Membership changes
Australian Taxation Office (ATO) Co-chair Amy James-Velagic advised of recent Private Groups Stewardship Group membership changes:
- Michael Croker, Chartered Accountants Australia and New Zealand, will retire as a member effective 1 July 2024.
- James Strong has replaced Daniel McInerny as the Tax Bar Association representative for the remainder of 2024, effective May 2024.
- Meng Lee, Andersen Australia, has resigned as a member effective June 2024.
Action item update
20231121-1 – Members to provide feedback on Top 500 engagements to be incorporated in nationwide internal sessions.
This item is closed.
20240613-1 – ATO to consider issuing communication to raise awareness about how the thin capitalisation amendments may impact private groups.
This item is due as soon as practicably possible.
Environmental scan
2024–25 Budget
The ATO will be responsible for delivering a total of 30 measures, including extensions to the Tax Avoidance Taskforce, Personal Income Tax Compliance program and Shadow Economy Compliance program until 30 June 2028.
Other measures of interest include:
- Strengthening the foreign resident capital gains tax regime (amendments to Division 855)
- Strengthening Tax Compliance – ATO Counter Fraud Strategy
- Strengthening Tax Compliance – extending the ATO’s retention framework (extending the mandatory notification period for retaining business activity statement refunds from 14 to 30 days)
- Future Made in Australia – Making Australia a Renewable Energy Superpower (jointly led with the Department of Industry Science and Resources and the Clean Energy Regulator)
- Royalty Penalty (and withdrawal of Intangibles measure)
- Small Business Support – $20,000 instant asset write-off (extended for a further 12 months to 30 June 2025)
- changes to debts on hold offsetting.
Members asked if there were further details regarding the reporting requirements and the 365-day testing period for the Division 855 changes. The ATO advised Treasury will undertake further consultation on these measures.
Recent litigation
Members discussed recent litigation impacting the private wealth market, including Minerva Financial Group Pty Ltd v Commissioner of Taxation. Members sought clarification on whether the ATO is planning advice or guidance in addition to the Decision impact statement, especially regarding the reach of the decision.
The ATO advised no guidance is planned at this time but invited members to share any potential unrecognised consequences of this decision. The ATO also welcomed members’ advice to provide more practical context and insights to support decision impact statements.
The group also discussed:
- Merchant v Commissioner of Taxation
- BQKD v FC of T
- FC of T v Michael John Hayes Trading Pty Ltd AFT MJH Trading Trust & Ors
- Mylan Australia Holding Pty Ltd v FC of T
- Ierna & Ors v FC of T
Members highlighted the recent number of Part IVA litigations. The ATO noted it is focused on strategic litigation aimed at addressing behaviour and seeking judicial clarification on legislation.
Other matters
Members asked if there has been a change in ATO policy on the collection of debts and general interest charge remissions. The ATO advised it has shifted to focus on positive payment culture and capacity to pay.
Members are experiencing longer response times in engagement products, private rulings and objections, noting a lack of contact by the ATO as to progress. The ATO undertook to provide this feedback to the responsible areas.
Privately owned and wealthy groups
Client experience view of risk and key focus areas for 2024–25
The ATO gave an overview of the frameworks used to understand the system in operation, measure tax performance, and identify current, evolving and emerging risks and potential blind spots across taxpayer populations.
The ATO has estimated and published tax gaps for several years. These estimates provide useful insights into the longer-term operation of the tax and superannuation systems, levels of taxpayer compliance, and focus areas; however, they are a lag indicator measuring historical performance. The ATO complements these insights with a range of other intelligence and data sources to inform understanding of new and emerging risks and potential blind-spots in a timelier way.
The ATO manages risks through a client experience lens, which recognises risks may manifest differently across taxpayer populations due to the nature of the population and their operating environments, and allows the ATO to tailor engagements and strategies to each population.
For each client experience, the ATO has developed a three-tier tolerance framework to help structure the tax risks for that population.
The ATO led discussion on the three-tier tolerance framework used for the privately owned and wealthy groups client experience. The framework helps categorise key risks based on the types of behaviours that might cause a private group’s tax performance to decline, and is a tool for tracking risk ratings, tolerance settings and ATO investment across risks.
Members discussed:
- the purpose and utility of the framework as a tool for the ATO to manage risks
- the importance of acknowledging the efforts that continue to be made by clients to achieve justified trust through their investment in governance and systems
- suggested refinements to the descriptions of risks that the ATO should consider if the framework is to be shared with a wider audience in the future, and the additional context that would be needed in accompanying communications.
Private Wealth Top 500 and Next 5,000 programs
Top 500
The annual Top 500 survey was conducted in April 2024, requesting anonymous feedback from Top 500 clients and their representatives. For the first time this year, advisers had the option to respond on behalf of multiple clients.
Key findings included increased participation in the survey (up by 22%) and overall satisfaction (up by 8%).
Members discussed the predominantly positive survey results and highlighted the importance of confidentiality when providing feedback. Members suggested future surveys could include a broader range of response options beyond 'satisfied', 'neutral' and 'dissatisfied' to capture more detailed feedback. The ATO values and appreciates all feedback.
In 2024–25, the focus for the Top 500 program is to simplify messaging and make the ATO's expectations clear. Part of this will involve reviewing items like the tax assurance report provided to clients at the end of a yearly engagement. The ATO will continue to consult with stakeholders on the best approach and will communicate any changes to the program. Members welcomed the opportunity to be consulted on improvements to the Top 500 program.
Members shared a few instances where ATO responses and response times could have been improved, particularly in relation to individual client experiences.
Next 5,000
There will be updates to the ATO's Next 5,000 web content to highlight the difference between streamlined assurance reviews and risk review processes. The ATO welcomes any feedback on further web guidance required.
Members shared client experience instances relating to next action issues and contact points. The ATO acknowledged these types of instances are not ideal and welcomed continued specific feedback to improve the client experience and better manage processes.
Property and construction
The ATO has previously published web content, including detailed examples on the Legal database, around the tax consequences on the sale of small-scale land subdivision and property development. This is intended to provide guidance to taxpayers who are engaging in, or considering, these activities and may not have sought seek tax advice.
Currently, web content on Tax consequences on sales of small-scale land subdivisions contains general guidance and several examples.
The group discussed the proposed expansion of web content focused on 3 current topical areas:
- properties acquired or held for multiple purposes, including resale for profit
- the circumstances which constitute mere realisation of a capital asset
- carrying on a business of renovating properties, also referred to as ‘property flipping’.
Examples relating to each of these areas were presented at a principle level. These proposed examples were recently presented to the Property and Construction Stakeholder Relationship Forum and changes have been made to reflect members' feedback.
Members were asked to consider the examples and provide insights on whether the adviser and intermediary community will consider them common and topical scenarios for small-scale land subdivisions and developments, and whether the examples will help clients get it right and/or understand when to seek tax advice.
Members shared their insights and observations on small-scale subdivisions, specifically in relation to the proposed examples. Members suggested the proposed examples could be improved by reflecting more of the complexities and variances that may occur in small-scale subdivisions including the GST implications. Members acknowledged the difficulty in striking the right balance between providing practical guidance but also being broad enough to reduce the risk of the examples being misinterpreted. The emphasis is for clients to seek tax advice.
The ATO acknowledged the feedback received through the discussion and previously on other property and construction matters.
Technical issues
Loss carry back tax offset
A member sought clarity as to whether a company could claim a loss carry back tax offset for the period prior to becoming a member of the consolidated group due to franking account limitation. The loss carry back tax offset is limited to the franking account balance at the end of the current year. The member highlighted that the ATO has not expressly stated what it sees as the ‘current year’ and requested the ATO engage on this issue.
Look-through earnouts and 124-M
A private ruling, issued on 13 February 2024, deals (amongst other things) with the interaction between scrip for scrip roll-over and look-through earnouts. Members noted this has been a subject of contention in the market and suggested it would be helpful to get clarity on the ATO's view. The ATO will look into private ruling further and consider if additional support can be provided through a public advice and guidance product.
Section 109U public advice consultation
The ATO is considering developing public advice and guidance on the operation of section 109U and associated provisions in Division 7A of the Income Tax Assessment Act 1936 (ITAA 1936) as it has observed a very small number of contrived arrangements that it considers are not effective at law due to the operation of section 109U and/or Part IVA.
In particular, the ATO is considering the best approach to raise awareness of the contrived arrangements that are considered legally ineffective for tax purposes, as well as assuring clients and their advisers that genuine commercial arrangements will not fall within the purview of section 109U or Part IVA.
The ATO sought member views on arrangements surrounding private companies providing guarantees or security to enable loans or payments to its shareholders (or associates of a shareholder) through other private companies.
Members supported the issuing of public advice and guidance, including around those genuine commercial arrangements where section 109U will not apply. Guidance should clarify when and how section 109U is engaged, including in cases where a public company, or other entity not being a private company, makes the loan which is guaranteed by a private company.
Capital raised for the purpose of funding franked dividends
The ATO discussed the new integrity measure preventing certain distributions funded by capital raising from being frankable distributions, section 207-159 of the Income Tax Assessment Act 1997 (ITAA 1997).
The ATO and members acknowledged there are no specific exceptions or exclusions for private companies for this measure.
The ATO has undertaken consultation across markets to determine the priority issues for ATO public advice and guidance. To date, consultation has highlighted the need for guidance on how the ATO assesses the compliance risk that the measure applies, and in particular what it considers high and low risk in line with the explanatory materials.
Members provided insights into the challenges of applying the provisions. Members would welcome practical guidance highlighting the ATO’s view of high and low risk arrangements, including how the explanatory materials reference to ‘ordinary family or commercial dealings’ will influence the ATO’s view of risk of arrangements in the private market.
Interest limitation (thin capitalisation) and debt deductions creation rules for private groups
The ATO discussed the changes to the thin capitalisation rules and debt deduction creation rules (DDCR) as a result of the Treasury Law Amendment (Making Multinationals Pay Their Fair Share – Integrity and Transparency) Act 2024External Link. Following ATO consultation, the following high priority topics have been prioritised for public advice and guidance:
- The Commissioner of Taxation’s practical compliance approach to restructures in response to the new law, including
- the Commissioner’s application of Part IVA of the ITAA 1936 and/or the DDCR specific anti-avoidance provision in section 820-423D of the ITAA 1997 to certain restructures in response to the new law
- tracing and apportionment issues relating to historical debt arrangements for the purposes of applying the DDCR.
- The Commissioner's view on key aspects of the third-party debt test – including interpretive guidance on key aspects of the third-party debt conditions, for example, ‘minor or insignificant’ in paragraph 820-427A(3)(c).
- The Commissioner’s practical compliance approach to the modified interaction of transfer pricing and the thin capitalisation rules – in particular, to address concerns on applying existing public advice and guidance, for example, Practical Compliance Guideline PCG 2017/4 ATO compliance approach to taxation issues associated with cross-border related party financing arrangements and related transactions.
Members confirmed there is a lack of awareness on these measures and how they apply to privately owned and wealthy groups, especially the DDCR which applies from 1 July 2024. Members encouraged the ATO to issue communications as soon as reasonably practical to create the necessary awareness. Communications should include the fact that Division 7A loans are not excluded from the operation of the invited members to DDCR.
Members also highlighted some practical issues in applying the provisions in this market segment especially the tracing requirements. The ATO will continue to consult with private groups in the development of public advice and guidance covering tracing and apportionment issues.
Attendees
|
Organisation |
Member |
|---|---|
|
ATO |
Amy James-Velagic (Co-Chair), Private Wealth |
|
ATO |
Andrew Watson, Individuals and Intermediaries |
|
ATO |
Jenny Lin, Private Wealth |
|
ATO |
Kasey Macfarlane, Private Wealth |
|
BDO |
Michael Anderson |
|
Chartered Accountants Australia & New Zealand |
Karen Liew |
|
CPA Australia |
Bill Leung |
|
Deloitte Private |
Priyanka Subramanyam |
|
EY |
Michael Gastevich |
|
Findex |
Carlo Di Loreto |
|
Fox Private Group |
Garry Voigt |
|
KPMG |
Belinda Cheesewright |
|
Law Council of Australia |
Tuan Van Le |
|
Oatley Family Group |
Sharon Clark |
|
Pitcher Partners |
Alexis Kokkinos |
|
Tax Bar Association |
James Strong |
|
The Tax Institute |
Jonathan Ortner (Co-Chair) |
Guests
|
Organisation |
Attendee |
|---|---|
|
ATO |
Amanda Priestley, Private Wealth |
|
ATO |
Andrew Fenn, Private Wealth |
|
ATO |
Anthony Pulvirenti, Private Wealth |
|
ATO |
Anthony Siouclis, International Support and Programs |
|
ATO |
Daniel Smith, Private Wealth |
|
ATO |
Glenn Cooper, Private Wealth |
|
ATO |
Glenn Nottingham, Private Wealth |
|
ATO |
Gordon Longhouse, Private Wealth |
|
ATO |
Harjit Singh, Tax Counsel Network |
|
ATO |
James de Clifford, Private Wealth |
|
ATO |
John Rennie, Private Wealth |
|
ATO |
Karen Price, Private Wealth |
|
ATO |
Laura Bagnato, Private Wealth |
|
ATO |
Natasha Kavvadias, Private Wealth |
|
ATO |
Nick Cekulis, Private Wealth |
|
ATO |
Nina Seal, Private Wealth |
|
ATO |
Stephen Dodshon, Public Groups |
|
ATO |
Virginia Gogan, Public Groups |
Apologies
|
Organisation |
Member |
|---|---|
|
ATO |
Louise Clarke (Co-chair), Private Wealth |
|
Chartered Accountants Australia & New Zealand |
Michael Croker |
|
William Buck |
Tim Lyford |