New requirement to report uncertain and other tax positions to the Australian Taxation Office
The ATO has recently released the most current draft of the Reportable Tax Position (RTP) schedule. The content and / or design of the schedule is subject to change until 2012 tax time when tax publications are made available. The RTP is to be lodged with the company income tax return. A copy of the draft schedule can be accessed from the ATO website at:
What is a reportable tax position?
The ATO has listed three paragraphs outlining the definitions of reportable tax positions:
- a material position that is about as likely to be correct as incorrect or less likely to be correct than incorrect("...that is, where there is 50% or less likelihood of being upheld by a Court").
- a material position in relation to uncertainty about how taxes payable or recoverable are recognised and / or disclosed by the taxpayer or in a related party's financial statements; and
- a position in respect of a 'reportable transaction'. This term is defined below.
Who is affected?
The purpose of the RTP schedule is to allow large businesses to disclose their most contestable and material tax positions to the ATO that have not been disclosed before lodging a company's tax return. The ATO is on record as stating that the issues that require disclosure are "...those material issues that a robust governance process would escalate to the attention of senior management." The schedule will initially be applied to taxpayers that the ATO has identified and notified as part of the largest economic groups. These taxpayers comprise those that have been determined by the ATO to be either key taxpayers or 'higher risk' (as categorised under the ATO Large Business "Risk Differentiation Framework"). The ATO has notified the applicable taxpayers that will be required to complete the RTP schedule for the 2012 income year. It has been foreshadowed that in the future, the RTP schedule will be rolled out and applied to a broader range of taxpayers, although initially this is expected to be taxpayers with an annual turnover of greater than $250 million.
What is a "reportable transaction"?
A "reportable transaction" has previously been defined by the ATO and includes a 'position' where:
- the taxpayer recognises more than $200 million of income in their financial statements and treats less than 50% thereof as assessable in that year; and
- the transaction involves a change in the effective ownership or control of an entity (or entities), business ( or businesses) or asset (or assets).
What is "material"?
A material position is one which would result in an increase in the income tax liability (or reduction in any tax loss or capital loss), should the position adopted not be sustained and would be considered material for the purpose of the company's financial statements for the current income year.
When will the RTP system commence?
The RTP system will have a soft start date of 1 July 2011 and first apply for the year ending 30 June, 2012. Taxpayers will have the option of reporting early disclosures through the 'RTP Early Disclosure Form' that will be finalised and available on the ATO's website by 23 December 2011. In the meantime, the ATO has released a draft to serve as a guide:
It is noteworthy that a taxpayer that does not have a RTP is still required to complete the RTP schedule stating that it has no reportable 'position'. In addition, income tax returns will not be considered lodged until all relevant RTP information is provided to the ATO.
The information required to be included in the RTP schedule comprise:
- A concise description of the position adopted- taxpayers will be required to outline the facts in a descriptive manner of 'what happened' explaining the position adopted, relevant circumstances, arrangement and/or transaction(s). The description must be clear and detailed as to allow a reasonable person to understand what did or did not transpire;
- The basis for position adopted- for each position adopted by taxpayers they are required to provide a short and accurate outline of relevant case law, legislative provisions and/or the ATO view relied upon. Taxpayers will need to take great care that legal professional privilege is not inadvertently waived in providing their reasoning for the positions that they adopt;
- Details of the related party involved- the ATO requires notification as to whether the relevant tax position is connected to a related party transaction; and
- The "type" of position involved- a statement categorising the tax position adopted under paragraphs (i), (ii) or (iii) of the reportable tax position definitions (refer above).
The ATO has advised that all disclosures are to be submitted in writing and in a format that is acceptable. Examples of how to fill out the disclosures of the schedule can be viewed on the ATO's website at:
The ATO has previously advised that taxpayers that have entered into an Annual Compliance Arrangement (ACA) or Advance Pricing Arrangement (APA), would not be required to lodge the RTP schedule. This is not strictly correct. The ATO has now advised that acceptable forms of notification in relation to relevant "positions" adopted by taxpayers includes: reporting 'reportable tax positions' in ACA or APA reporting or in a private ruling application or in an 'early reportable tax positions' disclosure schedule. In short, there appear no 'exemption' to taxpayers that are required to complete the schedule.
Taxpayers should keep in mind the potential tax risks involved during the process of completing the RTP schedule. They will need to ensure that they have identified and documented all RTPs and in this regard measures may be required to enhance a taxpayer's tax governance processes and controls so as to be sure they identify relevant 'positions'. In addition, each position identified will require supporting documentation that is prepared on a timely basis.
Taxpayer's will need to ensure that financial statement disclosures have been carefully considered and remain consistent with the relevant 'positions' entered into the RTP schedule; this will also require a consideration of financial statement disclosures that carry forward from prior year transactions. Given the inherently subjective nature of transfer pricing, clearly the transfer pricing 'positions' adopted by taxpayers in relation to documentation supporting their international related party pricing arrangements will be critical in the face of any future challenge by the ATO. We anticipate that penalties are likely to increase in future years for any taxpayers that have not taken due care in addressing their transfer pricing 'positions'.
Arguably the real "sleeper" in the new RTP system is the requirement to include in the RTP schedule details of any disclosures that have been made in relation to Australian 'uncertain tax positions' that have been reflected in the financial statements of overseas related parties. As we see it, this will require Australian subsidiaries of overseas parent companies to enquire of their parent entities whether there is anything to report in this regard. We believe that this enquiry will require documentation to be prepared to evidence both the enquiry and resolution of the question whether or not a tax 'position' reflected in the parent entity requires disclosure in the Australian subsidiary's RTP schedule. One wonders how the parent company might react to the relevant questions that can be expected to flow from Australian subsidiary companies.
If you have any questions in relation to the above or wish to discuss your transfer pricing issues, please contact your Moore Stephens Relationship Partner
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