Large Business Stewardship Group key messages 20 March 2024

Co-chair general update

The Australian Taxation Office (ATO) provided an update on current focus areas, including the inquiries into consulting practices and ethical standards, public advice and guidance for the multinational tax integrity packages, justified trust and service delivery for the large market.

Integrity declaration

Members were updated on the amendments to the integrity declaration template. Members thanked the ATO for taking previous feedback on board and raised further points related to:

• head of tax roles
• personal declaration of own tax affairs
• timing of the declaration.

The ATO agreed to work with members on further minor changes specific to heads of tax, with a view to finalising the template as a priority.

Justified trust

The ATO provided an update on the Top 1,000 program following consultation. There will be a recalibration of the entities in the program to ensure the focus is on the largest 1,000 taxpayers from the largest economic groups. There will be a differentiated and tailored approach that leverages from knowledge and assurance already attained.

Members discussed the changes to the program and provided feedback on the guidance shared.

Large business service offerings

The ATO updated members on its ongoing efforts to manage workflows, including additional resourcing and upskilling to ensure sufficient capabilities across work streams. This has led to a decrease across the work items reported. The ATO recognises the complex nature of certain issues that require management, and the large business services team is continuing to provide guidance to the service delivery area.

Compliance risk and emerging issues

The ATO provided an update on varying foreign resident capital gains withholding (FRCGW) rates. Where there is insufficient time for the ATO to consider a request to vary the FRCGW rate, and particularly where the application does not include the supporting information listed on ato.gov.au, the ATO is unlikely to grant the request. Other common issues seen in schemes of arrangement are where the purchaser has not correctly applied the non-portfolio interest test.

Updates on compliance risks and emerging issues previously discussed at the Large Business Stewardship Group (LBSG) included:

• GST and allowances – In recent reviews, the ATO has observed large business employers claiming input tax credits on allowances and payments to employees based on notional expenses, contrary to the long-standing ATO view. Taxpayers are encouraged to proactively review their claims and, where appropriate, seek to amend their past claims prior to being selected for further engagement on this issue.
• Interest withholding tax – The ATO is seeing a spectrum of behaviours where entities are not correctly meeting their obligations relating to interest withholding tax. Less complex issues have been the result of poor procedures or a lack of reasonable care in meeting reporting and payment obligations. The ATO intends to identify opportunities to provide more contemporary guidance to the market on the criteria and evidence needed to demonstrate eligibility for withholding tax exemptions.

The ATO gave an update on recent litigation and activity relevant to the large market. Members discussed taxpayer alerts in relation to investment activities and noted inconsistencies in when the ATO issues a media statement following court decisions.

The ATO noted the feedback and advised that a media release is typically issued when the decision confirms the existing interpretation and application; relates to an area of law that impacts many taxpayers; reinforces the work of the Tax Avoidance Taskforce; or if there is a high degree of public and media interest in the case. Issuing a media release ensures consistency in statements for cases with a high level of media interest. The ATO also publishes Decision Impact Statements to advise the community of the ATO’s view on the implications of all significant or strategic court or tribunal decisions.

Public advice and guidance – consultation

Amendments to the thin capitalisation rules

The ATO is seeking feedback on public advice and guidance topics, prioritisation and form for the new thin capitalisation measures and advised there are 3 themes emerging where guidance is being sought:

• third-party debt test
• debt deduction creation rules
• interaction of transfer pricing provisions with the thin capitalisation rules.

Members raised questions in relation to the expected timing of the ATO’s guidance and were advised guidance is unlikely before the end of the financial year. The ATO will consider what practical guidance can be provided. Members noted the Corporate Tax Association’s submission on the topic which provided the priority list for its members. The submission will be circulated to LBSG members.

Capital management

Consistent feedback received from participants in response to the Consultation paper – Capital management advice and guidance was that the existing capital management public advice and guidance is well known and understood but could benefit from more contemporaneous, commercial and worked examples as applicants often have recourse to the published class rulings and edited versions of private binding rulings. The ATO reviewed advice data on over 300 engagements which will assist in prioritising and improving public advice and guidance in relation to returns of capital.

Capital raised for the purpose of funding franked distributions

The ATO received relatively few written submissions in response to the Consultation paper – Capital raised for the purpose of funding franked distributions released in December 2023. The final submissions were received in mid-March 2024 following a number of requests to extend the original mid-February deadline. The ATO intends to organise discussions with interested parties as part of identifying issues where guidance should be prioritised, to assist entities apply the law to their circumstances.

Royalties and software

The ATO published Draft Taxation Ruling TR 2024/D1 Income tax: royalties - character of payments in respect of software and intellectual property rights in January 2024. The ATO has met with a significant number of consultees and is working through the many written submissions received. Key issues raised during consultation include the interactions with copyright law, double tax agreements and Organisation for Economic Co-operation and Development (OECD) commentary, as well as apportionment and the concept of ‘simple use’.

Members noted there are practical implications for corporate groups that allocate licences to licence software as a service product internally and how the Draft Taxation Ruling may apply to their circumstances. The ATO noted other broader practical guidance relating to apportionment is being considered and welcomed any further feedback or examples.

Promoter penalties

Treasury updated members on the series of reforms after the disclosure of confidential information by PwC. Some amendments have passed, other short-term measures are currently before parliament and longer-term review work is happening at Treasury, the Attorney-General’s Department and the Department of Finance.

Members noted the deterrence aspect of the legislation but questioned whether the quantum of the penalties ($780 million) strikes the right balance. Treasury advised that penalty points are a matter for the court and noted the quoted figure is a maximum amount.

The ATO noted that once the committee process is complete, public advice and guidance to support the measure will be considered. There is some uncertainty around the timing given the amendments are part of a broader suite.

Treasury discussed the High Court decision that found that the imposition of a road user charge on low or no emission vehicles by the State of Victoria is an excise. A working group has been established to work through the issues.

Treasury

Petroleum resource rent tax

The first tranche has passed the House of Representatives and consultation subsequently occurred on a further 2 tranches.

Thin capitalisation

There has been a second round of senate inquiry submissions.

Pillar Two

Treasury is continuing to work closely with the special sub working group established under the digital tax working group. The approach to drafting will be as close to the OECD rules as possible, while also noting areas that require modification against the rules and the supporting practices. Consultation is likely to be released imminently and will be conducted in 2 parts.

Tax treaties

It has been announced that several countries will be added to the list for new and updated tax treaties. Consultation is open for submissions.

Public country-by-country reporting

Consultation has been undertaken on the revised scope for reporting, with more positive feedback received on the aggregation of countries. The revised approach is more aligned with the EU reporting standard. The commencement of the measure has been delayed to 1 July 2024. Submissions are being considered and it is expected the government will introduce legislation into parliament before June.

Corporate residency

Treasury has previously engaged with the Australian Accounting Standards Board and Auditing and Assurance Standards Board (AUASB) on corporate residency related to the tax residency of subsidiary reporting. The issue is more relevant for the AUASB. Treasury will work with the Corporate Tax Association to engage with the AUASB further once the bill has passed parliament.

Board of Taxation

The Board of Taxation provided the following updates:

• The Annual Report 2022–2023 has been released on the Board’s website.
• Andrew Mills and Judy O’Connell have been appointed to the Board.
• A tax transparency session was held in February, key themes raised included
  • the purpose of the tax transparency regime and public expectations
  • the requirement to report under a number of regimes creates a compliance burden and is a significant investment for corporates
  • the narrative provided by corporates is important so that the public and media understand the disclosure of the figures.

Introduction to Commissioner of Taxation

Members met the new Commissioner of Taxation, Rob Heferen and were invited to ask questions following a brief introduction. The Commissioner was asked to provide his thoughts on visions for his role longer term and the three key things to drive change or evolution at the ATO.

Other business

Members enquired about the changes to the Reportable tax position schedule instructions in relation to the Practical Compliance Guideline that was released. The ATO agreed to discuss any concerns directly with the members.

Attendees

Guest attendees

Apologies list