The Australian Taxation Office (ATO) and Australian Prudential Regulation Authority (APRA) have made clear their views. Boards should understand the broad impact of tax throughout operations and be able to ask questions to manage and monitor tax risk.
Questions relating to tax compliance and after-tax performance management are intuitive and readily get an airing. However, what are relevant questions to ask regarding tax risk in unit pricing? To ask questions, Boards need an understanding of the tax risk trigger points.
A good place to start is to understand why:
- in a rising market tax negatively impacts on returns (except for pensioners)
- in a falling market tax positively impacts on returns (except for pensioners)
- tax always contributes to returns for pensioners and is not directly related to falling or rising markets
- in a falling market a deferred tax asset capping policy is critical.
The next step is to broadly understand the process for accruing tax in returns.
A lack of understanding of tax in unit pricing at a strategic level often contributes to underestimating the time and effort required to manage the associated risks in major projects such as a merger, custody or unit pricing transition. As in the Greek myth, pain may follow opening the Pandora’s Box of tax in unit pricing! There is, however, also hope - a future of better governance of the associated tax risk.