Findings report RTP – Public and multinational businesses
What we've learned from Reportable tax position (RTP) schedule Category C disclosures made in the 2020–21 income year.
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Reportable tax position schedule
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.
The Reportable tax position (RTP) schedule:
- was introduced as a schedule to the company tax return in 2011
- gathers information on uncertain tax positions from the largest public and multinational companies
- 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 3 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 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 the 2017–18 to 2020–21 income years under Category C of the schedule. These disclosures reflect most disclosures made by companies.
The data provides insights to types of arrangements large companies are entering. The range of risk levels can vary across the lodging population as self-assessed by taxpayers. We consider the level of risk as part of our compliance program and generally this corresponds with our assessment of the disclosed arrangements.
This is the third year of publishing this report and we have included high-level observations on trends over 4 years of data for the 2017–18 to 2020–21 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.
For more information on how we’re improving the system for those who want to comply, and taking firm action against those who choose not to, see Tax and Corporate Australia.
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 2020–21.
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 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.
In 2021, the RTP schedule was expanded to private companies. Private companies that were notified were required to lodge. From 2021–22, all companies that meet the threshold will be required to lodge.
This report only includes Category C disclosures for public and multinational businesses. Private companies are not included in the numbers or analysis.
Category C of the RTP 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)
- PCGs.
Together these products cover the key systemic risks in relation to large public and multinational businesses. As such, the aggregate data provides insights about the prevalence of key tax risks in the population.
This report provides aggregated data on 2017–18 to 2020–21 RTP schedule disclosures for Category C, as at 30 June 2022. Further lodgments of RTP schedules after this date will alter taxpayer and disclosure numbers.
There has been a greater than 170% increase in the number of schedules lodged over the 3 years between 2018–19 and 2020–21. This reflects the progressive expansion of the lodgment requirement from our Top 100 population to all entities that met the total business income threshold and ownership criteria. The non-lodgment rate has remained stable 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.
Questions
Nearly two-thirds of Category C questions that applied in the 2017–18 to 2020–21 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.
2020–21 Category C questions and the type of PAG product they refer to
Question number
|
PAG product
|
7, 9, 14, 22–24, 27 and 37
|
PCG
|
2, 3, 6–8, 10–13, 17, 18, 20, 25, 26, 32–36
|
Taxpayer alert
|
1
|
Taxation determination
|
16, 19, 21, 38
|
None
|
Notes
- Questions 28–31 have not been included as they relate to private company arrangements. All disclosures will be monitored however, the risks are not part of the compliance program for public and multinational businesses.
Disclosures
Lodgments by Category C disclosures, 2018–19 to 2020–21
Notes
- 2017–18 data has been omitted from the graphic. The population differs from that of 2018–19 to 2020–21, as a staggered approach to expansion of the population was adopted to take account of substituted accounting periods.
- Nil RTP disclosures are taxpayers that have lodged an RTP schedule but do not have any arrangements to disclose.
- Schedules not lodged are based on all public and multinational taxpayers that meet the RTP criteria to lodge.
There is a high level of lodgment compliance and increase in disclosures over the past 3 years due to improvements in processes, increase in questions and changes made to the schedule over the period.
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; 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; therefore, 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 or audit programs.
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 whether or not it includes the risk described. 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 high coverage levels through our assurance activities mean we will ordinarily 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, and to prioritise our assurance activities. Importantly, taxpayers who have achieved justified trust (high assurance) will have a less intensive engagement approach during the monitoring and maintenance period enabling us to effectively monitor changes in arrangements supported by disclosures in the schedule and adjust our action accordingly.
We review the Top 1,000 taxpayers on a 4-year cycle. This means not all arrangements related to RTP schedule disclosures made for the 2020–21 year have been assured by us yet. We review all disclosures to monitor the performance and 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 2020–21
Note
- 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. Most questions refer to taxpayer alerts, however the majority of disclosures relate to PCGs. PCG disclosures are higher as they relate to more common arrangements, for example related party finance arrangements irrespective of the risk level.
Disclosures by PCG related questions, 2018–19 to 2020–21
Note
- 2017–18 data has been omitted from the graphic given not all PCGs were released before lodgments were due.
2020–21 Category C, PCG related questions
Question number
|
PCG topic
|
7
|
Mobile offshore drilling units
|
9
|
Offshore hubs
|
14 and 23
|
Related party financing arrangements
|
22
|
Hybrid arrangements
|
24
|
Inbound supply chains
|
27 and 37
|
Non-ADI arm's length debt test
|
Disclosures by taxpayer alert related questions, 2017–18 to 2020–21
Note
- Only questions included in the 2020–21 schedule have been included in the graphic.
2020–21 Category C, Taxpayer alert related questions
Question number
|
TA topic
|
3
|
Bifurcated procurement hubs
|
6, 11, 17 and 18
|
Related party finance
|
7
|
Lease-in-lease-out arrangements
|
8
|
Offshore permanent establishments
|
10
|
Thin capitalisation
|
12
|
Business fragmentation
|
13
|
Research and development
|
25
|
Intangible migration
|
26
|
Multiple entry consolidated groups
|
32
|
DEMPE of intangible assets (new question)
|
33
|
Related party finance (new question)
|
34
|
Interest withholdings tax (new question)
|
35
|
Multiple entry consolidated groups (new question)
|
36
|
Derivatives (new question)
|
Disclosures on other questions, 2017–18 to 2020–21
2020–21 Category C, other questions
Question number
|
Topic
|
1
|
25–90 deductions
|
16
|
Consolidation churning rules
|
19
|
Settlements
|
21
|
Unamended mistakes or omissions
|
38
|
High-risk arrangements in relation to a PCG released since the 2020–21 Instructions were published (new question)
|
PCG related disclosures
Self-assessing risks related to arrangements
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 or tell us they haven't applied the PCG. 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.
We do consider the spread of risk ratings disclosed to understand relative risk levels. To understand the risk we use a variety of data sources including the disclosures received. This supports a true understanding of the relative risk of an arrangement in the population compared to other arrangements and over time.
Non-resident owned MODUs: Question 7 disclosures
Disclosures on question 7, 2019–20 and 2020–21
Disclosure
|
No MODUs
|
Medium risk
|
High risk
|
Total
|
2019–20
|
2
|
0
|
1
|
3
|
2020–21
|
1
|
2
|
1
|
4
|
Practical Compliance Guideline PCG 2020/1 sets out 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. The risk framework in PCG 2020/1 enables taxpayers to self-assess the transfer pricing risks for these arrangements.
Question 7 was updated for the 2019–20 income year to ask taxpayers for their self-assessed risk rating under PCG 2020/1. In 2020–21, 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, 2020–21
Notes
- PCG 2017/1 asks taxpayers to make a disclosure for each hub arrangement they have in place.
- In 2020-21, arrangements that did not apply the risk methodology or calculate the tax impact were separated from the high-risk category. Disclosures categorised as PCG not applied remain a high-risk focus.
Practical Compliance Guideline PCG 2017/1 provides guidance on transfer pricing issues related to centralised operating models involving procurement, marketing, sales, and distribution functions. We are concerned with the mispricing of services and functions relating to the sales and marketing of goods and commodities provided by international related parties, and also the risk of inappropriate structuring of marketing hubs. We monitor offshore procurement hubs that supply 'indirect' or 'non-core' goods or services (non-core product) to an Australian entity.
Ninety-eight taxpayers disclosed 140 marketing hub arrangements and 71 taxpayers disclosed they have 137 non-core procurement hub arrangements. We continue to have full coverage of arrangements of Top 100 taxpayers, who are responsible for most Australian exports sold through marketing hub arrangements. A small number of arrangements are subject to ongoing compliance action.
The top 3 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 2020–21
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 due to changes in who was required to lodge. While taxpayer and disclosure numbers remained relatively stable between 2018–19 and 2020–21, the population changed by nearly 30 percent in 2019–20 and a further 14 percent in 2020–21. This means that any comparison across the years is not a comparison of the same arrangements or taxpayers.
Between 2017–18 and 2020–21 the proportion of self-assessed risk ratings has remained relatively stable for the low risk and white zones. While medium risk disclosures increased nearly threefold, high risk and PCG not applied disclosures halved.
Comparison of risk zone disclosures on non-core procurement hubs in question 9, 2018–19 to 2020–21
Question 9 was extended to include non-core procurement hub arrangements in the 2018–19 schedule, resulting in a 75% increase in disclosures and a doubling of taxpayers making disclosures.
The large number of high-risk disclosures in 2018–19 and 2019–20 was due to one taxpayer that is part of a Top 100 corporate group that disclosed over 25 non-core procurement hubs. The taxpayer has indicated:
- they haven't applied the PCG 2017/1, and
- in 2020–21 the previously high-risk disclosures were made under the new PCG was not applied category – where a taxpayer does not apply risk methodology or calculate tax impact.
Where a taxpayer does not apply the PCG we treat this as high risk.
Related party finance: Questions 14 and 23 disclosures
Disclosures on questions 14 and 23, 2020–21
Notes
- Not disclosed are disclosures by taxpayers who included the question number but didn’t include the subcategory number on their schedule.
- In 2020–21, an additional category for question 14 was added where Schedule 1 and 3 of PCG 2017/4 were not applied; these are included under PCG not applied category. In prior years, these disclosures were included with high-risk arrangements. Where a taxpayer does not apply the PCG we treat this as high risk.
Practical Compliance Guideline PCG 2017/4 allows taxpayers to self-assess the tax risk of their cross-border related party financing arrangements. Schedule 1 sets out the risk assessment framework to determine the risk rating of cross-border related party debt. We expect the pricing of related party debt to align with the commercial incentive of achieving the lowest possible 'all in' cost to the borrower. Schedule 2 is used to determine the risk rating of related party derivative arrangements. Schedule 3 is related to outbound interest-free loans between related parties. It outlines the factors under which the risk score assigned to outbound interest-free loans made between related parties may be modified for the purposes of Schedule 1.
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 2020–21
Notes
- Not disclosed are disclosures by taxpayers who included the question number but didn’t include the subcategory number on their schedule.
- Prior to 2019–20, taxpayers were only required to disclose their highest-risk arrangement; if taxpayers disclosed multiple arrangements, we only included the highest rated disclosure.
- An additional subcategory was added in 2020–21 for PCG not applied, where Schedule 1 and 3 of PCG 2017/4 have not been applied. In prior years, these were included with high-risk arrangements. Where a taxpayer does not apply the PCG we treat this as high risk.
Question 14 now requires taxpayers to report their self-assessed risk zone for their 3 most material arrangements, and their highest-risk arrangement if that was not one of their 3 most material arrangements.
As expected, the number of disclosures increased in 2020–21 by over 60 percent, given the change in reporting requirements. At a broad level, the proportion of low-risk disclosures increased, which indicates a positive trend. The number of taxpayers that reported as high-risk zone and PCG not applied decreased slightly compared to the previous year.
In 2020–21, Schedule 3 modified the self-assessment of out bound interest free loans under Schedule 1 of PCG 2017/4 and introduced parallel set of risk zone categories. To aid the historical comparison the sets of risk zones have been combined.
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 3 years. Sixty-five percent 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.
The decrease in high-risk arrangements in 2020–21 was also due to the additional category for Schedule 1 and 3, PCG not applied as well as the change in reporting requirements which lead to an increased number of disclosures and a smaller proportion of high-risk arrangements.
Comparison of risk zone disclosures on related party financing derivatives in question 23, 2018–19 to 2020–21
Note
- Not disclosed are disclosures by taxpayers who included the question number but didn’t include the subcategory number on their schedule. In 2019–20, 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 2020–21, reporting requirements for question 23 changed and taxpayers are required to report their self-assessed risk zone for their 3 most material arrangements, and their highest-risk arrangement if that was not one of their 3 most material arrangements.
The number of disclosures received for question 23 decreased by 10% in 2020-21.The number of high-risk arrangements also decreased, indicating a positive behavioural shift for taxpayers entering into related party derivative arrangements. All high-risk arrangements have either been reviewed or are under review as part of our compliance and assurance program.
Caution should be exercised in comparing risk zones over the 2 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 and Question 27 disclosures
Disclosures on question 22, 2019–20 and 2020-21
Disclosure
|
Low risk
|
Not low risk
|
Total
|
2019–20
|
75
|
4
|
79
|
2020–21
|
16
|
-
|
16
|
The hybrid mismatch rules outlined in question 22 as set out in Practical Compliance Guideline PCG 2018/7 are intended to deter the use of hybrid mismatch arrangements that result in double non-taxation outcomes by exploiting differences in the tax treatment of an entity or financial instrument under the income tax laws of 2 or more countries. The objective of the imported hybrid mismatch rule under question 27 is to maintain the integrity of the other hybrid mismatch rules by removing any incentive for multinational groups to enter into hybrid mismatch arrangements.
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.
Question 27 was new to the RTP schedule in 2020–21 and relates to payments made under structured arrangements which gave rise to imported hybrid mismatches.
Law Companion Ruling LCR 2019/3 provides the Commissioner's view of the law in relation to the phrase 'structured arrangement', and Practical Compliance Guideline PCG 2019/6 helps taxpayers assess whether a payment giving rise to a hybrid mismatch is made under a 'structured arrangement'.
We use the data available from the RTP schedule disclosures and other information sources, such as question 47 on the International dealing schedule to identify and monitor imported hybrid mismatch arrangements. Our focus is on ensuring compliance with hybrid mismatch rules through ongoing engagement.
Comparison of risk zone disclosures on hybrid arrangements in question 22, 2018–19 to 2019–20
The number of question 22 disclosures decreased by 80 percent in 2020–21. This was expected due to the implementation of the hybrid mismatch rules, and the RTP schedule was updated in 2020–21 to no longer require disclosures for restructures that occurred in prior income years. All disclosures in 2020–21 have been rated as low risk.
Question 27 had one arrangement in 2020–21 which does not reflect the anticipated number of expected disclosures. While the international dealing schedule data has identified several imported hybrid mismatch arrangements, we are concerned that the limited number of disclosures at question 27 is due to taxpayers taking incorrect positions that payments are giving rise to imported hybrid mismatches were made under non-structured arrangements as opposed to structured arrangements. We are investigating this further through our assurance and review activities.
We will continue to use information available and ongoing engagement and assurance activities to detect and address non-disclosure under question 27.
Inbound distribution arrangements: Question 24 disclosures
Comparison of risk zone disclosures on inbound distribution arrangements in question 24, 2019–20 and 2020–21
Notes
- Not disclosed are disclosures by taxpayers who included the question number but didn’t include a valid sub-category on their schedule.
- PCG not applied refers to taxpayers who choose not to follow the PCG or taxpayers who fall within any of the following:
- entities that have adopted the distributor simplified transfer pricing record keeping option in PCG 2017/2
- paragraph 49 of PCG 2019/1
- where an entity has an inbound distribution arrangement but an EBIT margin is unable to be determined and the taxpayer has not applied PCG 2019/1.
- PCG 2019/1 doesn't provide for an equivalent white zone similar 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. Our focus for PCG 2019/1 is on transfer pricing outcomes associated with the activities of inbound distributors including the distribution of goods purchased from related foreign entities for resale, and the distribution of digital products or services where the intellectual property in those products or services is owned by related foreign entities.
We review the reasonableness of these disclosures as part of our Justified Trust program. Under this program we review the top 1,100 public groups and multinationals in Australia including many in-bound distributors. We use our data and analytics capabilities to assess the reasonableness of disclosures of distributors outside this population who are required to complete the RTP schedule. We employ a range of approaches to detect and address any incorrect disclosure or non-disclosure.
The level of high-risk disclosures decreased in 2020–21, however care needs to be taken when considering these figures due to changing reporting requirements for this question which makes it difficult to compare across years. Most taxpayers who disclosed an inbound distribution arrangement fall within our Top 100 or 1,000 programs. Therefore, the tax outcomes of their arrangements are reviewed and assured under these programs.
We engage with taxpayers with inbound distribution arrangements that are in our medium and emerging population. This engagement has resulted in further investigation or required lodgment of the RTP schedule and question 24 disclosures.
There was minimal change in the number of disclosures at question 24. Although there was a change in risk zones across the 2 years, it is difficult to compare these as the question sub-categories have changed. Different options for not applying the PCG were introduced in 2019–20 and are reported as PCG not applied. For these reasons, there isn't comparable data across the 3 years.
Non-ADI arm's length debt test: Question 37 disclosures
Comparison of risk zone disclosures for question 37, 2020–21
Practical Compliance Guideline PCG 2020/7 sets out our compliance approach in respect to the arm's length debt test. The arm’s length debt test sets out the requirements to determine a notional amount of debt capital that would reasonably be expected in the hands of the borrower. This approach often relied upon where a taxpayer is unable to rely on the safe harbour debt test to supports its maximum allowable debt amount.
The guidance provides a 'best practice' approach to undertaking the test and assessment framework against which taxpayers may self-assess. It also provides a differentiated risk assessment framework against which taxpayers may self-assess their perceived level of risk.
Disclosures made under question 37 provide meaningful insights into the population of taxpayers relying on arm's length debt test. The subcategories provide further understanding of the risk profile of taxpayers.
Question 37 received 44 disclosures in 2020–21. Sixty percent of disclosures in 2020–21 are rated as medium, implying that the majority of taxpayers have applied PCG 2020/7 and followed 'best practice' approach to undertaking the arm's length debt test. Most medium risk arrangements are or have been subject to a review or fall within our Top 100 or 1,000 programs.
There were 2 disclosures rated as high, both of which are subject to compliance activity. We have reviewed the 5 disclosures that have not applied the PCG, with some taxpayers referred to our compliance program for further action. The engagement will encourage optimal participation through ongoing monitoring of reporting obligations.
Disclosures on arrangements subject to taxpayer alerts
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 most 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.
Taxpayer 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 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.
Funding special dividends or buybacks: Question 2 disclosures
There were no disclosures at question 2 in 2020–21. Question 2 relates to equity raising to fund special dividend or share buyback arrangements. We are concerned that these arrangements are being used by companies for the purpose of releasing franking credits or streaming dividends to shareholders funded by raising capital. This may result in the release of franking credits that may otherwise have been retained by the company.
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
Question 3 relates to procurement hub arrangements described in Taxpayer Alert TA 2015/5. TA2015/5 addresses the risk of Australian resident multinational entities entering offshore procurement structures where there is a bifurcation of the procurement function between 2 separate offshore entities. The risk is that such structures are being used by multinational entities for the purpose of minimising tainted income under controlled foreign company rules.
There were 3 disclosures at question 3 in 2019–20. The number of disclosures halved in 2020–21 and all taxpayers who have disclosed arrangements at question 3 also disclosed arrangements in 2019–20. The stable number of disclosures indicates a positive shift in behaviour and that the risk is not proliferating.
The application of Taxpayer Alert TA 2015/5 is considered as part of our compliance and assurance program, where we have identified non-disclosure we review those taxpayers.
Our risk and assurance programs give us confidence these arrangements are no longer prevalent in the population.
Lease-in lease-out arrangements: Question 7 disclosures
Taxpayer Alert TA 2016/4 relates to arrangements involving cross-border leasing of mobile assets. We are concerned about multinational entities with arrangements that involve a related legal entity interposed to lease an asset from a foreign owner to an Australian operator to gain favourable tax treaty treatment. We are also concerned about whether the amount brought to tax is consistent with the contribution made by the Australian operations, including the use of the mobile asset, and whether this meets the arm's length requirements of the transfer pricing provisions of our tax laws.
There were 4 disclosures at question 7 in 2020–21. The arrangements are reviewed under our Top 1,000 assurance program.
Offshore permanent establishments: Question 8 disclosures
Question 8 relates to arrangements involving tax consolidated groups with offshore permanent establishments, as described in Taxpayer Alert TA 2016/7. We had been concerned about Australian tax consolidated groups with offshore permanent establishments that have entered into intra-group transactions with no substantive contribution from Australia to the business carried on or through the offshore permanent establishments.
There were 10 disclosures at question 8 in 2020–21. Most 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. Our risk and assurance programs give us confidence these arrangements are no longer prevalent in the population, therefore question 8 has been removed from the 2021–22 year and TA 2016/7 has been archived.
Thin capitalisation: Question 10 disclosures
There were 5 disclosures at question 10 in 2020–21, a reduction of 8 from 2019–20.
Question 10 deals with the exclusion of amounts treated as equity for accounting purposes from thin capitalisation debt calculations as described in TA 2016/9. Our interest is in those entities that reduce their tax liabilities by using excess amounts of debt capital to finance their Australian operations. 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 and in the majority of cases taxpayers have been found to be compliant with TD 2020/2. The reduction in disclosures from the previous year indicates that TA 2016/9 and TD 2020/2 are assisting in achieving broad compliance. The remaining arrangements are reviewed under our Top 1,000 assurance program.
Related party finance: Questions 6, 11, 17, 18, 33 disclosures
Disclosures on questions related to financing arrangements, 2020–21
Question
|
Topic
|
Taxpayer alert
|
Disclosures
|
6
|
Financing – CCIRS
|
TA 2016/3
|
6
|
11
|
Financing – round robin arrangements
|
TA 2016/10
|
5
|
17
|
Financing – WHT
|
TA 2018/4
|
11
|
18
|
Financing – debt deductions and NANE
|
TA 2009/9
|
23
|
33
|
Mischaracterisation arrangements connected with foreign investment
|
TA 2020/2
|
0
|
Risks associated with related party financing arrangements continue to be a key focus for us. We use the disclosures under questions 6, 11, 17, 18 and 33 together with data from the International dealings schedule and CBC reports to identify and assess these risks.
Taxpayer Alert TA 2016/3 considers arrangements involving related party foreign currency denominated finance with related party cross currency interest rate swaps. Our main concerns are arrangements which have implemented financing in an excessively complex manner designed to increase the cost of corporate borrowings by Australian companies from their overseas related parties to avoid interest withholding taxes.
The number of disclosures at question 6 decreased from 10 to 6 in 2020–21. We have reviewed, or are reviewing, 5 of the arrangements disclosed and we are planning to review the remaining arrangement.
Question 6 has been removed from the 2021–22 RTP schedule as the arrangements fall within Schedule 2 of PCG 2017/4 and the risk rating under that schedule is required to be disclosed at question 23.
Taxpayer Alert TA 2016/10 under question 11 addresses cross-border round robin financing arrangements. The concern with these arrangements is that they involve funding of an overseas entity or operations by an Australian entity, where the funds are subsequently provided back to the Australian entity, or its Australian associate, in a manner which purportedly generates Australian tax deductions while not generating corresponding Australian assessable income.
There were 5 disclosures at question 11, all of which have been reviewed as part of our compliance program. The number of disclosures has decreased by 33%.
Taxpayer Alert TA 2018/4 relates to cross-border arrangements where income tax deductions are claimed in Australia on an accruals basis, but withholding tax is not paid when deductions are claimed. We are concerned with tax-driven structuring, claiming a deduction where a payment is not expected to take place and tax issues that arise from how the transaction is affected.
One taxpayer 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 compliance program.
Taxpayer alert TA 2009/9 under question 18 concerns cross-border financing arrangements which seek to generate debt deductions in Australia via arrangements with little or no commercial or economic purpose and that appear to be driven by the tax benefits.
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 TA 2009/9 these disclosed arrangements don’t pose a compliance risk. Arrangements disclosed under question 18 should also report deductions under the International dealing schedule 25B. We will engage with 2 of the taxpayers that did not disclose an amount in the International dealings schedule. The remaining disclosures will be reviewed under our Top 100 and Top 1,000 assurance program.
Question 33 was added to the schedule in 2020–21 and relates to mischaracterised arrangements and schemes connected with foreign investment into Australian entities as outlined in TA 2020/2. As expected, there were no disclosures made for question 33, this risk remains part of our assurance program.
Business fragmentation: Question 12 disclosures
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, our concerns arise with arrangements which attempt to fragment integrated trading businesses in order to re-characterise trading income into more favourable passive income.
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.
There were 8 disclosures at question 12 in 2020–21. We understand that of the taxpayers that have lodged valid transitional election forms, many have not accurately reflected managed investment trust cross staple arrangements income. We are engaging with taxpayers that have interests in staple structures to ensure the application of integrity measures and appropriate pricing of financial arrangements.
R&D: Question 13 disclosures
There were 14 disclosures at question 13 in 2020–21. R&D disclosures relate to claiming tax incentives for ordinary R&D business activities within the industry sectors identified below. Arrangements likely to be reviewed by us and AusIndustry relate to companies that are claiming the R&D expenditure where some or all of the expenditure incurred relates to business activities.
These R&D activities are 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).
Almost half the disclosures for question 13 relate to arrangements outlined in TA 2017/5. 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.
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
Question 20 relates to arrangements involving securities lending and derivative contracts as described in Taxpayer Alert TA 2018/1. Our focus is on arrangements that are intended to provide imputation benefits to Australian taxpayers who are not the true economic owners of the shares.
There were no disclosures at question 20 in 2020–21. 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. This question has been removed from the 2021/22 RTP schedule as the information is collected through other means.
Intangibles migration: Question 25 disclosures
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 to inform whether intangible assets have been appropriately recognised and Australian royalty obligations have been met.
There were 18 disclosures at question 25 in 2020–21. Many of the 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. Several disclosures indicated that there is engagement with us about the arrangement under an advance pricing arrangement or other review activities.
The remaining disclosures are reviewed as part of our Top 100 and 1,000 assurance programs. We will continue to monitor the risk associated with arrangements described under TA 2018/2 as part of our compliance and assurance program.
MEC group and CGT asset sold: Question 26 disclosures
There was one disclosure at question 26 in 202019–210. Question 26 relates to the sale of a CGT asset to an eligible tier 1 entity in a multiple entry consolidated (MEC) group, with the entity subsequently sold to a third party. Question 26 was added to the RTP schedule in the 2019–20 income year to inform concerns that taxpayers may be entering into the arrangements described in TA 2019/1 to avoid realising large capital gains on the disposal of CGT assets.
The disclosure at question 26 in 2020–21 is being reviewed as part of our compliance program. We continue to monitor the risk associated with arrangements described in Taxpayer Alert TA 2019/1.
Activities connected with DEMPE of intangible assets: Question 32 disclosures
Question 32 relates to international arrangements that mischaracterise Australian activities connected with the development, enhancement, maintenance, protection or exploitation (DEMPE) of intangible assets as described in Taxpayer Alert TA 2020/1. We are concerned that these arrangements may be non-arm's length or intended to avoid tax, resulting in inappropriate outcomes for Australian tax purposes.
There was one disclosure made in 2020-21. This arrangement is currently being managed as part of our Advance Pricing Agreement Program. We will continue to monitor risks associated with activities set out in Taxpayer alert TA 2020/1 as part of our compliance program.
Interposed entities to avoid withholding tax: Question 34 disclosures
There were no disclosures made under question 34 in 2020/21.
Taxpayer alert TA 2020/3 describes arrangements involving interposed offshore beneficiaries of Australian trusts claiming excessive interest deductions on related party debt while no interest withholding tax is paid due to the interposition of the non-resident related party.
MEC groups: Question 35 disclosures
Taxpayer alert TA 2020/4 outlines our concerns on multiple entry consolidated groups avoiding capital gains tax through the transfer of assets to an eligible tier-1 company prior to divestment. Our focus is on arrangements which appear to be designed to avoid the inclusion of capital gains in the assessable income of Australian resident entities upon the disposal of their assets.
There were 6 disclosures at question 35 in 2020-21. All the disclosures are from taxpayers in the Top 1,000 program. The arrangements disclosed are reviewed as part of our compliance and assurance programs.
Derivative instruments: Question 36 disclosures
This question relates to arrangements where an imputation benefit is claimed by a taxpayer relating to a parcel of Australian shares held (directly or indirectly) where it has offset its economic exposure to those shares, through the use of a derivative instrument as described under Taxpayer alert TA 2020/5.
Our concerns are with arrangements where the taxpayer having no or nominal economic exposure to both the dividend and capital performance associated with additional shares acquired (through entering into derivative instruments) claims the imputation credit / franked dividend associated with those shares. There were no disclosures made under question 36 in 2020-21.
We are monitoring risks associated with TA 2020/5 through our compliance and assurance programs.
Other questions
Other questions include:
S25-90 deductions and NANE income: Question 1 disclosures
Question 1 relates to deductions claimed under section 25-90 where income earned is non-assessable and non-exempt (NANE).
Disclosures made under question 1 are considered along with taxpayers that disclose under the International dealings schedule question 25B. Of the 4 disclosures made under question 1, 2 did not disclose under the IDS; these will be subject to further engagement.
Question 1 was removed from the 2022 RTP schedule instructions as the information is collected via other means.
Consolidation churning: Question 16 disclosures
There were 15 disclosures at question 16 in 2020–21. Question 16 relates to application of the consolidation churning rule to arrangements entered into by a multiple entry consolidated group.
Most of the 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 Top 1,000 taxpayers. The arrangements have been reviewed under our assurance programs and assessed as no risk or taxpayers have resolved the matter with us through settlement.
Material changes to settlement positions: Question 19 disclosures
Question 19 relates to breaches or material changes to facts covered by settlement deeds and future compliance arrangements. It is an important feature of our settlements that we achieve behavioural change and secure future tax outcomes. We continue to monitor compliance with these agreements closely.
There were 7 disclosures at question 19 in 2020–21. 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 and agreements or are implementing changes to ensure compliance with the deed.
Unamended mistakes or omissions: Question 21 disclosures
There were 28 disclosures at question 21 in 2020–21. Question 21 relates to any unamended mistakes or omissions in tax returns. We review the responses to detect mistakes or error with a particular focus on those where amendments are not evident.
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 28 disclosures were from Top 100 or 1,000 taxpayers. Their disclosures are reviewed through our assurance programs to ensure appropriate amendments are lodged.
Approximately one-third of the disclosures have a corresponding amendment made to the tax return. The remaining have been reviewed, or the amendments are expected to be made to the 2019–20 return, and 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.
New PCGs published: Question 38 disclosures
Question 38 was added to the RTP instructions in 2020–21. It requires taxpayers to disclose high-risk arrangements on PCGs published after the RTP instructions were released.
Before 2020–21, the RTP instructions were updated throughout the year. This question was introduced to make this process simpler while ensuring that high-risk arrangements are disclosed.
There were 9 disclosures at question 38 in 2020-21. Five of the disclosures were rated as low, 2 were rated as moderate risk and 2 disclosures did not apply the self-assessment risk rating.
All of the disclosures made related to PCG 2021/5, published on 16 December 2021. PCG 2021/5 relates to risks associated with the imported hybrid mismatch rule in subdivision 832-H ITAA 1997.
The disclosures are used with other information sources such as question 47 of the International dealing schedule, to assess risks associated with the imported hybrid mismatch rule as part of our compliance program.
In the 2021–22 RTP instructions, arrangements relating to PCG 2021/5 are disclosed at Question 39. Question 38 was removed from the RTP instructions in 2021–22.
What we've learned from Reportable tax position (RTP) schedule Category C disclosures made in the 2020–21 income year.