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  • Energy and Resources Working Group minutes 26 March 2019

    Meeting details

    Venue:

    Melbourne ATO offices (Docklands)
    727 Collins Street
    Docklands VIC 3008

    Chair:

    Rebecca Saint
    Deputy Commissioner
    Public Groups

    Date:

    26 March 2019

    Attendees

    Organisation

    Name

    Chartered Accountants Australia & NZ

    Janelle O’Hare

    CPA Australia

    Gordon Thring

    Institute of Public Accountants

    Basil Mistilis

    TIA

    Catherine Dean

    APPEA

    Noel Mullen

    APPEA

    Marc Lewis

    APPEA

    Tony Principe

    MCA

    Anthony Portas

    MCA

    Ross Lyons

    MCA

    Premila Roe

    AMPLA

    Nick Heggart

    AMEC

    David Ocello

    Law Council of Australia

    Craig Bowie

    ATO

    Rebecca Saint

    ATO

    Faith Harako

    ATO

    Marcus Ryan

    ATO

    Tien Phan

    ATO

    Cindy Perryman

    ATO

    Hung Nguyen

    ATO

    Kevin O’Shaughnessy

    ATO

    Alex Chee

    ATO

    Grace Wu

    ATO

    Mohamud Hussein

    Apologies

    Organisation

    Name

    MCA

    Dominic Smith

    Department of Industry, Innovation and Science

    Joshua Reakes

    Treasury

    Simon Winckler

    AMEC

    Warren Pearce

    Institute of Public Accountants

    Lance Cunningham

    Institute of Public Accountants

    Belinda Cheesewright

    Minutes

    Item 1: Introductions

    • Rebecca Saint updated members on the Client Engagement Group realignment:
      • The realignment is the result of discussions within the ATO on how to shape ourselves around the client experience and offer a whole-of-tax experience.
      • Our new Group structure will include seven business lines, shaped around our clients:
        • Individuals and Intermediaries led by Deputy Commissioner Alison Lendon will focus on the largest group of taxpayers and the advisers who are key to their compliance behaviours.
        • Small Business led by Deputy Commissioner Deborah Jenkins will focus on all obligations for small businesses as taxpayers including the Black Economy work and will also have ownership of GST.
        • Superannuation and Employer Obligations led by Deputy Commissioner James O’Halloran will bring together a continued focus on superannuation with obligations functions for businesses as employers, harnessing the opportunities increased data and systems will provide.
        • Private Wealth led by Deputy Commissioner Tim Dyce will focus on wealthy individuals and their associated groups, with close alignment to Public Groups.
        • Integrated Compliance led by Deputy Commissioner Will Day will focus on behaviours at the more complex and/or deliberate end of the compliance spectrum, and in time, will coordinate whole of ATO special compliance projects.
        • Public Groups and International (PG&I), respectively led by Deputy Commissioners Rebecca Saint and Mark Konza will maintain its existing focus and gained the Indirect Tax Public Groups Engagement function.
        • Smarter Data led by Deputy Commissioner Marek Rucinski will continue to focus on data and analytics, including integrating automation and analytics into our delivery of services.
         
      • We have brought across into PG&I approximately 130 GST staff and will be working on integrating the two functions over the next 9 to 12 months.
       
    • Delivering on the ATO’s Tax Avoidance Taskforce commitments is a key priority; this includes the Justified Trust program. Belinda Darling and Judy Morris who lead the Justified Trust program for the Top 100 and Top 1000 population have been holding Justified Trust CCH workshops nationally. The ATO is currently working on integrating GST into the Justified Trust program.
    • The ATO is focusing on issues arising in relation to information gathering process cases to ensure that the office takes appropriate action on Legal Professional Privilege (LPP) claims that appear to be excessive. For example, discovering documents were clearly never privileged upon review of LPP claims. A NTLG subgroup has been established with ATO officers and nominated NTLG members to discuss the concerns regarding the use and understanding of LPP and to work together on potential solutions such as guidance.
    • Other focus areas include intangible assets and non-arm’s length arrangements (such as the migration of intangible assets) and the implementation of the hybrid mismatch rules. Taxpayers can expect the issuance of advice and guidance on these areas.
    • A member queried if Excise would be moved out of Private Wealth into Public Groups. This is something that the ATO is working through.

    Item 2: Minutes from previous meeting and action items

    • No exceptions to the ERWG meeting held on September 2018.

    Item 3: Deferred Consideration Arrangements

    • The ATO has concluded consultation on the income tax treatment of earnouts that do not qualify as look-through earnout rights. A discussion paper was released and sought feedback to enable the ATO to determine what the key tax issues are and whether there is a need for any additional public guidance on the tax treatment of such earnouts and the priority that should be given to any guidance.
    • The ATO has also largely concluded a scoping exercise following requests for information that were issued to certain taxpayers to better understand the tax treatment being adopted in relation to earnouts. The requests were designed to enable the ATO to better understand how taxpayers are treating their deferred consideration arrangements for tax purposes and whether there is any material tax risk. This evidence is also being used in assessing the need for additional public guidance. 
    • The ATO’s scoping exercise conducted to date has not revealed any systemic compliance concerns. However, the ATO is still following up with a small number of taxpayers. The submissions received with respect to the discussion paper do not show an overwhelming need or desire for guidance. One of the challenges in providing any additional guidance will be to identify fact patterns that are useful to a sufficient number of taxpayers. The ATO would encourage taxpayers to seek guidance if they have any concerns about the application of the tax law to their deferred consideration arrangements.
    • A member commented that the discussion paper suggests that the ATO has concerns about the tax treatment. There is uncertainty as to the application of Division 230 (TOFA) to royalty-like earnouts and the application of CGT events D1 and D3 to the grant of earnouts. It was suggested by some members that ATO guidance would be useful as taxpayers and advisers want to know the kind of arrangements and tax treatment that the ATO is and is not comfortable with. The ATO will consider the feedback received.

    Item 4: Capitalised Labour

    • The ATO will be issuing a draft ruling on the application of paragraph 8-1(2)(a) to labour costs and associated costs incurred in respect of the construction or creation of capital assets for targeted consultation. The document will be provided under strict embargo until the ATO’s publication of the draft ruling for wider consultation.
    • The draft ruling sets out:
      • what constitutes labour costs and associated costs for the purposes of the draft ruling;
      • the principles of capital and revenue relevant to labour costs and associated costs (that is, the matters to be considered according to Sun Newspapers per Dixon J, apportionment and the relevance of accounting principles);
      • the alternative view that the Steele’s case is authority for the deductibility of all labour costs and associated costs; and
      • a number of examples which illustrate how the principles practically apply to certain scenarios.
       
    • The principles in the draft ruling are not new and have been consistently held by the ATO as set out in existing advice and guidance products. Through the consultation process, the ATO is looking to build on the examples and to include other examples which may be relevant to taxpayers outside of the large market.

    Item 5: Related party financing - interest free loans

    • The last guidance product in this area was TR 92/11, which had provided factors to consider but ultimately relied on the Commissioner exercising the discretion whether or not to apply Division 13. A need has arisen to release more up-to-date guidance, to bring it in line with Subdivision 815-B.
    • This Schedule is not an interpretive document on how to conduct a transfer pricing analysis, but provides factors for taxpayers to consider when undertaking a risk assessment on the arm’s length conditions under Subdivision 815-B.
    • Subdivision 815-B operates in a way that taxpayers cannot use the exceptions under section 815-130 to substitute substance over form or change the commercial and financial relations.
    • However, the Schedule acknowledges there are exceptional circumstances where taxpayers can provide factual evidence to demonstrate that the commercial and financial relations of a contribution of funds would have been equity under arm’s length circumstances and there would be no transfer pricing benefit under Subdivision 815-B.
    • There will be a focus on the evidentiary burden expected from taxpayers to support a characterisation that the loan should be interest-free.
    • The Schedule will provide a number of detailed examples to illustrate fact patterns which would be considered low risk through to high risk.
    • It aims to improve the standard of analysis and direct taxpayers to the types of questions they would need to answer/information they would need to provide in order to be considered low risk under the PCG.
    • In terms of timing, the Schedule is being approved by internal stakeholders. Publication will be subject to caretaker conventions.

    Item 6: ATO advice and guidance under development

    Shipping Schedule to PCG 2017/1
    • Public consultation for draft Schedule 3 (shipping services hubs) to PCG 2017/1 closed in December 2018. The ATO received feedback during the consultation period and has made modifications to the Schedule. The ATO is aiming to finalise the schedule as soon practicable once internal approvals have been obtained.
    • A consultation compendium will be published with the finalisation of the Schedule setting out the feedback provided and actions taken.  
    • The core elements for the PCG remain the same to allow for general application including:
      • Cost + 25% benchmark; and
      • Cost + 100% benchmark (if the $2m de minimus applies for a combined shipping and marketing hub costs).
       
    • The ATO considered alternative risk benchmarks; however, due to differences in commodities and vessel sizes and types, these options were not pursued.
    • The Schedule has effect for income tax years commencing on or after 1 January 2019.
    • Taxpayers that complete the Reportable Tax Position Schedule will be able to disclose the risk zone of their arrangements in future schedules.
    • There will also be a minor editorial review of the PCG 2017/1 holistically. There is no current intention to publish additional schedules to PCG 2017/1.
    Thin Capitalisation
    • The ATO is developing guidance products relating to the arm’s length debt test for Division 820 purposes. A draft ruling together with a PCG will replace existing Taxation Ruling TR 2003/1.  
    • The draft ruling is expected to be released next week and outlines the Commissioner’s view regarding key interpretative issues related to the application of the test. The PCG will be published as soon as practicable and will be subject to caretaker conventions.
    • Further consultation will be sought, including in relation to the commencement date for the new products.   
    Transfer Pricing and debt/equity tests
    • TD 2018/D6 issued on 31 October 2018 with comments requested by 30 November 2018.
    • The ATO received a number of submissions. The ATO will publish a compendium of comments with responses.
    • At this stage, the position put in the ruling section of the Tax Determination is unchanged.
    • The Tax Determination is currently being approved by internal stakeholders. Publication will be subject to caretaker conventions.

    Item 7: Other business and close

    Junior Minerals Exploration Incentive (JMEI)
    • The JMEI will open for applications on Monday, 3 June 2019, due to scheduled system maintenance over 1 - 2 June 2019 preventing the earlier opening date.
    • The ATO will promote the JMEI through its various channels in the weeks leading up to June 2019 to ensure taxpayers get an opportunity to apply for the JMEI on the first come first served basis.
    Extractive Industries Transparency Initiative (EITI)
    • Since the last ERWG on 27 September 2018, KPMG won a tender for the completion of an EITI gap analysis between the current 2016 version of the EITI standard and Australia’s 2011-14 EITI pilot. KPMG presented their initial findings during an MSG meeting on 13 December 2018
    Hybrid mismatches
    • New hybrid mismatch rules apply to arrangements that exploit differences in countries’ treatment of instruments and entities with effect for certain payments and income years from 1 January 2019.
    • The rules potentially deny deductions or include amounts in assessable income (the rules apply to broad range of payments, not just financing).
      • The ATO has issued the following guidance to date:
      • Part IVA guidance on restructuring out of hybrid arrangements (PCG 2018/7); and
       
    • the concept of structured arrangements (PCG 2018/D9 and LCR 2018/D9).
    • The ATO is planning issue guidance on Subdivision 832-J targeted integrity rule (for inbound funding via low/no tax interposed entities). Further guidance under consideration include options for dealing with the interaction of foreign laws with new Division 832.
    • The ATO is willing to discuss any concerns taxpayers may have regarding the potential application of these rules or if there are industry specific issues that would benefit from guidance more generally.
      Last modified: 19 Jun 2019QC 59386