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.
Takeaway points
- 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 appointed.
- 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 arrangements.
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 personally.
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 GST.
For more information on the tax obligations of company directors, please contact HopgoodGanim's Taxation and Revenue practice.
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