CORPORATE TAX MASTER CLASS Compliance ... - The Tax Institute

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NSW Division 26 October 2010 The Hilton, Sydney

CORPORATE TAX MASTER CLASS Compliance Issues for Corporate Taxpayers Written & presented by: Stuart Hamilton Assistant Commissioner, Large Business Line Australian Taxation Office

© Commonwealth of Australia 2010 Disclaimer: The material and opinions in this paper are those of the author and not those of the Taxation Institute of Australia. The Taxation Institute of Australia did not review the contents of this paper and does not have any view as to its accuracy. The material and opinions in the paper should not be used or treated as professional advice and readers should rely on their own enquiries in making any decisions concerning their own interests.

Stuart Hamilton

Compliance Issues for Corporate Taxpayers

CONTENTS 1

INTRODUCTION .............................................................................................................................. 4

2 HOW THE ATO APPROACHES, ASSESS AND DIFFERENTIATES ITS RESPONSES TO RISK FOR LARGE AND MEDIUM SIZED CORPORATE GROUPS ................................................................. 5 2.1.1 2.2

Risk differentiation .............................................................................................................. 7

Higher tax risk likelihood factors ................................................................................................. 9

2.2.1

Lower likelihood factors....................................................................................................... 9

2.2.2

Higher consequence factors.............................................................................................. 10

2.2.3

Lower consequence factors .............................................................................................. 10

2.3

Issues identified in the compliance program for 2010. .............................................................. 11

2.3.1

Profit shifting ..................................................................................................................... 11

2.3.2

Corporate restructures, mergers and acquisitions.............................................................. 11

2.3.3

Consolidation .................................................................................................................... 12

2.3.4

Capital gains tax and foreign residents (Division 855)........................................................ 12

2.3.5

Revenue and capital losses .............................................................................................. 12

2.3.6

Taxation of financial arrangements (TOFA) (Division 230) ................................................. 13

2.3.7

Stapled groups ................................................................................................................. 13

2.3.8

Research and development claims.................................................................................... 13

2.3.9

Debt buybacks .................................................................................................................. 14

2.3.10

Small business and general business tax break ................................................................ 14

2.3.11

Black-hole expenditure ..................................................................................................... 14

2.3.12

Superannuation funds ....................................................................................................... 14

2.3.13

Leasing arrangement ........................................................................................................ 15

2.3.14

Div 7A............................................................................................................................... 15

2.3.15

Trusts ............................................................................................................................... 15

2.3.16

Phoenix ............................................................................................................................ 15

2.3.17

GST on financial supplies ................................................................................................. 15

2.3.18

GST and international and cross border transactions ........................................................ 16

2.3.19

GST Integrity of business systems – governance reviews ................................................. 16

2.3.20

GST property transactions ................................................................................................ 16

2.3.21

GST out-of-scope supplies/Section 13 Transition Act and refund exploitation .................... 16

© Commonwealth of Australia 2010

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2.3.22 2.4

Compliance Issues for Corporate Taxpayers

Excise and fuel tax credit .................................................................................................. 17

What you can do to reduce the likelihood of an audit and obtain certainty of outcome .............. 17

2.4.1

Where the law is clear ....................................................................................................... 17

2.4.2

Where the law is open to interpretation (contentious) ........................................................ 17

2.4.3

New legislation ................................................................................................................. 18

2.4.4

How the ATO provides advice ........................................................................................... 18

2.4.5

Interpretive Assistance ...................................................................................................... 18

2.4.6

Public rulings .................................................................................................................... 19

2.4.7

Class Rulings .................................................................................................................... 19

2.4.8

Product rulings .................................................................................................................. 19

2.4.9

Private rulings ................................................................................................................... 20

2.4.10

ATO Interpretative Decisions ............................................................................................ 20

2.4.11

Priority ruling process ....................................................................................................... 20

2.4.12

Practical, rather than binding, certainty.............................................................................. 20

2.4.13

Annual Compliance Agreements ....................................................................................... 20

2.4.14

Advanced Pricing Arrangements ....................................................................................... 21

2.4.15

Tax Issues Entry System .................................................................................................. 21

2.5

Mutual expectations – co-operative compliance ....................................................................... 22

2.5.1

Rulings ............................................................................................................................. 22

2.5.2

Indicative Advice ............................................................................................................... 22

2.5.3

Mutual expectations during compliance activities............................................................... 23

2.5.4

Information gathering ........................................................................................................ 24

2.5.5

Informal approaches ......................................................................................................... 25

2.5.6

Formal approaches ........................................................................................................... 25

2.5.7

Consultation, collaboration and co-design ......................................................................... 26

© Commonwealth of Australia 2010

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Compliance Issues for Corporate Taxpayers

As outlined in the flyer for this session, this paper will focus on four aspects of how the Australian Taxation Office manages compliance risk with its larger corporate taxpayers. These four aspects are: 1. How the ATO approaches, assess and differentiates its responses to risk for corporates 2. Issues identified in the compliance program 3. What you can do to reduce the likelihood of an audit and obtain certainty of outcome 4. Co-operative compliance – mutual expectations.

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INTRODUCTION

No informed discussion on tax compliance issues can really take place without considering tax risk management. It is an important part of the context in which compliance issues play out. Over the past decade there has been a growing global interest and emphasis on having robust tax risk management approaches in place – both within tax administrations and within businesses. It is no longer an arcane footnote to a company’s accounts, but something both Commissioners and Board members are expected to take an active interest in setting the tone and thresholds for. 1

I can recall writing the OECD’s first formal paper on revenue risk management in 1997 - a fairly dry and 2 somewhat academic piece at the time. By 2004 there was a growing sophisticated suite of papers from 3 across the OECD members and by 2010 there are approaches, including some co-designed with business, that cover the spectrum of compliance improvement approaches; including governance aspects, 4 5 and some focussed on compliance issues with particular industries and segments . The sophistication and understanding of those compliance improvement approaches has increased markedly and for anyone wanting to track and understand where tax administrations are coming from and heading too, it is worthwhile keeping an eye on the annual communiqués from the Commissioners 6 meeting at the Forum on Tax Administration . I’ve started this paper at this global level because it is increasingly important to understand that tax administration is now effectively global. Each of Australia’s 44 Double Tax Agreements and 25 Tax Information Exchange Agreements allows for information to be exchanged about transactions and arrangements of interest. Reporting requirement changes such as FIN48 also are a pointer to the future. The large global accounting firms have also produced papers on best practices in tax risk management and if you are here reading this paper it is because, hopefully, you have an interest in compliance risk management for your business and how it might be done better.

1

Risk Management - Practice Note, Centre for Tax Policy and Administration, OECD, 1997-amended 2001, http://www.oecd.org/dataoecd/36/0/1908440.pdf 2

Tax Administration Guidance & Information Series, Centre for Tax Policy and Administration, OECD, http://www.oecd.org/dataoecd/2/46/42419552.pdf 3

Managing and Improving Compliance: Recent Developments in Compliance Risk Treatments, Centre for Tax Policy and Administration, OECD, 2009, http://www.oecd.org/dataoecd/36/34/42490764.pdf

4

Building transparent tax compliance by banks, Centre for Tax Policy and Administration, OECD, 2009, http://www.oecd.org/dataoecd/3/43/42827589.pdf 5

Engaging with high net worth individuals (HNWI) on tax compliance, Centre for Tax Policy and Administration, OECD, 2009, http://www.oecd.org/dataoecd/3/44/42827651.pdf 6

FTA Communiqué, Paris, Centre for Tax Policy and Administration, OECD, 2010, http://www.oecd.org/dataoecd/18/25/46026232.pdf (The Istanbul Communiqué)

© Commonwealth of Australia 2010

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HOW THE ATO APPROACHES, ASSESS AND DIFFERENTIATES ITS RESPONSES TO RISK FOR LARGE AND MEDIUM SIZED CORPORATE GROUPS

It is useful to put in context that the ATO is a very large and complex business administering the operation of, and compliance with, tax and superannuation systems of Australia. The scale of this task makes it, in its own right, one of the largest businesses in Australia, with some 22,000 staff, turnover of 7 close to $300 billion and operating expenses of roughly $3 billion . During a typical year the ATO interacts electronically with millions of taxpayers, and deals with over ten thousand ruling requests, over twenty thousand requests for advice, about fifteen thousand objections and disputes, issues over two and a half million letters, makes close to three hundred thousand phone calls and undertakes nearly forty thousand field compliance activities with taxpayers. Within its remit the ATO shapes, designs and builds systems to administer the laws that enact the policies of Government regarding taxation. It manages the registration, processing, collection and transfers of revenues under those laws, provides assurance that compliance with the obligations imposed by the laws it administers is occurring and provides various services to other government agencies. Dealing with compliance issues is an important part of that very large business, but not its sole focus and various competing priorities have to be balanced. The ATO compliance sub plan has over 10,000 staff dealing with the end-to-end risk management of the broad tax obligations of registration, lodging the right forms on time, reporting accurately on those forms, and making payments or transfers of amounts due. The ATO recently released its new strategic statement that highlights five high level strategies that are used to encourage willing participation in Australia’s tax and superannuation systems. These set out that the ATO: •

Seeks to create an environment conducive to high levels of willing participation.



Believes that prevention is better than cure.



Uses risk-based choices to prioritise work.



Discourages people from ignoring their obligations by taking formal action against those who decide not to comply.



Collaborates with the community to design systems that make it easier to comply at minimal cost.

These high level strategies essentially are a practical acknowledgement that for compliance to occur in any regulatory system, taxpayers need to be ‘ready, willing and able’ to comply. That is: •

Ready (they know what the ATO view of compliance is)

>>

Educate



Willing (they have appropriate incentives to comply)

>>

Engage, Encourage & Enforce



Able (they are in a position to be able to comply)

>>

Enable & Empower

So what does this mean at the coal face for someone trying to ascertain whether the transaction they have been asked to advise on is ok to go - or needs to be escalated for further consideration? Leaving aside the simpler, somewhat binary, compliance aspects associated with registration, lodgement and payment, compliance issues for corporate taxpayers broadly arise when the corporate and the ATO come to different views as to the tax outcomes of an arrangement. It is considered contestable. The management of likelihood and consequences of such a difference in views is at the heart of effective tax risk management for both sides. 7

The ATO annual Reports are available at http://www.ato.gov.au/corporate/pathway.asp?pc=001/001/009

© Commonwealth of Australia 2010

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From the ATO perspective, it has a formal process that follows the Risk Management Standard ISO 31000, looking at risk: context, identification, assessment, mitigation; and monitoring. Each of the big 4, and many large taxpayers, also use formal approaches to tax risk management. Figure 1

End to end risk management approach

RISK CONTEXT

RISK > IDENTIFICATION >

INTENT & PRIORITIES

INTENT, STRATEGIES & ASSETS

ANALYSE & EVALUATE RISK

WHAT ARE WE TRYING TO ACHIEVE

CREDIBLE THREATS/ OPPORTUNITIES

CURRENT CONTROL EFFECTIVENESS

RISK ASSESSMENT >

RISK MITIGATION

>

RISK MONITORING

TREAT RISK WHO TO TREAT WITH WHAT DETER, DETECT & DEAL WITH

MONITOR & REVIEW EVALUTE EFFECTIVENESS COMMUNICATE & CONSULT

The ATO has also begun to formally use cause-consequence diagrams, or risk bow-ties, as a tool to assist it in considering the: deter, detect, and deal with ‘controls’ to reduce the likelihood, as well as the consequences, of non compliance. Figure 2 High level compliance risk bowtie (A cause – consequence diagram) Compliance constraint Deter Detect

•Public Rulings •Speeches •Articles •Booklets & Guides

Taxpayers unwilling

Engage & encourage

Why things go wrong

How things •Forums (3 C’s) •Relationship can go Management wrong

Attitude •Taxpayers who don’t want to comply with our view or who don’t take reasonable care to comply with our view

Taxpayers unable Capability •Taxpayers who are unable to comply with our view

Educate – support by

Compliance obligations • Register in the system • LodgeWhat correctgoes forms • Report accurately on them wrong • Pay or make transfers

•Review & Advise

Engage & encourage

•Governance Guides

How you fix •Review & Assist •Review & Adjust things when

Non Compliance The compliance ‘risk’

they do

Review Frequency

Enforcement as deterrent •Media releases •Reminders •Alerts Enable & Empower •Calculators & Forms •Pre-filling forms •Private rulings

Key Taxpayer

Higher Risk Taxpayer

Continuous Monitoring

Continuous Review

Lower Risk Taxpayer

Medium Risk Taxpayer

Periodic Monitoring

Periodic Review

Enforcement as remedy Review Intensity

Knowledge •Taxpayers who don’t know what our view of compliance is

Educate – support by

Risk Consequence

Taxpayers not ready

Deal with

Risk Likelihood

•Audit & Penalise •Investigate & prosecute Enable & Empower We champion •Law changes •System changes

Quantitative Qualitative + find out How do you Intelligence Intelligence Causal aspects

© Commonwealth of Australia 2010

Deterrent Controls

Detection Controls

Deal with Controls

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2.1.1

Compliance Issues for Corporate Taxpayers

Risk differentiation

Using a range of risk filters and other factors (these are listed later in the paper) the ATO profiles all large and medium businesses during the year against the businesses previous results and data from other businesses (both domestic and international). This ‘past and peers’ analysis is then supplemented with intelligence from other external sources such as ASIC, ASX, JITSIC etc. Using this qualitative and quantitative intelligence the ATO assesses and places a taxpayer into one of 8 four broad risk categories within its risk differentiation framework :



Higher risk, (relatively higher likelihood and consequence)



Key Taxpayer, (relatively lower likelihood and higher consequence)



Medium risk, (relatively higher likelihood and lower consequence) and



Lower risk, (relatively lower likelihood and consequence)

for each tax type and then aligns an initial engagement stance with that risk categorisation. It is important to note that the ATO risk rating of a taxpayer does not in any way influence the outcome of a possible risk review – that of course depends on the facts and circumstances found regarding the taxpayers compliance obligations. However the risk rating does influence the initial likelihood, and intensity, of a risk review – who the ATO looks at and why. Figure 3

The risk differentiation framework

The numbers of taxpayers in each category is informed by analysis of the Pareto-like distribution of taxpayers and risk. Relatively few taxpayers, about 2% are considered higher risk, about 8% are considered key taxpayers who account for the majority of income and taxes paid. Roughly 25% of taxpayers are considered medium risk, and the majority, about 65%, are considered relatively lower risk.

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See chapter 7 of the Large Business and Tax Compliance booklet available at: http://www.ato.gov.au/content/downloads/bus33802nat8675062010.pdf

© Commonwealth of Australia 2010

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For higher risk taxpayers the suggested initial engagement stance is a real time/continuous comprehensive risk review. These taxpayers matter a lot and often set the tone for the market. Accordingly the ATO assigns sufficient resources to enable it to identify, review and understand any material transactions that have the potential for tax planning with contentious outcomes so that it can quickly form a view as to their appropriate treatment - ideally before the tax return has been lodged. For key taxpayers the framework suggests a continuous monitoring stance. Most of Australia’s largest businesses fall into this category, they pay most of the taxes and they have significant influence on the tax system. The actions of key taxpayers matter a great deal to the overall health of the tax system. Hence the ATO has a keen interest in their risk management and governance frameworks to mitigate tax compliance risks. Key taxpayers in industries with traditionally higher levels of contention, such as finance and mining, are particularly encouraged to enter into Annual Compliance Arrangements to provide practical certainty and sign-off on tax risks. For medium risk taxpayers the framework suggests a more periodic review stance. From time to time the ATO may involve the business in specific risk reviews, where it follows up matters of concern relating to specific compliance issues. These are generally issues identified in the annual Compliance program. These reviews are likely to be part of a compliance project involving other businesses with similar issues. This approach allows the ATO to more consistently address the issue across the market and reduce compliance costs for the business. Such specific risk reviews are generally shorter in timeframe and less intense in effort than wider ranging comprehensive risk reviews. The majority of businesses, about 60 to 70%, have a lower risk rating. For lower risk taxpayers the framework suggests a periodic monitoring stance. This can involve activities such as targeted information requests about specific issues the ATO has identified in the market, visits and normal ATO internal risk review process of monitoring tax outcomes. If the ATO considers a business to be in this risk category, they are unlikely to be contacted for additional information and are less likely to have significant matters of concern requiring follow-up. It is a risk continuum and the underlying tone of approach thus changes from a service to more of an enforcement orientation as the perception of the relative likelihood of non compliance changes. The frequency and intensity of monitoring of review activity changes from a periodic/leveraged over many taxpayers, to a more intense focussed one as the consequences of potential non compliance changes. Importantly the approach is explained to taxpayers in the co-designed ‘Large business and tax compliance’ booklet which sets out in plain language how the ATO approaches things:



The respective roles of the parties involved



The ATO approach to the market, including the Taxpayers Charter setting out broad rights and obligations



The end-to-end compliance program approach of deterring, detecting, and dealing with compliance risks



The products that enable this such as speeches, media releases, guides, advice, public and private rulings through to risk reviews, audits, investigations and regulatory system changes



Expectations regarding corporate governance and its role in managing tax risks



How both sides can work together to provide certainty to the market



How the ATO differentiates and manage tax compliance risks (Chapter 7 of the booklet)



The approach to managing risk reviews, audits and disputes.

© Commonwealth of Australia 2010

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Compliance Issues for Corporate Taxpayers 9

A similar approach was followed in the design of the booklet for high wealth individuals. The Large business and Tax Compliance booklet is supplemented on an annual basis with the Compliance Program where the ATO sets out, again in relatively plain language, what compliance concerns it has for each market segment. For each of the compliance concerns identified in the Compliance program a risk owner and manager is appointed, who is then responsible for the overall end-to-end management of that risk, ensuring that the ATO has in place appropriate strategies to deal with the compliance constraints encountered. The aim, of course, is to have taxpayers who are ready, willing and able to participate in their tax and superannuation systems. Most are and do. Some of the factors considered in considering a taxpayers risk rating are:

2.2

Higher tax risk likelihood factors

Broadly speaking, higher and medium risk taxpayers might be expected to have some aspects of the following behaviours. No one factor is definitive and informed judgement is required:



Relatively low unexplained effective tax rates compared to industry peers or their past. Reducing tax is often a key driver for them.



A history of tax positions with which the ATO has disagreed with and has considered relatively ‘aggressive’. (i.e. highly contentious.)



Utilised complex tax driven structures and arrangements that appear to make little commercial sense other than to obtain a tax benefit.



Have significant transactions, often with related parties, that appear to lack economic sense or real commercial risk/return.



Relied on non disclosure or limited disclosure of significant, potentially controversial tax positions. (For example seeking rulings only on parts of the transaction without disclosing the whole structure.)



Sought out and used advisors with history of relatively aggressive tax planning.



Used concealment or obfuscation as part of process, playing the audit lottery approach in regard to detection.



Often tax risk is inappropriately factored into decision making (eg. rewarded) with limited objective peer or external advice built into subsequent governance proceedings.



Used ‘game playing’ in negotiations, trickle feeding information (and sometimes misinformation). Non bona-fide behaviours in negotiations - ‘deny, delay, defeat’ activity by the few most extreme.

2.2.1

Lower likelihood factors

Key and lower risk taxpayers might be expected to have more of the following behaviours:



Relatively high effective tax rates over time that accord with expected patterns and trends, peers and past.



Not a significant history of material adjustments relating to aggressive tax planning (though that is not to say that there aren’t bona fide disputes or differences of opinion on the tax outcomes intended by law where the law and its intent is genuinely unclear.)



Business-driven structures and approaches.

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Wealthy and wise: A tax guide for Australia’s wealthiest people @ http://www.ato.gov.au/content/downloads/bus00129961nat71960.pdf

© Commonwealth of Australia 2010

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Significant transactions with related parties are at arms length rates with appropriate supporting documentation and governance.



Upfront full and true disclosure of significant, potentially controversial tax positions via rulings process.



Use of advisors noted for advice that doesn’t push the boundaries of aggressiveness.



They seek the ATO opinion regarding controversial issues and keep it informed of their decisions and actions.



Generally tax risk is an explicit, considered part of corporate governance processes. Due diligence is followed and objective advice sought and appropriately factored in. Prudent tax risk management.



Negotiations, while preserving each party’s rights and interests, are conducted with a bona fide intent of resolving the issues appropriately. All material facts to the issue are disclosed.

2.2.2

Higher consequence factors

Key and higher risk taxpayers might be expected to have one or more of the following features:



Significant potential revenue impact (this may be reflected by relatively high turnover as the ATO know that most adjustments are for less than 10% of turnover and that it is rare for an adjustment to be more than turnover)



Control or influence over a relatively large number of assets (as return on assets is a factor in income)



Occupy perceived positions of trust in the community or in the market



Directly or indirectly influence significant numbers of other taxpayers



Significant linkages and influence regarding advisors and intermediaries

These taxpayers are material leverage points for compliance – the ATO needs to invest in knowing what they are doing now.

2.2.3

Lower consequence factors

Broadly speaking, lower and medium risk taxpayers might be expected to have the following features:



Relatively lower revenue impact per taxpayer



Not in positions of significant trust in the community or market



Relatively lower influence over other taxpayers or advisors and intermediaries

They are, by themselves, not material leverage points in the compliance market (though in total they may be). The ATO tax risk focus turns on the likelihood of existence and potential consequences of material contestable arrangements. If the ATO is not successful in deterring, detecting and dealing with relatively aggressive contestable arrangements in market time then the ‘bar’ of acceptability shifts and more taxpayers will become involved in these riskier transactions. More risk neutral taxpayers will perceive that they have not pushed the boundaries of acceptable behaviour and a reputational backlash against the regulator rather than the regulated can develop. For this reason the ATO has a fairly intense focus on those taxpayers who are perceived to be relatively higher risk and the ATO follows up contestable arrangements from both the supply (advisors) and demand (taxpayer) perspective.

© Commonwealth of Australia 2010

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Compliance Issues for Corporate Taxpayers 10

The ATO issues taxpayer alerts where the Commissioner has concerns, but has not yet formed a formal view, regarding the contestability of an arrangement. The ATO also flags compliance concerns annually 11 in the Compliance Program publication and in associated speeches.

2.3

Issues identified in the compliance program for 2010.

Each year the ATO sets out those areas where there are concerns in its Compliance Program. Some of these concerns are relatively enduring, such as profit shifting in its various guises and opportunistic tax planning regarding CGT events; while others are more sporadic, such as withholding tax compliance, or they can relate to ‘bedding in issues’ of new law, such as TOFA. Some of the issues flagged in the latest Compliance Program are:

2.3.1

Profit shifting

The ATO is concerned about the use of arrangements between Australian and offshore affiliates to shift or shelter profits (and tax) from Australia or losses to Australia including:



restructuring Australian-based operations to shift functions, assets and risks, on a non-arm’s length basis, such as the creation and use of marketing hubs or the sale of intellectual property at nominal prices



paying excessive royalties, interest, guarantee and other fees



Australian-headquartered companies providing services to overseas affiliates for a non-arm’s length consideration



allocating to Australia income and expenses not consistent with the economic activities (functions, assets and risks) used to conduct business here (eg ‘business support payments’)



cross-border financial arbitrage, with a particular focus on debt generators (s23AJ/25-90 arrangements, debt-creating arrangements and foreign tax credit arrangements) and non-commercial hedges and swaps, such as asymmetric swaps



thin capitalisation, with a particular focus on contrived arrangements that place high levels of debt into Australia



inappropriate use of offshore banking units.

To manage these risks the ATO will continue to engage with business and industry and will work with accounting firms and legal counsel to resolve the complex legal issues to provide greater certainty.

2.3.2

Corporate restructures, mergers and acquisitions

The ATO is concerned about arrangements where taxation and economic outcomes are not aligned and are unnecessarily complex. To deter risk and achieve certainty concerning tax outcomes, the ATO encourages businesses and their advisers to engage with us and seek advice on transactions before they occur. The ATO will be reviewing:



10 11

restructures involving complex or novel financial arrangements and/or unnecessary steps to achieve the business needs of the parties

Taxpayer alerts can be found at: http://ato.gov.au/atp/pathway.asp?pc=001/008/001 The Compliance Program is available at: http://www.ato.gov.au/content/downloads/cor00248103_NAT7769.pdf

© Commonwealth of Australia 2010

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treaty-shopping arrangements designed to avoid Australian tax on the disposal of investments acquired in a leveraged buy out by private equity (see draft taxation determinations TD 2009/D17 and TD 2009/D18)



changes to effective ownership or control of businesses or assets where the appropriate taxing point is deferred or avoided



uncommercial arrangements that seek indirect tax benefits, for example see the GST taxpayer alert TA 2010/1 which is about interposing an associated 'financial supply facilitator' to enhance claims for reduced input tax credits for expenses incurred in the course of a company takeover



the effectiveness of integrity measures, including law amendments relating to broader commercial developments in the use of scrip-for-scrip transactions.

2.3.3

Consolidation

The risks here include unintended or inappropriate income tax outcomes where there are complex interactions between the consolidation provisions, other parts of the tax law and external regulatory frameworks. While this is often first seen as a change in the tax cost of assets on entry or exit from consolidated groups, the results can include reductions in capital gains tax and increases in losses or deductions under the capital allowances rules. The ATO will continue to have a significant focus on risks relating to consolidation in the context of its general program of active compliance work on mergers and acquisitions, and other transactions or business activities. Of particular concern are arrangements where the tax outcomes do not appear to reflect the economic substance of the arrangement. The ATO is examining the inclusion of foreign partnerships in consolidated groups that facilitate double dips of interest deductions in two countries. The ATO will exchange this information with the relevant foreign tax authorities where appropriate. TLA (2010 Measures No 1) Act 2010 introduced a range of new measures to clarify certain aspects of the consolidation regime and improve interactions between the consolidation provisions and other parts of the law. The ATO will be providing advice and guidance to further clarify the application of these provisions and ensure appropriate and practical arrangements are in place to support the implementation of the changes. The ATO will actively monitor risks and undertake compliance action where the ATO identify that measures intended to facilitate the operation of the law are being used in ways that go beyond their intent.

2.3.4

Capital gains tax and foreign residents (Division 855)

The ATO is concerned about arrangements which may enable inappropriate access by foreign residents to the exemption provided in Division 855. Areas of concern with Division 855 include timing and valuation issues, as well as structuring around ownership and control. In some cases interactions between Division 855 and other provisions contribute to complexity and uncertainty. The ATO will continue to work with its external consultative partners to identify areas where the ATO can provide further clarity on the operation of the law. The ATO will continue targeted reviews in this area, supported by enhancements to its existing intelligence processes. The ATO will inform the community of arrangements of concern through taxpayer alerts and other communication approaches.

2.3.5

Revenue and capital losses

The ATO is concerned about claims for losses that do not reflect genuine commercial arrangements, lack economic substance or are used and do not meet the continuity-of-ownership test (COT) or the samebusiness test (SBT).

© Commonwealth of Australia 2010

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Compliance Issues for Corporate Taxpayers

With the increase in losses incurred and carried forward during the recent global economic downturn and the removal of foreign loss quarantining there is a heightened compliance risk associated with losses. The ATO will be reviewing higher risk cases to ensure losses are made and used in accordance with the tax law. The following issues are of concern:



non-genuine losses



errors and misclassification



arrangements that inappropriately attribute foreign losses to Australia



incorrect claiming of tax deductions, in particular finance-related claims



non-compliance with the COT and SBT



arrangements that inappropriately apply foreign losses against domestic income.

The ATO will be monitoring behaviour in light of recent law changes allowing optional capital loss rollovers for complying superannuation funds that merge, and eligible managed investment trusts to elect CGT treatment. The ATO will also focus on capital loss risks that may stem from removal of foreign-loss quarantining, capital loss claims by foreign residents not allowable by the application of Division 855 and incorrect recharacterisation of transactions from capital to revenue account.

2.3.6

Taxation of financial arrangements (TOFA) (Division 230)

The primary focus here will be on consultative implementation and education in relation to the new TOFA rules. However the ATO will be examining compliance risks including:



restructuring prior to entry into TOFA



the calculation of the balancing adjustment for those large businesses that have made the transitional election to bring in their existing financial arrangements



the validity of elections made under the TOFA rules



the appropriate application of the tax-timing methods to financial arrangements (in particular the accruals, hedging financial arrangements and reliance on financial reports methods).

2.3.7

Stapled groups

The ATO will be looking at arrangements involving capital raisings undertaken by stapled groups. A stapled group generally includes a unit trust and a company where the respective units and shares are stapled together to form a stapled security issued to investors. In some arrangements, the funds raised are advanced from the unit trust to the company through a debt interest and the returns on that debt interest are used to fund returns to the investors via the trust. Generally, the company claims deductions for the return being paid to the trust under the debt interest. In certain circumstances, specific debt/equity rules may apply. Under these rules the ATO may reclassify the interest issued by the company as an equity interest and consequently deny these payments as deductions.

2.3.8

Research and development claims

The ATO considers that some businesses appear to be incorrectly classifying normal business activities as research and development (R&D) and wrongly allocating related expenditure to R&D activities. The ATO will be reviewing a number of R&D deductions to test compliance with specific R&D rules.

© Commonwealth of Australia 2010

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2.3.9

Compliance Issues for Corporate Taxpayers

Debt buybacks

The ATO has noted an increase in the use of debt buyback arrangements during the global financial crisis and will be reviewing a number of transactions to ensure compliance.

2.3.10 Small business and general business tax break Given the magnitude of the government’s stimulus package, the ATO will be reviewing a number of claims to check for compliance issues regarding:



updating contracts to shift transactions into the relevant investment time period



changing dates on contracts to meet the requirements for the tax break deduction



assets inappropriately classified as ‘new’



inappropriately using a ‘start to construct’ date to fit into the relevant investment period



claiming a deduction on assets such as aircraft and ships used principally outside Australia



inappropriate financing arrangements to exploit the concession.

2.3.11 Black-hole expenditure The ATO has noted compliance risks regarding:



claiming expenditure that should be included in the cost base of assets as black-hole expenditure, and therefore deducted over five years



claiming expenditure upfront as a revenue deduction when it should be claimed as black-hole expenditure over five years.

The ATO will be reviewing a number of taxpayers’ claims, including those who have:



been involved in mergers and acquisitions (successful and failed)



conducted capital raisings (successful and failed)



have inconsistent claims in their tax returns for black-hole expenditure



have large claims in their tax returns for black-hole expenditure.

2.3.12 Superannuation funds Administration of a number of key aspects of the superannuation system relies on timely and accurate reporting by funds of contributions they have received and other information. The ATO will continue to review large fund compliance with their income tax obligations including ensuring that the investment and contribution income of large funds is taxed correctly. Other risk areas to be examined include:



fund mergers in light of the new CGT Loss Rollover Relief measures



exempt Current Pension Income (ECPI) claims



tax risks associated with foreign investment by superannuation funds



use of trust structures and the tax treatment of distributions



tax risks specific to Pooled Superannuation Trusts (PST)



industry practice regarding the Foreign Income Tax Offset (FITO) regime.

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The ATO will also continue to develop Superannuation Survey Agreements with large funds to monitor, explain and anticipate revenue trends. The analysis of tax payments made by large funds assists us in identifying unintended consequences arising from new measures. The ATO will also continue to review large fund compliance with their PAYGI tax instalments obligations.

2.3.13 Leasing arrangement Since the publication of the 2010/11 Compliance program the ATO has become aware of a relatively aggressive revaluation and leasing arrangement by a small number of large taxpayers and will be addressing this matter through enforcement activity.

2.3.14 Div 7A We are still see issues regarding the Div 7A in the corporate market, predominantly in the small and medium market as you would expect.

2.3.15 Trusts There will be a focus on improving the completeness and accuracy of reporting by trustees.

2.3.16 Phoenix There will be a continued focus of tax evasion via phoenix arrangements. GST aspects

2.3.17 GST on financial supplies Large market businesses making financial supplies face some uncertainty in determining their entitlement to claim GST credits. This uncertainty leads to the potential for over-claiming GST credits through:



failure to appropriately identify and link acquisitions (solely or partly) to the making of financial supplies



application of inappropriate apportionment methods.

The capacity for over-claiming GST credits is commonly found in large market businesses engaging in or operating:



capital-raising activities (for example, initial public offerings, mergers and acquisitions, rights issues and share buy-backs)



managed funds or superannuation funds



hire-purchase transactions



credit card issuing activities



securitisation arrangements.

ATO risk-management strategies this year will place a greater emphasis on consultation and active engagement with businesses, industry representatives and advisors. The ATO will also have a greater focus on education activities particularly in providing guidance to businesses engaged in capital raising activities. This will allow it to concentrate its efforts on resolving areas of uncertainty and targeting of active compliance resources towards those areas of high risk.

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2.3.18 GST and international and cross border transactions It can be difficult and confusing for large businesses to decide on the correct treatment of international and cross-border transactions such as taxable importations and taxation of services to non residents. The ATO will work with Treasury on Board of Taxation recommendations and law changes relating to international freight transport. From this work, the ATO will educate and help businesses and industries affected by any GST law changes regarding international freight transport and the cross border review.

2.3.19 GST Integrity of business systems – governance reviews Businesses may report incorrect amounts of tax if their systems for capturing and recording taxation information fail. Businesses going through change are most at risk of incorrectly reporting their tax information. For example, businesses experiencing rapid growth, restructure, mergers or de-mergers, installing new accounting software or changing accounting staff. Other common causes include:



failure of accounting systems



incorrect interpretation of taxation legislation



misclassification of transactions.

The ATO is examining internal control and systems in respect of mining joint ventures, and merger and acquisition transactions. The ATO will use our relationship manager programs to interact with businesses in respect of GST specific manifestations of risk in the financial services market around the correct GST treatment of:



mortgagee-in-possession sales



processing commission payments in the mortgage, insurance and asset finance industries.

2.3.20 GST property transactions The ATO is focusing on incorrect reporting of property transactions as well as retirement villages, unreported sales and the application of the margin scheme. The ATO is using a range of compliance strategies. These include engaging taxpayers and discussing risks the ATO are seeing so that they can voluntarily advise us of errors or omissions. The ATO will conduct risk reviews and audits to ensure compliance by taxpayers the ATO see as posing a high risk. The ATO will pay particular attention to non-complying margin scheme valuations and have issued a new determination on this matter. To ensure good compliance, the ATO will work with retirement villages to resolve interpretational issues, particularly relating to correct apportionment of GST credits. The ATO will be encouraging those outside the property sector and undertaking occasional large transactions to adopt robust governance approaches to secure correct classification, capturing and reporting of such transactions.

2.3.21 GST out-of-scope supplies/Section 13 Transition Act and refund exploitation Some taxpayers and advisers have sought to classify transactions historically treated as a taxable supply as ‘no supply’ or ‘out-of-scope’ of the GST legislation and hence GST-free. Last year, the ATO received a large number of notifications from businesses advising their intention to seek refunds of GST they had paid. Such claims are appropriate only if they meet the eligibility requirements. While the law in respect of the four-year time limits and restriction of refunds have been amended to prevent windfall gains occurring, there is an ongoing risk for transactions prior to 1 July 2008. The ATO will be reviewing the eligibility of these claims. Actions will include continued liaison with taxpayers and advisers, verification activities including audits and possible litigation initiated by taxpayers.

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2.3.22 Excise and fuel tax credit The major focus this year will be on supporting large market clients, providing clarity in areas of confusion and targeting potential non-compliance. In particular the ATO will be looking at the impact on compliance where large entities are subject to mergers / acquisitions / demergers with an emphasis on the residual effect on new systems and staffing utilising a system based auditing methodology. The ATO will potentially review a number of clients involved in the development of major resource projects. Finally the ATO will continue to focus on ensuring that fuel tax credits are claimed by the correct entity when reviewing contractor arrangements involving the provision of fuel. --While I’ve mainly touched on the compliance issues identified in the large market chapter of the compliance program in this paper I’d encourage a read of the entire document to get a full appreciation of the context and span of the ATO compliance concerns that may be relevant to your business.

2.4

What you can do to reduce the likelihood of an audit and obtain certainty of outcome

The ATO seeks to apply tax law to the particular facts of a case in regard to the words of the Act and the history and objects of the relevant provisions - in legal terms this is referred to as a ‘purposive’ approach. The key objective in applying the rule of law is to ensure that the correct amount of tax is paid – no more 12 and no less . A tax administration that operates in this manner, according to the rule of law, promotes certainty for taxpayers and builds greater community confidence in the tax system. To administer the law effectively both parties need to engage in constructive dialogue where the law is unclear, or has an unintended outcome, so that the equally wrong perceptions of ‘U-turns’ and ‘all big business avoiding taxes’ are headed off. By seeking ATO advice when transactions or arrangements that may be contentious are first being considered the taxpayer can factor ATO stated positions on matters into their strategic planning and manage tax risks with much greater certainty, thus reducing the likelihood of an audit and adjustment.

2.4.1

Where the law is clear

The ATO has a duty to apply the law, even if it produces inconvenient outcomes for revenue or for taxpayers. However where the law may give rise to unintended consequences, anomalies, or significant compliance costs inconsistent with the policy intent, the ATO has responsibility to advise the Government (usually through Treasury). The ATO will do this regardless of whether the existing law favours taxpayers or the revenue, thus giving the Government the opportunity to consider legislative change.

2.4.2

Where the law is open to interpretation (contentious)

There are times when, regardless of the quality of the legislative drafting, the words in the Act are ambiguous or open to be interpreted in a number of ways. In these cases, the ATO approach is to adopt the interpretation that best promotes the policy intent.

12

“Did you know? Not a penny more.” Speech by the Commissioner Michael D’Ascenzo to Deloitte Touche Tohmatsu, Tax Perspectives Breakfast, Sydney, 30 June 2009, http://ato.gov.au/corporate/content.asp?doc=/content/00199772.htm

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If more than one of the available interpretations promotes the policy intent, the ATO will generally favour the interpretation that reduces taxpayer compliance costs. In taking this approach, the ATO acknowledges that alternative interpretations are often reasonably arguable.

2.4.3

New legislation

The ATO are committed to ensuring that new laws are implemented efficiently and effectively through strong partnerships and in consultation with professional, representative and industry bodies as well as the Treasury – who play a central role in developing new tax policy and legislation. In relation to new tax law, the ATO aims to work with all stakeholders to develop administrative systems and information products to ensure the delivery of legislative intent and to minimise compliance costs. A heavy reliance on public interpretative products (for example, public rulings and determinations) rather than on the law itself can introduce an inherent lag between the introduction of legislation and the certainty desired by the community. Rulings can only interpret existing law; the process is not designed to address gaps or amend deficiencies in the legislation. The ATO do not, as a general rule, issue interpretative products where similar examples or guidance is provided in explanatory memoranda, second reading speeches and Government press releases, or in the legislation itself. However, the ATO generally provides easy access to them through its website or guides.

2.4.4

How the ATO provides advice

To provide certainty to large business taxpayers, the ATO provide a number of advice services. To support the process the ATO will often seek to have an initial discussion with a taxpayer regarding the issue. The ATO encourages taxpayers to have ruling pre lodgment discussions where these will add value. At the discussion taxpayers have an opportunity to provide the ATO with an overview of the proposed transaction (including any high level tax analysis and opinions). Pre-lodgment discussions are intended to assist taxpayers to meet their pressing commercial timeframes. They assist in clarifying technical issues, identifying and explaining the issue and information requirements, case planning and managing expectations. Taxpayers should be ready to explain the transaction and the technical issues of concern at pre-ruling discussions. Even if there is not enough information available to proceed with a pre-ruling discussion, early notification of a pending ruling helps the ATO to plan ahead so that the right people are available once the taxpayer is ready to proceed. The ATO also has a better opportunity to understand the commercial context of the business and of the proposed arrangements. Pre-lodgment discussions allow the ATO to help determine what should be included in the application, including information the ATO will need and issues that the taxpayer should address in the application. Part IV(A) rulings When a taxpayer requests a private ruling on the application of Part IV(A) anti-avoidance provisions this require a thorough examination of the facts and purpose of each step in the overall scheme and accordingly this may delay the issuing of the ruling or result in a qualified ruling.

2.4.5

Interpretive Assistance

The provision of written advice is a structural feature of Australia’s self-assessment system of taxation that allows for greater certainty for taxpayers.

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Providing written advice on how the tax laws apply is central to the ATO role in administering the tax system, noting that a ruling is the Commissioner’s opinion on the interpretation of the law and is binding on the Commissioner, but not on the taxpayer. By seeking advice early, taxpayers can gain clarity on the ATO position and factor it into strategic decisions about whether or not to proceed with an arrangement. The ATO does conduct some compliance activities to ensure that arrangements for which rulings are obtained are implemented in materially the same manner as was set out in the ruling.

2.4.6

Public rulings

A public ruling is a published statement that sets out the ATO view of how the law applies in circumstances that are common to many taxpayers. If a ruling applies to a taxpayer circumstances and they follow the advice it contains, the ATO is legally bound by it. The ATO provides two special types of public ruling:



A product ruling is advice for all taxpayers about a particular scheme (for example, an investment scheme).



A class ruling is advice for a particular class of taxpayers about a particular scheme (for example, a ruling for employees about a retirement scheme provided for them by their employer).

Public rulings generally deal with priority technical issues that require clarification. They enable the community to better understand the Commissioners view of the law and, in this way, play an important role in improving voluntary compliance in a self-assessment environment. Public rulings are issued as either Tax Rulings (TRs) or Tax Determinations (TDs). A TD is a short form of a ruling where there is a single point issue to be determined and the answer can be succinctly explained. A ruling deals with situations requiring comprehensive analysis and explanation of the operation of the law. The types of matters suitable to be covered by public rulings are identified in consultation with taxpayers through their representative bodies.

2.4.7

Class Rulings

Class rulings are a specific purpose form of public rulings. They were introduced to enable the Commissioner to provide legally binding advice in response to a request from an entity seeking advice about the application of a tax law to a specific class of persons in relation to a particular arrangement. The purpose of a class ruling is to provide certainty to participants about the way the taxation law applies to the arrangement dealt with in the class ruling and thus remove the need for individual participants to seek private rulings. A draft ruling will be issued to receive consent to name parties to the transaction.

2.4.8

Product rulings

Product rulings are a specific purpose form of public ruling. They were introduced to enable the Commissioner to rule publicly on the availability of claimed tax benefits from ‘products’. A ‘product’ refers to an arrangement in which a number of taxpayers individually enter into substantially the same transactions with a common entity or a group of entities. Product rulings provide taxpayers with certainty about the tax consequences of entering into a particular arrangement, provided the arrangement is carried out in accordance with details provided by the applicant and described in the product ruling. The highest levels of disclosure are expected of an applicant given that it is often used to market the product. While ruling on the application of tax law to the product, the ATO gives no assurance that the

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product to which the ruling relates is commercially viable, that charges made are reasonable, appropriate or represent industry norms, or that projected returns will be achieved or are reasonably based. Potential investors must form their own view about the commercial and financial viability of the product. This will involve consideration of important issues such as whether projected returns are realistic, the ‘track record’ of the management, the level of fees in comparison to similar products and how the investment fits an existing portfolio. The ATO recommends an appropriate experienced independent financial (or other) adviser be consulted for such information. There are no objections rights for product rulings.

2.4.9

Private rulings

To further reduce uncertainty a taxpayer can seek a private and reviewable ruling from the ATO - they can ask to be ‘assessed’ in relation to an existing or proposed transaction, including where appropriate, a ruling on the application of a general anti-avoidance provision. The ATO will work with draft material for those prospective transactions however the draft documentation must be materially similar to the end product. The ATO may also request further information and can make assumptions. In applying the tax law to the particular facts and assumptions stated in a ruling application, the ATO will have regard to the words of the Act and the history and objects of relevant provisions. A taxpayer may not need to seek a private ruling if a public ruling aligns with their facts and circumstances and there are no material differences in facts and circumstances. A taxpayer can object against a private ruling decision.

2.4.10 ATO Interpretative Decisions An ATO Interpretative Decision (ATO ID) is a summary of a decision on an interpretative issue and is indicative of the Commissioner's view on the interpretation of the law on that particular issue. ATO IDs are produced to assist ATO officers to apply the law consistently and accurately to particular factual situations.

2.4.11 Priority ruling process Certain private and class rulings may qualify for inclusion in the ATO priority rulings process. The aim of the process is to assist in the management of taxation risks associated with time - sensitive, significant transactions.

2.4.12 Practical, rather than binding, certainty For those large businesses looking for practical certainty rather than binding certainty, an annual compliance arrangement allows for the Commissioner to give indicative advice and for sign-off of the tax return apart from matters on the issues register shortly after it is lodged.

2.4.13 Annual Compliance Agreements Annual Compliance Agreements (ACAs) are the centrepiece of ATO efforts to build positive relationships with large businesses. An ACA improves practical certainty for large businesses by considering tax risks in real time. It offers a ‘no surprises’ approach that is desirable for large business and for us. It is a co-designed, assurance based approach that allows large businesses to engage with us so that they can differentiate and tailor their compliance relationship and experience. A joint practical commitment to work in a frank and open

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disclosure environment and an assurance based approach replace traditional compliance treatments such as audit and review. The ACA product was co-designed in consultation with large businesses and takes into account earlier experiences with Forward Compliance Arrangements and replaces this product. Implementing an ACA is initially resource intensive. It requires the right level of expertise to determine and resolve where possible in a collaborative way, what are often complex issues.

2.4.14 Advanced Pricing Arrangements Transfer pricing is an ongoing focus of compliance activities and Advanced Pricing Arrangements (APAs) provide taxpayers with the opportunity to reach an agreement with the ATO on the future application of the arm’s length principle in their dealings with international related parties. APAs may be unilateral which involves the ATO and a taxpayer, or bilateral or multilateral which involves an agreement of two or more tax administrations and their respective taxpayers. The arrangement generally covers a period of three to five years and may be reviewed if the trading circumstances of the taxpayer materially change. APAs are also subject to an annual reporting requirement which enables the ATO to monitor the arrangement. APAs are normally initiated after pre-lodgment meetings and the lodgment of a formal application. Bilateral APAs are concluded under the mutual agreement procedure article of the relevant double tax agreement, while unilateral APAs are concluded under the Commissioner’s power of general administration of the income tax legislation. APAs can provide certainty for both the community and taxpayers, with the benefit of:



ensuring the fair application of the arm’s length principle in related party international dealings



eliminating or reducing the risk of double taxation on related party international dealings



eliminating the risk of a transfer pricing audit.

Before committing to an APA, both parties need to examine the proposal to ensure the cost and effort of obtaining an APA is proportionate to the benefits obtained. An APA application needs to contain a properly developed and documented solution. The ATO role involves critical analysis rather than undertaking original work to establish the arm’s length outcome. The pre-lodgment process provides an opportunity for issues to be identified up front with the aim of facilitating successful applications.

2.4.15 Tax Issues Entry System 13

The Tax Issues Entry System , or TIES for short, is an Australian Government initiative jointly managed by the Australian Taxation Office and the Department of the Treasury. TIES provides an opportunity for taxpayers to raise issues relating to the care and maintenance of the Australian Government’s tax and superannuation systems. Care and maintenance issues are about making sure the existing law operates in the way it was intended, by correcting technical or drafting defects, removing anomalies and addressing unintended outcomes. Care and maintenance issues could involve minor policy changes, though they typically would not have a significant revenue impact.

13

Available through the website: http://www.ties.gov.au

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The TIES process will seek to find the best solution to issues, whether that can be done by way of a change to ATO existing administrative practices or by raising with the Government the possibility of changing the law. Law changes will be subject to the Government’s other legislative priorities. TIES replaces the work previously undertaken by the Technical Issues Management Subcommittee of the National Tax Liaison Group. The Technical Issues Management Subcommittee was disbanded in 2008 with outstanding issues being transferred to the Tax Issues Entry System.

2.5

Mutual expectations – co-operative compliance

The tax office/taxpayer relationship is a long term one and needs to be managed as such. The key to any ongoing effective relationship is engagement on material issues of concern / contention and respect in resolving those concerns and contentions. The ATO has set out its compliance concerns in various publications and has also set out its expectations regarding the behaviour and approaches of its staff and of taxpayers.

2.5.1

Rulings

In regard to rulings the ATO will:



treat taxpayers in accordance with the law, ATO policy and the principles outlined in the taxpayers’ charter



progress matters within the agreed timeframes



maintain open dialogue and keep taxpayers informed of the progress of rulings, including where complex cases may take more than 28 days.



make information requests clear and unambiguous



contact taxpayers in order to understand the facts and discuss any concerns the ATO might have



provide taxpayers with a central point of contact and access to the relevant decision makers.

What the ATO expects from taxpayers in regard to rulings:



contact as early as possible so that the ATO can have the best opportunity to meet business timeframes.



understand that complex cases may take more than 28 days



maintain open dialogue on the taxation issues and facts relevant to the ruling request.



comply with requests for information within the agreed timeframes.



provide us with a central point of contact in the organisation in relation to the ruling application.

A full and true disclosure of the material facts is needed. If relevant material facts are not disclosed naturally the ruling cannot be relied upon.

2.5.2

Indicative Advice

As part of an ongoing relationship with the ATO a taxpayer may ask the ATO to indicate its likely view of the law in relation to an arrangement. Providing such indicative advice depends on certain exceptional criteria being met and the taxpayer acknowledging that the advice is not binding on the Commissioner and should not be relied on as representing the firm ATO view of the law on the matter.

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In these circumstances the ATO will inform taxpayers of any concerns the ATO has as early as possible. When the ATO become aware that its interpretations of the law diverge from the businesses, the ATO will inform the business though always with the qualification that the ATO are still working through the issues and it is only the final ruling that can be relied upon. The ATO encourages large business to raise concerns they have regarding the application of tax law to material arrangements.

2.5.3

Mutual expectations during compliance activities14.

There will be times where the ATO and the Taxpayer disagree on the tax outcomes of contentious arrangements. These can be difficult discussions to progress where views of the appropriate tax outcomes may differ significantly. It is important for the ongoing relationship that these activities be managed in an objective, timely and professional manner. The ATO expectation is that both parties will:



at all times, have open and frank discussions



recognise that either party may have to ‘agree to disagree’.

The taxpayer should expect that the ATO will



participate in and organise upfront process meetings



identify potential blockers and agree on contingencies



deal with issues in real time (and mark off as completed) rather than at the end of the process by the progressive issuance of positional papers



provide timely notification of requests



communicate prior to a request and maintain dialogue during the process



clarify the intent of the issue



differentiate between businesses and issues



provide businesses with the appropriate contacts for taxpayer escalation points



treat any information according to the secrecy and, where relevant, the law’s privacy requirements.

and the ATO expects that the Taxpayer will



provide information to help the ATO understand the business context



provide facts and evidence as required



identify upfront if the business has any concerns with the ATO processes



specify and identify relevant documents related to an issue barring those covered by Legal Professional Privilege or Accountants Concession.



ensure that documentation is readily accessible whether maintained as a physical document or stored electronically.



engage with the ATO to agree upon realistic information gathering plans.



participate in upfront process meetings to identify potential blockers and agree on contingencies

14

See ‘Taxpayers Charter – if you’re subject to review or audit’ @ http://www.ato.gov.au/content/downloads/cor63140_n2558.pdf or Chapter 8 of the Large Business and Tax Compliance booklet.

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provide immediate notice if there are likely to be delays or if all requested information cannot be provided



provide prompt and ongoing access to key personnel in the organisation who can readily provide the information that the ATO require.

2.5.4

Information gathering15

In conducting any risk review or audit, the ATO will focus on gaining and understanding the business context and environment in which a contestable transaction or arrangement may sit. Examining complex matters often requires gathering substantial amounts of information and evidence. In this circumstance, information includes documents evidencing an intention, election, choice, estimate, determination or calculation. For these purposes ‘documents’ include both paper and electronic communications including emails. Providing the ATO with timely information is essential if the ATO is to efficiently conduct and resolve active compliance activities. The ATO experience is that delays in the information gathering phase is one of the main reasons why many compliance activities experience lengthy cycle times. Generally, a formal approach is only used by the ATO when it’s requested by the taxpayer, or where other attempts to obtain the required information have not succeeded in reasonable timeframes. The ATO understand that in some circumstances, documents can be legitimately protected by Legal Professional Privilege and the claim of this privilege does not affect the ATO view of cooperation. The ATO recognises how important it is to build good working relationships that help jointly manage tax compliance and the ATO prefers to use its formal powers only where the level of co-operation inhibits complete and timely access to information. For higher risk taxpayers, the need to understand the business and material transactions or arrangements in a timely manner is paramount. If information is not readily provided by such taxpayers, the ATO is more likely to seek this information using formal powers, through third parties or by using experts to enhance its understanding of the fact pattern. The ATO intends requesting information regarding uncertain tax positions from higher risk taxpayers. Generally, the ATO will seek information from the taxpayer first and then intermediaries if required. Efficient information gathering relies on:



effective planning



full co-operation



early and ongoing dialogue



timely escalation where issues arise.

Ongoing and open discussion about information requirements helps the ATO to:



understand the business and the environment that it operates in



explain the information gathering and escalation processes



keep the information gathering process ‘informal’ and avoid unnecessary escalation

15

See ‘Taxpayers Charter Fair use of our access and information gathering powers’ @ http://www.ato.gov.au/content/downloads/cor63142_n2559.pdf or for more detail the ATO Access Manual @ http://www.ato.gov.au/corporate/content.asp?doc=/content/51035.htm

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enhance the information flow and actively manage information requests



build and enhance a co-operative relationship

Approaches Though the ATO can utilise both formal and informal powers the ATO prefers to use informal approaches wherever possible to minimise cost and disruption to both parties.

2.5.5

Informal approaches

A co-operative approach to compliance means that an informal approach will be the preferred method for gathering information. Naturally this approach is premised on:



providing complete, timely and relevant information critical to good decision-making



constructive dialogue and keeping the information gathering process on track



a desire to achieve an outcome acceptable to both parties.

Where issues arise in the process it is expected that a reasonable effort will be made to resolve them initially by the team and, if necessary, by referral to more senior officers either in the ATO or the large business taxpayer. Mutual expectations Informal approaches presume full co-operation. A taxpayer can expect that the ATO will:



engage in constructive dialogue so that its information requests are clear and unambiguous



plan information gathering around a risk hypothesis with clearly stated evidentiary needs – the plan will include agreed milestones and timeframes



generally engage in face-to-face discussion to develop the key information gathering questions where appropriate



actively manage information requests with timely escalation when delays or unforseen events arise



adopt a transparent process prior to using formal powers and subject to operational needs.

The ATO expects that taxpayers will:



co-operate in meeting agreed timeframes



provide full, complete and timely information and work to ensure that the compliance activity proceeds in an efficient and timely way.

The change from a co-operative to a less co-operative relationship is often difficult to pinpoint because it generally results from several incidents or actions rather than a clearly identified single point. The ATO expects that differences may occur; however, persistence, openness and a willingness to understand the other view or position should still be present.

2.5.6

Formal approaches

Where the ATO decides that using formal powers is necessary, the ATO will generally advise the taxpayer that the ATO intends to use the formal power and the reasons the ATO is doing so. Using formal information gathering powers is appropriate when the informal process does not produce the desired outcome or where the circumstances, history or behaviour indicate that a formal approach is warranted.

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There are some situations where the ATO may adopt a formal approach in the first instance. This includes where:



there is a history of unco-operative behaviour



there are privacy, contractual, or confidentiality obligations (for example former employees or third parties)



the taxpayer requests a formal approach in relation to 3rd party information requests

In other cases it may be necessary during the course of an audit or a review to move from an informal to a formal approach. This can occur where:



full co-operation is lacking



there are ongoing or persistent delays in providing information



it is necessary to obtain an exact picture of an arrangement or transaction.

Examples where the ATO have moved to using formal powers include:



information provided informally only partially answers the requests.



access to senior personnel involved in the issues under examination was restricted, for example, obtaining information from the actual decision makers in cases where intention is an issue.



insisting that everything be put in writing and taking a legalistic approach to responding.



purposefully placing documents, people and other evidence outside this jurisdiction.



claiming legal professional privilege or the accounting advisors’ concession without providing sufficient information to enable the ATO to properly assess the veracity of such claims.

Mutual expectations during the use of formal powers: The ATO will:



treat the taxpayer fairly and in a non-intrusive way



give reasonable notice of the intention to use formal powers



clearly identify the object(s) of the examination



keep records of taxpayer information safe and secure



respect the right to legal professional privilege or the accountant’s concession

The ATO expect that the taxpayer will:



respond in a timely manner to all enquiries



prepare at an early stage for any formal interview

Essentially, as you would expect of any prudent administrator, during compliance activities the ATO seeks to establish the full facts quickly, so as to minimise both compliance costs (for the taxpayer) and administration costs (for the ATO).

2.5.7

Consultation, collaboration and co-design

The ATO understands the importance of working with taxpayers to better understand how the system is operating and the tension points and concerns that exist within it.

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A number of forums have been set up to allow for such engagement around law interpretation, administrative policy and practice, and to enable co-design of products and services. Figure 4

Forums and groups to facilitate consultation, collaboration and co-design with the ATO

Some of you reading this will already be part of these processes to better enable the ATO to hear your voice, your concerns, about how the system could operate better within the law and policy parameters set by Government and their interpretation by the courts. If you aren’t, these forums and groups provide a real opportunity for taxpayers to get involved. In the end it is your tax and superannuation system - and how you participate in it is an important decision. The ATO vision is to have you value Australia’s tax and superannuation systems as important community assets. The appropriate payment of tax and superannuation should be seen as a normal part of the cost of doing business in civil society, funding the legal systems that protect property rights as well as funding the social, education, health, defence and retirement systems that impact business, their employees and their customers. Such willing participation in the tax and superannuation systems is a tangible sign of good citizenship for all.

© Commonwealth of Australia, 2009. This work is copyright. Apart from any use as permitted under the Copyright Act 1968, no part may be reproduced by any process without prior written permission from the Commonwealth. Requests and

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inquiries concerning reproduction and rights should be addressed to the Commonwealth Copyright Administration, Attorney General's Department, Robert Garran Offices, National Circuit, Barton ACT 2600or posted at http://www.ag.gov.au/cca

Disclaimer: This paper represents laws and policies at the time it was presented. Persons should make appropriate inquiries, check the law for currency, and seek independent advice before acting in reliance on it.

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