Welcome and introductions
The Chairperson welcomed attendees and noted that minutes to today’s meeting will be published on ato.gov.au
Opening statements
Deputy Commissioner Public Groups Rebecca Saint, and Assistant Commissioner Banking and Finance Strategy Bill Neskovski
The ATO made the following comments.
Key staffing changes within ATO and PGI
Nick Maley has left the ATO, with Bill Neskovski currently acting in the Assistant Commissioner role. There is a competitive recruitment process underway for Assistant Commissioners across the entire ATO, including Client Engagement Group (CEG).
CEG Plan for 2021–22
The aspiration is to improve large market willing participation rate from 92% to 96%, then to 98% following ATO activity.
Part of this is to focus on providing public advice and guidance – ensuring that the ATO has sufficient guidance out in the market for taxpayers to understand ATO expectations and lodge in accordance with these.
The Justified Trust (JT) Programs have a direct impact on participation rate, as assurance activities impact on tax confidence. The Tax Avoidance Taskforce (TAT) has been very successful, with over $20 billion tax assured every year. Audit activities in Public Groups and International (PGI) have raised $14 billion in liabilities and $10 billion in cash collections.
The ATO will also continue to work with taxpayers to improve information gathering. The ATO is working on a best practice guide on how taxpayers can make legal professional privilege (LPP) claims in response to formal notices. Previously, LPP claim concerns have been on the legal construction of the engagement – whether there is a legal engagement in the first place. The ATO wants taxpayers to get high quality advice and make LPP claims where appropriate but wants to ensure that such claims are valid and are appropriately made.
The focus for GST is determining GST performance and GST gap in the large market. The Top 1,100 taxpayers are responsible for approximately 60% of net GST remitted. As such, it is important the ATO has assurance over correct remittance in the large market, focusing on how to detect and address key risks. The ATO looks to collaborate with large taxpayers to gain broader assurance over financial services for GST. Outside financial services, there is a risk of non-compliance with ATO guidance in relation to food.
GST governance continues to be the primary risk across the large market. It has been noted that 30% of taxpayers make voluntary disclosures upon commencement of an ATO review – this is a concern as the expectation is that a taxpayer’s governance processes will prompt review, as opposed to ATO activity.
The ATO is continuing to look at ways to improve the client experience more holistically rather than on a siloed basis. This will involve considering how the client experience plays across debt and lodgment to review and audit. There will be a move to a new system of tracking cases and obtaining insights across the entire pipeline. This will hopefully translate into efficiencies across the large market.
There is a large amount of work involved with Pillar 1 and Pillar 2, with a dedicated team in the ATO working with Treasury and the Finance and Treasury Association on how tax administrations will work together under the new rules. The ATO intends to work closely with taxpayers to implement.
COVID-19 update
The ATO notes different experiences across all taxpayers with respect to COVID-19. As such, the ATO will continue to engage with taxpayers on a one-on-one basis, providing support to taxpayers who need it. The ATO has provided support in respect of lodgment obligations and noted that notwithstanding the heavy impact of COVID-19, the largest taxpayers were able to continue meeting their obligations.
There are a few administrative concessions still available for the large market. This includes concessions around employees that are effectively trapped in Australia and whether that establishes Private Equity or not for the entity. There are also concessions still available around central management and control for similar reasons. The ATO is currently reviewing and considering extending these concessions, but no decision has yet been made on this.
General update
The ATO will ensure that requests for further information (RFIs) are not being issued over Christmas, or with due dates in the Christmas period to give both ATO staff and taxpayers a much needed break.
The ATO will look to see if flexibility is available for taxpayers with lodgments due in January.
PGI is leading a number of key measures such as the patent box regime and the effective life of intangibles. This will involve a large amount of work to commence implementation by 1 July 2022.
Multinational taxation will continue to be a focus in the future. It is anticipated that there will continue to be a focus on tax performance on large businesses.
PGI’s commitment to the Annual Compliance Arrangement (ACA) Program
In recent months, there have been questions and comments from banks in relation to what things are going to look like in the future and the role of the ACA and Pre-lodgment Compliance Review (PCR) processes. The ATO is still committed to those programs of work and will continue to move the ATO’s engagement with taxpayers in the banking and finance and other markets as close to real-time as possible.
The Monitoring and Maintenance (M&M) phase following a high assurance Tax Assurance Report is supposed to have tangible resource differences for both taxpayers and the ATO. ACA taxpayers, however may have a higher level of engagement under the M&M phase compared to other taxpayers. The ATO is committed to staying current with taxpayers to get certainty over new and significant transactions.
In terms of transactions, the ATO is still committed to reviewing them in real-time and will consider ways to provide practical certainty before the transaction is implemented. On this, the ATO noted that there has been a significant number of Merger & Acquisition (M&A) transactions in the last few months where taxpayers have approached the ATO for early engagement through ruling request. The ATO notes that it is beneficial to have discussions in the initial stages of the transaction rather than conducting a post-implementation review, as past experience has shown that post-implementation review has led to more disputes.
In response, the Australian Banking Association (ABA) noted:
- The ABA questioned whether ATO resourcing on the ATO will remain static, with no shift out to emerging risk areas.
- There has been some recent M&A activity, where banks have taken strategic interest in some emerging FinTech's and other technology companies. This will come to a natural end when banks have bought and sold what they can. The banking industry is quite mature – from a risk perspective, banks will continue to be busy but with repeatable types of work.
- The ABA considers that real-time engagement with the ATO is important and suggested that this commitment to real-time engagement by both the banks and the ATO can be formalised within the ACA or the assurance programs. For example, a formal ACA relationship framework that provides a guideline on how the ATO and the bank should behave with respect to real-time decision-making.
The ATO responded with the following:
- With respect to ATO resourcing on the financial services industry – the ATO has a developed strategy, with no significant shifts anticipated in relation to income tax. There will be further work for GST, but this will be on elements already discussed with the banks. While there are other industries (for example, commerce, oil and gas) that will become very topical, the ATO is committed to its plan for the financial services industry to continue to produce good results.
- With respect to M&A activities, the ATO noted that FinTech companies are generally start-ups in the private space before they grow bigger and go public. They tend to not turn a profit until they reach a scale to make profit. The ATO does place consideration in seeing what companies emerge from the Medium & Emerging market and develop an appropriate strategy on how to engage with these taxpayers.
- As the ATO moves through the JT Program, which has required heavy resourcing, the consideration is to free up some resources to provide businesses space to conduct other work. The ATO will focus on making sure the most value is obtained from its efforts in the M&M years. The Refresh year is designed to be a ‘top-up’ and not a complete redo of the work already completed under the JT Program. It is necessary for the ATO, during the Refresh year, to be able to reinforce the results the ATO assured previously.
- In relation to real-time engagement, the ATO considers that the timing of disclosures by the banks as critical. Where disclosures occur after the decisions have been made and transaction details are locked in, there is less scope for taxpayers and the ATO to work together to avoid disputes.
- Real-time engagement is driven by when the taxpayer engaged with the ATO and the foundation of trust between the taxpayer and the ATO. When the ATO is giving an indication of comfort or confidence over a particular transaction, the ATO is reliant on trusting that a true voluntary disclosure has been made. The ATO noted that in the past, some taxpayers have outlined the transaction to the ATO, only for the ATO to find after the fact that the transaction implemented was different to the one initially described.
- There may be scope to outline ATO obligations to commit to endeavour to provide practical certainty within taxpayer timeframes, although there will have to be limits on what the ATO can provide with respect to practical certainty. This can be done as a pilot for some ACA taxpayers before formal inclusion in ACAs across the board.
- The ATO is currently reviewing the ACA template more broadly and will work with the banks on what ACAs should look like going forward in light of the aim to providing meaningful results closer to real-time.
Topics for discussion and feedback from industry
Justified trust – Top 100 and Top 1,000 programs
The ATO made the following comments.
General update on the programs for the banking industry.
- The ATO is currently putting together a document to issue to the ABA and to the banks, setting out the expectations on getting to high assurance for Transfer Pricing (TP) and Branch Attribution over the next two months. The document will aim to address problems identified historically and mixed messages that taxpayers have received over the years.
- The approach is outlined in the following four steps:
- Step 1 – Build a comprehensive factual picture of the taxpayer’s cross-border and branch dealings and group into categories of transactions.
- Step 2 – Evidence and obtain TP documentation across all the banks cross border and branch dealings. Ensure they clearly document the deals covered, the methodology and approach to benchmarking. The ATO has a good picture of Steps 1 and 2 from what was done during the initial JT reviews.
- Step 3 – Assess the functional analysis which may involve the ATO undertaking targeted functional interviews / RFIs etcetera.
- Step 4 – Sampling and testing pricing/apportionment methodologies or mark-ups. The sample will focus on risk and materiality, as well as getting coverage across all transaction types.
- This approach is part of the planning for the next Refresh year, where the objective is to have high assurance on these topic areas for the big banks. While there may be some areas that the banks will need to review, the ATO considers that these are not major blockers for the banks to obtain high assurance for TP and Branch Attribution.
- This will be a revision to the approach taken as opposed to conducting more work and using more resources for TP and Branch Attribution.
- The ATO is aware that some banks have already gone and done some work on TP and welcomes discussion to make sure they are moving in the right directions.
ACA disclosures framework update for GST
- A comprehensive update was provided at the last Working Group meeting.
New and emerging issues in banking and finance
The ABA presented on the following.
Update on the current economic outlook for the banking industry in Australia in light of the COVID-19 pandemic.
- In relation to national income, there was a large contraction with COVID-19 in 2020 followed by a huge expansion.
- Over the long term, it can be seen that national income has steadily increased and is nearly back on trend after the dip in 2020.
- It is considered that government spending and support payments during COVID-19 has made a significant contribution to national income.
- Additionally, iron ore has made a significant contribution throughout 2020. Whilst there has been a slight increase in the volume of exports over the past five years, the driver behind its contribution to national income has been a big increase in the cost per tonne, thereby bringing in more income.
- Government predicts that iron ore exports will increase over the coming years, but with a large decrease in price. However, it is anticipated that this will be offset by the opening up of the economy in general, buoying internal economic growth, tourism etcetera.
- There was a huge temporary increase in unemployment during 2020, which came down quickly. This is likely due to government policy, that is, JobKeeper/JobSeeker.
- There is also an uptick in underemployment through the 2021 lockdown (where a person is employed but are employed in a lower capacity than desired. For example, a casual worker employed for 10 hours a week, even though they can work for 20 hours a week.
- The concern for the banking sector is housing prices and affordability. Recently, The Australian Prudential Regulation Authority has increased the serviceability buffer when a person is assessed for a home loan – a serviceability buffer is applied to whatever interest rate a bank gives to an applicant. Previously, for a 3% home loan, banks will have to assess whether the individual can pay the same loan if the interest rate went up to 5.5% With the new serviceability buffer, banks will need to assess whether the individual can pay at 6%. This is to put a dampener on concerns as to whether households can pay in a non-low interest rate environment.
- Despite increase in housing prices, there is no matching of increase in household debt to income. Real disposable income has also increased, with a sharp increase in 2020 likely due to government support payments as well as access to superannuation. There has also been a large increase in savings rate, but it is anticipated that this will fall back to pre-2020 levels.
- Consumer confidence has returned after 2020, with banks anticipating increase in retail spending after the current lockdown.
- Business confidence however is still low and there will continue to be hesitancy by small businesses until they start to experience consumer interaction – this will impact on business lending going forward.
- Deposits for households indicate that people have not had to start dipping into their savings as yet.
- In 2020, there was a large increase in loan deferrals. This has not been replicated this year. However, there may be certain businesses which may not be as competitive, when coming out of lockdown and back into a more normal economic cycle, will experience further deferrals as they try to keep afloat.
In response, the ATO noted:
- This resonates with the ATO data sources.
- The ATO has seen significant growth in debt books over the period – taxpayers are still paying their taxes, but not necessarily by their due date. As concessions start winding down, the ATO will need to carefully consider how to best manage this.
General commentary on FinTech’s impact on banking
- Digital identity – legislative regime to allow banks to create digital IDs for customers is anticipated to be passed by government in late October.
- Electronic payments – Australia has one of the world’s best payment systems (NPP and BPAY). However, new technologies such Buy-Now-Pay-Later and Apple Pay do not contribute to the existing infrastructure, a concern is how to ensure they pay their fair share such that Australia’s payment systems are fit for future purpose.
- Cryptocurrency – banks do not deal with cryptocurrency exchanges, and it is not commercially viable for them to do so when AUSTRAC levies $1.3 billion fines and sanctions.
- Consumer data rights – new rules allow FinTech's to share small business data with subcontractors, which are generally shared via email, which is not a secure environment. There is an increased risk for the ATO that tax data is being passed around without security.
- The ABA will continue to discuss FinTech issues at the next Working Group meeting.
Other business
The Chairperson thanked attendees and drew the meeting to a close.
Attendees
Organisation |
Attendees |
|---|---|
ATO |
Bill Neskovski (Chair), Public Groups and International |
ATO |
Adrian Mow, Public Groups and International |
ATO |
Anna-Maria Stephens, Tax Council Network |
ATO |
David White, Tax Counsel Network |
ATO |
James Campbell, Public Groups and International |
ATO |
Katherine Leung, Public Groups and International |
ATO |
Michelle Sams, Public Groups and International |
ATO |
Philemon Daniel, Public Groups and International |
ATO |
Rebecca Saint, Public Groups and International |
ATO |
Virginia Gogan, Public Groups and International |
ATO |
Yan Diu (Secretariat), Public Groups and International |
ANZ |
Anthony Fitzgerald |
Australian Banking Association |
Adrian O'Shaughnessy |
Australian Banking Association |
Jordan Muskitta |
Australian Banking Association |
Michelle Jakubauskas |
Australian Banking Association |
Prashant Ramkuman |
Bank of Queensland |
Michael Hellier |
Bendigo and Adelaide Bank |
Andrew Wright |
Bendigo and Adelaide Bank |
Benjamin Edwards |
Citi |
John Foster |
Commonwealth Bank of Australia |
George Spathis |
Commonwealth Bank of Australia |
Jeff Barcham |
HSBC |
Jeff Tan |
Macquarie Bank |
Ambrose Leung |
National Australia Bank |
Mark Killer |
National Australia Bank |
Stephen Southon |
Rabobank |
Anthony Lo Russo |
Suncorp |
Jay Treemer |
Suncorp |
Kate Boyd |
Suncorp |
Leah Colley |