Allens

Tax

Focus: Large business and tax compliance – the ATO's view

17 June 2010

In brief: The Australian Taxation Office recently released a revised booklet on tax compliance issues for large businesses. It outlines the ATO's expectations of large businesses, its areas of focus and processes to ensure their tax compliance. Partners Ross Stitt and Malcolm Stephens (view CV) and Senior Associate Chris Peadon report.

How does it affect you?

  • The booklet will assist large businesses (generally corporate groups that have annual turnover in excess of $250 million) in identifying the aspects of their operations that are likely to come under scrutiny from the Australian Taxation Office (the ATO).
  • Large businesses should have regard to the booklet when considering how they might minimise the risk of an adverse ATO audit.

Specific compliance issues

Each year the ATO releases a compliance plan identifying the areas on which it intends to focus in the coming year in each taxpayer segment. However, the booklet identifies the following issues as areas of constant focus in the large business segment:

  • Profit shifting through transfer pricing, thin capitalisation and debt generation. This confirms our recent experience of an increase in ATO interest in these issues.
  • Material transactions including mergers, acquisitions and restructures 'that allow for opportunistic tax planning'. This indicates that, among other things, the ATO may look closely at the manner in which a transaction is carried out to see whether the transaction, or a part of the transaction, is a 'scheme' to which Part IVA may apply.

The checklist the ATO provides gives some guidance as to what it considers to be 'opportunistic tax planning', including related party cross-border or tax haven dealings where a tax deduction is claimed with no corresponding amount of assessable income, and an arrangement where there is a divergence between the tax benefits generated and the economic substance of the relevant activity.

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Risk assessment: categorisation of taxpayers

The booklet provides a checklist of the issues likely to attract the ATO's attention to a particular business. It includes financial/tax performance that varies from industry patterns or prior performance, unexplained variations between economic and tax performance, a history of aggressive tax planning, perceived weaknesses in compliance structures, and businesses expanding or employing new accounting software and staff.

Regarding those matters, the ATO categorises large business taxpayers into four broad groups, listed below in descending order of perceived risk to revenue:

  • Higher risk taxpayers: This category comprises a small number of taxpayers. Some are included simply because of 'their relative size'. Taxpayers in this category are subject to 'real time/continuous review' by the ATO.
  • Key taxpayers: This comprises most of Australia's largest businesses (ie the largest of the large business taxpayers). They are subject to 'a continuous monitoring stance' by the ATO.
  • Medium risk taxpayers: They are subject to a 'more periodic review stance' by the ATO.
  • Lower risk taxpayers: This comprises most of the businesses in the large business segment. Again, the ATO has a more periodic monitoring stance for this group.

One issue for taxpayers in relation to this categorisation is that the more intense the ATO's scrutiny, the greater the business's compliance costs are likely to be.

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Corporate governance

As noted above, one of the matters by which the ATO assesses a taxpayer's compliance risk is the taxpayer's corporate governance structure. For some years, the ATO has been encouraging company directors to understand and scrutinise their companies' approach to tax compliance.

In 2004, the ATO took a positive step in this regard by granting an administrative concession not to seek access during a risk review or audit, 'except in exceptional circumstances', to documents1 :

  • created by advisers (being suitably qualified in-house or independent advisers);
  • created for the sole purpose of providing advice or opinion to the board of directors (including properly constituted subcommittees) on tax compliance risks and their likelihood and impact; and
  • that address tax risks associated with major transactions and arrangements and/or tax risks arising from corporate systems and processes.

What constitutes 'exceptional circumstances' is outlined in the ATO Practice Statement. It includes failure to furnish full information in a timely manner, an inability to establish information important to the risk review or audit, and the taxpayer having a history of serious non-compliance (eg fraud, evasion).

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Audits and disputes

The booklet also discloses the following information concerning historical trends in the outcomes of risk reviews, audits and appeals. That information may assist tax managers to align internal management expectations with the likely outcome of a group's dealings with the ATO:

  • first, approximately 30 per cent of large business taxpayers are subject to a risk review each year;
  • second, approximately 80 per cent of risk reviews result in no further action being taken;
  • third, of the 20 per cent of risk reviews that proceed to audit, approximately 70 per cent result in the ATO making an adjustment;
  • fourth, approximately 30 per cent of those adjustments are disputed; and
  • fifth, of the 30 per cent of adjustments that are disputed, approximately 30 per cent are settled (usually on a 50/50 basis) and the court system finds for the taxpayer in a further 30-50 per cent of the cases.

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Conclusion

The booklet largely confirms the messages the ATO has been communicating to large business taxpayers for a number of years. It is, however, a useful guide for taxpayers who want to familiarise themselves with the ATO's approach to risk management.

Footnotes
  1. See ATO Practice Statement Law Administration 2004/14 entitled 'Access to corporate board documents on tax compliance risk'.

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