Earning and keeping ‘justified trust’
The ATO has issued guidance on the ‘Monitoring and Maintenance’ approach it intends to take in maintaining its confidence that those taxpayers who attained an overall ‘high assurance’ rating under its ‘Top 100 Justified Trust’ program are continuing to pay the right amount of tax.
Under the ATO’s ‘Monitoring and Maintenance’ approach, for those taxpayers who attained an overall high assurance rating, the ATO will be monitoring their disclosures and tax outcomes over the two income years following receipt of that rating to maintain the level of Justified Trust obtained. This will be followed by a more comprehensive Justified Trust review to ‘refresh’ the ATO’s confidence in the taxpayer’s tax outcomes every third year.
According to the ATO, the monitoring activity in years one and two will involve a review of:
- the last tax assurance result issued;
- financial statements;
- tax return disclosures and accompanying schedules, such as the international dealings and reportable tax position schedules;
- country-by-country reporting statements; and
- any other relevant information for the income year under review.
In addition, the ATO will continue to meet with taxpayers on a regular basis throughout the year to “maintain a contemporary understanding of business performance, key transactions and areas of focus”.
Significant or new transactions and material changes
The ATO has flagged that under the Monitoring and Maintenance approach taxpayers will be expected to proactively disclose significant or new transactions. In this regard, taxpayers are expected to engage with the ATO contemporaneously when there are material changes to any tax treatment or positions adopted that had been the subject of the previous assurance review.
The items to be disclosed on a real-time basis to the ATO (or as part of the annual review (as relevant)) include items such as:
- significant or new transactions;
- material business changes;
- change of tax treatments or positions that have previously been assured as part of the current or prior review;
- change of reporting of uncertain tax positions as reflected in current and deferred tax balances in the financial statements;
- details of any new tax risks flagged to market (note these should align with disclosures in the RTP schedule);
- issues or errors relating to information reported in the income tax return or accompanying schedules that should be corrected;
- material changes to the design of the tax governance framework; and
- outcomes of independent operational effectiveness testing of the tax governance framework completed.
The ATO has separately indicated that the program is ultimately intended to capture new significant transactions. Accordingly, it will be important to discuss the ATO’s expectations during the ongoing engagement and be clear on what it considers needs to be disclosed in the context of the specific business (ie all new transactions or all new significant transactions). For some businesses, all new transactions may be significant but for others arguably not all new transactions will be significant or pose any new tax risks. In those cases it may be worthwhile opening up a discussion with the ATO to understand the scope and explore whether the breadth of transactions under review could be reduced in order to manage the compliance burden for the entity.
Verification of information
The ATO has foreshadowed that it will request further evidence from the taxpayer to determine if further, more detailed, verification activity is required where a disclosure or notification is made by the taxpayer about any of the above circumstances. The same request for information may follow, of course, if the ATO independently identify a significant change or potential tax risk.
The ATO has clarified that where an item requires verification, the ATO’s assurance activities will generally be targeted to those transactions or events not previously assured. This approach is different to the type of engagement a taxpayer would expect in a comprehensive risk review or audit. In this regard, the ATO appears to remain keen to demonstrate the benefits of receiving a high assurance rating. In particular, the ATO have separately indicated it expects the Monitoring and Maintenance reviews to be well scoped, targeted and less intense than the initial compliance assurance review where the original high assurance rating was given.
It is clear the ATO has high expectations of those taxpayers who have achieved Justified Trust. As such, for those taxpayers to maintain Justified Trust, it will be important to ensure that they have appropriate controls and governance in place to identify new, significant and material changes and to have a strategy for engaging proactively with the ATO and obtaining clarity on the scope and nature of what needs to be disclosed.
If you have any questions about the ATO’s Justified Trust program, assurance programs or the Monitoring and Maintenance reviews, please do not hesitate to reach out to Kristie Schubert or Jacqueline McGrath.
This article was written by Kristie Schubert, Partner and Jacqueline McGrath, Special Counsel.