The ATO has recently stated that there is a 'silent T' in ESG. In this article, we explore the 'silent T', and explain how a taxpayer's tax governance and risk management policies needs to be framed by reference to reputation, cost and compliance risk management considerations that reflect the regulatory environment in which the taxpayer operates.
"Tax is inextricably linked to social licence ... The
tax system is really the 'sharing rules' whereby citizens
come together to pool resources to fund the things that they cannot
achieve by themselves. An individual or company which aggressively
avoids (or worse evades) their obligations is effectively
repudiating the rules of engagement of that community and puts its
social licence at risk."
- Jeremy Hirschhorn, Second Commissioner, Client Engagement
Group at a speech delivered at the Australian Shareholders'
Association Investor Conference on 6 May 2025
The 'silent T' in ESG
The management of tax risks has always been regarded by a company as being important in relation to the management of their reputation. However, increasingly it is being posited that there is a 'silent T' in ESG, being that a company's social licence to operate is dependent on them managing tax considerations 'appropriately'.
Most recently, at the address to the Australian Shareholder' Association Investor Conference cited above, Jeremy Hirschhorn, a Deputy Commissioner of Taxation, put this forward to shareholders. The stated purpose of that address was for the Deputy Commissioner to remind the shareholders in attendance as to why they should be interested in what he referred to as the 'tax performance' of their investee companies. In particular, he argued that 'tax performance' should not only impact on the 'investment decisions' made by the shareholders, but also the activism undertaken by shareholders to 'influence the behaviour of the companies in which you invest'.
The concept of 'tax performance' – Commissioner's approach
Importantly, the 'tax performance' referred to by the Deputy Commissioner is not the traditional measure of, say, 'after tax' performance, which is traditionally what a shareholder is, and arguably should be, focused on. This concept of 'after tax' performance is a more Australian Taxation Office (ATO) concept, being focused, perhaps, on whether the company has paid an 'appropriate' amount of tax, and whether the company has managed tax risks 'appropriately'.
At that conference, the Deputy Commissioner identified some areas which an activist shareholder could consider in assessing whether there were 'silent T' risks in an actual or prospective investee. From an accounting perspective, the Deputy Commissioner focused on:
- A low 'accounting effective tax rate', and what the source of this is;
- A low 'cash tax rate', and what the source of this is; and
- How the shareholder discloses and accounts for tax disputes, including any aggressive positions that have been taken as to how the dispute is disclosed and provisioned for from an accounting perspective.
The Deputy Commissioner also drew attention to the other publicly available information around the tax affairs of companies, including:
- ATO published data, such as:
- the existing corporate tax transparency data that is being published; and
- the new public country-by-country reporting data that will be released from mid-2026); and
- Voluntarily disclosed data, such as:
- the voluntary Tax Transparency Report that some companies have published); and
- there was even some explicit encouragement (and praise) for companies who voluntarily disclose the assurance ratings given to them by the ATO as part of its 'justified trust' program, with the examples of Telstra, BHP, Woolworths, Origin and BUPA being cited as examples.
The concept of 'tax performance' – needs to be assessed more broadly
Few would disagree with the ATO on the thesis that the level of tax paid, and how a company manages their tax risks, is an important ESG or broader reputational or business consideration. However, what is more contentious is how good 'tax performance' should be measured.
The ATO, perhaps unsurprisingly, appears to define this by reference to the taxpayer paying the amount of tax and taking a level of tax risk which the ATO considers to be 'appropriate'. This is, with respect, simplistic. This will only achieve the best 'tax performance' on the assumption that Australian tax laws are clear and unambiguous in all situations and that the ATO would also be putting forward the clearly 'correct' view of the tax law. It also assumes that the taxpayer exists in a vacuum where tax considerations have no impact on the other regulatory and commercial considerations that the entity is subject to.
That these assumptions are not always correct is obvious.
Compliance is the starting point
What is also perhaps obvious but, equally, important to state in this context is that the foundation of any good taxpayer's tax management approach must be compliance with the tax law. If this is not the case, and the taxpayer is paying less tax than what they are legally allowed to do, or the taxpayer is not disclosing information than what they are legally obligated to do, it would only be in the most exceptional of circumstances that this could be justified on some other grounds.
Resolving difficult situations
However, what becomes more contentious is where a company should sit within this bright line, or where the company should place itself if the location of this bright line is not clear. It is in these situations that the broader legal, regulatory and commercial considerations that apply to the relevant taxpayer can be instructive.
For example, there may be situations where there is some uncertainty regarding whether a particular amount is deductible from a tax perspective. While the taxpayer may have obtained an opinion from an independent qualified tax expert that the relevant amount is at least deductible, that advice may flag that the ATO may take a different view and seek to challenge that position, if it were to be reviewed. In this case, while there may be clear economic benefits to the taxpayer and its members to claiming the tax deduction, these needs to be weighed up against both the economic and reputational costs of defending its position, as well as the uncertainty that the tax advice obtained is incorrect.
An additional consideration could also be if there are specific regulatory considerations that impose obligations on the taxpayer to take what is the better position at law, even if there are other costs and risks associated with this. For example, the trustee of an APRA-regulated superannuation fund is under various duties, including duties to act in the best financial interests of members, as well as to prioritise the interests of members over their own. These duties could, in some circumstances, arguably be interpreted as imposing legal obligations – breaches of which could have serious ramifications – to take and defend particular tax positions that may generate real benefits for their members. However, this needs to be weighed against the other costs associated with defending the position taken, including not only the immediate out of pocket costs but also taking into account the wider financial impacts of the proposed course of action.
Importance of a clearly documented policy and tax advice
This illustrates that there is often no clear 'right' or 'wrong' on how the 'silent T' in ESG is to be managed by a taxpayer. However, what is important in managing the practical risks associated with these positions is for there to be a clear, well-documented and consistently applied policy within the relevant taxpayer that sets out at least a methodology for how these issues are to be analysed and resolved. This can ensure both a consistency in the approach, but also assurance that all of the pertinent legal and commercial considerations are being considered.
What is also important in the context of the resolution of these dilemmas is the need for independent, frank and fearless tax advice on the relevant issues. In particular, as noted above, the starting point to determining how a more difficult tax issue is to be resolved is an understanding of what the better position at law is, and what are the risks and costs associated with taking such a view. Obtaining and documenting such a view is critical to evaluating how these types of situations should be resolved.
Key takeaways
Directors are encouraged to proactively review their organisation's existing tax governance and risk management policies in the context of ESG frameworks.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
