Directors will come under fresh scrutiny by the Australian Tax Office as the revenue authority seeks to build "justified trust" with the nation's top 1000 companies.
The move will change how the ATO approaches its tax review obligations with the level of enforcement determined by where a company sits in terms of its tax and risk control systems.
The term "justified trust" is borrowed from the OECD and premised on whether a "citizen" jury would be satisfied that everything had been done to ensure a company is paying the correct amount of tax.
Big four accounting and advisory firm KPMG said the ATO is taking the approach seriously and warned that company boards need to pay heed.
"[The ATO] has been given budget to audit the top 1000 Australian companies over the next four years – starting with the top 100 plus others this year," KPMG national managing tax partner David Linke writes in Wednesday's The Australian Financial Review.
According to Mr Linke, the ATO has adopted an expanded view of the directors' duties in relation to tax and will expect to see board-level "risk appetite and testing" frameworks for both federal and state taxes.
The "carrot" for companies in all of this is the prospect of light-touch approach by the ATO.
'Preventative medicine'
"Public companies with reputations to protect will see it as preventative medicine in the event their tax affairs become an issue," PwC tax partner Michael Bersten said.
"What's new is the ATO is rigorously building this into its reviews of corporate Australia and it is going to be systemically tested."
The ATO published a detailed guide to governance expectations in January.
There has been a mixed reaction to the justified trust approach, which deputy commissioner Jeremy Hirschorn previously framed in these terms: "If we were to tell a citizen jury what we had done to assure the tax paid by an individual company, would they be satisfied that we had done enough to make sure that the tax they have paid is correct?"
Directors have a clear responsibility to understand their company's tax obligations and risks, said Louise Petschler from the Australian Institute of Company Directors.
"The ATO has been clear for some time that it expects boards to oversee tax frameworks as part of their corporate governance responsibilities," Ms Petschler said.
Mixed response
Industry sources said the response to justified trust had been mixed. On the one hand there was optimism that well-behaved companies might be left alone but, on the other, concern it would just mean more red tape.
Moreover, the ATO's "risk differentiation framework" – the four quadrants of risk with Q1 being the highest and featuring only News Corp – will remain.
Tax barrister John Morgan said "justified trust" was a deliberately ambiguous concept.
"The Commissioner [Chris Jordan] speaks of the community having trust in the ATO but it really comes down to ATO having 'justifiable trust' in taxpayers," Mr Mogan said.
Justified trust is the latest in a transparency drive by governments and revenue authorities trying to prove they are tough on tax avoidance. The ATO now publishes annually taxable income and tax paid for the biggest public and private companies. The government has also asked companies to sign up to a tax transparency code.
