In the week commencing 14 December 2015, the Commissioner will release the first tax transparency report disclosing certain tax information of public companies whose total income for the tax year 2013-14 exceeded $100 million.
The tax information to be released will be taken from the public company’s income tax return for 2013-14 and will be:
- the company’s name and its ABN;
- total income;
- taxable income; and
- income tax payable.
There will be separate reports for the disclosure of the Mineral Resource Rent Tax (MRRT)1 and Petroleum Resource Rent Tax (PRRT).
The tax transparency regime will not apply to Australian resident private companies whose foreign ownership stake does not exceed 50%. The definition of ‘private company’ is taken from section 103A of the Income Tax Assessment Act 1936 (ITAA 1936) and therefore some public companies may qualify as private company.
It will also not apply to individuals and their tax information continues to be subject to strict confidentiality.
Care should be taken in interpreting this information. For example, calculating effective tax rates from the information disclosed could be misleading given that ‘total income’ will not be determined in the same way for each taxpayer and each taxpayer would be expected to have different tax attributes such as differing access to tax offsets and prior year losses. Further, related party transactions could have the effect of spreading the total tax liability over a number of entities in non-tax consolidated group.
On 3 April 2013, the then Assistant Treasurer announced that, following public consultation, the Government intended legislating a regime of public disclosure of certain tax information of large corporate tax entities. The backdrop to this measure was ‘the Government’s broader efforts to maintain the integrity of Australia’s tax base and crack down on profit shifting’2 in respect of multinational corporations.
On 28 June 2013, the Commonwealth Parliament passed Tax Laws Amendment (2013 Measures No.2) Bill 2013 (TLAA 2013). Royal Assent was given on 29 June 2013.
The new regime applies in respect of income years after 1 July 2013. For the 2013‑14 income year the Commissioner is to release the first report in the week beginning 14 December 2015.
Under TLAA 2013, all companies with a total income of $100 million in a year would be subject to the tax transparency regime. This included both publicly listed companies and private companies whether Australian owned or foreign owned.
Since the enactment of TLAA 2013, and following the election of the Coalition Government, the Treasury on 4 June 2015 released for public consultation an Exposure Draft Bill seeking to exempt Australian owned private companies from the Commissioner’s statutory duty to disclose the tax information of large corporate tax entities contained under TLAA 2013. Following public consultations, the Government proceeded with Tax and Superannuation Laws Amendment (Better Targeting the Income Tax Transparency Laws) Bill 2015 which passed the Commonwealth Parliament on 15 October 2015. Royal Assent was given on 12 November 2015 (TLAA 2015).
TLAA 2013 enacted section 3C of the Taxation Administration Act 1953 (TAA) which imposed on the Federal Commissioner of Taxation statutory duty to file an annual report of the tax information of large corporate entities. TLAA 2015 has amended section 3C to exclude Australian owned private companies from this reporting regime.
An individual’s tax information continues to be subject to strict confidentiality and this is unaffected by the new regime.
The Commissioner has recently released a publication titled Tax transparency: reporting of entity tax information (the ATO Tax Transparency Guide) which he last modified on 13 November 2015.
This article will now examine:
- the rationale for the tax transparency regime;
- section 3C and how it operates;
- the exemption for Australian owned private companies; and
- the contents of tax disclosure in more detail.
The Rationale for a Tax Transparency Regime
A central feature of Australia’s tax system is, and has been, the strict legal regime preserving taxpayer confidentiality. These provisions are contained in Division 355 of Schedule 1 to the TAA. Prior to TLAA 2013, taxation officers were only permitted to disclose taxpayer information in restricted circumstances and generally only to other government bodies for the purposes of the administration of Commonwealth, State and Territory laws. Under Australian information exchange treaties with other nations, taxation officers were permitted to disclose taxpayer information relating to taxpayer compliance with tax obligations of the counterparty nation.
A tax transparency regime for large corporate tax entities was introduced as part of a number of measures addressing the so-called ‘base erosion, profit shifting’ activities of large multinational companies. The justification for such a regime was set out in the Explanatory Memorandum to TLAA 2013 as follows:
3.6 The first objection of these amendments is to discourage large corporate tax entities from engaging in aggressive tax avoidance.
3.7 The second objective of these amendments is to provide more information to inform public debate about tax policy, particularly in relation to the corporate tax system.
3.8 The third objective is to enable better public disclosure of aggregate tax revenue collections, even when the identity of particular taxpayers (other than natural persons) could potentially be deduced. This may arise, for example, where the number of taxpayers paying tax under a particular published head of revenue is small, so one taxpayer may be able to deduce information about another from an aggregate figure.
3.9 The fourth objective is to allow improved sharing of relevant tax information between Government agencies. The amendments will ensure that the Department of the Treasury (Treasury) is better placed to consider the tax implications of applications under the Foreign Acquisitions and Takeovers Act 1975 and Australia’s Foreign Investment Policy.
The new Coalition Government had a number of concerns with the new tax transparency regime in respect of its application to the private companies that the regime applied to. These concerns were:3
- the commercial sensitivity of the information and the impact of disclosure on their personal privacy and security;
- the nature of the information disclosed can be misleading as to the true amount of tax payable by the owners of private companies as it ignores their residual tax liability once profits are distributed to them;
- the information disclosed is not otherwise available to the company’s competitors, suppliers and customers and could be used by larger firms to cause loss to the company; and
- as it does not apply to certain trusts, private companies may be encouraged by the new regime to restructure to minimise any commercial disadvantage that disclosure may cause.
There were also submissions made that the transparency regime was introduced against the backdrop of the Government’s attempts to combat ‘base erosion, profit shifting’ practices of large multinational companies and therefore was not directed at Australian-owned private companies who do not engage in such practices.4
Who does the regime apply to?
Following the enactment of TAA by TLAA 2015, subsection 3C(1) of the TAA provides as follow:
(1) This section applies to a corporate tax entity for an income year if, according to information reported to the Commissioner in the entity’s income tax return for the income year:
(a) the entity has total income equal to or exceeding $100 million for the income year;
(b) at the end of the income year:
(i) the entity is not an Australian resident that is a private company for the income year; or
(ii) the entity is a member of a wholly owned group that has a foreign residual ultimate holding company; or
(iii) the percentage of foreign shareholding in the entity is greater than 50%.
An expression used in this subsection that is also used in the Income Tax Assessment Act 1997 has the same meaning as in that Act.
A ‘corporate tax entity’ is defined in section 960-115 of the Income Tax Assessment Act 1997 (ITAA 1997) to mean a company and entities which are treated as companies for Australian tax purposes. These are corporate limited partnerships, corporate unit trusts and public trading trusts.
Where a company is a member of a tax consolidated group, the transparency regime will apply only to the head company of the tax consolidated group. Accordingly, it will apply to corporate tax entities which are required to lodge income tax returns.
In respect of determining whether a company’s income exceeds the $100 million threshold in an income year, this will be based on the amount that a company shows at item 6(S) of the company tax return. This is the amount which corresponds to the amount of income shown in the company’s financial statements. According to the Commissioner:5
This amount may vary from taxpayer to taxpayer, depending on how their accounting system is set up. It is a gross revenue figure and may include exempt income, other non-assessable income and foreign source income. The inclusion of such amounts increases total income relative to taxable income (described below) and accounting profit.
Importantly, total income does not take into account expenses. The total income figure is similar to gross accounting revenue, not profit. It makes no allowances for the cost of earning income.
How does the private company exemption apply?
A corporate tax entity will not be subject to the tax transparency regime if the following conditions are met:
- the company must be a private company.
A ‘private company’ is defined in section 103A of the Income Tax Assessment Act 1936 to be a company which is not a public company. A public company will include:
- companies whose shares are listed on a stock exchange and which more than 20 entities hold 75% or more of the shares in the company;
- a private company for the purposes of the Corporations Act 2001 (Cth) which is subsidiary of a publicly listed company.
- the company is a resident of Australia at the end of the relevant year.
A company will be a resident of Australia if:
- it is incorporated in Australia;
- it carries on business in Australia and has either its central management and control in Australia or its voting power is controlled by Australian tax residents.
- the company is not a member of a wholly owned group that has a foreign resident ultimate holding company;
- the company does not have a foreign shareholder whose shareholding exceeds 50% of the total shares on issue.
In determining whether the above conditions are met, the Commissioner will rely on the information pertaining to residency status and the extent of foreign ownership of a private company that the private company corporate tax entity discloses in its income tax return.
Accordingly, the tax transparency regime will notapply for private company groups which are wholly owned by Australian tax residents where foreign ownership is not greater than 50%.
It will also, as was the case under TLAA 2013, not apply to non-corporate tax entities, such trading trusts not taxed as companies, and corporate tax entities whose total income is less than $100 million in an income year.
Directors of private companies should therefore monitor the extent of their foreign ownership and:
- where this exceeds 50% of the total shareholding of the company; and
- the private company’s total income for the year exceeds $100 million,
the private company will become subject to the tax transparency regime.
Which information is disclosed and where does it come from?
Subsection 3C(3) of the TAA provides:
3(C)The information is as follows:
(a) the entity’s ABN (within the meaning of the Income Tax Assessment Act 1997) and name;
(b) the entity’s total income for the income year, according to information reported to the Commissioner in the entity’s income tax return (within the meaning of that Act) for the income year;
(c) the entity’s taxable income or net income (if any) for the income year, according to information reported to the Commissioner in that income tax return;
(d) the entity’s income tax payable (if any) for the financial year corresponding to the income year, according to the information reported to the Commissioner in that income tax return.
What is total income?
‘Total income’ for the purposes of subsection 3C(3)(b) is not defined in either the TAA or ITAA 1997. As stated above, it is the amount taken from item 6(S) of the company’s income tax return.
What is taxable income?
The entity’s taxable income is the amount shown at Label 7T. This is defined in ITAA 1997. Where the amount is a loss amount, the Commissioner has indicated that a nil amount will be reported.
A non-resident company’s taxable income will be its assessable income derived from sources in Australia less allowable deductions plus any other assessable income included on some basis other than having an Australian source.
A comparison between ‘total income’ and ‘taxable income’ can be misleading in that the concepts can be determined very differently. For instance, ‘total income’ is a gross amount (with no deduction for expenses) whereas ‘taxable income’ is a net amount (to the extent that expenditure which reduces taxable income is an allowable deduction). There are other significant differences. The Commissioner elaborates further on this:
An entity’s taxable income may include franking credits and non-deductible items that increase accounting profit, but will also reflect available concessions or adjustments allowable for income tax purposes such as tax losses utilised from prior years. The inclusion of such assessable amounts and/or allowable deductions to arrive at the taxable income reported, and the omission of expenses from the total income reported, means it is not a simple equation between ‘Total income’ and ‘Taxable income’.
What is income tax payable?
‘Income tax payable’ is the amount of tax shown on the company’s tax return at Label T5 in the ‘Calculation statement’ section and is determine by multiplying the amount of taxable income shown at Label A, adding any R&D recoupment tax, as applicable, and then reducing this amount of tax payable by the following, as applicable:
- non-refundable non-carry forward tax offsets;
- non-refundable carry-forward tax offsets;
- refundable tax offsets;
- franking deficit tax offset.
Such offsets include franking credits and the R&D incentive tax offset.
What about MRRT and PRRT?
MRRT6 and the PRRT7 are also included in the tax transparency regime. As with income tax payable, the amounts for the MRRT and the PRRT are taken from a company’s MRRT return at Label 15H and the PRRT return at Label 25I, as the case may be.
As MRRT was repealed with effect from 1 October 2014, reporting for the MRRT will apply for the 2013-14 and 2014-15 MRRT years only.
Where does the information come from?
As indicated above, the reported information is taken from a corporate tax entity’s income tax return. It will be the information that the corporate tax entity provides. Accordingly, the Commissioner has indicated that where he audits a corporate tax entity and this leads to any of the reportable items changing at the instigation of the Commissioner, these changes will not be disclosed.
Any amendments requested by taxpayers and processed prior to the cut-off date (see below) after which reporting will take place, will be included in the disclosure report.
When will the disclosure tax place and how?
The first year for which tax disclosure will occur will be the income year ended 30 June 2014. The Commissioner has set a ‘reporting cut-off date’ of 1 September of the calendar year following the tax year and the information that will be reported will be sourced from the income tax returns (together with any amendments they have requested) lodged by corporate tax entities for the 2013-14 year before this date.
Accordingly, the reporting cut-off date for the 2013-14 year was 1 September 2015. For the 2014-15 year, it will be 1 September 2016.
For the 2013-14 year, the Commissioner has indicated that the tax disclosure report will be publicly available in the week commencing 14 December 2015. It will be directly accessible on the website: www.data.gov.au
There will be an income tax report and separate reports for MRRT and PRRT.
What if a corporate tax entity doesn’t lodge their return before the reporting cut-off date?
Where this occurs, the Commissioner will include that relevant year’s tax information in the report that is released for the following year.
Can the tax disclosure report for a year be amended?
Where a corporate tax entity requests an amendment after the cut-off date, the Commissioner has indicated that no amendments will be made to the tax disclosure report after it has been finalised and released.
However, the Commissioner has a discretion to make further public disclosures for the purposes of correcting an error on an earlier tax disclosure report. This discretion is contained in subsection 3C(5) of the TAA. This provision will apply where either the Commissioner identifies an error with the corporate tax entity’s income return or where the corporate tax entity itself brings the error to the attention of the Commissioner.8
Subsection 3C(6) of the TAA further provides that if the Commissioner considers that information that is made publicly available fails to reflect all of the information required to be made publicly available, he may at any time make other information publicly available in order to remedy that failure.
Given the number of factors that affect the determination of ‘total income’, ‘taxable income’ and ‘income tax payable’, it would appear that any interpretation of this information should proceed very carefully.
Such public disclosure would appear to be encouraging a comparison of income tax payable of companies within a particular industry sector or an analysis and determination of effective tax rates.
Such analysis and comparison has the potential to mislead and confuse. Under the regime, there is not the level of disclosure which could adequately facilitate a proper analysis and comparison of, for example, income tax payable or the determination of effective tax rates.
The Commissioner in the ATO Tax Transparency Guide expresses similar views. For example, he states that:
The reported figures do not themselves indicate whether an entity is paying a high or low rate of tax. Measuring a company’s ‘effective tax rate’ (how much tax they pay as a percentage of profits) and comparing effective tax rates across single entities does not take into account related party transactions, the broader economic group or a number of other factors.
He also identifies a number of factors that affect the determination of a corporate tax entity’s taxable income and income tax payable including timing differences between companies in deriving income and incurring deductible expenditure, the tax treatment of various structures established to hold assets and conduct trading enterprises, the varying availability of tax deductions for different taxpayers, the availability of tax losses, franking credits and non-refundable non-carry forward tax offsets and the receipt of exempt income.
Given the existence of these factors, any conclusions from this information should be carefully constructed.