CEO Report Mr Carmodys epistle to the chairmen AICD Review

Michael Carmody, the Commissioner of Taxation, addressed a letter to the chairmen of the nation's public companies on January 29. This, in itself, is unusual: the Australian Tax Office normally deals with company managements rather than with directors or chairmen. 

It was a concise and apparently reasonable letter, but its implications have worried many people.

Mr Carmody's epistle to the chairmen

Michael Carmody, the Commissioner of Taxation, addressed a letter to the chairmen of the nation's public companies on January 29. This, in itself, is unusual: the Australian Tax Office normally deals with company managements rather than with directors or chairmen. It was a concise and apparently reasonable letter, but its implications have worried many people.

Carmody said that "boards can and should concern themselves with the management of the tax risk associated with major transactions or arrangements". He went on to offer 10 questions of the kind that boards "could consider putting to their tax advisers with a view to identifying and managing any relevant risks". Company managements maintain the accounts of businesses and deal daily with taxation matters. This is, after all, a full-time job. Boards are required to ensure that appropriate systems and arrangements are in place, that the accounts are accurate and potential business risks are recognised and managed. Included in this is the policy and practice for the handling of tax matters.

A company's board should of course consider any "major transaction or arrangement" with financial implications and the overall aggressiveness of the company's approach to tax. This is distinct from everyday transactions, which are dealt with by management under the board's oversight of systems, policies and compliance.

Directors and chairmen wonder what Carmody was intending when he sat down to write his letter. Some at the big end say the letter has no consequence and says nothing that wasn't already obvious to a well-run company. They wonder why he bothered. Others suspect a hidden agenda. Is he trying to "upstream" tax responsibility from management to directors? Is he floating a trial balloon for some onerous new law or regulation?

The words that led to most concern were that "an important issue for a board and CEO is to consciously decide the position they wish to take on tax planning, rather than have it made for them by others". This does read like upstreaming, even though it has always been the case that ultimate responsibility rests with the board.

The role of directors and boards is under strain at the moment as an increasingly challenging job definition is colliding with sharply heightened public expectations. The Australian Financial Review's editorials have thundered that directors "as a class" must "take more responsibility for the crucial functions of corporate governance" and should be "drummed out" if they fail. It is time for some cooler consideration.

The Commissioner's letter was petrol on a fire in the circumstances - only a thimbleful, but petrol all the same. He seems to be trying to put tax on the already overcrowded corporate governance agenda.

Directors should keep an eye on what he is doing. They are the agents of shareholders, as they have been since the role was invented centuries ago (it dates at least since the royal charter of the Dutch East India Company, granted in 1602). They are not agents of the Tax Office. It is hard enough to make a success of the complex job they have at the moment without adding the burden of direct responsibility for the management of corporate taxation.

Nevertheless, when tax policy or major transactions with tax implications do come to the board, Carmody's questions will form a useful checklist and frame of reference.

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