Latest income tax developments November 2021

ATO UPDATES

Decision impact statement on Federal Commissioner of Taxation v Glencore Investment Pty Ltd [2020] FCAFC 187

• Glencore concerned a transfer pricing dispute in which the Federal Court held that the ATO had incorrectly applied the transfer pricing provisions. In particular, the case considered whether the Commissioner was able to alter the pricing arrangement between the parties to what the Commissioner believed was a more objective and reasonable arrangement. 
• In the decision impact statement, the Commissioner takes the view that the case does not narrow the extent by which a comparable hypothesis is to be personalised and it does not set a stringent standard for depersonalisation under the transfer pricing rules. 
• On the issue of evidence, the Commissioner's view is that expert opinions as to what independent parties in the same industry might reasonably have done is not sufficient to discharge the onus of proof. Furthermore, agreements that exist in the broader industry between independent parties which are not comparable but may establish general reference points, are insufficient to establish arm's length conditions and consideration under the rules. 

Draft taxation ruling TR 2021/D6 Income tax: the games and sports exemption

• The ATO has revised its guidance on the games and sports income tax exemption for clubs in TR 2021/D6. Please refer to our recently published comprehensive bulletin on this new draft ruling.

ATO statement regarding Pandora Papers

• The ATO has responded to the release of the Pandora Papers by the International Consortium of Investigative Journalists (ICIJ) in early October 2021. The Pandora Papers comprise a leak of around 11.9 million documents from 14 different sources around the world. 
• The ATO will be analysing the information to identify any possible Australian links. It will compare the data set with the data the ATO already has to identify any potential connections. 
• The Pandora Papers follow the release of the Panama Papers and the Paradise Papers in recent years, the latter of which was the subject of the High Court's decision in Glencore International AG v Commissioner of Taxation [2019] HCA 26.  In that case, the High Court held that legal professional privilege could not be invoked to prevent the Commissioner from using legal advice publicly disclosed in the Paradise Papers.

ATO guidance on the concept of aggregated turnover

• The ATO has issued a series of determinations on whether an entity is “connected with” another entity for the purposes of determining aggregated turnover under Subdiv 328-C of ITAA 1997. The concept of "aggregated turnover" is relevant to a number of different provisions in the tax law (such as the threshold for application of the taxation of financial arrangements (TOFA) rules and the threshold for application of the employee share scheme "start-up" concession, amongst others).  These determinations will therefore be relevant to a wide range of provisions. 
• TD 2021/D2 Income tax: aggregated turnover - application of the 'connected with' concept to partnerships, foreign hybrids and non-entity joint ventures considers how the provisions to apply to a partnership (excluding corporate limited partnerships). The determination states that it is the partnership, rather than the individual partners, that is the relevant entity when determining whether a partnership directly controls another entity under section 328-125(2). The provisions also apply to foreign hybrid limited partnerships and foreign hybrid companies which are treated as though they were a partnership for income tax purposes under the foreign hybrid rules.
• TD 2021/D3 Income tax: aggregated turnover - application of the 'connected with' concept to corporate limited partnerships considers that the rules for determining aggregated turnover apply to a corporate limited partnership as though it were a company rather than a partnership.
• TD 2021/D4 Income tax: aggregated turnover - application of the public entity exception to the indirect control test considers  the application of the "indirect control test" in section 328-127(7) where the second entity interposed between the first and third entities is of a kind listed in s 328-125(8) such as public entities. In this draft determination the ATO states that the mere presence of an interposed public entity does not result in a control chain being broken. If a public entity is interposed in an ownership structure, the first entity may still control the third entity through direct control.
• TD 2021/7 Income tax: aggregated turnover - calculating the annual turnover of a connected entity or affiliate with a different accounting period to you provides that when calculating a taxpayer's aggregated turnover, the relevant annual turnover of linked entities are determined by reference to the taxpayer's own income year, whether that be a year that ends on 30 June or some other date. 

Draft taxation determination TD 2021/D5 Income tax: when are you genuinely restricted from immediately disposing of an interest provided under an employee share scheme?

• The ruling sets out the principles for determining whether genuine disposal restrictions existed within an employee share scheme (ESS).  The concept of a "genuine disposal restriction" is relevant to determining the taxing point under a tax deferred employee share scheme. 
• In making this assessment, the ruling provides that:
  1. Requirements for an employee to make an application to their employer do not necessarily constitute a genuine disposal restriction.
  2. Disposal restrictions must be sufficiently identifiable, certain and enforceable.
  3. A restriction that may be lifted by the board of a company applying clear and objective criteria may constitute a genuine disposal restriction.

• The ruling largely "codifies" the ATO's views on the principles for determining what constitutes a genuine disposal restriction previously set out in fact sheets on the ATO website.

LEGISLATIVE UPDATES

Additions to list of information exchange countries

• As part of the 2021-22 Budget measures, the Taxation Administration Regulations 2017 (Cth) have been amended to add Armenia, Cabo Verde, Kenya, Mongolia, Montenegro, and Oman to the list of information exchange countries, which are eligible to access the reduced Managed Investment Trust (MIT) withholding tax rate of 15% on certain distributions, instead of the default rate of 30%.
• The amendments apply from 1 January 2022. 

Treasury Laws Amendment (2021 Measures No. 7) Bill 2021

• The Bill has been passed by the House of Representatives with two key measures included.
• Sharing economy reporting regime: The Bill amends the Taxation Administration Act 1953 (Cth) to create an obligation for electronic platform operators to share information on transactions made on their platforms to the ATO. 
• Self-education expenses: The Bill removes the $250 non-deductible threshold for self-education expenses related to work. 

HOT TOPICS

OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS)

• A vast majority of the members of the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS) have agreed to ensure that certain large multinational enterprises (MNEs) will be subject to a minimum 15% tax rate from 2023. 
• In particular, 136 countries and jurisdictions, including Australia, joined the Two-Pillar Solution to be implemented by 2023. 
• Pillar One will reallocate some taxing rights over large MNEs from their home countries to markets where they have businesses activities and earn profits, regardless of their physical presence. These rules will apply to MNEs with global turnover above €20 billion and profitability (ie, profit margin) above 10%, with 25% of profit above the 10% threshold to be reallocated. Regulated financial services and mining companies will be excluded. It is expected that there will only be a handful of Australian companies (if any) affected by this measure, although it is intended that the measure is reviewed after 7 years with the turnover threshold potentially reducing at that time.
• Pillar Two will introduce a global minimum corporate tax rate of 15% to put a floor on competition over corporate income tax for companies with revenue above €750 million. It will include interlocking domestic rules known as the Global anti-Base Erosion Rules (or "GloBE"). In addition, a treaty-based “subject to tax rule” (STTR), will protect the right of developing countries to tax certain base-eroding payments, such as interest and royalties, where they are not taxed up to the minimum rate of 15%. 

Mandatory JobKeeper reporting requirements for listed entities

• In our last bulletin, we covered the new mandatory requirements for listed entities to report any JobKeeper payments received by the entity or its subsidiaries. 

• If a listed entity has lodged its financial report for the relevant financial year with ASIC on or before 13 September 2021, the notice must be given to the market operator within 60 days after 13 September 2021.  In other cases, the notice must be given to the market operator within 60 days after the listed entity lodges the financial report for the relevant financial year with ASIC.

• ASIC has also issued a template for the notice and an information sheet. 

WATCHING BRIEF 

• The finalisation of a number of draft taxation rulings expected in October has been delayed.  This includes the finalisation of Taxation Ruling 2019/D6 (relating to whether certain labour and other costs associated with building and construction of capital assets are capital in nature) and Taxation Ruling 2017/D1 (relating to composite items and identifying depreciating assets for capital allowance purposes), both of which are now expected in December.
• A draft ruling on the residency test for individuals is scheduled for release in November.  This draft ruling is proposed to consolidate a number of existing ATO rulings and provide updated guidance following a string of recent cases.  The new ruling may, however, be no more than an interim measure, given the proposals announced as part of the 2021–22 Federal Budget to replace the individual tax residency rules based on recommendations from the Board of Taxation.
• In addition, a number of draft rulings and guidelines are expected to be finalised in November, including draft TD 2019/D9 (dealing with the application of the "natural love and affection" exception to the debt forgiveness rules), PCG 2021/D2 (dealing with the allocation of profits in professional firms and so called "Everett" assignments) and LCR 2021/D1 (dealing with the temporary full expensing of assets).
• The Privatisation and Infrastructure – Australian Federal Tax Framework, which sets out the ATO's views on a range of taxation issues including with respect to Division 6C, cross-staple arrangements, financing, and other issues that are relevant to infrastructure assets, is now expected expected to be finalised in early 2022.  It is understood that this document will be released in two parts – one relating to public-private partnerships (PPS), and the other relating to privatised infrastructure.