The ATO wants to change the rules of engagement with large
What is the background of the ATO bulletin?
The ATO wants to change the rule of engagement with large
business. Large business is any group that turns over more than
$250 million a year. The traditional model of the ATO was to
commence an audit two, three or four years after the transaction
time. The ATO has concerns that this may not be an efficient way to
proceed with an issue or even to identify the issue. Therefore the
ATO has decided to change its approach and to focus on early
engagement and real-time risk assessment.
What is the ATO intending to do?
The ATO is implementing its risk differentiation framework.
Essentially what the ATO did is to divide all of the large
businesses in Australia into four groups, and this classification
now determines how the ATO engages with the company and what sort
of compliance measures may be put in place.
For example, the ATO may request the company to agree to a
pre-lodgement compliance review which means that the ATO and the
company will be discussing the company's tax affairs before the
company lodges the return. Alternatively the ATO may ask the
company to audit itself and to identify its own uncertain tax
positions and then lodge that with its tax return.
On the other hand if you are in a low-risk category there may be
very little additional compliance activities that a company may be
required to engage with. So there is a clear message of the carrot
and the stick that underpins the ATO's program. And the ATO is
not neglected its traditional audit activities and has identified a
number of major audit areas. The focus will be on private equity,
transfer pricing, access to tax losses and consolidation
Is it good news for big business?
The new model is a game changer. I think that the concept of
constructive engagement makes good sense and in my experience when
companies approach the ATO and deal with the ATO on an upfront and
proactive basis the ATO is more willing to be receptive to
arguments and the ATO is more reasonable and the outcome normally
positive. So I think that the new model is based on the same
Of course it is early days, it will take time for the ATO and
for large business to adapt and adjust and to fully understand the
implications of the new compliance products. However I believe that
the landscape will change in that we will see a real change in the
way that ATO and business interact with each other and I think
overall the change will be positive.
At the end of the day tax is complex enough. It is in the
interests of both the ATO and business to cut through the dead wood
and focus on their relations. And of course will be times when you
agree to disagree but if the dispute can be conducted in the
context of a good and healthy relationship the difference could be
What are the implications for board members of large
Tax is a bit unique in terms of corporate governance and there
are two reasons. First tax work is complex and it can be uncertain
and second the amount at stake can be quite large.
The ATO has stated a number of times that it would expect board
members to get more involved with the tax affairs of the company
and the courts have been saying that board members should be a bit
more hands-on in terms of the financial affairs of the company. For
this reason companies have now adopted or developed their own tax
risk management solutions. Those solutions are sub-sets of the
company's broader corporate governance structure and
Those tax risk management solutions have a number of aspects and
a number of purposes. As far as board members are concerned they
have two important objectives, firstly they define a set of
circumstances where a tax risk is escalated and brought to the
attention of the board, and secondly they are there to ensure that
the communication is effective.
Most board members have no special tax qualifications. It may be
a little benefit to provide board members with a highly
tax-technical report that only a tax expert can fully understand.
Therefore what you want to do is to ensure that the communication
is effective so it is done in a way that board members are put in a
position they can make an informed decision and discharge their
Clayton Utz communications are intended to provide
commentary and general information. They should not be relied upon
as legal advice. Formal legal advice should be sought in particular
transactions or on matters of interest arising from this bulletin.
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The income tax treatment of any property lease incentive will vary, depending on the nature of the inducement provided.
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