It has never been as important as now to consider tax risk management. In January, the ATO released a new Tax Risk Management and Governance Review Guide, highlighting directors’ responsibilities in their company’s tax risk protocols. Last November, the Federal Court also affirmed directors’ common law and statutory duties to act with care, skill and diligence in dealing with their company’s tax risk management.

These events show a shift in the ATO’s treatment of corporate tax management. The ATO’s Review Guide represents its position in encouraging directors to take a more proactive approach to tax management. Although the ATO has not introduced new tax management duties in its updated guide, it has elaborated on existing ones.

The review guide affirms that while the everyday control of compliance is often handled by managers, directors are responsible for overseeing an internal control framework that informs managers of how tax risks are identified and managed. It is also the directors’ responsibility to be able to show the ATO that these controls are operating effectively. To achieve this, regular control testing and auditing should be conducted.

Understanding Tax Risk Implications

The Guide calls for effective policies to be put in place to review and assess the tax implications of material company transactions. Special attention needs to be given to high-tax risk events, such as:

Restructures, consolidations mergers and acquisitions, and related party transactions;
Transfer pricing and international transactions;
Historical performance that is inconsistent with industry benchmarks;
Unexplained losses that are carried forward for a long period of time;
Tax minimalisation arrangements.

Evidenced-Based Approach

Your risk management framework should take into account that when the ATO conducts a full-blown audit, it will use an evidence-based approach. Thus, documentation is important every step of the way. Your internal control and tax risk protocols should be in written form, along with any important communication and reporting. You should also ask for signed assurances from management teams stating that their tax responsibilities have been met.

Personal Liability under Legislation

When a company is in breach of tax laws, its directors may also be made personally liable in the following scenarios:

Unpaid super guarantee charge obligations (from and including 30 June 2012);
Unpaid amounts of Pay As You Go;
Outstanding tax debts to the ATO in the event of insolvency;
Penalties for providing false or misleading taxation documents.

General Statutory and Common Law Duty

Outside of the expectations set out in the detailed ATO guide, directors also have a general duty to perform their responsibilities to an acceptable standard in leading their company.As the Federal Court has shown in the recent BCI Finances Pty Ltd v Binetter (2016), this obligation, found both in the Corporations Act and at Common Law, also applies in the context of tax risk management. The test adopted here is whether the director has acted with sufficient diligence, skill and care. If a company is found to be involved in tax avoidance, directors will need to illustrate to the Court that they have exercised impartial judgement in assessing company transactions. In other words, there needs to be documentary proof that transactions were authorised on the basis that they have a dominant commercial purpose outside of providing a tax benefit. This can take the form of correspondence, memos, minutes or evaluation records.

The Bottom Line

The ATO has made it clear that tax risk management goes to the very heart of corporate governance and directors can no longer take a hands-off approach.

What do I do now?

Contact us if you would like to have more information on managing tax risk. Our lawyers at You Legal will be happy to assist you in whatever way we can.

* This blog is for general guidance only. Legal advice should be sought before taking action in relation to any specific issues.

The ATO’s Call for Proactive Tax Risk Management in 2017