ATO Reportable Tax Position Schedule guide update

The Australian Taxation Office (ATO) has updated its 2017 Guide to Reportable Tax Positions (RTP) to include:

·       an updated list of Category C reportable transactions and arrangements (note this list is updated regularly throughout the year), and

·       additional clarification on the application of penalties.

The ATO has also made changes to the exemption from lodging the RTP schedule for taxpayers in an Annual Compliance Agreement (ACA). To qualify for the exemption, taxpayers will now need to agree to provide full and true disclosure and engage in ongoing dialogue of all material tax matters, including any positions that fall within any RTP category as part of their ACA.

From 2018, the ATO also plans to extend the obligation to lodge a RTP Schedule to include all companies in economic groups with turnovers above AUD250 million.

ATO’s Top 1,000 performance program

The ATO has released information on its Top 1,000 Performance Program, which is one of several programs under the Tax Avoidance Taskforce. The program involves streamlined assurance reviews of the largest 1,000 multinational and public companies, focusing on the income tax affairs of taxpayers with turnover above AUD250 million. This program does not cover taxpayers regularly engaging with the ATO under Pre-lodgment Compliance Reviews or Annual Compliance Arrangements.

Under the program, the ATO indicates that it will work with the vast majority of large taxpayers to obtain additional evidence that they are paying the right amount of tax according to law, and will engage with each taxpayer using tailored compliance approaches.

Draft AASB guidance on effective tax rate for tax transparency code

In response to a request from the Board of Taxation, the Australian Accounting Standards Board (AASB) has developed guidance to assist businesses in meeting the tax transparency code (TTC) recommendations for the suggested tax reconciliation and calculation of the effective tax rate. The draft guidance, contained in a Draft Appendix to the Tax Transparency Code, promotes consistency and comparability of key information about entities' tax positions (in particular, their effective tax rate (ETR) relative to the corporate tax rate), and aims to support entities in presenting income tax disclosures under the TTC for the 2017 tax year. For further information, refer to PwC Australia’s Straight Away IFRS bulletin.

ATO guidance on non-share equity interests issued by an ADI at or through a permanent establishment

The ATO has released Practical Compliance Guideline PCG 2017/10 which provides guidance on the Commissioner's expectations on the application of the provisions regarding unfrankable non-share dividends paid by an Authorised Deposit-taking Institution (ADI) on certain Tier 1 capital raised at or through a foreign branch.

No franking credit entitlement under a dividend washing scheme

The Administrative Appeals Tribunal (AAT) in David Lynton as trustee for the David Lynton Superannuation Fund (Taxation) has affirmed the Commissioner's decision in relation to a dividend washing scheme. The Tribunal found that section 177EA of the Income Tax Assessment Act 1936 was enlivened and the Commissioner correctly made determinations to deny imputation benefits that arose in respect of franked distributions received under the scheme. The Tribunal also determined that section 207-145 of the Income Tax Assessment Act 1997 applied to the shares which were held for less than 45 days and as such, the taxpayer was not entitled to a franking credit in respect of those franked dividends.

Interest income assessed on an accrual basis rather than a receipts basis

The Federal Court in News Australia Holdings Pty Ltd v Commissioner of Taxation dismissed the taxpayer’s appeal and held that the Commissioner correctly included interest income originating under a loan agreement in the attributable income of a controlled foreign company (CFC) on an accrual basis rather than a receipts basis.

The taxpayer had contended that the CFC was not in the business of money lending and was to be assessed on its interest income upon a receipts basis. The taxpayer also argued that the Commissioner was bound to assess the interest income on a receipts basis in accordance with Taxation Ruling TR 98/1: Income tax: determination of income; receipts versus earnings.

Justice Pagone found that an accruals basis of accounting for the interest accruing provided the correct reflex of the CFC’s true income and the taxpayer was to be assessed on that basis. According to his Honour, “income will ordinarily be derived when money has become due to a taxpayer if the accruals (or earnings) basis of tax accounting gives the substantially correct reflex of the true income of the particular taxpayer, but will ordinarily only be derived when received if the receipts (or cash) basis of tax accounting gives the substantially correct reflex of the true income of the taxpayer”.

In finding that the accruals method applied, it was relevant that the CFC accounted for its interest income on an accruals basis and used and relied upon its funds upon accrual. The Court also found without deciding that the CFC did not carry on a business of investment or of lending money, its income earning activities included the lending of money on commercial terms for reward and the interest income had come home in a realised or immediately realisable form upon its accrual.

Finally, the Court held that TR 98/1 “was directed to giving general guidance concerning the application, in the context of interest income, of the general principle that the correct method of tax accounting to adopt was that which gave a substantially correct reflex of income”, and as such, the Commissioner was not bound by the ruling based on the facts of the case.