Introduction
To achieve a high rating for tax governance, you implement the required items where they apply.
Principle 1: Accountable management and oversight
Principle 1 requires that your group has put in place:
- Roles and responsibilities in respect of your Top 500 group’s tax and accounting functions are clearly defined and designed effectively, for example through organisational charts that
- map responsibilities for the management of tax issues that arise in your group to key personnel
- designate role descriptions and sign off points for key deliverables.
- Lodgment and payment calendars with supporting project management procedures to help ensure that your group meets its key lodgment and tax payment obligations on time.
- Where external tax advisors are engaged, roles and responsibilities are clearly defined and fit for purpose for you and them. The role of your advisors should be documented in an overarching advisor engagement letter, or in engagement specific agreement that sets the scope of work for the engagement, including:
- a list of entities that are in scope
- deliverables to be produced by the tax agent or advisor which may include a list of lodgments to be prepared or reviewed annually, the occurrence of pre-lodgment closure meetings, the provision of transmittal letters, and periodic catchups
- a list of financial or other information to be provided by you that will be relied upon by the agent or advisor in the conduct of their work
- tax issues that are in scope for advisor review, as referenced to a list of tax issues, materiality thresholds, or both
- specific focus areas where required for items that might present a higher risk of incorrect reporting.
- Mechanisms through which your group’s finance or tax function can access adequate resources to help ensure that your group can meet its tax obligations – the policy includes employing, or being able to engage externally, with suitably competent personnel with sound tax qualifications.
Operational effectiveness testing
You need evidence that your policy, processes and procedures are operating effectively requiring verification that the relevant processes or procedures have been followed. In practice, testing the operational effectiveness of processes and procedures that fall under the Accountable Management and Oversight principle can be demonstrated by reference to written evidence such as:
- lodgments and payments per the portal or receipts have occurred in accordance with your group’s lodgment and payments calendar
- steps taken to undertake the preparation of returns can be seen through email communications as having occurred in accordance with the return project management procedures
- emails or meeting minutes showing communications between functionaries and the responsible persons identified in your ‘Roles and Responsibilities’ procedures concerning escalation, review and sign off
- records of agendas, pre-lodgment meetings and information exchanges with your group’s advisors etc, have been retained and show alignment with the scope of work and responsibilities under the most recent tax return specific lodgment engagement.
See an example of an Accountable Management and Oversight tax governance framework.
Principle 2: Recognise tax issues and risks
Principle 2 requires that your group has put in place a process to identify the tax issues and risks that your group has to manage, and processes or procedures that govern how each of those tax issues and risks should be managed.
Recognising tax issues and risks
- Your overarching tax governance framework includes a policy and procedure to conduct an environmental assessment that identifies ‘business-as-usual’ tax issues that arise from your group’s income producing activities.
- The environmental assessment of the tax issues your group is required to managed is a one-off exercise that should be undertaken when a tax governance framework is first implemented, or as part of a self-review process.
- The process of recognising tax issues should also ensure legacy tax issues are identified and taken into account, and that there are processes in place to position your group to be able to manage the potential for tax risk that may arise from atypical transactions.
Operational effectiveness testing
- Evidencing that your policy, processes and procedures are operating effectively requires verifying that the relevant processes or procedures have been followed – in practice, testing the operational effectiveness of processes and procedures that fall under the ‘recognise’ aspect of principle 2 can be demonstrated by reference to written evidence such as:
- a documented ‘Tax Issues Register’ exists that clearly records the business-as-usual tax issues that your group (or specific entities within your group) must manage
- the workings papers for how the ‘Tax Issues Register’ was developed have been sighted, which (as an example) show how economic activities are tracked to the trial balance as the starting basis to identify tax issues requiring management
- where an atypical transaction has occurred, a process of initial triage and escalation or referral regarding the management of tax risk arising from the transaction is evident from communications.
See an example of a Recognise Tax Issues and Risks tax governance procedure.
Managing material tax issues and risks
It's important all of the tax issues that arise from the activities undertaken in your group are managed to ensure correct reporting.
However, the tax issues that you should manage under a documented tax governance process or procedure will have been determined based on the following qualitative and quantitative materiality thresholds:
- The quantitative materiality threshold at which a tax governance process or procedure should be in place for tax issues arising from an entity’s wealth creation activities (that comprises of an active business) is the lower of $500,000 or 5% of the entity’s total revenue or expense items.
With some trial balance accounts, such as where there is low potential for temporary or permanent book-to-tax differences in the account, tax governance could be limited to reliance on the work of an external auditor in verifying the completeness and accuracy of the account balance.
Where the entity’s activities are passive in nature and the 5% of total income or expense threshold is being applied, you are only required to consider tax governance over the account when the balance in the account is greater than $100,000.
- The qualitative materiality factors arising from your group’s wealth creation activities include trial balance items of entities within your group where there is a higher risk of misreporting (such as uncertainties with tax characterisation) and with respect to the management of tax information that does, or could, sit outside of the trial balance, for example
- franking account balances
- income derived for tax under transfer pricing arrangements
- loss schedules.
- expenditure deducted over time.
The qualitative materiality factors include all tax issues related to your choice of operating and ownership structure (for example, use of companies, trusts or partnerships) and consequential wealth extraction issues (for example, the application of Division 6 and Division 7A).
Operational effectiveness testing
Evidencing that your policy, processes or procedures are operating effectively requires verifying that the relevant processes or procedures that your group has in place to manage the discreet material tax issues have been followed.
In practice, testing the operational effectiveness of processes and procedures that fall under the ‘manage’ aspect of principle 2 can be demonstrated by reference to our Managing Tax Issues examples.
Managing the preparation of income tax returns
The tax return procedures that impact on your group should be documented using checklists, decisions trees or similar.
- To the extent that tax returns are prepared in-house, there are documented end-to-end procedures that are effectively designed and operating effectively in practice. The procedures include:
- instructions around how to prepare tax return disclosure items, and how data is extracted from source documents
- processes to reconcile and reference tax reconciliation calculations and tax return disclosure items to the trial balance, accounting or other work papers (see also principle 4).
- There are effective controls for data and information and the policy and procedures include:
- protocols to ensure final versions are used to either prepare tax returns in-house, or are provided to the group’s external tax advisors to undertake the tax returns preparation process
- specific procedures to check
- accounting profit used in the return against finalised financial accounts
- that opening balances match closing balances in the prior year income tax return
- final versions of advice are used in the tax return where tax positions are based on external tax advice (for example, due to a significant event) or deliverables under a separate engagement with an external advisor (for example, R&D calculations)
- checklists and other controls to govern what information is provided to an external reviewer (such as a tax agent) and to ensure that the information provided to the reviewer in response to queries is accurate and complete.
- Where returns are prepared by external tax agents, there is evidence that your tax agent has the following tax governance processes in place to include:
- tax return and tax reconciliation workpapers prepared by the tax agent are referenced and reconcile to source workpapers, such as the trial balance or accounting and other workpapers
- a transmittal letter is issued with the tax return which outlines the information provided by your group and assertions that have been relied on by the tax agent in preparing the return, as well as significant matters and tax positions that have been adopted by your agent.
- You exercise oversight over the work performed by the tax agents in reviewing or preparing your tax return, including having procedures:
- that ensure all the necessary information you are required to provide, has been provided
- to verify that the scope of work carried out by the tax agent is consistent with the scope of work agreed to in your engagement letter or engagement specific agreement
- to verify that the deliverables required from your tax agent have been provided in final form
- that require the review of the transmittal letter issued by the tax agent, which should outline the significant tax matters and, where relevant, changes made to the tax return as a result of the review.
Operational effectiveness testing
Evidencing that your processes and procedures are operating effectively requires verifying that the relevant processes and procedures have been followed.
In practice, testing the operational effectiveness of processes and procedures that fall under the ‘manage’ aspect of principle 2 (as it pertains to tax returns) can be demonstrated by reference to written evidence such as, but not limited to:
- a checklist prepared showing that the tax return procedures have been followed and the checklist has been sample tested against the disclosures in the return
- checklists prepared and corresponding emails (with attachments) sighted that show information that has been sent across to your group’s tax agent
- emails reflecting correspondence between your group and your agent about tax return disclosures and the process of query and response have been sighted
- tax reconciliation line items that can be easily map back to working papers, trial balance accounts, and fixed asset registers
- the transmittal letter prepared by the tax agent is read and confirms the scope of work undertaken per your engagement letter, and lists (where relevant), significant tax matters that have been considered by the tax agent.
See an example of a Recognise Tax Issues and Risks tax governance framework.
Atypical transactions
You have a policy in place to ensure tax is considered and documented as part of your group’s decision-making around atypical transactions.
- The policy should include a clearly defined list of transactions by reference to materiality thresholds which require approval by certain persons (or positions within your group) – the list of transactions may include:
- change of ownership (rights to income, capital, and voting)
- establishment or winding up of entities or businesses
- amendments to trust deeds
- acquisition, disposals, and restructures of assets
- significant changes to accounting methodologies
- making trust distributions from discretionary trusts
- loans, payments or debt forgiveness and guarantor arrangements to related entities.
- Escalation procedures should be in place to firstly, determine and secondly, verify the financial and tax consequences of any atypical transactions that your group undertakes.
- Where your group relies on their tax agents or advisors, transactions on the list should be considered within the advisor’s scope of work (see principle 1) and within your group’s Seek Advice policy (see principle 3).
- Procedures to ensure that atypical transactions are documented contemporaneously, including the tax positions taken and the reasons for them – the procedures have regard to the activity and type of entity and include:
- what transactions are required to be documented including materiality
- ensuring facts are documented and are current and complete
- how they should be documented
- who is responsible for documenting and reviewing the decisions that have been taken.
Operational effectiveness testing
Operational effectiveness testing of how your group manages tax risk arising from an atypical transaction is not mandatory, because an atypical transaction may not have occurred during the year.
However, if operational effectiveness testing was to occur, evidence that your policy, processes or procedures are operating effectively requires verifying whether the relevant processes or procedures that you have put in place have been followed.
To use an example that might be applicable in practice, testing the operational effectiveness of the processes and procedures that are in place to manage atypical transactions can be demonstrated by reference to evidence such as:
- records were sighted of a recent material atypical transaction from the list contained within the policy – the records show that
- a Senior Accountant prepared the relevant journals and a recommendation
- the Senior Accountant followed through with an internal escalation process to the CFO
- the CFO verified and documented the tax consequences with your group’s external tax advisor
- a memo was sighted which had been prepared by the CFO advising the Board of the financial and tax outcomes arising from another atypical transaction.
Goods and services tax (GST)
- Where the BAS or GST reporting is prepared in-house for trading entities, there are documented BAS procedures that are operating effectively in practice. The procedures include:
- procedures to reconcile the BAS disclosures to a control account, the general ledger or trial balance
- procedures to produce exception testing reports to identify anomalies or potential errors
- instructions on how to extract data from the system including who is responsible and ensuring final versions are used
- sufficiently detailed and comprehensive, meaning that a new but experienced employee can prepare the BAS by referring to the procedures
- there is a separate preparer and reviewer – the reviewer can be internal or external.
Operational effectiveness testing - GST
As GST is highly reliant on effective systems, operational effectiveness testing of GST is not mandatory. However Top 500 groups are encouraged to conduct operational effectiveness testing. For more information, see Top 500 GST assurance program.
Principle 3: Seek advice
Principle 3 requires that your group has put in place a clearly defined and documented:
- policy and procedure for seeking external tax advice from your advisors – this written policy can be embedded within an overarching tax governance framework and includes
- clear escalation thresholds having regard to the group’s structure and activities which include quantitative or qualitative factors, or both, for when and how to seek external advice in a consistent way – the procedures may also assist in determining whether a separate scope and costing is required
- a requirement to conduct periodic (quarterly or semi-annual) check-ins with the group’s tax advisors regarding business performance and to note any significant issues or events that have arisen
- a nominated person (or role) who is responsible to inform the group’s tax advisors of significant changes to the group or atypical transactions that have been undertaken, and in that regard for ensuring that facts and assumptions underlying any advice is accurate, current and complete
- a policy and procedure for when your group engages with us – whilst it is not mandatory to engage with us to seek advice, such a procedure should be embedded within an overarching tax governance framework and includes a policy to:
- consider our published guidance and advice
- inform your Top 500 client contact of key changes
- engage with us where higher certainty is required, based on clear thresholds or an assessment of risk – for example, with reference to quantitative or qualitative considerations that may require tax certainty through a commercial deal engagement or a private binding ruling.
Operational effectiveness testing
Evidence that your Seek Advice policy and procedures are operating effectively requires verifying that the relevant procedures have been followed.
Operational effectiveness testing under the Seek Advice principle is limited to the requirement to verify whether periodic check-ins with your advisors have occurred. This is because a transaction may not have occurred that would enliven your group’s Seek Advice policy.
Evidence of the check-in having occurred would be a simple as sighting meeting minutes demonstrating that the tax advisor has been informed of the entity’s or your group’s business performance, and significant issues or events that arose during the year.
If your group was to undertake operational effectiveness testing by reference to a transaction that has occurred, adherence to the processes and procedures that fall under the Seek Advice principle can be demonstrated by reference to written evidence such as:
- an email or meeting minutes showing that the person responsible under the Seek Advice policy (or under the Roles and Responsibilities policy), has escalated and sought advice as prescribed by the policy
- an email, meeting minutes, or a document with tracked changes from the responsible person which shows that the facts and assumptions upon which advice has been sought (and where relevant any changes) has been communicated to the group’s advisors.
See an example of a Seek Advice tax governance policy.
Principle 4: Integrity in reporting
Principle 4 requires that your group has put in place the following.
- A procedure to monitor and explain differences between tax outcomes and accounting or economic outcomes for entities within the group:
- This includes a nominated person, or position in the group, that is responsible for identifying, explaining and documenting, any significant differences between the economic performance (per financial statements) and tax performance for each entity within the group that has an income tax return lodgment obligation.
- Procedures that show 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 (for example, tracking of expenditure that is deductible over time).
- For trusts within your group, the procedures require you, the trustee, or appointed advisor to identify and explain
- any mismatches between distributable income (trust law) and net income (tax law) of the trust
- to the beneficiaries of each discretionary trust who will receive trust distributions
- any mismatches between who receives the financial benefit of a trust distribution versus who is presently entitled to it.
- Ensure good record keeping practices are being followed and records are easily accessible.
- Where your approach to tax governance for the Integrity in Reporting principle is outsourced to external advisors, the policy is documented in the group’s overarching framework, and the advisor’s scope of work is documented (see principle 1).
Operational effectiveness testing
Evidence that the policy and procedure is operating effectively requires verifying whether the relevant policy or procedures have been followed. In practice, testing the operational effectiveness of policies and procedures that fall under the Integrity in Reporting principle can be demonstrated by reference to evidence such as:
- the document that was created by the person in the nominated position shows (for a small sample of entities) that they identified and explained significant differences between economic and tax performance
- tax reconciliation checklists have been prepared that cross reference to the trial balance, and other relevant working papers needed to complete the tax reconciliation
- the working file and back-up archive where tax information for an income year (or reporting period) has been stored has been accessed by the reviewer and verified as complete with a screenshot
- work papers or review processes have been sighted that were prepared by the nominated person that explain and reconcile mismatches in distributable income and net income – for example, if a mismatch is due to the differing treatment of an asset disposal, summarising the treatments under the trust deed and tax law
- a documented checklist or review process has been prepared by a nominated person to verify that the beneficiary who was appointed income from a trust is eligible in accordance with that trusts trust deed
- where trust income has been distributed, the work papers verify that the financial benefit of a trust distribution has been received by the nominated beneficiary and the payment appropriately recorded.
See an example of an Integrity in Reporting tax governance policy.
Find out what's required for principles 1 to 4 in an effective tax governance framework for Top 500 groups.