Company directors to make ‘uncomfortable’ tax disclosures

Companies will have to disclose “uncertain” tax positions, including amounts disputed by the Australian Tax Office, under new accounting rules designed to increase information available to investors.

Australia will adopt international accounting guidance with effect from 2019 that RSM Australia national technical director Ralph Martin said would result in some “uncomfortable” disclosures by company directors.

“Where you have a tax position you’re not certain about, either because there is no precedent or it’s under dispute with the ATO, directors are going to have to make their best estimate of the likely outcome and provide that amount in the financial statements,” he said.

“If you think you only owe $1 billion but the Tax Office thinks that amount is closer to $2 billion, that’s going to be a very uncomfortable disclosure to draft and sign off on.”

Regulators are enthusiastic about the change and urged directors to act now rather than wait for the standard to become mandatory.

“Directors are now required to continually assess the aggressiveness of tax positions taken,” Australian Accounting Standards Board chair Kris Peach said.

“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,” she said.

AASB advises that if it is “probable” that the tax authority would not accept the company’s tax position, a liability for the expected settlement amount had to 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.”

Australian Securities and Investments Commission commissioner John Price said tax was a focus of the regulator’s review of financial reports this year.

“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,” he said.

Tax Institute Senior Tax Counsel Bob Deutsch said directors of public companies would have to ensure contentious tax issues were disclosed.

“This is likely to result in more early disclosures of doubtful positions,” he said, pointing to the recent Chevron transfer pricing case.

“The rules might bite where a company has borrowed on certain terms from its related foreign parent where there is almost always uncertainty about whether the terms are arms length from a transfer pricing perspective.

“Disclosure of such uncertainty is likely to be required under these new rules.”

ATO deputy Commissioner Jeremy Hirschhorn said directors should look to the Tax Office’s success in previous disputes to help them determine the likely outcome of any action.

“Thanks to our improved management of disputes, the ATO has a success rate in matters that ultimately go to litigation of more than 75 per cent, and a recent track record in settled matters of recovering about 75 per cent of the disputed tax on average,” he said.

“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.”

The Australian Institute of Company Directors declined to comment because it the AASB had yet to release the full guidance.