The company director as an ATO auditor: E-Alert April 2011

This week the Australian Tax Office (ATO) indicated that company boards will in future be expected to be responsible for identifying tax positions that are 'contestable' and therefore susceptible to challenge by the ATO.  This effectively co-opts directors into the frontline of the ATO's information gathering capability and represents a seismic shift in the manner in which a company discloses its tax affairs to the ATO. 

For a number of years the ATO has quietly, and sometimes not so quietly, reminded directors that it expects them to be mindful of tax risk and compliance issues, despite the fact that analysis of tax risk is not a duty usually imposed on directors. This approach has largely been driven by the ATO's desire to have, what it terms, 'real-time dialogue' with corporate taxpayers.  This is, in effect, an offer by the ATO to act as a quasi-tax advisor to corporate taxpayers.  However, corporate taxpayers have not engaged to the level anticipated by the ATO and it has turned to 'FIN 48', a US Accounting Standard, as a result.

FIN 48 requires an enterprise to examine the economic benefits obtained as a result of tax positions adopted in an income year.  To the extent that the tax position adopted is 'uncertain', that is may not be accepted by the Internal Revenue Service (IRS), that position needs to be identified and quantified by the enterprise in its accounts.  Accordingly, FIN 48 provides a roadmap to an enterprise's tax soft-spots and is an invaluable tool for the IRS in selecting tax risk and therefore potential audit targets.

The ATO has made no secret of its desire for Australian companies to make a similar disclosure but there is no equivalent Australian Accounting Standard to FIN 48.  The ATO will now circumvent this inconvenience by requiring directors of certain companies to describe and disclose tax positions that the ATO has variously described as being 'contestable, 'uncertain' or 'borderline'.  Absent an accounting standard or accepted definition of these terms, directors may be required to form a subjective view as to the correctness of the tax positions taken by the company.

Certain companies have already been subject to the ATO's 'Uncertain Tax Positions' Pilot Program, which requests information similar to that to be provided under FIN 48 and approximately 90 companies will be expected to identify their 'contestable tax positions' in a schedule attached to their 2012 returns. The ATO will vastly increase the number of companies required to complete the schedule in the 2013 financial year.  Essentially, the ATO seeks to remedy the absence of a FIN 48 standard in Australia by forcing corporates to analyse tax risk at the board level and then imposing a duty on the corporates to disclose their subjective assessment of this risk.

How will this affect you?

The real danger for directors lies in their ability to form a subjective view as to tax risk and the susceptibility of their view to ATO examination. This needs to be balanced against the risk of creating a paper trail of uncertain tax positions that can be uncovered and scrutinised by the ATO.

It is critical that directors properly inform themselves as to their duties in respect of tax risk and are mindful of the fact that legal professional privilege is the only protection against the ATO's compulsive information gathering powers.  The Maddocks Corporate and Tax Teams have a great deal of experience in advising boards as to corporate governance and tax risk issues.  We would encourage you to speak with your Maddocks Corporate or Tax Advisor in relation to the risks faced by directors in meeting this new challenge.

If you have any queries about any of the matters in the update, please click here to contact a member of our Tax Controversy team.