ is a concept adopted from the OECD and its purpose is to build and maintain community confidence that large businesses are paying the right amount of tax. One of the key requirements for an organisation to achieve justified trust is to provide or display objective evidence that would lead a reasonable person to conclude that it has paid the right amount of tax. The ATO tailors their assurance approach based on the unique business profile of the tax payer, and focuses on four key areas:
- understanding a taxpayer’s tax governance framework, including seeking evidence of its existence, application and testing;
- identifying the presence of any tax risks which have been communicated to the market;
- understanding the tax implications of any significant and new transactions; and
- understanding why the accounting and tax results vary.
The ATO has developed three programs as part of the justified trust initiative: one focused on the top 100 taxpayers, one on the top 1,000 taxpayers and one on the top 320 private groups.
The ‘top 100’ public and multinational large business groups pay over 40% (2014-2015 financial years) of all company income tax and have a combined business income of above $5 billion globally. The ATO identifies these large public and multinational business groups as ‘key taxpayers’.
The ATO performs a risk assessment of the ‘top 100’ based on the size of the Australian operations and each organisation will be assigned a risk category. The ATO has created three risk categories:
- key taxpayer - lower level of risk and no significant history of adjustments from the ATO;
- key taxpayer with significant concerns - identified risks and/or economic outcomes that are not reflected in tax outcomes; and
- high risk - multiple complex and structural risks, poor engagement with the ATO, late lodgement of tax obligations.
These entities will receive a letter from the Commissioner advising them of their risk category and how the ATO intends to engage with them.
This program provides assurance that the largest 1,000 multinational and public companies are paying their fair share of tax and identifies and addresses key tax risks. The program focuses on taxpayers with turnover above $250 million. The ATO engages the taxpayer through a four month streamlined assurance review. The taxpayer will be notified prior to the commencement of such a review.
This program is an engagement and assurance approach under the Tax Avoidance Taskforce. The top 320 are identified based on the following turnover and net asset criteria:
- groups with >$350 million turnover, regardless of net asset value;
- groups with >$500 million net assets, regardless of turnover;
- groups with >$100 million turnover AND >$250 million net assets; and
- market leaders or groups of specific interest.
What is the importance of having a robust tax risk management framework?
The existence of a robust tax risk management framework is a key focus area for the ATO achieving justified trust. The ATO has developed a tax risk management and governance review guide which outlines the ATO’s expectations in respect of tax risk management and the accountability and responsibilities that board and senior management levels should have in regards to the identification and management of tax risks.
What are the key features of a tax risk management framework?
A framework should focus on how tax risks are identified, evaluated, mitigated and monitored including:
- the tax risk appetite of the business;
- the roles, responsibilities and qualifications of all levels of management;
- the tax policies and procedures in place; and
- the communication strategy and documentation requirements when tax risks are identified.
The ATO’s expectation of tax risk management is no longer focused on large public multinationals, as evidenced by the recent top 320 program. The ‘Justified Trust’ initiative puts more onus on the board and senior management levels to take an active role in ensuring that their organisations have a robust and strong tax risk management framework in place.
If organisations want to ensure that they are prepared when and if they receive a letter from the ATO, evidence of a robust tax risk management policy and framework will provide assurance to the ATO that they are proactively managing their tax risks and therefore one step closer to achieving justified trust.