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20 September 2018 Australian Taxation Office expands group of taxpayers required to file Reportable Tax Position Schedule For income years ending on or after 30 June 2018, the Australian Taxation Office (ATO) has expanded the group of taxpayers required to file the Reportable Tax Position (RTP) Schedule to "include companies in public or international economic groups with a turnover greater than AU$250 million." "Economic group" is an undefined term, which means this test may be open to some interpretation. As in prior years, the Commissioner of Taxation will notify relevant taxpayers in writing if they are required to file an RTP Schedule. Notifications have been sent by email to the last known address per the ATO's records. However, the email address per the ATO's records may no longer be current or the intended recipient may have left the organization. As a result, taking the approach of "no news is good news" is not an option as "failure to lodge" penalties could arise (and for significant global entities, these penalties are substantial). Accordingly, the burden is on taxpayers to clarify whether they are required to file an RTP Schedule – particularly given there is no "bright line" test. The ATO is encouraging taxpayers to contact them for clarification in the event of any uncertainty. Broadly, RTPs are what the Commissioner may regard as contestable and material tax positions, or positions that may warrant further consideration. There are three categories of RTP:
Categories A and B are subject to a materiality threshold: 5% of current tax expense subject to the following floor and ceiling:
For purposes of Category C, there is no materiality threshold unless the particular reportable arrangement specifies as such. The ATO has recently updated its Guide to Reportable Tax Positions (RTP Guide) for the 2018 year, to include further clarification on Category A and B RTPs, and extended the list of Category C positions to 21 items. The ATO's RTP Guide refers to Category A RTPs as positions where there is "tax uncertainty in your income tax return." Merely having a reasonably arguable position (RAP) is not sufficient to obviate the need to disclose a Category A RTP. This is a consequence of the overlap in the definition of Reasonably Arguable ("if it would be concluded in the circumstances, having regard to relevant authorities, that what is argued for is about as likely to be correct as incorrect, or is more likely to be correct than incorrect") and the Category A definition of RTP. Both definitions include positions that are about as likely as not. Accordingly, the strength of a RAP must be considered in the context of whether a position falls within Category A of the RTP definition. In determining whether a position falls within the definition of Category A, the RTP Guide indicates that taxpayers "must have regard to all matters relevant to the position – this includes anti-avoidance rules, integrity provisions, transfer pricing and market valuations." Consideration of anti-avoidance rules and integrity provisions may require assumptions in relation to how the Commissioner will apply discretion. Thus, to a degree, one is required to step into the shoes of the Commissioner when determining whether a position falls within the Category A definition. Given the customized nature of transfer pricing and market valuations, taxpayers need well-documented methodologies for assessing whether positions fall within the Category A definition. In relation to transfer pricing, the RTP Guide indicates that if the position stems from related party dealings not covered by documentation compliant with section 284-255 of Schedule 1 of the Taxation Administration Act 1953, the position will constitute a Category A RTP. This is on the basis that (in the ATO's view) there is insufficient information to determine if the position is more likely to be correct than incorrect. Unless the taxpayer has the requisite level of transfer pricing documentation, the position should be disclosed as an RTP (indeed, there are circumstances in which a transfer pricing position gives rise to an RTP notwithstanding that compliant documentation is maintained). Importantly, relevant matters do not include anticipated or un-enacted legislation, nor do they include industry practice or ATO administrative practices. Therefore, the focal point in assessing whether a position is a Category A RTP is the current legislation and case law. Long-standing positions may require disclosure as a Category A RTP, particularly those based on industry practices. At its simplest, if the treatment of the relevant position in the income tax return (ITR) is not consistent with its treatment in the tax provision, and the differential is material, a Category B RTP will arise. Importantly, for first time filers, Category B must be considered not only in the context of the current year, but also in the context of provisions and/or contingent liabilities raised in prior reporting periods that have not previously been disclosed. When RTP Schedules were first introduced, there was one Category C item. The 2018 list now extends to 21 items, and the ATO has foreshadowed that the Category C list may be updated throughout the course of the year. Thus, a taxpayer who files their ITR for the year ended 30 June 2018 in October 2018 may be required to consider a different Category C list than a taxpayer who files their ITR for the year ended 30 June 2018 in January 2019. The arrangements/transactions in Category C are items about which the Commissioner is particularly interested. Many of the items in Category C require a yes/no answer. However, various questions will require work beyond a binary response. For example, questions 9 (related-party dealings involving market hub arrangements) and 14 (financial arrangements involving cross-border related-party debt funding) require taxpayers to disclose the results of their self-assessment under the relevant practical compliance guide. That is, taxpayers are required to disclose which zone (or sub-category) they fall into. Interestingly, for RTP purposes, a taxpayer who has not self-assessed must place themselves in the same sub-category as those who self-assess themselves to be in the high-risk red zone. Category C also requires taxpayers to consider whether they are aware of unamended mistakes or omissions in an ITR filed in the last four years. This is another example of the transparency demanded of taxpayers. In the current ATO "justified trust" environment, taxpayers need to be able to assure the ATO as to the robustness of their process when completing an RTP Schedule. As the ATO is looking to assess tax risks on a regular and real-time basis, taxpayers must ensure they remain ahead of the curve. Taxpayers need to ask themselves how they will get comfort that they have identified all potential RTPs: this is particularly the case where taxpayers file schedules with no RTPs disclosed. The most effective means of doing so is for taxpayers to ensure they have a robust tax corporate governance (TCG) framework and to be proactive in tax risk assessment and management. At their core, both TCG frameworks and the RTP Schedule have the same purpose: to identify, categorize, assess and mitigate tax risk. A TCG framework will clearly articulate responsibilities of the board, management and staff from a risk management, administration and compliance perspective. Critically, it also assists taxpayers to identify high risk positions and arrangements before adoption, allowing them to either change their position or contemporaneously prepare the documentation needed to support the position or arrangement. So, an operationally effective TCG framework will enable taxpayers to identify the positions and arrangements that will need to be disclosed in the RTP Schedule well in advance of filing. A rigorous TCG framework is made all the more important by the expanded Category C items in the RTP Schedule. Unlike Category A and Category B RTPs which should, in the ordinary course, be considered as part of the tax compliance or financial audit process, Category C requires taxpayers to disclose whether they have considered and applied the relevant ATO issued Tax Alerts, Determinations and Guidelines. This requires taxpayers to be cognizant of what material the ATO publishes, whether that material applies to them, and what issues are raised. Therefore, it is important to assign responsibility to a relevant individual in the organization for staying abreast of current ATO guidance and updating the tax function and Board/Committee, to avoid ATO updates slipping through the cracks. If it is determined that a taxpayer is not required to disclose any RTPs, maintaining evidence files to support material positions should further validate non-disclosure. In order to prepare for the RTP process, organizations should consider the following practical questions:
The recent changes to the scope and application of the RTP Schedule highlight the ATO's increased focus on identifying and understanding tax risk. Having a robust TCG framework in place to facilitate completion of the RTP Schedule is critical from a tax compliance and risk management perspective. In navigating the expanded RTP Schedule and its interaction with TCG, taxpayers should take the following action to:
Document ID: 2018-6106 |
