BDO Tax Event Wrap Up - Justified Tax Governance and Assurance 2019
12 March 2019
BDO and Thomson Reuters together held a series of ‘Justified Trust - Tax, Governance and Assurance’ events during February 2019 across Melbourne, Sydney and Brisbane. The ATO were invited to present at this event series on their ongoing Justified Trust Programs. BDO and Thomson Reuters shared key insights, including on how technology can assist taxpayers to be better prepared to demonstrate tax governance.
Justified trust in summary
The concept of Justified Trust, comes from the Organisation for Economic Cooperation and Development (“OECD”) and was adopted by the Australian Taxation Office (“ATO”) in 2017. To achieve justified trust, the ATO seeks objective evidence that would help reach the conclusion that a taxpayer is paying the right amount of tax.
Under the concept of justified trust, the ATO has moved to a holistic assurance based approach that will assist them in understanding taxpayers’ business, both in Australia and overseas. This approach has been rolled out in different phases by the ATO under the Top 100, Top 1000, Top 320 private groups tax performance programs and under the newly released Action Differentiated Framework (“ADF”).
ATO status update on and feedback from various reviews and programs
Top 100 program
- The ATO is adopting a one-on-one tailored due diligence style to its Top 100 program approach that includes providing an initial extensive information request
- The reaction from most taxpayers that have received this information request is that the request is extensive and difficult to collate, requiring a significant investment of time, cost and effort.
Top 1000 program
- The ATO urged all taxpayers who are likely to be reviewed under the Top 1000 program to prepare early, as early preparation together with supporting evidence would increase their likelihood of an enhanced rating, thereby reducing the risk of a subsequent audit or specific review in the near future
- At the end of a review, the streamlined assurance review report (“SAR”) does not provide ‘sign off’ but rather a level of assurance that for specific areas where the taxpayer has achieved green flags in the report, there is a reduced likelihood of a further ATO review.
- The diagrams below provide a summary of the ratings provided to taxpayers under the Top 100 and Top 1000 programs.
Top 1000 program (approximate figures)
- 320 reviews completed
- 270 reviews currently in progress
- 400 reviews remaining.
ATO’s expectations in an assurance review
- The ATO’s areas of focus span the spectrum of tax issues including income tax, R&D, accounting versus tax results, support for uncertain tax positions taken and transfer pricing
- The ATO expects taxpayer cooperation, transparency, disclosure of errors (to facilitate trust) and timely provision of required information
- The ATO aims to keep the timing of its reviews within 4 months and aims to provide sufficient notice before a first request for information is sent to the taxpayer
- Tax does not currently appear to be a standing priority agenda item at the Board level for most taxpayers – the ATO expects this to change.
Tax governance – emphasis on documentation and evidencing practice
- The ATO has released two guides - ‘Tax risk management and governance review guide’ and ‘Tax governance for privately owned groups’ which sets out the features of ‘better practice’ tax governance
- Taxpayers need to demonstrate that appropriate tax governance systems and controls are in place, are operating effectively in practice and have been endorsed by the board
- There is an increased focus by taxpayers looking to leverage technology to keep up with increased scrutiny across tax compliance and reporting
- ATO’s expectation is that taxpayers do not necessarily need to have all controls in place, rather that they have appropriate controls, in the context of the size and nature of their business
- For future reviews, the ATO indicated they would be placing more emphasis on the existence of a documented risk governance framework, with taxpayers unlikely to achieve a high-level of assurance in its absence.
Taxpayers will need to be prepared
- With 2 years left to run of the Top 1000, the ATO has advised taxpayers they may not be in a position to grant extensions or deferrals in respect of the timing of a review. It is suggested that taxpayers start pre-emptively preparing for such reviews as soon as possible so they can manage their resources and capability
- Transfer pricing is one of the most common areas where taxpayers are not scoring well in their ratings
- Transfer pricing is also one of the areas where majority of adjustments post review are made.
Achieving assurance or a level of justified trust
- Under the concept of justified trust, a red flag on SARs can lead to more frequent and a more intense level of engagement with the ATO due to a lower level of assurance provided;
- The ATO has indicated that taxpayers that achieve a “high” tax assurance under the Top 1000 program can expect a lighter touch during the next review which may be up to 4 years after high tax assurance is first achieved.
Taxpayers should try to avoid ‘red flags’ under the review because this will result in ongoing scrutiny and further reviews from the ATO
BDO conducted a survey of taxpayers during February 2019 to gain an understanding of taxpayers’ current readiness for a review of its tax governance framework under a tax performance review.
Findings from the survey can be found here: BDO ATO Justified Trust Survey Results.
The three events across Melbourne, Sydney and Brisbane were concluded with a panel session that provided the audience an opportunity to ask key questions of the ATO, BDO and TR.
- The ATO’s expectations of taxpayers include cooperation, transparency, disclosure of errors (to facilitate trust) and timely provision of required information
- The ATO’s areas of focus span the spectrum of tax issues
- It is vital taxpayers take steps to enhance their tax governance frameworks to be relevant and support their business outcomes. This includes being able to systematically address the ATO’s expectations by having a documented tax governance framework, detail on transactions including acquisitions, evidence of tax governance testing and support for positions taken.
- Technology is a key pillar that will support taxpayers in enhancing their governance and compliance frameworks.
- Specific actions for taxpayers with transfer pricing arrangements are to ensure they satisfy transfer pricing documentation requirements, self-assess under PCGs and ensure that they have actual procedures and policies that are in place and are being followed.