As we enter the new financial year, it has never been more important for the controllers of Australian large and small and medium-sized enterprises (SME) to consider the Justified Trust methodology applied by the Australian Taxation Office (ATO) and ensure they have a sound understanding and appreciation of its implications for their controlled businesses.

What is Justified Trust?

Justified Trust is a concept first espoused by the Organisation for Economic Co-Operation and Development (OECD) that has been applied by the ATO since 2016. The ATO’s application of Justified Trust commenced through its assurance reviews of Top 100 taxpayers, and has gradually expanded to other assurance review programs, including those referable to privately-held groups (e.g., Top 500 and Next 5000 assurance reviews).

Broadly, Justified Trust represents a departure from the time-consuming issues-based reviews of the past, and instead focusses on the efficacy of tax risk management processes, with the underlying assumption being that effective processes should generally produce appropriate tax outcomes. By applying Justified Trust, the ATO seeks to provide the community confidence that in-scope business taxpayers are paying the right amount of tax.

How does the ATO apply Justified Trust?

For a taxpayer to achieved Justified Trust, the ATO must obtain objective evidence that would lead a reasonable person to conclude the taxpayer has paid the right amount of tax. This is considered a higher level of assurance than simply confirming certain risks are absent.

The ATO’s Justified Trust methodology focusses on the four areas set out in the following table, with the first (understanding a taxpayer’s tax governance framework) arguably paramount:

Understanding a taxpayer’s tax governance frameworkConfirming the existence, application and testing of a tax risk management and governance framework
Identifying tax risks flagged to the marketReviewing whether risks or concerned communicated to the market (e.g., through Taxpayer Alerts) are present
Undertaking significant and new transactionsUnderstanding a taxpayer’s current business activities, particularly significant or new transactions, and the tax outcomes
Understanding why tax and accounting results varyAnalysing the various streams of economic activity and how they are treated for taxation purposes.

Notably, achieving a ‘Stage 2’ rating for tax risk management and governance, which means there is evidence to demonstrate that an effectively designed tax control framework exists, is a conditiontrust precedent to an overall ‘high’ assurance from the ATO. This demonstrates the centrality of tax risk management and governance to the ATO’s Justified Trust approach.

Taxpayers should be aware that the ATO adopts a different approach, and different guidance applies, depending on the relevant taxpayer segment. For example, the ATO will apply its Tax Risk Management and Governance Review Guide1 and GST Governance, Data Testing and Transaction Testing Guide2 , both of which are highly prescriptive, to Top 100 and Top 1000 taxpayer (i.e., large public companies), but will apply its seven principles of effective tax governance to Top 500 and Top 5000 Private Groups3.

Why it matters

Not only does having in place an effective tax risk management framework and achieving Justified Trust enables taxpayers to avoid the pitfalls of ineffectively managed tax risk, such as reputational risk, potential financial exposure and resource-intensive disputes, the ATO also applies a lighter-touch ‘monitor and maintain’ approach to such taxpayers for the two income years following the attainment of Justified Trust, whereafter it seeks to refresh its confidence that Justified Trust has been maintained. The benefits of this should not be underestimated.

How we can help

RSM Australia has significant experience in assisting clients of all sizes and across all industries in achieving and maintaining Justified Trust. Please do not hesitate to contact your local RSM advisor should you wish to discuss.

1 Tax risk management and governance review guide 
2 GST Governance, Data Testing and Transaction Testing Guide 
3 Seven principles of effective tax governance