The Australian Taxation Office (ATO) will be requiring certain companies to file an additional schedule with their 2011-12 tax return, called the Reportable Tax Position (RTP) Schedule, which will disclose that company’s tax risk in relation to certain transactions and arrangements.

This action by the ATO is no doubt influenced by steps taken last year by the US Internal Revenue Service in requiring certain large business taxpayers in the US to report their uncertain tax positions in annual business tax returns.

For the 2011-12 tax year, the ATO will be confining the requirement to lodge an RTP Schedule to large business taxpayers that it has categorised as “higher risk” or “key taxpayer” under the ATO’s Large Business Risk Differentiation Framework. The ATO will be notifying those taxpayers directly of the need to lodge the RTP Schedule and it is expected that it will affect around 100 of the largest Australian taxpayers.  It may be that, in future years, a wider group of taxpayers will be required to lodge this Schedule.  A copy of the current draft of the Schedule is available on the ATO website (see: http://www.ato.gov.au/content/downloads/bus00279408rtp2011.pdf).

The ATO is currently engaged in consultation through various working groups as to the form of the RTP Schedule, as well as other issues relating to the reporting obligations which the ATO is seeking to impose by means of this Schedule.

What is a Reportable Tax Position?

Of critical importance in completing the RTP Schedule is identifying what constitutes a “reportable tax position”.  For these purposes a “position” means the basis for lodgement of an income tax return in respect of a specific set of circumstances, arrangement or transaction.  At present, the ATO proposes that the following 3 positions will be reportable tax positions:

  1. a material position that is not more likely to be correct than incorrect. 

Determining “materiality” for these purposes is still under consideration.  The current ATO view is that it will be determined according to whether, if the position adopted was not correct, the increase in income tax liability or the reduction in any tax loss or capital loss would be considered material for the purposes of the taxpayer’s Australian financial statements for the income year.

A position is considered to be not more likely to be correct than incorrect if it would not be concluded in the circumstances, having regard to relevant authorities, that what is argued for is more likely to be correct than incorrect.  In order to not fall within this category of a “reportable tax position” the taxpayer and his/her professional advisers will need to have formed a reasonable opinion that what is argued for is more likely to be correct than incorrect.

  1. a position in respect of which uncertainty about taxes payable or recoverable is recognised and/or disclosed in the taxpayer’s or a related party’s financial statements. 

This may be the case where a tax-related provision, contingent liability or contingent asset is recognised in the financial statements in accordance with the relevant accounting standards.

  1. a position in respect of a “reportable transaction”.

This will be a transaction where:

  • the taxpayer recognises more than $200 million of income in their financial statements for the current income year and recognises less than 50% of such income as assessable income in the current income year; and
  • the transaction involved a change to the effective ownership or control of an entity, business or assets.

Both requirements need to be satisfied in order for there to be a “reportable transaction”, which limits the transactions possibly falling within this category of reportable tax position.

Tax Positions already Disclosed to the ATO

A position will not, however, be a reportable tax position if it has been adequately disclosed to the ATO:

  • by way of an application for a private binding ruling; or
  • in writing in a form determined by the ATO, and receipt of which has been acknowledged by the ATO.

The ATO see the RTP Schedule as designed to provide greater assurance to businesses about their most contestable and material tax risks and help the ATO better understand tax risk for large business. 

For taxpayers, the disclosure of “reportable tax positions” in the RTP Schedule could be expected to invite ATO scrutiny of the tax position taken by the taxpayer in relation to an arrangement or transaction.  It may be expected, therefore, that the aim for taxpayers who are required to file the RTP Schedule will be to minimise, to the extent permissible, positions that are required to be reported.  The need for expert tax advice in relation to tax positions adopted by taxpayers will be an important aspect of this exercise.