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  • Large Business Stewardship Group key messages 26 July 2018

    Welcome and introductions

    The meeting chair, Jeremy Hirschhorn (Deputy Commissioner, Public Groups), opened the meeting and welcomed all members and participants to the second meeting of the group for this year.

    Jeremy welcomed the following new member to the meeting: Josie Guastalegname, Group Head of Tax, SEEK Limited.

    Jeremy advised that Geofrey Fooks, Group Taxation Manager, Wesfarmers Limited has decided to stand down from the LBSG and thanked Geofrey for his contribution to this forum.

    Commissioner’s opening remarks

    The Commissioner emphasised the ‘stewardship’ aspect of the LBSG and encouraged members to put forward issues with respect to the operation of the tax system.

    The ATO has joined an intelligence network with other law enforcement agencies from the United States, United Kingdom, Canada and the Netherlands as part of the Joint Chiefs of Global Tax Enforcement group. Will Day, Deputy Commissioner, Private Groups and High Wealth Individuals, is the Australian representative. The Group is currently focused on intermediaries. The role of tax evasion in facilitating other criminal activity was noted.

    The ATO recently published the tax gap for individuals not in business, however the community will remain interested in compliance of large corporates. The Superannuation and Small Business tax gaps are in planning for later release.

    The ATO is concerned that the recent ‘Four Corners’ report may have negatively impacted the community’s confidence in the tax system. Despite the positive feedback received from the Small Business Stewardship Group, there is concern that the report may discourage small businesses from engaging with the ATO on their issues.

    Recent developments in Large Business tax policy

    Maryanne Mrakovcic was an apology and this Agenda Item was omitted.

    Compliance risks and emerging issues

    Jeremy Hirschhorn and Jeremy Geale updated members on the following matters:

    • Thin capitalisation – we have published guidance material on the valuation of assets for the purposes of the thin capitalisation regime.
    • Draft Practical Compliance Guidelines (PCG) on corporate residency was released on 21 June 2018. The transitional period will take into account any delay with settling the final view. There is still some concern among large corporates with respect to the delay in providing the PCG.
    • Diverted Profits Tax – Consultation on the draft PCG is in progress.
    • Treasury has released a Stapled Structures legislative package.
    • Hybrid mismatch rules – Consultation on the draft PCG is in progress. Taxpayers are encouraged to engage early on their restructures.
    • Demergers – the ATO has recently seen a number of transactions that seek to inappropriately access the roll-over relief provisions.    
      • We have had concerns for a lengthy period about multi-step transactions, where each step seeks to qualify for separate Capital Gains Tax (CGT) roll-over. More recently, there has been an increase in applications and we are therefore looking to ensure our position is in the public domain.
      • In the absence of tax relief, members in an entity that reorganises their activities would be subject to a number of tax consequences which could act as an impediment to a commercial transaction. The relief provisions are designed to ensure that, where an entity undertakes a reorganisation or restructure of its operations that leaves members in the same economic position as they were immediately before the reorganisation, there should be a deferral of taxation until the member disposes of those shares. Conversely, there is a clear theme that CGT is expected to apply where there is both a legal and economic change in ownership of property from the transaction. Where the restructuring or reorganisation of a company group is designed to change the ownership of the companies or shareholders involved (typically if a third party buys the interest of some or all of the existing shareholders), demerger relief is not appropriate.
      • Our view is that back-to-back or sequential rollovers do not work from either a policy or legislative perspective. The inclusion of the ‘and nothing else test’ in a number of the roll-over provisions supports this view. The mechanical requirements of the provisions generally indicate that shareholders are expected to participate equally and proportionally in any in-specie distribution or scheme of arrangement and should thus only receive shares and nothing else.
      • Taxpayers will not obtain roll-over relief for a demerger event under Division 125 where the restructure of the group is designed to change the underlying economic ownership of the companies involved, for example through the spin out and then subsequent sale of the company. The ‘restructure’ for the purposes of Division 125 includes the entire scheme of arrangement and accordingly the shareholders do not receive a new interest in the demerged entity and ‘nothing else’.
      • The ATO is committed to providing public advice and guidance which outlines our view in respect of the above by 31 December 2018.
    • Penalties for Significant Global Entities (SGE) – the ATO process for SGE penalties at present is to quarantine any penalty impositions identified by the automated system prior to applying them to the SGE’s account. They are reviewed manually by contacting the SGE to discuss any extenuating circumstances that may give rise to remission. Where such circumstances do not exist, the full penalty will be imposed.
    • Indirect Tax – update was provided on the Financial Services and Insurance Strategy and low value imported goods. It was noted that 280 transactions have been reported under the ‘GST at Settlement’ measure.
    • Indirect Tax – we are seeing a large number of self-objections, typically for small refunds that test existing ATO positions being lodged by the firms. They cover all indirect taxes but there is a focus on fuel tax credit claims. Michelle asked how the ATO will pursue this in the future and how to manage this as a ‘stewardship’ issue.  Michelle urged the issuance of some sort of guidance or alert.

    Transfer pricing

    Mark Konza led discussions on reconstructive powers and arm’s length conditions:

    • Mark referred to a recent speech at a local transfer pricing conference and noted that there were no real changes in this environment – legal contracts are not determinative factors where they are inconsistent with actual commercial and financial relations.
    • Guidance on Division 815 will be updated to reflect any impact from the Chevron decision.

    Multilateral Instruments (MLI)

    Mark Konza led discussions on the status of treaty negotiations:

    • The MLI has passed through the Lower House but was withdrawn from the Senate in the last sitting. The ATO is seeking legal advice from the OECD regarding the ratification to preserve a 2019 operative date.
    • The ATO is in the process of producing ‘synthesised texts’ to provide guidance on matters such as the ‘principal purpose’ test and mandatory binding arbitration.
    • 33 treaty partners are expected to achieve ratification status.

    Country-by-Country (CbC) Reporting

    Mark Konza led discussions on post-implementation reflections:

    • The ATO met the 30 June deadline and has commenced exchanging CbC files with other countries. We have received 2,600 local files, 2,200 master files and 139 CbC reports.
    • The Joint International Taskforce on Shared Information & Collaboration (JITSIC) is now positioned to be the centralised place to go to for CbC reports/issues.
    • Still too early to say what has been learnt from CbC.
    • The ATO has not been persuaded at this stage of the need for a rolling extension for December balancers as system issues have now been addressed. However, taxpayers are welcome to apply for an extension which will be considered on a case-by-case basis. The ATO will be flexible with deadlines if requirements change.
    • Report on peer review of mutual agreement procedure (MAP) process will be available soon.

    Reportable tax positions (RTP) schedules

    Michael Morton led discussions on the process for developing and reviewing RTP questions:

    • Income years where taxpayers are required to first report on RTP Category C questions are:    
      • 2017 income year for the Top 100 with a June or late balance date.
      • 2018 income year for the Top 100 with an early balance date.
      • 2018 income year for the Top 1,000 with a June or late balance date.
      • 2019 income year for the Top 1,000 with an early balance date.
    • Category C questions are reviewed biannually and the data received from lodged schedules will be used to further review Category C questions.
    • The process behind developing and reviewing questions include the following thresholds – language must be clear, information needs to be useful with regards to detecting risk and tailoring engagement, the questions needs to be relevant and relate to guidance, and no duplication of questions in other returns and schedules.
    • Members raised a concern that, while the RTP schedule is relatively easy to complete, interpretation of the question together with the relevant PCG referred to in the question can be very difficult (especially for Top 1,000 clients who are usually less well-resourced). Members were asked to contact the ATO directly or via the CTA if they find the questions ambiguous and the ATO will work on being more precise with the RTP questions. It was noted that the drafting of Taxpayer Alerts is to be tightened and that this may assist in addressing concerns around related RTP questions.
    • Members also asked whether there was sufficient consultation taking place when labels on ATO forms and returns were changed (especially for December balancers who usually receive very little notice). The ATO already consults on changes to the RTP schedule on a biannual basis, including changes to Category C questions.
    • Members raised concerns that consultation on the International Dealing Schedule (IDS) may have fallen short of expectations. Mark Konza stated that we would be reviewing our consultation processes.
    • Andrew Mills suggested at the recent NTLG that the any changes to the IDS or RTP should be presented to the LBSG. Jeremy noted that the ATO has also started work to determine how best to communicate changes to income tax returns and schedules.

    Board of Taxation (BoT)

    Karen Payne led discussions on recent developments at the BoT:

    • Tax Transparency Code – transparency developments are constantly changing including investor requirements and financial reporting standards. The BoT monitors for engagement with the Code but there is a concern that there may be a perception that the BoT is (like a regulator) responsible for the quality of reports or that there is no single regulator responsible for monitoring the reports produced under the Code. The BoT is an advisory board only. Members were generally of the view that the quality of reports is the individual company’s own responsibility and that they are mindful of obligations not to mislead the market.
    • Fringe Benefits Tax Compliance Cost Review – two surveys will be conducted including a random sample of taxpayers as well as an online survey for voluntary participants.
    • Residency for individuals – report provided to the Minister who asked for further consultation to be conducted on whether individuals can be residents of ‘nowhere’ and how the residency rules can be simplified.

    Justified trust

    Judy Morris led discussions with contributions from Belinda Darling, Tom Wheeler and Jennifer Moltisanti:

    • Top 100 – about 50% of the first year tax assurance reports (TARs) targeted for completion have been finalised and the project is on track to achieve 100% completion of the program’s first year reports by the end of the calendar year. The ATO applies the justified trust methodology for Top 100 clients within our pre-lodgement compliance review (PCR) and annual compliance arrangement (ACA) case products each year.
    • There are positive trends of engagement and willingness to collaborate to achieve higher assurance.
    • The forward work plan will determine the types of activities to be undertaken on the unassured areas of the TAR. For one particular taxpayer, the 2nd year TAR only required 20% of the intensity required for the 1st year TAR. For some taxpayers, the intensity of the 2nd year TAR will be greater than this (as it depends on the aspects of the business still to be assured).
    • Top 1000 – more than 200 taxpayers have been reviewed through the program so far. The ATO has commenced processes to notify taxpayers as early as 4 months in advance.
    • Relevant to the Top 100 and 1000, the ATO has released guidance on Tax Risk Management and Governance, Effective Tax Borne, and are exploring the provision of additional guidance on book to tax issues (as this is a key focus area of the justified trust methodology in relation to understanding the alignment between accounting and tax outcomes, and why accounting and tax results vary).
    • The Top 1000 follow-up action program considers the most appropriate means of working with taxpayers to achieve higher levels of assurance or to address identified tax risks. The program is considering innovative methods to address identified risks.
    • Top 1000 program findings from progress to date are being compiled and will be shared in the next few months.
    • Indirect Tax (Top 100 and Top 1000) – focusing on internal capability building, integration with the more developed income tax programs, and ensuring information gathering is not duplicated.
    • Members would like some information to help with educating the company’s board about what the assurance ratings in the Top 100 and 1000 programs mean in practice.

    Audit guidance

    Jeff Stevenson led discussions on the audit timeframes and applicable guidance:

    • Audit timeframes were reduced from two years to 18 months in 2014 with the ATO website being updated in 2015. The ATO has in place better processes to support this timeframe - internal specialists are engaged early in the process and information gathering practices are more streamlined and targeted. The Justified Trust methodology can also assist to ensure audits are targeted to the appropriate risks and there is a robust call over process to ensure active case management.
    • Members were concerned that the reduced timeframe drives behaviour and, while information requests are more targeted, the questions being asked are also more complex. Further, if the timeframe is flexible, then this flexibility should be clearly acknowledged in public statements. The ATO will give this further consideration.

    Industry perspective

    Pero Stojanovski provided an overview of the Business Council of Australia, including:

    • Establishment
    • Membership
    • Vision, purpose and principles
    • How ideas are developed
    • Committee structure and focus

    Digital Identity Program

    George Afarian updated members on the progress of the Digital Transformation Agency’s Govpass program and how the changes would impact business, including:

    • Update on myGov ID
    • Relationship authorisation manager
    • Managing the AUSkey transition
    • Reasons for change
    • Update on testing

    Members were encouraged to participate in the consultation.

    Other business

    • Jeff Stevenson foreshadowed consultation that will be occurring on the Action Differentiation Framework and the Public and Multinational Business Client Experience 2024 Vision and Goals in August 2018 (initially with clients, then with representative groups).
    • The next meeting of the LBSG is scheduled for Thursday, 22nd November 2018 at the ATO’s offices in Melbourne (Docklands).

    Action items

    Action item

    180726.1

    Responsibility

    Garry Bourke; LBSG Secretariat

    Garry Bourke to provide more details on his query regarding the new questions on the International Dealings Schedule to the LBSG Secretariat so that the ATO can respond out-of-session.

    Action item

    180726.2

    Responsibility

    LBSG Secretariat

    The LBSG Secretariat to provide more detail on the 2-step demerger risk in the LBSG Key messages.

    Action item

    180726.3

    Responsibility

    Jeremy Hirschhorn; Michael Morton

    Jeremy Hirschhorn to follow up with Small Business in the ATO on whether the 2-step demerger risk is also prevalent in the small business sector and provide a response to Karen Payne.

    Action item

    180726.4

    Responsibility

    LBSG Secretariat

    The LBSG Secretariat to circulate Mark Konza’s recent speech on Transfer Pricing to the LBSG members

    Action item

    180726.5

    Responsibility

    Mark Konza

    Mark Konza to provide further information on the Peer Review forward program on MAP at the next LBSG meeting scheduled for 22 November 2018.

    Action item

    180726.6

    Responsibility

    Jeff Stevenson

    Jeff Stevenson to provide statistics on audit timeframes and an update on the sufficiency of the current audit guidance at the next LBSG meeting scheduled for 22 November 2018.

    Action item

    180726.7

    Responsibility

    George Afarian; LBSG Secretariat

    George Afarian to provide consultation details for the Digital Identity Program to the LBSG Secretariat for circulation to the LBSG members.

    Action item

    180726.8

    Responsibility

    Jeff Stevenson, LBSG Secretariat

    Jeff Stevenson to provide consultation details for the Action Differentiation Framework and the Public and Multinational Business client experience 2024 Vision and Goals to the LBSG Secretariat for circulation to the LBSG members.

    Action item

    180726.9

    Responsibility

    LBSG Secretariat

    PCGs on corporate residency and DPT to be referred to the Consultation Steering Committee to determine whether there are any systemic issues/learnings related to their delay. Consultation Steering Committee to report back to LBSG on findings (if any).

    Action item

    180726.10

    Responsibility

    Michelle de Niese

    The CTA to provide volunteers to participate in the consultation on the Digital Identity Program.

      Last modified: 24 Apr 2019QC 58677