In December 2006, the Commissioner of Taxation, Michael D’Ascenzo, wrote a letter to the Chief Executive Officers (CEOs) of Australia’s leading corporates reiterating the Australian Taxation Office’s (ATO’s) views on corporate governance in the Australian large business environment, as part of the co-operative compliance philosophy.
Previous ATO communications and forums held in relation to corporate governance and aimed at the "large end of town” have included a letter from the Commissioner to Directors of the top 1500 Australian companies on 29 January 2004, the release of an updated 2006 Large Business and Tax Compliance booklet in August 2006 and the inaugural ATO Large Business Symposium held in August 2006 that involved the top 100 corporates in Australia.
The intention of the Commissioner’s December 2006 letter to CEOs appears to be twofold. First, it aims to "highlight” and reiterate that corporate governance is an important part of the ATO’s approach to tax compliance in the large business market. Secondly, it reiterates the Commissioner’s position that although CEOs and Boards are not expected to be "experts” in all matters related to tax, they are ultimately responsible for the compliance obligations and tax risks of their corporate groups and awareness of tax compliance is required to discharge these responsibilities.
Enclosed with the Commissioner’s letter are:
- A copy of the ATO’s 2006 Large Business and Tax Compliance Booklet issued in August 2006, and
- A "one sheet” companion guide extracted from the Compliance Booklet which provides a "snapshot” of the governance issues the ATO suggests that Large Business should consider.
The Commissioner notes that the companion guide is "intended to assist company board members and directors better understand and manage their corporation’s tax obligations.”
The companion guide lists what the ATO considers to be key governance questions, supplemented by a checklist which Board members and Directors should refer to when managing their tax obligations. In the context of tax risk management, the companion guide lists the following as issues that Boards should focus their attention on:
1 The overall tax performance of the business: in particular, whether the amount of tax paid is in line with the business results.
2 Major transactions and strategy: ensuring commercial objectives can be clearly identified, and that the tax advice obtained is adequate and includes consideration of the likelihood of a court deciding a matter in favour of the Commissioner. A major focus is the risk of falling within the general anti-avoidance provisions of Part IVA of the Income Tax Assessment Act 1936.
The companion guide also provides some insight into the areas the ATO will be focusing its attention on,
which include:
1 What attracts the ATO’s attention? The guide summarises seven key features including significant variations in the amounts or patterns of tax payments and unexplained variations between economic and tax performance.
2 What may constitute a risk? The ATO indicates some risk features they would consider "challenging”. These features are set out in the following table extracted from the ATO’s guide.
Practical Considerations
Outlined below are some practical considerations that Boards may wish to consider in their Corporate Governance planning for the 2007 financial year and beyond.
- To avoid surprises and obtain appropriate levels of certainty, in what circumstances should management seek independent expert advice or a private ruling from the ATO to obtain greater certainty as to the application of Part IVA to a transaction? Materiality of the financial and reputational risks will no doubt be considerations, as will the novelty of the tax position and the ATO’s perspective on the risks associated with the tax issues.
- Are the risk management policies, processes (e.g. controls) and accountability (e.g. reporting) structures at a standard that enables Directors and management to discharge their governance responsibilities?
- Is the ATO checklist taken into account, for example to monitor total tax contribution against other financial indicators and potentially benchmark these against applicable industry and large business norms?
- Is the relationship between the company and the ATO actively managed to support the business strategies and corporate governance policies of the Board? For example, consideration should be given to the benefit to the company of an open and co-operative relationship with the ATO which ensures regular communication, early identification of contentious issues and an environment in which matters in dispute can be resolved quickly and appropriately.
The above suggestions are not intended to be exhaustive and you should consider the circumstances of your organisation.
