Tax Brief - ATO Access to Board Papers on Tax Compliance Risk

The ATO has released a Practice Statement (Practice Statement) setting out its access policy for company board papers relating to taxation risk. The Practice Statement considers advice to the Board that addresses tax risks associated with both specific transactions and internal compliance systems. The Practice Statement was released on 23 December 2004 during the December season of desk clearing announcements by the ATO and Treasury before the employees involved take their break for summer holiday. Which leaves those affected by the announcements to take any necessary action during their holidays.

The Practice Statement does not offer a great deal of new information or protection:

• it is limited to documents created by advisors for the sole purpose of providing advice or opinion to the board (or committees of the board) on tax compliance risks;
• it largely follows and extends existing practice in relation to accountants’ work papers;
• it is subject to an exceptional circumstances qualification which is effectively decided by the ATO;
• it is not legally enforceable in the same way as legal professional privilege; and
• it does not override existing protections such as legal professional privilege.

From an ATO perspective the Practice Statement is one outcome of the renewed focus on auditing of taxpayers which included the letter the Commissioner wrote to the chairs of listed companies in early 2004 discussing the issue of tax risk.

Corporate board documents on tax compliance risk are defined as documents:

• created by advisors (being suitably qualified in-house or independent advisors);
• created for the sole purpose of providing advice or opinion to the board of directors (including properly constituted sub-committees) on tax compliance risks and their likelihood and impact; and
• that address tax risks associated with major transactions and arrangements and/or tax risks arising from corporate systems and processes.

The practice statement states that the ATO will not seek access to such papers during a risk review or an audit, except in “exceptional circumstances”. It is silent about access on other occasions, for example, the discovery process during litigation.

Much of the tax advice obtained by companies is obtained for the company generally usually via its tax or legal staff who then decide if the advice should be escalated to the board. For such documents other protections will need to be relied on such as legal professional privilege or the ATO guidelines on professional accounting advisers’ papers (the Guidelines). If a tax manager summarises the advice for the board as part of the risk assessment of a transaction by the board, then the summary would be protected. A document that records a transaction or arrangement is not a protected type of document.

The protection continues to apply even if the documents are disclosed to third parties provided the disclosure is for the purpose of better management of tax risks, for example, for a second opinion, and on a confidential basis.

The Practice Statement gives three examples of exceptional circumstances when the ATO will seek access to such documents:

• the taxpayer has not cooperated with the Tax Office to furnish full and complete information in a timely manner,
• information important to the risk review or audit, including evidence as to purpose for entering into or carrying out a transaction or arrangement, cannot be sufficiently established from the taxpayer's source documents and other enquiries, or
• the taxpayer has a history of serious non-compliance, for example involving fraud or evasion or persistent avoidance of their tax obligations, or is under investigation in that regard.

Although a process is provided for working out when exceptional circumstances apply, it is very much in the eye of the beholder whether or not there are exceptional circumstances. For example, in the past when applying the Guidelines, the ATO has considered and the court has upheld that exceptional circumstances may exist where the ATO considers the general anti-avoidance provisions apply. 

If the ATO officers conducting the review or audit wish to invoke exceptional circumstances to deny the protection, then it is necessary for them to obtain a sign-off to that effect from a senior ATO staff member not involved in the review or audit process. The courts have considered that where the ATO considers that “exceptional circumstances” exist under the Guidelines, the ATO should afford procedural fairness to the affected taxpayer. It is likely that a similar conclusion would be reached in relation to the Practice Statement. However, this may provide little comfort to an affected taxpayer.

To claim the protection, it is necessary for the company to do so on a document by document basis and provide basic information about the documents to the ATO.

If the protection is claimed by a company during a risk review or audit and the ATO is not willing to agree that the protection applies, then the documents over which there is a disagreement are to be sealed and secured with the company’s or ATO’s professional representatives provided they give an undertaking not to access the documents without the permission of the company and the ATO.

The ATO and the company then arrange for a joint cursory examination of the documents to seek agreement on whether they are or are not protected. If this does not settle the issue then the ATO may engage an independent third party to advise the ATO on whether protection applies.

If the disagreement remains unresolved, then the ATO may proceed to access the document (assuming that there is no other basis of protection). In this process the ATO may exclude parts of documents which do not relate to the risk review or audit by the ATO.

In many situation companies may be happy to disclose documents to the ATO even though there are potential protections available including this protection for board documents on tax risk.

Unfortunately tax risk is such a complex and specialised area that ordinary risk management processes may not be sufficient to deal with it. If companies have recently addressed tax risk processes, perhaps arising out of the 2004 letter from the Commissioner, it is timely to check that the processes enable ready identification of the board papers that may attract protection under the practice statement. If companies have not given specific attention to tax risk, now may be an appropriate time to do so.

If a risk review or audit is notified by the ATO, then most companies will want to know what documents may have protection, even if it is ultimately decided to disclose some of them. If a risk review or audit is already underway then companies should consider whether additional protection for their tax sensitive documents is available under the Practice Statement.

For further information, please contact,

Andrew Mills
61 2 9225 5966
andrew.mills@gf.com.au

Michael Moschner
61 2 9225 5969
michael.moschner@gf.com.au

www.gf.com.au