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  • Australian Financial Markets Association Liaison Group minutes 23 October 2018

    Meeting details

    The meeting was held on 23 October 2018 at the ATO's Sydney office and chaired by Anthony Marvello, Assistant Commissioner, Public Groups and International.


    ATO/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

    • Minutes of the last ATO/AFMA liaison meeting on 17 May 2018 were accepted as final and will be published on the ATO website.

    2. Diverted Profits Tax (DPT) guidance

    The ATO provided an update on the DPT. Key points of note were as follows:

    • ATO has finalised guidance and compendiums on DPT
    • ATO has looked at a number of cases including all current APAs under negotiations and there are none from the banking and finance industry cases at this stage.
    • To date, the DPT cases have focussed on instances where business functions have been moved offshore. For example:
      • Entities moving intellectual property offshore with no other changes
      • Entities entering into arrangements where profit moves with no other changes
      • Split up of businesses, profits and legal ownership of certain assets sitting in low tax jurisdictions with Australia continuing to be involved in the work, risks and financing
    • There are currently a small number of cases where we are considering DPT assessments
    • In the likelihood of issuing a DPT assessment, ATO will try to inform the taxpayer as early as possible so the taxpayer can provide supporting information to the ATO showing the economic substance of the entity’s activities
    • The ATO has received a number of private ruling requests in relation to DPT

    The ATO noted that outside private rulings, taxpayers could get certainty the DPT will not apply to their circumstances by getting a DPT specific clause in their APAs which states the ATO will not seek to issue a DPT assessment for the income years covered by the APA.

    The ATO undertook to provide AFMA with an update to the extent that there were any DPT issues arising relevant to the AFMA membership that can be shared without breaching confidentiality.

    3. Significant Global Entity (SGE) Penalties

    AFMA members raised the following concerns in relation to SGE penalties:

    • Circumstances in which the ATO and AFMA members may have different views on whether reporting obligations are triggered by the existence of a Permanent Establishment (PE).
    • ASIC has proposed a Foreign Financial Services Provider (FFSP) Regime which may require foreign banks to hold a licence going forward and whether this could indicate the presence of a PE that is subject to reporting obligations.
    • Different views on whether reporting obligations are satisfied when AFMA members lodge financial reports with ASIC but the ATO says that it is not a General Purpose Financial Statement (GPFS).
    • Difficulties in reporting of FX gains/losses due to system constraints.

    The ATO provided some background to the introduction of SGE penalties and how it is being administered:

    • SGE penalties were introduced to prevent entities from avoiding Country by Country (CBC) reporting obligations with the aim of encouraging and educating the taxpayers of their reporting obligations.
    • Taxpayers are expected to make a genuine attempt to lodge on time. If taxpayers are having difficulties meeting lodgement dates, they should contact the ATO ( to request for deferral.
    • In response to a specific query, the ATO confirmed that there was no requirement for nil returns to be lodged with the ATO for foreign entities that deal with Australian counterparties, but have no lodgement obligation, to mitigate the risk of SGE penalties.
    • The ATO agreed that, due to systems constraints, and where a lodgement deferral is not appropriate, the disclosure of FX gains/losses on international related party dealings is an estimate only, this will not constitute non-lodgement of the return and will not trigger an SGE FTL Penalty exposure. The taxpayer will need to ensure that the disclosures in the return are not false and misleading, ensuring any estimate is accurate, duly minuted in their own records, and corrected with the actual figures at the first available opportunity. Where the taxpayer has made a genuine effort, it is unlikely to trigger a False and Misleading Statement Penalty.
    • FTL penalties are not aimed at raising revenue, but to encourage compliance with obligations and the ATO’s focus is primarily on those who deliberately choose not to comply with those obligations.
    • The ATO is actively engaging with taxpayers to inform them of their lodgement obligations. If the ATO identifies any taxpayers that have failed to make lodgement, ATO will contact them prior to issuing any penalties.
    • The ATO has issued warning letters for late lodgement but has not issued any SGE penalties so far.

    Action item




    AFMA to provide specific cases in which the ASIC FFSP Regime issues may come up and circulate to ATO.

    4. Administration of the Hybrid Mismatch Rules

    The ATO provided an update on the Hybrid Mismatch rules. Key points were as follows:

    • The legislation has been passed and received royal assent on 24 August 2018 and will take effect on or after 1 January 2019.
    • Current focus areas for compliance guidance in relation to the new rules are:
      • Guidance on the application of Part IVA for restructures undertaken with the intention of avoiding the operation of the hybrid mismatch rules

        Draft PCG was issued in July for public consultation and will be issued in final shortly.
      • Guidance on the Structured Arrangement Threshold

        The format of the guidance product is not yet determined but it is expected to be issued in coming months in the form of a PCG or LCR.
      • Guidance on the Targeted Integrity Measure that applies to certain deductible interest payments or payments under derivatives

        Expected to be issued very shortly.
      • Guidance on the current rule which requires the ATO to consider CFC rules of other jurisdictions and whether the taxpayer will be subject to foreign tax in a similar way they are taxed in Australia

        This is currently being drafted in the form of LCR.

    AFMA members raised the following questions in relation to the fourth LCR regarding the CFC rules of other jurisdictions:

    • Is there a framework to check if the taxpayer is subject to CFC or similar rules in other jurisdictions such as the Global Intangible Low Taxed Income (GILTI)? Will there be any guidance covering the Base Erosion Anti Abuse (BEAT) Tax?

      Foreign law interactions are currently listed under the heading of the OECD Hybrid Mismatch rules on the ATO advice under development webpage. Work is progressing in the office regarding evaluating foreign tax systems in this context, though the form such guidance might take and the process by which particular foreign laws are considered is still to be determined. If in the meantime AFMA members have particular concerns regarding these measures, we would welcome the opportunity to engage with AFMA members and discuss those concerns.
    • Can the ATO provide views on the specific amendment to Part IIIB (section 160ZZZL) and particularly the scope of “recognised transfer pricing methodology?

      The ATO confirmed that the safe harbour will only not be available where the methodology that has been adopted is open to dispute, and where the transfer pricing methodology is an appropriate OECD recognised methodology, applied consistently for each member making up the multinational group in a manner that is accepted by the relevant revenue authorities then the safe harbour should be available.

    For branch mismatches that are outside Part IIIB, these are not front of mind for the ATO and no specific branch mismatch scenarios were noted at the meeting. The ATO is happy to talk on issues on a no-names basis, such as through AFMA or other industry bodies, or on a named basis via an ATO early engagement process. 

    Action item




    ATO to respond to questions raised by AFMA during the meeting.

    5. OECD review of the Offshore Banking Unit (OBU) regime

    The ATO advised AFMA members that the ATO is unable to provide any comments on this topic due to confidentiality issues.

    AFMA noted that they had lodged a submission with Treasury providing AFMA’s comments on how they saw the OBU regime as not being harmful.

    6. Changes to TR 2005/5

    The ATO provided the following update on TR 2005/5:

    • The ATO has received AFMA’s submission on the ATO’s proposed changes to TR 2005/5.
    • The addendum to TR 2005/5 has been drafted and awaiting for approval from the Deputy Chief Tax Counsel.
    • The addendum is expected to be issued in November with limited scope for consultation to occur.
    • The ATO believes the changes outlined in TR 2005/5 clarify the ATO’s view but note the difficulty in covering all fact patterns. AFMA members are encouraged to approach the ATO if their specific fact pattern gives rise to uncertainty under the ruling.

    7. Liquidity Management Discussion paper

    The ATO provided an update on the liquidity management discussion paper. Key points of note were as follows:

    • The ATO has reviewed AFMA’s draft submission and is considering ways to address some of the points raised in the submission.
    • The ATO does not think there is a sufficient business case to develop formal public advice guidance. Main reasons being:
      • Lack of common industry practice from a commercial and tax perspective (centralised vs de-centralised models)
      • The ATO has observed that a number of taxpayers have adopted a conservative approach to deductibility of liquidity management charges, and accordingly there is not significant materiality in the issue from a revenue perspective;
      • Different mechanisms used for liquidity charges (fixed charge vs pricing of internal loans)
    • Overall, the materiality level of liquidity management charges is not considered a priority issue

    AFMA provided the following comments:

    • AFMA noted the apparent disconnect between the ATO’s approach from what was outlined in TR 2005/11 and the Internal Derivatives PCG to that outlined in the draft discussion paper on liquidity management and sought clarity as to how the approaches could be reconciled.
    • AFMA members noted that the approach outlined in the draft liquidity discussion paper was being applied by the ATO, such as in Justified Trust reviews, in the absence of formal public advice guidance.
    • AFMA noted that the final guidance issued by the ATO would need to confirm that there is no need for taxpayers to trace the funding used to acquire the liquid assets in order to ground deductibility.

    ATO responded to AFMA’s comments and noted the following:

    • Discussion paper on liquidity management will be published on ATO’s legal database for record keeping and transparency purposes.
    • In ATO’s response to AFMA’s final submission, ATO will point out fundamental differences between the liquidity discussion paper to TR 2005/11 and internal derivative PCG.
    • Once AFMA provides their final submission, ATO is expecting to prepare a final discussion paper along with a cover letter which will address the points that AFMA members have put forward.

    Action item




    AFMA to provide the final submission to the ATO after members sign off.

    8. Top 1,000 program

    The ATO provided an overview of the Top 100/1,000 program work to date. Key points of note were as follows:

    • Most foreign bank cases are carried out in Sydney for consistency purposes and to ensure the right internal stakeholders are engaged.
    • The ATO is two years into the program as at 30 June 2018. Approximately 200 cases have been completed and the ATO has almost doubled the resources for the program.
    • Information requests during the review can be quite comprehensive although most of the information requested should be readily available to taxpayers. A generic set of questions are available on the ATO website.
    • Face to Face meetings with key personnel in the business has been found very useful for the ATO to get a thorough understanding of the business. This helps reduce the number of questions asked in the information requests.
    • The ATO prefers dealing with the taxpayer directly and have experienced that cases flow more smoothly and efficiently when the tax advisors are not involved.
    • It has been difficult to obtain a high level of assurance given the four month timeframe and complexities of the business operations, especially for larger banks with centralised/integrated models. The ATO considers medium level of assurance to be a good assurance level whereas low level of assurance would be a concern.
    • Main focus areas for foreign bank cases are:
      • Branch Attribution
      • Funding Models
      • Profitability of business units
      • Transfer Pricing
    • The ATO noted that if there are any business divisions with poor economic and tax performance, taxpayers should try to actively explain the reasons behind it

    The ATO outlined the key reasons for cases in which the ATO is unable to provide a high level of assurance:

    • Information gaps when the ATO does not have adequate responses to information requests
    • Red flag categories on specific issues which the ATO does not agree with the taxpayer. For example:
      • Liquidity or any other charges made from foreign parent to the Australian branch
      • Offshore Banking Unit
      • Head Office Expense Allocation
      • R&D Tax Concession

    AFMA members raised the following questions:

    • Is the ATO benchmarking the banking and finance industry against other industries?

      No, it is difficult to benchmark one industry against another as each industry has different tax risks. However, there is a moderation panel for each case to ensure consistency across industries and the entire Top 100/1,000 population.
    • How does the ATO look at profitability of each business unit?

      ATO often relies on information from management accounts or discussions with business unit heads to ask how the profit is divided amongst the group.
    • Does the ATO expect the profitability of each business unit to align?

      No, but the ATO does take into account different economic factors affecting each business unit.
    • Is there an agreed path to green zone where the taxpayer can tick off the issue for future compliance activities?

      In the final assurance report issued to the taxpayer at the end of the review, the ATO will provide a detailed explanation on each of the assurance ratings. The key point to consider is whether the low assurance rating is due to a red flag or due to an information gap that can be bridged.
    • Is there a target number of cases to be completed by end of 2018?

      There are about 30 taxpayer groups under the foreign bank category that fall under the Top 1,000 group. Foreign bank cases are generally operated on a six monthly basis with January and July start date. ATO aims to complete 4-5 cases each period.

    9. Other Business

    The ATO provided AFMA members with the Banking and Finance Strategy document for 2018-19 which highlights:

    • Demographics of the banking and finance industry
    • Breakdown of the banking and finance population into Action Differentiation Framework (ADF) ratings, number of taxpayer groups and tax payable
    • Overview of key tax risks for both domestic and foreign banks

    The ATO requested feedback from AFMA members on the strategy document for any possible omissions or points of clarification.

    AFMA raised the following questions:

    • The date for public disclosure of the corporate tax transparency (CTT) report
    • Whether same governance process will apply when a new Deputy Commissioner replaces Jeremy Hirschhorn

    Action item




    ATO to provide electronic copy of the banking and finance strategy document to AFMA members.

    Action item




    ATO to take AFMA’s questions on notice and revert back to AFMA members.


    Organisation   Members  


    Rob Colquhoun

    Bank of America Merrill Lynch

    Johanna Tang

    BNP Paribas

    Andrew Condous

    Commonwealth Bank of Australia

    Robert Pugliano

    Credit Suisse

    Kevin Martin

    Deutsche Bank

    Ross Baker

    JP Morgan

    Alice Lam

    Macquarie Bank

    Kane Nicholson

    National Australia Bank

    Derek Chan

    Nicole Stratford


    Raymond Chow


    Mark Stevens

    Societe Generale

    Anley Viengkhou


    Anthony Marvello

    Nick Maley

    Anthony Siouclis

    Wayne Duncan

    Justen Nixon

    Reuben Pace

    James Campbell

    Brendon Chapman

    Phil Daniel

    Vasuki Seemampillai

    Justine Suh

      Last modified: 30 Apr 2019QC 58691