Under pressure from Treasury due to declining revenues, the
Australian Taxation Office has started looking to sectors of the
economy that are perceived to be booming to boost its tax take. The
mining and resources industry has been a particular focus because
despite high profitability, companies in this sector may report low
tax payments due to significant upfront investment costs.
The ATO is also shifting its focus from audit activity several
years down the track to upfront compliance that has an immediate
impact on its tax take. The ATO's focus on compliance in public
companies has recently been the subject of attention in national
media, including the Australian Financial Review.
Here, Corporate Advisory Partner Michael Hansel and Taxation
Solicitor Julian Wright discuss how the ATO's focus on public
companies presents a particular risk to company directors, both in
their capacity as directors and personally.
The additional resources that the ATO is currently deploying to
boost its tax take present a particular risk to directors, in terms
of both corporate governance and personal financial risk.
Technical and inadvertent breaches of tax law can result in
significant tax liabilities. To manage these tax risks, directors
need to be well informed of their company's tax activity.
Undertaking a health check of the company's tax compliance
history is a practical way to manage tax risks. A tax health check
can be particularly valuable for directors who are newly appointed
to a board, so they don't get stuck with personal liability,
for example, that relates to things that happened before they were
Directors should also be very careful to manage any personal
tax risk, especially when entering into things like employee option
and share plan arrangements.
Managing corporate governance obligations
The ATO's focus on public companies puts pressure on boards
to be more aware of the key tax risk areas relating to their
company's activities. Although directors have always had
governance responsibilities, tax risk is usually dealt with down
the track, typically when and if the ATO undertakes a direct audit.
The ATO's shift in focus to things like regular lodgement
reviews is bringing these issues to the forefront, and requiring
directors to deal with tax risks earlier.
Given the complexity of tax law, and the facts that it regularly
changes, this increased focus on compliance means managing tax risk
will be an increased burden on directors and company staff. This is
especially the case in things like merger and acquisition activity
and executive remuneration. Because these activities take place in
the public domain, the ATO is able to readily scrutinise the tax
treatment and cross-check compliance with other parties to the
One way for boards to manage corporate governance obligations is
to seek appropriate tax advice ahead of entering into the relevant
transaction or arrangement, and ensure that this advice is legally
privileged and for the benefit of the board, and where appropriate,
each director personally. We note that the ATO is currently
reviewing the status of tax advice given by accountants to decide
whether it will extend a similar sort of protection as afforded to
tax advice given by lawyers.
Minimising personal tax risk
The ATO's focus on public companies also highlights the
areas of significant personal risk for directors.
The ATO has a team devoted to reviewing employee equity
arrangements (such as grants of share options to senior executives
and directors). The law in this area is very complex and has
undergone changes relatively recently, and the ATO can use
technical non-compliance to impose tax bills that are significantly
higher than the financial benefit the executives in fact receive
from the equity. These tax bills are imposed on directors
Where the company has failed to discharge certain tax debts, the
ATO has the power to collect those debts from directors personally
by issuing what is called a director penalty notice. At this point
in time, this power mainly covers PAYG withholding debts -
essentially the tax withheld from employees that needs to be
remitted to the ATO.
One reason why directors need to pay close attention to a
company's compliance history is that a director penalty notice
may be issued to a director in relation to PAYG withholding debts
that arose before that director was appointed. There has also been
talk of the Federal Government widening the director penalty notice
legislation to cover other tax debts of the company, such as
For more information on the tax obligations of company
directors, please contact HopgoodGanim's Taxation and Revenue
We discuss whether certain clauses commonly found in ordinary commercial contracts could be considered to be penalties.
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