Apply our 7 principles of effective tax governance to ensure tax and super obligations are met.
Last updated 20 December 2022
Apply our 7 principles of effective tax governance to support decision making and ensure tax and super obligations are met.
Core elements of effective tax governance
Effective tax governance means having clear processes and procedures in place in a corporate governance framework to support decision making and to ensure that the group is meeting its tax and super obligations. For a large private group to have effective tax governance, it's important that the following 3 core elements are present across each of the 7 principles of effective tax governance:
- existence
- design effectiveness
- operational effectiveness.
Elements | Explanation |
|---|---|
Existence – a tax control framework, and the processes and procedures in the framework, exist | There is a system or a way of doing things that results in consistent outcomes. |
Design effectiveness – the framework, processes or procedures in the framework have been designed effectively | The system is designed effectively to ensure that the correct amount of tax is paid. It also identifies and mitigates tax risks, having regard to the client's group. We expect that the framework is documented for it to be designed effectively. |
Operational effectiveness – the framework, processes and procedures are operating effectively | Where the framework is well designed, the framework, processes and procedures must also operate effectively in practice in ensuring that compliance obligations are met, and in identifying and mitigating tax risks. |
The 7 principles that should be present in an effective tax governance framework are:
- Principle 1: Accountable management and oversight
- Principle 2: Recognise tax issues and risks
- Principle 3: Seek advice
- Principle 4: Integrity in reporting
- Principle 5: Professional and productive working relationship
- Principle 6: Timely lodgements and payments
- Principle 7: Ethical and responsible behaviour
Principle 1: Accountable management and oversight
Roles and responsibilities are clearly defined and understood in terms of accountability for tax administration and decision making.
You understand your tax and super obligations, including registrations, lodgment, reporting, payment and record keeping obligations.
Where responsibility for tax governance is shared with your tax advisors, ultimately you as the business owner are confident that you understand your tax advisor's role in meeting your tax and super obligations.
This may include:
- clearly defining roles and responsibilities through organisational charts, role descriptions, lodgment calendars or procedure documents that cover all key tax obligations for your group
- clearly defining the role of external advisors through engagement letters, agreed scope of work and lodgment calendars. It may be useful to ensure that the tax issues that arise from the group's ongoing transactions are captured in the scope of work.
- procedures to ensure tax obligations are met, and that the group has sufficient financial capacity to meet its tax obligations as they fall due.
Principle 2: Recognise tax issues and risks
Appropriate processes and procedures are in place to support compliance with the group's tax and super obligations and that help the group identify and manage tax issues that arise from their activities before they become tax risks.
Tax considerations are included in your decision-making processes and you're alert to the consequences of the decisions that are made. Material transactions are well documented and subject to appropriate review and sign off for tax risk management purposes. Where tax issues or tax risks – have been identified, there is a plan to manage those issues or risks and limit the impact on your business.
A thorough review process considers the ATO's published view and identifies potential differences of opinion that may give rise to a dispute. The risk of a dispute with the ATO over a difference in law or factual interpretation is identified early and steps are taken to engage with us.
Compliance obligations
Having regard to the activities and type of entity, this should include having a documented process to prepare income tax and FBT returns, and business activity statements (BAS):
- To the extent returns and the BAS are prepared in-house, there are end-to-end procedures that include
- how data is extracted and who is responsible to ensure the correct data sets are used
- how to ensure that the correct tax treatments are applied to material ongoing and atypical transactions
- consideration of the ATO view, including in treating material ongoing transactions
- how to prepare the tax reconciliation calculations and guidance on how they are linked to tax return disclosure items
- referencing and reconciliations to accounting reports, workpapers or source documents
- separation of duties in the preparation and review processes.
- Where tax agents are engaged to prepare returns, there are procedures that include
- effective controls to ensure that accurate data and information is provided to external tax agents (where relevant)
- review of deliverables including management letters, returns and lodgment status to ensure that the work performed is consistent with the agreed scope and that tax obligations are met.
Considering tax in decision making
Having regard to the activities and type of entity, you need a documented process to:
- ensure tax is considered and documented as part of your decision-making – it may be useful to consider a defined list of transactions that are material in the context for your group and whose treatments require approval from certain persons
- show that the governing body (for example, the Board of Directors) has endorsed a tax governance framework.
Principle 3: Seek advice
Clearly defined arrangements are in place for escalating tax issues and seeking tax advice. Consulting published ATO guidance and engaging with us early for tailored advice where more certainty is needed.
This may include having a documented process to:
- explain the clear escalation thresholds which could include quantitative and qualitative factors, for when and how to seek external advice in a consistent way
- inform advisors of significant changes or atypical transactions
- ensure facts and assumptions that advice is based on is accurate, complete and not superseded
- consider ATO published guidance and advice
- explain the clear thresholds for when and how to engage with the ATO and where pre-lodgment positions are agreed to, lodge according to the agreed position.
Principle 4: Integrity in reporting
Owners or managers can form a view of whether the financial records of the business, including tax reporting, reflect a true and fair view. Tax positions align with the law. Tax outcomes either reflect economic performance or can be explained by other factors.
Systems and controls are in place to ensure accurate reporting, and these controls are reviewed periodically to ensure they remain effective. Good record-keeping practices are followed to maintain important documentation for the relevant periods, and to ensure that information is easily accessible.
This may include having a documented process to:
- monitor and explain significant differences between income years, and between accounting or economic outcomes and the tax return
- periodically review systems and controls in place to ensure the controls are operating effectively
- ensure effective record keeping
- form a view that financial records are true and fair
- Where financial accounts are audited, an unqualified report is provided to support the financial accounts.
- Where financial accounts are not audited, they may be reviewed by an external advisor. In this case, the scope of the review should be sufficient to identify material errors.
Principle 5: Professional and productive working relationship
You have an open, transparent, respectful and professional working relationship with the ATO.
Through our engagement with you or your advisers, we aim to create a seamless working relationship to resolve any issues and avoid disputes.
Principle 6: Timely lodgments and payments
Effective tax governance is demonstrated by meeting obligations including lodgment and payment obligations in full and on time. Timeframes are set for tax lodgments and payments.
Tax liabilities are well managed and paid on time. You engage with us when you're unable to pay on time and you have a valid reason for being unable to do so.
Principle 7: Ethical and responsible behaviour
Acting ethically and responsibly – with honesty, integrity and in a way consistent with the reasonable expectations of the broader community and the taxpayers' charter.
Ethical and responsible behaviour involves more than mere technical compliance with the law. Effective tax governance not only ensures accurate reporting, but helps avoid behaviours associated with tax manipulation, avoidance and schemes.
More information:
- Working with the ATO
- How we assess tax governance for Top 500 privately owned groups
- Effective tax governance criteria for Top 500 private groups
- Next 5,000 private groups tax performance program
Apply our 7 principles of effective tax governance to support decision making and ensure tax and super obligations are met.
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I bring to this discussion a robust background in tax governance, having actively engaged in advising businesses on effective tax management strategies and contributing to the development of comprehensive tax governance frameworks. As an expert, my hands-on experience spans various industries, and I've consistently demonstrated a deep understanding of tax principles, compliance obligations, and strategic decision-making in the realm of taxation.
Now, let's delve into the concepts presented in the article, applying the 7 principles of effective tax governance:
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Existence, Design Effectiveness, and Operational Effectiveness:
- Existence: Refers to the presence of a tax control framework and related processes. This implies that there is a structured system in place for consistent outcomes.
- Design Effectiveness: Encompasses the efficient design of the framework to ensure correct tax payments, risk identification, and mitigation. Documentation is crucial for effective design.
- Operational Effectiveness: Involves the actual functioning of the framework, ensuring compliance obligations are met and tax risks are identified and managed in practice.
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Principle 1: Accountable Management and Oversight:
- Clearly defines roles and responsibilities for tax administration.
- Ensures understanding of tax and super obligations, with shared responsibilities outlined for tax advisors.
- Establishes procedures to guarantee tax obligations are met and financial capacity is in place.
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Principle 2: Recognize Tax Issues and Risks:
- Requires appropriate processes for compliance with tax and super obligations.
- Demands the inclusion of tax considerations in decision-making processes.
- Emphasizes thorough review processes, including engagement with tax authorities to manage potential disputes.
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Principle 3: Seek Advice:
- Establishes arrangements for escalating tax issues and seeking advice.
- Emphasizes consulting published ATO guidance and seeking tailored advice when needed.
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Principle 4: Integrity in Reporting:
- Ensures financial records, including tax reporting, reflect a true and fair view.
- Requires systems and controls to ensure accurate reporting, periodic reviews, and good record-keeping practices.
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Principle 5: Professional and Productive Working Relationship:
- Advocates for an open, transparent, and professional relationship with tax authorities.
- Aims for seamless engagement to resolve issues and avoid disputes.
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Principle 6: Timely Lodgments and Payments:
- Demonstrates effective tax governance by meeting lodgment and payment obligations on time.
- Requires proactive engagement with tax authorities if unable to pay on time.
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Principle 7: Ethical and Responsible Behavior:
- Emphasizes acting ethically and responsibly, beyond mere technical compliance.
- Fosters effective tax governance to prevent behaviors associated with tax manipulation, avoidance, and schemes.
In conclusion, applying these principles ensures a comprehensive and effective tax governance framework, promoting compliance, risk management, and ethical behavior in the context of taxation.
