This audit assessed the effectiveness of the Australian Taxation Office’s administration of annual compliance arrangements with large corporate taxpayers.
Audit objective and criteria
To form a conclusion against this objective, the ANAO adopted the following high-level criteria:
- the governance arrangements for ACAs are well planned and effective;
- there are sound processes for identifying entities to enter into an ACA;
- results achieved to date reflect initial expectations of ACAs; and
- individual ACAs are effectively administered, in accordance with internal policies and procedures, to achieve intended benefits.
ACAs were introduced in 2008 in response to feedback from large corporate taxpayers that they were looking for a ‘no surprises’ approach in relation to their tax positions. Built on the premise that taxpayers would have sound tax governance arrangements and provide full and true disclosure, ACAs aim to provide taxpayers with greater practical certainty of their tax positions. The ATO sees ACAs as the premium cooperative compliance arrangement for large corporate taxpayers. As such, they are closely aligned with the ATO’s 2020 vision, which embraces real-time engagement and disclosure as well as a lighter touch for compliant taxpayers.
The effective administration of ACAs relies on judgements by the ATO as to the soundness of the governance arrangements put in place by large corporate taxpayers, the reliability of the information they disclose on significant matters affecting their taxation liability, and the review of this information by the ATO on an annual basis. While not without risks to both parties, this approach is consistent with contemporary international practice of building cooperative relationships with those larger corporate taxpayers considered willing to meet their tax obligations and unlikely to be involved in aggressive tax planning practices. ACAs have also delivered benefits to participating taxpayers. These taxpayers advised the ANAO that the arrangements have provided greater certainty for more straightforward taxation matters and improved the ATO’s responsiveness to their concerns.
Notwithstanding the positive experiences of participating taxpayers, take-up of ACAs has been low. In 2013–14 only 24 of the 158 potentially suitable key taxpayers (15 per cent) had an ACA, and six of these taxpayers would not be categorised as ‘key’ under the current risk assessment arrangements. As such, ACAs have not been the centrepiece of cooperative collaboration with large corporate taxpayers as envisaged when introduced, but do provide an alternative approach for large corporate taxpayers to engage with the ATO on potentially contentious tax matters. Most large corporate taxpayers are aware of ACAs as a result of the ATO’s promotional efforts but prefer to be subject to alternate compliance activities, such as pre-lodgment compliance reviews, instead of voluntarily entering into an ACA.
Taxpayers have advised the ANAO and the ATO that the main reason for not entering into an ACA was the relatively high cost of meeting the requirements of the ACA, particularly at the entry phase. They perceived other compliance activities to have similar benefits but lower administrative demands. Although the ATO has not quantified the cost of participating in or administering an ACA, it recognises these concerns, and is looking to better tailor the intensity of its compliance activity to the assessed risk, as envisaged in its 2020 vision.
ACAs currently provide a differentiated means by which the ATO can engage with large corporate taxpayers. If ACAs are to be positioned to maximise the participation of suitable large corporate taxpayers, it will be important for the ATO to reassess the extent of differentiation, taking into account the costs and benefits to taxpayers and itself. In this regard, the ATO will also have to decide whether ACAs are to be positioned more as part of the spectrum of compliance approaches going forward rather than as the centrepiece of cooperative collaboration as initially envisaged.
In administering existing ACAs, shortcomings in recordkeeping and oversight have meant that the ATO could not readily demonstrate: the extent and outcomes of its efforts to gain assurance over taxpayers’ governance arrangements; the number, nature and treatment of disclosures; or success in encouraging higher levels of compliance on the part of those large corporate taxpayers with an ACA. Accordingly, the ATO has not administered ACAs as effectively as it could have, particularly when these arrangements were viewed as a flagship measure that provided a new and innovative way of engaging with large corporate taxpayers.
Issues surrounding the design and administration of ACAs have been raised in recent internal and external reviews, in line with the findings of this audit. It is apparent the ATO needs to act on these findings to improve the effectiveness of ACAs if they are to achieve the benefits envisaged when the arrangements were introduced in 2008.
Further, the ANAO has made two recommendations aimed at improving the design of ACAs, and the ATO’s recording of taxpayers’ disclosures of contentious tax positions and how they were dealt with through ACA processes.