How to prepare for ‘justified trust’
New tax regulations will require large Australian businesses to become more transparent than ever when it comes to tax. Australian franchisors will also be affected by these changes.
The Australian Taxation Office (ATO) is looking to give the Australian public increased confidence in the corporate tax system. Consequently, the ATO will demand demonstrable governance and transparency for taxpayers.
The new regulations stem from Australia’s acceptance of the Organisation for Economic Cooperation and Development (OECD)’s Base Erosion and Profit Shifting (BEPS) initiative. Australia is one of 100 countries backing the initiative, which aims to reduce the nonpayment of fair tax by international businesses.
‘Justified trust’ means businesses must be able to demonstrate to the ATO that they have the right systems in place to test significant transactions for tax risk. The program applies to the top 1,000 Australian companies and each one will need to take a tailored approach depending on variables such as size and industry.
- Broadly speaking, each business will need to cover four key areas:
- Understanding the business’s tax and risk management framework;
- Reviewing tax risks communicated to the market;
- Understanding significant new transactions; and
- Understanding why accounting and tax results may vary.
Previously the ATO relied on companies to selfidentify their main tax risks, but now companies will have to provide fact-based evidence to justify their tax position. That means they’ll need to re-examine how they structure their financial and tax teams, and how they approach data and technology. Much more collaboration is required in a justified trust environment, so organisations must ensure their systems and culture can adapt to the new ‘justified trust’ mindset.
Franchisors must make sure every facet of the company can contribute to the new level of transparency required; this means involving everyone from the board and senior leadership team through all the different departments, not just finance and tax, but also risk, internal audit, and human resources.
It’s important to conduct a gap analysis in coordination with stakeholders from various departments, then develop an action plan. By creating a spirit of collaboration and breaking down information silos, it will become possible to understand how each part of the organisation is accountable for ensuring the business pays the right amount of tax.
Technology is the key enabler to let businesses achieve this. Many businesses are undertaking transformation projects to achieve justified trust. For example, corporations are moving away from using manual spreadsheets in favour of automated systems that reduce the risk of errors. This could include accounting software that automatically pulls in accurate bank data, for instance.
Breaking down silos is crucial. Embedding the tax department in the activities of the finance department and other areas of the business can create a spirit of collaboration and a genuine appreciation for why each department needs certain information.
While the OECD acknowledges that most businesses pursuing aggressive international tax strategies aren’t breaking the law, it also suggests they do not meet community expectations about paying the appropriate amount of tax for the profits they earn. Most Australian corporations are already well underway with actions and strategies to address the BEPS initiatives and establishing ‘justified trust’ is the next step.
And, while technology and data are clearly integral to the ‘justified trust’ process, organisations must be careful to avoid overcommitting resources to compliance. The right technology can expedite the compliance process, but it’s important to ensure valuable resources remain focused on the business’s strategic needs.
Businesses cannot meet the ATO’s obligations and expectations alone. It’s vital to work with the right partners who can contribute best practice technologies, processes, and data to support and maintain an organisation’s justified trust position.
The correct combination of internal focus from the board down, in combination with insights from expert partners, gives organisations the best chance of achieving tax compliance in an increasingly-complex global regulatory environment.
Joining Thomson Reuters in 2007 from PwC, in 2016 Ben Scull was appointed to the role of managing director for Thomson Reuters Tax & Accounting business in Australia and New Zealand. He was promoted from the role of Sales Director for Australia and New Zealand, where the regional sales force grew by 10 times in seven years under his management.
The Tax and Accounting business of Thomson Reuters is a leading provider of technology and integrated information solutions to accounting, tax and corporate finance professionals. They focus on providing technology and integrated information and guidance to accounting, tax and corporate finance professionals in public accounting firms, corporations, financial institutions, law firms and governments.