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Annual compliance arrangements – what you need to know

Detailed information about the Annual compliance arrangements (ACA).

Last updated 7 November 2018

Annual compliance arrangements (ACAs) are voluntary arrangements that allow us to tailor your compliance relationship with us, rather than working through traditional compliance approaches, like audits and risk reviews.

They offer you greater practical certainty, concessional treatments of penalties and interest, and strategies to mitigate tax risks before they arise. In return, you must be willing to engage with us to identify and disclose your material tax risks.

Suitability of an ACA

ACAs are most suited to public and multinational businesses we classify as ‘key taxpayers’ – most of Australia’s largest businesses fall into this category.

To get an ACA we expect a high level of assurance and cooperation from the taxpayer in all engagement activities with us.

If this is not currently the case, the ATO will work with taxpayers as part of the key taxpayer engagement to attain that high level of assurance in order to obtain (and maintain) an ACA.

Eligibility for an ACA

ACAs are offered to clients who typically exhibit the following characteristics:

  • are categorised as a key taxpayer according to the risk differentiation framework (RDF)
  • are willingly transparent and collaborate to resolve issues or risks
  • have a trusting relationship with the ATO and a good compliance history with no or little concerns
  • have robust tax corporate governance practices (aligned as appropriate with the Tax risk management and governance review guide)
  • engage in rulings processes and generally follow the ATO view – if the ATO view is not followed, we would expect that the ACA client would  
    • have a reasonably arguable position
    • disclose this to the ATO – see the next point
  • adopt the ‘full and true disclosure’ approach and early engagement in regard to any potential tax risk or area where the ATO may take a different view
  • lodge full and complete returns on time and willingly provide additional information
  • positively influence others
  • engage with the ATO to enhance the tax systems
  • provide intelligence to the ATO on risks and issues
  • do not engage in activities which are the subject of taxpayer alerts
  • have achieved a high level of assurance under the justified trust methodology
  • take up the Voluntary Tax Transparency Code.

The above list is not exhaustive. It should be noted that it is not essential that taxpayers must meet every one of these characteristics to qualify for an ACA.

Whole of tax ACA

The ATO would encourage future ACA clients to enter into a whole-of-tax ACA, for example, income tax, GST, excise, PRRT and FBT, as desirable. In these cases each tax covered would have a schedule to the main ACA detailing the relevant obligations and services.

If there are reasons why a whole-of-tax ACA is impractical, the ATO will discuss any issues with the taxpayer to determine the extent to which a whole or multi-tax ACA would be practical and desirable. For example, where a particular tax has a low level of materiality to the client or the ATO, then we may consider excluding that tax from the ACA.

For clients with an existing single tax ACA, where it is appropriate and desirable the ATO will work with the client to consider a whole-of-tax ACA.

Benefits of entering into an ACA

Key benefits of entering into an ACA include:

  • a speedier resolution of technical issues
  • administrative solutions to resolve compliance irritants
  • centralised points of contact and ongoing dialogue on technical matters, including access to ATO senior officers
  • a closure of returns to further ATO review
  • concessional treatments of penalties and interest
  • a plan outlining agreed processes and timelines
  • the possibility of extension of thresholds for correcting GST errors for a GST ACA
  • not being subject to post-lodgment risk reviews or audits for periods and income years covered by an ACA
  • not needing to complete the reportable tax position (RTP) schedule for income years covered by an ACA
  • not being subject to a pre-lodgment compliance review.

Practical certainty

We will issue a “sign-off” letter confirming that, subject to any noted conditions, the tax return for a particular year, or specific periods in the case of GST, are closed from further review or audit.

For tax risks rated as low we will not undertake further compliance activities for the particular period or year.

For tax risks rated as high we will develop mitigation strategies in consultation with you to mitigate the risk.

If you have not made a full and true disclosure of material risks or we consider that there is fraud, evasion or that the general anti-avoidance rules may apply we may re-open compliance activities for the period or year.

Entering into an ACA

To enter into an ACA, your CEO or CFO must first write a 'tax governance letter' that confirms your framework is aligned to the better practices set out in Tax Risk Management and Governance Review Guide.

The letter must also show us that:

  • you have good tax risk management procedures and they align with our guide
  • you are willing to work with us to establish the ACA, and will engage with us throughout the term of the ACA
  • you will fully and truthfully identify and disclose all material transaction and risks.

As ACAs are collaborative arrangements, we will then develop the supporting documentation with you – this includes the terms of the arrangement. Once developed, this is signed by both parties.

Costs of entering into an ACA

Our approach is to ensure that entering into an ACA is at minimal cost to you and for us. The incurrence of costs can be incurred at different stages of the ACA process such as during the negotiation stage, disclosures and implementation of mitigation strategies.

What your ACA will look like

Generally, your ACA will have two main documents: the tax governance letter from your CEO or CFO, and the Terms of arrangement (ToA).

The ToA establishes the general operating and relationship terms, including the expectations and obligations of both parties – it provides a written record of:

  • details of your representatives and ours, including the steering committee established under the ACA
  • the role of the steering committee in providing joint governance for the arrangement
  • the years to which the ACA applies, including how to exit the ACA
  • written commitments provided under the ACA, for example, the tax governance letter
  • guidance for continuous, full and true disclosures under the ACA
  • the penalty and interest concessions
  • the points of contact and escalation
  • the disclosure obligations applicable to each party so they can operate in a transparent environment
  • our commitment to provide prompt advice to ACA participants
  • how unresolved issues will be managed
  • the dispute resolution process, should one arise
  • the schedules for the taxes covered in the ACA, with each providing more specific information relating to the tax under an ACA.

Maintaining an ACA

There is no set period for the operation of an ACA, but we generally have a cycle of three years in a typical arrangement.

The ACA is managed along a financial year basis for taxes requiring an annual return to be lodged, for example income tax and FBT. Other taxes, for example GST, are managed on a periodic basis usually 12 months from the date of entering into the ACA. We will tailor the arrangement for you.

During the term of the ACA we expect you to:

  • make ongoing disclosures
  • maintain your governance processes and notify us of any changes
  • work with us to resolve risks, in an open and transparent manner
  • provide adequate resources to maintain the ACA
  • maintain your lodgment obligations
  • make time for the annual discussion with us.

What you can expect to see during the ACA

During the life of the arrangement, you can expect to see:

  • joint assessments and workshopping of identified tax risks as they happen
  • agreement on mitigation strategies before issues or disputes arise
  • an annual review of the effectiveness of your tax compliance assurance processes
  • disclosure of major transactions or tax positions that you consider have a level of uncertainty
  • a review of the arrangement to ensure contemporary practices
  • a sign-off letter for the year, effectively closing off any further ATO reviews to relevant returns and activity statements – this will be subject to whether there are any unresolved issues after an annual review has been completed.

What you can expect from us

You can expect us to:

  • work with you in an open, honest and transparent manner
  • progress matters you raise with us within agreed timeframes
  • maintain an open dialogue and keep you informed about the progress of issues you have raised
  • make contact with you in order to understand the facts and discuss any concerns we have
  • provide you with a central point of contact and access to relevant decision makers
  • approach you about risks that we become aware of.

Tax risks you need to disclose

It is critical for us to have a shared understanding about the types of tax risks you need to disclose under an ACA. We will discuss this with you, and determine materiality thresholds, as part of establishing the ACA.

Examples of business activities that may raise tax issues or positions that require ACA disclosure could include where:

  • applying the law to a set of circumstances and facts results in an unclear or ambiguous outcome
  • there is a risk that either we, or a court, might take a different view to your application of the law
  • you alter a GST apportionment methodology
  • you enter into a major transaction with significant tax impacts
  • the tax outcomes might be inconsistent with economic substance
  • there are material cross-jurisdictional issues
  • there are complex financial arrangements and business structures
  • the transaction attracts tax benefits not contemplated by the law
  • there are potential inconsistencies in market valuations
  • there are matters that are likely to attract media attention, reputation risk or impact on community confidence.

Ideally, you should disclose as close as possible to the time you are contemplating the transaction or strategy.

If you are uncertain about the correct tax position, or if you think the transaction may attract our attention, you should disclose it.

Information you should disclose

Disclosures under the ACA need to include enough information for us to make an accurate risk assessment of the transaction.

The level of information required by an independent reasonable person with relevant tax knowledge (such as an external advisor) to give advice on a tax position, would normally be sufficient if all known material facts about the transaction are disclosed. The information should also be provided in a timely manner and not be misleading.

Full and true disclosure is limited to information you are aware of, and information that a reasonable person would say you should be aware of. If further material facts or information comes to light, it should be disclosed as soon as possible as you become aware of it.

In practical terms because an ACA is underpinned by an open and collaborative relationship, the information we need to make an accurate risk assessment will normally be agreed through discussion at the appropriate time. The earlier that information is provided, workshopped or discussed, the more likely the issue will be resolved quickly for all parties.

Annual review meeting

The annual review meeting provides an opportunity to:

  • discuss risks that have already been disclosed and any mitigation strategies
  • raise any other risks that either you or we are concerned about
  • agree on which risks require further mitigation and what mitigation strategies are required
  • determine whether any further information or work is required by either party in order for us to sign off on the year or period
  • confirm your internal assurance processes are operating effectively.

We will also discuss with you our ongoing relationship and how we will continue to work together.

Once the annual review is completed, we will issue a letter confirming that, subject to any noted conditions, the tax return for a particular year or specific periods in the case of GST, are closed from further review or audit.

We will also outline any mitigation strategies we have agreed to if there are any ongoing issues we cannot resolve at that time.

Exiting an ACA

Any party can exit the ACA, at any time.

The exiting party needs to notify the other party in writing, giving reasons for exiting.