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  • Energy and Resources Working Group minutes 27 September 2018


    Item 1: Introductions

    Item 2: Minutes from previous meeting and action items

    No exceptions to the ERWG meeting from March 2018.

    Updates provided on:

    • Junior Minerals Exploration Incentive
      • The ATO has set up all implementation of the Junior Minerals Exploration Incentive (JMEI), working closely with main stakeholders to ensure an efficient process of all applications.
      • It is important to consider, in relation to the JMEI, the change to the base tax rate, specifically the active and passive split, and the potential for companies to create more credits by using the incorrect tax rate. This may result in excess exploration credit tax and penalties and interest charges.
    • Extractive Industries Transparency Initiative
      • Tenders for the Gap analysis are being sought by the Extractive Industries Transparency Initiative (EITI). This analysis will assist the EITI Multi Stakeholder Group address concerns and work through deficiencies to see whether the ATO's candidacy application is accepted. Additional requirements are needed to be met to seek candidacy, as per the 2016 EITI standard.

    Item 3: Deferred Consideration Arrangements

    • The ATO is conducting consultation on the income tax treatment of earnouts that do not qualify as look-through earnout rights. A discussion paper has been released (distributed to targeted stakeholders including ERWG members) seeking feedback so that the ATO can 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. Feedback is sought by 22 October 2018.
    • The industry acknowledges there may be GST issues but consider income tax to be a priority. It is important to consider the separation of prioritising matters from a purchaser and seller perspective.
    • We have issued Requests For Information (RFIs) to around 70 relevant taxpayers (mostly in the E&R sector) to better understand the tax treatment being adopted by taxpayers in relation to earn outs. Recipients of the RFIs are encouraged to contact the ATO if they require additional time to respond after 5 October 2018.
    • The ATO cannot confirm when the date of effect will be of any guidance that might be created as it is usually considered after what the actual guidance product is. The ATO focus will be to prioritise technical issues (which the ATO will be relying on input from industry), form our view and determine timing.

    Item 4: Thin capitalisation – Revaluation of mining rights (update)

    • At previous ERWG meetings on 12 September 2017 and 22 March 2018, the ATO advised that it proposed to issue a Tax Determination (TD) paired with a Practical Compliance Guideline (PCG), or a PCG schedule, to address the off-balance sheet revaluation of mining rights for thin capitalisation purposes.
    • On 20 September 2018, the Treasury Laws Amendment (Making Sure Multinationals Pay their Fair Share of Tax in Australia and Other Measures) Bill 2018 was introduced into Parliament.
    • If enacted, the off-balance sheet revaluation of mining rights will become a legacy and transitional issue, and will cease to be relevant going forward. As such, a TD and PCG in the form previously contemplated will not have ongoing application for income years covered by the new law. Therefore, the ATO does not envisage providing further interpretative guidance or advice on this point (since it will not have prospective effect).
    • Consequently, following the enactment of the new law, the ATO will consider instead providing guidance in an appropriate form (for example, via fact sheet(s) or web guidance). The focus of any guidance to be issued will be on valuation outcomes, both for prior and future years. In creating suitable guidance on valuation issues, the ATO will take into consideration inputs from external valuers and accounting experts, among others.
    • ERWG members are encouraged to identify and advise the ATO of any practical aspect of the new law on which you would like the ATO to provide specific guidance or certainty, noting that tax return instructions will also be updated in the normal course to reflect the operation of the new law, once enacted.
    • Members’ attention was also drawn to the ATO’s administrative treatment with respect to the new law pending its enactment, which can be found on the ATO’s website at this link

    Item 5: Related Party Financing

    • The ATO received 15 submissions on the derivatives schedule and had discussions with groups who have been asked to provide specific examples.
    • The major concern regarding the schedule is for derivatives backed out to market to be rated as green. The ATO will consider this recommendation moving forward and consider the appropriate risk rating. Other concerns include the breadth of the derivatives schedule. The ATO will make it clear the schedule is only for derivatives for related party financing and nothing further. The revised completion date is now for end of October 2018.
    • The Related Party Financing PCG acts as a risk document, following up on Taxpayer Alert 2016/3. Obtaining a Risk zone of red or green does not guarantee anything, as these ratings are only indicators of risk.
    • It is possible for an entity to have a commercial arm's length transaction with a related party however Part IVA can still apply. The office will focus on the structure of the transaction itself.
    • It is difficult for the ATO to provide an example of shifting business risk (scope creep) and therefore only a general example can be provided at this time.
    • The ATO is continuing to working on Schedule 3 with a revised completion date of 30 November 2018, due to extensive internal approval measures. This schedule will focus on inbound and outbound interest-free loans.
    • In relation to guarantee fees, whether a separate schedule will be released addressing this topic is still being considered. At this stage the ATO is still finalising an ATO view before considering what would be the most appropriate form of guidance material (i.e. PCG, TR etc).

    Item 6: Diverted Profits Tax

    • As outlined in the previous ERWG minutes, the ATO has set out practices and safeguards in relation to the potential application of DPT to taxpayers given the serious of making a DPT assessment.
    • PCG 2018/6 and LCR 2018/5 and the associated compendia were published on 26 September 2018. The ATO was able to address most of the concerns raised in feedback across 31 distinct issues despite the law not allowing the ATO to adopt some recommendations in the final guidance products.
    • Revisions to the LCR and PCG include highlighting that a ‘principle purpose’ element is required in the application of DPT along with reference to the vigorous internal processes to be followed by staff, clarifying that the ATO will consider traditional transactional methods and transactional profit method and have regard to the OECD principles in the SES test.
    • The DPT principal purpose test essentially mirrors the MAAL principal purpose except that the list of matters to which regard must be had is different. Therefore, the views expressed in paragraphs 11-16 in Law Companion Ruling LCR 2015/2 are relevant to the interpretation of principal purpose.
    • Appendix 1 of the PCG confirms that a low risk rating both SES and principal purpose are required to warrant no further engagement from the ATO.
    • The ATO was unable to accept the recommendation to adopt an administrative practice of accepting viable Australian based transfer pricing positions as meeting the requirements of the SES test as it is not consistent with the legislative requirements of the SES test.

    Item 8: ATO advice and guidance under development

    Shipping schedule

    • The ATO has released the shipping schedule to industry bodies and Big 4 accounting firms. The ATO intends to publish a draft in the near future (October or early November). The ATO will provide written comments in response to feedback from the industry bodies. Consultation will continue when the draft schedule is published.

    Best Practice Explorations Deductions Guide

    • The ATO has completed the exploration guide. It will be published on the ATO website in mid-October.
    • There will no longer be a question on exploration within the RTP schedule as taxpayers are unable to rate themselves under the revised guide.

    First-use TDs

    • The consultation process for comments closed in early July 2018 and TCN is currently reviewing all comments. The TD is expected to be finalised in the coming months.

    Capital Costs

    • Earlier this year, the ATO flagged concerns with the deductibility of some labour costs. The office is already obtaining significant feedback from industry prior to issuing a draft view. Targeted consultation is expected to commence in mid to late November 2018.

    Marketing Hub AUP

    • Material will be sent to the group for consultation in the next few weeks. The AUP is directed at fact checking taxpayers in the green zone to ensure taxpayers are applying the methodology in the PCG correctly.

    Item 9: Other business and close

    PRRT & Callaghan report

    • There is a strong desire from industry to hit the ground running upon the Callahan report being released. This is due to the number of issues with regards to the outcome of the report, including single production licenses and the potential for companies not to lodge if they are unprofitable.
    • The ATO is still unsure about the timing of the government’s announced response but has lined up resources to deal with recommendations that are adopted to ensure a quick turnaround.

    Meeting details

    Venue: Melbourne ATO offices (Docklands), 727 Collins Street, Docklands VIC 3008

    Chair: Rebecca Saint, Assistant Commissioner, Public Groups

    Date: 27 September 2018


    Premila Roe, MCA

    Domenic Smith, MCA

    Anthony Portas, MCA

    Craig Bowie, Law Council of Australia

    Janelle O’Hare for James O’Reilly, Chartered Accountants Australia & NZ

    Belinda Cheesewright for Lance Cunningham, Institute of Public Accountants

    Noel Mullen, APPEA

    Marc Lewis, APPEA

    Tony Principe, APPEA

    David Ocello, AMEC

    Basil Mistilis, Institute of Public Accountants

    Nick Heggart, AMPLA

    Rebecca Saint, ATO

    Faith Harako, ATO

    Kenneth Wee, ATO

    Simon Staples, ATO

    Marcus Ryan, ATO

    Cissy Zhao, ATO

    Jerome Phung, ATO

    Tien Phan, ATO

    Glenn Hunter, ATO

    Neil Dixon, ATO

    Jai Singh, ATO

    Hung Nguyen, ATO


    Jeremy Hirschhorn, ATO

    Nick Maley, ATO

    James O’Reilly, Chartered Accountants Australia

    Gordon Thring, CPA Australia

    Lance Cunningham, Institute of Public Accountants

    Warren Pearce, AMEC

    Simon Winckler, The Treasury

    Joshua Reakes, Department of Industry, Innovation and Science

      Last modified: 13 Dec 2018QC 57646