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  • Energy and Resources Working Group minutes 12 August 2016

    Meeting details

    Venue:

    Northbridge ATO Office - Conference Room
    45 Francis Street
    Northbridge WA 6003

    Chair:

    Jeremy Hirschhorn
    Deputy Commissioner
    Public Groups

    Date:

    12 August 2016

    Attendees

    Organisation

    Name

    AMEC

    David Ocello

    Institute of Public Accountants

    Basil Mistilis

    Treasury

    Tamara Hartwich

    CPA Australia

    Gordon Thring

    MCA

    James Sorahan

    MCA

    Dan O'Connell

    Chartered Accounts Australia

    James Strong

    APPEA

    Noel Mullen

    APPEA

    Stuart Brown

    The Tax Institute

    Craig Bowie

    AMPLA

    Nick Heggart

    ATO

    Patricia Sampathy

    ATO

    Rebecca Saint

    ATO

    Michael Jenkins

    ATO

    Len Hertzman

    ATO

    Glenn Davies

    ATO

    Geoff Tarran

    ATO

    Kevin Wallace

    ATO

    Kevin O'Shaughnessy

    Apologies

    Organisation

    Name

    Law Council of Australia

    Grant Cathro

    MCA

    Ann-Maree Wolff

    APPEA

    Vicky Coulson

    Department of Industry

    Joshua Reakes

    APPEA

    Michael Lawry

    Institute of Public Accountants

    Lance Cunningham

    Minutes

    Item 1: Introductions

    Item 2: Minutes from previous meeting and action items

    Item 3: Hubs practical guidance

    • The draft Practical Compliance Guideline (PCG) issued on Wednesday 10 August 2016.
    • The PCG outlines the ATO’s risk framework in relation to hubs generally, and is broadly based on 3 factors: ATO’s risk tolerance, tax impact and behavioural attributes. The benchmark within Schedule 1 of the PCG only relates to marketing hubs.
    • Schedule 1 does not give the arm’s length price for arrangements. It sets out the risk indicator and identifies the level of compliance activity a taxpayer can expect given their position on the spectrum.
    • Schedule 1 outlines the use of indicators. Cost plus 100 is the first indicator. If a taxpayer’s arrangement satisfies this indicator, they will then need to look at a second indicator which is yet to be determined and is subject to consultation. Admission into the green zone is expected to be contingent on meeting both indicators.
    • If the taxpayer is not the green zone, taxpayers will need to calculate their tax impact and consider their behavioural attributes (including, but not limited to, if they have transfer pricing documentation) to determine their overall risk rating.
    • Broadly the higher the overall risk rating, then the greater the level of evidence and analysis we will expect in support of a taxpayer’s transfer pricing position. The green zone means taxpayer’s arrangements are considered low risk and it is proposed that taxpayers in such situations will have access to reduced documentation requirements and will not generally be subject to compliance activity. However, the ATO may ask questions in the course of fact checking.
    • High consequence taxpayers will be required to report their self-assessed risk rating based on the framework. This reporting will be done via the reportable tax position (RTP) schedule, commencing with the 2017 lodgement. Taxpayers that do not answer the RTP question are deemed to be in the red zone and can expect ATO queries or compliance action.
    • Taxpayers that are outside the green zone may transition into the green zone. There are concessions in respect of penalties and interest for taxpayers that make voluntary disclosures in respect of past years.
    • There are timing implications for taxpayers that are outside of the green zone. For taxpayers that do not wish to transition into the green zone, they have a 12 month period in which to apply for an Advance Pricing Arrangement (APA). The APA does not have to be finalised within 12 months – taxpayers only need to be registered for the APA program within 12 months.
    • There will be other schedules for other types of hubs.
    • The consultation period is until the end of September. The ATO is seeking feedback around some specific areas of the paper – especially the second indicator. There are also questions regarding the implication of being within the green zone. However, feedback will be welcomed in respect of any aspect of the paper.

    Item 4: Thin capitalisation – recognition and revaluation of intangible assets

    • The ATO has raised the revaluation of assets in the context of the thin capitalisation provisions in a number of taxpayer alerts.
    • In the mining context, the ATO is aware that some taxpayers are revaluing (or considering revaluing) mining rights and related intangibles to fair value for the purposes of the thin capitalisation safe harbour.
    • The ATO is currently establishing a view as to whether such revaluations are permissible, and if so what requirements need to be met. ATO emphasised that it had not yet reached any view on this.
    • It can be seen from an analysis of sections 820-680 to 820-684 that the answer is heavily dependent on the application of accounting standards. The ATO has engaged external accounting experts to seek their advice on the application of the standards in this context. When the ATO has obtained and considered this advice, and progressed its thinking to a suitable stage, it will consult with industry and this group. The ATO recognises that there is a need for the ATO to complete this work as quickly as possible so that people know where they stand.

    Item 5: Subdiv 815B and interest free loans

    • This matter has been placed on the public rulings program as of 22 July 2016.
    • The ATO has developed a proposed Tax Determination on the topic. However, after reviewing the representations made as part of the consultation conducted so far, we are now proposing to develop a Taxation Ruling.
    • In developing the legal position, the ATO has decided to expand the scope of the document and consider that it is important we also deal in more detail with the more significant arguments that have been put forward by taxpayers and advisors, particularly those seeking to maintain the position taken by the Commissioner in Taxation Ruling 92/11 that interest free loans should be characterised as a contribution of equity.
    • The position the ATO is developing is that a transfer pricing benefit may arise in most instances from an interest free loan where there is a debtor/creditor relationship and the elements of section 815-120 have been satisfied. However, where the entity can demonstrate in its transfer pricing analysis that the arm’s length conditions are such that the independent parties would have entered into such a loan, then there would not likely be a transfer pricing benefit such that subdivision 815-B has application.
    • The development of this document is inextricably linked to another taxation ruling being developed on the interaction of subdivision 815-B and Division 974 of the ITAA 1997.
    • On the basis of undertakings provided to the Subdivision 815 technical working group, the ATO anticipates consulting again with stakeholders in October and appearing before the Public Advice and Guidance Panel in late November. At this stage, we anticipate releasing a draft ruling in December-2016 or early-January 2017.
    • The ATO is also considering whether we will develop a practical compliance guideline to accompany the ruling. We will endeavour to publish this at the same time as the ruling.

    Item 6: Override royalties – source, assessability and withholding

    • The ATO has prepared a draft Taxation Ruling. It is currently being reviewed prior to referral to the Public Advice and Guidance Panel for their consideration in late September 2016. We anticipate release of the draft ruling around mid to late November 2016 with a final version scheduled for release in the first half of 2017.
    • The document puts the position that, in the vast majority of instances involving tax treaty partner countries, the Real Property Article of the relevant tax treaty will apply to give Australia a taxing right over override royalties that are natural resource payments. In particular instances, the result depends on the wording of the definition of real property in the relevant tax treaty. Essentially, the ATO is seeking to put the view that the scope of the application of the Real Property Article of the relevant tax treaty to an override royalty is no greater than what is a natural resource payment under the domestic provisions (section 6CA).
    • With the tax treaty / domestic source rules and subsection 6-5(3), the override royalty will be assessable income in Australia. Where this is the case, consequential withholding obligations follow under section 12-325 of Schedule 1 of the Taxation Administration Act 1953.
    • Where the foreign resident recipient is not a treaty country resident, Australia will tax override royalties where they fall within the scope of section 6CA of the ITAA 1936.
    • The scope of section 6CA is limited to situations where a payment is calculated by reference to all of the production or recovery in Australia so as to exclude payments made by reference to only a discrete portion of the production of natural resources. For example, this may be the case in relation to payments made for transport, marketing or insurance.

    Item 7: Exploration expenditure

    • Income tax – TR 2015/D4
    • s 40-80 interpretive issues
    • Earn-outs
    • Mining, quarrying and prospecting rights
    • Practical examples of how the PRRT meaning of exploration applies to onshore industry

    Draft s40-80 TDs and Earn-outs PCG

    • The ATO discussed the draft section 40-80 Tax Determinations and earn-outs practical compliance guideline with industry bodies prior to the Government caretaker period and we are close to reaching a position that is broadly acceptable to the ATO and industry.
    • The ATO is awaiting further comments from industry bodies before undertaking broader consultation in respect of these documents.

    Draft exploration ruling (TR 2015/D4)

    • The ATO is waiting on the exploration practical compliance guideline before finalising the ruling as industry bodies requested we publish these documents at the same time.
    • We will commence consultation on the practical compliance guideline shortly.

    MQPR

    • The ATO consulted with industry bodies on the meaning of an interest in an MQPR before the Government caretaker period and will continue further consultation to get a better understanding of the commercial arrangements and the broader context in which an interest in a MQPR could potentially arise.

    Onshore PRRT examples

    • The ATO have been asked for examples of how the PRRT meaning of exploration applies to the onshore coal seam gas (CSG) industry as there are no specific onshore examples in PRRT exploration expenditure ruling (TR 2014/9).
    • We met with industry representatives prior to the Government caretaker period. The main issue is whether fracking activities by the CSG industry fall within the ordinary meaning of exploration.
    • Industry have offered to provide further information on fracking to the ATO by the end of August, so we will be in a better position to consider whether these activities fall within the PRRT meaning of exploration.

    Item 8: Project pools consultation

    • Initial consultation indicates that the key issue is the definition of a 'project' as it impacts the determination of project life and questions of abandonment and start time.
    • Industry groups have advocated for a principle based approach to determine whether there is a project. As we understand it, such an approach involves looking at the economic benefit of the expenditure that is prospective in nature over a life that reflects the benefit that it provides.
    • The ATO has requested further clarification of this approach including refinement of the principles. We have also asked for the policy and legislative basis for the principles.
    • Following receipt of this clarification, the ATO will undertake further consultation with a view towards releasing a form of public guidance.

    Item 9: Petroleum resource rent tax

    • The ATO has undertaken consultation on the application of the PRRT general deductible expenditure provisions to some areas.
    • This consultation has now ended and the ATO proposes to publish the following two draft PCGs:  
      • Deductibility of general project expenditure to the overhead component of time written costs charged to a joint venture billing statement or sole risk operation account.
      • How we will allocate compliance resources according to our assessment of risk in relation to the application of section 38 of the Petroleum Resource Rent Tax Assessment Act 1987
       
    • The compliance approaches outlined in the above PCGs apply to general PRRT project expenditure actually incurred on or from 1 July 2015.
    • The ATO had aimed to issue these PCGs prior to 29 August 2016, the due date for lodgement of the 2016 PRRT return. However there may be procedural difficulties in meeting this timeline and the ATO is considering other options for taxpayers who may be impacted by the guidelines.
    • The ATO will also be commencing consultation on three other PRRT matters in the near future:
      • Deductibility of social infrastructure costs – to progress the consultation on the other expenditure types, it was agreed that the deductibility of social infrastructure expenditure would be dealt with separately. The ATO is likely to take an approach that is based on an assessment of the risk that particular species of these expenditure types may not be deductible under the narrower PRRT general deductibility tests
      • Reversion of the production licences to retention leases – the concern relates to the potential blackholing resulting from the treatment of undeducted expenditure incurred in relation to a production licence that reverts to a retention lease. Though legislative intervention may be necessary, the ATO aims to work with industry to explore administrative solutions to some aspects of this issue.
      • Closing down expenditure – we will be consulting in respect of possible guidance on closing down expenditure, including the scenario where persons hold a project combination certificate in respect of their production licences and there is cessation of production on one or more (but not all) of the licences in the project combination certificate.
       

    Item 10: Exploration development incentive

    • Year two of the EDI is now open and those entities wishing to participate in the incentive will have to lodge the EDI Participation Form by 30 September 2016.
    • The ATO has written to the previous year participants advising them that year two is now open. We have also published information in the various business bulletins, tax professional newsletters as well as other editorial sources, in order to raise awareness of the measure.
    • The ATO will again undertake a step-by-step educational mail-out process.
    • The ATO aims to register the legislative instrument advising of the modulation factor for year two by 1 December 2016 at the latest. The legislative instrument advising of the modulation factor for the first year was registered on 27 November 2015.
    • The ATO is currently analysing the data from the participation forms to obtain better insight into the demographics of the applicants – for example, the location of applicants, and the resource being exploring for, however this work is not yet completed.

    Item 11: Other business

    Foreign resident CGT withholding

    • It has been raised that for intragroup transfers between entities within an income tax consolidated group, each member vendor would need to seek a clearance certificate. As a way to reduce the compliance burden of this requirement the ATO will administer it such that the head company can apply on behalf of every member of that ITCG, so avoiding the need for each member to apply in their own right. Content to this effect has been prepared for the www.ato.gov.au/FRCGW webpage.
    • Head companies or provisional head companies of income tax consolidated groups and multiple entry groups may wish to have confirmation from the ATO that a clearance certificate that is issued to the head company also applies to all of its subsidiary entities.
    • The ATO will issue a clearance certificate to the head company which includes the members of the group as an attachment. Note that we will rely upon the group membership information as recorded on ATO systems. Should group membership have changed, it is the responsibility of the head company to ensure that it has correctly notified the ATO of any such changes.
    • Alternatively, subsidiary entities can, in their own right, apply for a clearance certificate and have one issued in their own name if they wish.

    Effective life schedules

    • For 2016, a review was completed on CSG extraction assets so that there could be safe harbour, Commissioner endorsed, effective lives applied for depreciation purposes. Through consultation with the CSG industry, a number of changes and additions were made to CSG extraction assets.
    • These updates now form part of the broader Oil and Gas extraction assets effective lives, ANZSIC code 07000, and they are effective from 1 July 2016.
    • Taxation Ruling 2016/1 lists all the effective lives for depreciable assets
    • There is now a tool that can be accessed on ato.gov.au called the Depreciation and Capital Allowances Tool (DCAT). This tool has a quick look-up function for effective lives, where they can be found by either searching for the name of the asset, or by industry type and sub-type.

    Valuation of mining information for Division 855

    • A question was raised to the status of the proposed legislative amendment to the principal asset test in Division 855 as it relates to mining information. The EM to the proposed amendment outlined that the Government has decided to defer the enactment of the proposed valuation amendment until after the effect of the decision in Resource Capital Fund III LP v Commissioner of Taxation [2014] FCAFC 37 had been analysed.
    • The ATO has previously recommended to the Treasury that the proposed valuation amendment should proceed.
    • Nothing further has been announced by the Government as at the date of the meeting.
      Last modified: 27 Oct 2016QC 50400