Tax treaty with Germany
On 1 April 2016, the Commonwealth Treasury released draft legislation to give the new Australia/Germany tax treaty the force of law in Australia. The treaty was signed on 12 November 2015. The new treaty will enter into force after both countries have completed their respective domestic requirements and instruments of ratification have been exchanged.
The New Zealand (NZ) Government has announced a package of proposed tax changes that are intended to reduce compliance costs and make tax simpler for businesses. The package aims to make paying tax easier and more certain, reduce the burden of interest and penalties, and help smaller businesses to tailor payments to their own circumstances. A summary document available on the NZ Inland Revenue's Policy Advice website outlines all 16 proposed changes.
Taxpayer Alert on revaluation of assets for thin capitalisation purposes
On 26 April 2016, the Commissioner of Taxation issued Taxpayer Alert TA 2016/1 which covers thin capitalisation and revaluation of certain intangible assets. This Alert is just one of many issued in April that deal with various multinational tax issues.
TA 2016/1 deals predominantly with sections 820- 683 and s820-684 of the Income Tax Assessment Act 1997 (ITAA 1997) which, for thin capitalisation purposes, allows departure from the 'accounting standards' in relation to recognition and valuation of certain 'internally generated intangible assets’ (other than goodwill). Under s820-683, assets (other than goodwill) which fall under the definition of internally generated intangible asset in Australian Accounting Standard AASB 138 (AASB 138) can be recognised for thin capitalisation purposes, if the asset cannot be recognised under that standard as an internally generated intangible asset because AASB 138 determines that the cost of the item cannot be distinguished from the cost of developing the entity's business as a whole. Importantly however, the further condition in s820-683 is that the asset in question must otherwise meet the criteria under AASB 138 for recognition as such an asset.
In TA 2016/1, the Commissioner states his concern that some taxpayers have been applying s820-683 to assets that would not otherwise meet the criteria in AASB 138 for recognition as an internally generated intangible asset. In this respect, AASB 138, at paragraph 9 provides the criteria that must be satisfied for an item to be regarded as an intangible asset. These are:
- identifiability - this requires an intangible asset to be identifiable to distinguish it from goodwill. Under AASB 138, an asset is identifiable if it either:
- is separable, i.e. is capable of being separated or divided from the entity and sold, transferred, licensed, rented or exchanged, either individually or together with a related contract, identifiable asset or liability, regardless of whether the entity intends to do so
- arises from contractual or other legal rights, regardless of whether those rights are transferable or separable from the entity or from other rights and obligations
- control over a resource - under AASB 138, an entity controls an asset if the entity has the power to obtain the future economic benefits flowing from the underlying resource and to restrict the access of others to those benefits. The capacity of an entity to control the future economic benefits from an intangible asset would normally stem from legal rights that are enforceable in a court of law. In the absence of legal rights, it is more difficult to demonstrate control
- existence of future economic benefits - under AASB 138, the future economic benefits flowing from an intangible asset may include revenue from the sale of products or services, cost savings, or other benefits resulting from the use of the asset by the entity.
AASB 138 provides further commentary on these criteria and gives some examples.
The items that the Commissioner has identified in TA 2016/1 as not being intangible assets for the purposes of AASB 138 (and therefore are not within the scope of s820-683) are:
- market related items such as 'customer relationships' or 'customer loyalty'
- human resource items, including 'skilled staff', 'management’ or 'key employees/training
- organisational resources including 'internal policies', 'internal meeting protocols', 'procedures' and 'manuals', and
- assets not owned and controlled by the taxpayer.
In relation to customer relationships which has historically been considered by many taxpayers under the consolidation tax cost setting process, a general proposition is that this would not be an internally generated intangible asset because of the lack of control able to be exercised over customers where there is no legal right to 'compel custom'. Whether there would be control in situations where there is economic dependence of the customer on the taxpayer would need to be carefully considered on a case by case basis.
A further aspect of TA 2016/1 deals with revaluations undertaken for thin capitalisation purposes. Issues raised by the Commissioner as concerns are:
- Applying unsupportable or questionable management assumptions. For example:
- Software valuations which assume a useful life of 25 years or more
- Growth rates in excess of historic and probable market indicators.
- Generic material such as internal policies, internal meeting protocols and procedures being revalued.
- Double counting of asset value across multiple intangibles (e.g. recognition and revaluation of separate 'business processes' items connected to intellectual property), including failure to correspondingly impair other intangible assets where the 'revalued' intangible asset relies on the same underlying economic returns.
- Revaluing the intangible asset based on economic returns which do not accrue to the taxpayer.
The revaluations for thin capitalisation purposes need to satisfy the criteria in s820-680 of the ITAA 1997.
Finally, TA 2016/1 expresses the Commissioner's concern that taxpayers are not 'impairing' assets where the fair value or the cash generating unit has declined (as required by AASB 136 Impairment of Assets).
The effect of the issue of TA 2016/1 is that taxpayers who have recognised internally generated items for thin capitalisation purposes should be on notice that the Commissioner will sooner or later be reviewing the approach taken. In some instances, ATO compliance activities are underway with cases identified from data analysis including tax returns and the International Dealings Schedule.
Other Taxpayer Alerts that issued on 26 April 2016 are:
- TA 2016/2: Interim arrangements in response to the Multinational Anti Avoidance Law (MAAL)
- TA 2016/3: Arrangements involving related party foreign currency denominated finance with related party cross currency interest rate swaps
- TA 2016/4: Cross-border leasing arrangements involving mobile assets.