Going forwards, or not, with GST Forward Compliance Arrangements.(Professional Updates: TAXATION LAW)

In early 2004 the then Commissioner of Taxation, Michael Carmody, departed from convention. Usually the ATO seeks to engage and educate taxpayers via tax practitioners and intermediate forums. (1) This approach is tried and true. It is also comfortable. Tax practitioners and tax officers talk the same arcane language of tax law and lore.

However, on 29 January 2004, Mr Carmody sent a personalised letter direct to each CEO of Australia's top 100 companies. This was an upfront attempt to place tax firmly on the board's agenda. (2) The timing of the letter followed the ASX's release of Principles of Good Corporate Governance and Best Practice Recommendations (the ASX Principles) in 2003. The pitch of the letter fell squarely within Principle 7 of the ASX Principles which emphasises the best practice requirement for a material risk management system. The current Commissioner, Michael D'Ascenzo, has continued this approach; a further letter was sent in December 2006.

Tax risk can become a material risk in two ways. First, the magnitude of a transaction may bring with it a commensurate sized tax exposure, where the interpretation of the tax law is uncertain or contentious (tax interpretation risk). Second, a minor flaw, or failure, in a company's accounting system may generate a tax risk due to the sheer volume of transactions (tax implementation risk).

These situations are particularly true of GST, which due to its relative youth retains both tax interpretation and tax implementation risks. Take, for example, a simple system error where a $12.50 shifting spanner is incorrectly coded as GST-free, rather than as taxable. If 400,000 of the items are shipped Australia-wide each year, this …