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  • Key governance steps and processes

    There are some key steps and processes you can take to ensure an effective level of tax governance in your business.

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    Understand your obligations

    Effective tax governance helps your business comply with tax administration obligations. Operating without required tax registrations or failing to lodge returns on time will attract our attention and potentially expose your business to interest and penalties.

    It's important that you understand your obligations, including any registration and reporting requirements, both for tax and other regulators. Regulatory and tax obligations vary according to the type of entity structure (trust, company, partnership or super fund) you choose.

    Your business should have procedures to capture all tax administration obligations, and review them annually for any changes that impact your business. For tax registrations, effective tax governance processes include:

    • annual review of all tax and corporate registrations to identify gaps or lapsed registrations
    • comprehensive payroll and superannuation procedures for registering new and departing staff
    • defined accountabilities for ensuring registrations are complete
    • assistance from a tax adviser for new, complex or unfamiliar registrations.

    It's also important to keep your contact details with us up to date so that we can contact you.

    See also:

    Sound decision-making processes to address tax risks

    It's good practice to adopt decision-making that is transparent and accountable and aligns with corporate policies and procedures. In an effective governance model, tax risks are properly factored into decision-making, particularly for larger, new or one-off transactions, such as acquisition or disposal of business and assets.

    How you document your policies and procedures will depend on your business size and needs. Whatever your circumstances, a good starting point would be to incorporate tax governance principles and policies into your overall governance framework, and day-to-day tax governance procedures into your operational business procedures.

    Many private groups have a ‘family board’ with less formal decision-making processes. Your business should have clear policies and procedures for making and recording key decisions. This may include permanent files with details of all meetings held (formal and informal) to discuss business affairs. The formality of such processes generally matches the size and complexity of a business.

    You may also incorporate objective reviews or tax advisers into your decision-making processes. Including your trusted advisers in your decision-making helps ensure that issues are adequately addressed and decisions adequately recorded.

    Proper advice

    ATO guidance and advice

    Effective tax governance is demonstrated by considering the ATO view when determining the appropriate tax treatment for transactions or arrangements. Consult our current guidance and advice products such as tax alerts, taxation rulings and interpretative decisions.

    If you or your tax adviser are not able to find the ATO view on how the law applies to your circumstances, or are not certain how it applies, you can engage directly with us for advice before lodging tax returns.

    Professional advice

    Having qualified professional advisers who understand your business can:

    • ensure your business is appropriately structured
    • help you meet regulatory obligations
    • reduce ongoing tax risks, and
    • provide a resource for escalating future tax issues.

    You may also wish to engage directly with us for advice when tax issues are more complex and require certainty.

    Your relationships with advisers should be clearly defined. Engagement or appointment letters should articulate the adviser's role, responsibilities and obligations.

    As part of the year-end compliance process, in conjunction with your adviser:

    • identify and flag unusual or significant transactions (such as major asset purchases and private transactions or arrangements connected with the business) for discussion with advisers
    • if you have pre-CGT assets including shares or carried-forward losses, document any changes to business operations that may impact their status
    • identify ordinary and any extraordinary transactions where the tax treatment is unclear, controversial or may not be reasonably arguable or in accordance with the current ATO view.

    See also:

    Example 1

    You recently identified two complicated and material tax issues relating to your carried-forward losses and your consolidated group. You’re not certain how the law applies in your unique circumstances.

    You engage with your adviser who assures you that your treatment of the first issue is consistent with the ATO view. However, on the second issue you may have a reasonably arguable position but your adviser is uncertain and recommends engaging directly with the ATO. You, your adviser and the ATO work through the issue based on your circumstances and come to an agreed position. This is reflected in the tax treatment of the issue. As the tax treatment accords with the ATO view, the group's tax profile is lower.

    End of example

    Systems and controls to maintain integrity in reporting

    The Information System Risk Assessment (ISRA) tool is available for business clients and advisors to self-assess the integrity of their information technology (IT) systems. The tool will establish if the IT systems are well governed with appropriate controls to help businesses meet their tax and super reporting obligations.

    A good tax governance framework includes systems and controls to ensure accurate reporting and identify, assess and manage any tax risks. To address these risks:

    • establish effective procedures for correcting errors or oversights that impact on your tax obligations, including raising the issue with relevant stakeholders, advisers and the ATO where necessary (see Correcting a mistake and Correcting GST errors)
    • have tax and accounting staff with the knowledge and skills to properly manage your tax affairs and the opportunity to engage with external advisers where necessary on more complex matters
    • put systems in place (such as exception reporting) to identify, flag and address unusual transactions or events when they occur
    • document any reasonably arguable position in relation to the tax treatment of transactions, particularly those outside the ordinary dealings of the business
    • consider engaging a tax agent or adviser to lodge tax returns and other statements and adopt procedures to address enquiries or information requests from the ATO and other regulatory bodies
    • ensure you and your adviser understand how to seek advice from us to get certainty about a complex transaction or arrangement
    • establish procedures to ensure all advice sought is adhered to and practically applied – and where there are deviations from the advice or recommendations, these are articulated along with their supporting reasons
    • ensure senior decision makers are aware of any outstanding issues or disputes with the ATO
    • ensure procedures are in place to raise tax provisions for higher-risk transactions, and where statutory financial accounts are prepared, the tax note details these extraordinary transactions and their associated tax impact
    • document any significant changes to the business operations by way of minutes of meetings.

    To be effective, your tax governance needs to support an appropriate tax outcome. Ensure your tax governance framework remains effective by:

    • testing systems and controls
    • regularly reviewing your tax governance arrangements to make sure they suit your business
    • regularly checking that your policies and procedures are up to date with current tax laws
    • having policies that refer to current reference materials and examples available to staff from various resources (including the ATO website)
    • ensuring staff responsible for the taxation function maintain knowledge, skills and experience to perform their core duties, with practices such as  
      • continuing professional development
      • hiring practices that reflect the skills and experience required
      • encouragement for staff to identify and address emerging skill gaps
      • annual reviews of staff resourcing and capability during periods of expansion
    • maintaining up-to-date tax modules in your accounting systems, with all outputs (such as reports, ledgers and accounts) reviewed for accuracy and completeness, including procedures to detect and deal with system output or accuracy errors.

    Good tax governance practices also contribute to the security of your business information, including protecting it from identity theft. Be aware of the risks and how to protect your business and your systems from identity theft.

    Example 2

    Your accounting and tax governance procedures ensure your financial controller is kept up to date with changes in tax laws, and accounting systems are thoroughly reviewed before information is provided to your tax agent for tax returns.

    While periodically reviewing your accounting ledgers, your financial controller identifies a complex tax issue relating to your business inventory. Your tax governance procedure requires that you seek external advice (from the ATO or a professional adviser) on complex tax issues. The advice you receive ensures that you are paying the correct amount of tax and are making more informed commercial decisions about business inventory.

    End of example

    See also:

    Record keeping and documentation

    Under tax law, you must keep records to support your liabilities and claims, including documents evidencing an intention, election, choice, estimate, determination, valuation or calculation.

    Establish record-keeping systems and practices that are appropriate to the size, scale and complexity of your business. Consider implementing internal controls, such as secondary sign-offs and reconciliations, to ensure the integrity of all accounting records.

    Ensure that all the founding documents and any subsequent amendments or variations are complete, executed or signed and stored for easy access when needed. Maintain records relating to your annual tax obligations, including asset registers.

    Documents that you're required to keep can be in written or electronic form. If you store your records electronically make a backup copy to ensure the evidence is easily accessible if the original becomes inaccessible or unreadable.

    Good practice includes ensuring that business decisions makers and advisers have full access to key documents.

    Documenting key decisions to support tax treatment

    Adopt practices that ensure key decisions are documented at the time they are made. Key decisions made at the formation of a business and at the start of transactions often impact future tax outcomes. Contemporaneous records of such decisions can form crucial evidence to support your tax treatment of major transactions and may prove valuable should we later review your tax affairs.

    Appropriate tax governance arrangements will ensure continued access to source documentation, such as the trust deed, detailed records of proceeds and expenditures relating to the sale of property, financial statements, trust income distribution resolutions and other key evidence supporting tax treatment.

    When making decisions to undertake new projects or ventures, keep a record of any advice received, as well as contemporaneous statements from business owners on their plans and intentions.

    Example: Property investment – capital or income?

    You decide to make a significant property investment, which you intend to dispose of in the near future. You document the decision and keep the records in a permanent file.

    Later, when the ATO contacts you as part of a review of your subsequent disposal of the property, you're able to demonstrate your original intentions from contemporaneous objective evidence, such as permanent records and documented advice. The issue is quickly resolved without leading to audit.

    End of example

    See also:

    Timelines for tax lodgments

    A good tax governance model will provide for documented timelines to ensure income tax returns, excise returns and activity statements are lodged by the due dates.

    Timelines should allow sufficient time for tax agents to be appointed (unless the entire tax function is in-house), financial records to be reviewed, key tax treatments to be agreed and final returns prepared.

    At any time, you may identify errors in registrations, governing documents or lodgments. Routinely review ongoing tax positions and foster a culture of self-correction. Promptly and voluntarily disclosing errors to us is an indicator of good tax governance and suggests regular self-review is being undertaken.

    Example 3

    Your business has grown rapidly over the last four years, and preparing the year-end financial statements now takes more time. For the last two years, your tax returns have been lodged several months late due to competing priorities and delays encountered in preparing financial statements. The late lodgments attracted ATO attention, and your business was reviewed and charged interest for late tax payments.

    However, this year you have strengthened your governance procedures by preparing a calendar for lodgment and agreeing with your staff and tax agent on accountabilities for meeting financial statement and tax return deadlines. As a result, your tax lodgment due dates are met and the ATO becomes aware of your improved tax governance.

    End of example

    A reporting and lodgment procedure may include processes such as:

    • annual review to identify, and capture in a calendar, all due dates for all tax obligations
    • defined accountabilities within your business and with your tax agent for ensuring lodgments are on-time
    • engagement with the ATO to request lodgment extensions where appropriate
    • identifying trigger points for key non-tax reporting, such as corporate law reporting obligations and deadlines.

    Tax liabilities and cashflow management

    Staying on top of your business debts and operating cashflow requirements is critical to the success and even the survival of your business. Tax liabilities often arise irregularly and can impact cashflow.

    Poorly managed tax liabilities are an indicator of inadequate tax governance. Persistent late or non-payment of tax liabilities, particularly when coupled with failure by the taxpayer to engage with us to arrange payment terms, attracts our attention.

    To demonstrate effective governance around tax liabilities, consider adopting the following practices:

    • establish a corporate debt management policy including management of tax liabilities
    • prepare a schedule of income tax, PAYG withholding, GST, excise and customs duties and other tax-related payments
    • include estimates of tax payments in formal cashflow budgets
    • apply formal processes to ensure that tax, finance and treasury functions share tax payment information and forecasts
    • contact the ATO to propose and agree on payment arrangements where tax payments can't be paid on time.

    See also:

    Last modified: 18 Jun 2019QC 49164