The art of tax administration in Australia
December 2024 | SPECIAL REPORT: CORPORATE TAX
Financier Worldwide Magazine
December 2024 Issue
In many ways, Australia is an attractive jurisdiction in which to do business. However, when it comes to adopting and defending Australian tax positions, it can be challenging. It is not as simple as adopting technically sound legal positions based on a conventional interpretation of existing legislation and case law.
The Australian Taxation Office (ATO) is proactive and strategic in its attempts to shape the tax landscape and taxpayer behaviour to increase the tax it collects. It does this through a range of diverse channels that need to be taken into account when adopting tax positions and setting the strategy for defending them.
The ATO has a heavy focus on multinational enterprises (MNEs). Company income tax is a major contributor to the Australian balance sheet. According to Rob Heferen, the new Australian tax commissioner, in his 19 June 2024 speech to the Corporate Tax Association Heads of Tax Forum: “[company tax] is responsible for around 22 percent of federal government tax collections … more than double the Organisation for Economic Co-operation and Development average of 10 percent.”
Mr Heferen also notes that the relatively high Australian company tax rate (30 percent) makes Australia highly susceptible to profit shifting. He continued: “It is unsurprising that global profit-shifting disputes continue to make up a significant part – roughly 70 percent – of the audit book of work for public and multinational businesses.”
Furthermore, the perception of high levels of MNE tax compliance is seen as driving tax compliance in other sectors of the economy (e.g., individuals and small business).
In this article, we illustrate some of the ways in which the ATO seeks to influence MNE behaviour. This is particularly relevant to MNEs with Australian operations but may also be relevant to other jurisdictions if the tax authorities in those jurisdictions follow the ATO’s lead.
‘Encourage’ taxpayers to adopt conservative positions
The ATO is a well-resourced organisation. According to Jeremy Hirschhorn, second commissioner, in his 29 November 2023 speech to Financial Review CFO Live, the ATO, with its dedicated Tax Avoidance Taskforce, now boasts a bigger large business tax division (relative to the size of the Australian economy) than almost any other tax administration.
Voluntary compliance in the large taxpayer market is the highest it has ever been, attributed to ATO actions taken to influence taxpayer behaviour, including, according to Mr Hirschhorn, “the success of the ATO’s justified trust program and [the ATO’s] ability to assist taxpayers to avoid tax disputes through innovative products such as practical compliance guidelines”.
Under the ‘justified trust’ programme, the ATO engages in a cycle of regular engagement across the population of Australia’s largest taxpayers and issues them with an ‘assurance’ rating. ‘High assurance’ means that the ATO is satisfied that the taxpayer is paying the ‘right’ amount of tax and comes with the promise of a lighter touch compliance approach.
MNEs are encouraged to disclose publicly their assurance ratings, on the basis that this will provide confidence to community stakeholders. Mr Hirschhorn has stressed that a high assurance rating is no longer just a goal, it is a community expectation. This is consistent with other public speeches by senior ATO officers (which are often reported in the mainstream press), which use the language of morality to hold large corporates to a higher behavioural standard than legal compliance. This is increasingly being linked to a taxpayer’s social licence to operate.
If an MNE has a ‘low’ or ‘medium’ rating (or does not publish its rating), it is exposed to adverse attention from community stakeholders (including media). This creates pressure on MNEs to conform to ATO expectations (whether the MNE agrees with the ATO’s views or not).
In parallel, the ATO is vocal about the transactions, arrangements and behaviours that it views as egregious. Since 2016, the ATO has issued multiple practical compliance guidelines (PCGs). PCGs provide guidance on how the ATO assesses the level of risk associated with particular arrangements. More compliance resources are allocated to arrangements that are assessed as higher risk.
It should be noted that these risk assessments are based on circumstantial factors that correlate to the ATO’s perception of risk rather than a technical analysis of the taxpayer’s actual legal position. Arrangements can be flagged as ‘high risk’ even where the tax positions are technically correct.
In addition, numerous taxpayer alerts (TAs) have been issued, designed to warn taxpayers about new or emerging higher risk arrangements or issues that the ATO has under review. The ATO requires Australia’s largest taxpayers to disclose in their tax return the outcome of their PCG risk assessments and whether they have arrangements similar to those described in the TAs – thereby providing the ATO with a roadmap for future compliance activity.
The taxpayer is forced to weigh up whether it wants to defend a lower tax position that it believes to be correct (knowing that it will need to endure a drawn out, painful and costly audit) or pay more tax (and receive less attention from the ATO).
Importance of other stakeholders
In striving to influence MNEs to meet the ATO’s preferred tax outcomes, the ATO seeks the support of other stakeholders in the tax system. It does so with clear, clever and consistent messaging, asserting the existence of an implied ‘social contract’ binding the stakeholders to ‘do the right thing’ by ensuring that MNEs pay the ‘right’ amount of Australian tax.
One stakeholder group is the tax profession, described by Mr Heferen in his 12 September 2024 address to The Tax Institute’s Tax Summit as one of the ATO’s partners in the system. The ATO’s messaging to advisers is that some within their ranks may have engaged in bad behaviour, including aggressive planning, but that the overwhelming majority do the right thing. Further, the ATO and broader Australian community relies upon them and seeks their assistance in ensuring that they are positive influences on their clients.
Mr Heferen states: “as tax professionals, you’re integral to ensuring the self-assessment system operates with integrity. Your clients are putting their trust in you. And so am I.” This approach (in combination with increased penalties for advisers promoting aggressive tax schemes) is designed to rid the system of the most aggressive advisers and influence those who remain to give conservative advice.
A second stakeholder is the general public, the customers and shareholders of the MNEs. There is increased public (and media) interest in the tax affairs of MNEs. The ATO leverages this interest (e.g., through speeches and press releases). Risk of adverse headlines has become a more significant consideration for MNEs defending tax positions.
A third stakeholder is the Australian government, which the ATO seeks to influence to introduce new or changed laws to address perceived compliance issues. This has included the introduction of additional tax-related conditions in the process of approving foreign investments and further amending legislation to align the tax laws with the ATO’s preferred interpretation (sometimes with retroactive effect) and significantly increase taxpayer penalties.
Strategic use of settlements and litigation
The ATO seeks to influence MNE behaviour, current and future, during the conduct and resolution of tax disputes.
During a tax dispute, the ATO has a range of legislative weapons at its disposal that may have significant potential adverse financial, evidential or reputational consequences for the MNE. The latest such weapon is the diverted profits tax, imposed at a 40 percent rate payable upfront and with onerous rules regarding review of any assessment.
Many ATO audits are resolved through settlement. If amended assessments are issued, the ATO requires payment of some or all of the assessment amount pending resolution of the dispute. This can provide a significant incentive to settle. The ATO knows this and will, in general, prefer most cases involving MNEs to follow this course.
However, the ATO is strategic about the matters that it decides to settle and those that it decides to litigate. It does this by reference to the portfolio of disputes in which it is involved (which is not visible to the taxpayer). A taxpayer may not be able to settle where the ATO wants to test a technical point in court to create a legal precedent.
Where a settlement relates to an arrangement that has continuing application, the ATO seeks to effect ongoing behavioural change through the settlement process. As such, typically it will not settle a dispute unless agreement is reached in relation to the tax outcomes for future years.
MNEs are often required or encouraged to make an announcement regarding any settlement reached. In some cases, once the settlement has been publicly disclosed, the ATO makes its own announcement.
These ATO announcements tend to champion the Tax Avoidance Taskforce, explain within the constraints of the tax secrecy provisions the terms of settlement (including, importantly, how the taxpayer may have agreed to future arrangements that the ATO views as welcome long term behavioural change) and take the opportunity to warn other MNEs that the taskforce will be vigilant in ensuring that the profits of MNEs are ‘appropriately’ taxed in Australia.
Addressing the influence offensive (a taxpayer perspective)
The ATO’s influencing strategies are diverse and constantly evolving. It is important to consider a broad range of factors (in addition to the strength of the technical arguments) when adopting or defending a tax position.
From the examples illustrated above, these factors include: (i) the required tax return disclosures; (ii) the potential ATO assurance rating impact; (iii) the ATO’s view of the relevant tax advisers; (iv) whether the matter is similar to disputes that the ATO has on foot with other taxpayers; and (v) how the law might change in the future.
There are, of course, a raft of other factors that must be considered, such as the amount at stake, the precedent that might be set by compromising a position and accounting, financing and public disclosure impacts.
The way that a taxpayer responds to these factors will vary between organisations depending on (among other things) whether the issue is isolated or ongoing, the appetite (and resourcing) for dealing with ATO enquiries and the appetite to manage adverse attention from community stakeholders (including media).
Stewart Grieve and Alison Haines are partners and Don Spirason is special counsel at Johnson Winter Slattery. Mr Grieve can be contacted on +61 3 8611 1353 or by email: stewart.grieve@jws.com.au. Ms Haines can be contacted on +61 3 8611 1334 or by email: alison.haines@jws.com.au. Mr Spirason can be contacted on +61 3 8611 1379 or by email: don.spirason@jws.com.au.
© Financier Worldwide
BY
Stewart Grieve, Alison Haines and Don Spirason
Johnson Winter Slattery