Companies operating in today’s modern business environment face significant scrutiny from regulators concerning their approach to Environmental, Social and Governance (ESG) matters. In particular, the ATO continues to sharpen its focus on reviewing the tax governance framework of organisations as an integral component of its justified trust engagement program. To ensure that tax risks are identified as early as possible, a robust tax governance framework has quickly become a key pillar of any organisation’s wider ESG strategy.
What is the ATO doing?
To ensure that corporations are accounting for and paying the correct amounts of tax, the ATO has in recent years placed significant focus on ensuring that corporations have a comprehensive and well-documented framework in place to identify and effectively manage tax risk. This objective has and continues to be achieved via the ATO’s various engagement programs, including its ‘Top 100 Program’[1] and ‘Top 1,000 Program’[2] for public and large multi-nationals, as well as the ‘Top 500 Program’[3] and ‘Next 5,000 Program’[4] in respect of privately owned groups.
These programs are carried out by reference to the ATO’s ‘justified trust’ methodology, which involves the ATO using the following factors to assess whether a taxpayer has paid the right amount of tax:
- Governance: whether the group have effective tax governance in place to support current and future compliance;
- Tax risks flagged to the market: whether risks or concerns which have been previously flagged to the market by the ATO are present in the group’s affairs;
- New and significant transactions: tax outcomes arising from significant transactions entered into by the group; and
- Book to tax: whether differences in accounting and tax results of the group are able to be explained in context.
The first step of the justified trust methodology involves the ATO identifying and testing a company’s tax risk management and governance framework to determine a company’s overall assurance rating. Achieving a high assurance rating may allow taxpayers to engage with the ATO through its ‘monitoring and maintenance’ approach, a more informal, scaled-down engagement process whereby the ATO conducts annual reviews over two years and will only seek to verify material changes to the business or the tax outcomes of new significant transactions.
To assist in building justified trust, the ATO has specifically recognised the following board-level controls which all organisations should have in place:[5]
- Formalising a tax control framework: preparation of a tax strategy document providing details of how the organisation identifies and manages tax risk;
- Establishing and documenting clear roles and responsibilities for tax risk management: this can be documented by clear role and responsibility descriptions for directors, as well as induction programs for new directors; and
- Ensuring that the board is appropriately informed: the board should be briefed by management on tax risk matters and the ongoing effectiveness of the organisations tax control framework.
Strengthening of ATO resources
Given the increasing significance of ESG for both business and the broader community, the Government has committed significant funding in recent years towards bolstering the ATO’s capabilities in pursuing new priority areas of tax compliance risk.
The Government’s 2022-23 October Budget extended the ATO’s Tax Avoidance Task Force (Taskforce) to 30 June 2026, by committing additional funding of $200 million each year. The Taskforce administers the ATO’s major compliance programs in respect of public and multinational corporations as well as privately owned groups, relying on advanced data and analytics capabilities to identify potential risks of non-compliance. In addition to its significant investment in the Taskforce, the Government announced as part of its 2023-24 May Budget that the ATO will receive additional funding of $82.1 million over 4 years to facilitate engagement with taxpayers with high-value debts over $100,000 and privately owned groups with aged debts older than two years.[6] The ATO will also receive additional funding of $27.0 million to improve data matching capabilities in order to identify and act on cases of Superannuation Guarantee underpayments.
The above measures are set to bring significant attention to the tax governance framework of many organisations, as the ATO continues to increase compliance activity in this space. Investing in an effective tax governance framework as soon as possible should help businesses to identify tax risk issues early while improving future engagement outcomes with the ATO.
The ATO’s focus in recent years on tax risk management and governance has emphasised the importance for many businesses in being able to demonstrate a good tax governance framework. As the Government continues to invest in the ATO’s monitoring and compliance capabilities, it is clear that tax governance has a key role to play for all organisations in meeting the ESG expectations of the ATO, other key stakeholders and the broader community.
Directors are encouraged to proactively review their organisations approach to tax governance through an ESG lens. This should assist organisations to identify tax risks as early as possible while also building justified trust with the ATO.
The Top 100 population consists of public and multinational businesses and super funds that carry on substantial economic activity in Australia. The Top 100 taxpayers covered by this program are initially identified by the ATO based on the size of their Australian operations. More information on the Top 100 Program can be accessed on the ATO’s website, here.
The Top 1,000 Program covers large public and multinational corporations with turnover above $250 million. This program doesn’t include taxpayers in the Top 100 Program. More information on the Top 1,000 Program can be accessed on the ATO’s website, here.
The Top 500 program involves tailored one-to-one engagements with the Top 500 private groups in Australia on an ongoing basis. More information on the Top 500 program can be accessed on the ATO’s website, here.
The Next 5,000 program is an expansion of the Top 500 program involving streamlined assurance reviews of high net wealth private groups and their associates that control wealth of more than $50 million. More information on the Next 5,000 program can be accessed on the ATO’s website, here.
Australian Taxation Office, Tax risk management and governance review guide, ‘Board-level responsibilities’, https://www.ato.gov.au/Business/Large-business/In-detail/Key-products-and-resources/Tax-risk-management-and-governance-review-guide/?page=3.
This measure will apply to privately owned groups that control over $5 million of net wealth.
