Tax Reform Working Group Update

The Large Business Stewardship Group (LBSG) met in Canberra on the 29th of March.

The attached agenda refers, please refer to my key observations under the relevant agenda items.

 

1. Action items from previous meeting

ACTION: ATO to discuss Multilateral Instrument Implementation (MLI). RESOLVED: Discussed today at Agenda item 5

ACTION: Provision of blanket deferrals for Country-by-Country (CBC) reports. RESOLVED: ATO published statement.

FURTHER ACTION: ATO to provide CTA with numbers of taxpayers who have lodged CBC reports and extensions granted.

ACTION: ATO to provide GST top-down tracker. ON HOLD: Presentation to be made at next LBSG meeting given restructure of GST reporting lines. ATO will also present on GST’s integration into Justified Trust program.

 

2. Recent developments in large business tax policy

Passage of tax measures

  • 15 Bills (27 tax measures) passed
  • 08 Bills (16 Tax Measures) introduced
  • Given bi-partisan alignment there is still some chance of bills passing on following:
    • Stapled structures
    • PRRT
    • Thin cap (but tricky as its in same bill as R&D)
    • Significant Global Entity BIll

Tax treaties 

  • Treaty with Israel signed (after 2 1/2 year negotiation), China and Pakistan on the list

Digital Economy and the rights of importing countries to tax tangible goods and services (not just digital services) delivered to their countries

  • Looks more and more like an American-led multilateral approach through the OECD will be followed.
  • Australia likely to support this multilateral approach rather than seek to go it alone; have heard industry concerns on possibility of double tax if a purely unilateral approach is adopted.
  • Treasury are aiming to develop a preferred position by next OECD meeting (May) but may have to be in Observer mode (given Caretaker status)
  • Presence in market needs to be acknowledged with profit share (but not as much as large population bases). This problem can be solved by a Consumption Tax – favoured by Euro bloc (rather than sharing of income tax – favoured by Americans)
  • System that is getting some airtime is allocating profit to marketing intangibles. Americans are pushing for formulaic allocation of profit. Possibility of minimum taxes being raised by importing countries also remains live.

Goods and Services Tax (GST) Regulations  

  • Treasury consultation will be forthcoming, aim is to redraft expiring regulations in a more principled basis but not change overall intention.

 

3. Client engagement Group re-alignment

  • 3 ATO lines “disbanded” as separate functions – Indirect Tax, Individuals and Lodgement, CEG (Back Office).
  • Staff moved on a “lift and shift” basis (organisationally) and more or less merged into service delivery lines. There is a separate Assistant Commissioner in charge of integration.
  • Taxpayers should not see a difference in service teams in near-term, same contacts.
  • Aim is to shape overall client experience. Will be subsequent changes, redesign work of individual staff.
  • Large market GST moved into PG&I. (includes risks International and Finance)
  • Small business absorbed some GST line as well.
  • Excise gone to Private Wealth (for time being) under Tim Dyce. R&D largely under this line as well but in partnership with Large business PG&I.
  • Superannuation expanded to include all other Employer obligations (i.e. FBT)
  • Integrated Client Line will look more at egregious behaviour – Phoenixing, J5, Illegal Tobacco
  • ATO will look at single Relationship Manager philosophy.

 

4. CTA Relationship Survey

  • Survey done on basis of everyday relationships (approx. 45 respondents on each survey across the last 5 years).
  • Another survey will be run in May this year, results of 6 surveys will be published on a consolidated basis.

Summary of questions and answers

  • Q: Does ATO understand our business (ATO scored a smidgen above an average)
  • Q: Relationships – Income tax – 53% said very good to excellent. Other relationships (transfer pricing TCN and GST) scored less well. Taxpayers expressed concern on lack of access to TCN and pace of responses. ATO are saying not seeing ACA taxpayers reach out to TCN.
  • Q: Outcomes –  Taxpayers say feel treated fairly about 1/3 of time
  • Q: Workload – Heads of Tax expect 21% increase in workload but 0% of members expect increase in resources
  • Q: Staffing – In-house tax teams well outnumbered by ATO (ATO staff looking at taxpayer versus FTE in tax team). Taxpayers have been spending a lot of time getting through Justified Trust program and still keeping up to date with BAU compliance.

 

5. Compliance risks and emerging issues

Goods and Services Tax (GST)

  • Voluntary compliance program extended.
  • Now get real time information on collection of GST on commercial property transactions. Seeing downward trend on errors.
  • Targeted consultation on retirement village industry.
  • Scoping issues on Build to Rent sector; still a small component of overall property industry
  • Issued a draft TD on credit card usage and apportionment (views finalised will be prospective).
  • Div 93-47 – time period for amending assessments. May be time barred if fail to include an “amount” on a self-objection (see also Lynfox decision)

Corporate tax

  • Legal Professional Privilege (LPP) – NTLG sub-committee formed (led by PG&I) to provide guidance on this topic. LBSG will be informed on progress. ATO concerned with misuse of LPP and seeing insufficient information in logs for ATO decision on whether LPP should be applied – these issues will be worked through by NTLG.
  • It was provided that Taxpayers can agree “search terms” with the ATO if information requests require voluminous/global searches.

Senator Patrick’s request for specific taxpayer information

  • ATO has provided individual taxpayer data to Senator Patrick (not published on Hansard).

Taxpayer Alert Activity

  • Taxpayer Alert (always needs 2 Second Commissioner sign-off) published on Trust transactions used to avoid Div 855.
  • Corporates expressed disappointment that this type of taxpayer activity occurred in the first instance.
  • ATO always remain concerned on risk of proliferation if they do not promptly respond.

Research and Development (R&D)

  • ATO work closely with AusIndustry to ensure claims are eligible.
  • Seeing some concerning activity around software development and mining projects as well as patterns amongst certain advisers.
  • Encourage taxpayers to review ATO guidance and proactive approach to AusIndustry/ATO if making claims.
  • CTA have asked for meeting between ATO and AusIndustry to clarify ongoing administrative issues; is a constant source of irritation for members.
  • Examples were raised of AusIndustry not being consistent as to level of activity and hypothesis required to justify R&D.
  • Corporates are welcome to approach ATO to get on this roundtable.

Capital management activity (demerger and restructure activity)

  • Have had a large volume of PR requests on capital management activity e.g. demergers, restructures.
  • Draft TD released, first in a series of public guidance on capital management to ensure Taxpayers don’t always have to require a Private Ruling (PR). Submissions due on 30 April.
  • Law Council expressed some concern that draft TD is too broad and captures other transactions e.g. rights issues

Tax Treaties

  • PCG and PSLA being worked on the principle purpose test allocation
  • Working on corporate dual resident issues with NZ tax office.

6. Reportable Tax Position (RTP) Schedules

  • RTP vital tool for ATO; key component of Justified Trust (JT) work – one of the four pillars.
  • Have dedicated working party and e-mail box. Want taxpayers to approach proactively in event of uncertainty on how to answer questions.
  • ATO concerned Taxpayers are reading RTP too narrowly; if achieving same outcome as Taxpayer Alert/PCG but not necessarily fulfilling each criteria, ATO expect a “YES” answer.
  • Corporates raised issue of wording in questions, some questions if answered “YES” are effectively an admission of tax avoidance.
  • Category  C questions are aimed at high risk behaviour, will increase in importance when JT is achieved for a Taxpayer.
  • ATO is open to feedback on specific questions, especially on clarification of definitions.
  • Draft of new RTP questions will be circulated. RTP are not intended to be ‘gotcha’ moments.

 

7. Justified Trust and corporate governance update

Top 100 and Top 1000 update

  • Top 100 – Large number of second year TAR’s in production, expecting to get majority to “Justified Trust” by 2020.
  • What is differentiator once you reach high level of assurance?
    • Light touch, ATO will do less intensive assurance activity. Differential will be fundamental, Run on a 3 year cycle: a Reliance year, a Verify year (because of change in business/new transaction – will focus on these matters), a Refresh year
  • How do you achieve JT ? JT = 90% of economic activity assured plus meeting 7 qualifying criteria:
    • Tax Governance must at least be at Stage 2 (as defined under ATO Tax Governance guidance).
    • Taxpayer Alert/PCG activity – can have a low or med level of assurance in TAR provided no further action identified by ATO case.
    • IRPD and CFC activity – must have at least a med level of assurance in TAR, but no further actions identified by ATO case team.
    • Losses – must have at least a medium level of assurance in TAR.
    • ETB – low or medium level of assurance is acceptable provided ATO understand assumptions and proxies used in calculation.
    • No inconsistencies between RTP disclosures as filed and TAR analysis.
    • AN overall co-operative and transparent behaviour during TAR.
  • Top 1000 TAR  –  Have Issued 338 Reports by end of Feb, plan for 500 by July and to complete by 1000 reviews by June 2020.
  • Top 1000 findings report tabled at meeting (draft not for further distribution), information on how to get to high assurance (tips) will be published by ATO on website. Feedback on these tips can be provided back to ATO.
  • Top 100 will deliver a similar findings report.

 

8. Board of Taxation (BoT) – recent developments

  • Transparency report on Post implementation of Tax Transparency Code will not be delivered by BoT under Caretaker Mode.
  • BoT will make clear that recommendations are made in context of being a voluntary code.
  • G100 raised point that Reconciliations recommended could be easily used against Taxpayers.

 

9. Private Ruling program

  • General trends in PR space; no of requests trending upward (13% increase Q1 2019 versus Q1 2018)
  • 18% Taxpayer initiated, majority of PRs applied for by “Big 5” advisory firms.
  • Priority ruling process has been superseded by Early Engagement Model (EEM) – 60% of users of EEM from Top 100 & Top 1000. EEM s really well understood by external advisers.
  • EEM – has tried to take away red tape, aim is to get right people in right place at the right time.
  • Comfort letters – very topical point in ATO.
  • Comfort Letters talk to a low risk rating and provides Commissioner won’t allocate compliance resources (typically given to arrangement that has already concluded).
  • Not legally binding (but will be stood behind unless circumstances change).
  • Comfort Letters being reviewed more broadly to ensure consistency, alignment with other products especially Justified Trust
  • ATO views this as a product of “last resort”.
  • Future Assurance Plan is being developed – Assurance Teams will now compare facts as they were described in a PR and then again at completion of transaction contemplated in that PR. Not meant to be a revisit of technical position unless facts have changed.
  • [As an aside it was provided that Class Rulings are not issued on prospective transactions – they will only be issued in final once a transaction has occurred]

 

10. ATO Data Strategy

  • “Smarter Data” program now running for 5 years at ATO, brings together all data resource in ATO and working together efficiently.
  • 2024 Strategy will aim to “industrialise” data processes at ATO.
  • Other agencies use ATO data
  • ATO maintains 13 trillion records digitally, has been an “explosion” data (i.e. speed and volume)
  • Using data matching to analyse ride sharing industry
  • Using analytics to identify patterns in data which is followed up on an exception basis.

 

11. Industry update – Oil and Gas in Australia

  • Australia has plenty of Gas (70 years of reserves) but also 400 years of resources – this says there is a lot of gas in the ground that still has to be monetised/made economic. The future is infrastructure sharing in order to optimally develop these resources (i.e. collaboration)
  • Third largest energy resource in Australia after (1) Coal, (2) Uranium
  • Over the last 6 – 7 years, US shale gas has boomed and is competing with Australia’s traditional Asia Pacific customers.
  • Two world firsts in Australia – FLNG Prelude and CSG to LNG at Gladstone (QLD).

 

12. Effectiveness of LBSG

  • Questionnaires will be sent to Group members on areas of improvement for the LBSG.