• Subdivision 768-A Consultation Minutes: 21 July 2015

    Venue:

    747 Collins St Melbourne

    Teleconference

    Sydney, Melbourne

    Date:

    21 July 2015

     

     

    Start:

    10:00am

    Finish:

    12:00pm

    Chair:

    Paul Korganow

    Facilitator:

    Paul Korganow

    Contact and Secretariat:

    Julie Walters

    Contact phone:

    (03) 9275 9897

    Attendees

    ATO Members

    Paul Korganow

    Assist Commissioner International Profit Shifting

    Penny Georgiou

    Senior Director International Profit Shifting

    Kevin O'Shaughnessy

    Senior Director Technical Leadership Group

    Michelle Osler

    Director Technical Leadership Group

    Nick Zanikos

    International Profit Shifting

    Gulalai Fazal

    International Profit Shifting

    Hajar Khasmuim

    Technical Leadership Group

    Andrew Phlorides

    Technical Leadership Group

    Professional and Industry Body Representatives

    Cameron Blackwood

    Taxation Institute of Australia I Corporate Tax Association

    Tony Stolarek

    Chartered Accountants Australia and New Zealand

    Vivian Chang

    Law Council of Australia

    Tim Carberry

    CPA Australia

    Sach Pelpola

    PricewaterhouseCoopers (representing Peter Collins)

    Jenny Wong

    Chartered Accountants Australia and New Zealand

    Apologies

    Peter Collins

    PWC

    Michael McCormack

    ATO

    Agenda items

    Disclaimer

    Technical working group agendas, minutes and related papers are not binding on the Australian Taxation Office (ATO) or any of the other bodies referred to in these papers. While every effort is made to accurately record views expressed, the wording necessarily represents a summary of statements of general position only, and care should be taken in interpreting those statements. These papers reflect the position at the date of release (unless otherwise noted) and readers should note that the position on any issue may subsequently change.

    1. Introduction and welcome

    The chair welcomed the group and introduced the members.

    2. Purpose of the meeting

    This meeting follows the initial Subdivision 768-A Consultation Group meeting which was held on 24 February 2015.

    This group has been convened to specifically look at administrative and technical interpretive issues associated with Subdivision 768-A. The group is expected to have a limited life to resolve the identified administrative and interpretive issues. The ATO will prioritise the matters and provide timely responses.

    3. Action items - February meeting

    The Chair reviewed the action items from the previous meeting on 24 February.

    1. The first action item discussed was whether the ATO had determined the type of guidance products that would be developed to address the issues in the scoping brief. This item was closed as the ATO explained they are still considering whether they will address the issues through Taxation Rulings, Tax Determinations or Practise Statements.

    2. The second action item required the ATO to research previous Private Rulings relating to the section 23AJ exemption applying to share buy-backs. This item was completed; the ATO reported their findings that previous Private Rulings reviewed were favourable in extending the section 23AJ exemption to share buy-backs.

    3. The third action item sought clarification and the rewording of the question on Issue 2 to reflect the discussions in the first consultation meeting in relation to the interaction between Subdivision 768-A, Subdivision 815-B and C and Division 974 of the ITAA 1997 for legal form debt instruments that are characterised as equity interests. The party that raised the original issue provided a reworded version of the question. The ATO explained that as the Subdivision 768-A issue raised is consequential to other issues, it is outside the scope of this consultation's purpose.

    The ATO advised that the issue is being considered by the Subdivision 815 Working Group and together with relevant stakeholders a document covering the issue is being constructed. Members expressed that they believe the issue needs to be addressed for all purposes of the Act and a uniform approach is needed to be taken by the ATO.

    4. Scoping Brief

    The issues listed in the scoping brief were identified by the professional and industry representatives at the last meeting of the consultation group. See the Subdivision 768-A scoping brief for proposed ATO guidance.

    4. The first issue from the scoping brief discussed was in regards to differing views on the meaning of 'at the time' in section 768-5 taking into account on-market and off-market share buy-backs, liquidations and share cancellations.

    The ATO explained that previous Taxation Rulings on section 23AJ had extended the NANE exemption to share buy-backs and that the Explanatory Memorandum to Subdivision 768-A does not mention that the policy was intended to change to disallow the exemption. However, Treasury has stated in writing that the NANE exemption is not intended to be extended to be applicable to share buy-backs. It was mentioned that the issue is currently being looked into by the Senior Tax Council and TCN has accepted the issue; however it is not yet listed in their Taxation Ruling Register.

    A member of the group mentioned that Treasury's view was that the policy under the former section 23AJ the exemption was not extended to share buy-backs. The ATO explained that their understanding differed. Once the ATO view is established it would be presented to Treasury at a high level regarding the policies intention.

    The ATO asked the external group representatives for their views on the best construction of the phrase 'at the time' in section 768-5 and any real life examples of on-market and off-market share buy-backs, liquidations and share cancellations and redemptions with an emphasis on the point in time when the distribution is made and the point in time when the equity interest is cancelled. The group determined that many situations occurred when this issue could be raised such as is 'at the time' when the cash remittance is made after the distribution, contract date or journal entry date?

    It was suggested that the ATO needed to test different scenarios as taxpayers would structure their share buy-backs to benefit from the exemption. If a dividend is paid when the buy-back contract is entered into, and if the events occur simultaneously, does the taxpayer get the benefit of the provision? A suggestion was that the ATO require the taxpayer to satisfy the participation test 'just before' the share buy-back.

    A member stated that concept of contract should be avoided as issues regarding contract law in foreign jurisdictions make raise potential issues. The ATO asked for examples from the external representatives regarding potential scenarios where this issue is apparent.

    It was determined that this issue is a priority and many members had current life cases on this issue.

    5. The second issue discussed was the difficulty in determining the amount of attribution if foreign equity distributions flowed through interposed entities. The ATO explained that the issue stems from there not being a statutory method provided on the attribution process therefore partnership and trust law is being looked into, to determine the methodology for determining how one would attribute a foreign equity distribution through trusts and partnerships.

    It was explained that the attribution issue arose from situations where the taxpayer in question had a 10% or more stake in an entity but not control, and there was a lack of information provided to the taxpayer such as in certain private equity type trusts. An issue is at what 'time' the amount of income is determined. The ATO requested examples from the external representatives of situations where the attribution of foreign equity distributions is difficult to determine due to lack of information provided. A member of the group stated that would provide a numeric example of how one would work out how the foreign equity distribution is attributed.

    6. The final issue from the scoping document discussed was in regards to what the meaning of 'holds' is where interests are held and distributions are made through interposed entities. The ATO explained that this issue interlinks with the participation test and at which time the participation needs to be satisfied (section 768-15).

    It was agreed by the members that policy intent of Subdivision 768-A was to make the exemption available when the interest is held through interposed entities, however the issue that needs to be addressed refers to the mechanics of getting to the 'answer' of what is the relevant 'time' for determining 'hold' for interposed entities and how the amount is attributed (section 768-5(2)(c)). The ATO requested examples from the external representatives of similar situations, particularly if the amount 'held' by the entity changes by the end of the year, therefore resulting in them failing the 'hold' for the participation test.

    The members were referred to section 350 and 351 of ITAA 1936 as referred to in section 960-190 of the ITAA 1997 in determining the participation test which ascertains the beneficial entitlements at the end of the year and assumes that the interest held was for the whole year. A member mentioned that this interest amount may change during the year if an interim distribution was made and also the timing would be different depending on the trust type such as unit trust or discretionary trust.

    The ATO informed the group that TD 2008/24 which applied to section 23AJ does not apply to Subdivision 768-A as the intent of the new subdivision is that the exemption will apply where the dividend flows through an interposed trust or partnership. The ATO will ensure that the documents released will state that TD 2008/24 will not apply to Subdivision 768-A.

    The chair discussed any additional interpretive issues.

    7. A member explained the uncertainty regarding the treatment of FX gains/losses in relation to instruments which were on issue prior to Subdivision 768-A. Will the gain/loss be assessable and/or will it be apportioned? The ATO explained that this issue is outside the scope of this consultation process and will be noted but will not be included in this consultation group scoping brief. The ATO advised that if this issue was of concern that a Public Binding Ruling request may be suitable.

    8. The discrepancy between Subdivision 768-A and Subdivision 768-G was discussed. The ATO explained that issue appears to be outside the policy parameters of this measure; however it is noted that there are merits in using a consistent test and the issue can be escalated to New Measures.

    5. Options for further exploration

    It was further requested that case studies be provided in order to give an insight to the ATO regarding situations where the above issues may be of concern.

    The issue was raised relating to the funding costs to finance investments and income from foreign sources. The ATO responded that the issue was outside the scope of this consultation group.

    The group discussed the priorities of the three issues mentioned in the scoping brief. It was decided that the issues relating to share buy-backs and 'holds' (Issue 1 and 3 in the scoping brief) were top priorities followed by the issue relating to 'attribution' (Issue 2 in the scoping brief).

    6. Action items

     

    Action Item number

     

    1

    Action item name

    To raise an issue regarding interaction between Subdivision 768-A, Subdivisions 815-B and C and Division 974 of the ITAA regarding legal form debt instruments that are characterised as equity interests with the Treasury BEPS Group, as the 2010 OECD Guidelines refer to ‘exceptional circumstances’ this may lead to the risk of arbitrary double taxation.

    Responsibility

    Tony Stolerak

    Status

    Open

    Expected delivery date

    31 August 2015

    Action Item number

    2

    Action item name

    ATO to consult with Subdivision 815 Working Group, to determine if the current in-progress Tax Rulings address what an independent party would do in a re-characterisation of debt/equity scenario.

    Responsibility

    Kevin O’Shaughnessy

    Status

    Open

    Expected delivery date

    31 August 2015

     

    Action Item number

    3

    Action item name

    External representatives to provide:

    • real life examples of on-market and off-market share buy backs, liquidations and share cancellations and redemptions with an emphasis on the point in time when the distribution is made and the point in time when the equity interest is cancelled.
    • any views they have on the best construction of the phrase ‘at the time’ in section 768-5 taking into account these examples.

     

    Responsibility

    Cameron Blackwood, Vivian Chang, Tim Carberry, Tony Stolarek, Sach Pelpola and Jenny Wong.

    Status

    Open

    Expected delivery date

    31 August 2015

     

    Action Item number

    4

    Action item name

    To provide real life scenarios illustrating the point in time when the cancellation of the equity interest occurs and the point in time the distribution is made (for example, when there is a contract, when there is no contract etc.)

    Responsibility

    Cameron Blackwood and Vivian Chang

    Status

    Open

    Expected delivery date

    31 August 2015

     

    Action Item number

    5

    Action item name

    External representatives to provide:

    • examples where interests are held and distributions are made through interposed entities.
    • any views they have in light of these examples of:  
      • When an entity ‘holds’ an interest (for the purpose of section 960-190 ITAA 1997 and sections 350 and 351 ITAA 1936).
      • The time at which the participation test needs to be satisfied (section 768-15).
      • How the amount is attributed (section 768-5(2)(c))?

     

    Responsibility

    Cameron Blackwood, Vivian Chang, Tim Carberry, Tony Stolarek, Sach Pelpola and Jenny Wong.

    Status

    Open

    Expected delivery date

    31 August 2015

    Action Item number

    6

    Action item name

    To provide examples of live issues in private equity type funds where the interest is held, and the distribution flows, through interposed entities.

    Responsibility

    Sach Pelpola

    Status

    Open

    Expected delivery date 31 August 2015

     

     

    Action Item number

    7

    Action item name

    To provide a numeric example that shows how one would work out how the foreign equity distribution is attributed.

    Responsibility

    Vivian Chang

    Status

    Open

    Expected delivery date

    31 August 2015

     

     

    Action Item number

    Action item name

     

    Responsibility

    Status

    Expected delivery date

     

     

    8

    To enquire into examples where attribution of foreign equity distribution is difficult to determine due to lack of information provided.

    Vivian Chang

    Open

    31 August 2015

     

     

    Action Item number

    Action item name

     

     

    Responsibility

    Status

    Expected delivery date

    9

    External representatives to look into and provide views on the application of section 350 and 351 of ITAA 1936, as referred to in section 960-190 of the ITAA 1997, in determining the participation test.

    Cameron Blackwood, Vivian Chang, Tim Carberry, Tony Stolarek, Sach Pelpola and Jenny Wong.

    Open

    31 August 2015

     

     

    Action item number

    Action item name

    10

    External representatives to provide comments on the logistics of applying section 350 of the ITAA 1936 overlayed with the assumptions provided in section 960-190 of the ITAA 1997 concerning partnerships

    Jenny Wong to provide some trust examples.

    Responsibility

    Cameron Blackwood, Vivian Chang, Tim Carberry, Tony Stolarek, Sach Pelpola and Jenny Wong.

    Status

    Open

    Expected delivery date

    31 August 2015

     

    Action Item number

    11

    Action item name

    ATO to escalate the issue regarding the discrepancy between 768-A and 768-G to New Measures.

    Responsibility

    ATO

    Status

    Open

    Expected delivery date

    31 August 2015

      Last modified: 30 Aug 2016QC 48631