Australia’s tax regulator is stepping up its engagement with large taxpayers around justified trust. As the program moves into its fifth year, the key for corporates continues to be proactively monitoring and addressing risks to improve or maintain their overall level of assurance with the ATO.
The easing of COVID-19 restrictions is seeing the Australian Taxation Office (ATO) resume new assurance reviews with some of Australia’s largest taxpayers, after the pandemic delayed progress with its justified trust program over the past six months.
In September 2020, the tax authority began notifying some of the Top 1,000 taxpayers included in its new Combined Assurance Review (CAR) program, senior ATO officials said in a recent webinar on justified trust. This program is now underway and covers both income tax and GST performance. Tax governance will be a key focus.
Andy Hung, a Director of CCH Integrator at Wolters Kluwer, hosted the webinar jointly with the ATO. He said the justified trust program gives added impetus to large taxpayers to review their tax functions, streamline processes, improve data capabilities and governance.
“As taxpayers are becoming more accustomed to the expectations of the regulator and its data requirement, it’s a good time to look at how to provide better data driven capability within your organisation as well as the supply, management and decision making around tax data,” he said.
“Systems are not the be-all and end-all, but they are an enabler for tax function subject matter experts to make their deliverables easier to achieve and more effective overall,” Hung added.
New way to work together
Since 2016, the ATO has applied justified trust through a program of assurance reviews of Top 100 and Top 1,000 taxpayers to ensure large public businesses, multinationals and superfunds are paying the right amount of tax and have the right tax governance processes in place. It also has a top 500 and top 5,000 program in the private wealth sector.
Ultimately, the intention is to forge a new way for taxpayers and the ATO to work together to manage tax risk and bolster community confidence in the corporate tax system.
Thirty per cent of the Top 100 achieved a high level of assurance by June 30 this year from the ATO, up from only six per cent a year earlier, with an additional 50 per cent achieving a medium rating. There is still more to do with some taxpayers in the Top 100, with 20 per cent currently on a low rating.
The Top 100 are large businesses and superfunds with “substantial economic activity” related to Australia. They are the largest contributors to corporate income tax and collections of Goods and Services Tax (GST), excise, and Petroleum Resource Rent Tax (PRRT), and reported $30.9 billion, or 42 per cent, of all corporate income tax for the 2016-17 income tax year.
Delays from the impact of COVID-19 mean fewer-than-expected Top 100 taxpayers achieved a high assurance rating during 2020, although the ATO expects this to increase to 50-60 per cent by the end of 2020-21.
More than 700 people participated in the Wolters Kluwer webinar “Justified Trust – The ATO presents 2020 in review” on 22 October.
The webinar included advice on how to prepare for an assurance review, what attracts the ATO’s attention and common reasons why taxpayers don’t obtain the highest level of assurance, as well as some commentary on the impact of COVID-19.
“We did not start any new cases during COVID-19, except for a few Top 100 cases where we got the taxpayers’ approval to do so,” said Belinda Darling, the ATO’s Assistant Commissioner for the Top 100 Tax Performance program, during her presentation.
The ATO had given “careful consideration” to recommencing the assurance programs “while fully acknowledging the impact of the unprecedented crisis on the community,” she added. However, the impact of the pandemic on many organisations was not yet fully known or quantified and would differ between businesses and industries.
Darling advised businesses to carefully document any changes, such as transfer pricing arrangements. “There will be greater emphasis placed on gathering evidence to support any transfer pricing changes or impacts as a result of COVID-19,” she said.
‘Build the relationship’
Judy Morris, ATO Assistant Commissioner for the Top 1000 Tax Performance program, advised taxpayers to make sure they understand the ATO’s assurance approach and regularly scan for information updates.
She also suggested they review and apply the GST governance data testing and transaction testing guide, be prepared for the ATO’s review methodologies and have considered and applied the public guidance relevant to their particular circumstances.
The ATO has specialist assurance teams for large taxpayers, Morris added. “Build the relationship with your case officer. If you’re not sure about the information you need, give them a call. Our goal is to work with you as a taxpayer to obtain higher levels of assurance.”
The benefits for a Top 100 and Top 1000 taxpayer include certainty of their tax outcomes and effectiveness of the tax governance processes, confidence in understanding the tax profile of their organisation, and an objective way to compare others in the market, Morris and Darling both observed.
Examples of some areas attracting the ATO’s attention include transfer pricing and related party financing, methods used to allocate R&D expenditure, particularly the allocation of overheads, as well as consolidation and restructuring with little economic impact but resulting in substantial tax benefits.
“What’s really important there is to have contemporaneous documentation that evidences the commercial rationale for those transactions,” Morris said.
“If you follow our guidance and recommendations, provide timely, accurate, complete responses, proactively engage with the team — and I’d encourage that — you’ll have a much less intense review,” she said.
On 30 November, ATO officials will outline the future of the justified trust program and what’s ahead in 2021 for Top 100 and Top 1000 taxpayers in an interactive webinar hosted by Wolters Kluwer and featuring experts from the Corporate Tax Association, the key representative body for major companies in Australia on corporate tax issues. Register for our November webinar “2021 Justified Trust & Combined Assurance Programs“ to make sure you are up to date with the information and practical ideas, and take the opportunity to ask questions directly to the subject matter experts.