Welcome and opening remarks
Nick welcomed attendees. He noted that, in relation to COVID-19, the ATO has moved a lot of its sites to different stages of returning to the office. For the most part, aside from Victoria, other sites are either encouraged or required to come back to the office. While the ATO is still limiting face to face meetings, there is more leniency in relation to meetings of particular importance. For example, GST is going out and doing systems analysis.
The focus has returned to Justified Trust. While the JobKeeper program is still ongoing, it is no longer affecting people in the Justified Trust teams. Operations teams are returning to the round 1 case reviews and proceeding on the basis that most taxpayers are able to start engagement again.
Australian Financial Markets Association (AFMA) queried whether all taxpayers had been notified.
Nick noted that nearly everyone should have received notification of their review.
In terms of round 2 Justified Trust case reviews, these will be tailored to the findings from round 1. For those with high assurance, a shorter review would be expected, with the approach more towards following up on recommendations and whether there have been any changes.
In terms of GST, integration is continuing. Given the nature of the industry and specific provisions of the GST Act, there are issues the ATO is still working through on how rules relate to different groups and will discuss further with the industry in due course.
Banking & Finance (B&F) Strategy is planning to issue observations as part of the Next Actions work, in the form of commentary sent to industry bodies about common issues across the industry that we would like to focus on or reiterate the ATO’s view on those issues.
In terms of timing, the ATO is aiming to complete round 1 by the first quarter of 2021.
The ATO noted that a taxpayer should not be subject to a Next Actions case if they were not subjected to a review under round 1.
Next Actions work can comprise a range of products, including Advanced Pricing Arrangements (APAs), audits, risk reviews and letters to industry.
For AFMA members, Next Actions is more likely to comprise of letters to industry and in some cases, further tailoring the next engagement in round 2, whereas taxpayers in other industries are seeing cases going straight to audit or APAs.
No one in the B&F industry has been sent to audit at this stage from round one of the Top 1,000.
AFMA asked whether there will be any messaging put out about the learnings from the process.
The ATO said the dilemma is that we have not yet completed the round 1 cases. However, when looking at the market as a whole, there are some common issues and areas of uncertainty which we are looking to address via a letter to industry with our observations. While there are certain areas that are difficult to get to high assurance on, this does not imply we have evidence of non-compliance.
Banking & finance strategy document 2020–21
The B&F strategy document is a public document released for the 2020–21 financial year.
Income tax and GST have been integrated for 12–18 months, and the ATO is trying to move forward in the way the two areas work together in the office to complete cases and administer the law holistically.
Public groups & internationals (PG&I) income tax B&F industry strategy 2020–21
Page 1 shows the demographics which is heavily focused on the Top 10,000 and Top 1,000 groups. A lot of time is spent focusing on the major banks, due to their size, importance to the tax system and the complexities of their business.
As we developed our strategy, COVID-19 was also spreading and having an impact on our work program, as well as on taxpayers. We saw resourcing shifts within the ATO, with people redeployed towards administering the JobKeeper program, applications to the Foreign Investment Review Board (an increase in applications due to the lowering of the threshold), and other stimulus measures introduced by the government.
Another impact has been those taxpayers affected by COVID-19. Some smaller inbound groups have felt a big impact from COVID-19, primarily from an operational perspective, for example, with no one physically in the office, this has affected how they can interact with the ATO, or it may have triggered governance mechanisms, or the tax function redeployed in other areas.
There has also been a big focus on revenue, given the increase in government spending, requiring the ATO to pay close attention to revenue forecasting. The focus again is on the major banks and the larger taxpayers within financial services.
The Major Bank Levy was also impacted by COVID-19, with an increase in liabilities in March causing an increase in the levy payable. However, this has adjusted and stabilised in the June quarter.
PG&I GST financial services & insurance strategy 2020–21
GST demographics are shown on page 2, the first time they have been included in the same strategy document. There is a slight difference in what the GST team looks at, as the population includes insurers, super funds and other investment vehicles. The five major banks within the Top 100 make up more than 40% of GST throughput for the industry. We have seen major banks refocus on core banking activities and divest parts of their business, such as wealth management or life insurance. Additionally, there has been a focus on remediation payments coming out of the Royal Commission.
Another trend has been the declining use of cash, changes in automated teller machine (ATM) fees and networks which could also be accelerated by COVID-19.
It remains to be seen what other impacts COVID-19 may have on the industry.
B&F strategy’s approach to assurance: Top 100
The statistics on page 3, show 29% being at medium-high overall assurance.
Top 100 teams follow a framework, which includes covering the specific tax issues listed on page 3.
For the major banks, the aim is to get them to high assurance in the next six months and move to the lighter impact monitoring and maintenance phase. This will see a return to the normal arrangements, in the Annual Compliance Arrangement and Pre-lodgment compliance products, where the focus will be on new and emerging transactions, such as the application of the hybrid rules, changes in account standards, or any divestment activity.
B&F strategy’s approach to assurance: Top 1000
For the foreign banks, the focus is on getting governance to stage 2, being mindful that some groups will not have documentation that is tailored for its Australian operations and may not have the appetite or budget to rewrite these.
The tax issues listed on page 4 are largely consistent with issues presented in the previous year and notes our approach for taxpayers to achieve high assurance.
In the context of branch attribution for example, we have seen inconsistencies between the approach taken by taxpayer’s compared with the ATO regarding mark-ups on cross-border cost allocations. Some taxpayers are operating under the Organisation of Economic Co-operation (OECD) framework whereas Australia only permits the Relevant Business Activity approach for permanent establishments.
There continue to be challenges with thin capitalisation, due to the legislation relying on capital adequacy rules prescribed in prudential standards of either a foreign regulator or Australian Prudential Regulation Authority.
When looking at Offshore Banking Unit (OBU) calculations, some taxpayers are continuing to use the previous statutory formula, however, we are not seeing evidence that the continued use of the formula is producing an appropriate outcome. While some of the domestic OBUs are larger, with resources to develop more sophisticated apportionment methodologies, it is understandable that there may be cost constraints for smaller taxpayers.
AFMA queried whether it was the ATO’s aspiration to get the Top 1,000 to high assurance.
The ATO stated that its focus for the Top 1,000 is more on dealing with red flags and low assurance case outcomes. While we would like to get all groups to an overall rating of high assurance over time, that is a secondary objective in the short term.
AFMA asked about the impact of COVID-19 on thin capitalisation. The ATO’s response was that it was seeing more questions on the asset side of things with changes in asset values and revaluations, rather than liabilities, though one observation in relation to liabilities has been some of the major banks entering into additional securitisation arrangements.
GST financial services & insurance strategy’s approach to assurance: Top 100 and Top 1,000
GST is at a much earlier stage of obtaining justified trust, compared to income tax.
In terms of the Top 100 entities, majority of the banks are under first year Tax Assurance Reviews, while cases for Top 1,000 started in October.
The biggest risk is the extent of creditable purpose, which is a highly complex area of law, focusing on whether taxpayers correctly identify acquisitions to the extent they relate to financial supplies, and whether the apportionment methods are fair and reasonable. Industry guidance has been released with a risk assessment framework for retail banking activities, and we are working with taxpayers that are transitioning in response to that guidance.
Reduced input tax credits are also a key risk, ensuring that entitlements to input tax credits and reduced input tax credits are correctly determined.
AFMA queried the guidance on apportionment, which deals with credit cards and transaction accounts, and whether there was consideration on having further guidance for wholesale banking activities.
The ATO responded that no further schedules to the guidance were planned. However, if there are emerging risks identified from the first round of justified trust reviews, we would consider on the need for further guidance which could lead to additional schedules.
Industry issues and guidance – Income Tax
The ATO discussed page 6 of the strategy and the industry issues and guidance for income tax, as follows:
- Remediation – a fact sheet is being considered for development for withholding and reporting issues, while there are other instances of dealing with taxpayer’s one-on-one.
- Buyback and redemption of hybrid securities – the discussion paper will be developed into a Practical Compliance Guideline.
- Credit union merger – relates to the Financial Sector (Transfer and Restructure) Act 1999 and tax consequences arising from that. The ATO is seeking opinion on this matter.
- London Interbank Offered Bank (LIBOR) cessation – the ATO has met with Treasury, with the focus currently on Part IIIB and the possible options going forward, such as whether to wait for a new universal rate that can be used, or where there is a policy objective in removing the LIBOR cap in total. The ATO will be able to provide a more detailed update after another discussion with Treasury
AFMA has divided the issues between those that require a legislative fix, such as Part IIIB, and those suited for ATO guidance, such as section 128F, such that the repapering of instruments with a different rate does not give rise to a new obligation under the public offer test. They are currently undertaking a project to go through current paper issued, looking at what the rate is, whether there is a fallback rate. AFMA has also discussed with fund managers who are now considering their contracts.
AFMA is hoping for any guidance to allow taxpayers to move forward with a sense of comfort, although it anticipates that Division 230 would address most concerns at this stage.
The ATO was interested to know if there were any unique situations or fact patterns, and if so, early engagement would be the best approach for obtaining certainty, rather than relying on generic guidance.
AFMA stated that it had not seen a live example so far.
- Hybrid mismatch – the ATO is currently working on a solution to determine the foreign income tax deduction of overseas permanent establishments to include in Australian taxable income.
- Thin capitalisation – In 2014, a letter was issued regarding outward investing Authorised Deposit-taking Institutions, with alternative methods on how to risk weight assets. We are now looking at whether it is possible to streamline these methods and consider publishing the approach in a formal public advice and guidance product.
- Bail-in – There has been no update on this for a while, though we understand the impact it has on AFMA members. The ATO’s position is that it will not disturb the tax treatment of financial instruments under Division 974 until we consult with Treasury and confirm the policy intent. In the meantime, if members have concerns about their arrangements, contact B&F Strategy.
AFMA noted that it would be helpful if there was some comment that the ATO would not allocate compliance resources towards the issue until there is some legislative clarity.
Industry issues and guidance – GST
The ATO then discussed page 7 of the strategy and the industry issues and guidance for income tax, as follows:
- Apportionment – Guidance products have been published for apportionment issues from retail banking activities and may assess the need for more guidance products during the justified trust program.
- GST record keeping for financial suppliers – The ATO is working on some small amendments to this existing web guidance to clarify how it interacts with the justified trust governance guidance for GST.
- Remediation payments – Existing web guidance covers payments received by superannuation funds.
Tax assurance program – Top 100 and 1,000
With the Top 1,000, B&F Strategy committed to tailoring and executing the program, largely focusing on the foreign banks. Currently, there are about six cases still on foot, and we are working to complete those shortly, which would finish round 1 of the Top 1,000 cases.
In terms of Next Actions, we are working on developing key observations from round 1 of the justified trust program, as articulated in the B&F Strategy document 2020–21.
For round 2, the Combined Assurance Review product is being rolled out, which has a short time frame. We are working with the Top 1,000 Program to pinpoint a handful of taxpayers in the foreign bank population, and again, tailor this product for the market. We do not think that the product as designed gives taxpayer's adequate opportunity to be reviewed in order to address the issues that we have identified, particularly in round 1. However, we do not expect the foreign bank population to be approached in the next 3–6 months, as we are focusing on completing round 1.
It may be possible for some domestic banks to be approached, such as the mutual banks or credit unions, though most of these should have achieved high assurance in round 1, so if they are revisited, it should be a fairly straightforward review.
With the foreign banks, the outcomes trended to mostly medium assurance, so we want to complete round 1 for the population, gather a complete set of case outcomes in order to publish key observations to the market and then prepare for round 2.
A scheduled meeting of the OECD’s Forum of Harmful Tax Practices (FHTP) earlier in the year was pushed back due to COVID-19.
No decisions have been made thus far, so the OBU regime remains unaffected.
With registrations, the process still involves the ATO receiving an application and making a recommendation to the Minister, and thereafter it is up to the Minister to sign and make a declaration.
While in theory the ATO will be required to process any application it receives, the declaration decision making remains with the Minister.
AFMA noted that its view was that the OECD’s work on Pillar Two should take priority, which would lead to a minimum rate of tax, and which would then inform the FHTP’s work on what constitutes a harmful tax practice.
COVID-19 frequently asked questions (FAQ) document
The ATO noted that the ATO’s COVID-19 FAQs were archived as at 30 June 2020, and then updated and moved to other web pages.
Specifically, the FAQs in relation to permanent establishments has been updated and moved.
In circumstances where staff have relocated to Australia, the ATO suggests members review the changes. If further clarification is required on specific fact patterns, we can facilitate the conversation between taxpayers and Advice & Guidance.
In relation to the Fringe Benefits Tax (FBT) questions, AFMA noted that the FAQs were merely a restatement of the law using relevant examples, but with no concessions made.
The ATO stated it was trying to develop a fact sheet specifically around employers supporting employees with remote working arrangements, noting that it will cover the potential of ongoing remote working arrangements, which the ATO can provide to AFMA for consideration once it is available.
As of 3 February 2021, the compliance approach in relation to the impacts of COVID-19 on the creation of permanent establishments has been extended until 30 June 2021. The updated guidance notes that, from 1 July 2021, this approach will cease to apply, and taxpayers will be required to consider whether ongoing arrangements give rise to a permanent establishment in Australia. Taxpayers are encouraged to engage with the ATO for ongoing arrangements after that date.
Federal budget 2020–21
Usually AFMA’s pre-Budget submission lists its outstanding concerns, however this year it was framed in relation to how the issues support the economy as well.
AFMA noted it would be helpful if there was an announcement about FBT compliance.
AFMA also noted the Budget covered the corporate residency test issue, which remained uncertain after the Bywater decision and the Board of Tax report.
AFMA’s next opportunity to push for wholesale reform will come with the 2021–22 Budget next May.
Negative interest rates
This is becoming more of a reality, with the cash rate dropping to 0.1%.
AFMA queried whether the ATO’s preliminary view, that the payment of negative interest is not in the nature of interest but akin to a fee for service, still holds.
The ATO noted that this was the current thinking although this preliminary view has not been published publicly.
AFMA noted that the issue is live domestically. When collateral is posted with the Australian Stock Exchange, they will charge you the cash rate, less 45 basis points.
The ATO queried how AFMA members were dealing with payments resulting from negative interest rates from an operational perspective, and AFMA said it would go back to members to seek responses.
Corporate tax transparency report
The ATO noted that the report will be released in early to mid-December. It would cover the 2019 income year, so there is a lag in the data, particularly considering most AFMA members have a December year end.Summary of key topics discussed at the Australian Financial Markets Association Liaison Group meeting on 11 November 2020.