In conjunction with BDO and Thomson Reuters’ recent Justified Trust – Tax Governance Events held in Melbourne, Sydney, and Brisbane, BDO performed a survey of to gauge how prepared Australian taxpayers are to provide the ATO with evidence needed to gain justified trust under an ATO review.
The purpose of the survey was to gain a better understanding of taxpayers views and experiences in respect of the ATO’s Justified Trust initiatives. We gathered the data either by respondents completing the survey online, or via a telephone interview, providing us with an opportunity to gain some insight into the reasons behind the responses.
Based on our discussions we have made the observation that the expectations and experiences of those that have been through a Top 1000 review, differ somewhat, to the expectations and perceptions of those who have not.
A common theme in the feedback was that respondents do not feel adequately prepared to engage with the ATO under a tax performance program. This self-assessment is consistent with the ATO’s feedback of what they encountered when they conducted their reviews.
A few of the key findings from the survey have been highlighted below which provide valuable takeaways for taxpayers, the ATO, and advisors.
Do you understand the ATO’s concept of Justified Trust and how this can be achieved?
Less than 10% of taxpayers with annual revenue of less than $250m have a comprehensive knowledge of the ATO’s Justified Trust concept and how it can be achieved. This is likely to place more strain on these taxpayers when they are subject to a review as they do not necessarily understand the level of detail or transparency which is expected by the ATO to achieve justified trust.
Emerging and medium sized taxpayers with annual revenues of less than $250m will be engaged by the ATO either on an ongoing or periodic basis under the ATO’s Action Differentiation Framework (‘ADF’). Although they will not receive as in-depth of a review as Top 100 or Top 1000 taxpayers, they can expect periodic interaction with the ATO and should be aware of how to achieve justified trust in the eyes of the ATO.
How much do you know about the ATO's Top 1000 tax performance programs?
Survey results show less than 40% of taxpayers with annual revenue of greater than $250m feel they are well informed about the ATO’s Top 1000 tax performance program.
There is a large knowledge gap about the ATO’s performance programs which is cause for concern. In order for taxpayers to engage successfully with the ATO, they will need to be well informed of the ATO’s key focus areas and programs.
Do you have a documented tax governance framework in place?
The survey results indicate 87% of taxpayers who have not yet been contacted by the ATO do not have a documented tax governance framework in place. Taxpayers in this position have a great opportunity to establish a documented tax governance framework and implement it in advance of an ATO review. The ATO is more likely to find justified trust in taxpayers who can provide evidence of implementing a documented tax governance framework.
Going forward, it is the ATO’s expectation that taxpayers who have previously been subject to review under their tax performance programs will have a documented tax governance framework in place.
How aware is your Board of their obligations under the ATO’s tax risk management and governance review framework?
The ATO released a tax risk management and governance review guide which sets out principles for board-level and managerial-level responsibilities. At a minimum, the ATO expects the Board to be informed and involved in tax risk management and governance.
Survey results show taxpayers, particularly taxpayers with annual revenue of less than $250m, have not been actively involving their Boards with tax risk management and governance. Although these businesses will be subject to different standards than large businesses in an ATO review, it will still be key for these taxpayers to provide evidence of Board involvement with their tax control and governance framework.
Do you think the community’s perception that corporates are not paying their fair share of tax is reasonable?
Perhaps unsurprisingly over 75% of respondents felt the communities’ perception that corporates are not paying their fair share of tax was not reasonable. Some of the respondents we spoke with felt this perception has had a negative impact on their organisations interactions with the community and the ATO. With some feeling that the level of ATO scrutiny of their organisation was at least in part influenced by this perception.
We would hope that as the ATO moves through its Justified Trust program and assuming rates of assurance continue to be overwhelming either at the high or medium level, that the ATO is able to reassure the community that large corporates are in fact paying their fair share.
The assertion that large corporates are generally paying their fair share appears to be at least partly confirmed by the ATO data showing the reduction of the tax gap for large corporate groups (which as last reported in 2015 - 2016 had reduced to $1.8 billion from $2.1 billion in 2014 – 2015).
What cost impact (including employee & advisor costs) do you believe an ATO review would have on your organisation if it happened now?
Nearly 70% of taxpayers who have already been contacted by the ATO for review estimate the cost impact of an ATO review to be greater than $100,000 compared to only 5% of taxpayers who have not yet been contacted by the ATO.
This large gap shows taxpayers who have not yet been contacted by the ATO for review are likely underestimating cost and time impact of an ATO review. It is easy to understand how this would occur, when you consider that an RFI covers 4 income years and will require taxpayers to provide explanation and/or evidence to support differences between accounting and taxable income, papers or advice to support positions taken, including assessments of how specific tax risks which have been flagged to the market have been treated. Add to this the time required to compile evidence of how the organisation has managed tax risk, particularly in the absence of a documented and tested tax governance framework the strain on resources is apparent.
How confident are you that your tax governance framework would satisfy the ATO’s requirements to achieve ‘Justified Trust’ if subject to review?
Survey results show that taxpayers without tax governance frameworks in place may be overly optimistic about their ability to satisfy the ATO’s requirements to achieve justified trust. Over 50% of taxpayers without a tax governance framework in place were moderately confident or very confident about their ability to satisfy the ATO’s requirements to achieve justified trust.
Additional education about what the ATO relies upon for achieving justified trust is needed as the ATO has stated that documented evidence of a tax governance framework is one of the key starting points to achieving justified trust.
What overall level of assurance rating do you believe the ATO would obtain during a review of your organisation?
When asked what level of assurance taxpayers thought they would achieve, 83% of respondents thought they would achieve a low or medium-level of assurance.
In numbers provided by the ATO in September 2018, 31% of taxpayers had achieved a high-level of assurance and 53% a medium level of assurance. We understand that since this time these numbers have remain broadly consistent.
The level of assurance that you can achieve under you first review will set the tone for your future reviews, that is, high assurance this time means a lower level of scrutiny next time, or conversely low assurance means that you will be subject to the another comprehensive review with a high level of scrutiny.
Learn more about how BDO’s Tax Governance services can assist in preparing taxpayers of all sizes for interactions with the ATO.