Directors must realise that the corporate governance playing field extends to playing straight and narrow on tax issues, says Graham Whyte FCPA.
Large corporates make a significant contribution to Australia's revenue system. Projected income tax from the corporate sector is expected to be $31 billion this financial year with over 60 per cent of that paid by large corporates.
Comparisons of tax payable by large business to total income, profits, total expenses and total assets all show a distinct upward trend over recent years.
However, these large corporates are coming under the ATO's microscope, with the recent announcement of the large business compliance program for 2003-04. Tax commissioner Michael Carmody recently made a clear link the between a corporation's tax responsibilities and good corporate governance.
'Judgments about tax compliance need to be part of the corporate governance processes of every company and board. Boards have a responsibility under Australia's system of self-assessment to ensure that tax laws are properly applied. Linking tax compliance and good governance will provide benefits for companies, shareholders and the community,' Carmody said, when launching the compliance program and accompanying information booklet.
The ATO expects that large businesses will ensure appropriate oversight and employ systems for management and assurance relative to the importance of various tax issues. Close management and scrutiny of material issues are expected. Failure to do that can have significant financial consequences for the revenue system, corporations and shareholders.
The sheer size of the contribution of large corporates to the tax system, together with the complexity of their business dealings and the ever-changing globally competitive environment in which they operate, will raise significant revenue risks. Over the five years to 2001-02, the ATO's audit program for large corporates and high-wealth individuals raised $7.4B of tax and penalties in assessments. Collections in respect of these assessments will continue as disputes are resolved through court action or settlements.
There are a range of issues currently under review as part of the ATO's audit program. These include capital gains tax reduction arrangements, losses, transfer of exploration tax concessions, transfer pricing and corporate financing.
The ATO's approach may involve an initial discussion to identify the reasons for the variance in tax performance. It may also involve an intensive risk review more closely evaluating the corporation's operating environment and business results, and evaluating its systems and processes for tax compliance. Audit activity may result from this evaluation or other specific intelligence relating to the group or industry and may be directed at a specific identified issue, industry issues or a broad-based group audit.
Continuous monitoring
As part of the ATO's responsibility for management of the country's revenue system, it operates assurance processes to ascertain whether overall collections are consistent with the underlying economic and industry performance and with the patterns it is expecting.
With the introduction of the GST and new Pay As You Go instalment arrangements, tax collections throughout the year are now increasingly linked to business and economic performance. Where tax collections at key payment points throughout the year are materially less than expected, the ATO will investigate the reasons for this.
Implementation of consolidations regime
The implementation of the consolidations regime is an area of particular focus. Consolidation is a fundamental change to the basis of assessment of corporations.
There are inevitable risks associated with the introduction of a change of this significance whether they relate to uncertainty, legislative design or compliance behaviour.
The ATO's response has been to develop a proactive program of risk management. This includes the development of a statement on how Part IVA the general anti-avoidance provision would apply to pre-consolidation planning arrangements. The ATO has been consulting extensively with business and tax and accounting representatives in the development of that statement.
Particular attention is being paid to:
losses being transferred and used by consolidated groups
asset values and movements in capital allowance claims
liabilities and movements in interest expenses
Compliance program 2003-04
The ATO will continue to expand its risk profiling and field work activity across the large corporate sector, including economic risk profiling of the entire 1400 large businesses in Australia in relation to income tax.
Activities will include:
160 large business income tax audits
320 detailed income tax risk reviews involving the top corporates
50 high-wealth individuals audits
8 excise audits of major corporates
20 advance pricing agreements for transfer pricing issues
risk assessment activity to identify outstanding superannuation reporting obligations
A range of verification checks and audits will be undertaken for GST including:
30 comprehensive audits
1200 issue audits
200 Business Activity Statement integrity audits
700 refund integrity audits
300 non-lodgements
What attracts the ATO's attention
These are the factors the ATO takes into account in identifying cases for possible audit:
Financial or tax performance that varies substantially from industry patterns
Significant variations in the amounts or patterns of tax payments compared to past performance and relevant economic indicators and industry trends
Unexplained variation between economic performance, productivity and tax performance
Unexplained losses, low effective tax rates, and cases where a business or an entity consistently pays relatively low tax
A history of aggressive tax planning by the corporation, group, board members, key executives or advisers
Weaknesses in the structures, processes and approaches to tax compliance
Tax outcomes that are inconsistent with the policy intent of tax reform
What you can expect the ATO to challenge
Complex structures and intra-group transactions associated with generating tax benefits unrelated to the economic substance of the commercial activity (if any)
Related party cross-border and tax haven dealings where tax profit returned in Australia does not reflect the economic contribution made here
Tax benefits in respect of financial and other arrangements that are disproportionately high compared to the limited financial exposure, or there is a divergence between the real and claimed economic substance of the activity
Arrangements or products that transfer or create tax benefits in circumstances not contemplated by the law
Characterisation of transactions in a way beneficial for tax purposes but at odds with their economic substance
Distortions and inconsistencies in market valuations
The ATO's business and tax compliance booklet and tax commissioner Carmody's comments regarding compliance are available at http://www.ato.gov.au/
This article was written by Graham Whyte FCPA, the ATO's assistant commissioner, large business.
