Australian Banking Association Steering Group key messages 22 May 2024

Welcome and introductions

The purpose of the forum is focused on industry wide issues that are strategic in nature and not necessarily covering specific tax issues which is covered in the quarterly working group meeting.

Deputy Commissioner Fiona Knight was welcomed to the group.

Deputy Commissioner's intro and background

The Australian Taxation Office (ATO) have 2 Deputy Commissioners (DC) leading Public Groups (PG). DC Fiona Knight in Engagement and Assurance, which Australian Banking Association (ABA) members will engage with more on an individual case basis and DC Rebecca Saint in the strategy of PG. Generally, the ABA as an industry group will engage with Rebecca Saint on wider matters.

Fiona Knight provided a brief background of her experience prior to joining 6 months ago. Some specific observations she noted since joining are:

• the breadth and amount of work was surprising
• engagement has shifted from risk / audit to a more forward planning engagement, with a focus on the relationship with taxpayers and large corporates (corporate partnership)
• an increase in the types of work in relation to Justified Trust (JT).

ATO and PG changes

Commissioner of Taxation Rob Heferen commenced in March 2024. He prides himself being a career public servant and is committed to delivering on government policy. He is constantly observing, learning and listening. The Commissioner has visited various ATO sites around the country and held meetings with his SES to understand the work portfolio.

The Commissioner has been impressed by the various presentations regarding Client Engagement and PG. He supports the JT program and is mindful of the funding for Client Engagement by the Tax Avoidance Taskforce (TAT). He anticipates no big changes for the ATO at this stage.

He has commenced engagement with various stewardship groups such as the Large Business Stewardship Group (LBSG) and aims to attend meetings in person where possible. He is interested in hearing people’s thoughts on how the ATO is performing, and where he can make a difference. He has held different roles around law reform, new measures and values deep industry and technical knowledge to ensure interactions with the ATO are meaningful.

The ABA noted their ongoing positive relationship with the ATO and acknowledged our expertise. Whilst not every issue is agreed upon, the industry finds comfort that the people they interact with understand the commercial aspect of transactions.

Plans and focus areas

Justified Trust

The JT program makes up a large part of work in PG. Assistant Commissioner Megan Croaker attended the ABA Working Group meeting in March to discuss changes to the Top 1,000 program, in particular the new differentiated approach, now published on ato.gov.au

Consultation has commenced on changes to the Top 100 program, noting that many taxpayers have obtained a high assurance rating. Consultation has primarily occurred with members of the LBSG and feedback received that the changes are moving in the right direction.

The ATO is seeking to improve the Top 100 program, focusing on Monitor and Maintenance years, as well as adopting light touch approaches where appropriate.

An emphasis is on continual real-time disclosures on transactions and catching up on prior year reviews to bring it in line with real-time engagement. It was noted that for the banks in particular, disclosures are already being managed in real time. The focus therefore regarding the Banking and Finance (B&F) taxpayers is to get real time of the returns, that is Taxpayer Assurance Reports, and completing the post lodgment review within a reasonable time.

Program level changes the Top 100 program is looking at will provide the B&F strategy area capacity to work with ABA members to tailor the approach with individual taxpayers.

At a previous ABA meeting the topic of how taxpayers could achieve high assurance was discussed. The ABA brought attention to the beneficial nature in co-designing and partaking in an industry-specific consultation on this issue to ensure the ATO obtains sufficient information for assurance whilst ensuring the resource burden on the banks is reasonable.

Audit program

Topics and risk areas being seen within the audit program include:

• transfer pricing (approximately 70% of audits have some transfer pricing element)
• disposals
• restructures
• capital gains tax (CGT)
• Part IVA.

The ATO continue to see good real-time interactions with individual banks in this regard. The ABA noted the relationship with the ATO has worked well over the last 5 years where members have experienced real-time engagement on several important issues.

Advice and guidance

The ATO is cognisant that banks often use Advice and Guidance products and recognise the appetite for certainty in the industry.

Specific tax issues

The hybrid mismatch rules are an ATO focus, and we acknowledge that the hybrid mismatch rules are challenging, as the banks depend heavily on the ability to obtain information from overseas operations, while keeping up to date on tax rules in those countries and understanding how industries are impacted differently. The ATO presently has no specific areas of concern; however, balance is required in finding comfort in the level of evidence required to provide assurance. The ATO noted additional challenges for inbound banks, in particular foreign banks around Part IIIB of the Income Tax Assessment Act (ITAA) 1936, and how branch structures and transactions are dealt with under the hybrid mismatch rules.

Intellectual property migration and embedded royalties take up resources in review activity; however, risks associated with these issues are not often seen in the banking industry.

The changes to thin capitalisation and debt deduction creation rules are topical in the organisation. We are currently consulting on Public Advice and Guidance (PAG) priorities around the types of acceptable restructures upon the application of these rules. It is anticipated to be one of the biggest changes to corporate taxpayers since consolidation. The rules have some carve outs for authorised deposit-taking institution but there are issues in the broader B&F industry for financial institutions that do not have a banking licence.

Advanced pricing arrangements and MAP

Recently banking Advanced Pricing Arrangements (APAs) have increased significantly, especially bilateral and multilateral APAs. This contrasts with other industries, where the number of APAs has decreased. Australia is committed under the Organisation for Economic Co-operation and Development (OECD) to offer solutions to provide certainty and to resolve or avoid double taxation. Practically, the ATO must manage and prioritise where several applications come in simultaneously.

There are various issues that arise regarding APAs with banks, such as: allocation keys and mark-ups on head office and regional charges, increased interest in the residual profit split methodology for global businesses, and inbound banks and their use of methodologies using risk weighted assets as an allocation method. Regarding the latter issue, the ATO is in the early days of understanding and determining principles in accepting such approaches.

Another common issue relates to regional hubs. There are examples of banks with increasing operations in India requiring greater consideration in relation to what is reasonable pricing for all parties. India is viewed as a jurisdiction for which APAs may be more appropriate as a formal process leads to a better result for all parties. It was noted that the ATO has had different experiences with different jurisdictions.

Various early engagement enquiries have been received from advisers. The ATO continues to encourage members of the ABA to engage with the ATO and discuss issues up front, where they are considering if an APA is appropriate.

Banking and economics

The ABA presented an analysis on economic outlook of Australia focusing on the Australian economy now and where it is forecast to be in 12 to 18 months.

At a high level, the economy significantly slowed down during the December 2023 quarter, primarily due to increasing pressure on the consumer sector resulting in hugely reduced purchasing power and spending. During this time the business and government sectors grew.

Current observations are that labour income is strong, however this has been offset by the effects of inflation. Prices have been slow to fall, and mortgage and interest rates risen. These factors have resulted in a reduction in real purchasing power. There have been increases in immigration during this time, which is observed to have mitigated the onset of a recession.

Tax cuts from 1 July are expected to relieve cost of living pressures for consumers. Budget measures have been announced, and it is anticipated that the Reserve Bank of Australia will cut the cash rate at least once in 2024 and 2025. These will further support household incomes.

Inflation is trending downwards and consumer purchasing power is set to increase, which is likely to result in better economic performance towards the end of the year and into early 2025.

Budget, new policies and impacts

The Labor government has recently delivered its third budget since being elected with the stated purpose of addressing costs of living pressures, tackling fraud and scams, strengthening tax compliance, investing in 'Future Made in Australia' and a desire to strengthen the Government’s fiscal position.

The Budget included the extension of the TAT and funding the ATO to strengthen the system and combat challenges with cyber fraud.

It was noted that for the measures impacting the large market, government has outlined a legislative timeframe that includes consultation to inform the final design.

Two tax related measures were announced as part of the 'Future Made in Australia' renewable energy superpower range of measures to support investment in developing green metals, critical minerals, sustainable fuels and green hydrogen industries. Noting that some features for the tax incentive support for hydrogen and critical minerals have not been announced. The government will further consult on these issues.

Changes to the CGT regime in Division 855 of the ITAA 1997 was announced with the intent of clarifying and broadening the types of assets that are subject to CGT for foreign residents, to improve integrity and certainty for investors. These changes will be managed by the Private Wealth business line and was announced to commence 1 July 2025. Consultation will be held on the implementation details.

The ABA asked if any further details on the foreign investment changes were announced in the Budget. The ATO noted that the Budget announcement referenced changes to be made to reform and renew the foreign investment framework and will be led by Treasury working with the states and territories.

Pillar Two

ATO – Status of implementation

The Global Anti-Base Erosion (GloBE) and Domestic Minimum Tax (DMT) measure was announced as part of the May 2023 Federal Budget and was effective from 1 January 2024 for both the Income Inclusion Rule (IIR) and DMT. The May Federal Budget estimates that revenue generated by the measure will be $160 million in 2025–26 and $210 million in 2026–27.

The ATO has established a dedicated project team to oversee the administrative implementation of Pillar Two.

The ATO has worked closely with Treasury and the Office of Parliamentary Council (OPC) throughout the draft law design process and will continue to support them through to the laws being introduced into parliament. The ATO will continue to progress with the implementation of this measure, including developing the systems required to administer the measure in advance of the first lodgments which are due earliest on 30 June 2026. The ATO are focusing on the systems needed to facilitate the global exchange of the GloBE information return (GIR).

ATO consultation

To date a total of 25 consultations have been undertaken in relation to the administrative aspects of the implementation of global minimum tax and domestic minimum tax with multinational enterprises (MNEs), industry groups, advisors and digital service providers (DSPs). We will be undertaking future consultations in relation to the administration of the GloBE rules and DMT. Information on how to participate will be provided.

Feedback from the market has indicated that there is a wide spectrum of preparedness for MNEs in different markets. Many were waiting for release of Australian legislation before committing any significant resources into preparation. Additionally, MNEs noted that there will be potential technical difficulties in capturing necessary data points, with many requiring system changes to facilitate reporting.

Early consultation sought advice as to what PAG products taxpayers may require for various topics and issues to support them meeting their obligations. Whilst several consultees indicated they were still waiting for legislation, high-level themes around eligibility, safe harbour, definition questions around excluded entities and potential Australian income tax regime interactions with potential application of penalties emerged. The ATO will look to reengage on PAG once the law design process has progressed further.

OECD

Over the last 2 years, the OECD and base erosion and profit sharing (BEPs) Inclusive Framework has released several documents further to the GloBE Rules and commentary including 3 volumes of administrative guidance, a safe harbour and transitional penalty document and the GloBE Information Return.

Additional work is being conducted by the OECD, including the release of administrative guidance dealing with different technical issues, settling on the approach and framework to the peer review process, and finalising important practical aspects such as the GIR EOI framework and XML schema. The XML schema is particularly important to administrator system builds and system solutions for taxpayers.

Status of implementation – Law

The Exposure Draft Legislation package includes the Primary legislation, Subordinate legislation, Explanatory materials and a discussion paper.

The Primary Legislation comprised 3 Bills. The main Bill is the Assessment Bill which contains the liability rules for the IIR, undertaxed profits rule and DMT and rules for determining who is in scope. The primary legislation is expected to be introduced into parliament during the 2024 winter parliamentary sitting. With a winter introduction, you would expect the Bill to be passed later this year. We expect that the subordinate legislation will be tabled in Parliament following enactment of the primary legislation. Of course, this timeline depends on other Government priorities and depends on the Parliament.

The Subordinate Legislation covers the operative parts of the GloBE Rules, being the detailed computation rules.

Treasury also released a consultation paper covering various income tax interactions issues.

In response to the consultation, some issues were raised as potential PAG priority items and the ATO continues to work closely with Treasury during the law design process. It was noted that guidance may be required to address some of the issues raised in consultation.

New Administrative Obligations

The exposure draft indicates that in scope MNEs will need to lodge a GIR, being the standardised document developed by the OECD. In line with the GloBE Rules, the exposure draft allows annual lodgment of the GIR by the Ultimate Parent Entity of the MNE Group (or a Designated Filing Entity) with their local tax administration where there is a qualified competent authority agreement in place. This GIR is then exchanged with other tax authorities based on an agreed dissemination approach. The deadline for filing the GIR is 15 months after the year end (extended to 18 months for the first year). The first GIR will generally need to be filed by 30 June 2026 for 31 December balancers. The ATO will determine system requirements to receive and process the form.

The Exposure Draft also provided that there will be new tax return obligations. This is needed as the GIR is only an informational form and local tax returns in jurisdictions are needed to trigger assessment and collection. The ATO is currently developing domestic tax returns for:

• GloBE, the Australian GloBE Tax Return (AGTR)
• DMT, the Domestic Minimum Tax Return (DMTR).

The deadline for filing the AGTR and DMTR will be aligned with the deadline for filing the GIR – that is, 15 months after year end extended to 18 months for first year in scope. Payment of any GloBE or DMT top-up tax is also aligned to this deadline. Centralised lodgment for domestic returns is allowed based on the exposure draft, such that one filing entity (the Designated Local Entity) can file for all in-scope Australian entities in the MNE Group.

Client Engagement

We are developing our client engagement strategy considering feedback from consultations. We understand the significant compliance burden for in-scope taxpayers and will be seeking to apply transitional relief (including in respect of penalties) in accordance with OECD administrative guidance. There will be a focus on education and awareness initiatives such as targeted communications will be communicated in the lead up to the first lodgment due date.

Targeted GloBE reviews are anticipated on a risk-based approach basis following the receipt of the first lodgments. There are no plans to undertake a JT or assurance approach in this phase of reviews, at least in the initial years.

Next steps

The ATO will continue to work with Treasury and the OPC to finalise the primary and subordinate legislation and continue progressing domestic form design and consultation with DSPs. The ATO is preparing to undertake future consultation on the administration of the proposed measure, likely to be conducted in a focus-group format.

Data rectification strategy

There has been greater reliance on third party data for individuals to streamline the income tax return (ITR) process. Initially, third party data was used to pre-fill Annual Investment Income Report (AIIR) data. The ATO is now utilising third party data to pre-fill ITRs from a range of other sources of data, for example Managed Investment Trusts (MITs) data received from the financial sector.

Occasionally, upon review, third party data providers identify that data reported to the ATO was incorrect and requires adjustments. The historic approach often used often was through a global settlement where the data provider settles an amount to compensate for the loss to the Commonwealth without rectifying the data at the individual tax return level. The ATO has concerns with this approach as it has potential impacts for other obligations across government such as Services Australia child support payments.

The preferred approach is to have the correct data resubmitted so the ATO can amend returns so the individual’s tax position is accurate, and the correct information flows through to other government agencies.

The ATO is looking to review the process and will develop guidance to ensure governance processes for rectifying data reporting errors are robust, and that appropriate information is communicated to customers by the third party. Other aspects will revolve around understanding steps taken to ensure the integrity of the data reported in future.

In terms of next steps, the ATO is looking to test the processes, the content that can be used for communications and setting up points of contact around questions. Generally, the ABA members in attendance will have a relationship manager which they can notify in the interim.

The ATO advised that historically there weren’t any penalties for incorrect reporting in these cases, and generally it is not anticipated. However, if a pattern of behaviour is observed, questions around the third-party reporter’s governance processes will be raised. Emphasis is placed on ensuring the data is correct for individuals. Additionally, while the ATO would prefer to rectify the data to produce better outcomes, they are not completely closed to a global settlement in limited circumstances.

Advice and guidance

In the ABA working group meeting in August 2023, we spoke about a key driver for class rulings and private rulings being the Additional Tier 1 (AT1) capital note issuances and how we had started to identify options to make more efficient to obtain certainty over tax issues associated with these issuances.

We see the tax treatment is now well established, mature and there is consistency on the terms and features among financial institutions in how they raise AT1 capital. We recognise the importance of legally binding certainty to issuers and investors. However, one-to-one guidance can be time consuming and costly for all parties involved.

The option the ATO is most interested in exploring further with the ABA is in the form of one-to-many guidance via a public taxation ruling that describes the essential features of AT1 issuances and the key tax issues upon which certainty is desired. If progressed, the aim would be to remove the need for the one-to-one rulings for each AT1 note issuances. This is an important pre-condition before a business case for a taxation ruling can be prioritised and committed to.

The ATO is proposing consultation where a draft paper will be shared. The ATO will seek feedback on the draft scheme that the ruling could be based on, the tax issues that should be covered in the ruling, as well exploring any practical issues the ABA foresees with implementation, for example in disclosure documents and communication on the transition.

It is anticipated a consultation paper will be shared in the next month and the ATO will arrange a meeting to discuss feedback.

The ABA stated while it sounds like a sensible idea to consider, they are cautious about ensuring the broad range of internal and external stakeholders agree and all necessary issues are covered. Where the public ruling is caveated, members are still likely to request one-to-one rulings as there is no appetite for risk where investor tax issues are involved. However, if the public ruling is sufficiently comprehensive, the ABA is open to further discussions.

The ATO agreed that this path will only be pursued if it provides value for all parties and the ABA commit the resources to be involved to ensure it is fit for purpose if it is ultimately prioritised.