To boost tax collections and reduce an estimated budget deficit of near $80bn, we expect the new Albanese Government to increase funding of targeted ATO audit programs and tighten existing tax rules. Here we’ve outlined the expected changes and how, as a CFO, you can minimise tax risks and prepare your business for an ATO review.
Targeted ATO audit programs
The ATO’s tax avoidance taskforce, which has already been in place for six years, has raised $22.9 billion in liabilities against public groups, multinationals, wealthy individuals and associated private groups (including trusts and promoters), with the collection of over $15.9 billion in cash. Further funding was flagged in the last federal budget, and we expect that that incoming government will also look to boost the ATO’s audit capabilities.
The taskforce has undertaken comprehensive review and audit processes on the Top 1000 public and multinational businesses, the Top 500 privately owned groups, and is now moving on to the Next 5000 high wealth private groups.
The focus areas include tax governance processes; review of tax risks flagged to the market by the ATO in the form of rulings, taxpayer alerts and guidelines; new and significant transactions and as book-to-tax variances.
Part of managing a review by the ATO is being able to demonstrate the mechanisms and processes in place related to tax governance – both in respect of routine and non-routine transactions.
This is critical to establishing ‘justified trust’ with the ATO. The assumption is that a taxpayer with sound tax control and governance frameworks will be more likely to appropriately manage its tax compliance obligations and tax risks. This gives the ATO comfort that the taxpayer is ‘paying its fair share of tax’ and reduces the intensity of the audit activity that the ATO will conduct on that taxpayer.
The ATO expects strong tax governance processes for all larger taxpayers. Even privately owned businesses are expected to have tax governance processes similar to those implemented by the largest public or multinational groups.
Tighter enforcement of rules
We expect another key approach to boosting tax collections and reducing the deficit will be tighter enforcement of existing tax rules. Put another way, the ATO issuing new or updated guidance that clarifies or evolves its views or approach with regard to existing tax rules.
An example of this is the recent draft guidance issued on section 100A. This provision, which has been in place for over 40 years, is an anti-avoidance provision targeted at contrived trust distribution arrangements.
Broadly, it applies when a trust beneficiary is made presently entitled to trust income, but the economic benefit is provided to another person, with the intention of paying less tax. Whilst the original intent of the provision may have been to counter trust stripping schemes, the ATO is now using it to target trust distributions made to adult children beneficiaries where the economic benefit does not follow, and is instead paid to the parents.
Another change in the ATO’s approach that we have seen recently relates to when software-related payments made by Australian entities to non-resident recipients will constitute royalties, and thus be subject to royalty withholding tax. Royalty withholding tax is imposed at a rate of 30% but may be reduced to between 5% and 15%, depending on the tax treaty in place with the country of the recipient.
Guidance was issued previously by the ATO on this matter in 1993. In this ruling, it was accepted by the ATO that payments made in respect of the sale of software for simple use by the end user, whether by sale or under a licence, would not constitute a royalty payment.
In the ATO’s updated guidance, which is currently still in draft form, the ATO has changed its approach. Payments made in respect of software distribution arrangements conferring a right on an Australian distributor to enter into end user licence agreements or cloud service agreements will comprise a royalty for Australian tax purposes.
Preparing for a review
So, what should your business do? In the current economic climate, we recommend that you undertake a review of your tax compliance processes and controls and document these. If your organisation already has written procedures in place related to tax compliance, you should assess whether these are followed in practice. Evidentiary documentation should be identified and maintained.
Businesses should also look to conduct a tax risk review to identify tax risks flagged to the market and situations where changes in interpretation of the tax laws could impact on the business. The review, and the process by which future tax risks will be identified, are key parts of a business’s tax governance framework.
Proper documentation of tax governance and management of tax risks should put your business in good stead in the event of an ATO enquiry.
For more information on preparing for an audit or advice tailored to your business and finance function, contact your local William Buck Tax Services specialist.