Obtaining high assurance
In the top 100 program, we apply a principled approach to reaching overall high assurance (justified trust). This is based on 2 elements:
- a quantitative threshold of more than 90% tax assured and economic activity correctly reported
- an objective assessment of 7 qualifying factors.
The quantitative threshold of element 1 must be met before the qualifying factors in element 2 can be applied.
The 7 qualifying factors are outlined below:
- Governance
Governance has been rated at least a Stage 2 in the TAR.
- Tax risks flagged to market
Any tax risks flagged to market (Practical Compliance Guidelines, Taxpayer Alerts, Public Rulings, including those set out in the RTP Schedule Category C disclosures) have been rated at least a medium level of assurance in the TAR, and are not of immediate concern or identified as necessitating further action based on the information provided.
- International related party dealings and CFCs
International related party dealings, profit attribution to permanent establishments and CFCs have received at least a medium level of assurance in the TAR and are not identified as necessitating further action based on the information provided.
- Losses
Losses, if applicable, have received at least a medium level of assurance in the TAR. This includes the commerciality of tax losses that have been verified and we understand when a taxpayer expects to utilise carried forward balances and move into a tax payable position.
- Effective Tax Borne (ETB)
The ETB calculation in the TAR and any underlying assumptions or proxies have been verified with the taxpayer. The ETB calculation has not highlighted any new areas of concern that pose a potential tax risk, for example, holding overseas interests in jurisdictions where there is not a substantiated commercial purpose.
- Reportable tax position schedule
There are no inconsistencies in RTP Schedule disclosures which are identified between lodgment of the tax return and finalisation of the review.
- Cooperative and collaborative behaviour
It has been a cooperative and collaborative process and when working with a taxpayer we have not observed any non-cooperative behaviour.
An overall provisional high assurance rating may still be possible in limited circumstances. Such circumstances may include where the taxpayer has provided an undertaking and is actively working on addressing a specific design gap in their tax governance framework or there is ongoing compliance activity. Where there is ongoing compliance activity, provided the quantitative threshold is met (inclusive of the unassured issue), the availability of a provisional rating will depend on the nature and stage of the compliance activity.
What a high assurance rating means for income tax
An overall high assurance rating for income tax means that we have obtained assurance that you paid the right amount of Australian income tax or reported the right Australian income tax outcomes for the income year reviewed.
Where you have high assurance for a significant or new transaction, a transaction with respect to a tax risk flagged to market, or a specific tax risk, this means that with respect to this issue, we obtained assurance that the right Australian income tax outcomes were reported in your income tax return.
You can therefore rely on a high assurance rating to mean we will not initiate any additional review of the income year return (including assurance or audit activity), other than any issues listed in the future assurance plan or similar work plan, noted as requiring further review, unless in exceptional circumstances. Similar work plan, includes a taxpayer specific justified trust maintenance plan, issues register or annual review plan.
It will only be in exceptional circumstances that we will apply compliance resources to review any of the relevant issues in the income year reviewed. The following circumstances are likely to constitute exceptional circumstances:
- legislation is enacted, a final decision of the court or tribunal is made, or there is a precedential ATO view that applies retrospectively to the income years reviewed
- where a review is required to complement compliance activity, or give effect to a determination, of another government agency or regulator
- there is a self-amendment/objection to the return for the income year reviewed (we will review the return in relation to the issue covered by the self-amendment/objection and related issues)
- you have subsequently notified us of a disclosure issue or error that should be corrected (relevant factors for consideration include materiality, potential risk to revenue, likely proliferation in the market or consistency with the policy intent)
- there is a change of tax treatment or position by you or a related taxpayer in that year or in subsequent years (other than due to a retrospective change in law or a precedential ATO view), particularly where the change in treatment means some amounts are never taxed or double benefits will be obtained for expenditure
- it becomes apparent to us that full and true disclosure was not made
- there is potential application of the general or specific anti-avoidance rules
- fraud or evasion becomes evident to us.
Monitoring and maintenance approach
When a top 100 taxpayer attains an overall high assurance rating under our justified trust assurance program, this means we have confidence that they have complied with Australian income tax laws. In recognition of the level of trust we have in the reported tax outcomes of these taxpayers, we tailor our engagement approach to focus on maintaining our high level of confidence.
The nature of our engagement with taxpayers under a pre-lodgment compliance review (PCR) following an overall high assurance rating is known as the monitoring and maintenance approach. We have published guidance on this approach for taxpayers and their advisors.
Under the monitoring and maintenance approach, we will monitor the taxpayer’s disclosures and tax outcomes over the 2 income years following an overall high assurance rating to maintain the level of justified trust obtained. During this period, we will seek to leverage the high assurance already obtained in relation to ongoing business activities.
We will continue to meet with taxpayers on a regular basis throughout the year to maintain a contemporary understanding of business performance, key transactions and areas of focus. We may request supporting evidence to be provided throughout the year to assist our enquiries.
Taxpayers will be expected to proactively engage with us and make disclosures of significant or new transactions. We should also be notified of material changes before these occur. We expect the following to be disclosed on a real time basis or as part of the annual review (as relevant):
- significant or new transactions
- material business changes
- change of tax treatments or positions that have previously been assured as part of the current or prior review
- change of reporting of uncertain tax positions as reflected in current and deferred tax balances in the financial statements
- details of any new tax risks flagged to market (note these should align with disclosures in the RTP Schedule)
- disclosure issues or errors relating to information reported in the tax return or accompanying schedules that should be corrected
- material changes to the design of the tax governance framework
- outcomes of independent operational effectiveness testing of the tax governance framework completed.
Where the taxpayer makes a disclosure or notifies us of any of the above circumstances, or where our review detects a significant change or potential tax risk, we will request further evidence from the taxpayer to determine if verification is required. Where an item requires verification, our assurance activities in relation to these transactions or events will generally be targeted to areas not previously assured. At the end of the review, the taxpayer will receive a monitoring and maintenance assurance report.
Many top 100 taxpayers seek further certainty on their tax positions by requesting rulings via our rulings program. Under the justified trust program, where a ruling is obtained, we assure compliance with the ruling, but this assurance process is generally streamlined compared to circumstances where we have to assure a similar transaction without a ruling.
While most taxpayers should experience a tangible decrease in the intensity of their review under the monitoring and maintenance approach, this is very much dependant on whether (and the extent to which) transactions need verification.
To date, we have completed 55 monitoring and maintenance reviews for taxpayers in the current population with 15 of these reviews completed in the 2023 income year. 28 of the top 100 taxpayers have had at least 2 monitoring and maintenance reviews completed to date. A few taxpayers are currently into their second round of monitoring and maintenance reviews after a refresh review which resulted in their overall high assurance rating being reaffirmed.
The monitoring and maintenance reviews completed to date have resulted in all taxpayers maintaining their justified trust ratings.
We have further observed the following in relation to the monitoring and maintenance reviews:
- Taxpayers are proactively engaging with us and making disclosures of significant or new transactions, or where there are material changes.
- Additional work on governance is typically focused on reviewing the implementation of our recommendations (including enhancements), addressing any specific design gap that is the subject of a provisional Stage 2 rating, and reviewing the outcomes from an independent operational effectiveness testing to assess whether a Stage 3 rating is achievable.
- Any issues listed in the future assurance plan or similar work plan as requiring further review in the latest TAR are followed up and/or reviewed.
- Where further verification work was required in the 2023 year, it has typically been in relation to significant new transactions with 87% of reviews looking at new transactions or tax risks flagged to market. The balance of the reviews generally considered governance and issues flagged as requiring further review such as significant transactions, capital allowances claims, related party transactions, TOFA gains and losses, and R&D expenditure.
- The top 4 topics associated with significant new transactions related to capital gains tax, related party financing issues, disposals and general domestic tax risks. In 2022–23 requests for rulings on capital management and capital gains tax continued to be in the top 5 topics of our rulings program as outlined in the Public and multinational business advice and guidance program report. Requests for advice on capital management transactions decreased by 33% in 2023 after large increases in the years 2019–20 to 2021–22.
- The Book-to-Book, Book-to-Tax and ETB analyses are generally undertaken based on our internal data sources, external data sources, the Statement of Taxable Income (SOTI), relevant balance sheet tax accounts and any other information provided by the taxpayer (additional information will generally only be sought where there are significant changes in adjustments or transactions).
Annual Compliance Arrangement taxpayers
Annual Compliance Arrangements (ACAs) were historically entered into with a small group of qualifying taxpayers and established mutual rights and obligations. In light of the increased justified trust ratings, we have started to work with the small remaining group of top 100 ACA taxpayers to transition them out of the ACA program and into the PCR program. This means that ACA taxpayers will have the benefit of the monitoring and maintenance approach when they reach overall high assurance.
Prior to fully transitioning into the PCR program, ACA taxpayers who have obtained an overall high assurance rating will revert to an annual ACA review in accordance with the ACA terms of arrangement.
A few taxpayers have completed reviews in accordance with the terms of the ACA. We have observed that all ACA taxpayers reviewed to date have had significant new transactions in the relevant income year. In addition, where governance was reviewed, 75% of the ACA taxpayers shifted from Stage 2 to Stage 3.
Refresh year
The monitoring and maintenance reviews and ACA year reviews are followed by a more comprehensive justified trust review to refresh our confidence in the taxpayer’s tax outcomes every third year.
The assurance activities for the refresh year will resume a whole-of-business approach, covering the tax outcomes of the entirety of the taxpayer's economic activities and applying the 4 pillars of justified trust.
We will seek to 'top up' our assurance where appropriate. In ordinary circumstances, it is expected that the refresh review will require less resource investment by taxpayers and the ATO as existing information, evidence and knowledge are able to be leveraged. At the end of a refresh year, the taxpayer will receive a full TAR.
There may be circumstances where a refresh year may be required to be conducted earlier than the third income year, for example:
- where there has been a fundamental business change such as a new business operation we need to obtain assurance over
- where we have reason to consider that our trust should no longer be maintained.
As of 30 June 2023, we have completed refresh reviews for 14 taxpayers in the current population, 11 of these completed in the 2023 year. Refresh reviews are currently underway for 16 taxpayers.
The refresh reviews completed to date have resulted in all taxpayers maintaining their justified trust ratings.
We have further observed the following in relation to the refresh reviews:
- The review of governance typically relied on taxpayer disclosures and information obtained in the monitoring and maintenance reviews. Most reviews were limited to areas that were outlined in the future assurance plan. A few taxpayers increased their governance rating in the refresh review from a provisional Stage 2 to a Stage 2 rating or from a Stage 2 to a Stage 3 rating.
- Just under 50% had new transactions where a tax risk flagged to market applied. These were identified from the RTP schedule alongside other taxpayer information and as expected for taxpayers with overall high assurance, all new tax risks were rated as either
- high assurance, or
- at least a medium assurance with no immediate concern or identified as necessitating further action based on the information provided.
- Around two-thirds of the reviews identified one or more new significant transactions that required review.
- A small number of assurance areas that had been previously reviewed attained a lower or higher assurance rating than in prior reviews.
We are refining our refresh review approach as we undertake and complete more cases. Our reviews will include following up with overall provisional high assurance taxpayers who have not yet provided us with their periodic internal controls testing plans.
We expect to publish guidance to assist taxpayers with their refresh reviews by the end of the 2023-24 year.