The Australian Taxation Office (ATO) continues to signal its increasing expectation that large private companies will move towards compliance with the stringent corporate governance frameworks required of public listed entities.

We are seeing the ATO, as part of their taxpayer reviews, actively looking at this area and the ways in which tax risks are being managed by companies. These risks range from technical tax matters to the tax implications across all aspects of a business from products through to technology – so this area cannot be ignored.

Time to revisit Governance

Many private companies already have governance arrangements in place depending on the size and nature of the business but with the introduction of increasing corporate transparency measures, it is worth revisiting your governance model to make sure it is still aligned with the vision and the objectives of the group and its owners. While you may well have a corporate governance policy in place, now is the time to get the adequacy of this policy critically evaluated given the ATO’s stance.

Having the right structures, processes and documentation in place is good business practice and supports improved business outcomes as the business itself, office holders and those in control are held to account. While it is needed for regulatory compliance, good financial control and risk management oversight is essential for those running their own business to ensure sustainable growth and realise opportunities from a position of strength. In an SME, there is often a high level of overlap between being a director on the Board, owning the business and running it, however there are differing roles and responsibilities attached to acting in each capacity.

ATO Director’s summary

The ATO included a Director’s summary section in the latest update of its Tax Risk Management and Governance Review Guide. This emphasised the role of Board directors in overseeing an organisation’s risk management framework as part of its overall approach to corporate governance. While this summary was aimed at helping large organisations develop and improve their governance and internal controls, there was some information for small and medium companies.

The guide targets both Board and management, and stresses the need for tax risks to be effectively managed as part of corporate governance to help flag, assess and manage tax and superannuation risks. Tax planning, compliance and risk management used to be handled by the CFO and finance team, but increasingly Boards, business owners and senior executives need to make sure that tax risk management is part of their governance purview.

As such a tax governance framework needs to be viewed in the context of the overall risk management and corporate governance framework which should be ratified by the Board. Having a corporate governance policy in place will be used by the ATO to determine your tax risk profile and the nature of their engagement with you and how frequently they will interact with you.

Tax risks are part of your overall risk management process

The Director’s summary provided further guidance on how a board should consider tax risks in their role of overseeing the risk management framework for their organisation. There are a multitude of processes to grapple with as part of any risk management framework and tax is no different. This includes processes around decision making on transactions, the technical and commercial experience of Directors, the execution of transactions and contracts, the preparation of lodgements with the ATO and the preparation and adherence to formal policies.

Tax risks come in many forms across a business. They should be assessed, tested and managed through policies and frameworks to mitigate risk. These controls and protocols need to be constantly utilised and revisited in practice to ensure they remain relevant and effective for the company’s current and future tax positions.

How we can help

At ESV, we can advise on your responsibilities in relation to corporate tax governance at every phase of your business lifecycle. We can help you to understand, and take responsibility for, the tax risks of companies you act for or work at. We have experience in corporate governance and risk management as directors of, and advisors to, Australian public and private companies. We combine this with our tax planning, compliance and management expertise to give you the whole picture. You can find out more about our Tax Risk Governance Services here.

Should you have further questions or need help with developing a corporate governance framework and a tax risk management policy please do not hesitate to contact your relevant ESV engagement partner on 02 9283 1666.