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  • Findings report Reportable tax position schedule Category C disclosures

    Companies are required to provide a range of information and disclosures to us each year. The base level of information they provide is contained in the company tax return. There are several schedules to the return, providing more detail on specific aspects of company tax, such as the International dealings schedule. Certain significant global entities are also required to provide information through country by country (CBC) reports and general purpose financial statements.

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    Reportable tax position schedule

    The Reportable tax position (RTP) schedule was introduced as a schedule to the company tax return in 2011. This schedule gathers information on uncertain tax positions from the largest public and multinational companies. It was later expanded to include disclosures of arrangements considered to pose a systemic risk to the corporate tax base. This often involves questions related to tax avoidance or profit shifting, or both.

    The RTP schedule has three categories:

    • Category A – requiring disclosures of material positions that are either
      • about as likely to be correct as incorrect, even if they are reasonably arguable
      • less likely to be correct than incorrect.
       
    • Category B requiring disclosures of material tax related provisions, current tax liabilities or contingent liabilities recognised and/or disclosed in accordance with accounting principles in financial statements
    •  
    • Category C – requiring disclosures of
      • specific arrangements of concern
      • self-assessed risk ratings for arrangements covered by our practical compliance guidelines (PCGs).
       

    In this report, we provide the aggregated disclosures made by companies for 2017–18 to 2019–20 income years under Category C of the schedule. These disclosures reflect the vast majority of disclosures made by companies.

    The data provides insights to types of arrangements large companies are entering into. Some display the range of risk levels across the lodging population as self-assessed by taxpayers. However, this level of risk may not correspond with our assessment of the disclosed arrangements.

    This is the second year of publishing this report and we have included high level observations on trends over three years of data for the 2017–18 to 2019–20 income years, where practicable. Generally, there has been a significant increase in taxpayers making disclosures and an upward trend in low risk disclosures.

    The data shows that high-risk or arrangements of concern aren’t prevalent among large public and multinational businesses. This finding is consistent with our view that most large businesses do the right thing and are paying the right amount of tax. It is also reflected in our estimate of the large corporate groups income tax gap.

    For 2018–19, we estimate a gross gap of 8.3%, which is the gap prior to considering the impact of our engagement. We estimate a net gap of 4.3%. This reflects the final amount of income tax uncollected after impacts of our action.

    While the data from RTP schedule disclosures and the tax gap estimates indicate high levels of voluntary compliance, we still see room for improvement. We will continue our scrutiny of the large corporate groups population to ensure their continued compliance. We will also deal appropriately with the small minority who choose to do the wrong thing.

    See also:

    The role of the RTP schedule in our large public and multinational business compliance program

    Under the Tax Avoidance Taskforce, we continually monitor and review the tax performance of Australia’s largest businesses. We focus our efforts on the top 1,100 public and multinational businesses, as collectively they contributed more than 60% of the total corporate tax reported in 2019–20.

    The RTP schedule plays an important role in our compliance program. It aids both detection and prevention of the proliferation of high-risk tax arrangements and tax avoidance schemes. We review all disclosures made and, where required, undertake more detailed investigations to understand and resolve any compliance risks.

    We use disclosures to better understand the prevalence of new and emerging issues and key tax risks across the large business population. This enables us to understand and assess the impact of our risk, advice and guidance, and compliance programs. We then adjust these, where necessary, based on the insights we have gained.

    The role of the RTP schedule in a company’s tax risk governance

    The RTP schedule can play an important role in the tax risk governance framework of large companies. It is a useful tool for tax functions, risk committees, chief financial officers (CFOs) and boards to understand the tax risk profile of their organisation across key system risks.

    RTP schedule disclosures can highlight potential areas of dispute with us. Conversely, they may provide a board with the confidence we are unlikely to undertake an intensive review of their arrangements. Where RTP disclosures show a high-risk rating for an arrangement, or an arrangement having the same or similar characteristics to those within a taxpayer alert, we encourage companies to review and amend these arrangements to reduce their level of tax risk. This will improve their own and our confidence in those tax positions.

    Our report will allow large companies to understand their risk profile across key system risks relative to that of their peers. This provides an important sense check to organisational thinking as to the relativity of their tax risk profile.

    Who needs to lodge an RTP schedule?

    RTP schedules are lodged at the same time as the company tax return. Taxpayers who meet the lodgment criteria are required to lodge a schedule even if they have no reportable tax positions to disclose. Administrative penalties may apply if a taxpayer fails to lodge a schedule when they are required to do so. We monitor the lodgment of RTP schedules and follow up taxpayers that don’t lodge as part of our non-lodgment program.

    Companies are required to self-assess against the lodgment criteria in the instructions to determine their obligation to lodge an RTP schedule. The definition of economic group and the threshold total business income of $25 million means some companies outside our large corporate groups population have an obligation to lodge the schedule.

    Category C – Reportable tax position schedule

    Questions in Category C of the RTP schedule are typically linked to ATO public advice and guidance (PAG) products, such as:

    • taxpayer alerts (TAs)
    • practical compliance guidelines (PCGs).

    This report provides aggregated data on 2017–18 to 2019–20 RTP schedule disclosures for Category C, as at 31 August 2020. Further lodgments of RTP schedules after this date will alter taxpayer and disclosure numbers.

    There has been a greater than 150% increase in the number of schedules lodged over the three years between 2017–18 and 2019–20. This reflects the progressive expansion of the lodgment requirement from our Top 100 population to any company who met the total business income threshold and ownership criteria. The non-lodgment rate has declined over the same period. Companies who lodge their tax return and meet the schedule lodgment criteria but fail to lodge their schedule are subject to our non-lodgment program.

    There are generally no materiality thresholds on Category C questions. Taxpayers who meet the lodgment criteria must disclose arrangements irrespective of the impact on their overall tax outcomes.

    See also:

    Questions

    Nearly two-thirds of Category C questions that applied in the 2017–18 to 2019–20 income years related to arrangements described in taxpayer alerts. A quarter of the questions sought the self-assessed risk rating from applying the criteria in PCGs covering a range of arrangements.

    2019–20 Category C questions and the type of PAG product they refer to

    Question number

    PAG product

    7, 9, 14, 22–24

    PCG

    2, 3, 6–8, 10–13, 17, 18, 20, 25, 26

    Taxpayer alert

    1

    Taxation determination

    16, 19, 21

    None

    Disclosures

    Anticipated lodgments by Category C disclosures, 2018–19 and 2019–20

    Graph showing breakdown of total anticipated schedule lodgments by Category C disclosures 2019-20 Multiple Category C disclosures 439 One Category C disclosure 593 No Category C disclosures 623 Schedule not lodged 205 2018-19 Multiple Category C disclosures 340 One Category C disclosure 375 No Category C disclosures 550 Schedule not lodged 230

    Notes:

    • 2017–18 data has been omitted from the graphic as the population was not the same as 2018–19 and 2019–20 as a staggered approach to expansion of the population was adopted to take account of substituted accounting periods.

    Taxpayers are only required to provide a response to a question under Category C if they have an arrangement covered by the question. Therefore, we don’t expect every schedule lodged to contain a response to every Category C question. For example, not every taxpayer required to lodge the schedule engages in registered research and development (R&D) activities and those who don’t will not make any disclosures under question 13.

    For some taxpayers only one question will relate to an arrangement they have and they will only make one disclosure. Other taxpayers may have multiple arrangements to disclose or a question may ask them to make multiple disclosures. For example, question 9 on offshore hub arrangements requires each hub arrangement to be disclosed.

    Typically, PCGs provide a range of risk ratings:

    • arrangement reviewed or concluded – white zone
    • low – green or blue zones
    • moderate – yellow or amber zones
    • high – red zone.

    We tailor our compliance approach to the risk rating disclosed. For example, our activity for low-risk disclosures is limited to confirming the arrangement is within the low-risk zone and the methodology in the PCG has been correctly applied. We apply more intensive scrutiny for high-risk disclosures to determine if they comply with the relevant legislative provisions. If we can’t gain this assurance at the review stage, we may undertake an audit or more intensive investigation through our Top 1,000 Next Actions program.

    We review disclosures on taxpayer alert related questions as part of our assurance activities. Where required, we address remaining concerns as part of our audit or next actions programs. Disclosures are required where a taxpayer’s arrangement is similar to that described in a taxpayer alert but lacks the mischief described or doesn’t give rise to a tax benefit. This means that not all disclosures on taxpayer alert questions will give rise to a compliance concern or require intensive scrutiny by us.

    We monitor and determine if disclosures in the RTP schedule are incomplete or inaccurate through our assurance programs and analysis of other data sources, for example CBC reports. We have full coverage of the most systemically important corporate groups through our Top 100 program and Top 1,000 tax performance program. This allows us to check the accuracy of disclosures. Penalties may apply if taxpayers do not make full and true disclosures under the RTP schedule.

    We continually monitor taxpayers in the Top 100 population and assess disclosures on an annual basis. Our monitoring and assurance activities mean we may already be aware of arrangements before disclosures are made.

    Disclosures enable us to understand and assess changes in tax positions and arrangements, including new arrangements taxpayers are entering into, and to prioritise our assurance activities. These may take more than one year for Top 100 taxpayers. Importantly, taxpayers who have achieved justified trust (high assurance), disclosures on the schedule will have a less intensive engagement approach during the monitoring and maintenance period by enabling us to effectively track changes in arrangements and adjust our action accordingly.

    We review the Top 1,000 taxpayers on a four-year cycle. This means not all arrangements related to RTP schedule disclosures made for the 2019–20 year have been fully reviewed. We review all disclosures to monitor the performance, assess and prioritise our engagement with this population. Where we identify new high-risk arrangements or arrangements of concern, we prioritise the taxpayer for review. RTP disclosures will also inform how we conduct the assurance review. For example, a taxpayer who has self-assessed in the green zone, will be reviewed on whether the PCG has been correctly applied to obtain confidence of the tax outcome. This is typically a less resource intensive process.

    For taxpayers in the medium and emerging populations, we take a risk-based approach to allocating compliance resources. This means we review the highest risk arrangements where these are material. Given the lack of materiality thresholds for most Category C disclosures, we may not apply compliance resources to review in detail every high-risk arrangement disclosed. Instead we will concentrate our efforts on arrangements that have a material impact on the taxpayer’s tax outcomes.

    Disclosures by public advice and guidance product

    Proportion of disclosures by public advice and guidance product, 2017–18 to 2019–20

    Graph showing breakdown of Category C disclosures by public advice and guidance product 2019-20 Practical compliance guidelines 90% Taxpayer alerts 7% Other 3% 2018-19 Practical compliance guidelines 85% Taxpayer alerts 10% Other 4% 2017-18 Practical compliance guidelines 73% Taxpayer alerts 23% Other 5% Figures may not exactly total 100% due to rounding

    Notes:

    • Where a PCG related question instructs the taxpayer to make only one disclosure of the highest risk rating and the taxpayer has made more than one disclosure, they have been counted only once.

    Most Category C questions ask taxpayers to disclose whether they have arrangements covered by specific ATO public advice and guidance products. The majority of questions refer to taxpayer alerts but the majority of disclosures relate to PCGs.

    Disclosures by PCG related questions, 2018–19 and 2019–20

    Graph showing breakdown of PCG related question disclosures 2019-20 Q7 disclosures 3 Q9 disclosures 279 Q14 disclosures 853 Q22 disclosures 76 Q23 disclosures 91 Q24 disclosures 270 2018-19 Q9 disclosures 221 Q14 disclosures 577 Q22 disclosures 50 Q23 disclosures 81 Q24 disclosures 164 Figures may not exactly total 100% due to rounding

    Notes:

    • 2017–18 data has been omitted from the graphic given not all PCGs were released before lodgments were due.
    • Question 7 is on mobile offshore drilling units, Question 9 is on offshore hubs, questions 14 and 23 are on related party financing arrangements, question 22 is on hybrid arrangements and question 24 is on inbound supply chains.

    Disclosures by taxpayer alert related questions, 2017–18 to 2019–20

    Graph showing breakdown of taxpayer alert related question disclosures 2019-20 Q3 disclosures 6 Q6 disclosures 10 Q7 disclosures 3 Q8 disclosures 10 Q10 disclosures 13 Q11 disclosures 6 Q12 disclosures 8 Q13 disclosures 17 Q17 disclosures 11 Q18 disclosures 20 Q25 disclosures 19 2018-19 Q3 disclosures 6 Q6 disclosures 11 Q7 disclosures 12 Q8 disclosures 14 Q10 disclosures 11 Q11 disclosures 7 Q12 disclosures 8 Q13 disclosures 12 Q17 disclosures 6 Q18 disclosures 23 2017-18 Q3 disclosures 3 Q6 disclosures 4 Q7 disclosures 5 Q8 disclosures 12 Q10 disclosures 1 Q11 disclosures 4 Q12 disclosures 9 Q13 disclosures 13 Q17 disclosures 2 Q18 disclosures 15

    Notes:

    • Only questions included in the 2019–20 schedule have been included in the graphic.
    • Question 26 has been omitted from the graphic as it was only introduced in 2019–20.
    • Question 3 is on bifurcated procurement hubs, questions 6, 11, 17 and 18 are on related party financing, question 7 is on lease-in lease-out arrangements, question 8 is on offshore permanent establishments, question 10 is on thin capitalisation, question 12 is on business fragmentation, question 13 is on research and development, question 25 is on intangibles migration.

    Disclosures on other questions, 2017–18 to 2019–20

    Graph showing breakdown of disclosures on other questions 2019-20 Q1 disclosures 1 Q16 disclosures 26 Q19 disclosures 3 Q21 disclosures 31 2018-19 Q1 disclosures 3 Q16 disclosures 24 Q21 disclosures 28 2017-18 Q1 disclosures 1 Q16 disclosures 1 Q21 disclosures 15

    Notes:

    • Question 1 is on section 25-90 deductions, question 16 is on the consolidation churning rules, question 19 is on settlements, question 21 is on unamended mistakes or omissions.

    PCG related disclosures

    PCGs provide a framework for corporate taxpayers and their boards to self-assess the risk associated with their arrangements and understand our likely compliance response. Self-assessment is voluntary but we consider it best practice for corporate taxpayers to include self-assessment under PCGs as part of their standard tax governance processes.

    If a taxpayer hasn’t undertaken the self-assessment, they must disclose a high-risk rating in the schedule. This alerts us to examine the arrangement more closely to obtain confidence about the tax outcome.

    Taxpayers must disclose their self-assessed risk rating in the corresponding Category C question. In some cases, they may be required to disclose multiple arrangements, such as question 9 on hub arrangements. For these reasons, the greatest number of disclosures are against PCG linked questions.

    A number of PCGs don’t include materiality thresholds and aim to identify the highest risk arrangement, where the taxpayer has multiple arrangements. The schedule also doesn’t apply any materiality threshold on Category C questions. This means we don’t use the quantum of disclosures against any particular question or any comparison of disclosure numbers to infer anything about the relative risk levels of the arrangements covered by PCGs.

    We do consider the spread of risk ratings disclosed to understand relative risk levels. But this is only one data source we use. The lack of materiality thresholds means, for most PCGs, we need to use other data sources in conjunction with the schedule disclosures. This helps us gain a true understanding of the relative risk of an arrangement in the population, compared to other arrangements and over time.

    Non-resident owned mobile offshore drilling units – Question 7 disclosures

    Disclosures on question 7, 2019–20

    Disclosure

    No MODUs

    High risk

    Total

    Number

    2

    1

    3

    The risk framework in Practical Compliance Guideline PCG 2020/1 enables taxpayers to self-assess the transfer pricing risks for projects involving the use in Australian waters of non-resident owned mobile offshore drilling units (MODUs). These MODUs include drill-ships, drilling rigs, pipe-laying vessels and heavy-lift vessels.

    Question 7 was updated for the 2019–20 income year to ask taxpayers for their self-assessed risk rating under PCG 2020/1. The one taxpayer who disclosed a high-risk arrangement indicated market conditions had led to a fall in their operating margin. The disclosed arrangement will be reviewed as part of a planned assurance review under our Top 1,000 assurance program.

    Offshore hubs – Question 9 disclosures

    Disclosures on question 9, 2019–20

    Graph showing breakdown of offshore hub disclosures Marketing hub disclosures High risk 7 Medium risk 11 Low risk 92 White zone 19 Non-core procurement hub disclosures High risk 77 Low risk 72 White zone 1

    Notes:

    • PCG 2017/1 asks taxpayers to make a disclosure for each hub arrangement they have in place
    • 106 taxpayers disclosed they have marketing hubs and 71 disclosed they have non-procurement hubs

    The risk framework in Practical Compliance Guideline PCG 2017/1 enables taxpayers to self-assess the transfer pricing risks of certain business activities and operating risks located or relocated into an offshore centralised operating model (hub). It currently covers marketing and non-core procurement activities.

    The disclosures received on PCG 2017/1 continue to assist us to identify previously unknown marketing hub arrangements. They have also given us a more comprehensive understanding of the level of risk associated with marketing hub arrangements.

    We continue to have complete coverage of arrangements of Top 100 taxpayers, who are responsible for the majority of Australian exports sold through marketing hub arrangements. A small number of arrangements are subject to ongoing compliance action.

    The top three commodities sold via offshore marketing hubs are iron ore, coal and liquified natural gas (LNG). Only a very small portion of all exports sold via offshore marketing hubs are for commodities not produced by the energy and resources sector.

    Comparison of risk zone disclosures on marketing hubs in question 9, 2017–18 to 2019–20

    Graph showing breakdown of offshore marketing hub disclosures 2019-20 High risk 5% Medium risk 9% Low risk 71% White zone 15% 2018-19 High risk 7% Medium risk 6% Low risk 73% White zone 14% 2017-18 High risk 12% Medium risk 3% Low risk 71% White zone 14%

    Care should be exercised in comparing the risk zones across years as the number of taxpayers making a disclosure nearly tripled in 2018–19 and disclosures doubled. While taxpayer and disclosure numbers remained relatively stable between 2018–19 and 2019–20, the population changed by nearly thirty percent. This means that any comparison across the years is not a comparison of the same arrangements or taxpayers.

    Between 2017–18 and 2019–20 the proportion of self-assessed risk ratings has remained relatively stable for the low risk and white zones. While high risk disclosures have halved and medium risk disclosures have increased nearly threefold.

    Comparison of risk zone disclosures on non-core procurement hubs in question 9, 2018–19 to 2019–20

    Graph showing breakdown of offshore non-core procurement hub disclosures 2019-20 High risk 51% Low risk 48% White zone 1% 2018-19 High risk 56% Low risk 44%

    Question 9 was only extended to include non-core procurement hub arrangements in the 2018–19 schedule. In the two years of disclosures, there has been a 75% increase in disclosures and a doubling of taxpayers making disclosures.

    The increase in high risk disclosures is due to one taxpayer that is part of a Top 100 corporate group and has disclosed over 25 non-core procurement hubs. The taxpayer has indicated they haven't applied the PCG 2017/1. We have reviewed and don't have any specific concerns with the tax outcomes of their hub arrangements.

    Related party finance – Questions 14 and 23 disclosures

    Disclosures on questions 14 and 23, 2019–20

    Graph showing breakdown of related party financing disclosures Arm's length conditions disclosures High risk 190 Medium risk 240 Low risk 392 White zone 25 Not disclosed* 6 Derivatives disclosures High risk 14 Medium risk 19 Low risk 56 White zone 2

    Notes:

    • Not disclosed are disclosures by taxpayers who included the question number but didn’t include the subcategory number on their schedule.

    Some taxpayers disclosed multiple arrangements, only the highest rated disclosure has been counted, as the instructions for questions 14 and 23 ask for only the highest rated arrangement to be disclosed.

    Practical Compliance Guideline PCG 2017/4 allows taxpayers to self-assess the tax risk of their cross-border related party financing arrangements. Given the prevalence and significant tax outcomes involved, we actively investigate these arrangements. We continue to undertake assurance activities on arrangements disclosed in the red and amber zones by Top 100 and 1,000 taxpayers. We have strategies in place to address high risk arrangements where the loan amounts are less significant, including where the disclosures come from taxpayers in the medium and emerging population segment.

    The review of related party financing arrangements is an inherent element of the assurance work we undertake. This involves reviewing the application of PCG 2017/4 against the taxpayer’s relevant loan agreements and transfer pricing documentation.

    Comparison of risk zone disclosures on related party financing arm's length conditions in question 14, 2017–18 to 2019–20

    Graph showing breakdown of related party financing arm's length conditions disclosures 2019-20 High risk 22% Medium risk 28% Low risk 46% White zone 3% Not disclosed* 1% 2018-19 High risk 28% Medium risk 29% Low risk 38% White zone 3% Undisclosed 1% 2017-18 High risk 27% Medium risk 34% Low risk 30% White zone 8% Not disclosed* 1%

    Notes:

    • Not disclosed are disclosures by taxpayers who included the question number but didn’t include the subcategory number on their schedule.

    Some taxpayers disclosed multiple arrangements, only the highest rated disclosure has been counted, as the instructions for question 14 ask for only the highest rated arrangement to be disclosed.

    Care should be exercised in comparing the risk zones across years as there has been a nearly fourfold increase in the number of taxpayers making a disclosure at question 14 over the three years. Less than 20% of the population has remained constant over that period. This means the majority of arrangements in each year are different to those in other years. As the question asks taxpayers to disclose their highest risk arrangement, regardless of its size, the same taxpayer may not disclose the same arrangement in each year.

    Given taxpayers are required to disclose their highest risk arrangement, at a broad level, the increasing proportion of low risk disclosures indicates a positive trend that taxpayers are entering fewer arrangements with high risk indicators. The disclosure data doesn't allow for any conclusions to be drawn on the particular high risk indicators that are no longer being included in financing arrangements.

    The requirement to disclose the highest risk rated arrangement also means that our assurance of a significant quantum of related party loans isn't fully reflected in white zone disclosures. Some taxpayers who have related party financial arrangements that are covered under a settlement deed have disclosed arrangements in other risk zones. These are new arrangements that are not included in the settlement deeds. There are other taxpayers whose arrangements have been assured or covered under a settlement deed who don't have an RTP schedule lodgment obligation.

    Comparison of risk zone disclosures on related party financing derivatives in question 23, 2018–19 to 2019–20

    Graph showing breakdown of related party financing derivatives disclosures 2019-20 High risk 15% Medium risk 21% Low risk 62% White zone 2% 2018-19 High risk 27% Medium risk 22% Low risk 47% White zone 1% Not disclosed* 2% Figures may not exactly total 100% due to rounding

    Notes:

    • Not disclosed are disclosures by taxpayers who included the question number but didn’t include the subcategory number on their schedule.

    Some taxpayers disclosed multiple arrangements, only the highest rated disclosure has been counted, as the instructions for question 23 ask for only the highest rated arrangement to be disclosed.

    In the two years question 23 has been included in the schedule the number of disclosures received have increased 10%. Caution should be exercised in comparing risk zones over the two years as only two-thirds of the population have remained the same. The same issues of differences in the population and the arrangements disclosed apply for question 23 as for question 14.

    At a broad level, the increase in the proportion of low risk disclosures indicates a positive shift in taxpayers entering into fewer arrangements with high risk indicators. As with question 14, the data from the schedule doesn't allow for any conclusions on which high risk indicators are no longer present in derivative arrangements being entered into.

    Hybrid arrangements – Question 22 disclosures

    Disclosures on question 22, 2019–20

    Disclosure

    Low risk

    Not low risk

    Total

    Number

    72

    4

    76

    Practical Compliance Guideline PCG 2018/7 has been designed to assist taxpayers to restructure into compliant replacement arrangements. These arrangements eliminate double non-taxation outcomes, consistent with the underlying objective of the hybrid mismatch rules.

    We use data available from schedule disclosures and other information sources, such as question 49 on the International dealings schedule, to identify and monitor hybrid restructures undertaken and arrangements maintained by taxpayers. Our focus is on ensuring compliance with the hybrid mismatch rules through ongoing engagement.

    Data from the RTP schedule disclosures is showing variances in restructure arrangements. These variances are to be expected and reflect differences in the hybrid element, instruments versus entities, and the jurisdiction involved.

    A self-assessed rating of not low risk doesn't mean the arrangement is high risk. If the arrangement hasn't been reviewed by us before and other information indicates it may be of high risk, we engage with the taxpayer to gain assurance the arrangement is compliant.

    Comparison of risk zone disclosures on hybrid arrangements in question 22, 2018–19 to 2019–20

    Graph showing breakdown of hybrid disclosures 2019-20 Not low risk 5% Low risk 95% 2018-19 Not low risk 14% Low risk 86%

    There has been an approximately 50% increase in the number of disclosures compared to 2018–19. The overwhelming majority of restructures continue to fall in the low risk category. We expect there to be fewer disclosures in 2020–21 as the schedule has been updated to no longer require disclosure of restructures that occurred in prior income years.

    Inbound distribution arrangements – Question 24 disclosures

    Disclosures on questions 24, 2019–20

    Graph showing breakdown of inbound distribution arrangement disclosures High risk 85 Medium risk 86 Low risk 93 Not disclosed* 6

    Notes:

    • Not disclosed are disclosures by taxpayers who included the question number but didn’t include a valid sub-category on their schedule.

    PCG 2019/1 doesn't provide for an equivalent white zone to other PCGs covered in this report.

    Practical Compliance Guideline PCG 2019/1 provides a framework for taxpayers to assess the transfer pricing risk of their inbound distribution arrangements. We have confidence in the reasonableness of these disclosures as we have good visibility of this population through our engagement with these taxpayers. We are also employing a range of approaches to detect and address any non-disclosure against question 24.

    The majority of taxpayers who disclosed an inbound distribution arrangement fall within our Top 100 or 1,000 programs so the tax outcomes of their arrangements are assured under these programs.

    We have also undertaken letter campaigns, both informational and risk based, for taxpayers with inbound distribution arrangements that are in our medium and emerging population.

    There was an overall increase in disclosures at question 24. It is difficult to compare the risk zones across years as the question sub-categories have changed over time. Originally only three risk zones were provided, this was expanded as the PCG was finalised. Different options for not applying the PCG were also introduced. For these reasons, there isn't a set of comparable data across the three years.

    Disclosures on arrangements subject to taxpayer alerts

    We issue taxpayer alerts to warn taxpayers of our concerns about new or emerging arrangements we consider might pose a high risk, such as tax avoidance arrangements. Our aim is to share our concerns early to help taxpayers make informed decisions about their tax affairs.

    Our experience shows the majority of large corporate taxpayers don’t wilfully take on tax risk. Taxpayers will often engage with us to gain certainty on arrangements we’ve indicated we have concerns with. They may apply for a ruling or advance pricing arrangement or simply not enter into these arrangements, preventing proliferation.

    Taxpayers alerts are intended as an advance warning system. The low number of disclosures against Category C questions referring to taxpayer alerts is, therefore, unsurprising. This is a healthy sign most large company taxpayers are choosing to not enter into or have exited arrangements of the nature described in the alerts. We use information obtained through our assurance programs and other data sources, for example CBC reporting, to identify any non-disclosure risk.

    Taxpayer alerts will often apply more broadly than to just the large company population required to lodge the RTP schedule. Disclosures on the RTP schedule help us to understand the proliferation of arrangements described in taxpayer alerts in the lodging population. They also help to identify variations of the arrangements and if these too pose a risk.

    We retain RTP schedule questions on taxpayer alerts for a period after we have reviewed all existing arrangements (disclosed and identified through other data sources). We do this to ensure no new taxpayers are entering into the arrangement or variation of the arrangement. We are also mindful that withdrawing a question too early may signal acceptance of the arrangement or variants of it to taxpayers, possibly leading to new high-risk arrangements proliferating.

    In this section:

    Funding special dividends and buybacks – Question 2 disclosures

    There were no disclosures at question 2 in 2019–20. Question 2 relates to equity raising to fund special dividend or share buyback arrangements.

    We have continued to monitor the risk associated with arrangements described in Taxpayer Alert TA 2015/2. Our risk identification processes and assurance programs have confirmed these arrangements are no longer prevalent in the large public and multinational business population. This gives us confidence we don’t have a non-disclosure risk.

    Bifurcated procurement hubs – Question 3 disclosures

    There were six disclosures at question 3 in 2019–20. Question 3 relates to procurement hub arrangements described in Taxpayer Alert TA 2015/5.

    Most taxpayers who have disclosed arrangements at question 3 have discussed those arrangements with us. We don’t have any ongoing concerns with the arrangements disclosed and discussed with us.

    One disclosure relates to an immaterial arrangement. The other taxpayer's arrangement will be reviewed in a planned assurance review under our Top 1,000 assurance program.

    Our risk identification processes and assurance programs give us confidence these arrangements are no longer prevalent in the population.

    Lease-in lease-out arrangements – Question 7 disclosures

    There were three disclosures at question 7 in 2019–20 relating to arrangements involving cross-border leasing of mobile assets described in Taxpayer Alert TA 2016/4. The arrangements will be reviewed under our Top 1,000 assurance program.

    Offshore permanent establishments – Question 8 disclosures

    There were 10 disclosures at question 8 in 2019–20. Question 8 relates to arrangements involving tax consolidated groups with offshore permanent establishments, as described in Taxpayer Alert TA 2016/7.

    Some of the arrangements disclosed don't demonstrate the non-compliance element in Taxpayer Alert TA 2016/7. In these cases, the taxpayer has returned the appropriate income in their Australian tax return.

    We have seen changes in taxpayer behaviour since Taxpayer Alert TA 2016/7 was released and the hybrid mismatch rules were implemented. Some taxpayers are recognising more offshore branch income as assessable in Australia. Others have wound up their outbound permanent establishment or restructured into compliant structures.

    Thin capitalisation – Question 10 disclosures

    There were 13 disclosures at question 10 in 2019–20.

    Question 10 deals with the exclusion of amounts treated as equity for accounting purposes from thin capitalisation debt calculations. We have released Tax Determination TD 2020/2 setting out our view of the operation of the law to these arrangements.

    We have reviewed most of these arrangements. In some cases, taxpayers have been found to be compliant with TD 2020/2 but have responded to question 10 as they have a bifurcated arrangement. We have also conducted audits on other arrangements. Amended assessments have either issued, or are planned to issue, in some of these cases. The remaining arrangements will be reviewed under our Top 1,000 assurance program.

    Related party finance – Questions 6, 11, 17 and 18 disclosures

    Disclosures on questions related to financing arrangements, 2019–20

    Question

    Topic

    Taxpayer alert

    Disclosures

    6

    Financing – CCIRS

    TA 2016/3

    10

    11

    Financing – round robin arrangements

    TA 2016/10

    6

    17

    Financing – WHT

    TA 2018/4

    11

    18

    Financing – debt deductions and NANE

    TA 2009/9

    20

    Risks associated with related party financing arrangements continue to be a key focus for us. We use the disclosures under questions 6, 11, 17 and 18 together with data from the International dealings schedule and CBC reports to identify and assess these risks.

    We have reviewed, or are reviewing, seven of the arrangements disclosed at question 6 to date. Our concerns with one of these arrangements has been resolved through a settlement with settlement negotiations underway with another. An audit is underway on our concerns with one arrangement. The final arrangement disclosed will be reviewed under our Top 1,000 assurance program.

    We have reviewed, or are reviewing, the arrangements disclosed at question 11. Most of the reviews have been complete and any concerns have been addressed. Other data sources available to us indicate there are no new round robin financing arrangements being entered into by taxpayers in this population.

    In some cases, taxpayers have disclosed arrangements at question 17 even though they have remitted withholding tax. We aren't concerned with arrangements where withholding tax has been remitted and there is evidence commercial non-tax factors drove the deferral of the entitlement to interest. Other disclosures have been reviewed or are being reviewed as part of our assurance program.

    Many of the disclosures at question 18 were made by taxpayers because they have claimed a deduction under section 25-90. Absent the other features outlined in Taxpayer Alert TA 2009/9 these disclosed arrangements don’t pose a compliance risk.

    Business fragmentation – Question 12 disclosures

    There were eight disclosures at question 12 in 2019–20. Question 12 relates to arrangements involving the fragmentation of integrated trading businesses in order to re-characterise trading income to passive income to achieve a more favourable tax outcome. This is described in Taxpayer Alert TA 2017/1.

    We combine the information obtained from disclosures at question 12 with data from transitional election forms to risk assess stapled groups. Those eligible taxpayers that have lodged a valid transitional election form may be entitled to claim transitional relief and continue to apply the lower 15% withholding rate during the transition period. We scrutinise the arrangements of taxpayers who make a disclosure at question 12 and also check whether the taxpayer has lodged an election for transitional relief to assure their compliance.

    We have reviewed three of the arrangements disclosed and are currently working to resolve concerns with one arrangement involving a cross staple loan arrangement. The remaining disclosures are being reviewed, or are planned to be reviewed, under our assurance programs.

    R&D – Question 13 disclosures

    There were 17 disclosures at question 13 in 2019–20. Question 13 relates to various R&D activities as described in:

    • Taxpayer Alert TA 2017/2 (construction activities)
    • Taxpayer Alert TA 2017/3 (any business activities)
    • Taxpayer Alert TA 2017/4 (agricultural activities)
    • Taxpayer Alert TA 2017/5 (software development activities).

    Most disclosures for question 13 relate to arrangements outlined in TA 2017/5. This aligns with our experience that the R&D claims of most concern in the large corporate groups population relate to software development activities. Where appropriate, we refer any concerns identified with eligibility of R&D activities to AusIndustry, who are responsible for this aspect of the R&D Tax Incentive.

    Almost all disclosures were from taxpayers in the Top 100 or 1,000 populations. The arrangements disclosed have either been reviewed or will be reviewed through our assurance programs.

    Securities lending – Question 20 disclosures

    There were no disclosures at question 20 in 2019–20. Question 20 relates to arrangements involving securities lending and derivative contracts as described in Taxpayer Alert TA 2018/1.

    We have continued to monitor and manage the risk associated with arrangements described in Taxpayer Alert TA 2018/1. Our risk identification processes give us confidence we don’t have a non-disclosure risk.

    We are separately addressing concerns with these types of arrangements entered into by superannuation funds. As these entities don’t complete a company tax return they have no obligation to lodge an RTP schedule.

    Intangibles migration – Question 25 disclosures

    There were 19 disclosures at question 25 in 2019–20. Question 25 relates to deductions for expenses incurred under an arrangement with offshore parties using intangible assets held by an offshore party, as described in Taxpayer Alert TA 2018/2. Question 25 was added to the RTP schedule in the 2019–20 income year.

    Almost all disclosures indicated the taxpayer had considered the arm’s length principle in determining the appropriate consideration for the use of the intangible assets, but the arrangement wasn't covered by section 284-255 (Taxation Administration Act 1953) compliant transfer pricing documentation. In some instances, this is due to the arrangement being covered by an advance pricing arrangement or a settlement deed.

    The remaining disclosures are either currently under review or will be reviewed as part of our Top 100 and 1,000 assurance programs.

    Multiple entry consolidated group and CGT asset sale – Question 26 disclosures

    There were no disclosures at question 26 in 2019–20. Question 26 relates to the sale of a CGT asset to an eligible tier 1 entity in a multiple entry consolidated group, with the entity subsequently sold to a third party. Question 26 was added to the RTP schedule in the 2019–20 income year.

    We are monitoring the risk associated with arrangements described in Taxpayer Alert TA 2019/1. Our preliminary view is the taxpayer alert was effective in stopping proliferation of these types of arrangements.

    Other questions

    Section 25-90 deductions and non-assessable non-exempt income – Question 1 disclosures

    There was one disclosure at question 1 in 2019–20. Question 1 relates to deductions claimed under section 25-90 where income earned is non-assessable and non-exempt.

    The arrangement disclosed is part of a broader restructuring being undertaken by a Top 100 taxpayer. That restructure is currently being reviewed. The review will consider the disclosed arrangements in context of the entire restructure to determine if the correct tax outcome was achieved.

    Consolidation churning – Question 16 disclosures

    There were 26 disclosures at question 16 in 2019–20. Question 16 relates to application of the consolidation churning rule to arrangements entered into by a multiple entry consolidated group.

    The vast majority of disclosures at question 16 were by taxpayers indicating the churning rule applied to deny certain cost setting rules. All disclosures stating the rules didn’t apply were made by Top 100 or 1,000 taxpayers. The arrangements are or will be reviewed under our assurance programs.

    Material changes to settlement positions – Question 19 disclosures

    There were three disclosures at question 19 in 2019–20. Question 19 relates to breaches or material changes to facts covered by settlement deeds. It is an important feature of our settlements that we achieve behavioural change and lock in future tax outcomes. We continue to monitor compliance with these agreements closely.

    Each taxpayer who made a disclosure on their RTP schedule had already brought the issues to our attention before their financial year end. We engaged directly with each of them and confirmed all are compliant with the terms of the settlement deeds.

    Unamended mistakes or omissions – Question 21 disclosures

    There were 31 disclosures at question 21 in 2019–20. Question 21 relates to any unamended mistakes or omissions in tax returns.

    Disclosures under question 21 related to issues including carry forward loss balances, depreciation expenses, the R&D tax incentive and income from trusts and other investments. All of the disclosures were from Top 100 or 1,000 taxpayers. Their disclosures have or will be reviewed through our assurance programs to ensure appropriate amendments are lodged.

    Amendments are expected from a number of taxpayers, some of these to the 2019–20 return, others to the 2020–21 return. Some amendments will result in an increase in tax payable, others a decrease and some will have a notional impact through changes in losses carried forward.

    Last modified: 12 Nov 2021QC 64611