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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 second 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 guests and members to the meeting:

    • Chris Jordan – Commissioner of Taxation
    • Dudley Heywood – Property Council of Australia

    Michelle advised members that Tony Principe will be stepping down at the conclusion of this meeting and thanked him for his contributions to this forum.

    Apologies were received from:

    • Tim Dyce Deputy Commissioner, Indirect Tax
    • Gavin Marjoram – General Manager, Group Taxation, Commonwealth Bank of Australia
    • Dr Niv Tadmore – Law Council of Australia

    Action items from previous meeting

    There were no Action Items from the 23 March 2017 LBSG meeting.

    2. Commissioner's opening remarks

    The Commissioner welcomed members to the meeting and thanked them for their ongoing support for this forum.

    He reinforced the messages from his address to the National Press Club on 5 July 2017, including:

    • The ATO has good assurance over the large market.
    • The ATO will shortly be releasing the large market corporate tax gap with some explanatory material entitled 'Tax and Corporate Australia'.
    • The large market corporate tax gap is approximately $2.5 billion – equivalent to about 6% of the collections for that market and similar to the gap estimated for large corporates in the UK.
    • There are other areas of the tax system that also deserve the ATO's attention, such as work-related expenses. While each individual amount over-claimed for work-related expenses is relatively small, the sum and overall revenue impact for the population involved could be significant.

    He also discussed:

    • Tax Time 2017 – so far, there has been 350,000 more returns lodged as compared to the same time last year, while complaints are down 20%.
    • Operation Elbrus – there are 10 individual reviews of the ATO's fraud, integrity and confidentiality procedures currently on foot.
    • System outages – the ATO is currently working through the recommendations made by PwC in its report on the ATO's recent system outages. This is a 2 year project.

    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:

    • Stapled Structures:
      • The Government has asked Treasury to examine how best to prevent the use of stapled structures to re-characterise trading income as concessionally-taxed passive income
      • On 24 March 2017, Treasury released a consultation paper on potential policy options to address this tax integrity issue.
      • On 2 May 2017, the Treasurer issued a media release noting that the timeline for the review will be extended to the end of July to allow more time for consultation and to formulate relevant options that minimise unintended consequences. Treasury is currently undertaking this work, together with the ATO.
       
    • Multilateral instrument (MLI):
      • Australia signed the MLI at a signing ceremony hosted by the OECD on 7 June 2017, along with 67 other jurisdictions. Two further jurisdictions have since signed the MLI, bring the total to 70.
      • Based on countries' known adoption positions, the MLI will modify (to varying degrees) 30 of Australia's 44 bilateral tax treaties.
       
    • Enterprise Tax Plan:
      • The Treasury Laws Amendment (Enterprise Tax Plan) Act 2017 was passed on 9 May 2017. This Act implements the tax cuts for companies with an aggregated annual turnover below $50 million.
       
    • The Treasury continues to progress the following matters:
      • Petroleum Resource Rent Tax
      • Black economy
      • Consolidation
      • Whistle-blowers legislation
      • Private sector legislation drafting
       

    4. Compliance risks and emerging issues

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

    • International Cross Border:
      • Since 1 July 2017, GST is being applied to non-resident digital products and services supplies made to Australian consumers (ie the 'B2C' measure). Since the previous consultation period, it has been identified that there were some unexpected issues for e-commerce clients.
      • One example is the transitional rules (raised by advisors) and how to calculate the exact apportionment between supplies pre- and post-1 July 2017.
       
    • Financial Services and Insurance (FSI):
      • On 11 May 2017, the ATO launched its FSI Risk Strategy for the 2018 financial year. This strategy provides a framework for obtaining greater assurance over the FSI industry.
      • Since the framework's introduction, the ATO has commenced the following:
        • Engaging with selected clients on FSI priority issues.
        • Beginning the process of reviewing relevant public advice and guidance and private advice to ensure that ATO views expressed regarding the application of FSI priority issues is consistent across the industry.
        • Undertaking a scoping exercise regarding the identification of potential issues or risks within the General Insurance industry.
        • Conducting various targeted technical/commercially-based internal training sessions aimed at strengthening FSI expertise for ATO staff.
         
      • The ATO published GSTD 2017/1 Goods and Services Tax: when is the supply of a credit card facility GST-free under paragraph (a) of Item 4 in subsection 38-190(1) of the A New Tax System (Goods and Services Tax) Act 1999.
       
    • Private Rulings:
      • Given external feedback, the ATO has been exploring the use of sunset and assurance clauses for Private Rulings:
        • Under this approach, the Private Ruling would sunset at a specified date. The client would have the opportunity to extend the period for which the Private Ruling is binding on the Commissioner if they choose to provide assurances that the facts/assumptions within the Private Ruling's scheme remain the same at the time of the sunset clause (i.e. an assurance clause). Alternatively, a sunset/assurance clause may be considered separately (if appropriate).
        • ITX has identified various issues/circumstances where a sunset/assurance clause may be appropriate such as:
          1. Where it is highly likely that the scheme/facts will change within a certain period; or
          2. Complex technical issues where the legal position is unsettled (e.g. pending appeal or decision from a higher level court) or there are various assumptions per the scheme, however the client requires certainty for a specific period.
           
        • Implementing a sunset/assurance clause would provide the following benefits:
          1. An opportunity for the client to review the facts and the practical inputs to the scheme and give the ATO the assurance required once the scheme has been implemented (i.e. many private rulings are sought prior to the scheme occurring or being finalised). This could provide greater assurance and certainty for both the ATO and the client's tax governance processes.
          2. The ATO could rule on more complex matters where the ATO previously considered that the correctness of that private ruling was dependent on certain assumptions and previously the ATO may have chosen not to rule subject to those assumptions.
          3. The period of a private ruling could be limited where the decision resulted in an inappropriate outcome; this would also ensure that issues of 'level playing field' can be managed more effectively.
           
        • This is considered an alternative approach to current ITX-issued Private Rulings which will enhance voluntary compliance and future assurance for the ATO.
         
      • Members questioned the benefit for the assurance clause as Private Rulings automatically cease to bind the Commissioner once the facts change. 
       
    • Input Tax Credit (ITC) Estimators:
      • Web guidance on ITC Estimators was published on 25 May 2017. Client using an ITC estimator are encouraged to consider the published information.
       

    Jeremy Hirschhorn led discussions on the following matters of interest in the context of income tax:

    • Priority issues for the ATO continue to be Shareholder Debt, Outbound Supply Chains, Inbound Supply Chains and Domestic Fragmentation.
    • The ATO published Practical Compliance Guideline (PCG) 2017/8 Income Tax - the use of internal derivatives by multinational banks; and PCG 2017/10 Application of paragraphs 215-10(1)(c) and 215-10(1)(d) of the Income Tax Assessment Act 1997.
    • The ATO is reviewing its guidance on corporate residency:
      • Members expressed the view that the guidance in its current form has caused a lot of consternation amongst corporates. Members suggested that the guidance could be improved by inclusion of better examples (particularly in light of modern digital communication channels).
      • Jeremy advised members that the ATO will review the guidance in light of the feedback.
       
    • The Reportable Tax Position (RTP) schedule is being rolled-out to the 'Top 1,000' clients.

    5. Tax gap

    Jeremy Hirschhorn, together with Kent Perdrisat, led discussions on the progress of measuring the tax gap:

    • The ATO is preparing to formally release the Large Corporate Groups Tax Gap in respect of the 2014–15 financial year.
    • At the same time, and to address community confidence in the tax system, the ATO will publish explanatory material regarding the large market entitled 'Tax and Corporate Australia'.
    • The tax gap measures the difference between the tax payable according to the law and the tax actually paid, based on available information.
    • The tax gap measures the effectiveness of the tax system (as opposed to audit results which simply measures the amount of non-compliance).
    • Members encouraged the ATO to outline in its messaging to the public:
      • The benefits of measuring the tax gap; and
      • The fact that the tax gap is based on 2014–15 data which predates many significant integrity measures such as the Diverted Profits Tax, Multinational Anti-Avoidance Legislation and administrative penalties for significant global entities.
       
    • The Corporate Tax Association (CTA) has been in discussion with the Confederation of British Industry (CBI) in respect of their experience with the UK tax gap. The CTA and the CBI have undertaken comparisons of numbers and data and discussed the public perception of: (a) corporate tax contribution; and (b) the tax gap's relativity to the budget deficit.

    6. Cross-border related-party financing arrangements

    Shaz Panhwar led discussions on draft PCG 2017/D4:

    • The consultation period on PCG 2017/D4 ended on 30 June 2017. The ATO has considered all submissions received and feedback provided and is currently amending the PCG in response to some of the feedback. The final version of the PCG is expected to be released before 30 September 2017.
    • One change is the bifurcation of the 11 indicators in the PCG into separate pricing and motivational indicators with a matrix scoring approach being adopted. This will ensure that taxpayers with conservative pricing arrangements should not be rated in the 'red zone'.
    • The ATO currently anticipates five additional schedules to this PCG:
      • Industry modifier schedules - this schedule modifies the indicators in Schedule 1 for certain industries. To date, the only industry which will have a modification will be infrastructure. This schedule is currently being drafted.
      • Related party derivatives - in advanced draft and is expected to be released in draft form for consultation shortly after the finalisation of the main PCG document.
      • Guarantee fees - in advanced draft and is expected to be released in draft form for consultation after the finalisation of the main PCG document.
      • Interest-free loans - is currently being drafted.
      • Arm's Length Debt test - work has commenced on this schedule.
       

    7. Justified trust

    Jeff Stevenson led discussions on the Key Taxpayer Engagement (KTE) approach:

    • Key taxpayer engagement is the overarching strategy for engaging with our 'Top 100' clients at a whole-of-tax level.
    • The staff from income tax, GST and excise will form whole-of-tax virtual teams for each client and will look at the opportunities to integrate work already underway.
    • Members of the whole-of-tax virtual teams will meet with the client to outline the tailored engagement approach and what that will mean in terms of services available to the client and the assurance plan for the remainder of the year. Annual Compliance Arrangements (ACA), Pre-lodgement Compliance Reviews (PCR) and relationship management activities will form the foundation of these plans.
    • It is proposed that the majority of these meetings be conducted before the end of this calendar year.
    • The justified trust methodology is being applied as business-as-usual across ACAs and PCRs in the Top 100 population (for income tax purposes).
    • While Indirect Tax has adopted the justified trust approach, it will not be rolling it out at the same pace as Income Tax.
    • Joint ATO/CTA workshops will be conducted to relay key messages to the Top 100 clients and ATO staff about the key taxpayer engagement and justified trust initiatives. The workshops are expected to commence in late October and into November 2017.

    Judy Morris and Jennifer Moltisanti led discussions on justified trust:

    • The justified trust initiative has or is being rolled out to the Top 100 and Top 1,000 clients for income tax. Indirect Tax will leverage off common information requests when they are ready to roll it out.
    • Since the Top 1,000 Tax Performance Program commenced in January 2017, the ATO has commenced reviews on 90 taxpayers, finalised 10 reviews, and issued 5 Streamlined Tax Assurance Reports at the completion of the reviews.
    • Since the last LBSG meeting, the ATO has explored sharing the Tax Assurance Reports (TAR) with the Top 100 clients. The ATO has now reviewed the structure of the report with the client experience in mind. It will be more suitable for presentation externally and may be read by different levels of management, including the Board.

    Jeremy Hirschhorn discussed the benefits of the justified trust initiative which include:

    • Cross-tax synergies.
    • Clear destination ie finalisation of the process.
    • Reduced compliance costs over the long term.
    • Better repository of the corporate's history within the ATO.
    • The TAR positively concludes whether the ATO has confidence that the client is paying the right amount of tax according to law.
    • Increased confidence in the ATO's ability to estimate the tax gap.

    8. Significant global entities (SGE)

    Anthony Siouclis and Mal Allen led discussions on the administrative penalties for SGEs and general purpose financial statements:

    • On 7 July 2017, the ATO released Frequently Asked Questions on SGE administrative penalties.
    • Statement penalties will continue to be applied manually. Automated processes for application of some failure-to-lodge penalties will continue, but with a manual review during the initial months prior to the application of the SGE uplift.
    • Policies and procedures relating to warnings and remission remain unchanged.
    • Guidance on general purpose financial statements is being considered by the ATO.

    9. Industry perspective

    Dudley Heywood discussed trends and issues in the Property Industry:

    • The key components of the property industry include office, retail, industrial, hotel, residential and retirement.
    • Big picture impacts on the retail sector include:
      • Expansion of 'Amazon' (although the impact is still unknown)
      • Retail sales growth
      • Wages growth
      • Mixed used developments
      • The digital economy
       
    • The emerging tax issues and opportunities include:
      • Corporate CIV regime - can a property investment be held in a CCIV?
      • Stapled structures consultation - property trusts are not the focus
      • Division 6C - is there an opportunity to expand scope of 'rental' income?
      • Debt equity rules and stapled arrangements
       
    • The key income tax issues include:
      • AMIT regime - including proposed technical tweaks
      • Non-arm's length income rule - watching brief as transitional arrangements end
      • Application of Division 6C
       
    • The GST issues include:
      • Interaction of the proposal for purchasers to pay GST to the ATO on new residential properties with the margin scheme
      • Impact on Australian retailers of GST being applied on inbound goods and intangibles
       
    • Tax administration issues and future opportunities include:
      • Compliance with FATCA and CRS
      • Data analytics and 'robotic' tax return preparations
       

    10. OECD International Compliance Assurance Program

    Mark Konza led discussions on the progress of this program:

    • The International Compliance Assurance Program (ICAP) is a multilateral risk assessment process where tax administration and Multinational Enterprises (MNE) can work together to obtain assurance on international income tax issues in a quicker and more efficient manner than what can be achieved unilaterally.
    • MNEs that participate in ICAP will benefit from having a single tax administration point of contact during the program, which will co-ordinate communication and risk assessment activities.
    • An ICAP pilot is expected to commence in October 2017. The pilot participants include Australia, Canada, Germany, Italy, Netherlands, Spain, United Kingdom and the United States. The tax administrations of these countries are currently determining the MNEs that will be invited to participate in the pilot.

    11. Status of exchange of information

    Mark Konza and Anthony Siouclis led discussions on the development of protocols for exchange of information (EOI) requests:

    • The ATO is reviewing and updating guidance on EOI following the Inspector-General of Taxation review. This includes clarifying why we exchange information, how we protect taxpayer data and when we might notify the taxpayer that we are exchanging information.
    • Sharing Country-by-Country (CbC) related forms will occur under the relevant Multilateral Competent Authority Agreement and Double Tax Agreements/Tax Information Exchange Agreements. The ATO is reviewing protocols for the sharing of this information.
    • The ATO will also consider the process for managing EOI requests from other countries stemming from the lodgement of Country-by-Country Reports, Master files and Local files.

    12. Diverted profits tax (DPT)

    Mark Konza led discussions on the implementation of the DPT:

    • Selective external consultation took place on 1 May 2017 in respect of the draft Law Companion Guide (LCG) and draft Law Administration Practice Statement (PSLA) on the DPT. These documents are currently at approval stage and will be released shortly.
    • The draft PCG on the DPT is being developed with ongoing consultation and feedback from stakeholders, with some examples already being sent to Treasury for comment. Further external consultation of the completed draft PCG will be conducted.
    • The ATO is continuing to consult with external advisors in relation to the standard clause to be included in an Advance Pricing Agreement (APA) to outline the impact of the APA on application of the DPT.
    • Members stressed the importance of the guidance material clearly outlining the circumstances to which the DPT applies and expressed that they had anticipated the draft PCG to have already been released.

    13. International dealings schedule (IDS) and Country-by-Country reporting

    Mark Konza and Anthony Siouclis led discussions on the addition of FX gains and losses on the IDS and CbC local file:

    • FX gains and losses have been a part of the Australian Local File design since March 2016 which was released to the consultation group in multiple versions and subject to consultation. The most extensive consultation occurred after finalising the instructions. Since then, the ATO has prepared two versions of guidance to clarify how FX gains and losses can be reported in year one.
    • Similar FX labels have been included in the 2017 IDS recognising the issue that large net FX losses deducted for various inter-related party foreign currency derivatives and borrowings were not disclosed on the IDS in 2016 and earlier. The new labels also align the IDS to the local file which has been an important feature of the ATO's CbC implementation to allow taxpayers to complete the local file in lieu of Questions 2–17 of the IDS.
    • To date, 4 Australian local files have been successfully lodged.

    Members observed that:

    • The administrative costs of extracting information to report FX gains and losses can be extensive.
    • Therefore, guidance on what should be reported needs to be as clear as possible.
    • Consultation timeframes on the draft guidance were inadequate in light of the lack of risk hypothesis presented to the consultation participants.

    The ATO has committed to a further round of consultation on the issue of FX gains and losses later in 2017 in anticipation of providing additional guidance for year 2 and beyond.

    14. Board of Taxation

    Karen Payne led discussions on recent developments at the Board of Taxation:

    • The Board's report on Asset Swap Roll-over Relief was discussed - including the problem that is seeking to be addressed. The report has been presented to the Minister (the Treasurer) (February 2017) and is still with the Minister.
    • The Board has consulted with stakeholders on how best to implement Action 12 of the BEPS Action Plan (i.e. Mandatory Disclosure Rules), taking into consideration issues relating to:
      • Client confidentiality;
      • Reconciling the objectives of the promoter penalty rules;
      • Striking an appropriate balance in drafting the "hallmarks" which trigger the mandatory disclosure requirement - including the use of a panel consisting of representatives from the ATO, the Treasury and the tax profession; and
      • Avoiding duplication with existing disclosure requirements - such as the RTP.
       
    • The Board's report on bare trusts and custodial arrangements was discussed and its importance in the context of upcoming CIV reforms. This report has recently been presented to the Minister (Minister for Revenue and Financial Services) and is still with the Minister.

    15. Other business

    Other matters

    There were no other matters raised for discussion.

    Next LBSG meeting

    The next meeting of the LBSG is scheduled for Monday, 20th November 2017 at the ATO's offices in Melbourne (Docklands).

    The meeting concluded at 3.30pm.

      Last modified: 09 Nov 2017QC 53886