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  • 1. Welcome and introductions

    The meeting commenced at 10.00am.

    The meeting chair, Michelle de Niese (Executive Director, Corporate Tax Association), opened the meeting and welcomed all members and participants to the first meeting of the group for this year.

    Michelle respectfully acknowledged the traditional owners and custodians of the land on which the meeting took place, and paid respects to their elders, past and present.

    Michelle welcomed the following new members to the meeting:

    • Garry Bourke – Partner, Deloitte, representing the Big 4 accounting firms
    • Vivian Chang – representing the Law Council of Australia
    • Marc Lewis – Global Head of Tax, Woodside Energy Ltd, representing the Group of 100
    • Mimi Ferguson – Group Taxation Manager, Adelaide Brighton Cement, representing the manufacturing industry

    Apologies were received from:

    • Mark Konza – Deputy Commissioner, International
    • Tim Dyce – Deputy Commissioner, Indirect Tax.

    Actions item from previous meeting

    There was one Action item from the 20 November 2017 LBSG meeting. The Action item and its status follow:

    Action Item 171120.1

    The LBSG Secretariat to provide the website link to the EOI guidance to the LBSG members 

    Status: Completed - The link to the EOI guidance was provided to LBSG members by email on 21 November 2017 

    2. Industry perspective

    Bevan Grace led discussions on emerging trends or issues in the superannuation industry

    • The superannuation industry is very large ($2.6 trillion and growing quickly).
    • The superannuation industry is segmented:
      • self-managed superannuation fund sector accounts for almost one-third of superannuation assets
      • the remaining superannuation assets held in the large fund sector
      • rates of future growth within individual funds largely depends on maturity of fund membership.
    • AustralianSuper is a profit for members superannuation fund. Some administrative functions are outsourced.
    • The ATO's role in the superannuation industry includes:
      • tax
      • member administration
      • lost and unclaimed superannuation administration
      • employer superannuation guarantee compliance
      • regulator of SMSF.

    3. Recent developments in large business tax policy

    Maryanne Mrakovcic updated members on the status of the following policy matters of interest to large business.

    • Enterprise Tax Plan – the matter is with the Government to consider next steps.
    • Stapled Structures – the Report is with the Minister.
    • Petroleum Resource Rent Tax (PRRT) – the Report is with the Minister.
    • Hybrids – the second exposure draft legislation was released on 2 March 2018.
    • Multilateral Treaty – pending passage of legislation. The multilateral instrument will ratify 31 of 44 bilateral treaties.
    • Announced but unenacted measures:
      • The consolidation reforms marked the completion of the 2013 announced but unenacted measures.
      • The additional funding received by Treasury has been very effective in delivering measures in quicker timeframes.
      • Members commented that they would like to see the Commissioner's remedial powers being more utilised where possible.
    • US Tax Reform – Treasury has released analysis of the US Tax Reform and its impact for Australia.

    4. Research & Development (R&D)

    Martin Jacobs led discussions on the ATO's role in administering the R&D tax incentive.

    • The R&D tax incentive programme is jointly administered by the ATO and the Department of Industry, Innovation and Science (DIIS). R&D activities must be registered with AusIndustry (the programme delivery division of the DIIS) before the tax offset is claimed, and the ATO determines if the expenditure claimed in the tax return for R&D activities is eligible for the tax offset. Where the ATO is concerned that the activities may not be eligible, it will refer these cases to AusIndustry.
    • The ATO and AusIndustry also work jointly in developing and publishing guidance. Forthcoming guidance includes allocation of overheads, expenditure at risk, feedstock rules and software.
    • Members remarked that there are significant levels of frustration with registration and eligibility, and the incentive is becoming disproportionately expensive to administer. Members were encouraged to provide more detail with respect to the frustration being experienced.

    5. Tax performance in Australia

    Jeremy Hirschhorn led discussions on the tax performance of large corporates in the context of recent integrity, disclosure and compliance measures:

    • The ATO has released several recent publications that are aimed at enhancing community confidence in the corporate tax system, including:
      • Tax And Corporate Australia and release of the large corporate groups tax gap - issued on 11 October 2017
      • Report of entity tax information 2015–16 and contextual information/analysis of corporate tax transparency report – issued on 8 December 2017
      • ATO statement on corporate tax – media release on 14 February 2018
      • ATO submissions to, and opening statements at, the Parliamentary inquiry into corporate tax avoidance and minimisation.
    • The ATO's large market strategy is driven by our goal to increase the proportion of tax being paid correctly on tax returns to 96% (from 91% currently, as per the tax gap referred to above), with overall tax paid following compliance activity to be increased to 98% (from 94% currently). The ATO aims to assist taxpayers to (voluntarily) pay the right amount of tax by providing more advice and guidance.
    • The ATO work on Justified Trust will assist in increasing the accuracy of the tax gap methodology. Calculation of the tax gap is continually revised with new information. The ATO is working towards publishing the large superannuation funds and PRRT tax gap this year also.
    • Karen Payne of the Board of Taxation suggested that the debate is moving towards the more difficult question of 'do we have a fair tax system?'.

    6. Justified trust, Key taxpayer engagement, Top 100/1,000 Programs

    Michelle de Niese and Jeff Stevenson led discussions (with Jennifer Moltisanti, Judy Morris and Rebecca McGirr also in attendance) on the outcomes of the joint CTA/ATO workshops and the general progress of these programs.

    • The outcomes of the joint CTA/ATO workshop include:
      • Justified trust being a higher level of assurance than simply confirming certain risks don't arise.
      • The likelihood of additional information requests to enable an analysis of objective evidence to support assurance ratings.
      • The need for ATO client engagement teams to provide timely updates and work with the taxpayer to ensure there are 'no surprises' in the tax assurance report outcomes.
      • How the ATO will communicate the high-level outcomes of the justified trust program to the community through our public messaging, such as Tax and Corporate Australia.
      • The ability of taxpayers to choose to disclose all or part of their assurance outcomes or tax assurance reports to their stakeholders.
    • A shared outcomes document has been developed capturing the key messages and answers to commonly asked questions. The shared outcomes document can be used as a reference point for taxpayers as it provides additional practical support for a justified trust review.
    • The ATO is planning to conduct further joint workshops concentrating on engagement and approaches with Top 1,000 taxpayers.
    • Members remarked that there was still confusion as to whether the Annual Compliance Arrangement (ACA) is available and what the benefits of achieving Justified trust are.
    • The ATO confirmed the continuation of the ACA as its premium co-operative compliance product (under which the justified trust methodology will be applied).
    • For clients who obtain justified trust, the benefits include:
      • reduced compliance costs in future years where their arrangements remain largely unchanged
      • their Board having confidence in their tax compliance
      • greater certainty over their tax affairs
      • 'Lighter touch' approaches where we shift to more service-focused approaches
      • less intensive assurance-related engagements with us
      • retained corporate knowledge through a permanent file for each taxpayer to help ensure a seamless transfer of knowledge where personnel changes occur within the ATO.
    • The justified trust methodology is continually being improved as it is being implemented.
    • Income and indirect tax reviews underway for the Top 1,000 are progressing well and the number of STARs being provided to clients is increasing. The Top 1,000 is a four month process. Clients are encouraged to prepare for their review and to facilitate this, the ATO has recently published the standardised initial request for information on its website. The ATO is also looking to provide clients with increased periods of fore-warning that a STAR is scheduled to begin.

    7. Public advice and guidance

    Jeremy Hirschhorn led discussions on ATO public advice and guidance products:

    • Members were concerned that some ATO officers may be interpreting ATO guidance products too literally. Guidance products are different to rulings and should be administered differently. For example, the tax risk management and governance review guide and agreed-upon procedures are not reflective of industry practice and raise concerns for taxpayers who are unable to meet the ATO criteria.
    • The ATO is cognisant that not every aspect of our public advice and guidance products applies to every client.
    • Guidance products are designed to be transparent in the way the ATO administers the tax system. They state how the ATO will allocate its compliance resources according to assessments of risk and outline administrative approaches that mitigate practical compliance difficulties relating to the operation of tax laws.
    • The aim of the tax risk management and governance review guide is to provide a flexible, scalable and non-mandatory framework for all stakeholders to use when assessing tax governance and risk management processes against the ATO's best practice framework.
    • Fact finding procedures, which are based on agreed-upon procedures, aim to reconcile and agree factual data of businesses. These procedures allow the ATO to complete necessary factual checks in a way that is more streamlined and sensitive to the impacts the ATO's work can have on businesses.

    8. Board of Taxation

    Karen Payne advised members of the following projects that the Board of Taxation (the Board) are currently focusing on.

    • The Board's report on Bare Trusts - which is now available on the Board's website.
    • Fringe benefits tax compliance costs and international treatment of benefits.
    • Residency for individuals.
    • Tax and agriculture.
    • Small business tax concessions.
    • ASX listing of innovation companies – the Board is currently looking for another organisation to lead the discussion.
    • Taxing rights reserved under Australia's double tax treaties with respect to real property.

    Members noted an interest in the fringe benefits tax compliance project in particular and commented that the compliance costs associated with this tax are disproportionate to the revenue that it generates.

    9. Country-by-Country (CbC) Reporting

    Anthony Siouclis led discussions on ATO observations to date and update on lodgements.

    • As at 15 February 2018:
      • 2,400 reporting entities have self-assessed as a significant global entity (SGE).
      • Over 3,500 CbC statements have been lodged, which include more than 40 CbC Reports, 1,400 Master files, 2,100 Short Form Local files, 1,900 Local file Part A and 1,700 Local file Part B.
    • First year observations include:
      • 18% take up rate of the administrative solution to lodge Local file early in lieu of the International Dealings Schedule
      • feedback through the consultation group has been excellent and has helped shape key aspects of CbC reporting guidance, including the reporting of FX gains and losses
      • over 300 requests for extension beyond the 15 February deferral date highlights some entities underestimated the requirements under CbC reporting and required extra time to obtain assistance from advisory firms and/or to collate information to complete their lodgement obligation
      • some problems in lodgement in year 1 although the ATO has worked with affected firms to resolve and remediate these problems.
    • The final version of the guidance on FX gains and losses is the same as the latest draft version released pre-Christmas 2017. The ATO is in the process of finalising the publishing of the guidance. The ATO will continue to work with the regulated finance sector on specific issues.
    • Although entities can choose not to provide documents and agreements already provided to the ATO, it has been observed that the vast majority have chosen to re-lodge all agreements.
    • Members commended the ATO on taking public feedback on board.

    10. Single Touch Payroll

    John Shepherd led discussions on the ATO position on corporate readiness.

    • Single Touch Payroll (STP) was designed to align with an employer's natural business process in payroll and provide employers and digital service providers (DSPs) with flexibility in reporting around those processes. That flexibility includes the ability to correct mistakes in the next report as well as providing a 12-month penalty-free transitional period from 1 July 2018.
    • STP allows both DSPs and employers not ready to report from 1 July 2018 to apply for deferrals for a specific period of time based on supporting evidence, including a clear transition plan.
    • The ATO has just released its deferral process for those employers that are not in a position to start reporting from 1 July 2018 and are not covered by a DSP deferral.

    11. Compliance risks and emerging issues

    Amy James-Velagic led discussions on the following matters of interest in relation to indirect tax.

    • Digital products and services and low value imported goods new measure:
      • For the Digital Products and Services New Measure that commenced on 1 July 2017, the number of registrations in the simplified system is above 300 (this does not include other entities that would have registered in the full GST) from over 40 countries (the majority being from the USA and EU). Whilst it is difficult to assess success, Australia’s current publicly registered number exceeds those of other countries that have a similar system (eg. Russia (13); Japan (75); Taiwan (59)).
      • For the Low Value Imported Goods New Measure, it is an option for non-resident businesses to register in the simplified system from 1 January 2018 for a 1 July 2018 commencement date. During January 2018, over 2,000 letters were issued to entities that the ATO had profiled to be within scope of the low value imported goods measure. These letters advised entities that registration had opened on 1 January 2018 and to prepare for registration. The ATO has also devoted resources (i.e. client relationship managers) to contact 100 of the most important and influential entities. In addition to the client relationship managers, the ATO has also met with some of these entities to support their compliance under the new measure. So far, approximately 30 entities have already registered in the simplified registration system for low value imported goods. The ATO is developing stronger compliance messages to elicit engagement from those have not been contactable.
      • The ATO has also commenced compliance action with entities who they believe should be registered for the Digital products measure.
    • Financial services and insurance:
      • The broad framework of the new cross-border measure is that GST only applies to supplies made to consumers, rather than to Australian GST-registered businesses. Instead of requiring overseas suppliers to collect GST on these supplies, any GST payable is collected by the recipient through the Division 84 reverse charge (the reverse charge applies if the recipient would not have been entitled to a full GST credit if GST had applied to the sale, eg. where acquisitions may relate to input taxed supplies).
      • Last year, the ATO held consultation sessions with industry associations and advisors on the GST cross-border new measures and their impacts for the financial services and insurance industry. In the sessions, the ATO received feedback that some suppliers may be incorrectly charging GST on their supplies to Australian GST-registered businesses, but that it was challenging for domestic businesses to educate suppliers without providing them with advice.
      • The ATO has published updated web guidance which is aimed at educating these suppliers, as it explains when the supplier is not required to charge GST, and the potential negative impacts for their recipient if they do incorrectly charge GST (given that the recipient may have an obligation to pay GST because of the reverse charge regardless of how the supplier has treated the supply). The updated web guidance is also aimed at assisting recipients who have asked for guidance from the ATO that they can readily provide to their suppliers to explain these rules.
      • After the consultation sessions held last year, the ATO received enquiries about what the ATO's compliance approach will be in situations where the recipient has not identified their liability under the reverse charge for these types of supplies because the supplier has incorrectly charged GST on the supply, in particular whether a period of 'grace' can be applied to provide them with time to resolve existing arrangements.
      • To ensure a level playing field and also again to raise awareness of this, the ATO has advised industry associations and relevant advisors that if you have not identified supplies where you are liable for GST under the reverse charge as a result of these law changes (because your supplier incorrectly charged GST), the Commissioner will not devote compliance resources to making amendments to correct this for the tax periods spanning 1 October 2016 to 1 July 2018, where certain requirements are met.
      • The ATO encourages clients who receive these types of supplies to review their arrangements to make sure they have identified all the supplies they receive which are subject to the reverse charge.
    • GST at settlement:
      • There is GST evasion by property developers that dissolve their companies (phoenix) between the collection and remittance of GST on new houses or land sales. This property risk has been prevalent in the ATO for many years. There is then no money left in the company to pay creditors.
      • Treasury Laws Amendment (2018 Measures No. 1) Bill 2018 is currently before Parliament. The Bill amends a range of GST laws to improve the integrity of GST on taxable supplies of certain real property. The date of effect of the new law is 1 July 2018 and it includes transitional relief for property contracts entered into before that date. This includes transitional relief for certain Property Development Agreements with waterfall funding arrangements.
      • An extensive program of communication and education activities will be delivered to key stakeholders affected by the changes. The ATO’s focus will be on purchasers of property, property developers, conveyancers/solicitors, real estate agents, tax practitioners and banks to inform them of the changes. Seminars for conveyancers and other stakeholders will be held Australia-wide, starting in March/April 2018.

    Michael Morton led discussions on the following matters of interest in relation to income tax.

    • Valuation of intangibles – the ATO is concerned about the migration of Australian generated intangibles to offshore related parties of multinational entities.
    • Hybrids – to help taxpayers manage compliance risk with the new rules, the ATO will:
      • Develop guidance products (LCRs and PCGs) to provide greater certainty on the ATO's view of the law and how the ATO intends to administer it.
      • Address new concepts that will be introduced into our domestic legislation which will impact upon taxpayers who do not restructure.
      • Prepare a client experience roadmap for taxpayers to engage with the ATO as early as possible.
      • Have a dedicated team to assist on complex queries.
    • TA 2018/2 'Structured arrangements that provide imputation benefits on shares acquired on a limited risk basis around ex-dividend dates' – issued on 13 February 2018.
    • PCG 2017/4 'ATO compliance approach to taxation issues associated with cross-border related party financing arrangements and related transactions' - currently drafting schedule on interest-free loans and derivative financial arrangements
    • Corporate residency – TR 2017/D2 is anticipated to issue as a final taxation ruling in late March 2018 and draft PCG will issue at that time for consultation
      • Note that since the date of the meeting, on 21 June 2018, Draft TR 2017/D2 was published as final TR 2018/5 Income tax: central management and control test of residency and Draft PCG 2018/D3 Income tax: central management and control test of residency: identifying where a company's central management and control is located was published for public comment until 20/7/2018.
    • SGE penalties – Until April 2018, a manual approach will be used for SGEs as part of an education process. From April 2018:
      • Warning letters to SGEs will issue from the automated system
      • The automated system will identify penalty impositions for SGEs as it does for all taxpayers
      • Automatic penalty impositions for SGE taxpayers will be quarantined and they will be subject to a manual review by a case officer
      • This manual review will include contacting the SGE to discuss the penalty, and any extenuating circumstances that may give rise to remission, prior to the penalty being applied to the SGE's account.
    • Reportable Tax Position (RTP) – The 2018 guide to RTP will be published in June 2018. RTP working party consultation will begin in April 2018 on the following:
      • Guidance on the application of transfer pricing in respect of Category A disclosures
      • Category C questions relating to legacy taxpayer alerts (losses, capital gains tax and debt deductions), current PCGs and recently released taxpayer alerts
      • Revised guidance to remove ambiguity in questions based on an ATO review of compliance with Category C responses
      • Note that since the date of the meeting, the 2018 guide to RTP was published on 2 July 2018.
    • Interest withholding and TOFA – the ATO is closely reviewing arrangements that involve a non-resident shareholder loan where interest is expressed to only be payable upon termination of the agreement (which for calculation purposes, accrues monthly). Under these arrangements, interest deductions are claimed on an accruals basis pursuant to TOFA, but no interest withholding tax is withheld
    • Residency, re-domiciling and tax consolidation – the ATO has identified a number of tax consolidated groups that include offshore incorporated entities. The ATO is undertaking further work to understand the justification that the entities are centrally managed and controlled in Australia, which enables them to be brought within the tax consolidated group.

    12. OECD International Compliance Assurance Program (ICAP)

    Michael Morton led discussions on the progress of this program.

    • ICAP is a voluntary program that will use CbC reports and other information to facilitate open and co-operative multilateral engagements between multinational entities (MNE) and tax administrations
    • The main purpose of ICAP is for MNEs and tax administrations to obtain certainty and assurance, respectively, over transfer pricing and permanent establishment issues.
    • The pilot commenced in January 2018 for a duration of approximately 12 months. Outcome letters are expected to be issued in December 2018.
    • MNE pilot participants were selected prior to announcement of US tax reforms. As such, it is hard to ascertain any impact on interest in the pilot.
    • The pilot will focus on transfer pricing and permanent establishment issues. MAAL and DPT are not within scope of the risks being covered.

    13. Other business

    Other matters:

    There were no other matters raised for discussion.

    Next LBSG meeting:

    The next meeting of the LBSG is scheduled for Thursday, 26 July 2018 at the ATO's offices in Sydney.

    The meeting concluded at 3.00pm.

      Last modified: 23 Jul 2018QC 56309