Findings report RTP – Public and multinational businesses

What we've learned from Reportable tax position (RTP) schedule Category C disclosures made in the 2021–22 income year.

About this report

In this report, we provide the aggregated disclosures made by large public and multinational companies for the 2018–19 to 2021–22 income years under Category C of the reportable tax position (RTP) schedule as of 30 June 2023. Further lodgments of RTP schedules after this date will not be included for this report.

The data provides insights as to the prevalence of key corporate tax risks large public and multinational entities. The range of risk levels can vary across the lodging population. We consider and verify the level of risk reported as part of our compliance program; generally this corresponds with our assessment of the disclosed arrangements.

RTP disclosures are provided to our specialist tax performance teams and reviewed under our compliance and assurance programs, which include the Top 100 Justified Trust program, the Top 1,000 Combined Assurance program and the Top 1,000 Next Actions program.

To ensure RTP lodgment obligations are met we undertake an annual RTP non-lodgment program and take action when required.

RTP disclosures help us understand and assess changes in tax positions and arrangements, including new arrangements taxpayers are entering into. The disclosures also allow us to prioritise our assurance activities.

We tailor our compliance approach to the risk rating disclosed by taxpayers. Taxpayers who have achieved justified trust (high assurance) will have a less intensive engagement approach during the monitoring and maintenance period. This enables us to effectively monitor changes in arrangements supported by disclosures in the RTP schedule and to adjust our actions accordingly.

We apply more intensive scrutiny for high-risk disclosures to determine if they comply with the relevant legislative provisions. If we can’t gain this assurance at the review stage, we may undertake an audit or more intensive investigation through our assurance programs.

For more information about how we use RTP disclosures and our assurance programs, see RTP and our assurance programs.

For more information about the purpose of the RTP and information disclosed, see Reportable tax position schedule.

Report highlights

This is the fourth year of publishing this report. It includes high-level observations on trends over the 4 income years 2018–19 to 2021–22, where practicable.

Once again, there has been a significant increase in taxpayers making disclosures and an upward trend in low-risk disclosures for large public and multinational entities.

The data shows that high-risk or arrangements of concern are declining for large public and multinational businesses. This finding is consistent with our view that most large businesses do the right thing and are paying the right amount of tax. It is also reflected in our estimate of the large corporate groups income tax gap.

There has been a 50% increase in the number of schedules lodged and the number of disclosures increased nearly threefold the 4 years 2018–19 to 2021–22. This reflects the progressive expansion of the lodgment requirement from our Top 100 population to all entities that meet the total business income threshold and ownership criteria. The non-lodgment rate has remained stable over the same period. Companies who lodge their tax return and meet the schedule lodgment criteria but fail to lodge their schedule may be subject to our non-lodgment program.

While the data from RTP schedule disclosures and the tax gap estimates indicate high levels of voluntary compliance, we still see room for improvement, such as the rate of errors made by taxpayers on their schedules. We will continue our scrutiny of the large corporate groups population to ensure their ongoing compliance. We will also deal appropriately with the small minority who choose to do the wrong thing.

For more information on how we’re improving the system for those who want to comply, and taking firm action against those who choose not to, see Tax and Corporate Australia.

Category C of the RTP schedule

Questions in Category C of the RTP schedule are typically linked to ATO public advice and guidance (PAG) products, such as:

• taxpayer alerts (TAs)
• practical compliance guidelines (PCGs).

Together these products cover the key systemic risks in relation to large public and multinational businesses. As such, the aggregate data provides insights about the prevalence of key tax risks in the population.

There are generally no materiality thresholds on Category C questions. Taxpayers who meet the lodgment criteria must disclose arrangements irrespective of the impact on their overall tax outcomes.

Questions

Nearly two-thirds of Category C questions in 2021–22 relate to arrangements described in taxpayer alerts. A third of the questions relate to PCGs and require taxpayers to self-assess the risk rating by applying the criteria in PCGs; the remaining questions relate to other risks.

2021–22 Category C questions and the type of PAG product they refer to

Question number	PAG product
7, 9, 14, 22–24, 27, 37 and 39	PCG
2, 3, 7, 10–13, 17, 18, 25, 26, 32–36	Taxpayer alert
16, 19 and 21	Other

Note:

• Questions 28–31 and 40 have not been included as they relate to private company arrangements. All disclosures will be monitored; however the risks are not part of the compliance program for public and multinational businesses.

Disclosures

Taxpayers are only required to provide a response to a question under Category C if they have an arrangement covered by the question. This means every schedule lodged won’t contain a response to every Category C question. For example:

• if a taxpayer required to lodge the schedule doesn’t have registered research and development activities, they won’t make any disclosures under question 13
• some taxpayers will only have one question related to an arrangement
• some taxpayers may have multiple arrangements to disclose, or a question may ask them to make multiple disclosures, such as question 9 offshore hub arrangements, which requires each hub arrangement to be disclosed.

Care needs to be taken when making comparisons across multiple years as taxpayers and arrangements change year on year. Any comparison across years may not be a comparison of the same arrangements or taxpayers. The population has changed over the years as a staggered approach to the expansion of the schedule has occurred to take account of substituted accounting periods and the expansion to private entities. Disclosures made by private entities have not been included in this report.

Note: Only questions included in the 2021–22 schedule has been included in the analysis. Any questions from prior years that have been removed are not included in this report.

For more information, see How we use RTP disclosures.

RTP lodgments and disclosures

The following graph looks at RTP lodgments and disclosures from 2018–19 to 2021–22.

Note:

• Nil RTP disclosures refer to taxpayers that have lodged an RTP schedule but do not have any arrangements to disclose.

There has been an increase in lodgments, a high level of lodgment compliance and increase in disclosures over the past 4 years due to:

• improvements in processes
• an increase in questions
• the expansion to the schedule made over the period.

Disclosures by public advice and guidance product

Most Category C questions ask taxpayers to disclose whether they have arrangements covered by specific ATO public advice and guidance products. Most questions refer to taxpayer alerts, however the majority of disclosures relate to PCGs. PCG disclosures are higher as they relate to more common arrangements, for example related party finance arrangements irrespective of the risk level.

The following graph shows the proportion of disclosures by public advice and guidance product for 2018–19 to 2021–22.

Disclosures by PCG related questions

The following graph shows disclosures by PCG related questions for 2018–19 to 2021–22.

2021–22 Category C, PCG related disclosures

Question number	PCG topic
7	Mobile offshore drilling units
9	Offshore hubs
14 and 23	Related party financing arrangements
22	Hybrid arrangements
24	Inbound supply chains
27 and 37	Arm's length debt test
39	Imported hybrid mismatch rule (new question)

Disclosures by taxpayer alert related questions

The following graph shows disclosures by taxpayer alert related questions for 2018–19 to 2021–22.

Note:

• No responses were received for questions 2, 33, 34 and 36.

2021–22 Category C, Disclosures on arrangements subject to taxpayer alerts

Question number	Taxpayer alert topic
2	Funding special dividends or buybacks
3	Bifurcated procurement hubs
11, 17 and 18	Related party finance
10	Thin capitalisation
12	Business fragmentation
13	Research and development
25	Intangible migration
26	Multiple entry consolidated groups
32	DEMPE of intangible assets
33	Related party finance
34	Interest withholdings tax
35	Multiple entry consolidated groups
36	Derivatives

Disclosures on other questions

The following graph shows disclosures on other questions for 2018–19 to 2021–22.

2021–22 Category C, Other questions

Question number	Topic
16	Consolidation churning rules
19	Settlements
21	Unamended mistakes or omissions

Self-assessing risks related to arrangements

PCGs provide a framework for corporate taxpayers and their boards to self-assess the risk associated with their arrangements and understand our likely compliance response. Self-assessment is voluntary, but we consider it best practice for corporate taxpayers to include self-assessment under PCGs as part of their standard tax governance processes.

If a taxpayer hasn’t undertaken the self-assessment, they must disclose a high-risk rating in the schedule or tell us they haven't applied the PCG. This alerts us to examine the arrangement more closely to obtain confidence about the tax outcome.

Taxpayers must disclose their self-assessed risk rating in the corresponding Category C question. In some cases, they may be required to disclose multiple arrangements, such as question 9 on hub arrangements. For these reasons, the greatest number of disclosures are against PCG linked questions.

Most PCGs don’t include materiality thresholds, they aim to identify the highest risk arrangement where the taxpayer has multiple arrangements. The schedule also doesn’t apply any materiality threshold on Category C questions.

We do consider the spread of risk ratings disclosed to understand relative risk levels, using a variety of data sources including the disclosures received. This supports a more accurate understanding of the relative risk of an arrangement in the population compared to other arrangements and over time.

Taxpayer alerts

We issue taxpayer alerts to warn taxpayers of our concerns about new or emerging arrangements we consider might pose a high risk, such as tax avoidance arrangements. Our aim is to share our concerns early to help taxpayers make informed decisions about their tax affairs.

Our experience shows most large corporate taxpayers don’t wilfully take on tax risk. Taxpayers will often engage with us to gain certainty on arrangements we’ve indicated we have concerns with. They may apply for a ruling or advance pricing arrangement or simply not enter into these arrangements, preventing proliferation.

Taxpayer alerts are intended as an advance warning system. The low number of disclosures against Category C questions referring to taxpayer alerts is, therefore, unsurprising. This is a healthy sign most large company taxpayers are choosing to not enter or have exited arrangements of the nature described in the alerts. We use information obtained through our assurance programs and other data sources – for example, country-by-country (CBC) reporting – to identify any non-disclosure risk.

Taxpayer alerts will often apply more broadly than to just the large company population required to lodge the RTP schedule. Disclosures on the RTP schedule help us to understand the proliferation of arrangements described in taxpayer alerts in the lodging population. They also help to identify variations of the arrangements and if these too pose a risk.

We retain RTP schedule questions on taxpayer alerts for a period after we have reviewed all existing arrangements (disclosed and identified through other data sources). We do this to ensure no new taxpayers are entering into the arrangement or variation of the arrangement. We are also mindful that withdrawing a question too early may signal acceptance of the arrangement or variants of it to taxpayers and advisers, possibly leading to new high-risk arrangements proliferating.

PCG related disclosures

Non-resident owned MODUs: question 7

Overview of question 7

Practical Compliance Guideline PCG 2020/1 sets out the transfer pricing risks for projects involving the use in Australian waters of non-resident owned mobile offshore drilling units (MODUs). These MODUs include drill-ships, drilling rigs, pipe-laying vessels and heavy-lift vessels. The risk framework in PCG 2020/1 enables taxpayers to self-assess the transfer pricing risks for these arrangements.

Findings from question 7

Disclosures for question 7, 2019–20 to 2021–22

Disclosure	No MODUs	Medium risk	High risk	Total
2019–20	3	0	2	5
2020–21	1	2	1	4
2021–22	1	1	3	5

Question 7 was updated for the 2019–20 income year to ask taxpayers for their self-assessed risk rating under PCG 2020/1. In 2021–22, 3 taxpayers disclosed a high-risk arrangement indicating market conditions have led to a fall in their operating margin. These arrangements will be reviewed as part of our engagement and assurance programs.

Offshore hubs: question 9 disclosures

The following graph shows disclosures on question 9 in 2021–22.

Note:

• PCG 2017/1 asks taxpayers to make a disclosure for each hub arrangement they have in place.
• In 2020–21, arrangements that did not apply the risk methodology or calculate the tax impact were separated from the high-risk category. Disclosures categorised as PCG not applied remain a high-risk focus.

Overview of question 9

Practical Compliance Guideline PCG 2017/1 provides guidance on transfer pricing issues related to centralised operating models involving procurement, marketing, sales, and distribution functions.

We are concerned with the mispricing of services and functions relating to the sales and marketing of goods and commodities provided by international related parties, and also the risk of inappropriate structuring of marketing hubs. We monitor offshore procurement hubs that supply 'indirect' or 'non-core' goods or services (non-core product) to an Australian entity.

Marketing hubs findings

103 taxpayers disclosed 159 marketing hub arrangements in 2021–22. There were 5 high risk arrangements in 2021–22, 3 of which are currently under review and the other 2 will be subject to further investigation under our compliance and assurance programs.

Information from other schedules such as the International dealings schedule (IDS) and CBC reporting are also used to understand and identify the risk.

The top 3 commodities sold via offshore marketing hubs are iron ore, coal and liquified natural gas (LNG). Only a very small portion of all exports sold via offshore marketing hubs are for commodities not produced by the energy and resources sector.

Disclosures on marketing hubs

The following graph compares risk zone disclosures on marketing hubs in question 9 for 2018–19 to 2021–22.

Between 2018–19 and 2021–22 the proportion of high risk ratings decreased and low risk disclosures increased. The change over this period indicates a positive behavioural shift for taxpayers undertaking these types of arrangements.

We continue to undertake a range of engagement activities in relation to the risk, including engagement with industry bodies and other jurisdictions and work through our compliance and assurance programs.

Disclosures on non-core procurement hubs

The following graph compares risk zone disclosures on non-core procurement hubs in question 9 for 2018–19 to 2021–22.

Procurement hubs findings

Question 9 was extended to include non-core procurement hub arrangements in the 2018–19 schedule, resulting in a 75% increase in disclosures and a doubling of taxpayers making disclosures.

In 2021–22, 85 taxpayers disclosed 144 non-core procurement hub arrangements, an increase in the number of disclosures and taxpayers making disclosures from the previous year. The number of low risk disclosures increased and for the last 2 years there have been no high risk disclosures, indicating a positive behavioural shift for taxpayers with these arrangements.

The large number of high-risk and PCG not applied disclosures in 2018–19 to 2020–21 were due to one taxpayer that is part of a Top 100 corporate group disclosing approximately 50 non-core procurement hub arrangements. In 2020–21, the previously high-risk disclosures were made under the new PCG was not applied category – where a taxpayer does not apply risk methodology or calculate tax impact. In 2021–22, the taxpayer self-assessed as white zone, indicating the self-assessment of the risk rating is unnecessary as it has already been assured by the ATO.

Related party finance: questions 14 and 23 disclosures

The following graph provides disclosures on questions 14 and 23 for 2021–22.

Note:

• Not disclosed refers to disclosures by taxpayers who included the question number but didn’t include the subcategory number on their schedule.
• Schedule 3 was introduced in 2020–21 and included a parallel set of risk zone sub-categories, 11 to 17. Schedule 3 modifies how outbound interest-free loans are self-assessed under PCG 2017/4.
• In 2020–21, an additional category for question 14 was added where Schedule 1 and 3 of PCG 2017/4 were not applied; these are included under the PCG not applied category. Where a taxpayer does not apply the PCG we treat this as high risk.

Overview of question 14 and 23

Practical Compliance Guideline PCG 2017/4 allows taxpayers to self-assess the tax risk of their cross-border related party financing arrangements.

Schedule 1 sets out the risk assessment framework to determine the risk rating of cross-border related party debt. We expect the pricing of related party debt to align with the commercial incentive of achieving the lowest possible 'all in' cost to the borrower.

Schedule 2 is used to determine the risk rating of related party derivative arrangements.

Schedule 3 was introduced in 2020–21 and is related to outbound interest-free loans between related parties. It outlines the factors under which the risk score assigned to outbound interest-free loans made between related parties may be modified for the purposes of Schedule 1.

Given the prevalence and significant tax outcomes involved, we actively investigate these arrangements. We continue to undertake assurance activities on arrangements disclosed in the red and amber zones by Top 100 and 1,000 taxpayers. We have strategies in place to address high-risk arrangements where the loan amounts are less significant, including where the disclosures come from taxpayers in the medium and emerging population segment.

The review of related party financing arrangements is an inherent element of the assurance work we undertake. This involves reviewing the application of PCG 2017/4 against the taxpayer’s relevant loan agreements and transfer pricing documentation.

Findings from question 14

Disclosures on related party financing

The following graph compares risk zone disclosures on related party financing arm's length conditions in question 14 for 2018–19 to 2021–22.

Note:

• Not disclosed refers to disclosures by taxpayers who included the question number but didn’t include the subcategory number on their schedule.
• Schedule 3 risk zone sub-categories, 11 to 17 have been combined with sub-categories 1–7 to provide a historical comparison.
• From 2020–21 taxpayers are required to report their self-assessed risk zone for their 3 most material arrangements and their highest risk arrangement if that was not one of their 3 most material arrangements.

The number of disclosures increased in 2020–21 by nearly 50% and a further 21% in 2021–22, largely due to the change in reporting requirements for question 14. Over the past 4 years the proportion of low-risk disclosures has increased while the proportion of high risk and PCG not applied decreased. This indicates a positive behavioural trend for taxpayers engaging in related party financing arrangements.

The information from question 14 is used with other information such as CBC and IDS to understand the risk. The high-risk disclosures have been reviewed or will be subject to relevant compliance and assurance activity.

Findings from question 23

Disclosures on related party financing derivatives

The following graph compares risk zone disclosures on related party financing derivatives in question 23 for 2018–19 to 2021–22.

Note:

• Not disclosed refers to disclosures by taxpayers who included the question number but didn’t include the subcategory number on their schedule.
• In 2020–21, reporting requirements for question 23 changed and taxpayers are now required to report their self-assessed risk zone for their 3 most material arrangements, and their highest-risk arrangement if that was not one of their 3 most material arrangements.

There were 100 disclosures made for question 23 in 2021–22. There were 8 high risk disclosures made in 2021–22, all of which have either been reviewed or are under review as part of our compliance and assurance program. More than 80% of disclosures made under question 23 have had or are currently undergoing compliance activity.

The number of high-risk arrangements decreased by 27% in 2021–22 while the number of low-risk arrangements increased by 40%, indicating a positive behavioural shift for taxpayers entering into related party derivative arrangements.

Hybrid arrangements: question 22, question 27 and question 39

Disclosures on hybrid arrangements

Disclosures on question 22, 2019–20 to 2021–22

Disclosure	Low risk	Not low risk	Not disclosed	Total
2018-19	44	6	1	51
2019–20	75	4	0	79
2020–21	16	0	0	16
2021–22	9	1	4	14

The following graph compares risk zone disclosures on hybrid arrangements in question 22, 2018–19 to 2021–22.

Question 22

Overview of question 22

The hybrid mismatch rules are intended to deter the use of hybrid mismatch arrangements that result in double non-taxation outcomes by exploiting differences in the tax treatment of an entity or financial instrument under the income tax laws of 2 or more countries.

Question 22 relates to Practical Compliance Guideline PCG 2018/7, which has been designed to assist taxpayers to restructure into compliant replacement arrangements. These arrangements eliminate double non-taxation outcomes, consistent with the underlying objective of the hybrid mismatch rules.

We use data available from schedule disclosures and other information sources, such as question 49 on the IDS, to identify and monitor hybrid restructures undertaken and arrangements maintained by taxpayers. Our focus is on ensuring compliance with the hybrid mismatch rules through ongoing engagement.

Findings from question 22

The number of question 22 disclosures continued to decrease again in 2021–22 to 14 disclosures. This is in line with our expectations that the majority of restructuring would have occurred closer to the implementation of the hybrid mismatch rules on 1 January 2019.

More than 60% of disclosures self-assessed as low risk. A self-assessed rating of not low risk doesn't mean the arrangement is high risk. There was one 'not low risk' disclosure, which is being reviewed as part of our compliance and assurance program.

Four disclosures were made without subcategories being provided, of which one is currently being reviewed under our engagement and assurance program. The remaining 3 disclosures without subcategories were made by taxpayers that did not undertake any restructures. As such, these taxpayers were not required to make a disclosure at question 22.

Data from the RTP schedule disclosures is showing variances in restructure arrangements. These variances are to be expected and reflect differences in the hybrid element, instruments versus entities, and the jurisdiction involved.

Question 27

Overview of question 27

This is the second year of reporting under question 27, which was introduced in 2020–21. This question relates to payments made under structured arrangements which gave rise to imported hybrid mismatches.

The objective of the imported hybrid mismatch rule is to maintain the integrity of the other hybrid mismatch rules by removing any incentive for multinational groups to enter into hybrid mismatch arrangements.

Law Companion Ruling LCR 2019/3 provides the Commissioner's view of the law in relation to the phrase 'structured arrangement', and Practical Compliance Guideline PCG 2019/6 helps taxpayers assess whether a payment giving rise to a hybrid mismatch is made under a 'structured arrangement'.

Findings from question 27

Question 27 had 5 disclosures in 2021–22. Three disclosures were made in error. Of the remaining 2 disclosures, one has been reviewed as part of our compliance and assurance program and received a high level of assurance in relation to the imported hybrid mismatch rule. The remaining disclosure will be reviewed under our compliance and assurance programs.

The number of disclosures at question 27 is not as high as anticipated on the basis that the IDS data for 2021–22 identified several structured imported hybrid mismatch arrangements. We are investigating the reasons behind the lack of disclosures in the RTP schedule through our assurance and review activities

We will continue to use information available and ongoing engagement and assurance activities to detect and address non-disclosure under question 27.

Question 39

Disclosures on hybrid arrangements

The following graph compares risk zone disclosures on hybrid arrangements in question 39 for 2021–22.

Overview of question 39

Question 39 is new to the RTP instructions in 2021–22. It requires taxpayers to disclose self-assessed risk ratings using Practical Compliance Guideline PCG 2021/5.

PCG 2021/5 contains practical guidance as to the ATO’s assessment of the relative levels of tax compliance risk associated with imported hybrid mismatches addressed by Subdivision 832-H of the Income Tax Assessment Act 1997. It sets out the Commissioner’s approach to reviewing whether a taxpayer has undertaken reasonable enquiries in relation to the imported hybrid mismatch rule for non-structured arrangements.

Findings from question 39

There were 1,009 disclosures made in 2021–22 at question 39. PCG 2021/5 is relevant to any Australian taxpayer that seeks a deduction for a cross-border payment made to a member of its Division 832 control group. As such, the large number of disclosures received was expected.

More than 80% of disclosures are rated as low risk, low-moderate risk or white zone, indicating most taxpayers have applied PCG 2021/5 and followed the ATO recommended approaches to demonstrating compliance with Subdivision 832-H.

Five disclosures are rated as high to very high risk. All will be reviewed under our compliance and assurance programs.

Due to the complexity of the imported hybrid rules and PCG 2021/5 being published in the second half of the calendar year, we allowed taxpayers a transition period for assessment against this question. For that year only, taxpayers were able to assess that they had insufficient time to apply the PCG but would do so in future years. Nearly 20% of disclosures assessed that they had insufficient time. This subcategory has been removed from the 2022–23 RTP instructions as it is no longer applicable.

Four disclosures noted that, while the PCG publication fell in the first half of the taxpayer’s income year, the taxpayer did not apply the PCG to self-assess its risk rating. The remaining 3 disclosures did not provide a risk rating and will be reviewed as part of our compliance and assurance programs.

The disclosures made under question 39 are used with other information sources such as the IDS to assess the risk.

Inbound distribution arrangements: question 24 disclosures

The following graph compares risk zone disclosures on inbound distribution arrangements in question 24, 2019–20 to 2021–22.

Note:

• Not disclosed refers to disclosures by taxpayers who included the question number but didn’t include a valid sub-category on their schedule.
• PCG not applied refers to taxpayers who choose not to follow the PCG or taxpayers who fall within any of the following
  • entities that have adopted the distributor simplified transfer pricing record keeping option in PCG 2017/2
  • paragraph 49 of PCG 2019/1
  • where an entity has an inbound distribution arrangement but an EBIT margin is unable to be determined and the taxpayer has not applied PCG 2019/1.
   
• PCG 2019/1 doesn't provide for an equivalent white zone similar to other PCGs covered in this report.

Overview of question 24

Practical Compliance Guideline PCG 2019/1 provides a framework for taxpayers to assess the transfer pricing risk of their inbound distribution arrangements. Our focus for PCG 2019/1 is on transfer pricing outcomes associated with the activities of inbound distributors including the distribution of goods purchased from related foreign entities for resale, and the distribution of digital products or services where the intellectual property in those products or services is owned by related foreign entities.

We review the reasonableness of these disclosures as part of our Justified Trust program. Under this program we review the top 1,100 public groups and multinationals in Australia including many inbound distributors. We use our data and analytics capabilities to assess the reasonableness of disclosures of distributors outside this population who are required to complete the RTP schedule. We employ a range of approaches to detect and address any incorrect disclosure or non-disclosure.

Findings from question 24

There has been an increase in the number of disclosures made each year and a 7% increase in 2021–22. The level of high-risk disclosures decreased by 10% in 2021–22, while low risk disclosures increased by 24%. Indicating a positive shift in behaviour for disclosures regarding these arrangements.

The majority of taxpayers who disclosed an inbound distribution arrangement fall within our Top 100 or 1,000 programs and are subject to review under our compliance and assurance programs.

Arm's length debt test: question 37 disclosures

The following graph is a comparison of risk zone disclosures for question 37, 2020–21 and 2021–22.

 

Overview of question 37

The arm's length debt test is one of the tests available to establish an entity's maximum allowable debt for thin capitalisation purposes. The test focuses on identifying an amount of debt a notional stand-alone Australian business would reasonably be expected to borrow, and what independent commercial lenders would reasonably be expected to lend on arm's length terms and conditions.

Practical Compliance Guideline PCG 2020/7 sets out our compliance approach in respect to the arm's length debt test. It also provides a differentiated risk assessment framework for taxpayers to self-assess their perceived level of risk.

Disclosures made under question 37 provide meaningful insights into the population of taxpayers relying on arm's length debt test. The subcategories provide further understanding of the risk profile of taxpayers.

Findings from question 37

This is the second year of reporting for question 37. There were 71 disclosures received in 2021–22, approximately a 45% increase from the previous year.

55% of disclosures in 2021–22 are rated as medium, implying that the majority of taxpayers have applied PCG 2020/7 and followed 'best practice' approach to undertaking the arm's length debt test.

A further 32% of disclosures have self-assessed as low risk rating indicating taxpayers meet the necessary criteria to fall within the low risk zone. The proportion of low risk rated disclosures increased in 2021–22.

There were 2 disclosures rated as high, both of which are subject to compliance activity. There are 2 disclosures that have not applied the PCG, these have been reviewed and may be referred to our compliance and assurance program.

Disclosures on arrangements subject to taxpayer alerts

Funding special dividends or buybacks: question 2

Overview of question 2

Question 2 relates to equity raising to fund special dividend or share buyback arrangements as described in Taxpayer alert TA 2015/2.

We have concerns where these arrangements are being used by companies for the purpose of releasing franking credits or streaming dividends to shareholders funded by raising capital. This may result in the release of franking credits that may otherwise have been retained by the company.

Findings from question 2

There were no disclosures at question 2 in 2021–22. We continued to monitor the risk associated with arrangements described in Taxpayer alert TA 2015/2. Specific integrity measures are being introduced through Treasury Laws Amendment (2023 Measures No.1) Bill 2023 to prevent the use of such arrangements.

Bifurcated procurement hubs: question 3

Overview of question 3

Question 3 relates to procurement hub arrangements described in Taxpayer alert TA 2015/5.

TA 2015/5 addresses the risk of Australian resident multinational entities entering offshore procurement structures where there is a bifurcation of the procurement function between 2 separate offshore entities. The risk is that such structures are being used by multinational entities for the purpose of minimising tainted income under controlled foreign company rules.

The application of TA 2015/5 is considered as part of our compliance and assurance program, where we have identified non-disclosure we review those taxpayers.

Findings from question 3

There were 7 disclosures at question 3 in 2021–22. Four of the arrangements have been or are currently under review. The remaining disclosures will be considered as part of our compliance and assurance programs.

Other information such as CBC and IDS are used to understand and support disclosures. Our risk and assurance programs give us confidence these arrangements are no longer prevalent in the population.

Lease-in lease-out arrangements: question 7

Overview of question 7

Taxpayer alert TA 2016/4 relates to arrangements involving cross-border leasing of mobile assets.

We are concerned about multinational entities with arrangements that involve a related legal entity interposed to lease an asset from a foreign owner to an Australian operator to gain favourable tax treaty treatment.

We are also concerned about whether the amount brought to tax is consistent with the contribution made by the Australian operations, including the use of the mobile asset, and whether this meets the arm's length requirements of the transfer pricing provisions of our tax laws.

Findings from question 7

There were 5 disclosures at question 7 in 2021–22. Three arrangements self-assessed as high risk, one medium and one not disclosed. These arrangements will be considered under our compliance and assurance programs.

Thin capitalisation: question 10

Overview of question 10

Question 10 deals with the exclusion of amounts treated as equity for accounting purposes from thin capitalisation debt calculations. Specifically, it relates to bifurcated instruments as described in TA 2016/9. Our interest is in those entities that have not correctly valued their debt capital. We have released Tax Determination TD 2020/2 setting out our view of the operation of the law to these arrangements.

Findings from question 10

There were 4 disclosures at question 10 in 2020–22, a slight decrease from 2020–21.

We have reviewed these arrangements under our compliance and assurance programs. While most taxpayers have been found to be compliant with TD 2020/2, we have taken action where necessary. The reduction in disclosures from the previous year indicates that TA 2016/9 and TD 2020/2 are assisting in achieving broad compliance.

Related party finance: questions 11, 17, 18, 33

Disclosures on questions related to financing arrangements, 2021–22

Question	Topic	Taxpayer alert	Disclosures
11	Financing – round robin arrangements	TA 2016/10	5
17	Financing – WHT	TA 2018/4	10
18	Financing – debt deductions and NANE	TA 2009/9	28
33	Mischaracterisation arrangements connected with foreign investment	TA 2020/2	0

Risks associated with related party financing arrangements continue to be a key focus for us. We use the disclosures under questions 11, 17, 18 and 33 together with data from the IDS and CBC reports to identify and assess these risks.

Question 11

Overview of question 11

This question addresses Taxpayer alert TA 2016/10 Cross-border round robin financing arrangements.

The concern with these arrangements is that they involve funding of an overseas entity or operations by an Australian entity, where the funds are subsequently provided back to the Australian entity, or its Australian associate, in a manner which purportedly generates Australian tax deductions while not generating corresponding Australian assessable income.

Findings from question 11

There were 5 disclosures at question 11 in 2021–22, all of which have been or are currently under review as part of our compliance and assurance programs.

Question 17

Overview of question 17

Question 17 relates to Taxpayer alert TA 2018/4 Cross-border arrangements where income tax deductions are claimed in Australia on an accrual basis but withholding tax is not paid when deductions are claimed. We are concerned with tax-driven structuring, claiming a deduction where a payment is not expected to take place and tax issues that arise form how the transaction is affected.

Findings from question 17

There were 10 disclosures made at question 17 in 2021–22. All disclosures have been reviewed. Further engagement will occur as part of our compliance and assurance programs.

Question 18

Overview of question 18

Question 18 concerns Taxpayer alert TA 2009/9 Cross-border financing arrangements which seek to generate debt deductions in Australia via arrangements with little or no commercial or economic purpose and that appear to be driven by the tax benefits.

Arrangements disclosed under question 18 should also report deductions under the IDS 25B.

Findings from question 18

There were 28 disclosures made in 2021–22. The majority of disclosures at question 18 were made by taxpayers because they have claimed a deduction under section 25–90. Absent the other features outlined in TA 2009/9, these disclosed arrangements don’t pose a compliance risk. The disclosures under question 18 have been reviewed and will be used with information from other sources such as the IDS to understand the risk. The disclosures will be considered under our compliance and assurance programs.

Note that question 18 has been removed from the 2023 RTP schedule as the information is collected through the IDS.

Question 33

Overview of question 33

Question 33 was added to the schedule in 2020–21 and relates to mischaracterised arrangements and schemes connected with foreign investment into Australian entities as outlined in TA 2020/2. TA 2020/2 is concerned with cross-border arrangements that mischaracterise the structure used by foreign investors to invest directly into Australian businesses.

Findings from question 33

There were no disclosures made for question 33, as expected for this risk. The risk remains part of our compliance and assurance program.

Business fragmentation: question 12

Overview of question 12

Question 12 relates to arrangements involving the fragmentation of integrated trading businesses in order to re-characterise trading income to passive income to achieve a more favourable tax outcome as described in Taxpayer alert TA 2017/1. Our concerns arise where an arrangement fragments integrated trading businesses in order to re-characterise trading income into more favourable passive income.

We combine the information obtained from disclosures at question 12 with data from transitional election forms to risk assess stapled groups. Those eligible taxpayers that have lodged a valid transitional election form may be entitled to claim transitional relief and continue to apply the lower 15% withholding rate during the transition period.

Findings from question 12

There were 5 disclosures at question 12 in 2021–22. 2 of these have been subject to a recent review and 2 are scheduled for compliance and assurance activity. One arrangement is known to us and will be subject to further investigation.

We understand that of the taxpayers that have lodged valid transitional election forms, many have not accurately reflected managed investment trust cross staple arrangements income. We are engaging with taxpayers that have interests in staple structures to ensure the application of integrity measures and appropriate pricing of financial arrangements.

R&D: question 13

Overview of question 13

Taxpayer alerts for the Research & Development (R&D) tax incentive relate to claims for ineligible activities and expenditure, including R&D tax incentive claims for ordinary business activities. Specific concerns are also identified within the following industry sectors:

• Taxpayer alert TA 2017/2 (construction activities)
• Taxpayer alert TA 2017/3 (any business activities)
• Taxpayer alert TA 2017/4 (agricultural activities)
• Taxpayer alert TA 2017/5 (software development activities).

Findings from question 13

There were 11 disclosures at question 13 in 2021–22, a slight decrease from the previous year.

The majority of disclosures for question 13 relate to TA 2017/3 and TA 2017/5. Where appropriate, we refer any concerns identified with eligibility of R&D activities to AusIndustry, who are responsible for this aspect of the R&D tax incentive.

All disclosures were from taxpayers in the Top 100 or 1,000 populations. The arrangements disclosed have either been reviewed or will be reviewed through our compliance and assurance programs.

Payments connected with intangibles: question 25

This information is about the characterisation of payments connected with intangibles as part of question 25 disclosures.

Overview of question 25

Question 25 relates to deductions for expenses incurred under an arrangement with offshore parties using intangible assets held by an offshore party, as described in Taxpayer alert TA 2018/2. Question 25 was added to the RTP schedule in the 2019–20 income year to inform whether intangible assets have been appropriately recognised and Australian royalty obligations have been met.

Findings from question 25

There were 17 disclosures at question 25 in 2021–22. Thirteen of the disclosures indicated the taxpayer had considered the arm’s length principle in determining the appropriate consideration for the use of the intangible assets, but the arrangement wasn't covered by section 284–255 (Taxation Administration Act 1953) compliant transfer pricing documentation.

Two disclosures indicated that the taxpayer hasn't applied the arms' length principle in determining the appropriate consideration for the use of intangible assets, and a further 2 disclosures that did not appropriately recognise an amount as consideration for the use of the intangible. These will be reviewed through compliance and assurance activities.

We will continue to monitor the risk associated with arrangements described under TA 2018/2 as part of our compliance and assurance programs.

MEC group and CGT asset sold: question 26

Overview of question 26

Question 26 relates to the sale of a CGT asset to an eligible tier 1 entity in a multiple entry consolidated (MEC) group, with the entity subsequently sold to a third party. Question 26 was added to the RTP schedule in the 2019–20 income year to inform concerns that taxpayers may be entering into the arrangements described in TA 2019/1 to avoid realising large capital gains on the disposal of CGT assets.

Findings from question 26

There was one disclosure at question 26 in 2021–22, this has been reviewed as part of our compliance and assurance program. We continue to monitor the risk associated with arrangements described in Taxpayer alert TA 2019/1.

DEMPE of intangible assets: question 32

The following information relates to activities connected with development, enhancement, maintenance, protection or exploitation (DEMPE) of intangible assets (question 32 disclosures).

Overview of question 32

Question 32 relates to international arrangements that mischaracterise Australian activities connected with the DEMPE of intangible assets as described in Taxpayer alert TA 2020/1. We are concerned that these arrangements may be non-arm's length or intended to avoid tax, resulting in inappropriate outcomes for Australian tax purposes. Finalisation of draft PCG 2023/D2, released in May 2023, will assist in getting a more in-depth view of this risk across the population and better inform our treatment management strategy .

Findings from Question 32

There was one disclosure made in 2021–22. This arrangement is currently being managed as part of our compliance and assurance program. We will continue to monitor risks associated with activities set out in Taxpayer alert TA 2020/1 as part of our compliance programs.

Interposed entities to avoid withholding tax: question 34

Overview of question 34

Taxpayer alert TA 2020/3 describes arrangements involving interposed offshore beneficiaries of Australian trusts claiming excessive interest deductions on related party debt against Australian sourced income while no interest withholding tax is paid due to the debt arrangement being held offshore by the interposed non-resident beneficiaries.

Findings from question 34

There were no disclosures made under question 34 in 2021–22. We will continue monitoring the risk associated with arrangements described in TA 2020/3 as part of our compliance and assurance programs. Any taxpayers identified with arrangements of this kind are likely to be subject to further enquiries.

MEC groups: question 35

Overview of question 35

Taxpayer alert TA 2020/4 outlines our concerns on multiple entry consolidated groups avoiding capital gains tax through the transfer of assets to an eligible tier-1 company prior to divestment.

Our focus is on arrangements that appear to be designed to avoid the inclusion of capital gains in the assessable income of Australian resident entities upon the disposal of their assets.

Findings from question 35

There were 6 disclosures at question 35 in 2021–22. The majority of disclosures made in 2021–22 are known to us and fall within the Top 1,000 population. One disclosure is part of the Top 100 program. All arrangements disclosed have been reviewed and will be considered as part of our compliance and assurance programs.

Question 35 was expanded in the 2022–23 RTP schedule instructions to include 3 subcategories. We expect this to result in capturing additional arrangements in 2022–23. This risk will continue to be monitored through our compliance and assurance programs.

Derivative instruments: question 36

Overview of question 36

This question relates to arrangements where an imputation benefit is claimed by a taxpayer relating to a parcel of Australian shares held (directly or indirectly) where it has offset its economic exposure to those shares, through the use of a derivative instrument as described under Taxpayer alert TA 2020/5.

Our concerns are with arrangements where the taxpayer having no or nominal economic exposure to both the dividend and capital performance associated with additional shares acquired (through entering into derivative instruments) claims the imputation credit / franked dividend associated with those shares.

Findings from question 36

There were no disclosures made under question 36 in 2021–22.

We are monitoring risks associated with TA 2020/5 through our compliance and assurance programs.

Disclosures on other questions

Consolidation churning: question 16

Overview of question 16

Question 16 relates to application of the consolidation churning rule to arrangements entered into by a multiple entry consolidated group.

Findings from question 16

There were 12 disclosures at question 16 in 2021–22 a 25% decreasing from 16 in 2020–21.

Question 16 relates to the application of the consolidation churning rule to arrangements entered into by a multiple entry consolidated group. Most of the disclosures at question 16 were made by taxpayers indicating the churning rule applied to deny certain cost setting rules. All disclosures stating the rules didn’t apply were made by Top 1,000 taxpayers. The arrangements have been reviewed under our assurance programs and assessed as no risk or taxpayers have resolved the matter with us.

Material changes to settlement positions: question 19

Overview of question 19

Question 19 relates to breaches or material changes to facts covered by settlement deeds and future compliance arrangements. It is an important feature of our settlements that we achieve behavioural change and secure future tax outcomes. We continue to monitor compliance with these agreements closely.

Findings from question 19

There were 5 disclosures at question 19 in 2021–22, a decrease from the previous year. We engaged directly with each taxpayer and confirmed all are compliant with the terms of the settlement deeds and agreements or are implementing changes to ensure compliance with the deed.

Unamended mistakes or omissions: question 21

Overview of question 21

Question 21 relates to any unamended mistakes or omissions in tax returns. We review the responses to detect mistakes or error with a particular focus on those where amendments are not evident.

Findings from question 21

There were 36 disclosures at question 21 in 2021–22.

Disclosures under question 21 related to issues including omitting assessable income, carry forward loss balances, depreciation expenses, the R&D tax incentive taxation of financial arrangements. All 36 disclosures were from Top 100 or 1,000 taxpayers. Their disclosures are or will be reviewed through our assurance programs to ensure appropriate amendments are lodged.

Approximately one-third of the disclosures had a corresponding amendment made to the tax return. We have reviewed the remaining disclosures and we expect that some further amendments will be made to the relevant tax returns. Some amendments will result in an increase in tax payable, others a decrease and some will have a notional impact through changes in losses carried forward.

What we've learned from Reportable tax position (RTP) schedule Category C disclosures made in the 2021–22 income year.