The recent increase in flow of available information to the Australian Taxation Office (ATO) can make even the owner of the local corner store nervous.
With the introduction of Single Touch Payroll, banking exchange of information such as Common Reporting Standard and Foreign Account Tax Compliance Act (FATCA), cross border initiatives such as country-by-country reporting, the Automatic Exchange of Information (AEOI) portal and governing bodies such as AUSTRAC, it’s never been more important to accurately document tax positions and procedures.
Rather than focusing on gathering data, the ATO’s focus on reviews and audits of taxpayers has transitioned to a theme of ‘justified trust’. Justified trust is the ATO wanting to establish confidence that taxpayers are paying their fair share of tax but also that the taxpayer can demonstrate they have the ability and procedures in place to identify potential problems.
In order for the ATO to obtain the justified trust of a taxpayer, it reviews the following four key areas:
- Understanding a taxpayer’s tax governance framework
- Identifying tax risks flagged to the market
- Understanding significant and new transactions
- Understanding why the accounting and tax results vary.
While most assume the ATO only target the big end of town, it’s important for all types and sizes of taxpayers to prepare for a review, especially where any of the following circumstances apply:
- Significant sale or purchase of assets/business
- A recently published ATO guideline or ruling applies to your circumstances
- Change or restructure in your funding or group
- Continued tax losses or GST credits reported
- Outstanding tax debts or lodgments
- Where you are a Top 1000 public group or Top 320 privately held group (group turnover in excess of $100 million and $250 million net assets or market leaders)
- Where your private accumulated wealth is more than $5 million
- You are requesting amendments to prior year returns or activity statements
- Where there is an unusually higher number of entities connected or controlled by you or your group
- Unreported foreign income found as a result of exchange of information
- Large sums of money in excess of $10,000 transacted domestically but also overseas; and
- Your or your connected entities have been reviewed or audited before.
Taxpayers who fall into any of the above criteria should consult their professional advisers who will work on developing a tax governance framework. This includes documenting in-house procedures to meet tax obligations and identifying existing tax risks, but also documenting internal controls to ensure potential problems are identified. These could include the required qualifications of a finance/tax function, the use of advisers, and identifying a minimum value where a transaction’s tax implications must be considered.
Investing in an effective tax governance structure that supports appropriate tax outcomes can influence a tax profile with the ATO and could ultimately save time and money. This is not withstanding the importance of attaining the ATO’s trust with the looming potential of the director penalties regime being extended so that directors will be personally liable for GST, PAYG withholding and superannuation.