Action Differentiated Framework: ATO’s New Strategic Approach to Engaging with Taxpayers

20 December 2018

Gary Poon, Partner, Tax |

In December 2018, the Australian Taxation Office ('ATO') released information about their Action Differentiation Framework ('ADF'), which is their new strategic approach to engaging with businesses.

Under ADF, companies of all sizes will be engaged by the ATO either on an ongoing or periodic basis. This is particularly significant for emerging and medium sized taxpayers with total business income of less than $250 million as these taxpayers can now expect and prepare for interactions with the ATO.  Emerging and medium sized taxpayers will not receive as in-depth of a review as Top 100 or Top 1,000 taxpayers, but they can expect periodic interaction with the ATO.

The ADF is another way for the ATO to focus on the principles of obtaining Justified Trust that taxpayers are paying the right amount of tax. Although the ATO’s strategic approach has changed, the Justified Trust strategy has remained unchanged and taxpayers should continue to be prepared to:

  • Confirm existence, application and testing of a tax risk management and governance framework
  • Clarify and provide support for any tax risks flagged to the market
  • Have knowledge of significant and new transactions and how tax was considered
  • Explain any differences between accounting and tax results

The frequency of ATO engagement with taxpayers will be informed by taxpayer size, transparency of engagement with the ATO, choices and behaviours evidenced in tax affairs, and company risk appetite. Taxpayers will be categorised into one of the following engagement experience categories which will determine the frequency and intensity of future interactions with the ATO:

  • Partner – the ATO will partner with taxpayers to maintain good compliance
    • Those in the partner category are willing to engage and are transparent in maintaining compliance. The ATO will partner with taxpayers to deliver services in a timely and efficient manner to help taxpayers meet tax obligations. The ATO will adopt a lighter touch approach to compliance interactions.
  • Encourage – the ATO will encourage taxpayers to address their concerns
    • Those in the encourage category will be urged to address the ATO’s concerns with positions relating to complex arrangements giving rise to significant tax risks. The approaches the ATO takes will be tailored to company’s particular characteristics and behaviours and the ATO will work with taxpayers to improve future transparency and compliance.
  • Influence – the ATO take firm action to influence taxpayers to improve their compliance
    • Those in the influence category are generally not transparent and consistently take high risk positions. The ATO will adopt a high-touch approach to ensure risks are addressed quickly. The services and approaches the ATO take will be tailored to taxpayers particular characteristics and behaviours and the ATO will adopt firm approaches, like formal powers for information gathering, until transparency and compliance is improved.

BDO Comment

Given the above initiatives, we believe that time-consuming risk reviews and one-on-one engagement are imminent.  Private groups are not accustomed to sharing private information with statutory bodies like the ATO so a cultural shift will need to occur, as happened some years ago with large public companies.  The big end of town was originally resistant to this approach but has become accustomed to it and now many large corporates embrace it.

Right now, there is a concern from the ATO and from those taxpayers that they may not be prepared for the scrutiny they are about to be subjected to.  As an example, BDO is aware that many taxpayers do not have tax-management policies formally documented as they do not have the resources of larger taxpayers.  However, BDO expects that private groups and rich listers would adjust so that they are in a position of prevention rather than correction and minimise exposures to years of litigation, legal fees and penalties.

Learn more about how BDO’s Tax Governance services and how we can assist in preparing companies of all sizes for interactions with the ATO.