The release of the Australian Taxation Office (ATO) "Large Business and Tax Compliance” booklet on 30 August 2006 marks a critical juncture in the Australian tax system for large business.
The new Commissioner of Taxation, Michael D’Ascenzo, is taking the lead in building a better relationship with business. Michael is a true believer in the rule of law, is pro-business, is totally committed to the good of Australia, and he sees community confidence in the tax system as a critical measure, and one he takes seriously. He also recognises the extensive revenue contribution made by large business, which is based predominantly on voluntary compliance.
The Commissioner articulates a vision of a shared future in which the ATO supports large business to achieve higher levels of voluntary tax compliance, helping business grow taxable profits in Australia, and siding with Australian business to eliminate double taxation arising from global business operations.
While many of the themes this year are consistent with previous years the ATO is taking a deliberate and measured approach to creating step by step changes that build on or evolve from the past. The first key area of change to note are the improvements in, and sophistication of, the ATO’s tools to execute on its "risk model”, which is utilised to identify and assess tax risk. The ATO’s approach represents world’s best practice, with the methodology being put into operation by skilled resources, including economists and financial analysts.
The ATO are also building in consistent, system-based project management disciplines into compliance operations, which are intended to increase the effectiveness, professionalism, transparency and accountability of the delivery of the ATO’s compliance products, such as client risk reviews and audits. Encompassing all of this is a premium, tailored and individualised approach by the ATO to managing the relationship with large business.
When the new booklet was launched, the reaction of many corporates at the ATO Symposium was to embrace the new direction of the ATO, while also challenging the ATO leadership to lead the cultural change deep into the ATO operations to ensure the promised experience and results were real. In short, the time has come for the ATO to deliver cultural change on the expectations of the shared future articulated by the new Commissioner. While everyone recognises it may take time, the tangible experience of change on the ground will be the measure.
Business will also need to play its role, with the booklet outlining "how” it will keep those large businesses that have high compliance levels on board, while bringing on board those businesses that are not there yet. It appears there will be a combination of a "carrot” and "stick” approach. The "carrot” includes the high level benefits for business and Australia in the "shared future” and specific benefits from lower compliance costs and even some concessions, such as penalty and interest remission arising from forward compliance agreements. The "stick” is changing in very practical and important ways. Rather than what is sometimes perceived as a blunt instrument, the ATO compliance program is becoming much sharper, defter and smarter.
| Background to the changes
The tax system is on a journey, which finds its beginnings in the strategic changes in tax administration in the 1980s. Community confidence in the system suffered from the perceptions of the 1970s era of tax avoidance being out of control with a tax department out of touch with the community and not modern enough in its methods or systems to cope. The ATO sought to change this by building bridges with business in some areas and driving major changes through modernisation of systems and the introduction of self assessment. While these changes have had their ups and downs, they have helped to move the system in the right direction and started what will be a continual journey to build a better tax system.
A critical strategic change for the ATO was to take a risk management perspective. While some of the approaches led to adversarial situations, many of which continue to influence current debate, the new ATO initiatives appear to be seeking to reframe the ATO compliance program to be broader than risk management. It is also about relationship management with an aspiration for win/win outcomes. |
Key risk areas
A good way to start to understand what will attract the ATO’s attention is to consider the seven high level propositions for risk identification and risk profiling (see page 17 of the ATO Booklet). For the first time the economic ratios and other indicia are published (see pages 42-43), which is surely an invitation for self assessment by taxpayers before the ATO undertakes its own risk review. They also remind us that, along with other initiatives, non-disclosure is not an option. Furthermore, risk profiling suggesting uncommercial tax outcomes provides an obvious segue into reviews and audits raising anti-avoidance issues as well as transfer pricing, to name but two.
Significantly, the Commissioner affirms the commitment to a two year period to close out audits, except in extraordinary cases such as where information gathering breaks down. More regular and tailored relationship management between the ATO and large business is promised, continuing the program of senior executive meetings between the ATO and companies. These initiatives will undoubtedly improve the level of communication and informed decision-making on all sides.
There are two very important points the Commissioner makes in the booklet. Firstly (page 49) differences of view on complex matters do not indicate un-cooperative or non-compliant behaviour. Indeed the legitimate exercise of legal rights and reliance on legal professional privilege are also not regarded as impugning levels of co-operation or compliance.
Second (page 68) the Commissioner indicates, "It is important that taxpayers do not feel intimidated or fearful in providing feedback [to the ATO]. Taxpayers have the Commissioner’s guarantee that they will not be jeopardized if they raise reasonable concerns. To the extent practicable, we want to nurture a relationship and environment that welcomes full and frank debate.”
Clearly the Commissioner is genuinely offering a new relationship with large business. In doing so, the Commissioner is offering large business the choice of pursuing a more open and mature relationship. As always there is the choice of how to manage tax risk, but the urgency of doing so even more effectively is created by the ever improving risk identification tools at the disposal of the ATO backed up by a more disciplined and professional approach to reviews and audits. Resolution of issues is also critical, with the ATO open to legitimate disagreement, but equally putting pressure on large business to be ready and able to defend their position.
