The Australian Accounting Standards Board (AASB) says that more Australian companies could be recognising amounts in dispute with the ATO in financial reports, under new guidance from the IFRS Interpretations Committee (IFRIC). The IFRIC guidance will be issued by the AASB shortly.
On 7 June 2017, the International Accounting Standards Board (IASB) issued IFRIC 23 Uncertainty over Income Tax Treatments to specify how to reflect uncertainty in accounting for income taxes. It is effective from 1 January 2019. The IFRS said it may be unclear how tax law applies to a particular transaction or circumstance, or whether a taxation authority will accept a company's tax treatment. IAS 12 Income Taxes specifies how to account for current and deferred tax, but not how to reflect the effects of uncertainty. IFRIC 23 provides requirements that add to the requirements in IAS 12 by specifying how to reflect the effects of uncertainty in accounting for income taxes.
The AASB says company 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, the AASB says 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 that the tax authority will accept the treatment, directors still need to assess whether disclosure of a contingent liability is necessary.
While the new guidance is not effective until 1 January 2019, the AASB recommends that all companies reassess whether to record a tax liability in their 2017 reporting.
Revenue Minister Kelly O'Dwyer has said that tax is a key Government focus, "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 that in applying the new rules, companies should consider the ATO's public guidance about what it is likely to dispute, as well as the ATO's success in determining the likely resolution of matters when it does raise disputes.
Mr Hirschhorn said that thanks to the ATO's improved management of disputes, it "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, he said, the ATO strongly encourages them to engage with it to obtain certainty "rather than be exposed to significant uncertain positions, which rarely improve with time".