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Australian Financial Markets Association Liaison Group key messages 31 May 2022

Summary of the key topics discussed at the Australian Financial Markets Association Liaison Group meeting 31 May 2022.

Last updated 24 August 2022

Banking and Finance strategy update

James Campbell advised the ATO is currently going through the planning cycle for the next year. Referring to the 2021–22 Banking and Finance (B&F) Strategy document, it was noted some items will drop off, for example remediation. More questions than usual were being asked by the ATO to various industries including B&F during the COVID-19 pandemic about economic profitability. The ATO noted changes in government may result in some other developments in various programs.

The ATO’s key engagement model with Top 100 groups was the annual compliance arrangement (ACA) program which dictated how we engage with taxpayers and provided sign off for transactions and the tax return. The ATO has moved into a more mature phase of the Justified Trust (JT) program and has decided to phase out of the ACA program and transition into the pre-lodgment compliance review (PCR) program. Work is being done to develop a new benchmark framework for banks. This is anticipated to be rolled out in the second half of the calendar year. The ATO is still interested in dealing in significant transactions including divestments, new products and services in real time.

The ATO advised that future sign off letters will be worded from an assurance perspective as the programs move into JT. Work is also being done in the background to define what high assurance means for taxpayers and how taxpayers can rely on the assurance rating. Once completed, this will be circulated to the Corporate Tax Association (CTA) and Australian Financial Markets Association (AFMA) members.

The ATO is developing strategy around the fintech market, working to provide some level of definition around the submarkets and stakeholders. The focus will be the fintech operations of public groups. It is noted fintech usually initially flows through private groups and then into the public groups either through growth or acquisition. The purpose is to provide certainty to ATO leadership about novel tax risks that may arise from the models, products and services on offer.

In relation to cryptocurrencies, the B&F strategy area is a lesser stakeholder. Many issues are managed and flow through to the Individuals business line in conjunction with Tax Counsel Network who are developing different views on whether current law can deal with crypto or whether policy change is required. There are also the Board of Taxation and Treasury consultations that are in progress. While it is not necessarily the focus at this stage, the ATO wants to understand the extent to which banks provide functionality for crypto assets.

Rob Colquhoun stated the feedback from AFMA members is that holding these assets is currently immaterial and there are not presently any matters to be brought to the ATO’s attention, though this may change in the future.

The ATO advised the Offshore Banking Unit (OBU), Part IIIB and London Interbank Offered Rate (LIBOR) work is still in train. Bail-in work is likely to be scoped out, and more work on Operation for Economic Co-operation and Development (OECD) Pillar  1 and Pillar 2 will be done.

There is another policy issue which is taxation of financial arrangements (TOFA) hedging. This is not the biggest ticket item, but draft legislation has not been made and progress of this policy reform to draft legislation depends on the new government.

The ATO wants to simplify the compliance approach to thin capitalisation and make it clear what the expectations are as it is a messy area for inbound and outbound investing in terms of the law. This may include guidance around inbound calculations and in particular, the application of risk-weighted assets.

In reference to outward investing Thin Cap rules and the promontory approach, Rob enquired of the status of this going forward and whether it is no longer fit for purpose.

The ATO noted the guidance was developed around 2012 to 2014 trying to deal with thin capitalisation for big Australian bank outbound operations. At the time there were a lot more non-banking parts of the business in existence when compared to present, and the prudential capital requirements were lower.

Thin cap calculations are required be done at a group level and the law applied to banking risk weighting which become a problem when it comes to non-banking businesses. Banks have got out of non-bank operations in recent years and that has changed the equity structure which has helped. Equity capital requirements have also increased over the years. We are considering moving away from the promontory approach. Ideally, the thin cap rules could be updated or there could be a change in the equity requirements.

Justified Trust

The ATO have rated 6 of the 7 banking groups in the Top 100 at high assurance.

The ATO is transitioning out of ACA program at the close of 2023 tax year. In 2024, the PCR framework will apply. There is currently a lot of work happening with the major banks in relation to transfer pricing and branch attribution. There were no material red flags with branch attribution, however, the ATO was unable to get a number of taxpayers to high assurance. Going forward, the approach may be more practical rather than having to assure every cross border/branch dealing, for example modifying the approach by grouping transactions together, looking at functionals, testing prices on material loans and derivatives rather than a review of every cross-border transaction.

Rob Colquhoun asked whether there was anything happening in relation to outbound branch attribution.

The ATO advised there is a new approach going forward and a transfer pricing expectations statement was issued to the Top 100 which sets out a pathway to high assurance. Consideration will be given to extending this to the other markets such as Top 1,000 – Medium and Emerging market clients.

Rob Colquhoun asked if there was any separate guidance being considered for branch attribution to transfer pricing issues such as liquidity. To the extent that the 2 issues can be aligned and expectations made known going forward, the market would appreciate this clarity.

TAT II Review products

Katherine Leung provided an update on the next round of Combined Assurance Reviews (CARs) and products referencing the TAT II review products document and new entrant reporting financial institutions (RFI) questions which were circulated.

The ATO clarified the scope of the new line of review products (New or Top-up CAR, IT-led next action risk review, GST-led risk review), noting that the current TAT II reviews end on 30 June 2023. Whilst additional funding was announced in budget, a decision has not been made on whether this will result in an extension of TAT II or a new TAT III program.

As part of this review, a taxpayer should only be reviewed under one of the 3 products (CARs, Next action IT-led risk review and GST-led risk reviews).

All 3 review products have an IT and GST component. The CAR contains both IT and GST and are assurance based. Next action IT-led and GST-led reviews are risk based. The ATO explained the main difference is that new entrant reviews are on the last 4 income years whilst a top-up review are the open income years since the SMSF annual report (SAR).

The ATO stated next action IT-led risk reviews are predominantly for bigger and complex foreign banks that did not get to overall high assurance or have specific issues that were rated low assurance. The product looks at any significant changes since the SAR and covers the years reviewed under the SAR and the open income years since the SAR. It was noted the outcome for risk reviews are either 'no further action', low-risk or potential further action, rather than providing an assurance rating and CAR report.

Rob Colquhoun enquired what were the future actions planned by the ATO on previous streamlined tax assurance report (STAR) products that had completed recently or were due to be completed in the near future.

The ATO responded they would like taxpayers to consider any recommendations from that STAR, for example preparing more in-depth responses for particular issues or preparing documentation to evidence transactions such that in the event of a further review the taxpayers would be prepared to demonstrate changes implemented after the STAR.

Rob Colquhoun requested and the ATO confirmed that the next action reviews would be focussed on items that were identified as areas of concern for the back-years in the previous STARs, rather than looking at all items again.

The ATO confirmed Rob’s understanding and added it was to address information gaps. With respect to the CAR products which look at newly lodged years, the ATO is hoping to leverage information from the previous products unless taxpayers have taken a new approach or significant change in their business.

With the GST-led risk review, it will be similar to the IT-led next actions review but restricted to the most recent 4 years. The income tax issues will be the same across all the products.

Rob Colquhoun asked what differentiates GST-led risk reviews from a CAR in case selection. The ATO noted that for next action IT-led products, it is IT instigated (for example, insufficient detail in a previous product and risks identified in income tax labels) and for GST-led risk reviews it is GST instigated. Only one product is done but the ATO will review both IT and GST.

Andrew Nutman noted that cases are selected where there is a perceived risk; a case context briefing is provided and very tailored RFI is prepared when commencing an instigated review on international banks and complex areas in the banks.

It is not necessarily because there is risk identified for that specific taxpayer, it may be that there is not enough information so it is about the ATO obtaining an understanding and tailoring the RFI appropriately.

Rob Colquhoun asked whether that would infer every foreign bank would be in a GST-led review, as it applies across to all banks.

Andrew Nutman clarified the selection is not necessarily based on actions of the individual but on GST issues in a particular area.

James Campbell clarified that within the case selection pool, there is additional prioritisation, for example, materiality and size of the knowledge gap, that contributes to the case selection process. There are some GST issues that are more big-ticket items for retail banks, a relatively small selection of cases are picked for this GST led program. If a bank gets picked under one of these programs, we will undertake the IT review at the same time in an integrated fashion so the client does not get reviewed shortly afterwards for Income Tax issues.

Rob Colquhoun expressed concern that some members did not understand what drove individual taxpayers being placed in that category before this document came out. In terms of governance and management of stakeholders, they need to be able to explain why they were selected for a particular type of review and requested case selection transparency.

The ATO stated the framework is a step in the right direction but will take this concern into account.

In reference to the draft IT RFI for B&F taxpayers, the ATO acknowledged it may come as a shock to see the number of questions in the RFI. The ATO advised this is based off the standard RFI to non-banking and finance clients and that modifications and tailoring will be made to B&F specific questions. However, as it is an assurance review, questions are not able to be removed from the standard RFI. It is up to taxpayers to confirm when questions do not apply to their business.

There should be several areas/questions where AFMA members can easily respond are not applicable or refer back to prior year reviews. The main modifications made to the RFI template are specific to B&F topic areas such as TOFA, thin cap, transfer of losses for multiple entry consolidated (MEC) group and branch, funding profile and additional questions will be asked such as OBU and related party/internal derivatives.

AFMA sought confirmation this RFI was only for the CAR product which was confirmed by the ATO.

Rob Colquhoun expressed an understanding that top-up CARs were meant to be light touch based off the previous review so upon receipt of this draft RFI, felt that it was quite invasive. The risk with going to standardised RFI is forgetting internal learning made through the initial review process in prior products and going back to the basics.

The ATO added there is hope not too much has changed in 3 to 4 years but the onus is on the taxpayer to say where something has changed in the business and/or approach to tax.

Rob Colquhoun asked for confirmation in the case that there were no changes, would the ATO accept a response that the treatment is the same as a previous year or indicate that there was no change? The ATO confirmed that is the approach we are hoping to take.

Rob Colquhoun asked about the timing of reviews which would be starting in the next phase of reviews. AFMA noted that they were expecting some of the B&F CARs would have commenced since the last interaction but have not heard from members about commencement yet.

The ATO acknowledged not many CARs started to date, in particular for AFMA members but confirmed several will be commencing in the next 2 to 3 months. There have been processes in the background triaging in the last few weeks and taxpayers will be receiving notification letters shortly.

LIBOR transition, ATO guidance and proxy letter

James Campbell provided an update on the LIBOR transition and proxy solution.

The ATO issued a letter to AFMA to circulate to its members and separately issued individual letters to the smaller non-AFMA, Part IIIB taxpayers and advisory firms.

The ATO acknowledged it is not the ideal situation with this area of the law in 2022 with the current legislation referring to LIBOR. There was more happening pre-election in relation to this issue, with the indication that Treasury wanted to be in a position sometime this year with a new proposal to provide comfort to the market. This does not come as a surprise to the AFMA members. The proxy is effectively saying we will accept what is happening in practice and the adjustments being made from a compliance perspective.

The ATO that the proxy solution that was issued to market was not a legal view so private rulings could not be issued but that the proxy solution will be used by case teams undertaking compliance action.

Rob Colquhoun enquired whether the previous position on the AUD LIBOR would be withdrawn and was not sure why it was not superseded by this new solution.

James Campbell expressed understanding that it is dated and not realistic of the market currently. The ATO stated that the current position was that it would continue, however happy to review it and consider whether it should be updated/replaced.

Interest deduction cap, Income tax return changes

Danny Ong provided an update on interest deduction cap and income tax return changes.

One of the proposed issues is the denial and interest deductions in excess of 30% of earnings before interest, taxes, depreciation and amortization. During a discussion at the AFMA tax committee, the AFMA members advised other jurisdictions have used net interest deductions which has worked quite well. The ability for members to satisfy the worldwide gearing test or arm’s length debt test seems to have been solved in other jurisdictions. Recent discussions were made with Treasury where Treasury noted that it was done in jurisdictions without robust thin cap rules in their legislation.

Danny Ong stated that the ATO considered this measure as part of the Base Erosion and Profit Shifting agenda in 2016–17. Presently there is no one in the ATO’s Internationals area working on this measure directly, as anti-hybrid rules and other measures have taken precedence and resourcing as they are being implemented.

There will likely be some consultation with how Australia implements this measure. It is likely to be based on OECD guidelines and on a net interest basis which will mean that banks are unlikely to be affected (that is, it will probably not be an issue for banks earning interest income rather than having an expense). Based on other similarly implemented measures in OECD countries, if this measure is implemented it will be a safe harbour and the worldwide gearing test and arm’s length debt test will still be available. However, at this stage this is speculation until further information is provided by Treasury and the ATO is allowed to provide input on these measures and specific industries which may require special consideration.

In relation to the anti-hybrid mismatch rules, the ATO advised tax return and disclosure changes for Subdivision 832, on the Reportable tax position (RTP) disclosure form at question 39. This is a new disclosure that is required, which refers back to Practical Compliance Guideline PCG 2021/5 Imported hybrid mismatch rule - ATO's compliance approach.

This requires taxpayers to self-assess a risk rating and colour. The other change is the international dealings schedule (IDS) section G change which was approved to be put it in at Question 47. It is expected these changes will make it to this year’s tax return.

AFMA expressed the PCG itself is difficult to administer for the members. AFMA commented that the operational requirements of the PCG were circular, which denied the deduction if you are in the red zone, but once you have denied the deduction you may be in the green zone.

AFMA enquired the time frame for this update going live in terms of the IDS as some members will be looking to lodge in the next 6 to 9 months.

The ATO confirmed that it should be in this return and that the RTPs is already live.

Rob Colquhoun requested the IDS question to be sent through once it comes live with a link to it.

OBU Transition Issues

James Campbell provided an update on OBU transition.

There are a number of OBUs trading in their last year at 10%. The ATO has issued letters to the market and all the registered OBUs to ensure that everyone understands the transition process and requirements.

The letters are tailored to the specifics for each OBU. The ATO has had feedback from the market in relation to some uncertainty and a letter will be issued in the second half of this year seeking feedback from OBUs regarding concerns about how the transition will operate and the way amendments happen.

It is noted not all OBU provisions have been repealed which can create uncertainty. One example that was noted was despite the concessional rate no longer applying beyond 2023, there may be record keeping requirements for long-dated transactions and to ensure records are accurately kept. A failure to do so could taint the concessional treatment of the transactions.

Rob commented that AFMA would not mind seeing the pro-forma letter which is not tailored to specific OBUs. They agree that more legislative requirements may be needed. Concerns that in the 30% world there will be relaxed record keeping requirements and whether or not there will be some OBUs where there is a 12 month gap between the concessional rate and the 30%, and the application of withholding tax exemptions.

Cryptocurrency, Interest rate environment

AFMA asked what the awareness is relating to crypto and whether TOFA could apply, as well as noting there were potential GST issues.

There has been consultation with Treasury on custody arrangements in crypto, registration requirements relating to exchanges, the risks associated with the products and disclosure requirements. AFMA noted that exchanges are not part of the AFMA membership but they sit adjacent, and those exchanges are going above and beyond to legitimise their services. Core AFMA membership will probably have issues that arise in the next 6 to 12 months that are not yet apparent.

In relation to the rising interest rate environment, the ATO asked whether there was any potential impact on profitability. Rob Colquhoun stated they are not seeing that, but if there is a storm to be weathered, it probably has been weathered.

Inbound PE, cost allocation for low value functions, MAPs

Carl Buttsworth provided an update on these issues.

The ATO has noted the allocation for head office expenses is not a new issue and has been flagged previously. Australia has not adopted the authorised OECD approach, and use the relevant business activity approach in Subdivision 815-C of the ITAA 1997 which is the way Australia calculates profits under the double tax agreement (DTA), that is, allocation of actual revenue and expenses.

The reason for raising this issue now is that some taxpayers enquired whether this mismatch in the treatment of mark-ups and the associated double tax can be addressed in DTAs through mutual agreement procedure (MAP). The MAP program allows tax administrators to discuss disagreement on various levels of mark-ups between different jurisdictions. The ATO is still talking about it internally but do not think MAPs is an appropriate solution. The nature of the issue in dispute is quite distinct from one where the mark-up rate for transfer pricing is a range, as opposed to binary where the interpretation of the law is correct/not correct. The ATO hopes to develop guidance to general administrative and low value arrangements.

Rob Colquhoun noted MAP was raised last liaison meeting, and that the purpose of MAP is to relieve double taxation. What is the resolution path if it is not MAP?

James commented that DTAs cannot resolve double tax in every scenario. It is more a disagreement about functional value and is hoping to resolve through this pathway. It is noted that each jurisdiction has a different way of calculating it and do not think it will be resolved through the treaty.

Rob Colquhoun enquired about the situation where both jurisdictions believe their interpretation is correct and whether that meant that there was no pathway to alleviate it. The ATO believes it is correctly taxed on our view of permanent establishment (PE) taxation, as with the other jurisdictions in their view but the treatment is different.

AFMA asked will the guidance be provided as to what can be considered under MAPs, and whether high value functions with a mark-up could be resolved through MAPs.

The ATO noted that where there is a cost compensation for valuable functions and the taxpayer is using a cost plus as their transfer pricing method as a proxy for profit attribution, there may be availability of MAPs.

James Campbell commented that it is challenging for the ATO because there are taxpayers who have followed the Australian law and have not applied mark-ups, and others have a misunderstanding about how the Australian law operates. The ATO is cognisant that there are parts of global groups with an outpost in Australia and PE, which will operate under the Authorised OECD approach rather than the specified Australian approach. The ATO has to be careful to ensure that there is a level playing field.

The ATO stated that the ATO is hoping in the second half of the year to provide something similar in correspondence to AFMA. The ATO is considering whether it warrants a formal product that goes out to the whole market, applies to inbound and outbound PEs and whether the advice could apply to other structures or industries as well.

COVID-19 Guidance – PEs central management control

The ATO commented on PEs central management control and the location of key staff undertaking key decision making in groups. People who are not ordinarily in Australia but are physically in Australia may create a PE. The concession ended 31 December 2021.

The previous concession was relating to a compliance approach, rather than a view of the law. It is the position of the office that a lot of the scenarios captured by the concession should not be relevant anymore. The ATO are aware that there are still lockdowns and certain travel restrictions happening around the world, and any AFMA members with that issue should reach out and chat with the ATO on a one to one basis. There is currently no blanket approach and no guarantee.

Rob expressed they were expecting a soft landing since the last conversation, however, found it to be a hard landing as there are still issues in Hong Kong and China with newly imposed lockdowns.

James Campbell stated the ATO can only offer to talk on a one-on-one basis to see what can be done.

Other Items

AFMA raised the issue of other Labor government policies being quite resource intensive going forward such as the suggesting of making the voluntary tax transparency code mandatory.

Members expressed concerns about potentially disclosing relatively sensitive information to satisfy Australian requirements. In terms of the OECD Pillar 1 and 2, these apply from 1 January 2023, but there is still a lot of work to go, everyone is on the assumption it will kick off on 1 January 2024 but unsure what the ATO and government perspective is on that.

The ATO provided it is still early days in relation to the new government policies and there is still work being done in the background in relation to the ATO’s role in Pillar 1 and 2. There is a lot happening with drafting in different teams. The Internationals and Treaties area are heavily involved and often it is very short notice with these kinds of issues and will reach out to stakeholders when they are drafting. The B&F group is brought into the loop and asked to comment and review. The challenge is that the standard draft at the OECD level is very US based and the ATO needs to ensure it works from an Australian perspective.

Rob Colquhoun expressed it is difficult to plan for 1 January 2024 and it is hard for members to get internal resources allocated to a project without formal rules as draft specifications currently do not exist. In terms of Pillar 1, most members will fall within the definitions. Some insurance groups are concerned and may have submitted on that issue.

The ATO stated as things move forward there will be more information and dedicated topic areas.


Attendees list




Adrian Mow, Public Groups and International


Alice Hu, Public Groups and International


Andrew Nutman, Public Groups and International


Carl Buttsworth, Public Groups and International


Danny Ong (Secretariat), Public Groups and International


Dilara Arslan, Public Groups and International


James Campbell, Public Groups and International


Jaydon Beatty, Public Groups and International


Johanna Tang, Public Groups and International


Katherine Leung, Public Groups and International


Lindy Tan, Public Groups and International


Shelley Sun, Public Groups and International


Vanja Stok, Public Groups and International

Australian Financial Market Association

Robert Colquhoun

Bank of China

Evelyn Xie

JP Morgan

Alice Lam

JP Morgan

Brendan Donnelly


Kane Nicholson


Andrew Houseden


Dale Gordon