Risk differentiation framework fact sheet

How do we manage tax risk?
We use the risk-differentiation framework (RDF) to help us assess your tax risk and determine the intensity of our response in a coherent, consistent and considered way. It complements the compliance model, which suggests an appropriate choice of remedy.

The RDF is based on the premise that our risk management approach to tax compliance should take account of our perception of both the:

estimated likelihood of you having a tax position that we disagree with, or you (through error or omission) have misreported your tax obligations (as evidenced by your behaviour, approach to business activities, governance, and compliance with tax laws)
consequences of that potential non-compliance (dollars, relative influence, impact on community confidence).
We apply the framework on an economic group basis (where possible) because we do not categorise each individual large business. We consider an economic group to include all Australian-based entities that fall under a direct or indirect majority controlling interest, whether in Australia or overseas.

We place economic groups into one of four broad risk categories for each relevant tax type (income tax, GST, excise). Your categorisation is based on an informed professional judgment, at a point in time, of the risk and the relationship we have with you – relative to the population. The model then suggests an initial engagement and treatment stance, based on the quadrant you have been placed in.

Over the coming year we will be working with taxpayers to move the RDF from a compliance focus to a service focus.

Higher risk taxpayers
For higher risk taxpayers, we assign appropriate resources to allow for continuous review. Our activities may include comprehensive audit and other intensive risk analysis approaches. This will enable us to identify and understand risks as they arise and provide information about our possible concerns, allowing the taxpayer to make a more informed choice about their compliance approach.

While we take all relevant facts and circumstances of a case into account, if you are identified as a higher risk taxpayer we are more likely to use our formal powers of information gathering if you are not open and transparent with us.

Key taxpayers
If you are identified as a key taxpayer, we take a particularly close interest in your risk management and governance frameworks to mitigate tax compliance risks. We expect key taxpayers to fully disclose potentially contestable matters to us as they arise.

We will assign the necessary resources to ensure a good working relationship and increase our understanding of your business.

If a potentially contestable matter is identified, we will work with you to resolve the matter and evaluate your compliance with the law. We are less likely to use our formal powers of access and questioning for additional information, although we will escalate matters if we are unable to obtain the information and evidence needed to form a view in a timely manner.

Medium risk taxpayers
For taxpayers identified as medium risk, we will undertake targeted activities to deal with tax compliance concerns. These activities are more likely to be reviews and audits. We may contact you to seek assurance that a particular transaction has been treated correctly.

To achieve greater consistency in the way we address specific issues, we may use project-based approaches that group large businesses with similar tax risks. These risks are normally identified in our compliance program.

Lower risk taxpayers
The majority of large businesses have a lower risk categorisation. For these taxpayers, we monitor intelligence to confirm your lower risk categorisation. This can involve activities such as requesting targeted information about specific issues we have identified in the market, visiting you for information about business operations, and our normal internal review processes.

Risk differentiation framework fact sheet | Australian Taxation Office.