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4 Jul. 2017

More companies should report on tax liabilities

More Australian companies could be recognising amounts in dispute with the Australian Tax Office (ATO) in financial reports, under new guidance from the IFRS Interpretations Committee (IFRIC). The IFRIC guidance will be issued by the Australian Accounting Standards Board (AASB) shortly.

Directors are now required to continually assess the aggressiveness of tax positions taken. They must assume the tax authority has full knowledge of all the relevant facts, regardless of whether their companies have had or are likely to have a tax audit, or are likely to be issued an amended assessment.

If it is probable that the tax authority will not accept the company’s treatment, a tax liability for the expected settlement amount must be recognised in the Statement of Financial Position, with an associated tax expense. Even if it is probable the tax authority will accept the treatment, directors still need to assess whether disclosure of a contingent liability is necessary.

Minister for Revenue and Financial Services Kelly O’Dwyer says, “Tax is a key focus of the Australian Government, so it is good to see an increased emphasis on encouraging clearer disclosures by corporates of areas of tax uncertainty in their financial statements.”

AASB Chair Kris Peach said, “The probability threshold is now being applied at an earlier point and could result in more tax liabilities being recognised. Previously, a tax liability was only recognised if the directors assessed it was probable that the entity would be required to pay additional tax.”

ATO Deputy Commissioner Jeremy Hirschhorn said “In applying the new rules, companies should have regard to ATO public guidance as to what we are likely to dispute, as well as to the ATO’s success in disputed matters in determining the likely resolution when we do dispute.

Thanks to our improved management of disputes, the ATO has a success rate in matters that ultimately go to litigation of more than 75%, and a recent track record in settled matters of recovering about 75% of the disputed tax on average. When companies are in doubt as to their tax positions, we strongly encourage them to engage with us to obtain certainty rather than be exposed to significant uncertain positions, which rarely improve with time."

ASIC Commissioner John Price says, “Tax is a focus area for ASIC’s review of financial reports as at 30 June 2017. Directors should consider the appropriate treatment of uncertain and disputed tax positions in financial reports, including whether there is a need to recognise a liability or disclose a contingent liability.”

Listed companies will also need to ensure they appropriately disclose uncertain and disputed tax positions under their continuous disclosure obligations.”

While not effective until 1 January 2019, it is recommended that all companies should reassess whether to record a tax liability in their 2017 reporting.