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  • Australian Financial Markets Association Liaison Group key messages 18 April 2019


    The ATO/Australian Financial Markets Association (AFMA) Liaison Group agendas, minutes and related papers are not binding on the 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. It is strongly recommended that where a formal ATO view does not exist for an issue contained in these Minutes that, for the abundance of clarity and certainty, Private Rulings be sought.

    1. Welcome and opening remarks

    Sandra Farhat opened the meeting and provided a brief introduction about her role as Assistant Commissioner in Public Groups and International – Operations and her background at the ATO.

    2. Diverted Profits Tax (DPT) guidance

    Nick Maley now also oversees the Advanced Pricing Arrangement (APA) and Mutual Agreement Procedure (MAP) programs as well as the administration of the Multilateral Instrument (MLI) and administration of Australia’s Tax Treaties.

    In relation to DPT, the following points were made by the ATO:

    • There are no active DPT audits of taxpayers in the AFMA industry.
    • There is some concern with related party transactions involving intangibles. The ATO is reviewing a number of taxpayers in this context. However, the issue is particular to the enterprise, rather than any particular industry as a whole.
    • The pricing of valuable intangibles is a current focus, whereby Australia is a major contributor to the development, but is then charged a significant fee for rights to access, intellectual property etc.
    • Withholding tax avoidance has been raised as an issue to which DPT may apply, as withholding tax avoidance is a benefit to which DPT can apply. The Taxpayer Alert TA 2016/3 is indicative of withholding tax avoidance structures that the ATO is concerned with.
    • The ATO has received 22 APA and private ruling requests in relation to DPT. The ATO noted that, for transfer pricing issues that also involve DPT, an APA is the best product. However, a private binding ruling is also potentially available in a similar manner to a general Part IVA ruling.
    • In relation to Top 1000 cases, DPT will only be raised if there are concerns.
    • There is an expectation that the ATO will issue some DPT assessments.

    AFMA asked whether the ATO was seeing taxpayers restructuring to get out of DPT.

    Some taxpayers are approaching the ATO about intended restructures to confirm that DPT would not apply.

    Action item





    Provide overview of the MLI and MAP Process at the next AFMA/ATO meeting.

    3. Significant Global Entity (SGE) penalties

    The ATO provided some background to the administration of SGE penalties:

    • Increased SGE penalties have been in place since 1 July 2017, though SGE penalties relating to schemes have been applicable since 1 July 2015.
    • The ATO has been applying SGE penalties in relation to late lodgement. An automated process detects late lodgement on various lodgement obligations. It was noted that PAYG annual reports can also attract SGE penalties.
    • However, a concessionary approach had initially been taken, to give warnings to taxpayers before an SGE penalty is applied, despite there being no obligation on the Commissioner to provide any warning prior to a Failure to Lodge (FTL) penalty. Given the legislation has been in place over18 months, and there have been multiple communications, taxpayers are now expected to be fully aware of their obligations.
    • A manual approach is taken when applying SGE FTL penalties, so a case officer will contact the taxpayer before any penalty is applied, and provides the taxpayer with the opportunity to request remission. PS LA 2011/19 sets out instances when remission may be considered. Where partial remission is allowed, only the net effect is posted to the taxpayer’s account.
    • The aim of SGE penalties is not to raise revenue, but rather to improve long term compliance.
    • SGE penalties also apply to false and misleading statements, failing to have a reasonably arguable position and for schemes.

    AFMA asked whether there has been an instance where the ATO and the taxpayer have disagreed as to the existence of the taxpayer’s lodgement obligation or as to whether the taxpayer has satisfied their lodgement obligation. AFMA provided the following examples, and wanted to know whether they had arisen:

    • where the taxpayer has provided what it considers to be General Purpose Financial Statements (GPFS) but the ATO does not consider the GPFS lodgement obligation to be satisfied; and,
    • where the taxpayer doesn’t think they have a Permanent Establishment (PE), but the Commissioner considers that it does.

    The ATO SGE Penalties representative was not aware at this stage whether those circumstances had arisen.

    The ATO did mention a case where a taxpayer was being required to lodge business activity statements for prior years to implement a retrospective adjustment in a genuine effort to comply with their obligations that did not result in any retrospective liabilities, but the ATO would not be seeking to apply SGE penalties in those circumstances.

    AFMA noted the following:

    • The GPFS guidance on the ATO website was updated to indicate a foreign resident operating a PE and did not lodge a GPFS with ASIC is required to provide the ATO with a GPFS prepared in accordance with Commercially Accepted Accounting Principles.
    • ASIC is continuing to review licensing requirements for Foreign Financial Service Providers (FFSP). An option being considered would require all foreign resident providers of financial services to wholesale clients to hold an Australian financial service license.

    Taxpayers wishing to obtain certainty on their lodgement obligations should request a ruling.

    The ATO is aware of the historical approach where, even in circumstances there may be a PE crystallised in Australia, the income of a PE is collectively disclosed in the return of another entity, rather than in a separate stand-alone return for that PE as required. The ATO sought feedback as to whether this approach was still in practice.

    The ATO also noted that there is a frequently asked questions page in relation to SGE penalties on the ATO website. It may be appropriate for some of the issues discussed in the meeting to be added to that guidance.

    Action item





    Inform AFMA if it encounters any fact patterns in relation to SGE penalties being applied where there is disagreement:

    • as to whether the taxpayer’s GPFS lodgement obligation has been satisfied
    • as to whether an entity has crystallised an Australian PE and so should have fulfilled its lodgement obligations.

    4. OECD Hybrid Mismatch Rules

    The ATO provided an update on the Hybrid Mismatch Rules, noting the following:

    • For taxpayers with income years commencing on or after 1 January 2019, the hybrid mismatch rules have now become applicable.
    • There have been a number of private ruling requests in relation to restructures of hybrid mismatch arrangements.
    • The ATO has been developing the following guidance products
      • PCG 2018/7. This PCG is in relation to Part IVA and restructures to preserve tax benefits that would otherwise be disallowed by the hybrid mismatch rules. It was finalised and issued October 2018.
      • PCG 2018/D9 and LCR 2018/D9. These guidance products are in relation to the ‘structured arrangement’ definition. They were opened for submissions in December 2018. Submissions have now been received and the ATO is anticipating that they will be finalised May 2019.
      • LCR 2019/D1. This LCR is in relation to the targeted integrity rule in Subdivision 832-J. This was opened for submissions on 5 April 2019. Submissions are open until 10 May 2019.
    • In relation to the foreign law interactions with the hybrid mismatch rules, the ATO was considering undertaking work on evaluating foreign tax regimes. However, the ATO is still considering what the format any consultation might take and what form of guidance might be appropriate. It is expected that any guidance would most likely be principles-based (with both negative and positive indicators), rather than a country by country listing.

    AFMA noted that its focus to date has been on branch mismatches. However, recently there has been consideration of the concept of “structured arrangement”, particularly in the context where demand for certain instruments was higher in a particular jurisdiction, and what triggers will give rise to an obligation to confirm whether a hybrid mismatch arrangement exists.

    AFMA asked whether it is possible to get guidance on a particular regime. The ATO advised that taxpayers should contact the Hybrids Team in the first instance for early engagement. This wouldn’t necessarily lead to issuing a private ruling, but if a private ruling was required, this would lengthen the process.

    The ATO noted that there were some announcements in the 2019–20 Budget in relation to the hybrid mismatch rules. Treasury has since provided further guidance on its website. The ATO summarised the proposed changes:

    • The following amendments to apply from 1 January 2019
      • ensure rules apply to multiple entry consolidated groups equally to consolidated groups
      • clarifying the application of the rules to trusts
      • clarify the meaning of foreign tax to national foreign income tax, while state and local taxes will be disregarded.
    • The following amendment to apply to income years commencing on or after 2 April 2019
      • as the hybrid mismatch rules apply in order, a change to ensure that the integrity rule can apply where other provisions have applied.

    Action item





    Provide AFMA with link to Treasury website in relation to the changes to the Hybrid Mismatch Rules announced in the 2019–20 Budget.


    Further information on the proposed Hybrid Mismatch Rules changes can be found on the Treasury websiteExternal Link.

    5. Addendum to TR 2005/5

    The ATO provided an update to the proposed changes to TR 2005/5:

    • The ATO received a submission late in the process and the subsequent caretaker period has caused the finalisation of the addendum to be held back.
    • The ATO is considering whether a PCG would be more appropriate to provide more guidance on the meaning of ‘substantially’. It will depend on the demand from the market and what would be most helpful, for example a percentage rule.
    • Given the deferment of finalising the changes, the ATO is willing to take further submissions on this matter. The earliest time for finalisation is anticipated to be August 2019.
    • The ATO clarified that the test will be on income from spread activities versus all non-spread activities collectively.

    In response to a query from AFMA, the ATO confirmed that, while TR 2005/5 only applies to the exemption in the United States and United Kingdom treaties, the ruling will apply to treaties with other jurisdictions with similar terms.

    Action item





    AFMA is invited to provide further feedback in relation to the addendum to TR 2005/5 (if not previously covered in its submission of 18 June 2018), particularly on:

    • whether a ‘bright line test’ would be helpful for members
    • what other activities may constitute spread activities.

    6. Liquidity Management Discussion paper

    The ATO provided an update on the Liquidity Management Discussion Paper:

    • ATO has determined not to amend the Discussion Paper or progress to formal guidance. Instead, a cover letter has been drafted to address AFMA’s submissions, particularly regarding the consideration of APRA’s prudential requirements in APS 210 and the ATO’s existing guidance on Australia’s permanent establishment attribution rules.
    • The cover letter will also provide a chronology of the issue, to ensure all discussions, consultation and feedback is captured in a single document.

    AFMA asked whether the cover letter will address other internal charges between a parent and the branch. The ATO advised that the cover letter would be liquidity specific. However, the principles could similarly be applied to other charges.

    AFMA asked whether it was still the case that the ATO is not seeing liquidity charges as being a significant issue. The ATO advised that this was the case, and a big factor as to why the Discussion Paper will not progress to formal guidance. However, if there are changes in the market or the issue becomes more material, it can be revisited.

    Some discussion was had surrounding current Banking & Finance representation in the Tax Counsel Network. The ATO noted that Marcus Ryan and Tim Loh would be the main contacts, though are not solely focused on Banking and Finance issues.

    7. Dividend Withholding Tax Reclaims

    AFMA provided background on the issue:

    • This is a live issue for AFMA, due to the takeover of Westfield in 2018 by a French and Dutch company. Investors of Westfield became investors in stapled instruments. The investors’ are given a beneficial interest by way of CHESS Depositary Interests (CDIs), while the CHESS Depositary Nominee holds the actual shares.
    • The security is paying its first dividend. In relation to the French component, French tax law requires withholding at 30 percent, regardless of residency. As a result, eligible investors will be seeking a reclaim of withholding tax overpaid from the French tax authority.
    • Australian investors will need to provide the French tax authority with evidence that they are subject to the Australian/France treaty (15 percent rate), so they will need a Certificate of Residence from the ATO.
    • AFMA noted that there are also privacy concerns, in relation to providing TFNs to a foreign jurisdiction and noted that the preference from industry would be for the issuance of Certificates of Residence disclosing ABNs as the unique identifier.

    AFMA asked the ATO how it administers the issuing of certificates of residency and whether the ATO has the capacity to issue certificates in bulk.

    The ATO stated that there is a push for a streamlining of the process. It will connect AFMA and/or the relevant member with the correct area within the ATO.

    Action item





    Provide AFMA with the appropriate contacts within the ATO.

    8. Tax Assurance Program (Top 100 & 1000)

    The ATO provided an update on the Justified Trust Tax Assurance Program:

    • The ATO is currently in the third of four years of the Taskforce. The ATO has completed around 50 percent of cases in the Financial Services industry.
    • Most reviews are being rated at medium assurance. While some are being rated high, these are generally taxpayers with smaller and simpler operations.
    • There are minimal red flags in this market and any red flags are generally isolated to the taxpayer.
    • Most reviews are being rated overall medium due to information gaps, and the reality that the ATO is unable to review all issues thoroughly enough to give a high assurance rating.

    The ATO highlighted the following issues that have been seen across the industry:

    • Governance
      • The ATO set a high standard in the framework on the ATO website. As a result, very few taxpayers in the whole Top 1000 population, and even Top 100, are getting to Stage 3.
      • The ATO noted that governance is particularly difficult for inbound groups, which rely on the global group governance structure.
      • However, not getting to Stage 3 does not prevent a taxpayer from getting an overall high assurance rating.
    • Research & Development (R&D) tax incentive
      • The ATO made a media announcement on 18 March 2019 in relation to software development claims. The focus is on ensuring that claimants are fully aware of the requirements in making R&D claims.
      • This is a systemic issue across the industry, though it is not as significant for foreign banks.
    • Branch attribution
      • Funding
        • The ATO is not seeing significant problems, as more branches are moving towards self-funding models in Australia with less reliance from head-office.
        • However, there are challenges in reaching high assurance for funding when considering all the related issues: Part IIIB, attribution, thin capitalisation, and, in particular, transfer pricing.
        • ATO noted difficulty in applying the LIBOR cap to currencies where LIBOR is not quoted and tend to opt out of Part IIIB.
      • Income
        • There is a focus around origination functions and attributing an appropriate share of income to Australia. Origination has value in a global business and warrants more than a cost function.
        • There are also management overlays added in some circumstances. However, taxpayers need to ensure that management overlays are not effecting the correct attribution for tax purposes.
      • Expenses
        • Cost plus arrangements are sometimes used as a way of attributing revenue offshore. Where the mark up is the same across different types of costs and functions, it is harder to justify as a proxy for attributing income.
        • If it is a cost centre type function, then there should be no mark up on the cost allocated. You can’t make margins on your costs under Australian tax law with intra-entity dealings.
        • Where the head office charges the Australian subsidiary, which on-charges to the Australian branch, there should not be a mark-up.
        • Where allocation keys are used, some taxpayers are using the same method for all charges. However, different charges should have appropriate keys to reflect the type of costs and functions.
        • The ATO has seen an information gap on third party expenses, where the costs allocated are not based on the actual expenses incurred with third parties.

    The issues highlighted will form part of an internal ATO report that will be drafted for senior management. The ATO also noted that outcomes and findings from the reviews to date have not justified a need for industry specific guidance.

    The ATO welcomes AFMA’s feedback on the Tax Assurance Program – whether there are any irritants in the process, what is going well and what could be better.

    • AFMA noted that feedback has been positive, with case officers advocating for the taxpayer. However, time frames have made achieving high assurance difficult.
    • AFMA queried if individual taxpayer ratings would be released, or if there would be ratings on an industry basis. Further, how is the ATO going to provide messaging at the conclusion of the Tax Assurance Program?
      • The ATO advised that, at this stage the main focus was on completing the remaining cases under the Assurance Program. It will need to consider how the reporting will be presented but did not anticipate individual taxpayer ratings would be released.
      • The ATO noted that the Tax Avoidance Taskforce received an extension in the Budget, which could mean reviewing all taxpayers again. If so, there may be guidelines on what taxpayers are required to do to achieve high assurance. The ATO also noted that this extension includes the Advisor Strategy program of work which is focussed on the inappropriate use of Legal Professional Privilege.
      • For those rated with low assurance, another program will need to be developed to manage and undertake the follow-up action on those taxpayers.
      • The ATO Banking & Finance Team is due to provide an interim report to the Strategic Management Committee by 30 June 2019 and the ATO will advise of any industry issues arising from that report.

    9. ATO Banking & Finance Strategy team - Governance and structure

    The ATO noted the following:

    • Sandra Farhat has taken over Anthony Marvello’s role as Assistant Commissioner of Banking & Finance Strategy.
    • Rebecca Saint has replaced Jeremy Hirschhorn as Deputy Commissioner of Public Groups.
    • Since mid-March, changes have been made in the Client Engagement Group to realign business lines with the client experience. The main change is that the Indirect Tax business line has joined the various market segment business lines.
    • At a practical level, the ATO is anticipating a 6–12 month transition period, in which to integrate teams, strategy areas and relevant pieces of work.
    • Some indirect tax issues may be discussed as part of the AFMA/ATO Liaison Group, however due to the impact on domestic banks, GST issues associated with Financial Supplies are better suited to the Australian Banking Association forum.
    • For the Tax Assurance Program, there are currently some pilot cases considering both income tax and indirect tax. Following the transition period, cases in the Top 100 and Top 1000 programs will be reviewing both income tax and indirect tax issues.

    AFMA noted that it has a separate GST Committee.

    10. 2019–20 Federal Budget announcement

    The following aspects were announced in the 2019–20 Federal Budget:

    • changes to hybrid mismatch rules
    • extended funding to the Tax Avoidance Taskforce.

    These were addressed at items 4 and 8.

    11. Other business

    Reportable Tax Position (RTP) Schedule – Category C queries:

    • AFMA noted that the instructions to the RTP Schedule – Category C required taxpayers to take a broad approach. Some questions relate to transactions that are very common for banks. Such instruments include, section 25–90 deductions, cross currency interest rate swaps, cross border financing arrangements and securities lending arrangements.
    • AFMA provided another example, in relation to related party financing, whereby the relevant PCG is not applicable to ADIs, but there is only an option to assess ‘Yes’ or ‘No’ against the question.
    • AFMA members are trying to ensure that they are lodging their RTP Schedule correctly and wanted to know what processes the ATO has to ensure that taxpayers are disclosing correctly.
    • The administration of the RTP Schedule is managed by the Assistant Commissioner for Domestic Risk with input from various internal stakeholders including Banking & Finance Strategy.
    • Specific queries can be addressed directly to the RTP Team at

    Labor Thin Capitalisation announcement:

    • the ATO noted that Labor had announced changes to the thin capitalisation rules
    • however, AFMA noted that the changes are not expected to apply to ADIs.


    Attendees are listed below.




    Sandra Farhat (Chair), Public Groups and International


    Lindy Tan (Secretariat), Public Groups and International


    Phil Daniel (Secretariat), Public Groups and International


    Alan Coorey, Public Groups and International


    Brendon Chapman, Public Groups and International


    Christopher Magee, Tax Counsel Network


    James Campbell, Public Groups and International


    Nick Maley, Public Groups and International


    Reuben Pace, Public Groups and International


    Wayne Duncan, Public Groups and International


    Rob Colquhoun

    Bank of America Merrill Lynch

    Johanna Tang

    Commonwealth Bank of Australia

    Tasos Mihail

    Goldman Sachs

    Chi Lee


    Jeffrey Tan

    JP Morgan

    Alice Lam


    Phil Duffy


    Tony Lo Russo


    Apologies are listed below.



    Deustche Bank

    Ross Baker


    Stuart Prior

      Last modified: 09 Sep 2019QC 60075