ATO provides tailored tax risk management guide for directors

The ATO has released a new guide for directors on their role in overseeing an organisation’s tax risk protocols, writes AICD’s Senior Policy Adviser Kerry Hicks.

The Australian Taxation Office (ATO) has included in the latest update of its tax risk management guide a summary targeted at directors on their role in overseeing an organisation’s protocols.

“There are no additional responsibilities on directors. The guide really restates what [directors’] responsibilities are,” ATO Assistant Commissioner Jeff Stevenson said.

Released in January, the update of the ‘Tax risk management and governance review guide’ and the accompanying summary for directors are aimed at helping large organisations develop and improve their governance and internal controls.

“We suggest an initial gap analysis by business. They can compare and contrast their framework with the guide,” Stevenson advised.

While the guide outlines best practice, it is not mandatory and therefore not necessarily the case that an organisation must comply with every single element. The ATO recommend an ‘if not why not’ approach when using the guide. “If an entity does not have a particular control in place that we’ve articulated in the guide, it doesn’t necessarily mean a fail. It’s more of a prompt for a conversation on why the control might not be there and how the risk might be managed otherwise,” Stevenson said.

What is tax risk and its relevance to governance?

The guide explains that tax risk comes in two forms. The first type involves paying or accounting for the incorrect amount of tax. The second type of risk is that the tax positions adopted by a company are out of step with what the directors have authorised or believe is prudent.

The new ‘Director’s summary’ section outlines directors’ responsibilities for tax risk management and the ATO’s initial areas of focus for governance reviews. Also included in the guide for the first time are a set of self-assessment procedures for tax governance reviews, which set out methods for examining tax risk practices. These procedures can be used by companies themselves, advisers and/or the ATO.

The aim of the guide is to help organisations understand what the ATO view of better practices for tax corporate governance look like, so organisations can:

• Develop or improve their own tax governance and internal control framework;
  
• Test the robustness of their own framework design against the ATO best practice benchmarks; and
• Demonstrate the operational effectiveness of key internal controls to stakeholders, including the ATO.

Director’s summary overview

The tax authority included the summary because directors asked for a more concise version of the guide, according to Stevenson. It provides guidance on how a board should consider tax risks in their role of overseeing the risk management framework for their organisation.

The director’s summary covers the following areas:

• Corporate governance and risk management – explaining how the existence of a strong tax governance process could stave off a more costly ATO review;
• Justified trust and key controls – the process the ATO uses to assess tax risks of taxpayers which includes gathering evidence on their governance process;
• Three lines of defence – as one approach to risk management;
• Board level controls – clarifying the responsibilities of the board and management;
• Internal controls testing – setting the expectation that directors will understand internal controls at the company in their oversight role;
• Managerial level controls – the board should oversee that managerial responsibilities in relation to tax risk management are assessed and met; and
• Directorship responsibilities and liabilities – reminding directors of their legal responsibilities and personal liability in respect of unpaid PAYG withholding amounts and unpaid superannuation guarantee charge obligations.