On 8 November 2016, the ATO put the following article on its website on the (I think) deliberately ambiguous notion of ‘justifiable trust’. It is ambiguous in that it is dressed up as the public having ‘justified trust’ in the ATO (that there is no ‘gap’ between what they do collect and what they ought). But it really amounts to the ATO establishing ‘justifiable trust’ in taxpayers (starting from the biggest down). This is really ‘re-birthing’ Quadrant Analysis.

The ATO’s web article

Justified trust is a concept from the Organisation for Economic Cooperation and Development (OECD). It applies to how we engage with large market clients.

It involves asking: ‘If we told the community how we assured the tax paid by a taxpayer, would they be satisfied we did enough?’

Justified trust builds and maintains community confidence that taxpayers are paying the right amount of tax. It also allows us to focus our resources in the right areas.

How we achieve justified trust

To achieve justified trust, we seek objective evidence that would lead a reasonable person to conclude a particular taxpayer paid the right amount of tax. This is a higher level of assurance than confirming certain risks do not arise.

When engaging with a taxpayer, we review the following four key areas.

  1. Understanding a taxpayer’s tax governance framework [1]

We confirm the existence, application and testing of a tax risk management and governance framework. We recognise entities use different governance practices based on a range of factors, including their: size; ownership; complexity; industry; history and corporate culture.

  1. Identifying tax risks flagged to the market [2]

We look for risks or concerns we communicated to the market (for example, through Taxpayer Alerts, Practical Compliance Guidelines, or Public Rulings).

  1. Understanding significant and new transactions [3]

We seek to understand a taxpayer’s business activities, particularly significant or new transactions, and the tax outcomes.

  1. Understanding why the accounting and tax results vary [4]

We analyse a taxpayer’s various streams of economic activity, to understand holistically the accounting and tax treatments (and the differences). For example, we analyse:

  • the Effective Tax Borne (ETB) and global value chain to understand the variance between accounting and income tax results
  • sales and acquisitions data and compare this to net GST paid.

Intended outcomes from our approach to justified trust

Justified trust gives the community confidence that large businesses are paying the right amount of tax. This fosters broader willing participation and engagement across the tax and superannuation system.

Our approach helps us focus how we minimise the tax gap through:

  • our engagement strategy (for example, identifying and resolving areas of concern at the earliest possible time)
  • active compliance (for example, audit cases)
  • active prevention across the market (for example, through Taxpayer Alerts, Practical Compliance Guidelines, or Public Rulings).

[ATO website – Justified Trust] [LTN 216, 8/11/16]