Australian Banking Association Steering Group key messages 24 May 2021

Opening Address/Welcome

The Chairperson welcomed attendees and opened the meeting.

Michelle Sams will be acting in Chris Ferguson’s Assistant Commissioner Engagement and Assurance role for three months whilst Chris moves into his role within Public Groups and International (PG&I) Case Leadership, providing leadership on cases, leading Budget measures and work within the Intangibles cluster.

Michelle has prior experience in KPMG with a focus on international tax and mergers and acquisitions. Since joining the ATO, Michelle has been overseeing the Foreign Investment Review Board (FIRB) program, following up on FIRB risk assessments.

Michelle will now have oversight of the Banking and Finance population in Docklands. Australian Banking Association (ABA) members who previously liaised with Chris can contact Michelle.

Opening statement

Key messages from Deputy Commissioner Public Groups Rebecca Saint, and Assistant Commissioner Banking and Finance Strategy Nick Maley

The ATO made the following comments:

COVID-19 – ATO update

• Last year, the ATO focused heavily on assisting the community through the pandemic and delivering on a range of key economic stimulus measures, primarily the JobKeeper program. With most of these measures coming to a close (bar a small number of tail-end cases), the ATO will be disbanding specific branches dealing with the stimulus measures and redeploying staff back to their original areas. For PG&I, it is anticipated that staff will return by the end of June. Notwithstanding the end of key stimulus measures, the ATO will continue to assist with economic recovery and provide ways for businesses to move through the current phase.
• The ATO will continue to work with other government agencies on data, with a focus on what can and cannot be shared between agencies. With the Commissioner of Taxation becoming the Australian Business Register Registrar, company registers will transition from Australian Securities and Investments Commission to the ATO. It is anticipated that the storage, maintenance and data ethics will become an increasing priority.
• Some other areas of work becoming a focus for the ATO include Single Touch Payroll Phase 2 and e-invoicing.
• A number of initiatives announced last year will continue to be in place this year, particularly within the small business space. The ATO will continue to redeploy resources to deliver on small business reform whilst monitoring and assessing tax performance for small businesses.

ATO & PG&I Strategy and focus areas leading into 2021–22

• The focus for PG&I for the upcoming year will remain on the reduction of tax gap. The ATO continues to see general positive improvements in the tax gap.
• No significant shift to the PG&I work program is anticipated, reflective of the funding commitments made to the government for the Tax Avoidance Taskforce program and goods and services tax (GST) commitments that are in place until 2023.
• In relation to the Top 100 Program, it is anticipated that approximately 50% of Top 100 taxpayers will obtain high assurance by 30 June for income tax. Additionally, 30% of taxpayers with medium assurance will be trending towards high assurance.
• There has been substantial work on the Monitoring & Maintenance (M&M) phase in terms of determining what the ‘refresh’ year looks like for Top 100 taxpayers, and determining which taxpayers will not require significant commitments in resourcing, taking into account the nature, diversity and complexity of their businesses.
• In relation to the Top 1,000 Program, the ATO noted that since the Combined Assurance Review (CAR) Program was rolled out in August 2020, 107 cases have been through the program to date. The ATO has experienced tangible improvements on the time taken to get through the CAR review, which is a ‘top-up’ from the income tax review undertaken in the first round, with a focus on whether taxpayers have implemented recommendations arising from the first round review. Taxpayers are expected to have gained a better understanding of the ATO’s expectations from the previous round, so the intensity of the CAR will be driven by the taxpayer’s preparedness and whether previous recommendations have been implemented.
• The ATO notes some difficulties Top 1,000 taxpayers are experiencing with respect to tax governance and is conducting consultations through the Large Business Stewardship Group to understand what it is that is proving difficult for taxpayers. An example the ATO has noted is on the testing of controls – what is meant to have controls ‘independently tested’. The ATO is committed to the principle that controls testing needs to be effectively designed and operating in practice, but how businesses can demonstrate this should be tailored to their individual circumstances. The ATO is seeking to provide some nuanced guidance on this issue.
• A number of cases have been deferred as a result of COVID-19, recognising that there was a lot of uncertainty for businesses who were focussed on survival. As the pandemic situation has become more stable, the ATO has now commenced a number of Top 1,000 Next Actions cases for review and audit.
• In relation to GST, the ATO will review how GST cases went in the first round pilot and look at the questions posed to taxpayers on GST and whether the information obtained from these questions were relevant in making an assessment. The ATO will review and consult on GST governance reviews, with changes to reporting financial institutions anticipated following this.
• The ATO has observed that transfer pricing continues to be one of the biggest issues for Top 1,000 taxpayers and expects to review the decisions in Commissioner of Taxation v Glencore Investments Pty Ltd [2020] FCAFC 187External Link (Glencore) to understand its impact on the case pool more broadly. The ATO will publish a Decision Impact Statement as soon as possible.
• Issues surrounding intangibles are growing in the context of transfer pricing and Part IVA cases. The ATO issued PCG 2021/D4 Intangibles Arrangements, designed to set expectations from the outset as opposed to the ATO shaping expectations through a review. It requires taxpayers to focus on the substance of the arrangement to self-assess risks as there are often difficulties in classifying intangibles.
• The ATO has also noted a number of arrangements that may fall within TA 2020/4 Multiple entry consolidated groups avoiding capital gains tax through the transfer of assets to an eligible tier-1 company prior to divestment – the use of eligible tier-1 (ET-1) company structure to avoid the inclusion of capital gains in the assessable income of Australian resident entities.
• Cross border related party arrangements remain a focus area in assurance reviews this year. Taxpayers should also be aware of the application of the newly introduced anti-hybrid rules to their related party arrangements.

Key messages/outcomes from the 2021 Budget

• The ATO has not seen as many income tax returns with the Temporary Full Expensing and Loss Carried Back measures so far. It is anticipated that interest may pick up post Budget 2021.
• The administrative concessions on permanent establishment (PE) for employees stranded in Australia or overseas as a result of COVID-19 are still in place and have been extended until the end of 2021. The ATO notes that the relevant integrity measures are still in place. Members who are looking to access PE concessions are encouraged to reach out to their client teams to discuss.
• The ATO notes concessions around income tax returns lodgments for taxpayers with substituted accounting periods that have lodgments due in July. There is no blanket deferral for lodgment, but the ATO will consider penalty remission for delayed lodgment. For significant global entities, there is an automatic penalty remission if lodgment is within 30 days of due date. If a longer deferral is required, taxpayers are encouraged to contact the ATO to discuss on a case-by-case basis.
• There are a number of other measures in the 2021 Budget that will be implemented by PG&I, including the Patent Box regime, digital economic strategies (digital games tax offset). These initiatives are generated from the Global Business and Talent Attraction Taskforce announced by the Prime Minister last year to attract digital businesses setting up in Australia.
• Work is underway to determine how the ATO can provide practical certainty early for transactions that might not be ready to go to rulings or may face some difficulties in the rulings process. Some issues are not suited to be resolved by way of a ruling, where the early timing of the transaction means insufficient facts and evidence has been gathered to make a decision. The approach taken may be similar to the comfort letter approach.
• However, the ATO has found in reviewing transactions that had comfort letters issued, that in a number of cases the transaction was no longer as was described to the ATO during discussions leading up to the comfort letter. Going forward, the ATO is looking at how to best address the issues that are important for both the taxpayer and the ATO in a particular transaction.
• The 2021 Budget announced new taxation of financial arrangements (TOFA) hedging rules. These rules are designed to address known problematic areas, or rules that don’t provide the correct outcome. The new rules are aimed to make the provisions more streamlined and to bring the TOFA treatment closer to the accounting treatment.
• The Offshore Banking Unit (OBU) amendments means that the regime will be closed to new entrants, and business as usual for existing participants. The ATO will continue to review OBUs under existing programs.

Other corporate messages

• The ATO anticipates questions on large market taxpayers in the upcoming Senate Estimates, particularly on digital services and e-commerce related issues. In addition, it is expected that there will be a focus on multinational taxation against a budget deficit backdrop. However, the ATO is well placed to assist in public debate through the results it has achieved in the Justified Trust program.
• The ATO will continue to work with banks on what assurance activities will look like after high assurance is achieved and what the Monitoring & Maintenance (M&M) phase will look like for annual compliance arrangements (ACA) taxpayers. The ATO aims to reduce the amount of work required for future years, whilst being aware of the need to review significant transactions that banks enter into during the M&M phase.

Topics for discussion and feedback from industry

Remediation: update on ATO strategy

The ATO made the following comments:

• The ATO has observed that each remediation program is unique at the granular level and therefore will look to deal with each program one-to-one as much as possible. To the extent that there are similarities, the ATO will look to publish public guidance on those points.
• The ATO notes that there has been recent discussions in the ABA regarding what data is required for non-Part VA investments. At this stage, the ATO is not collecting data outside of what is required under Part VA, nor does the ATO plan to get this data in bulk at this point in time. The ATO may still reach out and request data under a section 353-10 notice but only in limited circumstances where it is considered the benefits of obtaining the data will outweigh the costs of data gathering.
• The ATO notes that there is nothing planned at this point in time regarding section 353-10 notices but will ensure that if there is to be a section 353-10 request, that the ATO will reach out and discuss with the impacted banks beforehand.
• The ATO confirmed that the PAYG withholding fact sheet is a statement on the ATO’s view on how withholding and reporting on Part VA investments have applied and will continue to apply.

In response, the ABA noted:

• There is particular concern about reporting on non-Part VA investments, where banks are feeding payments back into loan accounts that do not bifurcate this payment into relevant interest amounts. Banks will need to have a look at how to reconfigure its systems going forward if there is a future requirement from the ATO for this type of data.
• There are business accounts that can pay both debit and credit interest, and there is a question on the nuance required on reporting on the types of payments that refund debit interest on something that pays credit interest.

Justified Trust

The ATO made the following comments:

Top 100

• There is good progress being made in the Top 100 space, with internal finalisation panels happening in June and July. It is anticipated that a few banks will reach high assurance following these panels.
• The ATO notes the continued focus on transfer pricing and branch attribution, with consideration on how to get to a level of assurance over these topics without examining every single transaction.

Top 1,000

• The ATO has issued a Next Actions letter that discusses the issues identified from the first round Top 1,000 reviews. The letter outlines steps that can be undertaken to get to the highest level of assurance possible.
• The ATO notes that the letter and appendices are outlining areas where some banks are a little out of step with the rest of the market, and not dealing with active mischief per se. While the focus of the letter is on Top 1,000 banks, there are many aspects that overlap with outbound banks. The ATO may look to organise a separate Q&A session to specifically discuss the letter and appendices with ABA members.
• The ATO is finishing the last cases under the first round of the Top 1,000 review, noting that some Top 1,000 banks are as complex, if not more complex, than Top 100 non-banking taxpayers. Should there be further issues that arise from finalising these final cases, the ATO may provide additional appendices to the Next Actions letter to cover these issues.
• With regard to next actions from the Top 1,000 reviews, the ATO is looking to dig deeper on any issues that were rated low assurance or red flag in the first round.

GST

• The ATO encourages feedback from members on Justified Trust for GST.
• The ATO is considering what kind of information is required particularly from ACA taxpayers in terms of disclosures to facilitate a move into the M&M phase. The ATO is looking to consult with members on additional disclosures under the ACA for GST such as extent of creditable purpose (ECP) rates for input tax recovery. More specific details will be provided in the upcoming ABA working group meetings.
• Additionally, Financial Services has been identified as a core GST risk area for additional resources. The ATO is keen to deal with known risks, avoid entrenched problems around issues such as apportionment, and to find a pathway for both the ATO and financial institutions to be comfortable on methodologies more broadly.

The ABA noted:

• The ABA wanted to know the ATO’s response to the London Interbank Offered Rate (LIBOR) transition more generally – whether the ATO is looking to publish some public guidance on this issue.

In response, the ATO noted:

• There is a lot of work happening internally on the LIBOR transition, with an internal working group progressing on a discussion paper that will be issued to the market for consultation in the next few months.
• The discussion paper will cover the relevant fact patterns/scenarios/problem areas put to the ATO by the market, which are largely Taxation of financial arrangements (TOFA) events, transfer pricing issues, section 128F withholding tax exemption. It will also outline some example scenarios that the ATO has been presented with.

New and emerging issues in banking and finance

The ABA made the following comments:

• The latest data on Australian Prudential Regulation Authority temporary loan repayment deferrals due to COVID-19 concession shows less than 5,000 loans remain deferred, compared to 900,000 loans during the height of COVID-19.
• The transition from these temporary loan deferrals has proven to be much smoother than anticipated, which is reflected in the banks’ provisions for the year.
• On a broader economic perspective, business confidence is at its highest since 2010. Small and medium enterprises (SMEs) have reported job roles to be filled, and banks have increased lending to SMEs recently (c.$8.4 billion in March 2021), potentially indicating new business and confidence.

The ATO noted the following in response:

• The ATO has interest in FinTech and cryptocurrency and the various tax considerations that flow from these businesses. The ATO may look to engage the ABA in the future to discuss the roles these businesses have and their impact on ABA members.

Other business

The ATO made the following comments:

• Internal discussions with Economist Practice (EP) continue on what documentation and evidence is required for achieving high assurance in transfer pricing. It is hoped that by the next working group meeting, a representative from EP can attend and speak to ABA members on this point.

Attendees