The term “uncertain” can have many meanings, however, it is vital that general purpose accountants understand and are aware of changes to the ATO’s definition of ‘uncertain’ as it relates to income tax treatments.
In recent years increasing scrutiny has been placed on disclosures in financial statements and corporate governance. As part of this scrutiny the disclosure of taxation positions has come to the fore with companies often adopting differing positions between financial statements and tax returns. As a result, Interpretation 23 Uncertainty over Income Tax Treatments has been released to provide guidance for annual reporting periods beginning on or after 1 January 2019.
Interpretation 23 provides guidance on how to apply the existing standard (AASB 112 Income Taxes) where there is uncertainty over the taxation treatment of a particular item or transaction. The Interpretation provides guidance with specific reference to determining what “uncertainty” is when ascertaining whether there is an “uncertain tax treatment”. Put simply, “uncertainty” is whether a tax authority will accept a position under law.
The Interpretation essentially provides a new methodology to determine whether a matter is “uncertain”, and therefore needs to be disclosed.
Under the revised approach, entities must now assume that tax authorities with rights to examine and challenge treatments will examine them closely and possess full knowledge of relevant information. As such, the measurement removes the unknown element of whether the tax authority will identify the issue and then have all the requisite information to make an informed decision.
Where an entity concludes that it is improbable that a taxation authority will accept an uncertain treatment, the effect of uncertainty needs to be considered in determining the disclosure of the position adopted. Entities will now be required to measure the effect using the method that best predicts its resolution.
In addition to new matters being subject to the revised criteria, reassessment of existing positions is required on an annual basis, where there is a change of circumstances.
Any uncertain tax treatments must be documented and submitted for audit. The Interpretation may also result in prepayments of tax in respect of uncertain tax treatments and how interest and penalties are accounted for in such circumstances.
The disclosure changes required may prove challenging for preparers whilst providing additional issues for audit committees and boards to consider.
If you need assistance in determining whether existing or new positions meet the disclosure requirements or assessing the correct tax treatment, please contact your ESV engagement partner on 02 9283 1666.