Companies face ATO challenge on tax risk and governance

Companies face ATO challenge on tax risk

From 20 July 2015, companies have an ATO-set benchmark to establish a tax control and governance framework – and will be expected to comply, or may need to explain why they are not doing so. KPMG’s own research shows that few Australian companies yet meet that level. Failure to implement the framework would be a risk factor the ATO will take into account when considering its audit activity.

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The ATO’s tax risk management and governance review guide, unveiled today, is the culmination of 2 years of consultation with the profession and the industry. It is intended to encourage boards to demand of their companies that they establish a formalised tax control framework, with appropriate tax risk appetite set for both strategic and operational risk, which the ATO recommends is published in the annual report, as well as internally.

David Drummond, KPMG Tax Partner said: “This is a major development in the current debate on tax transparency. This effectively takes the tax function out of its traditional ‘black box’ and puts it tax on a par, within organisations, with financial controls, which boards already have to sign off on as part of the revised ASX Corporate Governance principles in recommendation 4.2.

Companies will have to publicly attest that they are reaching these standards of tax governance and tax risk control. If they are not able to do so, then not only will their shareholders and the ATO want to know why, but in today’s climate, no doubt there will be other stakeholders quick to highlight any perceived deficiencies.”

Over the past few years KPMG has carried out continuous self-assessment surveys, both at Australian and international level on companies’ approach to tax risk management and governance. Relatively few of these companies benchmarked themselves at the level expected by the ATO.

Key findings

Key findings among the Australian companies, which covered a range of sizes and sectors, included:

  • nearly half (47 percent) of respondents replied that they were not fully confident that their internal controls were appropriate for the size and complexity of the company’s operations
  • only 7 percent had understood and documented their controls across entire tax processes
  • less than one-third (31 percent) undertook monitoring or testing of controls more frequently than once a year – of these only 50 percent documented this monitoring/testing
  • less than one-third (31 percent) reported to Board on tax matters of any sort under a framework which had been set by the board.

David Drummond said: “Our research has shown that most companies have much work to do in various areas: IT controls;  data integrity internal control frameworks and clarity of roles. Internal control testing is important here – boards need to be satisfied that the control framework is robust enough to manage the tax compliance risk effectively, with the ATO watching. The tax authority will be making this guide its benchmark for carrying out risk reviews of companies, and as is already the case in other countries, any organisation which tenders for government contracts may in time also be required to demonstrate meeting this tax benchmark to be accepted.

“The two key questions for boards are: how does the organisation attest that it is paying the legally right amount of tax due unless it has the core internal foundations in place to file correct tax returns? And does it ensure the design and operating effectiveness of these controls are being tested? We regularly see examples of companies putting in amended tax returns to accurately reflect the information lodged.”

Further information

Ian Welch

Senior Communications Manager, KPMG Australia

Mobile: +61 400 818 891

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