The ATO is using an approach called “justified trust” to reassure other taxpayers that the “big end of town” is paying its fair share of tax.
In a speech in March 2017, Tax Commissioner Chris Jordan listed some commonly-held community perceptions and attitudes to tax that are influencing taxpayer behaviour. At the top of the list: “The big end of town doesn’t pay the right amount.”
Much of the ATO’s current activity in the corporate tax sphere is designed to show that the top end of town is indeed paying what it should. In doing that, the ATO has begun using a concept called “justified trust”.
The OECD first raised the notion of justified trust in 2013, in reference to the Dutch model of co-operative compliance. The ATO has quickly adopted it, beginning with a “top 100” group and spreading out from there.
In a justified trust system, the taxpaying organisation builds trust with the tax agency by supplying fact-based evidence to justify its tax position. The ATO says (https://www.ato.gov.au/business/large-business/justified-trust/ ) that it asks itself: “If we told the community how we assured the tax paid by a taxpayer, would they be satisfied we did enough?”. This is in contrast to the ATO’s previous compliance management model, where it relied on companies to self-identify their main tax risks.
As part of our broader exploration of the push for greater transparency in today’s tax regimes, Thomson Reuters has examined the concept of justified trust in a whitepaper available at tax.thomsonreuters.com.au/BEPS/justifiedtrustimplications
The effects of justified trust
For the ATO, justified trust is in part a means to a broader end – gaining greater compliance from taxpayers right across the tax and superannuation system. If large corporations are seen to be complying, it argues, other taxpayers will more willingly comply themselves.
But justified trust has significant implications for the way businesses need to structure their finance and tax teams, and their approach to data and technology across these areas. Organisations must ensure their systems and culture can adapt to a tax landscape based on a justified trust mindset.
As KPMG Director of Tax Transformation James Gordon has made clear, achieving a position of justified trust requires a particular approach to governance. The ATO requires boards to have oversight of tax affairs and be accountable for a business’s tax stance.
Similarly, Gordon notes, the ATO requires tax and finance teams to be in dialogue on tax issues with other parts of the business – risk, internal audit, human resources and more.
The ATO’s approach also requires businesses to be able to show the ATO they have the right information technology systems and tools in place to manage tax obligations and risks, Gordon says.
The risks of justified trust
It is indeed sensible to assure the community that corporate tax is properly paid. There’s no doubt that businesses have to pro-actively show the community that they are contributing to society. It’s not only the ATO that takes this view. Corporate leaders such as former Business Council president Graham Bradley have been making the point that businesses need to keep investing in their community standing.
But justified trust is also a policy that needs careful implementation so that it is understood by the broader community. With the recent release of the “tax gap” figures which reveal the difference between between the tax paid by corporations and what they should have paid, the ATO has perhaps miscalculated the public’s reception of this news. As on face value these numbers seem an invitation to let corporate Australia be painted as tax cheats.
The ATO has been careful to note that the tax gap is relatively small ($2.5 billion on $1.5 trillion of gross income). It also says in its published commentary (https://www.ato.gov.au/About-ATO/Research-and-statistics/In-detail/Tax-gap/Large-corporate-groups-income-tax-gap/) that the gap has changed little over recent years, that it is of only “medium” reliability and that it “primarily reflects differences in the interpretation of complex tax law”. That last point is particularly important: applying tax laws to business circumstances will always cause disagreements between lawyers.
However, when the general public sees the “tax gap” figure for large companies, though, they do not see the ATO’s careful caveats. In such instances the ATO runs the risk of reducing trust in the system rather than bolstering it.
The future of justified trust
The ATO reports it has now expanded the justified trust program “to the largest 1000 public and multinational groups”. That expansion, it says, will give the ATO “even greater insight into the risks involved in the large corporate group population and allow us to provide assurance over a significant portion of the tax paid by this population”.
Thomson Reuters sees “justified trust” as a sensible element of corporate transparency. It is also a relatively new concept which needs to be applied carefully. The ATO may need to fine-tune its approach if justified trust is to fulfil its potential.