The future of the Self Assessment Regime - will large corporates be subject to a more onerous compliance [...]

The future of the Self Assessment Regime - will large corporates be subject to a more onerous compliance regime?

Australia's compliance system and collection of tax operates under the concept of "self assessment". Currently, a company need only provide the basic details of its taxable income in its annual company tax return form (Form C). Using the company tax return, publicly available information and information obtained from third parties, the Australian Taxation Office (ATO) will identify those taxpayers it wishes to review and audit in order to verify the information disclosed in Form C.

However, recent comments in the media indicate that in the future, large corporates may be required to provide details of uncertain tax positions in their tax returns.

The US Accounting Standards Board Interpretation No. 48 (FIN 48) entitled 'Accounting for Uncertainty in Income Taxes' describes the manner in which tax positions taken or expected to be taken in a tax return are recognised in an entity's financial statements. The entity is required to firstly determine whether a tax position will more-likely-than-not be sustained on examination (up to and including litigation) based on the technical merits of the position. The second step of FIN 48 requires the quantification of the tax position adopted to determine the amount of the benefit recognised in the financial statements.  There is no equivalent Australian Accounting Standard. FIN 48 effectively provides a roadmap for the Internal Revenue Service (IRS) to an entity's tax soft-spots and the ATO sees this is a valuable information gathering tool.

How this new compliance system would operate is still unclear, however it appears to be based on recent developments in the United States, where the IRS has recently released a draft schedule requiring selected large corporates to disclose uncertain tax positions from 2010.

Australia already has one of the most complicated tax systems in the world - increasing the compliance burden on large corporates and requesting that they disclose an "uncertain" position appears to be an onerous requirement that is better dealt with during the review and audit process rather than through the self assessment regime.

While recent comment in the media indicates that the ATO will request this information in the company income tax return, the ATO will shortly require approximately 6 "higher risk" companies in the Large Business and International segment to provide information regarding their "contestable" (that is, "uncertain") tax positions. The ATO will contact 2 – 3 companies before Christmas and another 2 - 3 after Christmas. The ATO envisages meeting with these taxpayers as well as writing to them and is seeking taxpayer co-operation. However, the ATO has not ruled out using its compulsive information gathering powers if co-operation is not forthcoming.

Although it is early days, the ATO is clearly seeking to identify potential tax risks as early as possible. The Commissioner's Compliance Plan for 2010-11 confirms that the ATO activity in conducting risk reviews and audits is increasing We encourage taxpayers to be prepared before the ATO comes knocking on their door.

The Maddocks Tax Controversy Team is widely considered to be one of Australia's premier tax controversy practices. We provide objective advice and assessment on the most relevant and efficient way to resolve or manage any controversy with the ATO. We have an excellent track record in early resolution of major risk reviews and audits. Our practioners have an unrivalled depth of experience and knowledge of tax controversy processes. This is supplemented by many years as tax litigators both for and against the ATO. If you have any queries about any of the matters in the update please click here to contact a member of the Tax Controversy Team.