One of our strategic aims is to sustainably reduce the tax gap. We know old approaches centred on active compliance programs of reviews and audits will not achieve that aim. Instead, our first focus is on active prevention.
We believe the majority of taxpayers prefer to avoid tax risk where possible. To do so, they need to know where our concerns lie and our compliance stance on various aspects of the law or areas of the economy. Our goal is to only have taxpayers entering into disputes with us where they know what our position is and have made a conscious decision to operate contrary to it.
To achieve this goal, we're more explicit about where we have concerns. We communicate our thinking across all aspects of our compliance activities. We're more creative and flexible in the type and form of guidance we produce. This means we now have tailored guidance products for specific purposes as well as our traditional public rulings.
Public guidance also supports community confidence in the system by letting the public know we are identifying and dealing with matters of concern.
Through early engagement and private advice, we also work directly with large corporate groups. This helps to identify higher risk transactions and reduce disputes. It allows us to work with the taxpayer to agree on the appropriate tax treatment before they lodge their tax return.
Sometimes we can’t avoid disputes, and we'll pursue matters through audit and to litigation where necessary. The community expects us to take strong action against deliberate non-compliance where we find it. A credible compliance presence also deters others from pushing the bounds of acceptable behaviour.
Large corporate groups have multiple tax obligations. The complexity in fulfilling these obligations can be costly. We’re improving the system to give more certainty and reduce corporate administrative costs. This includes continuing our focus on public guidance.
We'll continue to monitor the environment to understand what’s happening in the economy, tax system and business. This will ensure we provide relevant and timely guidance.
We'll also consult with stakeholders on their needs, so our advice is practical and contemporary. This consultation has already resulted in us developing new guidance products.
Law companion rulings
Law companion rulings (LCRs) provide practical certainty, in the form of a public ruling, on how we will apply significant new law. LCRs cover income tax, super and GST measures.
Recent LCRs include:
- LCR 2021/1 OECD hybrid mismatch rules – targeted integrity rule
- LCR 2021/3 Temporary full expensing.
Practical compliance guidelines
Practical compliance guidelines (PCGs) are designed to provide a practical compliance solution where there is uncertainty, impracticality or discord between the law and current commercial practices. They may also provide our view of what constitutes a low or high risk activity or arrangement in relation to a specific area of the law. PCGs issued cover income tax, excise and GST matters.
Recent PCGs include:
- PCG 2021/1 Application of market value substitution rules when there is a buy-back or redemption of hybrid securities – methodologies for determining market value for investors holding their securities on capital account
- PCG 2021/5 Imported hybrid mismatch rule – ATO's compliance approach.
We use taxpayer alerts to flag arrangements of concern with the community, taxpayers and advisers.
Each taxpayer alert describes an arrangement and our concerns about it. Taxpayer alerts don’t provide our interpretation of the law but outline where we currently have concerns and what we're doing to address them. They also invite taxpayers to seek advice from independent advisers or us. We encourage this if they have or are considering entering into a similar arrangement as described in an alert.
Taxpayer alerts help taxpayers and their advisers make more informed decisions. They stop the proliferation of tax schemes. They also support community confidence in the tax system.
Recent taxpayer alerts include:
- TA 2020/1 Non-arm's length arrangements and schemes connected with the development, enhancement, maintenance, protection and exploitation of intangible assets
- TA 2020/2 Mischaracterised arrangements and schemes connected with foreign investment into Australian entities
- TA 2020/3 Arrangements involving interposed offshore entities to avoid interest withholding tax
- TA 2020/4 Multiple entry consolidated groups avoiding capital gains tax through the transfer of assets to an eligible tier-1 company prior to divestment
- TA 2020/5 Structured arrangements that provide imputation benefits on shares acquired where economic exposure is offset through use of derivative instruments
- TA 2022/2 Treaty shopping arrangements that are designed to obtain the benefit of a reduced withholding tax (WHT) rate under a double-tax arrangement for royalty or dividend payments from Australia
Working with the tax profession
Advisers play an important role helping taxpayers meet their tax and super obligations. Because the laws are complex, we encourage taxpayers to seek high quality tax advice.
Most tax professionals provide support for the integrity of the tax system. We work with the tax profession and explain our concerns to them at the earliest opportunity. In this way, we support them to provide appropriate advice to their clients. We also use our strong relationships with tax professionals and their representative bodies to develop our approaches.
The Large Market Tax Advisor Principles (published August 2022) are a voluntary framework developed by the 4 largest tax advisory firms with input from the ATO and Tax Practitioners BoardExternal Link (TPB). All firms offering tax advisory services may choose to adopt the principles.
The 4 firms have each published the principles and explanatory information on their websites, see:
- Deloitte Australia Large Market Tax Adviser PrinciplesExternal Link
- EY Australia Tax ServicesExternal Link
- KPMG's adoption of Large Market Tax Adviser Principles External Link
- PwC Australia Tax ServicesExternal Link (scroll to the bottom of the main body to find the principles).
Firms that adopt and follow the principles provide added confidence to their clients, the community and the ATO about the quality of their tax advice. Adopting the framework provides confidence the firm has processes in place aimed at preventing it from being involved in proscribed engagements and particular governance arrangements for when it is advising on higher risk engagements.
We do not regulate the framework, but we will work closely with the firms to understand how the principles are operating in practice.
The design and publication of the framework is a positive innovation for the Australian tax profession. Increasing transparency of the role of advisers further strengthens the integrity of the tax system.
We also seek to positively influence ethical and professional standards in a range of areas relevant to tax advisers.
We'll act quickly with advisers who undermine the integrity of the tax system or facilitate non-compliance. In addition to the regulatory work of the TPB, we collaborate with professional associations to uphold the reputation of the tax profession. In serious cases, promoter penalty laws may apply to promoters of tax avoidance schemes.
The types of behaviour that cause us concern include:
- engaging in conduct designed to frustrate and prevent the collection of facts and information and the proper administration of tax laws
- the promotion of tax avoidance schemes.
On 6 August 2023, the Government announced a range of reform measures to strengthen the regulatory framework to combat advisor misconduct, focused on deterring the promotion of tax exploitation schemes to large market taxpayers. We will act quickly and decisively to ensure the tax system is protected from abuse.
Using our formal information gathering powers
We issue formal notices to advisers and their firms known to be associated with arrangements covered by our taxpayer alerts. The notices ask for information and documents for taxpayers to whom they provided advice.
We issue the notices to identify:
- information about the involvement of certain known taxpayers in the schemes
- any other taxpayers who may have been involved in the schemes
- who designed the schemes, why they were designed and the processes involved in their design
- what promotion of these schemes has taken place.
We pursue a range of cases to obtain documents, including testing claims for legal professional privilege, and for the consequences of breaching information notices, which include criminal sanctions.
Legal professional privilege
Legal professional privilege (LPP) protects confidential communications between a lawyer and their client for the dominant purpose of providing or seeking legal advice. LPP also protects confidential communications prepared for the dominant purpose of actual or reasonably anticipated legal proceedings.
LPP is an important common law right, as it:
- protects a client’s privacy
- encourages full disclosure between the client and their lawyer when obtaining and providing legal advice or services.
We want taxpayers to get high quality advice, as this underpins the self-assessment system. Most advisers, whether at accounting or law firms, provide this and support the tax system.
We had been concerned that in some instances, taxpayers and their advisers were incorrectly claiming LPP in an attempt to withhold material facts and evidence from us.
In some cases, it appeared that non-legal services or services provided by non-lawyers had been artificially packaged under a purported legal services engagement to support a subsequent LPP claim. In other cases, we saw:
- blanket claims of privilege being made over thousands or tens of thousands of documents
- the over-claiming of privilege
- a lack of transparency in claims.
This risked constraining the application of the law for the provision of information to us and hindering our audit function.
These issues largely arose in large business privilege claims where we had issued a notice requiring them to produce information as part of an audit. In most of our engagements with large businesses, they provide us with information we need and we do not experience difficulties with managing LPP claims.
In recognition of the need for greater coverage in education and better practices to improve its use and understanding, we developed the Compliance with formal notices – claiming legal professional privilege in response to formal notices – Legal professional privilege protocol (LPP Protocol).
- helps taxpayers and advisers making LPP claims in response to requests for information and documents we make under our formal information gathering powers
- contains our recommended approach for identifying communications covered by LPP and making LPP claims to us
- will result in a more efficient resolution of LPP claims for taxpayers and the ATO if steps are followed and properly embedded in a firm's engagement and legal services practices. Businesses that choose not to follow the protocol and do not provide sufficient information to support their LPP claims can expect further enquiries from us.
We engage one-to-one with large corporate groups. This gives us assurance over approximately two-thirds of all corporate income tax.
We assess the risk of each corporate group in the entire population based on our professional judgment of the:
- transparency of their engagement with us
- choices and behaviours evidenced in their tax affairs
- level of risk they exhibit.
We use the outcomes of our assessment to tailor our engagement with each large corporate group.
Given Australia's highly concentrated corporate tax base and the significant impact the Top 100 public and multination businesses can have on the health of our tax system, we engage with them on an ongoing basis to manage their compliance and assure their tax performance.
We seek to clarify issues and risks as they arise. Being transparent about issues that concern us provides a catalyst to resolve them early.
For more information about our differentiated engagement, see:
- Top 100 justified trust program
- Top 100 GST assurance program
- Top 1,000 combined assurance program
- Top 500 private groups tax performance program.
We're focusing on whole-of-taxpayer profiling and risk assessment using our justified trust methodology. This helps us understand the taxpayer's business model and any tax planning motivation and opportunities they may have.
The profile and risks involved tell us what we need to do to gain confidence each taxpayer is paying the right amount of tax.
We’re taking a structured approach to gain this confidence by considering:
- the taxpayer’s tax risk management and governance framework
- whether the taxpayer is involved in any arrangements we've indicated we're concerned about or consider high risk
- understanding the tax impacts of current business activities, particularly any significant and new transactions the taxpayer has entered into
- if the taxpayer's accounting and tax or GST results vary, understanding why this is the case.
Our effective tax borne (ETB) methodology provides an approach to analyse the income tax and economic performance of corporate groups. It identifies an economic group’s worldwide profit from Australian-linked business activities and the Australian and offshore tax paid on that profit.
Essentially, the ETB determines the weighted average of the cash tax paid ratios (cash tax paid over Australian-linked profits) for each jurisdiction. Analysing and understanding a taxpayer's ETB provides evidence of the absence of risk and assists in identifying risk.
For more information see Appendix 3 – Senate Economics References Committee report on corporate tax avoidanceExternal Link.
Helping corporates strengthen their tax governance
We developed the Tax risk management and governance review guide primarily for large public businesses. It articulates better practices that boards and management can adopt to enhance governance and manage tax risk.
The guide is designed to help businesses self-evaluate their governance framework and manage their strategic and operational tax risks. It sets out what we believe to be better tax corporate governance practices. We also provide guidance for privately owned groups to help them develop or improve the effectiveness of their tax governance framework.
Both guides are what we recommend, rather than mandate.
Where we are satisfied that companies have strong and lived governance, we can have increased confidence in their financial and tax reporting.
For more information see Tax governance for privately owned groups.
We recognise that willing participation supports a healthy and strong tax system. Approaches that prevent tax risks support willing participation better than corrective approaches. Our one-to-one active prevention approach seeks to influence taxpayer behaviour. We get involved before the taxpayer reports the tax outcomes of their business transactions to us.
We apply active prevention approaches to the largest corporate taxpayers. This is important because their compliance influences not only the revenue base but also the willing participation of other taxpayers. Our one-to-one prevention includes our:
- pre-lodgment compliance reviews
- private rulings
- advance pricing arrangements.
It may also include informal guidance and interactions.
The key is that taxpayers have openly and transparently discussed their plans and their view of the tax implications. Active prevention succeeds when clients modify their behaviour based on the concerns we raise.
We estimate the wider revenue effects of these strategies wherever possible. Most techniques are evidence-based. We use information supplied by clients to estimate the difference in tax paid due to engaging early. This allows us to understand their proposed tax position and the impact of shifting that position, where necessary.
Early engagement discussions are a key tool we use to assist large corporate groups seeking advice on complex transactions they are considering or have already implemented. These discussions allow for timely identification and management of tax risks. It enables businesses to enter into transactions with confidence.
Taxpayers also have the option to provide a draft ruling for review and endorsement by us. We'll still review the arrangement proposed and ensure the appropriate application of the law before any ruling is issued. This will deliver a more streamlined process and improve the client experience.
We recognise taxpayers are not obliged to follow our advice under our self-assessment system. Where our risk identification processes have identified a concern, we may engage in compliance activities to test if the transaction is implemented in materially the same manner as described in the private ruling request.
As part of our assurance reviews of the largest taxpayers, we seek confirmation of facts where we provided advice to ensure it has been followed.
Pre-lodgment compliance reviews
Pre-lodgment compliance reviews (PCRs) are a key approach to ensuring prevention before correction. Through early engagement and a transparent relationship, we are able to work with large corporate groups to identify and resolve potential compliance concerns as they arise and before tax returns are lodged.
Advance pricing arrangements
Advance pricing arrangements (APAs) lock in compliant outcomes by agreeing on the criteria for transfer prices in advance of transactions occurring. They can eliminate the need for costly post-lodgment reviews and audits. They also give the community more confidence in the compliance of multinational enterprises.
Before we agree to an APA, we need to understand the entire value chain and allocation of profits globally. We apply the same structured approach we use to gain confidence in the tax paid by large corporate groups to our analysis to determine the basis for any APA we enter into. We don't simply look at the immediate transaction between the Australian entity and the related party.
Under an APA, taxpayers provide us with an annual compliance report. This demonstrates how they have complied with the terms of their APA.
The APA and our review of the annual compliance reports assure us the taxpayer is reporting the appropriate revenue on these related party transactions in their tax returns.