Tax in the era of transparency: the ATO’s Justified Trust program

In this era of transparency, which requires that companies devote ever more attention to environmental, social and governance (ESG) matters, there are an increasing range of stakeholders – including investors, employees, customers and regulators – that actively evaluate an organisation’s identification of and approach to ESG issues.

In the Australian context, there has been much debate regarding the broader social licence of companies to operate, which has extended to a societal expectation that companies pay their fair share of tax in the jurisdiction in which they operate, draw their resources and engage with their customers.

In an environment where government debt levels are increasing, regulators such as the Australian Taxation Office (ATO) are likely to increase their audit activity to test compliance with an organisation’s tax obligations. Satisfying the social expectations placed on an organisation – which include its approach to tax – requires a building of trust with the relevant revenue authorities and transparency with the community regarding outcomes. 

The Australian Commissioner of Taxation long ago put boards on notice that tax risk management and governance is clearly within the purview of the directors. Directors are expected to understand the organisation’s approach to tax risk and to diligently prosecute positions adopted in relation to tax matters.

Since 2016, the ATO has adopted the concept of ‘Justified Trust’ from the Organisation for Economic Cooperation and Development (OECD) and has applied it to the Top 100 Australian taxpayers (identified by reference to the size of their Australian operations). The link between Justified Trust and ESG is clear: the ATO articulates that the purpose of the program is to build and maintain community confidence that taxpayers are paying the right amount of tax. The ATO does this by seeking objective evidence that would lead a reasonable person to conclude a particular taxpayer paid the right amount of tax. 

The ATO’s review under the Justified Trust program covers the following four areas:

1. Understanding the organisation’s tax governance framework (existence, application and testing).
   
   
2. Identifying tax risks that the ATO had flagged to the market (e.g. in public rulings or taxpayer alerts).
   
   
3. Understanding significant and new transactions.
   
   
4. Understanding why the accounting and tax results vary.

There is no doubt that being prepared for, and adopting an accommodating, measured and collaborative approach to, the Justified Trust program will involve a significant investment in the process by the relevant organisation. Obtaining an overall high assurance rating under the program would not mean that there would be less engagement with the ATO, but an organisation could expect that the way in which the ATO engages with them would be improved. 

One such improvement would be the prospect of a lighter touch engagement approach from the ATO, known as the ‘monitoring and maintenance’ approach. Under this approach, the ATO will conduct an annual review for the next two years with a view to maintain its confidence established as part of the initial assessment. The ATO expects a certain degree of proactivity with respect to significant transactions or material changes to the organisation’s business, which would involve sharing details in real time. 

An organisation that makes a sufficient investment in the Justified Trust program, and particularly those that obtain a high level of assurance such that the ATO adopts the monitoring and maintenance approach, can hold a high degree of confidence that the ATO is comfortable regarding the tax positions the organisation has adopted. It would usually also be reasonable for the directors to be confident that the organisation itself has dedicated the appropriate resources to ensure awareness and understanding of the tax profile of the organisation. Even where an organisation may not achieve the high assurance rating (at least initially), if there has been sufficient investment in the process, there is bound to be some benefit in terms of the incremental increase in trust garnered from the ATO and the identification of areas in which the organisation can improve from a tax risk and governance perspective.

While the ATO cannot publish the assurance rating of an individual taxpayer, an organisation may themselves choose to disclose that rating if it participates in the Voluntary Tax Transparency Code (Code) that is facilitated by the ATO. The Code is intended to encourage the public disclosure of tax information by corporate taxpayers with a view to developing an understanding within the community regarding an organisation’s compliance with its tax obligations. 

There have been a number of principles and minimum standards developed by the Board of Taxation to guide disclosure. While there is no prescribed format for the content, large businesses are encouraged to include: 

• a reconciliation between accounting profit to tax expense and to income tax paid or payable;
  
  
• an identification of material temporary and non-temporary differences;
  
  
• the accounting effective company tax rates for Australian and global operations;
  
  
• the approach to tax strategy and governance;
  
  
• a tax contribution summary for corporate income tax; and
  
  
• information about international related party dealings.

The new Federal Labor Government is also currently in the consultation phase regarding key aspects of its tax reform platform announced during the recent election campaign, which also includes a significant tax transparency element. The proposal would see enhanced tax transparency of multinational enterprises through measures such as public reporting of certain tax information on a country‑by‑country (CbC) basis, mandatory reporting of material tax risks to shareholders and requiring tenderers for Australian government contracts to disclose their country of tax domicile. These measures will build on the existing CbC reporting obligations that already apply to significant global entities.

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With increased focus on ESG issues generally, the adoption of OECD measures and an expectation that the ATO will only increase its audit activity, organisations may see some benefit in working towards obtaining a high assurance rating under the Justified Trust program. Organisations may also be able to leverage the results of that program to satisfy the expectations of stakeholders that the organisation makes a fair and reasonable contribution to the Australian tax base.