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  • EY feedback - Expansion of the Reportable Tax Position Schedule to large private companies and corporate groups consultation paper

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    Dear Mr Drogaris,

    We refer to the invitation from the Australian Taxation Office (“ATO”) to provide feedback in relation to the proposed expansion of the requirement to lodge Reportable Tax Position (“RTP”) Schedules to large private companies and corporate groups. We thank you for the opportunity to respond to your “Consultation Questions”.

    We make this submission on a general basis and we have not referred to specific client circumstances.

    We provide a summary of our submissions, as outlined in the Appendix:

    • It is imperative that the ATO identify and advise the private company and corporate group taxpayers that will be required to lodge RTP schedules in advance of the commencement of the relevant income year. As the ATO will be aware, private groups may have many entities, which might be connected through linkages in family trusts and companies. However, the management, operations and assets of the entities might be for the benefit of different segments of a family group, often with those segments not interacting nor sharing information, nor providing all information to employees. Therefore, self-assessment of RTP filing obligations would be unworkable.
    • Not all Category C questions may be applicable to private groups.
    • We urge the ATO to consider rearranging the Category C questions into logical groups in enable more efficient identification of relevant questions.
    • In addition to responding to your consultation questions, we outline other observations as well.

    EY’s primary concern relates to the potential for uncertainty for taxpayers in relation to self-assessing their need to lodge an RTP schedule.

    If you have any queries or would like further information, please feel free to contact Sue Williamson on (03) 9288 8917, Tony Stolarek on (03) 8650 7654 or myself on (02) 9248 5931.

    Yours sincerely

    Fiona Moore

    Partner – Tax

    Appendix A

    With reference to the “Consultation Questions” published in July 2019, we make the following submissions in our role as an advisor to many taxpayers who may be affected by the proposed changes. None of the points raised relate to an individual taxpayer’s circumstances. We have also provided our views more generally in relation to the proposed expansion.

    1. Does the proposed start time of the income year ended 30 June 2020 give sufficient time to prepare, considering the forms will be due in early 2021?

    The proposed start time does not allow sufficient time for taxpayers to prepare for lodging an RTP Schedule. Introducing a new compliance obligation part way through an income year is problematic for a number of reasons:

    • Taxpayers will have already commenced transactions. Assessment of whether a position or outcome is an RTP requires a qualitative assessment with regard to relevant authorities. This assessment should take place contemporaneously with the transaction, not after the fact.
    • Private entities and corporate groups often do not have an in-house tax function, rather they engage with advisors on an as-needed basis (for example, while undertaking transactions and after year end for the purpose of meeting compliance obligations). If there is no engagement with an advisor during the year, the assessment of whether any RTPs have arisen will occur after the fact.

    In light of the above, we are of the view that those taxpayers required to lodge the RTP Schedule should be notified prior to the commencement of the relevant income year (i.e. it would have been by 1 July 2019). Furthermore, in relation to the Category C questions, taxpayers should be informed of any new questions from the commencement of the year, rather than during the relevant year.

    The above approach will allow those taxpayers an opportunity to put in place the relevant tax corporate governance processes to facilitate identification of potential RTPs on a real-time basis, rather than retrospectively.

    With respect to the due date of early 2021, there needs to be further clarity as to whether this would apply to all taxpayers who are required to lodge an RTP Schedule under the expanded regime. It is foreseeable that not all entities with an income year ended 30 June 2020 will be in position to defer lodgement of their income tax return until 2021. There are some entities (e.g. entities prosecuted for non-lodgment of prior year returns) which will be required to lodge in October 2020. Accordingly, there will be a mismatch between lodgement of the income tax return and the RTP Schedule.

    2. Do you have any concerns with the proposed thresholds that determine who in the large private market will be required to lodge the RTP schedule?

    We have concerns with the threshold guidance assisting taxpayers to determine whether they are required to lodge the RTP Schedule: the ambiguity in the term “economic group”, and the practical ability for taxpayers to determine whether the relevant thresholds have been exceeded. We suggest the ATO could consider identifying and advising those taxpayers in the Top 320/500 program as the relevant taxpayers required to lodge.

    Definition of economic group

    Notwithstanding the term “economic group” is not a defined term, it is a term critical to taxpayers’ self-assessment of whether they are required to lodge an RTP Schedule. In the absence of a definition of “economic group” we are concerned that taxpayers may inadvertently incorrectly determine they are not required to lodge the RTP Schedule and thus potentially incur failure to lodge penalties.

    The issues in relation to privately held groups are very different to those for public groups that have reporting obligations.

    A common example is where the business interests of a high-net worth individual or family is held through a trust (with the corporate beneficiary of the trust owning the shares in the operating companies). The question to be asked in this context is whether the corporate trustee is included in the economic group, or whether the economic group “commences” at the operating company level. Put another way, does the economic group “commence” at the operating company level, or the investment vehicle level?

    We are of the view that the economic group should “commence” at the operating company level and not the investment vehicle level – this is particularly relevant to instances where the interest in the operating company may be owned by:

    • multiple entities that do not produce consolidated financial reports; and
    • different members of a family each owning an interest through a different investment vehicle, often in different family segments, with varying degrees of interaction, and often not sharing financial information with other family segments or employees thereof.

    Due to the above variants to ownership structure, different members of the group may have:

    • different tax advisers; and/or
    • different management and accounting responsibilities for investment vehicles as distinct from operating vehicles.

    Thus, including investment entities notably trusts in the definition of “economic group” presents a challenge with determining whether the relevant thresholds have been met (see below for further detail in this regard).

    Diagram 1: Identification of "economic group".

    Demonstration of 4 complanies in 2 economic groups.If the economic group “commences” at the operating company level, Individual A, who does not have an interest in Trust B, would not be in a position to be informed of the activities of Trust B or Company 4 in order to facilitate the meeting of the obligations of Company 1 or 2 (in which Individual A has an interest).

    In the above diagram, there would be two economic groups: Companies 1, 2 and 3, and Companies 3 and 4. This diagram demonstrates that if the economic group “commences” at the operating company level, Individual A, who does not have an interest in Trust B, would not be in a position to be informed of the activities of Trust B or Company 4 in order to facilitate the meeting of the obligations of Company 1 or 2 (in which Individual A has an interest).

    This issue of the limitations on the definition of “economic group” is also relevant in the private equity context. In this context, we are of the view that the “economic group” should be confined to the operating business and not include the private equity fund.

    Thresholds

    It is ambiguous as to whether the income thresholds (outlined under the section in your consultation paper entitled “Who are the impacted entities”) relate to Australian income or global income. Given the references to the income tax return, we assume it is the income included is the Australian income tax return. We also assume the references to income tax return labels are labels in Question 6 of the Australian income tax return. If it is instead to mean the income of the group globally, then this is not clear. This matter should be clarified.

    Furthermore, we have significant concerns with the ability of taxpayers to determine whether the thresholds for have been exceeded, particularly in widely dispersed family groups:

    • Depending on the scope of the “economic group”, taxpayers may not ordinarily be privy to the data required to make the determination of whether the thresholds have been breached (and that the owners of other segments of the private group may not be willing to share that data).
    • Additionally, where investment entities have significant assets, the realisation of those assets might result in capital or revenue gains, but these are often unable to be anticipated.

    3. Are there any concerns with applying the income tests during the year of lodgement?

    Applying the income tests during the year of lodgement can result in a taxpayer not having certainty as to their lodgement obligations until months after year end. Again, as we outlined in response to question 1, we are of the view that taxpayers should be notified of their obligations prior to the commencement of the income year to enable them to put the requisite processes in place to identify RTPs on a real-time basis. In this respect a “prior year” test may be more appropriate.

    Moreover, in applying the income tests, certain income should be excluded. For example, income arising from “once only” transactions and arrangements, such as income from a sale of a business or large asset, should be excluded. Inclusion of abnormal or extraordinary income may require a taxpayer to lodge an RTP Schedule when they would not otherwise be required to lodge an RTP Schedule.

    Therefore, we suggest limiting the income taken into consideration for the purposes of determining whether the income test is met to ordinary income, such that income arising from CGT events and other statutory income would excluded from the determination of whether the income thresholds have been breached. This is consistent with the way in which Instalment Income for the purposes of the PAYG instalment regime is calculated.

    4. Under what circumstances should the ATO provide an exemption for the lodgment of an RTP schedule or the disclosure for certain types of disclosures specific to large private groups?

    We are of the view that the obligation to lodge an RTP Schedule should be limited to taxpayers carrying on a business such that those taxpayers predominantly deriving passive income should be excluded from lodgement.

    5. Do you see any challenges in applying RTP Category C questions to companies in large private groups such as areas of tax law that may not be suitable for an RTP Category C question?

    As noted above this is largely dependent on when the ATO releases the list of matters that need to be considered in Category C. The ATO should release this prior to the commencement of the relevant income year to allow identification of RTPs on a real-time basis.

    With the expansion to private groups, we believe it would be highly desirable to restructure the Category C questionnaire into more logical form. The current sequencing lists the questions with their historical numbering by original issue date, with some numbers omitted where the questions have been deleted over time. This may have been useful for entities which have been filing RTP schedules for some years, but is confusing for new entrants.

    We also suggest, in the context of private groups, that the international questions be segregated to simplify responses for domestic private groups.

    A solution may be to have a “Public and Multinational Group” Category C, and a “Private Companies and Corporate Groups” Category C list.

    6. What are the difficulties in detecting and disclosing arrangements that were set up in earlier years?

    Taxpayers in the private market segment do not commonly have an in-house tax function and as such often heavily reliant on the assistance of their tax advisor to meet their tax obligations. Accordingly, if there has been a changeover in advisors for the years in question, it may be difficult to obtain the requisite detail of prior transactions to a degree to allow retrospective assessment of there an RTP arises. Accordingly, we submit that the RTP definition be limited to current year transactions and arrangements, and the guidance should clearly address the limitations which emerge due to a change in tax advisers.

    General observations

    In addition to the above, we take the opportunity to make a number of general observations:

    1. We suggest that the ATO notify relevant taxpayers and their tax agent by use of the tax portal. This would address a situation whereby taxpayers lodge an RTP Schedule to avoid the risk of the Commissioner imposing substantial failure to lodge penalties. As discussed above, an ATO notification, rather than self-assessment, would lower the risk of taxpayers being unintentionally subject to failure to lodge penalties and would allow the ATO more effective targeting in its general information gathering and reporting powers.
    2. The Commissioner should provide guidance in relation to the operation of Category B in a private company context, particularly given it is not uncommon for private companies not to prepare tax provisions.
      Last modified: 06 Dec 2019QC 60854