Release of the Corporate Tax Transparency Report

The Australian Taxation Office (ATO) released on 9 December 2016 its Corporate tax transparency report for 2014-15 which covers Australian public and foreign-owned companies with an income of AUD 100 million or more, and Australian-owned resident private companies with an income of AUD 200 million or more.

This is the second annual report that the Commissioner has published setting out certain tax information about relevant companies as extracted from their lodged tax returns including: total income, taxable income and income tax payable. It also includes those entities with Petroleum Resource Rent tax (PRRT) payable.

Refer also to the statement by the Commissioner of Taxation Chris Jordan AO setting out some further observations about the data and the ATO’s compliance efforts.

In an interesting statistic, the companies covered in the transparency population account for $42 billion or around 63% of total company income tax payable for 2014-15.

Taxation Determination on beneficiary’s entitlement to bad debt deduction

Taxation Determination TD 2016/19 sets out the ATO’s final view that the beneficiary of a trust is not entitled to a bad debt deduction (under section 25-35 of the Income Tax Assessment Act 1997 (ITAA 1997) for the amount of an “unpaid present entitlement” that the beneficiary has purported to write off as a bad debt.

Further ATO guidance on foreign equity distributions through interposed entities

The ATO issued the following draft tax determinations dealing with the application of the Subdivision 768-A exemption, which applies to certain foreign equity distributions made to a corporate tax entity, in the context of an interposed partnership and trust:

• Draft Taxation Determination TD 2016/D6 - a partnership can ‘hold’ a direct control interest (as defined in section 350 of the Income Tax Assessment Act 1936 (ITAA 1936)) in a foreign company for the purposes determining whether an Australian corporate tax entity that is a partner in the partnership has satisfied the participation test as required for purposes of applying the exemption.

• Draft Taxation Determination TD 2016/D7 - a trust can be taken to ‘hold’ a direct control interest (as defined in section 350 of the ITAA 1936) in a foreign company for the purposes determining whether an Australian corporate tax entity that is a beneficiary of the trust has satisfied the participation test.

When the final Determinations are issued, they will apply to foreign equity distributions made on or after 17 October 2014, being the date Subdivision 768-A commenced operation.

Draft taxation ruling on natural resource payments

The ATO has released draft taxation ruling TR 2016/D3 which deals with the application of section 6CA of the ITAA 1936 and Australia's tax treaties and payer's withholding obligations in relation to payments, typically made by the holder of a mining right to an entity that does not have an interest in the right, based upon the value of natural resources produced and/or sold. Such payments are commonly known as 'override royalties'.

The definition of 'natural resource income' in subsection 6CA(1) of the ITAA 1936 includes income that is calculated, in whole or in part, by reference to the value or quantity of resources produced where the calculation is based on the level of production. According to the draft ruling, in working out whether the calculation of a payment is based on the level of production, it is appropriate to have regard to the contractual terms of the override royalty agreement and any related agreements, and the substance of the arrangement. A direct causal connection between the amount of income and the level of production is not required. This means that in some circumstances, income calculated by reference to a value or measure other than production (such as sales or shipping volume), may be natural resource income.

The draft ruling also indicates that 'natural resource income' under subsection 6CA(1) of the ITAA 1936 will be income from real property under the majority of tax treaties. The Australian treaty with the United States of America is an exception. Recipients of override royalty payments who do not hold the right to exploit or explore for natural resources do not derive income from real property for the purposes of the US treaty.

Comments can be made on the draft ruling by 10 February 2017.

Review of Petroleum Resource Rent Tax

The Treasurer on 30 November 2016 announced a review of the operation of the Petroleum Resource Rent Tax (PRRT), crude oil excise and associated Commonwealth royalties. The review will advise the Government as to the extent the taxes are operating as originally intended, and address the reasons for the rapid decline of Australian PRRT revenues.

In addition, an issues note which was prepared by the review was released on 20 December 2016. The note provides some background on the relevant taxes and outlines views on key design and administration issues. Submissions in response to the note are due by 3 February 2017.

The review team is due to report back to the Government by April 2017 on recommendations for reform of the PRRT.

R&D and Specific Issues Guidance products

In recognition of common errors being made by companies undertaking research and development (R&D) activities in certain industries, the following new Specific Issues Guidance documents, which are designed to enable companies to correctly self-assess and register eligible R&D, avoid compliance reviews and potential penalties, have been issued:

• Getting software development R&D Tax Incentive claims right

• Getting building and construction R&D Tax Incentive claims right

• Getting mining R&D Tax Incentive claims right

• Getting farming R&D Tax Incentive claims right

Trust providing benefits to employees was not a unit trust

On 21 December 2016 the High Court of Australia handed down its decision in ElecNet (Aust) Pty Ltd v Commissioner of Taxation [2016] HCA 51. The Court unanimously dismissed the appeal from the Full Federal Court, holding that the Electrical Industry Severance Scheme was not a unit trust for the purposes of Division 6C of Part III of the ITAA 1936 because any interest created by the deed in favour of employees could not be characterised as a "unit".

The Court also held that the meaning of "unit trust" in Division 6C of the ITAA 1936 accorded with the common usage of the expression "unit trust" - that is, a trust where the beneficial interest in the trust estate is divided into units as discrete parcels of rights, analogous to shares, which, when created or issued, are to be held by the persons for whose benefit the trustee maintains and administers the trust estate. Refer to this previous edition of TaxTalk monthly for background to the case.

New Reportable Tax Position Schedule

The ATO has published an updated guide to reportable tax positions (RTPs). Substantial changes have been made to RTP Category C which now covers a number of specific issues that ATO finds concerning, most of these having been highlighted in Taxpayer Alerts issued last year. Taxpayers with income years ending on or after 30 June 2017 are required to answer the new Category C questions if they have been notified by the ATO that they must complete the RTP schedule.

The ATO will use the reported information for risk identification, case selection, and identification of unclear tax laws, and is expecting that one of the outcomes of the new reporting regimes is improved tax governance by corporates.

Additionally, for income years ending on or after 30 June 2018, the ATO is extending the RTP schedule to companies in economic groups with turnovers above $250 million. Taxpayers covered by the extension will be notified in writing that they must complete the RTP Schedule with their tax return next year.

Tax transparency in financial statements

Given the global focus on improving the tax transparency of multinational enterprises, the Australian Accounting Standards Board has prepared a Paper that recommends that the accounting standard-setters take a leadership role in improving income tax disclosures in financial reports.

The paper considers the case for amending IAS 12 Income Taxes to address user needs for greater transparency with respect to an entity’s tax practices, including disclosures to enable financial statement users to understand the relationship between income tax amounts reported in financial statements; and why reported tax expense deviates from corporate income tax rate.