TAX GOVERNANCE – for privately owned groups

Ajay Ravi, Special Counsel at McInnes Wilson Lawyers shares his insight on tax governance for privately owned groups in response to ATO’s recently published guidance package on effective tax governance criteria for Top 500 private groups.

As most of us would be aware, there has been a plethora of information and guidance from the Australian Taxation Office on the Justified Trust concept and associated compliance programs across the last few years. Whilst the ATO’s expectations from taxpayers in the course of such reviews has been well documented and understood, there has undeniably been some level of ambiguity and uncertainty when it comes to privately owned groups.

To alleviate some of these concerns, in January 2023, the ATO published a guidance package on effective tax governance criteria for Top 500 private groups [noting that tax governance is only one part of a robust tax function and its effectiveness, however is a growing and important part since the evolution of the Justified Trust].

The importance of effective tax governance

The existence of effective tax governance is a critical component of any taxpayer ensuring their taxation and superannuation obligations are being reported to the ATO with the required level of integrity.

In addition to the existence of tax governance, evidencing that the governance principles have been implemented, designed effectively and are operating effectively, will be necessary to achieve a high rating in the area of tax governance.

Whilst the specific particulars of the design of the governance framework will depend on a number of factors such as core activities, ownership structure, level of centralisation (or lack thereof) of the tax function, existing approaches to management and reporting, etc, there are some non-negotiable elements that are expected of a tax governance framework such as:

• clarity regarding specific roles and responsibilities
• the management of lodgments and payments
• tax issues to be managed (including from any wealth creation and its wealth extraction activities)
• framework for when external advisors need to get involved
• controls, policies and procedures to ensure high levels of integrity around tax and accounting information reporting and disclosures.

Who does it apply to?

The commentary released in January 2023 is predominantly aimed at Top 500 privately owned groups, which generally includes taxpayers with over $350 million in turnover or over $500 million in net assets. Having said this, there is little doubt that the focus areas addressed by the ATO in these publications will apply (in some manner) to other Justified Trust programs including:

• Next 5,000 [i.e. generally includes high wealth private groups who together with their associates control wealth of more than $50 million]
• Medium and emerging private groups [i.e. generally includes private groups linked to Australian resident individuals who control wealth between $5 million and $50 million].

In other words, it is recommended that all privately owned groups consider and self-test the benchmarks put forward by the ATO and engage in preparatory activities that can assist with minimising the risks of a compliance review progressing to a more serious audit.

In addition to the above, depending on the exact engagement and review strategy and nature and size of the business, the common focus areas of the ATO as part of the Top 100 and Top 1000 assurance programs should not be disregarded either.

How does a taxpayer achieve a positive tax governance rating?

As mentioned above, in order to achieve a high rating in the area of tax governance, it is necessary to show that governance principles exist, have been implemented, designed effectively and are operating effectively.

Importantly, the ATO has outlined that such evidence needs to be provided for:

• all 4 of the ‘required’ items for an effective tax governance framework; and
• at least 3 of the ‘additional’ items for an effective tax governance framework.

Required items for an effective tax governance framework

Briefly, the 4 items that are stated as being required for an effective tax governance framework include:

1. Accountable management and oversight, which relates to controls and expectations including:
   • procedures to ensure satisfaction of key lodgment and tax payment obligations
   • clearly defined and qualified in-house roles and responsibilities
2. Recognition of tax issues and risks, which relates to controls and expectations including:
   • robust processes to identify tax issues and risks (including on core transactions)
   • equally robust processes to determine how best to manage such tax issues and risks
   • tax considerations from atypical transactions
   • documented tax governance process or procedure (including suitable materiality thresholds)
   • documented tax return and Business Activity Statement preparation processes
3. Seeking advice appropriately, which relates to controls and expectations including:
   • effective framework for the engagement of external advisors
   • ATO engagement (including through a private binding ruling, etc)
4. Integrity of reporting, which relates to controls and expectations including:
   • controls to monitor and explain differences between tax outcomes and broader accounting / financial / economic outcomes
   • adequate record-keeping measures.

There are also several other sub-controls mentioned under each governance framework category that require consideration.

Each of the above-mentioned controls will also require the existence of evidence and documentation to support the operational effectiveness of the relevant elements.

Additional items for an effective tax governance framework

In addition to evidencing the required items mentioned above, the ATO states that a taxpayer you will need to show that it meets at least 3 of the following 10 items in place in order to obtain a high assurance rating for tax governance:

1. segregation of roles and responsibilities for tax and reporting governance
2. senior management, leadership and/or the board and audit committee (as relevant) of the group are aware of the group’s tax outcomes
3. the tax return preparation process includes a procedure that involves an independent review of the draft return by an external advisor
4. where preparation of the tax return is outsourced, measures exist to ensure the integrity of tax information being reported to the ATO
5. the tax governance framework is documented, reviewed and endorsed by the Board annually and processes are in place to identify weaknesses in the framework
6. procedures exist for engagement with the ATO to discuss matters such as the tax environment, treatment of atypical transactions, etc
7. the tax treatment of atypical treatments has been managed appropriately
8. there are documented procedures in place to ensure that Fringe Benefits Tax (FBT) is being reported correctly
9. a documented policy exists for a comparison of the financial with tax reporting obligations to assess and address inconsistencies
10. where the group is part of a tax consolidated group that is derived from an accounting consolidated group, there is a documented procedure to identify and capture any differences between the financial performance of the tax consolidated group and the accounting consolidated group.

Outside of tax governance, there are other aspects of a taxpayer’s tax function, systems, controls and processes that impact whether a high level of tax assurance can be achieved which will also need to be considered.

Ajay is a Special Counsel within McInnes Wilson Lawyers‘ Taxation and Revenue practice, with a particular focus on Goods and Services Tax, State Taxes (including duties and payroll tax) and tax governance. He has more than 14 years of experience in taxation and revenue matters and has worked with a range of clients, from large Australian and multinational companies to small to medium enterprises, private clients and Government organisations. Ajay is a Chartered Tax Advisor. Prior to joining McInnes Wilson Lawyers, Ajay worked for a Big 4 professional services organisation and brings across valuable experience in the areas of technical indirect tax advisory and consulting, due diligence, transactional structuring and agreement drafting, ATO engagement and dispute resolution, and indirect tax technology and governance matters. Connect with Ajay via LinkedIn.