Further guidance and examples for effective tax governance

Example: 1.1 Roles and Responsibilities

Part A – Reporting and payment responsibilities - general

Central Biz’s Chief Financial Officer (CFO) is in overall charge of, and accountable for, the group’s tax reporting and payment obligations and to ensure appropriate scoping of engagements with the group’s external advisors.

The CFO is to report through to the Managing Director (MD).

The MD is to act as the Public Officer (PO) of each of the entities within the Central Biz group. The PO is accountable for signing and ensuring on time lodgment of the group’s FBT and income tax returns.

The accountabilities for the management of the recurring tax reporting obligations of each of Central Biz’s three divisions resides with each division’s Senior Accountant who are employed in Central Co and report to the CFO.

Part B – Reporting and payment responsibilities – returns and payments

Senior Accountants are responsible for the preparation of each division’s BAS and draft FBT and income tax returns in accordance with a lodgment timetable. The Senior Accountant is authorised to engage the group’s tax advisors where there are uncertainties around the tax treatment of discreet tax issues.

Senior Accountants are to review the monthly BAS’s that are prepared by junior staff to ensure they correctly reflect the group’s prescribed GST treatment policies.

The Senior Accountant is required to present the finalised BAS to the Chief Financial Officer (CFO) who signs off and authorises the lodgment and payment of the BAS. The Senior Accountant is required to notify the CFO when the BAS lodgment and payment has occurred and retained confirmations thereof.

Senior Accountants are required to escalate draft FBT and income tax returns for second level review by the CFO, who then engages an external review of the returns by the group’s tax advisors, in accordance with the terms of their engagement letter.

The returns should then be presented by the CFO to the Public Officer (PO) for his signature prior to their lodgment by the due date. The PO is then required to brief Central Co’s Board regarding the outcomes.

The CFO is responsible for ensuring the bank accounts from which tax payments are made are adequately funded and that tax payments are made on time.

Example: 1.2 Preparation, lodgment and payments

Part A – Due dates for BAS, Income Tax Returns and Fringe Benefits Tax Returns

The Central Biz group’s policy is that all monthly BAS, income tax and FBT returns are to be lodged by their due dates.

The lodgment and payment dates specified in the calendar below are to be followed and achieved for each of the group’s operating entities.

Lodgment and payment calendars are to be reviewed annually by the group’s tax advisors to ensure they are current.

Not required* - This is due to staff not being provided with fringe benefits.

Part B – Preparation and lodgment of BAS and tax returns

The Senior Accountants for each division are to maintain electronic alerts - one week ahead of BAS lodgments; and 2 months ahead of ITR and FBT return lodgments, at which times the Senior Accountants should commence the BAS or FBT and income tax return preparation process.

Senior Accountants for each division are to maintain and update a handbook (or similar guide) that maps the entities GL accounts to the relevant label fields in the BAS.

The preparation and sign off of income tax and FBT returns is to be conducted in accordance with the attached project schedules which show the timing of activities across over an end-to-end process (including key milestone dates).

Download the example of a Tax Return Project Plan (XLSX, 10.9KB)This link will download a file

Part C – Payments of tax

All pay as you go instalment income ‘wash up’ payments are to be made from the Central Co bank account for the relevant operating division (entity).

The bank account numbers from which income tax payments are to be made are as follows:

• Division 1 – XXX44500
• Division 2 – YYY44501
• Division 3 – ZZZ44501

The ATO account numbers to which income tax payments should be paid are as follows:

• Division 1 – ATOXXX1234567
• Division 2 – ATOYYY1234567
• Division 3 – ATOZZZ1234567

All other payment obligations reported on the BAS are to be made from the general clearing accounts of the relevant operating entity to the designated ATO CAC account.

Reconciliations of the components of each divisions BAS payments should be retained and stored at tax file ref ##BAS_MM/YYYY.

Example: 1.3 Scoping the role of the Central Biz group’s tax advisors

Part A - Engagement letters and engagement specific agreements

To facilitate the provision of tax advisory services as and when required, at all times Central Biz will maintain an engagement letter with a suitably qualified tax advisory firm.

As noted in Part A of this section, Central Biz’s chief financial officer (CFO) is accountable for the implementation, renewal, and appropriate scoping of engagements with the Central Biz group’s external advisors.

The engagement letter (or engagement specific agreements) should provide specific details regarding the type and scope of tax services that the appointed tax advisory firm will provide to Central Biz and an associated schedule of fees. For example, the engagement letter (or specific agreement) should:

• where relevant to the tax issues requiring management by the entity in a tax return process, specify the need for a review process for accounts where the tax treatments may differ from accounting, such as repairs and maintenance, cost of goods sold (COGS) and legal fees, among others
• where relevant to an entity’s activities, require a review of treatments applied to items of income and expenditure that are the subject of ATO rulings or taxpayer alerts
• include materiality thresholds in the engagement letter or an agreed scope of work
• specify what information will be provided by Central Biz in supporting the work of its advisors
• specify what the tax advisor’s deliverables will be around tax return reviews, for example
  • prescribing the conduct of a pre-lodgment closure meetings
  • the provision of a transmittal letter outlining the work that has been conducted and noting any salient issues.
   

In order to plan work schedules, and to ensure the groups tax advisors can be on top of the tax implications arising from any changes to the Central Biz business, or its operating environment, the engagement letter should prescribe periodic catch ups (for example, quarterly).

The terms of, and the tax advisory firm’s compliance with the engagement letter, should be reviewed and renewed annually.

Example 2.1 Tax issues and risks

Part A – Recognise Tax Issues and Risk Policy – overview

The Central Biz group’s policy is to recognise the tax issues and tax risks within our overall tax governance framework by consolidating a list of tax issues into a central document, the ‘Tax Issues Register’.

The tax issues that are to be identified and listed in the Tax Issues Register arise from each of our operating division’s ‘business-as-usual’ activities.

The Tax Issues Register must be available for, and referred to by, our accounting, tax or finance team as appropriate.

Procedures for the recognition of tax issues that arise from atypical transactions are also to be followed as part of our group’s ‘Recognise Tax Issues and Risk’ policy.

Part C – Procedures for the initial identification of tax issues arising from ‘Business-as-usual’ transactions for each Business Division

1. Identify all accounting revenue and expense items in the trial balance that contribute to each entity’s accounting profit and loss. That is, those items that require management for tax purposes.
2. Disaggregate any aggregated accounting revenue or expense control accounts in the trial balance, such as accounts with headline classifications such a ‘vehicle expenses’.
3. Out of the accounts identified in (2), identify where the accounting and tax treatment of items recorded in the account may differ permanently.
4. Out of the accounts identified in (2), identify where the accounting and tax treatment may differ temporarily.
5. Refer to the entity’s prior year working file to identify carried forward legacy tax issues. Examples can include losses, prior year expenditure and prepayment adjustments.
6. Identify ATO issued Taxpayer Alerts or Taxation Rulings that may apply to items recorded in the trial balance accounts.
7. For the purposes of identifying which accounts may contain tax issues that require a tax governance process or procedure, identify revenue and expense accounts in the group’s active businesses that are quantitatively material, based on either:
   • for our operating entities, the lower of 5% or more of the entity’s total revenue or expenses, as applicable; and $500,000
   • for our passive investment entities, the lower of 5% or more of the entity's total revenue or expenses where the balances in those accounts are greater than $100,000; and $500,000
   • where the balances in the accounts are lower than the quantitative thresholds but have been determined by management to present a high risk of being reported incorrectly for tax purposes.
    
8. Collate information from the previous steps into a table and repeat the process for each entity in business division. Collate and summarise into a ‘Tax Issues Register’.
9. Submit to the CFO for review and approval.

Part D – Identification of tax issues arising from atypical transactions

Atypical transactions with a transaction value of greater than $500,000 require approval and sign off by the CFO.

Consideration should be given to whether it is appropriate to seek external advice in accordance with the Central Biz Group ‘Seek Advice’ policy, noting the following extract:

‘Organisational restructures and disposals of assets with a value of $Xm must be brought to the attention of the Board in concert with a summary of the financial and tax consequences of those disposals.’

Procedure:

1. Division Senior Accountant to provide a summary briefing that identifies and quantifies the tax issues and financial consequences for the division and notes any uncertainties.
2. Escalate the briefing to the group’s CFO.
3. CFO to review and:
   • confirm agreement with the briefing’s conclusions via email
   • seek to resolve queries with Senior Accountant’s conclusions via email
   • where uncertainties cannot be resolved, or outside the scope of expertise or time constraints, engage external advisors.
   • CFO to provide a memo to the Public Officer outlining the conclusion of financial and tax consequences.
    

Download the streamlined example of Central Biz's approach to recognising tax issues using the Trial balance approach and Tax Issues Register (XLSX, 15.8KB)This link will download a file.

Example 2.2 Tax Issues Management

Part A – Overview

Central Biz group’s tax issues management policy recognises that as a group we employ personnel with the capabilities to manage most of the tax issues listed in our ‘Tax Issues Register’.

Our capabilities are supported by the procedures laid out in this section of our tax governance framework. The procedures are presented in detail to support job sharing arrangements and help personnel who may be new to their role with the Central Biz group.

Where required (for example, due to uncertainties) we will seek external advice from our advisors to ensure that the correct treatments are applied to the tax issues our group has to manage.

Part B – In-house procedures for managing tax issues arising from ongoing (business-as-usual) transactions

Expenditure on Legal fees

1. For each division, a Junior Accountant is to review, and prepare a draft reconciliation of, the division’s legal fees expense account by:
   1. identifying line items relating to legal advice and classify transactions concerning
      • the operating division’s ‘business as usual’ activities
      • the acquisition or disposal of assets or businesses
      • financing activities
      • fines or penalties
      • defence of patents, intellectual property or other rights
      • private or domestic affairs of the group’s controllers
       
   2. ensuring expenditure is captured in the entity to which the advice relates
   3. resolving queries about the nature of the legal services obtained with the operating division that incurred the expense
   4. reconciling the legal fees expense account by each classification listed in 1a), and preparing journal entries for any expenditure that falls within 1b)
   5. submitting the draft reconciliation to the Senior Accountant for review.
    
2. Senior Accountant to finalise reconciliation workpaper for the legal fees expense account (including noting any adjustments that need to be carried forward) by:
   1. reviewing the Junior Accountant’s draft reconciliation
   2. classifying each class of expenditure listed in the draft reconciliation as
      • immediately deductible
      • deductible over time (and the basis as required)
      • a non-deductible, permanent difference
      • non-deductible, but included in the tax cost, or the cost base of, the relevant asset to which the legal services relate
       
   3. quantifying and specifying the book-to-tax reconciliation adjustments that are required as a result of analysis in 2b)
   4. escalating any uncertainties regarding classification or treatments of each category in 2b) and 2c) to the Central Biz group’s external tax advisors as part of the advisor’s review of the tax return and associated working papers
   5. sending the reconciliation workpaper to the Junior Accountant including directions to code appropriate journal entries to give effect to 1d).
    
3. Junior Accountant to:
   1. include legal expenses reconciliation workpaper in the current year’s tax working file and back-up to the designated facility
   2. update the tax fixed asset register for legal expenses that should be included in the tax cost, or cost base, of the relevant asset, upon confirmation from the Senior Accountant.
    

Expenditure on Repairs & Maintenance (R&M)

As a capital intensive business R&M expenditure is a significant part of Central Biz’s cost base, accordingly each of our operating divisions is to maintain a distinct general ledger account for R&M.

Currently our accounting policy for the treatment of R&M expenditure differs from the treatments required for income tax and therefore a book to tax reconciliation is required. To simplify the book to tax reconciliation procedure Senior Accountants are encouraged to set up additional R&M sub accounts in their division for R&M expenditure of greater than $1,000 and greater than $5,000.

1. For each division, a Junior Accountant is to review, and prepare a draft reconciliation of, their division’s R&M expense accounts by:
   1. extracting the operating division’s R&M account(s) for the reporting period and identifying line items recording R&M expenditure of greater than $5,000
   2. examining line items identified in 1a) and related invoices to determine, and take note of where, items of expenditure were incurred
      • on repairing assets and equipment in order to maintain them at, or return them to, their state of intended use; or
      • in relation to the acquisition of, creation of, or significant improvements to, an asset
      • on the replacement of major components that are themselves depreciable assets or improvements to depreciable assets
       
   3. scanning the remainder of the R&M account(s) for expenditure that could relate to the
      • acquisition or creation of low cost or low value assets
      • replacement of major components that are themselves depreciable assets or improvements to depreciable assets
      • private or domestic affairs of the group’s controllers.
       
   4. ensuring R&M expenditure identified in 1a) is captured in the entity which incurred the R&M expenditure.
   5. resolving any queries about the nature of the R&M expenditure with the line manager who approved the expenditure
   6. reconciling totals in the R&M expense account by each classification listed in 1b) and 1c) and preparing journal entries for any expenditure that falls within 1d)
   7. submit the draft reconciliation to the Senior Accountant for review.
    
2. Senior Accountant is then required to:
   1. review the Junior Accountant’s reconciliation of the R&M expense account
   2. scan the R&M expense account for line items the Junior Accountant may have missed in their review and analysis
   3. classify each class of expenditure listed in 1b) and 1c) as:
      • immediately deductible
      • a non-deductible, permanent difference
      • non-deductible, but included in the tax cost, or the cost base of, the relevant asset, or in a low value pool
       
   4. quantify and specify the book-to-tax reconciliation adjustments that are required as a result of the analysis in 2c)
   5. escalate any uncertainties regarding classification or treatments of each category in 2c) to the Central Biz group’s external tax advisors as part of the advisors review of the tax return and associated working papers
   6. finalise reconciliation workpaper and send to the Junior Accountant with directions to code appropriate journal entries.
    
3. Junior Accountant to:
   1. include R&M reconciliation workpaper in the tax working file and back-up to our designated facility.
   2. update the tax fixed asset register to include R&M expenses the Senior Accountant has confirmed should be recognised as
      • an asset, or
      • included in the tax cost or cost base of an existing asset, or
      • included in a low value pool for tax purposes.
       
    

Example 3.1 Seek Advice

Part A – General approach to escalation

There is a general approach to escalation for organisational restructures and disposals of assets with a value of $Xm. That is, the matter must be brought to the attention of the Board in concert with a summary of the financial and tax consequences of those transactions.

Part B – Engagements with the Central Biz group’s advisors

Central Biz’s tax advisors must be appraised at least quarterly of material changes to the business, its operating structure, or atypical transactions that have been undertaken.

External tax advice from the Central Biz group’s tax advisors must be sought in respect of any proposed:

• mergers, acquisitions, and divestments of equity interests
• atypical asset sales
• organisational restructuring
• cross border transactions
• non-vanilla financing or changes to the group’s capital structure
• transactions between the Central Biz group and its shareholders or their associates
• revenue authority reviews
• tax treatments that may conflict with an ATO view, Taxpayer Alert or Practical Compliance Guideline.

The CFO or their appointed delegate is responsible for ensuring the currency of facts and relevant information related to any of the above including:

• obtaining transaction related information from Central Biz’s operational stakeholders
• for providing such information to the group’s tax advisors.

The CFO is responsible for ensuring that positions adopted by the group based on any advice received is correctly captured in the relevant entity’s tax return.

Senior Accountants are authorised to cost and obtain advice around other tax uncertainties that might arise in the Central Biz business (for example, expense characterisation issues) where that advice cost is less than of $X0,000.

Part C – Engagements with the Australian Taxation Office:

Central Biz’s CFO will serve as the main liaison point with the ATO.

The Central Biz group’s Top 500 client relationship contact at the ATO should be notified of transactions that in the CFO’s judgement will have a significant impact on the group’s tax position or ongoing business structure.

Formal advice from the ATO should be sought if the group’s external advisors determine that tax treatments that are to be applied to a transaction might be inconsistent with published ATO views.

Informal advice from the ATO should be sought for disposals of assets or businesses with a value of more than $X0m.

Example 4.1 Integrity in Reporting

Part A – Financial reporting responsibilities:

The Chief Financial Officer (CFO) is responsible for the accuracy of the Central Biz group’s financial reporting obligations and the compliance of those reports with the accounting standards.

Where financial accounts of a group entity are externally audited, the CFO will be the contact person with the external auditor and liaise with the auditor and accounting staff on all matters concerning the audit.

Where financial accounts of a group entity are the subject of external audit the audit opinion and any auditor’s management report are to be escalated by the CFO to the managing director and to the Board.

The CFO is responsible for the subsequent implementation of any improvements to the group’s controls or accounting practices that are suggested by the auditor.

The Senior Accountants in each division are responsible for mapping and keeping records of how individual trial balance accounts and other relevant working papers map to the tax reconciliations used in the preparation of each entity’s tax return.

The Senior Accountants for each division are responsible for identifying and documenting differences between the accounting and tax performance of entities within the Central Biz group who have a tax return lodgment obligation.

The CFO is required must be able to explain (in detail) differences between the accounting and tax performance of entities within the Central Biz group who have a tax return lodgment obligation.

The Senior Accountants for each division are responsible for maintaining, archiving, and backing up the group’s financial and tax records.

Part B – Financial reporting integrity:

In addition to those entities where the group is under a statutory obligation to have the financial accounts of group entities audited, the following entities will have their financial reports audited to ensure their accounts reflect a true and fair view:

• Entity A
• Entity B

In addition to those groups entities whose financial accounts are audited, the accuracy and completeness of account balances in the following entities will be verified under specific assurance engagements:

Part C – Differences between accounting and tax:

Where relevant, a brief written narrative explaining any material differences between a group entity’s economic (accounting), and tax performance is to be prepared and retained in the tax return working file of the relevant group entity.

Draft tax reconciliations which map to accounts in the trial balance and other working papers are to be prepared internally, reviewed by the CFO, and then verified by the group’s external tax advisors (per principle 1).

A checklist is to be maintained and updated as required that records the accounts in each entity’s trial balance that need to be mapped (wholly or partly) to that entity’s tax reconciliation.

The Central Biz group’s tax advisors are to be engaged where there are uncertainties about the right tax treatments that need to be applied to discreet items in the trial balance accounts (per principle 3).

Any mismatches between the distributable income (trust law) and net income (tax law) of Central Trust A or Central Trust B, are to be documented and retained for future reference.

Income or corpus appointments to beneficiaries selected by the trustee of Central Trust A or Central Trust B are to be cross checked against the trust deeds to ensure the trustee has exercised their power accordance with the deed.

Mismatches between who receives the financial benefit of a trust distribution from Central Trust A or Central Trust B, versus who is presently entitled to it, are to be documented and advice about the tax consequences escalated in accordance with the Seek Advice policy.

Part D – Record keeping:

Financial and tax records are to be maintained [in file ref #]; archived [at location X] and digitised [in file ref ##}]; and backed up [in file ref ###; and offsite in the cloud].