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

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    Dear Michael

    EXPANSION OF THE REPORTABLE TAX POSITION SCHEDULE TO LARGE PRIVATE COMPANIES AND CORPORATE GROUPS

    1. Thank you for the opportunity to provide comments on the ATO's proposal expand the Reportable Tax Position ("RTP") Schedule to large private companies and corporate groups.
    2. Pitcher Partners specialises in advising taxpayers in what is commonly referred to as the middle market. Accordingly, we service many businesses that would be impacted by changes to the requirements to lodge an RTP schedule.
    3. We have included responses to the consultation questions posed in the discussion paper in Appendix A.

    If you would like to discuss any aspect of this submission, please contact either Leo Gouzenfiter on (03) 8612 9674 or me on (03) 8610 5170.

    Yours sincerely

    AM KOKKINOS

    Executive Director

    APPENDIX A - RESPONSES TO CONSULTATION QUESTIONS

    Question 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?

    1. No. We do not believe that the proposed start time allows taxpayers sufficient time to prepare large private groups who will be required to lodge the. RTP Schedule for the first time to adequately prepare to be able to comply with onerous disclosure requirements.
    2. In our view, such entities require appropriate internal governance to ensure that they are at all times in compliance with identifying and addressing Category A, B and C disclosures. This can only be achieved by having the appropriate procedures and controls in place from the time that is first subject to the RTP Schedule requirements (i.e. the start of the relevant income year). For taxpayers with a 31 December substituted accounting period ("SAP"), this could apply to the period commencing 1 January 2019.Footnote1
    3. The ATO acknowledge Footnote2 (in their views regarding tax governance) the importance of having appropriate systems in place at an internal governance level, whereby such systems are required from the start of an income year. We therefore strongly recommend that the commencement date should not be one that is earlier than the conclusion of this consultation process and any final announcement made regarding the application of the expanded rules.
    4. We believe that requiring a new population of taxpayers to turn their mind to completing RTP schedule for the first time around the time of lodging their tax return and doing so in a backwards looking manner will lead to errors and will not encourage best practices in regard to tax governance. Completing the RTP schedule properly is a significant commitment on taxpayers and tax agents and the expansion of the RTP schedule to a new population of taxpayers should not be done in way that leads to its completion been done in a sloppy or rushed manner. If the RTP schedule is seen as just another compliance burden or another form to fill out, many taxpayers will not dedicate appropriate resources to have it completed properly.
    5. We see this as a great opportunity to assist our clients with introducing clear internal control procedures that address tax risk management. We believe that the introduction of those systems will benefit both our clients and the ATO. However, we need to understand the exact parameters of the system applying to our clients and there are significant complexities in applying this retrospectively.
    6. Many taxpayers to whom the proposed expansion will apply to do not have an internal tax function and will rely heavily on their tax agent to complete the schedule. If appropriate time is given between the announcement of the new RTP schedule thresholds and the start of the first income year affected, this would encourage taxpayers and advisers to work together to put in place the appropriate processes and controls to make compliance easier, better manage tax risk in the long-term and contribute to justified trust with the ATO.
    7. Accordingly, we believe that the proposed start time should be no earlier than 1 July 2020 (i.e. the 2021 income year) with the final guidelines being released well before the start time (e.g. early in the 2020 calendar year). Alternatively, in line with previous practice in relation to public groups, the initial expansion may only be applicable to those private groups that have been notified by the ATO (e.g. those in the top 320 program).

    Question 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?

    1. Yes. For a company with $25m of business income and a profit margin of (for example) 5%, the RTP schedule will be required even though profits or taxable income is approximately $1.25m. The information in the schedule would therefore not disclose material issues.
    2. We suggest that the threshold for companies be $50m of business income which would align to the proposed increase to reporting requirements under section 45A of the Corporations Act 2001 (proposed to apply from 1 July 2019), the threshold for access to the instant asset write-off under section 40-82 of the Income Tax Assessment Act 1997 and access to the lower corporate tax rate under section 23AA of the Income Tax Rates Act 1986.
    3. The increase in threshold would be more appropriate from a materiality perspective. However, it will also ensure that only those taxpayers that are required to comply with disclosures under AASB 112 would be required to complete the schedule. This will help to ensure a greater reduction in compliance costs for taxpayers.

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

    1. Yes. As outlined in Question 1, certainty as to which entities are required to complete the RTP Schedule is preferable so that the appropriate processes can be put in place throughout the year. We note that this may pose difficulties for a tax agent who identifies that a group of entities has turnover in excess of the reporting threshold for the first time only at the time when tax returns are being prepared as the information to complete the schedule would have to be gathered retrospectively. Perhaps the ATO can consider offering private groups a one-year grace period for when they transition into becoming "large" whereby the group would have to complete the schedule from the next income year onwards.

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

    1. "Private groups" significantly rely on administrative practices simply because of how the laws operate with respect to key core provisions. Some examples (not an exhaustive list) include trust provisions (TR 2004/D25), bare trusts (PS LA 2000/2), Division 7A (PS LA 2010/4), fixed trusts (PCG 2016/16) and so on. Furthermore, where there is a body of private rulings or ATO IDs on a matter, these may amount to an administrative practice (see TD 2011/19).
    2. Requiring all positions taken in line with administrative practices to be identified and disclosed would be difficult and would significantly increase compliance costs.
    3. For example, if the ATO holds a certain view in an ATO ID and has provided a number of private rulings on the same matter, this would generally be seen as an administrative practice. Generally, most taxpayers would apply the view in the ATO ID and would not determine such views to be administrative. Technically, however, the ATO view could be incorrect and any position taken that is consistent with the ATO ID would thus need to be disclosed (unbeknown to the advisor).
    4. Such administrative practices supported by the ATO should be exempt from disclosure in the RTP schedule.
    5. Alternatively, the materiality thresholds for private groups in regard to these positions should be clear and in line with those that apply to public groups (e.g. $3m+).

    Question 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?

    1. Our main concern relates to the quantity of Category C questions which currently number 24 already. If this list keeps on expanding to cover various new PCGs and Taxpayer Alerts every year it will become an ever-growing compliance burden for private groups. Such onerous annual reporting requirements are not consistent with a self-assessment system. In particular, many questions in Category C relate to ordinary inbound/outbound transactions for which there is no materiality threshold.
    2. More broadly, we struggle to see the need for Category C in its current form to apply to large private groups. While noting that this would create consistency with public groups of the same size and that some private groups do enter into arrangements covered by Category C, we find that private groups tend to operate differently from public groups as a general rule of thumb.
    3. The current Category C which has a heavy focus on cross-border transactions is, in our view, far more relevant to public groups. Simply expanding Category C for private groups for the sake of consistency would needlessly add to their compliance costs without addressing the appropriate risks.

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

    1. Given that many private groups do not have an internal tax function, detecting ongoing arrangements set up in earlier years will be difficult due to potential lost "corporate memory". This is especially so where the private group has changed tax agents as the new agent will not have details of all advice previously provided to the group.
    Footnote 1
    We note the discussion paper refers to "income years ending on or after 30 June 2020". We have interpreted this so that the 30 June 2020 income year for an entity with a 31 December SAP as being the period ending 31 December 2019. If this interpretation is not correct - so that the ATO's proposal is that the requirement to lodge will first apply to such entities for the period ending 31 December 2020 - we suggest that this should made expressly clear to avoid confusion.

    Return to footnote 1 referrer

    Footnote 2
    https://www.ato.gov.au/Business/Large-business/Compliance-and-governance/Reviewing-tax­-governance-for-large-public-and-multinational-businesses/

    Return to footnote 2 referrer

      Last modified: 06 Dec 2019QC 60848