The tax office has become more active in the area of corporate compliance during the past year.
DURING the past two years there has been a dramatic change in the way the Australian Taxation Office operates. It has become a more sophisticated organisation in terms of its people and its operation. The ATO is now viewed as a leading force among global revenue authorities in tax compliance and recovery.
Tax Commissioner Michael D’Ascenzo is the man responsible for this more active approach. He is five years through his seven-year term and there is no sign that he is easing back towards the end of his appointment. This article explores some changes to the ATO’s organisation, how it approaches tax compliance for large corporates and some areas of focus that are likely to be (or will become) familiar to larger companies.
The business market in Western Australia is in many ways unique, following the exponential growth in the resource sector. For a number of years, ATO compliance activity was surprisingly reserved but there has recently been a dramatic increase in enquiries.
During the past 12 months, Ernst & Young has recorded a 50 per cent increase in the number of ATO compliance activities for its client base in WA.
Part of the reason for this increase is that the ATO now has a centralised business model underpinned by a case management database that drives all deadlines. Key decisions are made centrally.
The ATO has three- to five-year plans and specific strategies targeted at particular taxpayer groups. Taxpayer groups that are of concern to the ATO are likely to be heavily targeted for their compliance and reviewed with a view to ultimately forcing such groups to engage more with the ATO and make their affairs more transparent.
Intelligence and risk profiling
The ATO has developed high-tech intelligence gathering systems to build taxpayer profiles. The ATO matches 500 million items of data each year. The information is sourced from:
• tax returns – it is no coincidence that, over time, the information to be supplied via additional schedules has grown dramatically;
• financial accounts – ASIC information and ASX announcements;
other global revenue authorities – information held outside Australia through exchange of information with other global revenue authorities;
• Austrac for monitoring the movement of funds in and out of Australia;
• the media, which is monitored and the alerts sent to specific ATO teams to action – this often leads to real-time enquiries; and
• other government agencies – ASX and ASIC, state revenue offices, land titles and registry offices.
The risk-profiling data is then used to: identify major transactions; allow taxpayer year-on-year comparisons; allow comparisons of taxpayers within industries; and assess taxpayers as part of the ATO risk differentiation framework.
The framework is the ATO’s way of determining whether large businesses are:
• key taxpayers (8 per cent) – Australia’s largest businesses that will attract a continuous ATO monitoring stance due to the tax at stake;
• higher-risk taxpayers (2 per cent) – real time, continuous review stance;
• medium-risk taxpayers (18 per cent) – periodic review stance; or
• lower-risk taxpayers (72 per cent) – periodic monitoring stance.
The ATO’s risk classification of taxpayers is not a covert classification by any means. A taxpayer can, and should, request the ATO to tell them how they are rated. It can lead to some surprises.
If an entity/company is considered a ‘higher-risk taxpayer’ by the ATO they are probably already aware of the fact. They are likely to have the ATO as a frequent visitor and be spending significant professional costs and management time dealing with compliance activities.
Areas of ATO focus
The ATO is casting its net wide but the following are particular areas of focus that have been visible in WA.
• Foreign residents who have disposed of their interests in Australian resource companies have come under the ATO microscope. The ATO has been profiling taxpayers based on prior-year ASX filings and announcements going back over five years relating to changes of shareholder interests in public companies. Where a foreign resident disposes of an Australian asset that is real property or a mining licence, the foreign resident is usually subject to Australian tax on the capital gain. The ATO has been issuing assessments without contacting the foreign residents in question. The sting in the tail is a penalty of 75 per cent of the tax due plus interest.
• Monitoring of ASX announcements and other media sources. This has led to the ATO reacting on a real-time basis to taxpayer activities. Companies are receiving telephone enquiries from the ATO regarding the tax treatment of the activities on the same day that a transaction is announced. A particular area of focus for transactions is the GST treatment of professional costs incurred in fundraisings and share issues. An esoteric test known as the ‘financial acquisitions threshold’ is often overlooked. The consequence can be a significant reduction in the GST that can be claimed on professional and other deal costs.
• Tax risks and tax corporate governance. There is a move to ensure that tax risks should be treated like any other risk within an organisation (such as health and safety and reputational risks) and brought to a board’s attention to identify, monitor remediate, and report.
The ATO expects all boards to have a policy outlining: the company’s desired level of tax risk; tax roles and responsibilities; the requirement for documented procedures and processes; and reporting to the board – form and regulatory.
If a taxpayer does not have a tax corporate governance policy and this is brought to light in ATO compliance activity, it may lead to a higher risk rating and increased compliance activity. It is our view that this will be a key focus area for the ATO in the next few years and will be a must have for all listed companies.
The ATO is running a pilot project on the reporting of uncertain tax positions. The concept originated recently in the US. The ATO is targeting a handful of higher risk taxpayers who must disclose to the ATO tax positions they have adopted that have risks attached (subject to certain criteria). There is a view that it is a question of when and not if, an uncertain tax position regime will be applied more broadly in Australia. It will be the responsibility of the company to be aware of its tax risks and potentially disclose them to the ATO.
The ATO will commence joint audits of companies with other global revenue authorities with which it has tax-sharing agreements. This, together with a large increase in information shared by worldwide revenue authorities, will lead to a global approach to tax audits.
There has been a dramatic increase in the ATO’s proactive activity to preserve what it considers to be taxable funds. The recent attempt by the ATO in the Myer float case to freeze the accounts of the selling shareholders is the tip of the iceberg. In the Myer case the stable door closed after the horse had bolted, leading to much embarrassment within the ATO. The ATO is still pursuing the overseas shareholders.
In the majority of cases the ATO is far more effective. There is no shortage of overseas shareholders who find their Australian bank accounts frozen on the day the share proceeds arrive. Possession is often said to be nine-tenths of the law. Naturally the ATO finds it much easier to get taxpayers to engage with them when it has control of their money.
What does all this mean for the corporate taxpayer?
If you toe the line and operate in a way that meets the ATO’s sophisticated expectations, you may have more limited ATO compliance activity and an easier life.
Assume that the ATO already knows everything that you do.
Those companies that do not meet the ATO’s expectations will be forced to comply over time by increased compliance.
Every dollar spent in keeping a company’s tax affairs in order is $10 saved in fixing the problems after the ATO has had you in its sights.
If you do receive ATO enquiries it is essential that you act promptly and understand your rights and obligations.
• Christian Rogers is a director of Ernst & Young Law and leads the tax controversy department for Ernst & Young in WA.