About Category A: Tax uncertainty in your tax return
Find out about:
- Category A RTPs
- Relevant authorities
- Positions based on anticipated legislation
- Positions contrary to a public ruling
- Positions relating to the exercise of a Commissioner’s discretion
- Positions covered by a general administrative practice
- Positions where the law is clear but the facts are uncertain.
Category A RTPs
A Category A RTP is one where, given relevant authorities, you consider the material Position you take is either:
- about as likely to be correct as incorrect, even if it is reasonably arguable
- is less likely to be correct than incorrect.
For the meaning of ‘about as likely to be correct as incorrect’, ‘more likely to be correct than incorrect’, and ‘relevant authorities', see Miscellaneous Taxation Ruling MT 2008/2 Shortfall penalties: administrative penalty for taking a position that is not reasonably arguable.
You must disclose a material position, even if you base it on administrative or industry practice, where:
- it doesn't have regard to relevant authorities
- there are no relevant authorities
- you don't base the position on a well-reasoned construction of the applicable statutory provision.
You must have regard to all matters relevant to the position including:
- anti-avoidance rules
- integrity provisions
- transfer pricing
- market valuations.
A position will be material where the potential adjustment, should the position not be sustained, is equal to or exceeds your entity's materiality amount.
For information, see When a transfer pricing position is an RTP.
Relevant authorities
The relevant authorities include:
- tax law
- material for the purposes of subsection 15AB(1) of the Acts Interpretation Act 1901
- a decision of a court (whether or not an Australian court), the Administrative Review Tribunal or a Taxation Board of Review
- a public ruling, as defined in section 358–5 of Schedule 1 to the Taxation Administration Act 1953.
Relevant authorities don't include:
- announced but unenacted law changes
- our general administrative practices
- industry practices.
Positions based on anticipated legislation
If you rely on announced but unenacted legislation, you must determine whether the position your entity is taking is a material RTP that you must disclose.
Positions contrary to a public ruling
You must disclose a material position contrary to a public ruling where it meets the criteria for a Category A RTP.
Positions relating to the exercise of a Commissioner’s discretion
To determine if a position that involves an assumption about the way the Commissioner of Taxation will exercise a discretion is a Category A RTP, you should consider:
- PS LA 2005/24 Application of General Anti-Avoidance Rules
- subsection 284–15(2) of Schedule 1 to the TAA 1953
- the Revised Explanatory Memorandum to A New Tax System (Tax Administration) Bill (No.2) 2000 at paragraph 1.29.
Where an assumption about the exercise of the Commissioner's discretion forms part of a material Category A RTP, you must disclose the relevant legislative provision that relates to the discretion. Include this in the Basis for position field on the schedule.
Positions covered by a general administrative practice
You must include any industry or administrative practices your entity relied on to reach its position in the Basis for position field on the schedule.
Positions where the law is clear but the facts are uncertain
This position relates to valuation issues.
To determine if a material position involving market values is a Category A RTP, you should consider the guidance provided in Market valuation of assets. This includes guidance to determine the appropriate valuation methodology, documents and allocations among assets.
Treating similar arrangements or transactions as a single position
We treat similar arrangements or transactions as a single position when both the following occur:
- The facts in use to determine their treatment for tax purposes are the same or similar, or relate to each other in a way that makes it necessary to take them into account together.
- There is a common conclusion on their tax treatment, that is, there is a common basis for lodgment.
You only need to disclose these arrangements or transactions on the schedule once under a single RTP number. You must state in the Concise description field that the position relates to more than one similar arrangement or transaction.
Research and development tax offset claims
A research and development (R&D) tax offset claim you reflect on the tax return may not be a single Category A or B RTP. Instead, there may be several positions taken within the R&D tax offset claim – for example, whether the:
- entity is an eligible R&D entity
- expenditure included in the claim was incurred
- expenditure was incurred on eligible R&D activities
- expenditure was at risk for R&D purposes
- feedstock provisions are applicable.
Consider each of these positions separately to work out whether your entity has any material RTPs you must disclose on the schedule.
If your entity has several projects that make up its R&D tax offset claim, this doesn't mean you treat each project as a separate Category A or B RTP. If the criteria for treating similar arrangements or transactions as a single position are met, you only need to report the projects under a single disclosure.
Related party international dealings
Where your entity has multiple related party international dealings, if the criteria for treating similar arrangements or transactions as a single position are met, you only need to report the dealings under a single RTP disclosure.
You can also combine all related party revenue dealings, or related party expenditure dealings, as a single Category A RTP disclosure.
Category A and B positions relating to losses
Find out about Category A and B positions relating to:
Prior year losses deducted or applied
You may have to disclose a Category A RTP if, in its tax return, your entity has either or both:
- deducted prior year tax losses
- applied prior year unapplied net capital losses to reduce the net capital gain included in its assessable income.
You must disclose material positions only.
Prior year losses carried forward
In your entity's tax return, you don't need to disclose any prior income year:
- tax losses
- net capital losses carried forward to later income years.
Current year loss position
Your entity may still have an RTP to disclose even if it reports a loss and potential adjustment that doesn't change its income tax liability for that income year. You must consider if your entity has any material positions and disclose them, even in a loss year.
Compliance – administrative and failure to lodge penalties
The schedule is part of your entity's tax return, and you must lodge the schedule by your entity's tax return due date.
Administrative penalties will apply if you:
For more about compliance and penalties, see:
- PS LA 2011/19 Administration of the penalty for failure to lodge
- Significant global entities – penalties
- Items 3A, 3B or 3C of subsection 284–90(1) of the TAA 1953
- PS LA 2012/4 Administration of the false or misleading statements penalty – where there is no shortfall amount
- PS LA 2012/5 Administration of the false or misleading statement penalty – where there is a shortfall amount.
Interaction with voluntary disclosure provisions
A statement made in the schedule is not a voluntary disclosure for the purposes of section 284–225 of Schedule 1 to the TAA 1953.
Completing and lodging the schedule, as per the schedule instructions, doesn't satisfy the voluntary disclosure requirements.
If the information you provide in the schedule allows the Commissioner to identify and calculate the shortfall amount, this may lead to a remission of the shortfall penalty for:
- not having a reasonably arguable position
- making a false or misleading statement.
For more information, see Miscellaneous Taxation Ruling MT 2012/3 Administrative penalties: voluntary disclosures.
When a transfer pricing position is an RTP
If you have a transfer pricing position that is not covered by compliant transfer pricing documentation (according to section 284–255 (TAA 1953)), you must report it in Category A on the schedule. The lack of compliant documents means there's insufficient information to determine if it's more likely to be correct than incorrect.
If your dealings are covered by compliant documents, your position is a Category A or B RTP if it both:
- falls within the high-risk zone of guidance published by us
- isn't a Category C position.
Where a transfer pricing position is a Category C RTP you must disclose this position in Section C (not in Section B as a Category A or B RTP).
You need to separately report revenue and expenditure-based transfer pricing positions. However, you can combine and report all related party revenue, or related party expenditure, as a single Category A RTP.
For more on transfer pricing documentation, see Taxation Ruling TR 2014/8 Income tax: transfer pricing documentation and Subdivision 284–E.
Calculating materiality for transfer pricing positions
You only have to disclose Category A RTPs where the tax (or notional tax) affected by the position exceeds your entity's materiality amount. You can base the materiality calculation on either:
Applying accounting standards to quantify the uncertainty
Australian Accounting Standard AASB 112External Link Income Taxes specifies requirements for current and deferred tax assets and liabilities. An entity applies the requirements in AASB 112 based on applicable tax laws. AASB Interpretation INT 23External Link Uncertainty over Income Tax Treatments explains how to apply the recognition and measurement requirements in AASB 112 when there is uncertainty over income tax treatments.
Where you use the recognition and measurement methods specified in AASB Interpretation 23 to calculate the value of tax uncertainty for a tax position, your entity's position is material where that value exceeds its materiality threshold.
Arm’s length calculations
To comply with the record keeping requirements, trustees should keep documents to demonstrate that their dealings are at arm's length. We will seek to rely as much as possible on the documentation created in the ordinary course of business. We consider that such documentation would include:
- details of the relevant facts and circumstances of the transactions
- details of any agreements that set out the responsibilities of the parties
- any relevant comparable transaction data, and the basis for it being considered comparable
- consideration of why a particular methodology was adopted in preference to others
- financial and economic analysis that supports the application of the method, including any assumptions applied and cross-checks or commercial assessments.
If the non-arm's length income rule (NALIR) applies to your entity, see Law Companion Ruling LCR 2015/15 Managed Investment Trusts: the non-arm's length income rule in sections 275-605, 275-610 and 275-615 of the Income Tax Assessment Act 1997.
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