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Australian Tax Brief

Managing Tax Risks - Your board and corporate governance procedures
20 June 2012

In recent years the Australian Taxation Office (ATO) has increased its level of audit and review activity. It has also introduced new tax risk reporting requirements. The level of scrutiny that a corporate taxpayer can expect from the ATO will depend in part on how the ATO perceives that the taxpayer manages its tax risks. Accordingly, a robust corporate governance model in relation to tax risk is not only commercially advisable, it could also save corporate taxpayers much time and money in dealing with the ATO through the audit and review process.

The ATO have for many years emphasised the role of the Board in managing tax risks. The importance of this role has only increased following the recent Centro decision. Legislative reforms extending the potential director liability for unpaid company tax are also being enacted. The ATO Risk Differentiation Framework and recent administrative reforms requiring increased reporting of 'risky' and 'material' transactions for some taxpayers through the company tax return, are all examples of the importance the ATO places on appropriate tax risk governance.

Now is an opportune time for your Board to review the existing corporate governance policies to ensure that the management of tax risk is effective.

The following provides some guidance on what the ATO expect from the Board and what actions the Board can take to appropriately manage tax risks.

WHAT THE ATO EXPECT

ACTIONS REQUIRED

DO YOU KNOW 

The Board establishes and maintains strong corporate governance structures for managing tax risk.

Set the Policy

The Board should determine what aspects of tax risk are within its control and what level of risk is acceptable while pursuing the objectives of having:

  • enhanced profitability for the benefit of shareholders
  • controlled and transparent management of tax activities on a day-to-day basis;
  • decision making that is able to be understood by non-tax personnel
  • an enhanced ability to anticipate issues (such as changes in law and relevant court decisions).

We provide a list of some key tax issues to be included in the policy below. For example, the Board could have set policies for:

  • setting risk parameters - the Board should establish what is a "material" transaction that must come before the board and what is a material tax risk that must come before the board.
  • reporting - a regular (quarterly) report to the Board from the Tax Function (be that an external advisor or an internal Tax Function) as to tax law changes which may affect the company and as to the issues published in the Australian Taxation Office compliance program as being areas the Australian Taxation Office will review.
  • external sign off procedures - obtaining sign off from the Australian Taxation Office (for example by way of a tax ruling, advanced pricing agreement or otherwise), or obtaining a particular level of opinion from an adviser for transactions of a particular size.
  • ATO communications - how to manage Australian Taxation Office inquiries, for example, the sign off level for communications with the Australian Taxation Office e.g. Audit Committee involvement, Board reports, or when to seek external advisory assistance.

Monitor the policy

  • The Board should ensure there is a well resourced tax governance process with systems to identify, assess, monitor and approve material tax issues.
  • There should be a regular audit of the effectiveness of tax governance systems.

Apply the policy where a matter comes before the Board

  • The Board should regularly request an update on tax risk, especially around material transactions that come before the board.
  • How the ATO categorise your business under their Risk Differentiation Framework?
    • Level 1 – High
    • Level 2 – Key
    • Level 3 – Medium
    • Level 4 – Low
  • What are the consequences of your risk rating?
  • If the business is utilising ATO services and rulings (product rulings, private rulings, APAs, etc) to reduce tax risk and compliance costs?
  • Does the Board review the approach to tax risk?
  • Your tax advisor's risk stance and does their approach to risk align with that of your business? Do you want a particular level of certainty expressed in advice? Have you communicated that to your tax advisor?
  • Does your business have any major disagreements with the ATO? If so, are you satisfied with the way they are being managed? Have any potential additional tax liabilities been adequately provided for?
  • Is there anything to indicate that your business results and tax payments are lower than would be suggested by economic conditions?

The Board and tax function should ensure appropriate review and sign off procedures for material transactions and reporting requirements which ensure significant tax risks are elevated to the Board.

The tax governance process should ensure there are systems to identify, assess, monitor and approve material tax issues for reporting to the Board. There should be a regular audit of the effectiveness of tax governance systems.

  • Does your tax function have adequate resources to manage tax risks effectively and provide reasonable assistance when dealing with the ATO?
  • Is your business ensuring that its processes and procedures adapt to reflect changes to or court interpretations of the tax and superannuation laws?
  • Do you have the necessary processes in place to assess and where relevant escalate matters to the appropriate level?

What your Tax Risk Governance Policy should address

The Board Tax Risk Governance Policy should address the following issues:

  • What taxes it covers
  • What level of risk is acceptable to the company
  • The sign off process for tax returns and ensuring the Board is kept fully informed of material tax risks
  • Appropriate tax sign off is obtained for all material tax balances through the audit committee process in preparing the annual and half yearly financial reports
  • What tax risks are reportable to the Board
  • Instructing external tax advisers
  • Regular assessment of the independent external tax advisory panel
  • Maintaining the confidentiality of tax advice, document management, including electronic document management
  • Managing communications with the ATO.

We can help you

Minter Ellison has an experienced and commercial team of tax and corporate governance experts that can assist the Board and the Tax Function to develop and improve the tax risk management policies, processes and procedures and to prepare or review appropriate internal communications and documents. We have been directly engaged with clients in establishing tax risk management processes as part of overall corporate governance, reviewing the effectiveness of existing policies, in talking to Boards, and in liaising with the Australian Taxation Office on behalf of clients to manage their categorisation on the Risk Differentiation Framework so as to reduce the risk and cost of ATO inquiry.

We would be delighted to assist you. Please contact any of our tax and corporate advisory experts listed below should you wish to discuss any of these matters further.

Author(s) Karen Payne, Joanne Dunne, Robert Austin