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Making preparations and implementing strategies ahead of time can generate more favourable outcomes from ATO reviews, says a specialist law firm.
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Law firm flags risk mitigation strategies for ATO audits
25 March 2024
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For tax professionals with clients that fall into ATO’s Next 5000 program, Cooper Grace Ward Lawyers said they must have a deep understanding of their clients’ businesses and the priorities of the ATO.
Tax professionals with large company clients that fit into the $50 million controlled wealth criteria should be operating on the basis that the client is very likely to be subject to an ATO review, said CGW special counsel Murray Shume.
Shume said it is important that tax professionals think about risk mitigation strategies they can put in place before the ATO initiates the review.
“It’s much easier to do something before than during the review or audit by the ATO, he said, speaking at the CGW Annual Adviser Conference.
“We can consider strategies such as voluntary disclosure, private binding rulings, letters of advice, preparing documentation and tax governance structures,” said Shume.
However, Shume said in some cases it will be a balancing act between reward and risk.
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“With voluntary disclosure, for example, if we make a voluntary disclosure well we’re going to have to pay tax on that voluntary disclosure. However, if we make that disclosure we will likely have an 80 per cent decrease in any penalties and at least a chance of remission with any remaining penalties,” he said.
“So we may want to do that or not. It’s important to understand what the consequences are.”
Another issue that tax professionals will need to think about is whether to get a private ruling for issues that the ATO may find contentious.
“We need to think about the advantages and disadvantages of getting a private ruling. A big advantage is getting certainty on the ATO’s position. The big disadvantage is that if the ATO don’t agree with our position then we’ve got a private ruling which specifies what it should be which we may not agree with,” he said.
A letter of advice is another strategy that can be helpful if the ATO does conduct a review of the company, he said.
“That way, if the ATO does come for a review and questions what you’ve done about a particular situation, you can provide a letter that states it’s alright,” said Shume.
“In our experience, often if you come in prepared with some kind of reasonable position, it is easier for the ATO to tick the boxes they need to. You’ve also got the advantage of mitigating penalty risks if you have a reasonably arguable position.”
It is also critical that businesses have all their documentation in place such as loan agreements, service agreements and transfer pricing.
“If we’re relying on simplified transfer pricing documentation, then we need to have the evidence to show that we have actually satisfied the criteria to be able to use that method of simplified transfer pricing,” he added.
Tax governance structure is another critical part of preparing for a potential review, he said.
“The ATO has outlined seven principles of effective tax governance which tells you what the ATO is looking for,” said Shume.
“What they’re generally after is a clear process of procedure in place in relation to managing tax risks.
“These are all things that we can put in place before the ATO comes to help and things that the ATO will be looking for when they're trying to tick a box in relation to some of those issues,” he said.
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