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  • Subdivision 768-A Consultation minutes 27 April 2016

    Meeting details

    Venue:

    747 Collins St Melbourne

    Teleconference

    Sydney, Melbourne

    Date:

    27 April 2016

     

     

    Start:

    2:00 PM

    Finish:

    4:00PM

    Chair:

    Paul Korganow

    Facilitator:

    Penny Georgiou

    Contact and Secretariat:

    Julie Walters

    Contact phone:

    (03) 9275 9897

    Attendees

    ATO Members

    Paul Korganow

    Assist Commissioner International Profit Shifting

    Louise Clarke

    Tax Counsel Network

    Michael McCormack

    Tax Counsel Network

    Penny Georgiou

    Senior Director International Profit Shifting

    Kevin O'Shaughnessy

    Senior Director Technical Leadership Group

    Michelle Osler

    Director Technical Leadership Group

    Gulalai Fazal

    International Profit Shifting

    Hajar Khasmuin

    Technical Leadership Group

    Andrew Phlorides

    Technical Leadership Group

    Mary Fung

    Tax Counsel Network

    Professional and Industry Body Representatives

    Cameron Blackwood

    Taxation Institute of Australia Corporate Tax Association (via phone)

    Tony Stolarek

    Chartered Accountants Australia and New Zealand

    Tim Carberry

    CPA Australia

    Vivian Chang

    Law Council of Australia

    Apologies

    Michael Taylor (on behalf of Peter Collins)

    PricewaterhouseCoopers

    Nick Zanikos

    International Profit Shifting

    Jenny Wong

    Chartered Accountants Australia and New Zealand (via phone)

    Agenda items

    Disclaimer

    Technical working group agendas, minutes and related papers are not binding on the Australian Taxation Office (ATO) or any of the other bodies referred to in these papers. While every effort is made to accurately record views expressed, the wording necessarily represents a summary of statements of general position only, and care should be taken in interpreting those statements. These papers reflect the position at the date of release (unless otherwise noted) and readers should note that the position on any issue may subsequently change.

    1. Introduction and welcome

    The chair welcomed the group and introduced the members.

    2. Purpose of the meeting

    This meeting follows the initial Subdivision 768-A Consultation Group meeting which was held on 24 February 2015 and the two subsequent meetings held on 21 July 2015 and 9 December 2015.

    As noted in the minutes of the meetings held to date, this group has been convened to specifically look at administrative and technical interpretive issues associated with Subdivision 768-A. The concerns raised by external representatives were principally about (i) the meaning of 'at the time the distribution is made' in paragraphs 768-5(1)(b) and 768-5(2)(d) of the ITAA 1997 on share buy-backs; (ii) what is the meaning of 'the amount can be attributed…to a foreign equity distribution' in paragraph 768-5(2); and (iii) what is the meaning of 'hold' in sections 960-185 and 960-190 of the ITAA 1997 and what impact does it have of the availability of the exemption in Subdivision 768-A.

    3. Agenda Item 2 - Life of consultation committee

    The Chair explained that as a result of the Consultation Steering Group meeting held on 21 March 2016, the life of this consultation group would need to be discussed.

    The external representatives suggested that as the items of the group are still in progress, there would be value in continuing the consultation process until the relevant draft Tax Determinations/Rulings were ready for external release. The CTA and the Law Council also preferred that the consultation process continue.

    4. Agenda Item 3 - Review of action items

    1. The first action item discussed covered the real life legal form debt examples that the external representatives intended to provide to the ATO.

    The ATO explained that they had received one example; however the example had already determined the outcome of the scenario, whereas the ATO is looking for examples that consist of purely facts not the final result.

    An external representative stated that they had not yet provided the ATO with their live example and would provide two live cases involving the classification of interest free loans shortly.

    2. The second action item required the ATO to consult with the Subdivision 815 Working Group regarding whether the current in-progress taxation ruling addresses what an independent party would do in a re-characterisation of debt/equity scenario. The ATO briefed the group on the status of the public ruling, explaining that the relevant public ruling notification had progressed to TCN and that the publication of the draft documents is expected to be available by November 2016.

    The ATO also mentioned that they had received advice from the minerals and energy sector that the position in TR92/11 should continue.

    The ATO thanked the representatives from PwC for their real life example contributions thus far and requested that the external representatives submit any relevant live scenarios soon in order for the ATO to ensure they address all relevant issues and cover consequential flow on effects. An external representative stated that they would provide a relevant example of an outbound loan arrangement.

    3. The ATO explained Action Item 3, which required the ATO to communicate with Treasury on its view regarding share buy-backs had progressed, however a final agreement between both parties had not yet been reached. Discussions between the Integrated Tax Design area and Treasury were to occur shortly.

    5. Agenda Item 4- Draft Taxation Determinations

    The ATO asked the group for feedback/comments on the draft tax determinations provided for the external representatives to review.

    One representative questioned the operation of subsection 351(2) and how it would work in a buy-back scenario, particularly with the 10% participation test. The ATO explained that a practical approach would need to be taken.

    A representative questioned what occurs in a situation where at the time of the distribution the 10% participation test is satisfied, however at year end when the distribution is received, the amount held by the entity has reduced to 4%; is the participation test still satisfied? The ATO explained that the 10% participation test must be satisfied at the time of the distribution not when the distribution is received. The ATO explained that the issue will be covered in the relevant taxation ruling.

    A representative raised the issue relating to the difference between paragraphs 32 and 33 of the draft tax determination relating to trusts. Particularly, whether subsection 351(2) negates the entitlement in paragraph 32 and whether the terms of the trust deed would be relevant. The ATO explained that the exemption under Subdivision 768-A would only apply to the dividends which are distributed at the time the 10% participation test is satisfied and not to any other dividends during the period where the rights are below 10%.

    A concern was raised by a member regarding paragraph 7 of the draft tax determination on partnerships. The issue raised regarded the differences between partnership interests under partnership law and capital gains law, where partners have different interests in assets.

    A member enquired whether the 'question' in the draft tax determination for partnerships could be reworded to include the issue of what does a partnership hold, as only the 'question' is legally binding. The ATO responded that in accordance with the tax determination procedures the wording of the 'question' was limited. Members made some suggestions as to how the 'question' could be altered.

    A member explained that the trust tax determination may have some consequential effects such as Division 6, and the disconnection with trusts. The member stated they would put forward a hypothetical scenario attempting to trace the interest and when the income is taxed.

    6. Agenda item 5- Update on the development of Taxation Ruling on Timing Issue

    The ATO explained that the draft ruling is at a progressed stage and waiting for the internal consultation process. The ATO explained once internal feedback is received on the draft ruling it will go to the Chief Tax Council for approval and then be issued externally as a draft. The ATO intends to have a draft ready for external consultation by the 3rd quarter of 2016. There is still the issue with confirming Treasury's view on the issue and the ATO will provide an answer on the outcome to the consultation group by the next consultation meeting.

    The ATO continued to explain that the ruling is currently following the decision that 'at the time' the buyback occurs is 'any time in the day' that the buyback occurs as in Division 16K.

    The ATO explained that the ruling will cover the tender process for share buy-backs in Australia. The ATO also mentioned that they are unsure of how certain foreign jurisdiction share buy-back laws may impact on the ATO's decision in regards to 'timing'. A member suggested that the onus will be on the taxpayer to apply for a private ruling if the rules of their foreign jurisdiction have an impact on the ATO's decision. It was also mentioned that New Zealand's rules on share buy-backs may be of concern.

    At this stage it is presumed the exemption will also extend to cancellations and liquidations. The ATO is still determining whether it will break down the issues of 'at the time' for cancellations and liquidations into individual tax determinations.

    7. Action items

    Action Item number

    1

    Action item name

    To provide two real life legal form debt examples.

    Responsibility

    Tim Carberry

    Status

    Open

    Expected delivery date

    30 June 2016

     

    Action Item number

    2

    Action item name

    To provide hypothetical example of tracing interest for a trust under subsection 351(2)

    Responsibility

    Vivian Chang

    Status

    Open

    Expected delivery date

    30 June 2016

     

    Action Item number

    3

    Action item name

    To provide comments on technical aspects of Division 974

    Responsibility

    Cameron Blackwood

    Status

    Open

    Expected delivery date

    30 June 2016

     

    Action Item number

    4

    Action item name

    ATO to continue discussions with Treasury regarding the disagreement concerning the application of the exemption to share buy-backs.

    Responsibility

    ATO

    Status

    Open

    Expected delivery date

    30 June 2016

      Last modified: 17 Jun 2016QC 49357