PCG_Number,Document_Type,Title,Status,Date_of_Issue,Date_of_Effect,Date_of_Withdrawal,Replaces,Related_Rulings_and_Determinations,Legislative_References,Summary,Purpose_and_Scope,Background,Compliance_Approach,Examples,Appendices,Other_Sections,Compendium_Reference,Is_Archived,Is_Draft,Source_URL
PCG 2020/2,Final PCG,"Expansion of estimates regime to GST, LCT and WET",,,1 April 2020,,,PS LA 2011/18,Case References: CLK Kitchens & Joinery Pty Ltd v Commissioner of Taxation [2019] FCA 1086 Deputy Commissioner of Taxation v Armstrong Scalisi Holdings Pty Ltd [2019] NSWSC 129 2019 ATC 20-684 Transtar Linehaul Pty Limited v Deputy Commissioner of Taxation [2011] FCA 856 196 FCR 271,"1. This Guideline explains how the Commissioner will administer changes made by Schedule 3 to the Treasury Laws Amendment (Combating Illegal Phoenixing) Act 2020 (Amending Act). 2. Schedule 3 of the Amending Act brings goods and services tax (GST), luxury car tax (LCT) and wine equalisation tax (WET) within the existing estimates and director penalty [1] regimes. 3. This Guideline focuses on the expansion to estimates. The estimates regime enables the Commissioner to make an estimate of certain unpaid and overdue tax-related liabilities and recover the amount of the estimate. [2] 4. This Guideline should be read with Law Administration Practice Statement PS LA 2011/18 Enforcement measures used for the collection and recovery of tax-related liabilities and other amounts . 5. All legislative references in this Guideline are to Schedule 1 to the Taxation Administration Act 1953 unless otherwise indicated.",,,,"Example 1: BAS lodged late, no estimate made 39. Bob the builder has been particularly busy recently and forgot to lodge his BAS until it was two months late. He may be subject to a penalty for lodging late and interest on any liability that is outstanding. Apart from this occasion, he has a good compliance history, generally lodging on time and paying any liabilities as they are due. There is no indication of phoenix behaviour, assets being dissipated or actions being taken to defeat creditors in this case. The Commissioner will not seek to make an estimate of Bob's GST liability. | Example 2: missed BAS lodgment date, no estimate made 40. Angie runs a small business. When she started her business last year, she preferred to lodge her BAS on paper as she liked that the due date for lodging and paying is displayed on her BAS. Last quarter, Angie decided to switch to lodging electronically and did so for the first time. She made sure to update her contact details on myGov and awaited the reminder email for the next quarter. Unfortunately the ATO reminder email was automatically sent to her junk mail folder. A month after she would usually lodge, she wonders whether something has gone awry and finds the email in her junk mail folder. She calls the ATO and is advised to lodge her BAS as soon as possible to minimise any interest charges or penalties. In this case, there is no indication of phoenix behaviour, assets being dissipated or actions being taken to defeat creditors. The Commissioner will not make an estimate of Angie's GST liability in this scenario. | Example 3: missed multiple BAS lodgment dates, no estimate made 41. Carl is a sole trader carpenter. After operating his business for 10 years, he decides to take a break and go on holiday driving around Australia for six months. He usually engages a tax agent to lodge his quarterly BAS. He has a good compliance history, generally lodging on time and paying any tax-related liabilities as they are due. As Carl has temporarily stopped working, and he hasn't been to visit his tax agent recently, he has not lodged a BAS. After his first lodgment date passes without anything being lodged, the ATO systems send him a reminder text message and reminder prompts via the myGov portal. Carl does not receive these messages as he is outside of phone signal range. Carl's tax agent has noticed that the BAS is overdue but similarly can't reach him. When the next lodgment date passes without anything being lodged, further reminders are sent to Carl by both the ATO and his tax agent. When Carl goes into a town, gets phone reception and receives his messages he calls his tax agent to inform her that he's been on holiday and has not been trading. The tax agent lodges a nil BAS for the two periods via the portal for Carl. Despite the missed lodgments, there are no indicators of phoenix behaviour, assets being dissipated or actions being taken to defeat creditors, therefore the Commissioner has not made an estimate of Carl's GST liability in the interim. | Example 4: indicators lead to an audit being commenced 42. Suzie operates an art gallery business. She has employed a bookkeeper to help her with her accounts but otherwise lodges her own BAS and tax returns. A friend recommends a tax agent to her as they were very helpful in reducing their taxes last year. Suzie visits the tax agent and likes what she hears but wonders if it is too good to be true. She asks the tax agent whether the tax law really allows for what is being proposed, seeking some assurance and the tax agent explains to her that they can seek a private ruling if she wants certainty. The tax agent submits a private ruling request to the ATO containing four questions. The Commissioner rules favourably for the first two questions and unfavourably for the last two questions. 43. A year later an ATO team is reviewing Suzie's business' tax affairs and notices some inconsistencies between what was proposed in the private ruling request and what the business seems to have implemented, and their self-assessed tax treatment seems inconsistent with the ruling provided. Suzie's quarterly BAS lodgments show sales on trend with her previous quarters, but significantly higher input tax credits being claimed. The compliance team attempt to contact Suzie via phone but she does not answer and does not return calls after messages are left. The tax agent is no longer listed as an authorised contact on Suzie's account. ATO staff check the data the business is reporting about payments to employees and notice the payments and withholding have continued in a similar pattern to previous years. This risk review identifies some concerns so the ATO commences an audit on the art gallery business. There is no indication of phoenix behaviour, assets being dissipated or actions being taken to defeat creditors. The business's BAS lodgments are up to date. The Commissioner will not make an estimate in this case. | Example 5: company winding up imminent, no estimate made 44. Li and Wei are directors of LW Carpentry Pty Ltd, a carpentry business. Monthly BAS have been reliably lodged on time by LW Carpentry Pty Ltd for many years, until recently. Several months have gone by without any BAS being lodged. 45. Initial calls and texts to Li go unanswered. Contact is then made with Wei, who explains that Li was injured at work and that has caused the business's financial difficulties. They believe the business is not in a position to pay their suppliers and they won't be able to pay their tax liabilities. They have sought advice and intend to place the company into voluntary administration. The ATO will be a creditor. 46. Neither Li nor Wei has been associated with a company that has gone into liquidation before and they hold no other directorships. Records indicate that LW Carpentry Pty Ltd has three employees who are receiving employment income from that company. Third party data does not indicate any drawdown of bank accounts beyond their normal business expenses. 47. In these circumstances, there is no indication of phoenix behaviour. The Commissioner will not make an estimate. | Example 6: estimate made as phoenix behaviour indicated 48. Sebastian and Henry are directors of a company, KeenOne Enterprises Pty Ltd, which provides a luxury goods sales assistance service. The company was registered on 1 July 2018 and has an Australian Business Number (ABN) and a tax file number. Monthly BAS were lodged within due dates for the 2018-19 year, some resulting in a refund being paid to the company, others resulting in GST liabilities. The company has not lodged any BAS since. ATO data indicates that the company does not employ staff, however three individuals (unrelated to Sebastian and Henry) have lodged their 2019-20 tax returns showing employment income from the company and claiming credits for income tax withheld by the company. 49. The 2018 company tax return shows significant income but with an overall loss. The director payments disclosed in the company tax return have not been declared as income by the directors as they have not lodged their personal tax returns either. 50. BAS lodgment reminders have been sent to the company and the directors. Attempts to contact the directors have not been successful. Third-party data indicates that the company bank accounts are being drawn down; ad hoc withdrawals of amounts under $10,000 commenced in July 2019 and have since been increasing in size and frequency. 51. A check with the Australian Securities and Investments Commission shows that Sebastian and Henry have recently registered a new company, Keen2Go Enterprises Pty Ltd, with the same business address as KeenOne Enterprises Pty Ltd. Further checks show that the new company has just applied for an ABN and GST registration. In this scenario, there are reasonable indicators of phoenix behaviour. The Commissioner uses the estimates regime to estimate the PAYG withholding, SGC and GST liabilities of the company for periods after the last BAS was lodged. | Example 7: estimate made as phoenix behaviour indicated 52. Mandy and Christina are directors of Cars Co, a car dealership and servicing company. The entity reports and pays GST quarterly. Their GST net amounts have been in the range between $18,000 and $25,000 for each quarter from the beginning of 2018. 53. Cars Co fails to lodge its quarterly BAS for the January-March 2020 and April-June 2020 tax periods. 54. A tax officer attempts to contact Mandy and Christina to encourage lodgment of their outstanding BAS. Despite numerous promises to do so, they do not comply. Through investigation, a tax officer discovers that Mandy and Christina have previously been directors of three other similar companies, which operated from the same premises as Cars Co, and have been placed into liquidation leaving multiple tax debts unpaid. 55. This pattern of behaviour indicates that Cars Co may soon be liquidated to avoid outstanding debts, including unpaid GST and falls within the circumstances described in paragraph 13 of this Guideline. There is a time-sensitive risk to revenue which warrants speedy recovery action, so an estimate of unpaid tax-related liabilities is made. 56. To calculate the estimate, the tax officer takes into account: 57. In these circumstances, the reasonable estimate of unpaid amounts for each period are considered and the Commissioner issues a notice of estimate pursuant to Division 268 to Cars Co for the unpaid and overdue amounts of $22,000 for the quarter ended 31 March 2020 and $19,000 for the quarter ended 30 June 2020. 58. The notice is taken to be given at the time the Commissioner posts it to Cars Co. In the letter accompanying the notice of estimate, the Commissioner allows 21 days for the making of a statutory declaration in response. 59. If the company engages with the tax system: Mandy and Christina, as directors of Cars Co, provide the Commissioner, within 21 days, a complying statutory declaration verifying the requisite facts (see paragraphs 10 to 12 of this Guideline) and with sufficient evidence to demonstrate that their business is seasonal and their GST liabilities were significantly less for the last two quarters of the income year. As the complying statutory declaration is provided within the relevant period, the reduction of the estimate is automatic. 60. Alternatively, if the company ignores the notice: Cars Co fails to engage with the Commissioner and does not discharge any of the estimated GST liabilities, and Mandy and Christina fail to cause Cars Co to comply with its obligations under the Taxation Administration Act 1953 to pay the estimate. The Commissioner can commence immediate action to recover the unpaid amount of the estimate.",,,/law/view/document?LocID=%22COG%2FPCG20202EC%2FNAT%2FATO%2F00001%22&PiT=99991231235958,False,False,https://www.ato.gov.au/law/view/document?docid=COG/PCG20202/NAT/ATO/00001
PCG 2025/1,Final PCG,Fees for personal financial advice paid from member accounts by superannuation funds - apportioning the deduction and pay as you go withholding obligations,,,11. This Guideline applies as follows:,,,PS LA 2007/22,,"1. Legislative amendments to the Superannuation Industry (Supervision) Act 1993 (SISA) and the Income Tax Assessment Act 1997 (ITAA 1997) [1] were enacted to clarify the legal basis for the payment by a superannuation fund of financial advice fees [2] which are paid from or charged to members' superannuation interests (members' accounts), and the associated income tax consequences. 2. All legislative references in this Guideline are to the ITAA 1997, unless otherwise indicated. 3. This Guideline outlines: 4. A fund may choose whether to use the methodology outlined in Part 1 of this Guideline. However, by following the methodology in this Guideline, you can be confident that we will not have cause to apply compliance resources to review whether you satisfy the requirement in paragraph (d) of table item 5 of subsection 295-490(1), other than to verify compliance with this Guideline. 5. This Guideline does not apply to the other requirements, in paragraphs (a), (b) or (c) of table item 5 of subsection 295-490(1), which must also be satisfied for a payment of a financial advice fee to be deductible under that item. It is our expectation that a fund would have a documented governance framework and assurance practices in place that is adequate in meeting their income tax obligations for the deduction of financial advice fees for the purposes of satisfying paragraphs (a), (b) and (c) of table item 5 of subsection 295-490(1). This may be considered along with other relevant documentation when we engage with a fund as part of our compliance programs. 6. This Guideline does not consider the goods and services tax treatment of the payment of a financial advice fee. 7. This Guideline also does not consider how a fund should fulfil their obligations under the SISA in relation to a financial advice fee. Who this Guideline applies to 8. You may rely on this Guideline to determine the extent to which payments of financial advice fees satisfy paragraph (d) of table item 5 of subsection 295-490(1) for an income year, for financial advice fees paid from, or charged to, members' accounts (under Part 1 of this Guideline), if you: 9. The methodology in Part 1 of this Guideline is not available to SMSFs. SMSFs have a limited number of members. Where a trustee of an SMSF pays a financial advice fee at the request, or with the consent, of a member, it is expected that the trustee will review each piece of personal advice provided to the member to determine the extent to which the financial advice fee is deductible. 10. All superannuation funds, including SMSFs , may rely on this Guideline in relation to our compliance approach (under Part 2 of this Guideline) to funds' PAYG withholding obligations for income years prior to the 2019–20 income year.",,"Deductibility of financial advice fees and apportionment 12. Under table item 5 of subsection 295-490(1), a fund [6] can claim a deduction for an amount paid by the fund [7] to the extent: 13. Some larger funds have the compliance challenge of assessing whether and to what extent each financial advice fee paid satisfies these conditions. 14. In particular, funds need to determine whether a financial advice fee is wholly incurred in relation to gaining or producing the fund's assessable income in accordance with paragraph (d) of table item 5 of subsection 295-490(1). If not, funds would be required to apportion those fees using an appropriate method to ensure that a deduction is not claimed to the extent that the financial advice fees were incurred in relation to deriving the fund's exempt income or non-assessable non-exempt income. 15. The apportionment requirement in paragraph (d) of table item 5 of subsection 295-490(1) mirrors the requirements for general deductions under paragraph 8-1(1)(a) and paragraph 8-1(2)(c). Accordingly, the apportionment principles set out in Taxation Ruling TR 93/17 Income tax: income tax deductions available to superannuation funds apply to the deduction of financial advice fees. Consistent with paragraph 7A in TR 93/17, financial advice fees for personal advice that are distinct and severable outlays should be apportioned according to the distinct and severable method outlined at subparagraph 7(1) of TR 93/17. 16. We recognise that funds may incur significant compliance costs and an administrative burden in determining an appropriate approach to apportioning financial advice fees for personal advice. These costs may be disproportionate to the amount of the deduction funds are seeking to claim. 17. Part 1 of this Guideline sets out a practical compliance approach funds may use to determine the extent to which payments of financial advice fees paid from, or charged to, members' accounts satisfy paragraph (d) of table item 5 of subsection 295-490(1). Historical pay as you go withholding obligations 18. Under the PAYG withholding regime, funds may be required to withhold amounts from payments to members that are superannuation benefits. [9] 19. Under paragraph 307-10(e), the payment of a financial advice fee is excluded from the definition of a superannuation benefit if it: 20. The exclusion only applies from the 2019–20 income year onwards. This means, for income years prior to the 2019–20 income year, funds may have had an obligation to withhold from the payment of certain financial advice fees paid on behalf of the member (depending on the nature of the underlying arrangements between the parties). There is no time limit for us to impose a penalty for failing to withhold. 21. Part 2 of this Guideline sets out our compliance approach to the PAYG withholding obligations of funds for financial advice fees that satisfy the criteria in paragraph 307-10(e) but were paid prior to the 2019–20 income year. Part 1 – Apportioning your deduction using the account-based method","Intro: 22. We will not have cause to apply compliance resources to review the apportionment of your deduction for financial advice fees for the purposes of paragraph (d) of table item 5 of subsection 295-490(1) if you: 23. If you are found not to have satisfied the requirements in paragraph 22 of this Guideline, you will not be able to rely on Part 1 of this Guideline to determine the extent to which payments of financial advice fees satisfy paragraph (d) of table item 5 of subsection 295-490(1) for that income year. | The account-based method: 24. The account-based method is a simplified method for determining the extent to which payments of financial advice fees paid from, or charged to, members' accounts satisfy paragraph (d) of table item 5 of subsection 295-490(1), based on the type of member's superannuation interest the financial advice fee has been paid from or charged to. 25. Under the account-based method: 26. To be clear, the account-based method is only a method for determining the extent to which payments of financial advice fees satisfy paragraph (d) of table item 5 of subsection 295-490(1). The account-based method is not relevant for determining whether you satisfy the remaining requirements in paragraphs (a), (b) and (c) of table item 5 of subsection 295-490(1). 27. If you choose to apply the account-based method for an income year, it must be applied to all financial advice fees paid in that income year. [12] However, you can change your choice from year to year. 28. You cannot claim a deduction for any of these financial advice fees under any other provision of the income tax Acts [13] , including section 8-1.",,,,/law/view/document?LocID=%22COG%2FPCG20251EC%2FNAT%2FATO%2F00001%22&PiT=99991231235958,False,False,https://www.ato.gov.au/law/view/document?docid=COG/PCG20251/NAT/ATO/00001
PCG 2016/1,Final PCG,"Practical Compliance Guidelines: purpose, nature and role in ATO's public advice and guidance",,,3. This Guideline will have effect from its date of issue.,,,PS LA 2011/27 | TR 2006/10,,1. This Guideline outlines the nature and role of practical compliance guidelines within the framework of public advice and guidance provided by the ATO in relation to administration of the tax laws. 2. This Guideline explains:,,,,,,,,False,False,https://www.ato.gov.au/law/view/document?docid=COG/PCG20161/NAT/ATO/00001
PCG 2021/1,Final PCG,Application of market value substitution rules when there is a buy-back or redemption of hybrid securities - methodologies for determining market value for investors holding their securities on capital account,,,6. This Guideline applies both before and after its date of issue.,,,,,"1. A common form of security in the market is a hybrid security, which is an instrument that exhibits features of both debt and equity. Some of the more common types of hybrid securities are preference shares and capital notes, with these being particularly common in the banking and finance industry. The terms of such hybrid securities will generally permit (but not require) the issuer of the hybrid security to 'repay' investors at a particular time in the future where certain conditions are satisfied. Where the issuer does not elect to repay the investors at that time, the hybrid securities will usually convert into ordinary shares in the issuer at a determined point in time or continue to remain on issue until another relevant date with the option to repay or convert. 2. The actual form of repayment will depend on the legal form of the hybrid security. Where the hybrid security is in the form of a preference share ( hybrid share ), the issuer may, among other mechanisms, repay the investor through an off-market buy-back of the share or, where the hybrid security is in the form of a note ( (hybrid note ), through redemption of the note. Where this happens certain market value substitution rules (MVSRs) in Australia's income tax law (as discussed at paragraphs 7 to 14 of this Guideline) will require the holder of the hybrid security to determine its market value as a part of the process of determining the capital proceeds from the repayment or redemption. 3. In this type of fact pattern it is important to emphasise that MVSRs can apply despite the fact that the hybrid securities are widely held and the issuer is acting at arm's length from the holders. This is of relevance because the capital proceeds that are substituted under the MVSRs may not necessarily be equal to the amount actually received. 4. The ATO recognises the practical problems faced by investors in determining the market value of a hybrid security for the purposes of calculating capital proceeds from a buy-back or redemption. This Guideline provides a practical compliance approach for determining the market value of a hybrid security for capital gains tax (CGT) purposes when it is bought back or redeemed (as relevant) from an investor holding it on capital account. 5. This Guideline does not apply to an acquisition, buy-back or redemption of a hybrid security that is subject to the taxation of financial arrangements (TOFA) provisions under Division 230 of the Income Tax Assessment Act 1997. [1]","Scope: 17. The methodologies in this Guideline are confined to the application of the MVSRs in the situations mentioned in paragraphs 7 to 14 in this Guideline (that is, redemption of a hybrid note held on capital account or buy-back of a hybrid share held on capital account). However, this Guideline does not consider the appropriateness (or otherwise) of different mechanisms to repay investors in hybrid securities (for example, resale mechanism) for the purposes of the anti-avoidance rules. Transaction structure 18. When a hybrid security is subject to a buy-back or redemption one of 2 approaches is generally adopted by the issuer of the hybrid security: 19. As the 'two-dates approach' involves a buy-back or redemption of hybrid securities on 2 different dates, the market value for CGT purposes will need to be determined separately for each date.",,"Intro: 20. The methodology described in this Guideline will apply to a hybrid security with the following features: 21. The ATO will adopt the following practical compliance approach for a hybrid security that satisfies the requirements in paragraph 20 of this Guideline. | Market value on specified call date: 22. For the purposes of subsection 116-30(2) or subsection 159GZZZQ(2) of the ITAA 1936 (as relevant), the ATO will accept that the market value of a hybrid security on its specified call date is equal to its face value. [6] | Market value on reinvestment date: 23. For the purposes of subsection 116-30(2) or subsection 159GZZZQ(2) of the ITAA 1936 (as relevant), where a hybrid security features a reinvestment date before its specified call date then the ATO will accept that the market value of the hybrid security on the reinvestment date is equal to an amount calculated in accordance with the hybrid security's volume weighted average price (VWAP) over the last 5 trading days prior to the first announcement date, adjusted for any accrued distributions (refer to paragraph 45 of this Guideline for the steps to calculate the modified VWAP). Such an amount will be accepted so long as the result is within a tolerance of 2% of the amount received for the buy-back or redemption. [7] 24. Where the calculated VWAP is outside the acceptable tolerance range then: 25. In relation to the accepted valuation methodology for these early reinvestment date calculations, requiring the result of the VWAP calculation to be within an acceptable tolerance, is designed to cater for unusual conditions that may be present (for example, insufficient trading to produce a true market price) and which may indicate that the VWAP valuation methodology does not produce an acceptable proxy for determining the market value of the relevant securities.","Example s: 26. The following examples assume that there will be no incidental or other costs (for example, brokerage or advisory fees) associated with the acquisition, disposal or redemption of the relevant hybrid securities. Investors who incur such costs will need to take them into account in working out any capital gain or capital loss they make from a buy-back or redemption of their hybrid securities. Scenario 1 - single-date approach 27. Bank A issued subordinated preference shares to the market with a face value of $100 per preference share, with a call date at the end of the fifth year after issue. 28. Bank A announced to the market, one month prior to the call date, that holders of the preference shares will have the option of reinvesting the proceeds of the preference shares into a new tranche of preference shares to be issued by the Bank on the call date. As part of the reinvestment process, Bank A will buy back the original shares and apply the proceeds to the issue of new shares on the call date. 29. The preference shares are bought back from investors on the call date and they receive the face value of $100 per preference share. 30. In this scenario, for the purposes of determining an investor's capital proceeds, CGT event A1 happens to an investor upon the preference shares being bought back by Bank A. In determining the capital proceeds an investor is taken to receive may be modified by the MVSR in section 159GZZZQ of the ITAA 1936. However, the capital proceeds from the buy-back will not be modified by the MVSR as the ATO accepts the market value of each note as being $100 (that is, the amount received which is equal to the face value) at the time of the preference shares being bought back. 31. This means an investor that subscribed for the preference shares for $100 when they were originally issued and that is holding the securities on capital account will not have a capital gain or capital loss. Scenario 2 - 2-dates approach 32. Bank B issued subordinated convertible notes (original notes) to the market with a face value of $100 per note, with a call date at the end of the fifth year after issue. 33. Bank B announced to the market 3 months prior to the call date that holders of the notes have the option of reinvesting the proceeds of the notes into a new tranche of notes to be issued by the Bank 2 months prior to the call date of the original notes (date X). As part of this reinvestment process, Bank B will redeem the original notes from investors participating in the reinvestment for $100 per note, with the proceeds being applied to the issue of new notes. 34. The 5-day VWAP of each original note calculated at the time of the announcement is $100.80. 35. Investors that chose not to participate in the reinvestment option had their notes redeemed on the call date, receiving an amount equal to the face value of $100 per note. 36. In this scenario, for the purposes of determining an investor's capital proceeds, CGT event C2 happens on date X for investors that participate in the reinvestment and on the final call date for non-participating investors. The ATO accepts that: Scenario 3 - 2-dates approach with resale mechanism 37. Bank C issued subordinated convertible notes (original notes) to the market with a face value of $100 per note, with a call date at the end of the fifth year after issue. An optional resale mechanism (exercisable at the option of Bank C) is included in the terms and conditions in the prospectus for the convertible notes whereby Bank C can elect to engage a third party (the Purchaser), usually an investment bank, to acquire the original notes from the investors (instead of redeeming the original notes directly from investors). Where Bank C chooses the resale mechanism, it will redeem all (or a portion) of the notes from the Purchaser immediately after the acquisition. Bank C included this resale option in the terms of notes to provide it with flexibility in managing its capital position, as there was a possibility it may have wanted to convert some securities to ordinary shares depending on its equity capital position at the time of redemption. 38. Bank C announced to the market 3 months prior to the call date that holders of the subordinated convertible notes have the option of reinvesting the notes into a new tranche of notes to be issued by the Bank 2 months prior to the call date of the original notes (date Y). As part of the reinvestment and redemption process, Bank C has elected to engage the optional resale mechanism. 39. The 5-day VWAP of each original subordinated convertible note calculated at the time of the announcement is $99.80. 40. Investors that chose not to participate in the reinvestment option had their subordinated convertible notes bought back on the call date, receiving an amount equal to the face value of $100 per note. 41. On date Y, the Purchaser acquired the original notes from the participating holders for an amount of $100 per note. The proceeds were applied on behalf of the holders of the original notes towards payment of the subscription price for the new notes. 42. On the call date, the Purchaser acquires all the remaining notes on issue from the investors for an amount of $100 per note. Immediately after the Purchaser acquires the original notes from the investors, Bank C redeems all the notes from the Purchaser for $100 per note. 43. In this scenario, for the purposes of determining the capital proceeds for an investor, CGT event A1 happens to the investors when the Purchaser acquires their original notes and the capital proceeds from the event will be $100 per note. The MVSR will not apply to this event. This means an investor that subscribed for the hybrid securities for $100 per note when they were originally issued, and that is holding the securities on capital account, will not have a capital gain or capital loss. 44. The taxation consequences for the Purchaser will depend on a number of factors, including (but not limited to): Calculation of modified volume weighted average price 45. The process of applying modified VWAP involves the following steps: 46. Note that in calculating the VWAP, regard should be given to the definition of 'volume weighted average market price' in the ASX Listing Rules 19.12, introduced on 1 July 2014.",,,,False,False,https://www.ato.gov.au/law/view/document?docid=COG/PCG20211/NAT/ATO/00001
PCG 2018/2,Final PCG,Propagation arrangements adopted by registrable superannuation entities,,,1 July 2018,,,,,1. This Guideline sets out the ATO's compliance approach to the use of propagation in selecting assets for disposal.,,"5. The Commissioner's views on asset identification principles and record keeping methodologies are contained in CGT Determination TD 33 Capital Gains: How do you identify individual shares within a holding of identical shares? , Taxation Ruling TR 96/4 Income tax: valuing shares acquired as revenue assets and Taxation Ruling TR 96/7 Income tax: record keeping - section 262A - general principles . 6. TD 33 confirms that, for capital gains tax purposes, where a disposal occurs: 7. TR 96/4 provides: 8. TR 96/7 sets out the Commissioner's view on records sufficiently maintained to record and explain all transactions in accordance with section 262A of the Income Tax Assessment Act 1936 . What is propagation? 9. Propagation is a term adopted by custodians to describe a tax parcel selection process. Under propagation, the tax parcel selection methodology agreed with the RSE is applied across the RSE's asset class level holdings instead of being confined to the individual fund manager level. 10. When assets are disposed of, the relevant parcel is selected from the propagated portfolio for each transaction, based on the parcel selection methodology agreed with the RSE.","Intro: 11. This section explains the Commissioner's compliance approach to propagation arrangements that satisfy the asset identification principles and record keeping methodologies described in TD 33, TR 96/4 and TR 96/7. | Where propagation is low risk: 12. The Commissioner will generally not apply compliance resources to propagation arrangements when all of the following circumstances are satisfied: 13. The Commissioner may devote limited compliance resources to confirm that particular propagation arrangements satisfy these parameters. | Where propagation is not low risk: 14. The Commissioner considers that a propagation arrangement is not low risk where it does not satisfy each of subparagraphs 12(a) to 12(g) of this Guideline. 15. Furthermore, propagation arrangements the Commissioner considers are not low risk include those arrangements where: 16. Where a particular propagation arrangement is not low risk, the Commissioner may apply compliance resources to examine the arrangement in more detail. | The application of the general anti-avoidance provisions: 17. The general anti-avoidance provisions may apply to a propagation arrangement adopted by an RSE, for example, where it is part of a scheme that exhibits the following type of features: 18. In these circumstances, the Commissioner may conclude that the scheme was entered into, and carried out, to enable the RSE to make a choice to segregate and then unwind the segregation of its current pension asset pool, resulting in the obtaining of a tax benefit in the form of omitted assessable income.",,,,,False,False,https://www.ato.gov.au/law/view/document?docid=COG/PCG20182/NAT/ATO/00001
PCG 2016/15,Final PCG,Effects of the Addendum to Taxation Ruling 2002/14,,,2,,,PS LA 2003/7 | TR 2002/14,Case References: Re Retirement Village Co and Federal Commissioner of Taxation [2011] AATA 298 2011 ATC 1-031 (2011) 83 ATR 757 Re Retirement Village Operator and Federal Commissioner of Taxation [2013] AATA 887 2013 ATC 1-061 (2013) 96 ATR 455,"1. This Guideline sets out some of the effects of the Addendum dated 26 November 2014 to Taxation Ruling 2002/14 Income tax: taxation of retirement village operators (TR 2002/14A2) for retirement village operators making capital growth payments before, on or after, 26 November 2014.",,,,,,,,False,False,https://www.ato.gov.au/law/view/document?docid=COG/PCG201615/NAT/ATO/00001
PCG 2021/2,Final PCG,Fuel tax credits - basic method for heavy vehicles,,,1 October 2020,,,,,"1. Your fuel tax credit entitlement is reduced by the amount of the road user charge to the extent that the fuel is used for travel on a public road. [1] This requires an apportionment between the fuel used for travel on a public road and that used for other purposes. 2. This Guideline provides a simplified apportionment method to assist you in meeting your fuel tax credit obligations. 3. The use of the simplified method is not mandatory but aims to reduce compliance costs and make it easier for you to calculate fuel tax credits for diesel acquired and used in heavy vehicles. 4. In this Guideline, a 'heavy vehicle' is one that has a gross vehicle mass of greater than 4.5 tonnes (or, if acquired before 1 July 2006, has a gross vehicle mass of 4.5 tonnes or more). It is only these vehicles that are entitled to any credit for fuel used for travel on a public road.",,,,,,,,False,False,https://www.ato.gov.au/law/view/document?docid=COG/PCG20212/NAT/ATO/00001
PCG 2019/2,Final PCG,Fuel tax credits - practical compliance methods for farmers in disaster affected areas,,,3,,,,,"1. In meeting their fuel tax credit obligations an entity must: 2. These requirements can result in an additional compliance burden for entities in the agricultural industry when affected by natural disasters. To alleviate some of the burden, this Guideline provides some acceptable, practical compliance methods to assist these claimants in meeting their obligations.",,,,,"Appendix 1: Tax periods and postcodes applicable 12. For all taxable fuel acquired for use in carrying on your enterprise in an affected postcode during the tax periods, see the lodgment and payment deferral information for natural disasters . 13. The affected claimant entities are involved in cultivation or gathering in of horticulture, grains and crops and also the breeding and rearing of livestock and other farm animals. The affected ANZSIC codes are Subdivision A - 01 Agriculture (codes 011 to 019) listed below. © AUSTRALIAN TAXATION OFFICE FOR THE COMMONWEALTH OF AUSTRALIA You are free to copy, adapt, modify, transmit and distribute this material as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products). Not previously issued as a draft",,,False,False,https://www.ato.gov.au/law/view/document?docid=COG/PCG20192/NAT/ATO/00001
PCG 2016/2,Final PCG,Fuel tax credits - practical compliance methods for small claimants,,,31 March 2016,,,,,"1. In meeting their fuel tax credit obligations an entity must: 2. Currently, these requirements can result in significant compliance costs and administrative burdens for small claimants that are disproportionate to their fuel tax credit claims. To alleviate some of these costs and burdens, this Guideline provides some acceptable, practical compliance methods to assist small claimants in meeting their obligations.",,,,,,,,False,False,https://www.ato.gov.au/law/view/document?docid=COG/PCG20162/NAT/ATO/00001
PCG 2016/3,Final PCG,Fuel tax credits - fuel tax credit rate for non-business claimants,,,2,,,,,1. This Guideline sets out an acceptable practical approach to determine the fuel tax credit rate for non-business claimants lodging fuel tax credit claim forms. This approach deals with the disproportionate compliance and administration costs for non-business claimants and the ATO that can arise periodically from changes in the fuel tax credit rate. Commonly such rate changes occur as a result of indexation (February and August) during the period to which a claim may relate. 1A. All legislative references in this Guideline are to the Fuel Tax Act 2006.,,"5. Under section 42-5, there is a fuel tax credit entitlement for a non-business claimant in respect of taxable fuel acquired for their use in generating electricity for domestic use. 6. A non-profit body is also entitled to a fuel tax credit within subsection 41-5(3) for taxable fuel they acquire for use in a vehicle or vessel that provides emergency services. The vehicle must be clearly marked as an emergency vehicle. 7. These non-business claimants, who are not otherwise registered for GST, claim their fuel tax credits on a 'Fuel tax credit claim form'. The claim form must show details of the: 8. A non-business claimant is not required to calculate the amount of fuel tax credit when lodging their claim form. 9. The rate of fuel tax credit is determined under subsection 43-5(2) by reference to the rate of excise or customs duty in force on the day on which the taxable fuel was acquired (see subsection 43-5(2A)). 10. Therefore, where the rate of duty on fuel changes during the claim period, a non-business claimant may have entitlement to fuel tax credits at differing rates depending on the day on which the taxable fuel was acquired. Fuel tax credit rate for non-business claimants 11. The Commissioner will accept, as a matter of practical administration, that the non-business claimant has acquired (purchased) all the taxable fuel on the last date that the fuel was purchased where: 12. Accordingly, the Commissioner will calculate the fuel tax credit for all the taxable fuel acquired during the claim period by reference to the fuel tax credit rate in force on the last fuel purchase day.",,"Example 1: 13. Astrid has no access to the electricity grid at her residential premises. She purchases diesel to generate electricity using a generator for domestic use. 14. Astrid purchased diesel on: 15. When lodging her fuel tax credit claim in late March 2022, Astrid sets out the first and last purchase dates as 21 January 2022 and 28 March 2022 respectively. 16. There was a fuel tax credit rate change due to indexation where the rate changed for fuel purchased on or after 1 February 2022. As a matter of practical administration, Astrid's fuel tax credit will be calculated as if she had acquired all of the fuel for the claim period on 28 March 2022 (when she made her final purchase). That is, the amount of fuel tax credit will be calculated at 44.2 cents per litre (rate in force on the final purchase date). Non-indexation rate changes 17. To ensure non-business claimants receive their correct fuel tax credit entitlements, where a claim period covers fuel purchased both before and after a non-indexation rate change, it will be necessary to lodge separate claim forms. One claim form will be for fuel covering the period prior to the non-indexation rate change. The other claim form will cover fuel purchased on or after the non-indexation rate change. This will minimise delays in processing and ensure the correct rates are applied to the claim. | Example 2: 18. In June 2022, Esther wishes to claim fuel tax credits for fuel acquired both before and after 30 March 2022. A non-indexation rate change (reduction) came into effect on 30 March 2022. 19. So that Esther gets her correct fuel tax credit entitlement in June 2022, she should lodge two claim forms: 20. This will ensure the correct rates are applied to Esther's claims. More information 21. For more information, see:",,,,False,False,https://www.ato.gov.au/law/view/document?docid=COG/PCG20163/NAT/ATO/00001
PCG 2016/4,Final PCG,Fuel tax credits - incidental travel on public roads by certain vehicles,,,31 March 2016,,,,,"1. For the listed vehicles in paragraph 6, this Guideline sets out what will be considered a fair and reasonable apportionment of the taxable fuel between travel that is:",,,,"Example 1: travel by a harvester 7. Minate Enterprises carries on a primary production business on an agricultural property. Parts of the property are separated by a public road. Minate uses a harvester it owns to harvest crops on its farm. In the course of harvesting, the harvester travels 2 kilometres on the public road to get from one part of the property to another. 8. The harvester is not a vehicle for transporting goods or passengers; its main use is to harvest crops. The travel on the public road is incidental to the vehicle's main use. 9. For practical compliance purposes, it is accepted that all of the vehicle's travel is on non-public road areas. | Example 2: travel by a tractor 10. XYZ Council uses a tractor that is less than 4.5 tonnes that has mower and slasher attachments to maintain the grass on the parks, recreational ovals and school grounds in the council area. The tractor is housed at the council's vehicle depot. 11. The tractor travels from the depot to the various parks, ovals and school grounds for the purpose of maintaining the grass. The distance travelled varies depending on the location of the park, oval or school and whether the vehicle is travelling directly from the depot to each location or between these locations. 12. The tractor is not a vehicle for transporting goods or passengers; its main use is to pull and operate the mowing and slashing equipment. 13. For practical compliance purposes, it is accepted that all of the vehicle's travel is on non-public road areas. This is irrespective of whether the travel is from the depot to each location or between the locations. More information 14. For more information, see:",,,,False,False,https://www.ato.gov.au/law/view/document?docid=COG/PCG20164/NAT/ATO/00001
PCG 2016/8,Final PCG,Fuel Tax Credits - apportioning fuel for fuel tax credits,,,31 July 2010,,,PS LA 2010/3 | PS LA 2013/4,,"1. In Fuel Tax Determination FTD 2010/1, it is explained that entities may need to use a 'fair and reasonable' apportionment method to calculate the extent of their entitlement to a fuel tax credit. 2. This Guideline provides some acceptable, practical methodologies to assist taxpayers in apportioning taxable fuel to meet their fuel tax credit obligations. It also explains various principles, measures and factors that may be applied to determine if other methods used are also 'fair and reasonable.' 3. If one of the methods and measures set out in this Guideline is applied appropriately in the entity's circumstances, then it will be accepted as fair and reasonable apportionment. Taxpayers do not have to follow the methods outlined in this Guideline and may use other methods provided they can be shown to result in a fair and reasonable apportionment of taxable fuel use for the purpose of calculating fuel tax credit entitlements. 4. A glossary of terms used in this Guideline is provided in Attachment A .",,,,,,,,False,False,https://www.ato.gov.au/law/view/document?docid=COG/PCG20168/NAT/ATO/00001
PCG 2016/11,Final PCG,Fuel tax credits - apportioning taxable fuel used in a heavy vehicle with auxiliary equipment,,,7 September 2016,,,PS LA 2013/4,,"1. Under subsection 43-10(3) of the Fuel Tax Act 2006 , a fuel tax credit entitlement in relation to 'heavy' [1] vehicles is reduced by the amount of the road user charge to the extent that the fuel is used for travel on a public road. This requires an apportionment of fuel between use for travel on a public road and use for other purposes. 2. For the listed vehicles in the table following paragraph 9, this Guideline sets out what will be considered a fair and reasonable apportionment between fuel used for travelling on a public road (and therefore subject to the road user charge) and fuel used for other purposes (primarily to power auxiliary equipment but also for use off public roads). 3. This Guideline is intended to update and clarify guidance previously provided in Law Administration Practice Statement PS LA 2013/4 (GA) Apportioning taxable fuel used in a vehicle for powering the auxiliary equipment of a vehicle.",,,,,,,,False,False,https://www.ato.gov.au/law/view/document?docid=COG/PCG201611/NAT/ATO/00001
PCG 2024/2,Final PCG,Electric vehicle home charging rate - calculating electricity costs when a vehicle is charged at an employee's or individual's home,,,11. This Guideline applies for electric vehicles:,,,,,"1. Zero emissions vehicle [1] (electric vehicle) and plug-in hybrid electric vehicle [2] (PHEV) use is on the rise in Australia. Employers with fringe benefits tax (FBT) obligations and individual taxpayers (individuals) who incur work-related car and motor vehicle expenses face a compliance challenge in calculating electricity costs of charging vehicles at residential premises. This is because electricity usage for charging electric vehicles and PHEVs is combined with the total electrical consumption of the household, and often cannot be separately identified and valued. 2. To address the compliance challenge for employers and individuals, this Guideline outlines methodologies we have developed to calculate the cost of electricity when an electric vehicle or PHEV is charged at an employee's or individual's home. 3. A different methodology applies to PHEVs which recognises that they operate on a combination of both electricity and petrol fuel. 4. To determine the cost of the electricity used, an individual or an employer may choose to use one of the methodologies outlined in this Guideline, or, may identify the actual cost. The choice of method is to be made for each vehicle and is to be applied for the whole of the income or FBT year. The method chosen can be changed by the employer or individual from year to year. 5. This Guideline does not apply to electric motorcycles or electric scooters. 6. Table 1 of this Guideline outlines the relevant provisions for FBT and income tax purposes for which the electric vehicle or PHEV home charging rate (EV home charging rate) may be applied. 7. This Guideline does not deal with the GST implications of payments that employers make to their employees in relation to the cost of charging of an electric vehicle or PHEV at an employee's home. Who this Guideline applies to Employers who can rely on this Guideline 8. You may rely on this Guideline to calculate electricity costs of charging an electric vehicle or PHEV at the employee's home if you are an employer who: Individuals who can rely on this Guideline 9. You may rely on this Guideline to calculate electricity costs of charging an electric vehicle or PHEV at your home if you: 10. If you choose to rely on this Guideline, you must have incurred the vehicle home charging electricity cost. The vehicle home charging electricity cost is incurred when an amount is actually paid or when a definitive obligation to pay the amount arises. This will generally occur where you have entered into a contract for the supply of electricity for the home which is in place at the time you charge the electric vehicle or PHEV. Further, it would generally be accepted the electricity cost is incurred by you where there is a private household arrangement under which you had a shared obligation (either solely or jointly) to pay the bill in a household. See Taxation Ruling TR 97/7 Income tax: section 8-1 – meaning of 'incurred' – timing of deductions for more detailed guidance on the meaning of 'incurred' and the timing of deductions under section 8-1 of the ITAA 1997.",,,"Intro: 13. If you are an employer that satisfies the criteria outlined in paragraph 8 of this Guideline, you can choose to rely on this Guideline. 14. If you are an individual who satisfies the criteria outlined in paragraph 9 of this Guideline, you can choose to rely on this Guideline. 15. If you choose to rely on this Guideline for an electric vehicle or PHEV, that choice applies for the whole of the FBT or income year. However, you may choose to use a different method from year to year. | Electric vehicles: 16. The Commissioner would not have cause to apply compliance resources to review your calculation of electricity costs of charging an electric vehicle at a residential premises for FBT purposes or for income tax purposes (see Table 1 of this Guideline) if you multiply the cents per kilometre rate (the EV home charging rate indicated in Table 2 of this Guideline) by the total number of relevant kilometres travelled by the electric vehicle in the relevant income year or FBT year. | Plug-in hybrid electric vehicles: 17. The Commissioner would not have cause to apply compliance resources to review your calculation of electricity costs of charging a PHEV at a residential premises for FBT purposes or for income tax purposes (see Table 1 of this Guideline) if you apply the methodology in paragraphs 18 to 27 of this Guideline. Plug-in hybrid electric vehicle methodology Step 1: Calculate actual petrol costs for the FBT or income year 18. This is your actual petrol [12] costs for the PHEV for either the FBT or income year (year). Step 2: Calculate actual quantity of petrol purchased in the year 19. To calculate the actual quantity of petrol purchased in the year (petrol amount), you can either: 20. You can calculate the average petrol rate (that is, average cost per litre of petrol purchased) yourself using a reasonable basis or by using published information such as the Australian Institute of Petroleum's AIP Annual Retail Price Data . Step 3: Calculate total petrol kilometres 21. Calculate the total petrol kilometres travelled by the PHEV during the year by converting the petrol amount into litres using the PHEV's petrol consumption rate. You do this by dividing the Step 2 result by the petrol consumption rate. Total petrol km = Step 2 amount ÷ petrol consumption rate Step 4: Calculate total annual kilometres 22. Calculate the total annual kilometres, using your PHEV's odometer readings, as follows: Step 5: Calculate total electricity kilometres 23. Calculate the total electricity kilometres using the following formula: Total electricity km = Step 4 amount (total annual km) − the Step 3 amount (total petrol km) 24. This is the total kilometres driven by the PHEV using electricity. Step 6: Calculate total electricity cost 25. Calculate the total electricity cost by multiplying the Step 5 amount (total electricity kilometres) by the EV home charging rate. Total electricity cost = Step 5 amount (total electricity km) × EV home charging rate 26. Refer to Table 2 of this Guideline for the EV home charging rate. Step 7: Calculate total fuel expenses 27. Calculate the total fuel expenses by adding the Step 1 amount (actual petrol costs) to the Step 6 amount (total electricity cost). Total fuel expenses = Step 1 amount (actual petrol costs) + Step 6 amount (total electricity costs) | Home charging percentage can be accurately determined: 28. Where an electric vehicle or PHEV has the functionality to accurately report the percentage of a vehicle's total charge based on the type of charging location, electric vehicle charging costs can include both home charging and commercial charging station costs. This is because the extent to which the vehicle has been charged at home (that is, its home charging percentage) can be accurately determined. 29. The total number of relevant kilometres used to calculate home charging costs must be adjusted by applying the home charging percentage to arrive at the relevant kilometres for the purpose of this Guideline.","Example 1: – home charging percentage can be accurately determined 30. Bill owns an electric vehicle which generates a report detailing the annual percentage of total charge that relates to home charging. Bill charges his electric vehicle 75% at home during the 2022–23 FBT year. 31. Bill travels a total of 10,000 km in the 2022–23 FBT year. His home charging kilometres are determined by applying the home charging percentage of 75% to the 10,000 total kilometres travelled. Therefore, the relevant kilometres for the purpose of this Guideline are 7,500 km. 32. Bill has kept relevant records and can therefore also claim the cost of electricity purchased at a commercial charging station. Home charging percentage cannot be accurately determined 33. If electric vehicle or PHEV charging costs are incurred at a commercial charging station and the home charging percentage cannot be accurately determined, you can choose to either: 34. Further, all necessary records such as receipts must be kept to substantiate the claim, as per normal record-keeping rules. | Example 2: – home charging percentage cannot be accurately determined 35. Sue owns an electric vehicle. She usually charges it at home and occasionally at a commercial charging station. Her electricity purchase from the commercial charging station was $250 for the income year. Sue has kept the relevant records [14] and opts to rely on this Guideline but her electric vehicle does not have the functionality to accurately determine her home charging percentage. 36. Using the EV home charging rate, Sue calculates her electricity work-related car expenses to be $840. Given Sue has relied on this Guideline, she must disregard the $250 cost of electricity purchased at a commercial charging station and not include the amount as part of her work-related car expenses deduction claim. Transitional approaches Vehicles that are not plug-in hybrid electric vehicles – 2022–23 and 2023–24 FBT and income tax years 37. If odometer records have not been maintained as at the start of the 2022–23 or 2023–24 FBT or income tax years (that is, as at 1 April or 1 July 2022, or as at 1 April or 1 July 2023), for vehicles that are not PHEVs, a reasonable estimate may be used based on service records, logbooks or other available information. Vehicles that are plug-in hybrid electric vehicles – 2024–25 FBT and income tax years 38. If odometer records have not been maintained for PHEVs, as at the start or end of the 2024–25 FBT or income tax years (that is, as at 1 April or 1 July 2024, or 31 March or 30 June 2025), a reasonable estimate may be used based on service records, logbooks or other available information. 39. If records substantiating actual petrol costs have not been maintained for PHEVs, as at the start of the 2024–25 FBT or income tax years (that is, as at 1 April or 1 July 2024), a reasonable estimate may be used based on available information. Employers with FBT obligations Taxable value of a car fringe benefit 40. If you are an employer and your employees use a car you hold for private purposes, you may be providing a car fringe benefit and may be liable for FBT. 41. To calculate the taxable value of a benefit arising from the provision of an electric vehicle or PHEV which is a car fringe benefit, you can use either the statutory formula method or the operating cost method. 42. The EV home charging rate can be used under this Guideline to determine the home electricity charging costs for the: Expense payment fringe benefit 43. An expense payment fringe benefit arises when your employee incurs home electricity charging expenses for the electric vehicle or PHEV that the employee owns, and you either reimburse them or pay a third party for the expense. This may be an exempt benefit where the EV home charging rate is used to calculate the amount of the reimbursement. [15] 44. Where a car benefit is provided and you reimburse your employee's associated car expenses [16] , including fuel, the reimbursement of these expenses is an exempt benefit [17] and no FBT liability will arise. This would include the amount of a reimbursement that is calculated using the EV home charging rate. Residual fringe benefit 45. Where you provide your employee with an electric vehicle or PHEV that is not a car [18] and is used for private purposes, a residual fringe benefit will arise (unless an exemption applies). To calculate the taxable value of the residual benefit you can apportion operating costs on the basis of the proportion of private kilometres to total kilometres travelled. This will probably require the keeping of a logbook. Alternatively, you can use the cents per kilometre method in respect of private kilometres travelled. [19] | Example s: 46. The following examples illustrate the application of the practical compliance approach to calculating electricity costs of charging an electric vehicle or PHEV at the employee's home in an FBT context: | Example 3: – reimbursement by the employer of electricity charging cost for a car benefit provided under a novated lease arrangement 47. Sally and her employer have a salary sacrifice arrangement in place where benefits are provided in exchange for a reduction in salary. A car is provided under a novated lease agreement. The car is an electric vehicle, eligible for the electric vehicle exemption. 48. Sally exclusively charges her vehicle at home. The odometer reading is provided for the relevant period, and the cost of electricity is calculated using the methodology for electric vehicles outlined in this Guideline. 49. Sally seeks reimbursement of the electricity cost from her employer under the lease arrangement. 50. The reimbursement of the electricity cost is an exempt car expense payment benefit under section 53 of the FBTAA. 51. From a reportable fringe benefits perspective, expenses reimbursed under a salary sacrifice agreement are not a recipient contribution, and therefore cannot reduce the taxable value of the benefit. | Example 4: – reimbursement of electricity charging cost as a car expense payment benefit 52. Jack owns an electric vehicle and uses the vehicle for both work-related and private purposes. Based on Jack's records, he travels a total of 10,000 kilometres in the 2022–23 FBT year. 53. Roger, who employs Jack, reimburses the home electricity charging cost Jack incurs. He calculates the amount of the reimbursement using the methodology for electric vehicles, to be: electric vehicle electricity charging cost = total km travelled by vehicle × EV home charging rate 10,000 km × 4.20c = $420 54. This amount is an exempt benefit under section 22 of the FBTAA. The amount will be included in Jack's assessable income under section 15-70 of the ITAA 1997. | Example 5: – statutory formula method, electric vehicle above the luxury car tax threshold and not eligible for FBT exemption 55. An employer purchases an electric vehicle for $120,000 (including goods and services tax and luxury car tax) on 1 July 2022. It is provided to an employee for private use for the 2022–23 FBT year, and the employee travels a total of 27,037 kilometres during that FBT year. 56. The employee charges the electric vehicle at their residential premises throughout the year, pays for the electricity and provides the employer with the necessary declaration for the electricity costs. The home charging electricity cost is a recipient contribution amount. 57. Applying the EV home charging rate and using the methodology for electric vehicles, the employee works out the home charging electricity cost as: electric vehicle electricity charging cost = total km travelled by vehicle × EV home charging rate 27,037 km × 4.20c = $1,135 58. Therefore, the taxable value for FBT purposes is: (base value of the car × statutory formula %) × (days held in year ÷ 365) − recipient contribution ($120,000 × 20%) × (274 ÷ 365) − $1,135 = $16,881 | Example 6: – electric vehicle eligible for FBT exemption and benefit is required to be included in employee's reportable fringe benefits amount 59. An employer purchases an electric vehicle for $60,000 (including goods and services tax) on 1 July 2022. It is provided to an employee for private use for the 2022–23 FBT year, and the employee travels a total of 27,037 kilometres. 60. As the value of the electric vehicle at the first retail sale is below the luxury car tax threshold for fuel-efficient vehicles, and it is first held and used on or after 1 July 2022, the car fringe benefit is an exempt benefit and therefore not subject to FBT. 61. However, its taxable value must be determined for the purpose of determining the employee's RFBA for the 2022–23 FBT year in which the exempt benefit is provided. 62. The employee home-charges the electric vehicle throughout the year, pays the electricity bills and provides the employer with the necessary declaration for the electricity costs. The home charging electricity cost forms part of the recipient contribution amount. 63. Applying the EV home charging rate and using the methodology for electric vehicles, the employee works out the home charging electricity cost as: electric vehicle electricity charging cost = total km travelled by vehicle × EV home charging rate 27,037 km × 4.20c = $1,135 64. Therefore, the taxable value for FBT purposes is: (base value of the car × statutory formula %) × (days held in year ÷ 365) − recipient contribution ($60,000 × 20%) × (274 ÷ 365) − $1,135 = $7,873 65. As the taxable value of the car fringe benefit provided to the employee exceeds $2,000 in the FBT year, the employer must include the grossed-up taxable value in the employee's RFBA. | Example 7: – home charging of electric vehicle using operating cost method 66. An electric vehicle purchased by an employer in April 2022 is provided to an employee for private use throughout the 2022–23 FBT year. During the FBT year, the employee travels a total of 27,037 kilometres. 67. The employee home-charges the electric vehicle throughout the year, pays for the electricity and provides the employer with the necessary declaration for the electricity costs. The home charging electricity cost forms part of the recipient contribution amount. 68. Applying the EV home charging rate and using the methodology for electric vehicles, the employee works out the home charging electricity cost as: total km travelled by vehicle × EV home charging rate = electric vehicle electricity charging cost 27,037 km × 4.20c = $1,135 69. The $1,135 home charging electricity cost forms part of the $11,800 total operating costs, which also includes insurance, registration, repairs, and decline in value. Further, the employee's logbook and odometer records for the 12-week period show 75% business travel and 25% private travel. 70. Applying the operating cost method, the taxable value for FBT purposes is: A × B − C $11,800 × 25% − $1,135 = $1,815 | Example 8: – plug-in hybrid electric vehicle is eligible for the FBT exemption and benefit is required to be included in employee's reportable fringe benefits amount 71. An employer purchases a PHEV for $50,000 (including goods and services tax) on 1 July 2024. It is provided to an employee for private use for the 2024–25 FBT year and is the only non-cash benefit the employee receives. During the FBT year, the employee travels a total of 10,000 kilometres. 72. As the value of the PHEV at the first retail sale is below the luxury car tax threshold for fuel-efficient vehicles, and it is first held and used on or after 1 July 2022, the car fringe benefit is an exempt benefit and therefore not subject to FBT. [20] 73. However, its taxable value must be determined for the purpose of determining the employee's RFBA for the 2024–25 FBT year in which the exempt benefit is provided. 74. The employee home-charges the PHEV throughout the year, pays the electricity bills and provides the employer with the necessary declaration for the electricity and fuel costs. The home charging electricity cost forms part of the recipient contribution amount. 75. The employee provides the following information to the employer: 76. Using the methodology for PHEVs, the employee works out the home charging electricity cost as: Petrol amount = petrol purchased in year ÷ average petrol rate $1,000 ÷ $1.98 = 505 litres Total petrol km = Step 2 amount ÷ petrol consumption rate 505 litres ÷ 0.067 = 7,537 k Total annual km = odometer reading at end of year – odometer reading when car was first made available for private use 10,125 km − 125 km = 10,000 km Total electricity km = Step 4 amount (total annual km) − the Step 3 amount (total petrol km) 10,000 km − 7,537 km = 2,463 km Total electricity cost = Step 5 amount (total electricity km) × EV home charging rate 2,463 km × 4.20c = $103.45 Total fuel expenses = Step 1 amount (actual petrol costs) + Step 6 amount (total electricity costs) $1,000 + $103 = $1,103 77. Assuming the employer uses the statutory formula method, the taxable value for FBT purposes would be: (base value of the car × statutory formula %) × (days held in year ÷ 365) − recipient contribution ($50,000 × 20%) × (274 ÷ 365) − $1,103 = $6,403 78. The employer must include the grossed up taxable value in the employee's RFBA. The employee will have an RFBA amount for the FBT year as the taxable value of the car fringe benefit provided to the employee exceeds $2,000. | Example 9: – plug-in hybrid electric vehicle is not eligible for the FBT exemption and car fringe benefit is calculated using operating cost method 79. An employer purchases a PHEV for $38,000 (including goods and services tax) on 1 April 2025. It is first provided to an employee for private use for the 2025–26 FBT year, and the employee travels a total of 15,000 kilometres. 80. As the PHEV is first provided for FBT purposes on 1 April 2025, it is not exempt from FBT. This is the only fringe benefit the employee receives from their employer. 81. The employee home-charges the PHEV throughout the year, pays the electricity bills and provides the employer with the necessary declaration for the electricity and fuel costs. The home charging electricity and fuel cost forms part of the recipient contribution amount. 82. The employee provides the following information to the employer: 83. Applying the EV home charging rate using the methodology for PHEVs, the employee works out the home charging electricity cost using the following calculations: Petrol amount = petrol purchased in year ÷ average petrol rate $1,000 ÷ $1.98 = 505 litres Total petrol km = Step 2 amount ÷ petrol consumption rate 505 litres ÷ 0.05 = 10,100 km Total annual km = odometer reading at end of year − odometer reading when car was first made available for private use 15,175 km − 175 km = 15,000 km Total electricity km = Step 4 amount (total annual km) − the Step 3 amount (total petrol km) 15,000 km − 10,100 km = 4,900 km Total electricity cost = Step 5 amount (total electricity km) × EV home charging rate 4,900 km × 4.20c = $205.80 Total fuel expenses = Step 1 amount (actual petrol costs) + Step 6 amount (total electricity costs) $1,000 + $206 = $1,206 84. Total operating costs for the FBT year are $11,800, being the total fuel expenses of $1,206 added to the total other operating costs of $10,594. 85. Applying the operating cost method, the taxable value for FBT purposes is: A × B − C $11,800 × 40% − $1,206 = $3,514 86. The employer must include the grossed-up taxable value in the employee's RFBA. The employee will have an RFBA amount for the FBT year as the taxable value of the car fringe benefit provided to the employee exceeds $2,000. Deductibility of electric vehicle or plug-in hybrid electric vehicle electricity charging expenses for income tax purposes 87. For income tax purposes, the EV home charging rate can be used to calculate work-related car expenses when using the logbook method and otherwise when calculating work-related motor vehicle expenses. 88. To use the logbook method to claim your work-related car expenses, you need to keep: 89. To indicate you are using the logbook method when completing your individual tax return, in item 'D1 Work-related car expenses', enter the code letter 'B' in the 'Claim type' box beside your total claim. [25] 90. A home charging electricity deduction will be based on the number of business kilometres [26] the car travelled during the income year. You calculate the number of business kilometres by making a reasonable estimate which must take into account: Electric vehicles 91. To calculate the home charging electricity cost for your electric vehicle, you calculate the total kilometres travelled by the car during the period you owned it during the income year and multiply the total kilometres by the EV home charging rate: total km travelled by car × EV home charging rate = home charging electricity cost 92. You then apply the business use percentage [27] (business kilometres during the period you owned it during the income year divided by the total number of kilometres the car travelled in the period you owned it during the income year) to your home charging electricity cost as follows: business km ÷ total km × home charging electricity cost = home charging electricity deduction 93. The business use percentage is also applied to your other car expenses: business km ÷ total km × other car expenses = other car expenses deduction 94. If you use a motor vehicle which does not meet the definition of a car, you can claim the work-related percentage of your vehicle expenses. [28] Although you are not required to keep a logbook, it is the easiest way to calculate your work-related use of your motor vehicle. 95. To calculate the home charging electricity cost for your vehicle, you calculate the total kilometres travelled by the vehicle during the period you owned it during the income year and multiply it by the EV home charging rate. You then apply your work-related use percentage to your home charging electricity cost. The work-related use percentage is also applied to your other vehicle expenses. Plug-in hybrid electric vehicles 96. The PHEV home charging methodology is outlined in paragraphs 18 to 27 of this Guideline. To calculate the home charging electricity cost for your PHEV, you calculate the total kilometres travelled and split between petrol-fuelled kilometres travelled and electricity-fuelled kilometres travelled. | Example 10: – home charging of electric vehicle using logbook method 97. Ephrem is an owner of an electric vehicle that satisfies the definition of a 'car' and he charges its battery at his home on average 3 nights per week. 98. Ephrem drives his electric vehicle for both business and private purposes. He keeps a logbook for 12 continuous weeks to record his business travel, which is broadly representative of his travel throughout the year. He records the odometer readings at the start and end of the logbook period, and the start and end of the income year. For the 2022–23 income year, Ephrem's records show he drove 32,000 kilometres. 99. Ephrem's logbook and odometer records show that he travelled 8,000 kilometres for the 12-week logbook period, and 4,000 kilometres were for work-related purposes. As Ephrem's logbook is representative of the business kilometres he travelled during the 2022–23 income year, his business use percentage is 50% and his total business kilometres will be 16,000 km (32,000 kilometres × 50%). 100. Applying the EV home charging rate, Ephrem calculates his work-related home electricity charging cost as: home charging electricity cost = 32,000 km × 4.20c = $1,344 home charging electricity deduction = 16,000 km ÷ 32,000 km × $1,344 = $672 101. Ephrem can claim a home charging electricity deduction of $672, along with 50% of his other car expenses, for the 2022–23 income year. | Example 11: – home charging of plug-in hybrid electric vehicle using logbook method 102. Rod is the owner of a PHEV that satisfies the definition of a 'car' that he charges at his home on average 3 nights per week. 103. Rod drives his PHEV for both business and private purposes. He keeps a logbook for 12 continuous weeks to record his business travel, which is broadly representative of his travel throughout the year. He records the odometer readings at the start and end of the logbook period, and the start and end of the income year. For the 2024–25 income year, Rod's odometer records show he drove 15,000 kilometres. 104. Rod's logbook and odometer records show that he travelled 3,000 kilometres for the 12-week logbook period, and 1,500 kilometres were for work-related purposes. As Rod's logbook is representative of the business kilometres he travelled during the 2024–25 income year, his business use percentage is 50% and his total business kilometres will be 7,500 km (15,000 kilometres × 50%). 105. Total other car expenses excluding fuel costs for the income year are $10,000. This includes insurance, registration, servicing and repair costs and decline in value. Rod's total petrol costs for the 2024–25 income year are $750. 106. The Condition B test cycle fuel economy figure is 5 litres per 100 kilometres (provided by the vehicle's manufacturer). Using the AIP Annual Retail Price Data from the Australian Institute of Petroleum, Rod determines the average cost of the fuel he uses for the 2024–25 income year is $1.98 per litre. 107. Applying the EV home charging rate using the methodology for PHEVs, Rod calculates his work-related home electricity charging cost as follows. Rod calculates his substantiated petrol costs as $750. Petrol amount = petrol purchased in year ÷ average petrol rate $750 ÷ $1.98 = 379 litres Total petrol km = Step 2 amount ÷ petrol consumption rate 379 litres ÷ 0.05 = 7,580 km Total annual km = odometer reading at end of year − odometer reading at the start of the year Total kilometres driven by the vehicle for the year are 15,000 km. Total electricity km = Step 4 amount (total annual km) − the Step 3 amount (total petrol km) 15,000 km − 7,580 km = 7,420 km Total electricity cost = Step 5 amount (total electricity km) × EV home charging rate 7,420 km × 4.20c = $311.64 Total fuel expenses = Step 1 amount (actual petrol costs) + Step 6 amount (total electricity costs) $750 + $312 = $1,062 108. The total car expenses incurred for the car for the income year are $11,062 – that is, $10,000 other car expenses plus total fuel expenses of $1,062. 109. Applying the logbook method, the deductible car expenses are: total car expenses × business use percentage $11,062 × 50% = $5,531 110. Rod can therefore claim a deduction of $5,531 for car expenses for the 2024–25 income year. Record keeping 111. If you are an employer or an individual choosing to rely on the EV home charging rate to calculate the electricity charging expenses, you will need to keep a record of the distance travelled by the car (odometer records) in either the applicable FBT year to 31 March or the income year to 30 June. 112. If you are an employer or an individual choosing to rely on the EV home charging rate to calculate the electricity charging expenses where the vehicle is a PHEV, you also need to keep records to substantiate the amount of actual petrol costs incurred in either the applicable FBT year to 31 March or the income year to 30 June. 113. If you are an employer choosing to apply this Guideline and the EV home charging rate for FBT purposes, a valid logbook must be maintained if the operating cost method is used. 114. If you are an individual choosing to apply this Guideline and the EV home charging rate for income tax purposes, to satisfy the record-keeping requirements you must have:",,,,False,False,https://www.ato.gov.au/law/view/document?docid=COG/PCG20242/NAT/ATO/00001
PCG 2018/3,Final PCG,Exempt car benefits and exempt residual benefits: compliance approach to determining private use of vehicles,,,5,,,,,"1. Generally, a fringe benefit arises where an employer makes a vehicle they hold available for the private use of its employee. However, under subsections 8(2) and 47(6) of the Fringe Benefits Tax Assessment Act 1986 [1] (the car-related exemptions), a fringe benefit is an exempt benefit where the private use of eligible vehicles by current employees during a fringe benefits tax (FBT) year is limited to work-related travel, and other private use that is 'minor, infrequent and irregular'. 2. Feedback and experience has shown inconsistency as to methods used by employers to ensure compliance with the car-related exemptions, leading to additional compliance costs, especially when the private travel is relatively low. To reduce these compliance costs and provide certainty, this Guideline explains when the Commissioner will not apply compliance resources to determine if private use of the vehicle was limited for the purposes of the car-related exemptions. 3. 'Work-related travel' is defined in subsection 136(1) to include travel by an employee between his or her place of residence and place of employment or other place at which employment duties are performed. [2] 4. This Guideline does not affect the operation of the car-related exemptions. If you choose not to rely on this Guideline or do not meet the requirements in paragraph 6 of this Guideline; you can rely on the relevant provisions of the FBT law to determine if you can access the car-related exemptions for car and residual benefits that you provide. You are encouraged to engage with us early (for example, by applying for a private ruling) if you are uncertain as to whether you can access the car-related exemptions.",Scope: 6. You may choose to rely on this Guideline if:,,"Intro: This Practical Compliance Guideline sets out a practical administration approach to assist taxpayers in complying with relevant tax laws. Provided you follow this Guideline in good faith, the Commissioner will administer the law in accordance with this approach.","Example 1: diversion and wholly private travel 9. An employer provides an employee with a new panel van designed to carry a load of less than one tonne. The van is provided to the employee to enable the employee to carry bulky equipment to and from their work sites. The van is not provided as part of a salary packaging arrangement, and was acquired for a value below the applicable luxury car tax threshold. 10. The van is an eligible vehicle. The van is garaged at the employee's home and the employee uses the van to travel between their home and their place of employment. The employer has a strict policy in place about limiting the private use of the vehicle. 11. The employee usually stops at the newsagent to pick up a newspaper on their way to work. The diversion adds no more than two kilometres to the total trip from home to work. 12. On 10 occasions during the FBT year, the employee also transported their niece to school in the van during the employee's journey from home to work. The journeys from home to work generally do not exceed 20 kilometres. 13. At the end of the 2019 FBT year, the employer receives an email from the employee. The email outlines that multiple journeys were undertaken in the FBT year for a wholly private purpose and these journeys did not exceed 1,000 kilometres in total. The employee also outlines in the email that in driving to and from work, no diversions were undertaken that exceeded two kilometres. The employer is satisfied that the employee has adhered to their policy about limited private use. 14. The employer is able to rely on this Guideline as the requirements in paragraph 6 of this Guideline are met. | Example 2: not a diversion 15. Assume the same facts as in Example 1. However, during the football season the employee attends weekly football training after work. The diversion adds more than two kilometres to the total journey from work to home. 16. The employee's travel from work to football training is not considered to be a diversion, as the primary purpose of the journey was for the employee to travel to football training, not from work to home. Additionally, the travel to attend this weekly football training and the travel to transport their niece exceeds 1,000 kilometres. Therefore, the employee cannot provide assurance that the requirements in paragraph 6 of this Guideline are met and the employer will not be able to rely on this Guideline. 17. The employer will need to rely on the relevant provisions of the FBT law to determine if they can access the car-related exemptions. | Example 3: limited wholly private travel 18. An employer provides a car benefit to an employee. The vehicle is a panel van designed to carry a load of less than one tonne and is fitted with a navigation device. The employee uses the van to transport goods in their role as a courier driver. The van was acquired for a value below the applicable luxury car tax threshold and is not provided under a salary packaging arrangement. 19. The employee provides confirmation to the employer that their private use of the van during the year was limited to: 20. The journeys undertaken for a wholly private purpose by the employee in the 2019 FBT year amounted to 300 kilometres in total and no more than 200 kilometres was travelled in a return journey. The employer is satisfied that the employee has adhered to their policy about limited private use and is able to rely on this Guideline. | Example 4: not limited private use 21. Assume that the employer is aware that the van provided to the employee in Example 3 of this Guideline was also used by the employee to travel to the beach on a public holiday and is not satisfied with the assurance provided. The employee acknowledges they used the vehicle to travel to the beach and that the return journey exceeded 200 kilometres. As each return journey must not exceed 200 kilometres, the return journey to the beach would not fall within this Guideline. 22. Accordingly, even though the journeys undertaken wholly for a private purpose do not exceed 1,000 kilometres, the employer will need to rely on the relevant provisions of the FBT law to determine if they can access the car-related exemptions.",,,/law/view/document?LocID=%22COG%2FPCG20183EC%2FNAT%2FATO%2F00001%22&PiT=99991231235958,False,False,https://www.ato.gov.au/law/view/document?docid=COG/PCG20183/NAT/ATO/00001
PCG 2016/10,Final PCG,Fleet Cars: simplified approach for calculating car fringe benefits,,,5,,,,,"1. An employer may elect under section 10 of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) to apply the operating cost method to work out the taxable value of car fringe benefits provided to their employees. 2. One component of the operating cost method requires the employer to work out the business use percentage applicable to each of the cars provided. 3. Feedback and experience has shown that compliance with the record-keeping requirements of the operating cost method can be difficult and time-consuming for employers with large fleets. To reduce these compliance costs, this Guideline provides an optional, simplified approach to working out the business use percentage component of the operating cost method for employers with a fleet of 20 or more cars. 4. This Guideline has been prepared following consultation with business taxpayers. It outlines a simplified approach for calculating car fringe benefits that is expected to reduce the record-keeping burden on employers with large fleets by allowing them to rely on a representative average business use percentage to calculate car fringe benefits for the fleet under the operating cost method.",,,,,"Appendix 1: Glossary of terms 14. The following terms are defined for the purposes of the simplified record-keeping approach outlined in this Guideline. Tool of trade 15. A 'tool of trade' is a car provided by an employer to their employee to enable the employee to carry out duties that involve extensive business use of the car. For example, a car is a tool of trade where an employer provides the car to their sales representative to enable them to visit multiple customers each day as part of their role. 16. Where a car is provided by an employer to an employee mainly for private use purposes or as part of a salary packaging arrangement, the car is not a 'tool of trade' car. Salary packaging arrangements 17. A 'salary packaging arrangement' is defined in subsection 136(1) of the FBTAA. Feedback 18. If you have comments or feedback relating to this Practical Compliance Guideline, please email FBT Risk & Intell < R7967@ato.gov.au >.",,,False,False,https://www.ato.gov.au/law/view/document?docid=COG/PCG201610/NAT/ATO/00001
PCG 2021/3,Final PCG,Determining if allowances or benefits provided to an employee relate to travelling on work or living at a location - ATO compliance approach,,,11. This Guideline applies both before and after its date of issue.,,,TR 2004/6 | TR 2021/4,,"1. This Guideline outlines the ATO's compliance approach to determining if employees in certain circumstances are travelling on work [1] or living at a location away from their normal residence [2] (living at a location). [3] This Guideline should be read in conjunction with Taxation Ruling TR 2021/4 Income tax and fringe benefits tax: employees: accommodation and food and drink expenses, travel allowances, and living-away-from-home allowances. [4] 2. In order to determine the nature of an allowance paid, employers are required to consider all relevant circumstances to determine whether the employee is travelling on work or living at a location. The nature of an allowance is not to be determined by reference solely to its name or the period for which it is paid. [5] As such, there will be circumstances in which it may be difficult for an employer to conclude whether an employee is travelling on work or living at a location. 3. This Guideline is focused on providing practical guidance to assist in determining whether: 4. Where an employer is eligible to rely on this Guideline, and does so, they are not required to determine definitively if an employee is living away from their normal residence or not. If an employer is outside the terms of the compliance approach in this Guideline, this should not be construed as meaning that the employee is living at a location. ATO officers will not approach this Guideline as imposing a 'bright line' to this effect - the matters set out in TR 2021/4 would need to be considered to reach a conclusion.",,"5. Expenses for living at a location are usually not deductible. [10] However, expenses incurred on accommodation and food and drink are usually deductible, or otherwise deductible, where an employee is working away from home for short periods of time. In these situations, an employee is generally travelling on work. [11] 6. In many cases, short periods of travel can be consistent with an employee travelling on work in the course of their employment and incurring deductible expenses. In applying the views in TR 2021/4, the concept of 'reasonably short' [12] is used. In considering whether an employee's presence at a work location [13] is reasonably short, consideration needs to be given to the: 7. Where an employee maintains a continuous presence at a work location, their presence will be reasonably short if all of the criteria in paragraph 12 of this Guideline are met. Who this Guideline applies to 8. All employers who provide benefits referred to in paragraph 3 of this Guideline to their employees (who do not work on a fly-in fly-out or drive-in drive-out basis) may rely on this Guideline. Fly-in fly-out and drive-in drive-out employees are specifically dealt with under the FBTAA. [14] 9. An employee works on a fly-in fly-out or drive-in drive-out basis when all of the following apply: 10. If an employer chooses not to rely on this Guideline or does not meet the requirements in paragraph 12 of this Guideline; they will need to apply the relevant FBT provisions to determine if a FBT liability arises for the benefit provided (or if an exemption or concession applies) and ensure they substantiate (through obtaining relevant declarations or documentation) how they determined the taxable value of the benefit.","Intro: This Practical Compliance Guideline sets out a practical administration approach to assist taxpayers in complying with relevant tax laws. Provided you follow this Guideline in good faith, the Commissioner will administer the law in accordance with this approach.","Example 1: allowance is not a LAFHA benefit 14. Kate lives in Perth and is employed by engineering company Employer Co. Kate spends most of her time working at Employer Co's head office in Perth. 15. From time to time, Kate is also required to spend between one and three weeks (no more than 21 calendar days) working in various remote locations of Employer Co in Western Australia (WA). Kate will sometimes add a privately-funded weekend on to her trip. She returns to her home in Perth for periods of more than a week before her next trip. 16. When this occurs, Employer Co pays Kate an allowance which she spends on accommodation and food and drink while she is away. Kate is away for a period of no more than 90 calendar days in total in the same location in WA in the FBT year. 17. The allowance is included in Kate's assessable income and Kate may be entitled to a deduction for her accommodation and food and drink expenses. 18. Employer Co is able to rely on this Guideline as the requirements in paragraph 12 of this Guideline are met, that is, the Commissioner would accept that Kate is travelling on work. Employer Co is paying Kate a travel allowance and not a LAFHA, and Employer Co is not liable for FBT on the allowance paid. | Example 2: accommodation and food and drink expenses otherwise deductible 19. Louise works in Brisbane and is employed by engineering company Employer Co. 20. Employer Co gives Louise a three-month assignment in a remote work location in WA to perform duties for Employer Co. As part of the agreement, Louise works during the three-month assignment for: 21. In effect, during the three-month assignment, Louise works in the same work location in WA for nine weeks and is home for three weeks in between. She is away for no more than 21 calendar days at a time continuously and is away for a period of no more than 90 calendar days in the same work location in total. Louise does not return to work again in the same work location in WA at the end of the three-month assignment. 22. Employer Co pays Louise's accommodation and food and drink expenses while she is in WA. The accommodation and food and drink expense amounts are not provided to Louise as part of a salary-packaging arrangement. Louise cannot claim the accommodation and food and drink expenses as a deduction in her tax return as they have been paid for by Employer Co. 23. Employer Co is able to rely on this Guideline as the requirements in paragraph 12 of this Guideline are met. The Commissioner would accept that Louise is travelling on work. Employer Co is not liable for FBT on the accommodation and food and drink expense payment benefits it provides as the otherwise deductible rule applies. | Example 3: employee away for consecutive trips to different work locations 24. Ben lives in Melbourne and is employed by a law firm, ABC Co. 25. Ben is sent to Tasmania for 14 days to work on a litigation case. He then is sent to Canberra for 20 days to work on another litigation case. Ben does not return to his normal residence in Melbourne in between. 26. ABC Co is able to rely on this Guideline as the requirements in paragraph 12 of this Guideline are satisfied. While Ben is away from his normal residence for 34 days in total, he is not in any single work location for more than 21 calendar days, and he returns to his normal residence as soon as practicable after the period away. | Example 4: Guideline does not apply; character of allowance must be determined based on facts and circumstances 27. Employer Co (referred to in Examples 1 and 2 of this Guideline) undertakes a four-month project near Adelaide. Jeremy, who is based in Melbourne, is appointed project manager. 28. Jeremy works from Adelaide for the duration of the project, and Employer Co pays him an allowance to cover his food and accommodation expenses while he is working in Adelaide. Employer Co also pays for Jeremy to return to Melbourne for the weekend at the end of every fortnight. 29. Employer Co is not able to rely on this Guideline as the requirements in paragraph 12 of this Guideline are not satisfied. While each of the continuous periods Jeremy is away are no more than 21 calendar days, the overall period he is away at the one work location is more than 90 calendar days in total for the FBT year. Accordingly, without more information, the Commissioner does not accept that Jeremy is travelling on work. 30. Employer Co will need to apply the relevant FBT provisions to determine if the allowance Jeremy receives is a LAFHA benefit. Employer Co may, based on full consideration of the facts and circumstances of Jeremy's travel (by analysing the factors in paragraph 43 of TR 2021/4), determine that he is travelling on work.",,,/law/view/document?LocID=%22COG%2FPCG20213EC%2FNAT%2FATO%2F00001%22&PiT=99991231235958,False,False,https://www.ato.gov.au/law/view/document?docid=COG/PCG20213/NAT/ATO/00001
PCG 2016/14,Final PCG,Discount to the valuation of housing fringe benefits provided by retirement village operators,,,2,,,,,1. This Guideline sets out the acceptable discount to the valuation of housing fringe benefits provided to live-in-managers in a retirement village.,"Purpose: 3. This Guideline outlines the results of collaboration and consultation with industry participants regarding an acceptable discount to the valuation of housing fringe benefits provided to live-in-managers in a retirement village. Guideline 4. Consistent with the principles outlined in Miscellaneous Taxation Ruling MT 2025 Fringe Benefits Tax: Guidelines for Valuation of Housing Fringe Benefits, we confirm the following: a retirement village operator can apply a valuation discount of 10% to work out the statutory annual value of a live-in-manager's annual current housing right for the purposes of 'A' in the formula in paragraph 26(1)(c) of the Fringe Benefits Tax Assessment Act 1986. 5. This is in line with the physical characteristics of a live-in manager's accommodation and the location of that accommodation within a retirement village.",,,,,,,False,False,https://www.ato.gov.au/law/view/document?docid=COG/PCG201614/NAT/ATO/00001
PCG 2022/3,Final PCG,Goods and services tax and residential colleges - ATO compliance approach,,,1 January 2023,,,GSTR 2000/24 | GSTR 2001/1 | GSTR 2001/6 | GSTR 2003/1 | GSTR 2006/4 | GSTR 2012/2 | GSTR 2012/6 | GSTR 2012/7,Case References: Waverley Council and Commissioner of Taxation [2009] AATA 442 2009 ATC 10-095 73 ATR 243 TT-Line Company Pty Ltd v Commissioner of Taxation [2009] FCAFC 178 2009 ATC 20-157 74 ATR 771 181 FCR 400,"1. This Guideline sets out the Commissioner's compliance approach for universities and residential colleges (collectively 'residential colleges') supplying accommodation, meals, tertiary residential college courses and religious services (or a combination of any of these services) to resident students and claiming input tax credits. The purpose of the Guideline is to assist residential colleges to determine if supplies of accommodation, meals, tertiary residential college courses and religious services satisfy section 38-250 of the A New Tax System (Goods and Services Tax) Act 1999 and can be treated as GST-free supplies. 2. All legislative references in this Guideline are to the A New Tax System (Goods and Services Tax) Act 1999.",,"5. A residential college provides accommodation facilities that are generally on, or in close proximity to, a university and are generally fully-furnished. Some residential colleges have religious affiliations. Residential colleges vary in the services that they provide to resident students. All residential colleges provide accommodation and most provide meals but not necessarily all meals. Many residential colleges provide, solely for resident students, pastoral care, sporting or cultural infrastructure and academic support, among other things. 6. For goods and services tax (GST) purposes, an endorsed charity is a charity that has an Australian business number (ABN) and is registered with the Australian Charities and Not-for-profits Commission (ACNC) and endorsed for GST concessions by the Commissioner. [1] The Commissioner must endorse a charity if that charity: 7. Endorsed charities that are registered for GST can access a range of GST concessions. One of these GST concessions treats certain supplies as GST-free, rather than taxable or input taxed, where the requirements of section 38-250 are satisfied. 8. The Commissioner is aware of the practical difficulties for residential colleges in determining how GST applies to supplies they make under resident student contracts and in determining the amount of input tax credits they can claim. Section 38-250 9. For endorsed charities, section 38-250 provides a supply is GST-free if the consideration for: 10. This Guideline only considers application of the accommodation market value test and the non-accommodation market value test. Applying section 38-250 - residential colleges 11. Residential colleges may provide a combination of supplies to resident students for a single fee, including accommodation, meals, tertiary residential college courses and religious services. Not all residential colleges will provide all of these supplies. Some residential colleges may offer different contracts to resident students. For example, residential colleges may offer different contracts which provide resident students with a choice of: 12. Residential colleges may face practical difficulties applying the GST law, including: 13. These difficulties may also result in disproportionate compliance costs to residential colleges, including costs incurred for:","Intro: This Practical Compliance Guideline sets out a practical administration approach to assist taxpayers in complying with relevant tax laws. Provided you follow this Guideline in good faith, the Commissioner will administer the law in accordance with this approach.","Example 1: independent market valuation has been obtained 23. St Agatha's residential college obtained an independent market valuation for its student accommodation in October 2024 but not for its student meals. St Agatha's cannot apply the ATO charity benchmark market values to its student accommodation in the 2025 calendar year [6] and must use that independent market valuation. [7] However, St Agatha's may use the ATO charity benchmark market values for its supplies of student meals. 24. St Agatha's cannot use the ATO charity benchmark market values for its student accommodation in the 2026 calendar year. As explained in paragraphs 20 to 22 of this Guideline, St Agatha's must either: 25. Where the residential college can apply the ATO charity benchmark market values [8] and chooses to do so, the residential college must use: 26. The Detailed long-term accommodation table (Other dwellings 1 bedroom) will apply whether there are one or more people sharing the bedroom. Tertiary residential college courses 27. Tertiary residential college courses are GST-free. [11] A tertiary residential college course means 'a course supplied in connection with a tertiary course at premises that are used to provide accommodation to students undertaking tertiary courses'. [12] A course is a program of study involving systematic instruction, training or schooling. [13] 28. For the purposes of applying the approach set out in this Guideline, the Commissioner considers that a tertiary residential college course must consist of a formal structured tutorial program. A residential college will not be eligible to apply the approach set out in this Guideline for tertiary residential college course tutorials that are not formally structured. 29. Where a residential college: the Commissioner will not allocate compliance resources to review the amount attributed to tertiary residential college courses where a rate of no more than 2% of the total mandatory charges for each student contract has been attributed. 30. To determine the minimum number of tutorials per year, the formula is: 31. To determine the minimum number of tutorial attendances per year, the formula is: 32. The residential college may use its most recent full year information to determine if the minimum requirements are satisfied but must take into account any anticipated change in the level of tutorials or tutorial attendances for the coming calendar year. | Example 2: tertiary residential college course minimum 33. St Agatha's residential college typically has 220 resident students and the student contract provides for 38 weeks accommodation, of which 36 weeks relates to the academic year. St Agatha's provides tertiary residential college courses to its resident students. On a 'per resident student' basis, St Agatha's provides the same number of tertiary residential college course tutorials and has the same number of tutorial attendances each year and expects these levels to be the same in the coming calendar year. 34. In September 2024, St Agatha's sets its fees for the 2025 calendar year. St Agatha's most recent full-year information for tertiary residential college courses is for the 2023 calendar year, which shows 350 tutorials and 850 tutorial attendances. 35. To determine if it meets the minimum threshold for tutorials, St Agatha's calculates that, for the 2023 calendar year, it was required to have at least 396 tutorials: 220 (resident students) × (36 (weeks accommodation for the academic year) ÷ 20) 36. To determine if it meets the minimum threshold for tutorials attendances, St Agatha's calculates that, for the 2023 calendar year, it was required to have at least 792 tutorial attendances: 220 (resident students) × (36 (weeks accommodation for the academic year) ÷ 10) 37. As St Agatha's only had 350 tertiary residential college course tutorials, it did not meet the minimum threshold (being 396) for the number of tertiary residential college course tutorials required. 38. However, as St Agatha's had 850 tertiary residential college course tutorial attendances, it exceeded the minimum threshold (being 792) for tutorial attendances. 39. As St Agatha's exceeded the minimum threshold for tutorial attendances, it attributes 2% of the total mandatory charges for each student contract to tertiary residential college courses for the 2025 calendar year. Consistent with this Guideline, the Commissioner will not allocate further compliance resources to review the amount attributed to tertiary residential college courses by St Agatha's for each student contract. 40. Where the residential college attributes more than 2% of the total mandatory charges for each student contract as relating to tertiary residential college courses, the residential college may be required by the Commissioner to provide evidence to support the amount attributed. Religious services 41. Religious services are GST-free. [14] A religious service is a service that is supplied by an ACNC-registered religious institution and is integral to the practice of that religion. [15] 42. Where a residential college satisfies the requirements of a religious service and provides at least one service per week that is integral to the practice of that religion, the Commissioner will not allocate further compliance resources to review the amount attributed to religious services where a rate of no more than 2% of the total mandatory charges for each student contract has been attributed. 43. Where the residential college attributes more than 2% of the total mandatory charges for each student contract as relating to religious services, the residential college may be required by the Commissioner to provide evidence to support the amount attributed. Apportionment of fee for components in the student contract 44. A residential college that chooses to use this Guideline: 45. For the purposes of this Guideline, a residential college may apportion the fee using: | Example 3: apportionment of a student contract fee where the residential college chooses to use the accommodation benchmark market value 46. St Agatha's residential college is a charity that chooses to use this Guideline, is located in inner Sydney and has a range of student contracts. 47. One contract for the 2022 calendar year provides for accommodation for 38 weeks, breakfast, lunch and dinner each day for those 38 weeks, tertiary residential college courses which satisfy the requirements in paragraphs 27 to 29 of this Guideline and religious services which satisfy the requirements in paragraphs 41 to 42 of this Guideline. The mandatory charges for that student contract total $27,000. 48. St Agatha's does not have an NRAS market value rent or an independent market valuation and is not required to use a CPI-adjusted market valuation. St Agatha's chooses to apply the ATO charity benchmark market values to its supplies of accommodation and meals. 49. The following benchmark market values apply [19] : 50. The total of the benchmark market values for accommodation and meals is $49,375.30. 51. St Agatha's has attributed 2% of the total mandatory charges to tertiary residential college courses ($540) and 2% to religious services ($540). 52. St Agatha's chooses to apply the method of apportionment set out in Table 1 of this Guideline for the student contract fee. 53. St Agatha's apportions the student contract fee in the following way: Table 1: Step 1 - apportion the student contract fee 54. St Agatha's determines the GST status of the components and the GST payable in the following way: Table 2: Step 2 - compare apportioned amount to the benchmark market values 55. Where the residential college can use the meals benchmark market value but cannot use the accommodation benchmark market value [20] , the residential college may use the meals benchmark market value to assist with apportioning the fee and determining the GST status of the components. | Example 4: apportionment of a student contract fee where the residential college cannot use the accommodation benchmark market value 56. St Zita's residential college is a charity that chooses to use this Guideline, is located in inner Sydney and has a range of student contracts. 57. One contract for the 2022 calendar year provides for accommodation for 38 weeks, breakfast, lunch and dinner each day for those 38 weeks, tertiary residential college courses which satisfy the requirements at paragraphs 27 to 29 of this Guideline and religious services which satisfy the requirements at paragraphs 41 and 42 of this Guideline. The mandatory charges for that student contract total $27,000. 58. St Zita's has an independent market valuation for the accommodation and therefore cannot use the accommodation benchmark market value. However, St Zita's chooses to apply the ATO charity benchmark market values to its supplies of meals. 59. The independent market valuation for the accommodation is $450 per week, which is $17,100 for 38 weeks. 60. The following benchmark market values apply: 61. St Zita's has attributed 2% of the total mandatory charges to tertiary residential college courses ($540) and 2% to religious services ($540). 62. The total of the independent market valuation for the accommodation and the benchmark market values for meals is $48,501.30. 63. St Zita's chooses to apply the method of apportionment set out in Table 3 of this Guideline for the student contract fee. 64. St Zita's apportions the student contract fee in the following way: Table 3: Step 1 - apportion the student contract fee 65. St Zita's determines the GST status of the components and the GST payable in the following way: Table 4: Step 2 - compare apportioned amount to the benchmark market values Division 87 - employees and conference accommodation 66. Residential accommodation is normally input taxed. However, supplies of accommodation in 'commercial residential premises' [21] are treated differently. The supply of accommodation in commercial residential premises is a taxable supply subject to GST, with concessions available under Division 87 for supplies of long-term accommodation. [22] The supplier may also be eligible for input tax credits for creditable acquisitions that it makes for a creditable purpose. [23] 67. Residential colleges that are operated so as to fall within paragraphs (a) or (f) of the definition of 'commercial residential premises' in section 195-1 will not supply accommodation in commercial residential premises to the extent that the premises is used to provide accommodation to students in an educational institution that is not a school. [24] This exclusion does not apply to supplies of accommodation made by a residential college to non-students. [25] 68. Accordingly, where residential colleges satisfy the definition of commercial residential premises, Division 87 will apply to the extent that the premises are used to provide long-term accommodation to persons who are not students. This could include, for example, supplies of accommodation associated with conferences held outside term time and accommodation for employees (other than residential assistants). Supplies of accommodation in commercial residential premises that are of 27 days or less are taxable supplies or may be GST-free supplies where the requirements of section 38-250 are met. 69. However, the residential college may choose not to apply the concession under section 87-25 and make all supplies of long-term accommodation input taxed supplies under paragraph 40-35(1)(b). If this choice is made, acquisitions that relate to the supply of the input taxed accommodation will not be creditable acquisitions [26] and the residential college will therefore not be eligible for input tax credits in respect to these acquisitions. [27] Other student contract matters Division 129 70. This Guideline cannot be used retrospectively to amend an assessment or in calculating an adjustment for a change in use of an acquisition in a prior tax period when the residential college is not eligible to use this Guideline. The use of this Guideline does not affect the operation of Division 129. If the GST outcomes for supplies of accommodation differs to the GST outcome for the same supply for a previous year, the residential college will need to examine the change in the extent of creditable purpose for relevant prior year acquisitions in accordance with Division 129. 71. The residential college may be required to make an increasing or decreasing adjustment in relation to GST credits claimed for those acquisitions that are still within the scope of Division 129, in accordance with relevant GST rulings, determinations, fact sheets and guides. [28] Credit card fees 72. Credit card fees (that is, administration charges payable by a resident student when the contract fee is paid using a credit card) form part of the consideration for the supplies under the student contract. Credit card fees must be taken into account in apportioning the student contract fee and calculating the GST payable on a contract. [29] However, for the purposes of this Guideline and to reduce the administrative and practical difficulties of apportioning credit card surcharges to the supplies made under a student contract, the Commissioner will accept that credit card fees are not included for the purpose of determining the GST status of the supply under section 38-250. Different payment schedules 73. Residential colleges often permit resident students to pay their fees according to certain permitted schedules and different payment methods. If a residential college is required to separately assess each student contract based on the method of payment and the payment frequency or schedule to determine the GST status of the supplies made (GST-free, input taxed or taxable), the resulting number of assessments would be very high. 74. Students may typically select their payment frequency or schedule from one of the following options: 75. For simplicity and to reduce the number of assessments that need to be completed, the methodology contained in this Guideline permits all different payment frequencies and payment methods for the same room to be treated on the basis of a 'semester in advance' payment frequency and a 'direct debit' payment method for the purpose determining the GST status under section 38-250. However, residential colleges must apply this concessionary approach consistently across all student contracts for a particular type of room. | Example 5: payment schedules and methods 76. St Benedict's residential college has 15 different contracts, offering 3 different payment types (with different credit card charges for American Express, MasterCard and Visa and no additional charge for direct debit) and 4 different payment frequencies. If St Benedict's is required to assess each student contract type separately based on payment type and frequency, 180 potential assessments would be required. By allowing St Benedict's to adopt the concessionary approach based on the payment frequency of 'semester in advance' and 'direct debit' payment method across all student contracts, the number of assessments reduces to 15. Orientation week 77. Where a residential college charges a higher fee for students undertaking orientation week, the residential college must examine these contracts separately from contracts for resident students who are not undertaking orientation week. 78. For example, if the total amount payable excluding orientation week is $27,000 but the amount payable including orientation week is $28,000, the contracts must be examined separately to determine if the requirements of section 38-250 are satisfied. Residential assistants 79. Residential assistants are generally resident students who provide services to the residential college, often through providing pastoral support or tutoring of fellow resident students. Residential assistants may be compensated in the form of reduced fees or better accommodation (for example, a room with an ensuite rather than use of communal bathrooms). 80. The non-monetary consideration rules [30] require the market value of residential assistants' services provided to the residential college to be taken into account in determining the amount of the consideration received by the residential college for the supplies under the contract with the residential assistant for the purposes of apportionment of the contract charges under this Guideline. For residential assistants, the value of the non-monetary consideration they provide would be the difference between the market value of the accommodation provided to the residential assistant by the residential college and the amount that the residential assistant pays to the college under the student contract. This would mean that the total consideration provided by the residential assistant, including both monetary and non-monetary consideration, would be the full market value. As a result, the accommodation and meals supplied to residential assistants could never be GST-free under subsection 38-250(1). The supplies of accommodation would be input taxed and the supplies of meals would be taxable. [31] 81. However, if the residential assistant is occupying the 'same standard' of room as other resident students and is receiving meals of the same quantity and standard as other resident students, the non-monetary consideration for the recognition of the residential assistants' services is the difference between the amount that the residential assistant pays and the amount that other students pay. The result is that the total of the monetary and non-monetary consideration provided by the residential assistant will be the same as for other students who only provide monetary consideration for the same accommodation and meals. Therefore, the accommodation and meals provided to residential assistants will be GST-free if the accommodation to other students in the same standard of room is GST-free and the same quantity and standard of meals is GST-free. 82. The 'same standard' means that the room occupied by the residential assistant is essentially identical to the rooms occupied by other students who are not residential assistants. For example, the room should be the same size and have the same fit out and inclusions. It should also be occupied on essentially the same terms as for the standard student contract. For example, a room occupied by a residential assistant cannot be compared to a twin room offered to other resident students. | Example 6: residential assistants 83. Charlotte is a residential assistant at St Agatha's residential college. She is also a student. While Charlotte occupies the same standard of room and receives the same meals as other resident students who are not residential assistants, she receives a 10% discount on her fees for being a residential assistant, in recognition of the services she supplies to the residential college. 84. As Charlotte occupies the same standard of room and receives the same meals as other resident students who are not residential assistants, the non-monetary consideration provided for the supplies under her student contract is the 10% discount that she receives on the student fees she pays. The supplies of meals and accommodation by the residential college to Charlotte will be GST-free if the supplies of meals and accommodation are GST-free to other resident students who are not residential assistants and who enter the same contract. Essentially, Charlotte is receiving supplies of meals and accommodation of the same value as the supplies of meals and accommodation to other students but is paying less in recognition of the residential assistant services she provides to the residential college. It is the total monetary and non-monetary consideration provided which is the essential element in determining the GST status of the supplies under her contract. 85. Emma is also a residential assistant on a student contract and pays 10% less than other resident students who enter into a standard student contract. However, Emma occupies a better standard of room that is only available for selected residential assistants. 86. As Emma does not occupy the same standard of room as any other resident students who are not residential assistants, the non-monetary consideration provided for the supplies under her student contract is the difference between the full market value for those supplies made to other students and the amount she pays under her contract. The total of the monetary consideration and the non-monetary consideration is the full market value of those supplies. The result is that the supplies of meals by the residential college to Emma will be taxable and the supplies of accommodation will be input taxed because the tests in subsection 38-250(1) are not satisfied. [32] Claiming input tax credits 87. A residential college can claim input tax credits for their creditable acquisitions. [33] 88. One of the requirements for a creditable acquisition is that the acquisition be for a creditable purpose. An acquisition will not be for a creditable purpose where [34] : 89. If the residential college does not have any input taxed accommodation, all acquisitions will be creditable acquisitions. However, an acquisition will not be for a creditable purpose where it would relate to accommodation that is input taxed. 90. Some acquisitions may relate to supplies that are both: 91. These acquisitions are partially creditable acquisitions [35] and only the part which does not relate to input taxed supplies creates an entitlement to an input tax credit. 92. Where an acquisition is partially creditable, the residential college may use any method of apportionment that is fair and reasonable. [36] 93. For the purposes of this Guideline, the residential college may use the total value [37] attributable to input taxed supplies as a percentage of the relevant value of all supplies, with this percentage representing the extent to which the acquisition is not made for a creditable purpose. Each acquisition must be analysed separately to determine the extent of creditable purpose. For example:",,,/law/view/document?LocID=%22COG%2FPCG20223EC%2FNAT%2FATO%2F00001%22&PiT=99991231235958,False,False,https://www.ato.gov.au/law/view/document?docid=COG/PCG20223/NAT/ATO/00001
PCG 2019/8,Final PCG,ATO compliance approach to GST apportionment of acquisitions that relate to certain financial supplies,,,1 January 2020,,,GSTD 2017/1 | GSTD 2020/1 | GSTR 2004/1 | GSTR 2006/3 | GSTR 2008/1 | GSTR 2019/2 | GSTR 2020/1,,"1. This Guideline outlines our compliance approach for GST apportionment of acquisitions that relate to certain financial supplies. This Guideline sets out the framework we use to assess the risk associated with methods to determine the extent of creditable purpose (ECP) [1] of these acquisitions under the A New Tax System (Goods and Services Tax) Act 1999 . [2] 2. If this Guideline applies to you, it applies to acquisitions that relate to making the financial supplies covered by the Schedules [3] in the ordinary course of business. 3. This Guideline reflects our expectations for the design of an apportionment method for these acquisitions. We recognise that flexibility is required in practice, as your individual circumstances (such as your business structure and how your cost allocation system operates) will affect how the principles are implemented. 4. We use the risk assessment framework in this Guideline and the accompanying Schedules to tailor our engagement with you having regard to your risk rating. 5. You can use this Guideline to: 6. We are committed to working with you to assist you to obtain confidence about your approach and minimise your compliance risk in this area. If you are unsure about how we would assess the risk associated with your approach or would like certainty in relation to your arrangements, you should contact us for assistance. 7. This Guideline is not intended to address every potential feature of an apportionment method or variation in individual circumstances noting, in particular: 8. The apportionment methods set out in this Guideline are for risk assessment purposes only, and should not be taken as a requirement to use a specific method. Methods or examples provided in this Guideline must be considered in their entirety, as the absence of some elements or the presence of additional elements may change your risk rating. 9. This Guideline does not limit the operation of the law, and it does not replace, alter or affect our interpretation of the law in any way. [5] It does not relieve you of your legal obligation to comply with all relevant tax laws. 10. In this Guideline, we refer to 'relevant support area costs in other business units'. These are acquisitions that are not allocated to the business unit that makes a financial supply (such as the credit card issuing business), but that are to some extent for use in making the supply. [6] For example, in relation to Schedule 1 of this Guideline, this includes acquisitions in other business units that relate to particular supplies in the credit card issuing business (for example, a proportion of marketing, technology or customer service costs), overheads that indirectly relate to all the supplies made in the credit card issuing business, or enterprise costs to the extent they relate to making supplies in the credit card issuing business. [7] 11. This Guideline relates to determining the intended use of your acquisitions under Divisions 11, 15, 70, 72 and 84. While this Guideline does not address adjustments for the change in use of an acquisition under Division 129, we would expect you to use the same method that you used to determine intended use for these purposes. Who this Guideline applies to 12. This Guideline applies to you if you make financial supplies that are covered by the accompanying Schedules. 13. This Guideline applies to you in relation to all acquisitions that relate to making these supplies (including relevant support area costs in other business units). 14. This Guideline will not address how you identify which acquisitions are subject to a particular Schedule (for example, how to determine the extent to which acquisitions are for use in making supplies in the credit card issuing business). We would expect your identification of these acquisitions to follow your natural cost allocation or accounting systems (for example, in identifying the proportion of support area costs in other business units that are for use in making supplies in the credit card issuing business). We would also expect that any changes in the way you allocate your costs would be in response to business changes. Changes in cost allocation for reasons unrelated to business changes are likely to be subject to compliance activity. 15. Consistent with GSTR 2006/3, we accept that you do not necessarily need to give specific consideration to the status of each individual acquisition. In this context, we accept that you can take an approach where you identify and analyse acquisitions of a particular type that have a similar intended use (for example, the part of your debt collection costs that relate to making particular financial supplies) and treat them in the same way. 16. This Guideline does not apply to you if you have little or no access to direct estimation methods, and as a consequence you do not use direct estimation methods to allocate or apportion any of your acquisitions to particular business units (for example, a credit card issuing business) or products and/or particular supplies. [8] 17. For example, this Guideline does not apply to you if you are a smaller financial institution that uses an entity-based general formula for apportionment of all your acquisitions provided that this is in accordance with GSTR 2006/3. [9] 18. If this Guideline does not apply to you, a review may be undertaken under our usual compliance programs in order to determine whether your method is fair and reasonable in accordance with GSTR 2006/3. Structure of this Guideline 19. We may add additional Schedules to this Guideline to address other specific contexts in the future. We will consult publicly in respect of any additional Schedules. 20. This Guideline is structured as follows: 21. You will need to read the main body and the Schedule in conjunction to determine your risk rating for that Schedule.","Scope: 35. This Schedule applies to you if you issue credit cards or charge cards in a four-party (open loop) payment system. [13] 36. This Schedule applies to all acquisitions that are for use or partly for use in making supplies in the credit card issuing business, regardless of where they are allocated in your cost allocation system. 37. The Commissioner's views on the application of paragraph 11-15(2)(a) to acquisitions that relate to making these supplies are set out in GSTR 2019/2.",,"Intro: This Practical Compliance Guideline sets out a practical administration approach to assist taxpayers in complying with relevant tax laws. Provided you follow this Guideline in good faith, the Commissioner will administer the law in accordance with this approach .","Example 1: green zone 39. Verdant Bank's ECP rate is no more than 35%, as a weighted average, which is applied to: 40. As the ECP rate used is no more than 35% as a weighted average for all acquisitions to the extent they are for use in making supplies in the credit card issuing business (including acquisitions in relevant support areas in other business units), Verdant Bank is in the green zone. 41. As Verdant Bank is in the green zone we will not apply compliance resources to assess if the apportionment methodology is fair and reasonable. 42. In addition, Verdant Bank also claims reduced input tax credits on the relevant acquisitions to the extent it is entitled to do so. | Example 2: blue zone 43. Cyan Bank undertakes an analysis of the acquisitions that are for use or partly for use in making supplies in the credit card issuing business (including in relevant support areas in other business units) over the previous 12 months. 44. In this case, Cyan Bank only has a few bank branches, so a higher proportion of its acquisitions relate to both the supply of the credit card facility and the supply of interchange services. 45. Cyan Bank's analysis is as follows: These acquisitions include a proportion of branch network costs and call centre costs, debt collection costs, costs to prepare credit card statements, credit check services, services to facilitate the introduction of new cardholders, and advertising services to sign up new cardholders. [24] Some of these acquisitions are in the business unit for the credit card issuing business, and some are relevant support area costs in other business units. Cyan Bank determines these acquisitions have an ECP rate of 4% by reference to the past usage patterns of its cardholders in accordance with GSTD 2017/1. These acquisitions include loyalty reward costs, issuer scheme services and credit card production services. [25] However, in this example, Cyan Bank has an acquiring business, and it determines that 25% of its cardholders' transactions are 'on-us' transactions where it does not make supplies of interchange services. As such, only 75% of these acquisitions would attract the 52% ECP rate. Therefore Cyan Bank determines the ECP rate of the acquisitions is 40% ((75% × 52%) + (25% × 4%)). These acquisitions are partly to manage and operate the credit card facility account (which only relate to the supply of the credit card facility), and partly to process credit card transactions via the payment system (which relate to both supplies). [26] By undertaking an objective assessment of the relevant functions of the applications involved, Cyan Bank determines that 60% of the acquisitions only relate to the supply of the credit card facility and the remaining 40% relate to both supplies. Using the ECP rates of 4% and 40% from the two steps listed, Cyan Bank determines the ECP rate of the acquisitions is 18.4% ((60% × 4%) + (40% × 40%)). 46. To reflect this analysis in its apportionment method, Cyan Bank decides to use separate coding mechanisms to reflect the relevant ECP rate for each of the categories of acquisitions. It will review these coding mechanisms every 12 months (or if material changes occur in its business). 47. Cyan Bank also has acquisitions that are overheads that indirectly relate to all the supplies made in its credit card issuing business or that are enterprise costs (for example, a proportion of rental costs for head office premises or a proportion of marketing costs to promote awareness of the brand of entity) that are identified as being to some extent for use in the credit card issuing business. Using an input based indirect method, Cyan Bank calculates a weighted average ECP of 35.51% based on the acquisitions it has analysed, which it applies to these relevant overheads or enterprise costs. Cyan Bank also treats the small number of relevant acquisitions that it has not analysed in the same way. [27] 48. When calculated across all of the relevant acquisitions, Cyan Bank's method results in a weighted average ECP rate that is above the rate to be in the green zone. However, as Cyan Bank is using a method that meets all of the requirements to be low to moderate risk (this includes that it adjusts for any substantial one-off acquisitions or supplies, and that the apportionment method is documented and supported by an appropriate tax governance framework), it is in the blue zone. 49. In addition, Cyan Bank also claims reduced input tax credits on the relevant acquisitions to the extent it is entitled to do so. | Example 3: blue zone 50. As in Example 2, Cyan Bank undertakes an analysis of acquisitions that are for use or partly for use in making supplies in the credit card issuing business (including acquisitions in relevant support areas in other business units) over the previous 12 months. 51. However, in this Example, Cyan Bank decides to use only one ECP rate across all of the relevant acquisitions. Cyan Bank determines a weighted average ECP rate that reflects the analysis of its acquisitions. 52. This analysis can be summarised as follows: 53. Cyan Bank applies the weighted average ECP rate of 35.51% to all of the acquisitions to the extent they are for use in making supplies in the credit card issuing business (including acquisitions in relevant support area costs in other business units). It also applies this rate to acquisitions that are overheads that indirectly relate to all the supplies made in the credit card issuing business or that are enterprise costs which it identifies are to some extent for use in the credit card issuing business (for example, a proportion of rental costs for head office premises or a proportion of marketing costs to promote awareness of the brand of entity). 54. Cyan Bank uses this rate for the next 12-month period before re-testing it to determine a new weighted average ECP rate (assuming no material changes occur in the meantime). Cyan Bank applies this method consistently, using the analysis of the previous 12 months to determine the intended use for the next 12-month period. 55. Cyan Bank's method results in a weighted average ECP rate across all of the relevant acquisitions that are above the rate to be in the green zone. However, as Cyan Bank is using a method that meets all of the requirements to be low to moderate risk (this includes that it adjusts for any substantial one-off acquisitions or supplies, and that the apportionment method is documented and supported by an appropriate tax governance framework), it is in the blue zone. 56. In addition, Cyan Bank also claims reduced input tax credits on the relevant acquisitions to the extent it is entitled to do so. Date of effect 57. This Schedule has effect from the start of your first tax period commencing on or after 1 January 2020. This Schedule was published 18 December 2019 | Example 4: green zone 66. Piccolo Bank is an Australian ADI who supplies transaction accounts, including everyday accounts (which involve it making supplies of interchange services) and online savings accounts (which do not involve it making supplies of interchange services). 67. Piccolo Bank determines that, of the total number of transaction accounts they provide, more than 50% have access methods that, if used by the account holder, involve Piccolo Bank making taxable supplies of interchange services. Piccolo Bank does not need to establish that these interchange services were actually supplied in relation to each transaction account. 68. Piccolo Bank's ECP rate is no more than 20%, as a weighted average, which is applied to acquisitions in: 69. As the ECP rate used is no more than 20% as a weighted average for all acquisitions to the extent they are for use in making supplies in the transaction accounts business (including acquisitions in relevant support areas in other business units) and it meets the other requirements of the green zone, Piccolo Bank is in the green zone. 70. In addition, Piccolo Bank also claims reduced input tax credits on the relevant acquisitions to the extent it is entitled to do so. | Example 5: blue zone 71. Saxon Bank is an Australian ADI who supplies transaction accounts. Saxon Bank undertakes an analysis of the acquisitions that are for use or partly for use in making supplies in the transaction accounts business (including in relevant support areas in other business units) over the previous 12 months. 72. Saxon Bank's natural accounting or cost allocation systems do not separately identify acquisitions to provide accounts that involve them making supplies of interchange services (such as everyday accounts), when compared to other accounts where it does not make supplies of interchange services (such as online savings accounts or term deposits). 73. Saxon Bank's analysis is as follows: Some of these acquisitions are in the business unit for the transaction accounts business, and some are relevant support area costs in other business units. These acquisitions include: Saxon Bank determines these acquisitions have an ECP rate of 1%, using a method which meets the requirements in Step 2 of the blue zone. However, in this Example, Saxon Bank has an acquiring business, and it determines that 25% of its account holders' transactions are on-us transactions where it does not make supplies of interchange services. As such, only 75% of these acquisitions would attract the 50.5% ECP rate. Therefore, for these specific acquisitions, in accordance with Step 4B of the blue zone, Saxon Bank determines that the ECP rate of the acquisitions is 38.13%. Saxon Bank has not identified any other acquisitions it has that relate to both the supply of the transaction account and the supply of interchange services (except for overheads or enterprise costs), so it does not need to apply Step 4E of the blue zone. 74. Saxon Bank also has acquisitions that are overheads that indirectly relate to all the supplies made in its transaction accounts business or that are enterprise costs (for example, a proportion of rental costs for head office premises or a proportion of marketing costs to promote awareness of the brand of the entity) that are identified as being to some extent for use in the transaction accounts business. 75. To reflect the analysis of its acquisitions in its apportionment method, Saxon Bank decides to determine a weighted average ECP rate, which it will then use across all of the relevant acquisitions. [46] 76. This analysis can be summarised as follows: 77. Saxon Bank applies the weighted average ECP rate of 21.89% to all of the acquisitions to the extent they are for use in making supplies in the transaction accounts business (including acquisitions in relevant support area costs in other business units). It also applies this rate to acquisitions that are overheads that indirectly relate to all the supplies made in the transaction accounts business or that are enterprise costs which it identifies are to some extent for use in the transaction accounts business. 78. Saxon Bank uses this rate for the next 12-month period before re-testing it to determine a new weighted average ECP rate (assuming no material changes occur in the meantime). Saxon Bank applies this method consistently, using the analysis of the previous 12 months to determine the intended use for the next 12-month period. 79. Saxon Bank's method results in a weighted average ECP rate across all of the relevant acquisitions that is above the rate to be in the green zone. However, as Saxon Bank is using a method that meets all of the requirements to be low to moderate risk (including adjusting for any substantial one-off acquisitions or supplies, and that the apportionment method is documented and supported by an appropriate tax governance framework), it is in the blue zone. 80. In addition, Saxon Bank also claims reduced input tax credits on the relevant acquisitions to the extent it is entitled to do so. Date of effect 81. This Schedule has effect from the start of your first tax period commencing on or after 1 October 2020. This Schedule was published 25 September 2020 | Example 5: blue zone 71. Saxon Bank is an Australian ADI who supplies transaction accounts. Saxon Bank undertakes an analysis of the acquisitions that are for use or partly for use in making supplies in the transaction accounts business (including in relevant support areas in other business units) over the previous 12 months. 72. Saxon Bank's natural accounting or cost allocation systems do not separately identify acquisitions to provide accounts that involve them making supplies of interchange services (such as everyday accounts), when compared to other accounts where it does not make supplies of interchange services (such as online savings accounts or term deposits). 73. Saxon Bank's analysis is as follows: Some of these acquisitions are in the business unit for the transaction accounts business, and some are relevant support area costs in other business units. These acquisitions include: Saxon Bank determines these acquisitions have an ECP rate of 1%, using a method which meets the requirements in Step 2 of the blue zone. However, in this Example, Saxon Bank has an acquiring business, and it determines that 25% of its account holders' transactions are on-us transactions where it does not make supplies of interchange services. As such, only 75% of these acquisitions would attract the 50.5% ECP rate. Therefore, for these specific acquisitions, in accordance with Step 4B of the blue zone, Saxon Bank determines that the ECP rate of the acquisitions is 38.13%. Saxon Bank has not identified any other acquisitions it has that relate to both the supply of the transaction account and the supply of interchange services (except for overheads or enterprise costs), so it does not need to apply Step 4E of the blue zone. 74. Saxon Bank also has acquisitions that are overheads that indirectly relate to all the supplies made in its transaction accounts business or that are enterprise costs (for example, a proportion of rental costs for head office premises or a proportion of marketing costs to promote awareness of the brand of the entity) that are identified as being to some extent for use in the transaction accounts business. 75. To reflect the analysis of its acquisitions in its apportionment method, Saxon Bank decides to determine a weighted average ECP rate, which it will then use across all of the relevant acquisitions. [46] 76. This analysis can be summarised as follows: 77. Saxon Bank applies the weighted average ECP rate of 21.89% to all of the acquisitions to the extent they are for use in making supplies in the transaction accounts business (including acquisitions in relevant support area costs in other business units). It also applies this rate to acquisitions that are overheads that indirectly relate to all the supplies made in the transaction accounts business or that are enterprise costs which it identifies are to some extent for use in the transaction accounts business. 78. Saxon Bank uses this rate for the next 12-month period before re-testing it to determine a new weighted average ECP rate (assuming no material changes occur in the meantime). Saxon Bank applies this method consistently, using the analysis of the previous 12 months to determine the intended use for the next 12-month period. 79. Saxon Bank's method results in a weighted average ECP rate across all of the relevant acquisitions that is above the rate to be in the green zone. However, as Saxon Bank is using a method that meets all of the requirements to be low to moderate risk (including adjusting for any substantial one-off acquisitions or supplies, and that the apportionment method is documented and supported by an appropriate tax governance framework), it is in the blue zone. 80. In addition, Saxon Bank also claims reduced input tax credits on the relevant acquisitions to the extent it is entitled to do so. Date of effect 81. This Schedule has effect from the start of your first tax period commencing on or after 1 October 2020. This Schedule was published 25 September 2020",,,/law/view/document?LocID=%22COG%2FPCG20198EC1%2FNAT%2FATO%2F00001%22&PiT=99991231235958,False,False,https://www.ato.gov.au/law/view/document?docid=COG/PCG20198/NAT/ATO/00001
PCG 2017/15,Final PCG,GST and Customer Owned Banking Institutions,,,1 July 2017,,,GSTR 2000/24 | GSTR 2006/3,,"1. This Guideline [1] explains when the Commissioner will accept, as a matter of practical administration, a rate of no more than 18% as your extent of creditable purpose for certain acquisitions. [2]",,"5. Under the GST law you acquire a thing for a creditable purpose to the extent that you acquire it in carrying on your enterprise. However, you do not acquire the thing for a creditable purpose to the extent that the thing relates to making supplies that would be input taxed. You do not acquire a thing for a creditable purpose to the extent that the acquisition solely relates to making input taxed supplies. [4] 6. If you acquire a thing for a partly creditable purpose, [5] you need to work out the extent of the creditable purpose to determine your input tax credit entitlement for that acquisition. 7. We acknowledge that customer owned banking institutions may experience difficulties in meeting the requirements of the GST law in the context of apportionment of their partly creditable acquisitions. The ATO is also conscious of its administration costs associated with seeking assurance of apportionment methodologies and in particular, consideration of the customer owned banking institutions' design, maintenance and use of apportionment methodologies. The rate set out in this Guideline is reflective of the resource commitment and low level of risk to revenue. 8. The purpose and intent of this Guideline is to remove the complexity and to minimise compliance costs for customer owned banking institutions. 9. Further guidance on apportionment methods can be found in Goods and Services Tax Ruling GSTR 2006/3: Goods and Services tax: determining the extent of creditable purpose for providers of financial supplies (GSTR 2006/3). 10. This Guideline only applies in relation to GST and is not applicable for any other purpose or in relation to any other tax obligations and entitlements. The approach under this Guideline 11. This Guideline applies to you if you are a customer owned banking institution (as defined in paragraph 4 of this Guideline). 12. Under this Guideline the Commissioner will accept as a matter of practical administration a rate of no more than 18% (the rate) as the extent of your creditable purpose: 13. You can only apply paragraph 12(a) of this Guideline where you are able to identify acquisitions that solely relate to taxable, GST-free or input taxed supplies. The GST on such acquisitions is either wholly recoverable or not recoverable. The rate would only apply to your remaining acquisitions that are partly creditable. 14. You can only apply paragraph 12(b) of this Guideline where are you are unable to identify acquisitions that solely relate to taxable, GST-free or input taxed supplies because it is practically difficult and burdensome for you to do so (for example due to limited accounting system capability). For large, one-off acquisitions, we would expect you to firstly identify whether the acquisition solely relates to taxable, GST-free or input taxed supplies. 15. If you apply the rate under either paragraph 12(a) or (b) of this Guideline, we will not devote compliance resources to review input tax credit claims for acquisitions to which you have applied the rate for the purpose of determining the extent of creditable purpose. However, we may still conduct verification of all of your acquisitions to ensure that you applied the rate in accordance with this Guideline including paragraphs 12(a) and (b). We may also verify whether you are entitled to claim the input tax credit for other reasons, for example whether you made the acquisition, whether the input tax credit was claimed in the correct tax period and whether you hold a valid tax invoice. 16. For tax governance purposes, you should keep adequate records that show why you applied the rate to your particular types of acquisitions under either paragraph 12(a) or 12(b) of this Guideline. 17. This Guideline will only apply where you start applying the rate at the beginning of the tax period in which you decide to use the rate and as a minimum, continue to use it for the remainder of your financial year. In the subsequent financial year you would be required to use the rate for the whole of the financial year. 18. At the start of each financial year that applies to you, you will need to re-assess your eligibility under this Guideline (and in particular your eligibility as per paragraphs 12(a) or 12(b)) to ensure that you are applying the rate appropriately. This Guideline does not apply to acquisitions made in prior periods when you have not applied the rate under paragraph 12. 19. The rate cannot be used in calculating an adjustment for change in use of an acquisition that you included in a tax period when you were not using the rate. We would expect you to use the same methodology that you used to determine the original use. Further guidance on this can be found in Goods and Services Tax Ruling GSTR 2000/24: Goods and services tax: Division 129 - making adjustments for changes in extent of creditable purpose. 20. You do not need to notify us that you have applied the rate under this Guideline. However, you do need to keep records to show how you determined which acquisitions were solely or partly creditable, and when you started and/or stopped applying the rate under this Guideline. 21. The use of the rate under this Guideline is not mandatory and you can apply your own apportionment methodology to calculate the extent of your creditable purpose provided that it is fair and reasonable. Further guidance can be found in GSTR 2006/3. 22. We will review the rate and scope of this Guideline every two years or earlier if appropriate (for example if there are changes in the industry or the GST law) in consultation with the customer owned banking sector.",,,,,,False,False,https://www.ato.gov.au/law/view/document?docid=COG/PCG201715/NAT/ATO/00001
PCG 2018/6,Final PCG,GST - inbound tour operators and agency,,,10 October 2018,,,GSTR 2000/37 | GSTR 2001/8,,"1. This Guideline describes circumstances in which the Commissioner will not apply his compliance resources to examine whether you act as an agent for your non-resident clients. 2. You may choose to self-assess in accordance with the requirements under this Guideline, whether you act as agent of non-resident travel intermediaries [1] and/or non-resident-consumers. 3. For the purposes of this Guideline we collectively refer to non-resident travel intermediaries and/or non-resident-consumers as non-residents.",,"7. If you are an ITO, you provide or arrange tours in Australia for the benefit of non-residents. Your GST obligations depend on whether you are acting as an agent or principal. 8. Where you act as an agent of the non-resident to arrange an Australian tour package (when the non-resident is outside Australia), any commission you charge the non-resident in respect of that package will be GST-free. [2] 9. However, where you are acting as a principal the entire supply (which includes your mark-up or profit margin) may be subject to GST. 10. The Commissioner recognises the complexities for you in determining whether you act as an agent or principal. The purpose and intent of this Guideline is to reduce the complexity for you in determining whether you are acting as an agent for non-residents for the purposes of the GST law. The approach under this Guideline 11. If this Guideline applies, the Commissioner will not apply his compliance resources to examine whether you act as an agent for the non-resident for the purposes of the GST law. 12. The Guideline applies where all of the following requirements are met: The APP must also be made aware of the identity of the non-residents through the booking process (or at another time during the booking process).",,,,,,False,False,https://www.ato.gov.au/law/view/document?docid=COG/PCG20186/NAT/ATO/00001
PCG 2016/7,Final PCG,GST Joint Ventures in the energy and resource industry,,,2. This Guideline may be relied on either before or after its publication.,,,,,"1. This Guideline provides a practical compliance approach to the GST treatment of supplies made between two GST joint ventures with common participants, as well as supplies made involving a GST joint venture where the supplier is a participant in that GST joint venture. This Guideline is intended to provide greater certainty and compliance cost savings for those who choose to follow it in the circumstances outlined. It has been developed with the assistance of relevant industry stakeholders.",,,Intro: 7. The practical approaches set out below relate to the example arrangements and transactions shown in Diagram 3.,,,,,False,False,https://www.ato.gov.au/law/view/document?docid=COG/PCG20167/NAT/ATO/00001
PCG 2026/D2,Draft PCG,Draft Practical Compliance Guideline,Draft,,13,,,TA 2026/1 | TR 2018/3,,,"Scope: This Practical Compliance Guideline is a draft for consultation purposes only. When the final Guideline issues, it will have the following preamble: This Practical Compliance Guideline sets out a practical administration approach to assist taxpayers in complying with relevant tax laws. Provided you follow this Guideline in good faith, the Commissioner will administer the law in accordance with this approach. What this draft Guideline is about 1. This draft Guideline [1] explains when we will be more likely to have cause to apply compliance resources to consider the potential application of anti-avoidance provisions in the tax law, with specific emphasis on Part IVA of the Income Tax Assessment Act 1936 (the general anti-avoidance provisions of the income tax law), to property development arrangements involving long-term construction contracts. 2. This Guideline considers property development arrangements where a landowner engages another party to develop its land under a property development agreement (PDA) using a long-term construction contract. Typically (but not always) the developer engages a builder to undertake the construction work. In some arrangements, the landowner may also grant security over its land, or otherwise provide guarantees, to support financing obtained by the developer for the purposes of undertaking the development. Diagram 1: Typical property development arrangement 3. A PDA (or a similar agreement, however it may be described) is a contract between a developer and a landowner, outlining the terms and conditions for developing land and construction works, as well as the respective responsibilities of the parties and the financing arrangements for the project. A long-term construction contract refers to a contract under which construction work extends beyond one year of income. While long-term construction contracts can be separate from PDAs (and vice versa), they are often one and the same or together form part of the contractual framework underpinning the broader property development arrangement. This Guideline will primarily refer to the PDA, rather than differentiating between the PDA and the long-term construction contract in each instance. 4. The use of PDAs is common in Australia's property and construction sector. Generally, we do not have a concern with this operating model. 5. We are concerned where certain taxpayers are using PDAs between entities that are under common ownership or control, or are not dealing with each other at arms' length, to obtain a tax benefit. Specifically, our compliance focus is on entities that are in substance undertaking a single economic activity of property development but separate the land ownership and development activities in an attempt to defer the recognition of income and circumvent the trading stock provisions. [2] 6. This Guideline provides a risk assessment framework on the application of the general anti-avoidance rules in Part IVA of the Income Tax Assessment Act 1936, in the context of property development arrangements involving PDAs. The risk assessment framework sets out factors that we will take into account in deciding whether or not we will devote our compliance resources to further examine these property development arrangements. It does not mean that the general anti-avoidance rules will necessarily apply. 7. This Guideline does not replace, alter or affect our interpretation of the law in any way. 8. All further legislative references in this Guideline are to the Income Tax Assessment Act 1936, unless otherwise indicated. How to use this Guideline 9. You can use the risk assessment framework set out in this Guideline to understand and assess the level of risk associated with your property development arrangements. By following this Guideline, you can understand the compliance risks associated with particular property development arrangements under contemplation or already entered into. 10. If your property development arrangement is low risk (that is, it is in the green risk zone of the risk assessment framework set out at paragraph 18 of this Guideline), we will generally not have cause to allocate resources for intensive examination beyond verifying your self-assessment. 11. If your property development arrangement falls within the high risk zone (that is, the red risk zone of the risk assessment framework set out at paragraph 19 of this Guideline), we are likely to allocate compliance resources to undertake further scrutiny. This may include commencing a review or audit to examine the arrangement in detail and to assess the potential application of Part IVA to the arrangement. 12. The Appendix to this Guideline provides the types of evidence we are likely to ask you to provide in relation to any review of property development arrangements.",,"Intro: This Practical Compliance Guideline is a draft for consultation purposes only. When the final Guideline issues, it will have the following preamble: This Practical Compliance Guideline sets out a practical administration approach to assist taxpayers in complying with relevant tax laws. Provided you follow this Guideline in good faith, the Commissioner will administer the law in accordance with this approach. | What this draft Guideline is about: 1. This draft Guideline [1] explains when we will be more likely to have cause to apply compliance resources to consider the potential application of anti-avoidance provisions in the tax law, with specific emphasis on Part IVA of the Income Tax Assessment Act 1936 (the general anti-avoidance provisions of the income tax law), to property development arrangements involving long-term construction contracts. 2. This Guideline considers property development arrangements where a landowner engages another party to develop its land under a property development agreement (PDA) using a long-term construction contract. Typically (but not always) the developer engages a builder to undertake the construction work. In some arrangements, the landowner may also grant security over its land, or otherwise provide guarantees, to support financing obtained by the developer for the purposes of undertaking the development. Diagram 1: Typical property development arrangement 3. A PDA (or a similar agreement, however it may be described) is a contract between a developer and a landowner, outlining the terms and conditions for developing land and construction works, as well as the respective responsibilities of the parties and the financing arrangements for the project. A long-term construction contract refers to a contract under which construction work extends beyond one year of income. While long-term construction contracts can be separate from PDAs (and vice versa), they are often one and the same or together form part of the contractual framework underpinning the broader property development arrangement. This Guideline will primarily refer to the PDA, rather than differentiating between the PDA and the long-term construction contract in each instance. 4. The use of PDAs is common in Australia's property and construction sector. Generally, we do not have a concern with this operating model. 5. We are concerned where certain taxpayers are using PDAs between entities that are under common ownership or control, or are not dealing with each other at arms' length, to obtain a tax benefit. Specifically, our compliance focus is on entities that are in substance undertaking a single economic activity of property development but separate the land ownership and development activities in an attempt to defer the recognition of income and circumvent the trading stock provisions. [2] 6. This Guideline provides a risk assessment framework on the application of the general anti-avoidance rules in Part IVA of the Income Tax Assessment Act 1936, in the context of property development arrangements involving PDAs. The risk assessment framework sets out factors that we will take into account in deciding whether or not we will devote our compliance resources to further examine these property development arrangements. It does not mean that the general anti-avoidance rules will necessarily apply. 7. This Guideline does not replace, alter or affect our interpretation of the law in any way. 8. All further legislative references in this Guideline are to the Income Tax Assessment Act 1936, unless otherwise indicated. | How to use this Guideline: 9. You can use the risk assessment framework set out in this Guideline to understand and assess the level of risk associated with your property development arrangements. By following this Guideline, you can understand the compliance risks associated with particular property development arrangements under contemplation or already entered into. 10. If your property development arrangement is low risk (that is, it is in the green risk zone of the risk assessment framework set out at paragraph 18 of this Guideline), we will generally not have cause to allocate resources for intensive examination beyond verifying your self-assessment. 11. If your property development arrangement falls within the high risk zone (that is, the red risk zone of the risk assessment framework set out at paragraph 19 of this Guideline), we are likely to allocate compliance resources to undertake further scrutiny. This may include commencing a review or audit to examine the arrangement in detail and to assess the potential application of Part IVA to the arrangement. 12. The Appendix to this Guideline provides the types of evidence we are likely to ask you to provide in relation to any review of property development arrangements.","Example s: 23. The following examples illustrate how the risk assessment framework for the potential application of Part IVA applies in this Guideline will apply in different scenarios. Green zone (low risk) | Example 1: – progress payments made and basic approach or estimated profits basis applied 24. The landowner engages the developer, which is a related entity, and the landowner makes progress payments to the developer during the development phase. The developer returns income progressively over the life of the project, consistent with the economic activity undertaken. 25. The landowner elects to apply the cost method under paragraph 70-45(1)(a) of the Income Tax Assessment Act 1997 (ITAA 1997) for trading stock purposes (that is, no income is returned by the landowner). Diagram 2: Progress payments made and basic approach or estimated profits basis applied 26. Whether the developer applies the basic approach or the estimated profits basis as outlined in TR 2018/3, the key factor is that income is recognised progressively in line with the work performed. These methods of income recognition are regarded as low risk from a compliance perspective. Generally, we would not have cause to apply compliance resources to these arrangements, other than to confirm that they fall within the parameters of the green zone. | Example 2: – no progress payments made but income recognised progressively in accordance with TR 2018/3 27. The landowner engages the developer, which is a related entity, but the landowner does not make progress payments to the developer during the development phase. Despite this, the developer recognises income progressively for tax purposes by applying the estimated profits basis or the basic approach. 28. The landowner elects to apply the cost method under paragraph 70-45(1)(a) of the ITAA 1997 for trading stock purposes (that is, no income is returned by the landowner). Diagram 3: No progress payments made but income recognised progressively in accordance with TR 2018/3 29. This approach accords with the principles outlined in TR 2018/3. As income is returned progressively in line with the economic activity, the arrangement is considered low risk. Generally, we would not have cause to apply compliance resources to these arrangements, other than to confirm that they fall within the parameters of the green zone. | Example 3: – landowner engages builder directly and applies trading stock provisions 30. The landowner contracts directly with the builder, which is a related entity, and pays for the construction costs progressively to the builder. The landowner applies the trading stock provisions (either at cost price, market selling value or replacement value under subsection 70-45(1) of the ITAA 1997), thus progressively recognising income over the duration of the development. While this arrangement does not involve a PDA between a landowner and developer (as there is no developer entity), it still falls within the scope of an arrangement involving a long-term construction contract. Diagram 4: Landowner engages builder directly and applies trading stock provisions 31. Provided the trading stock provisions are correctly applied, and income is recognised in accordance with the increase in value of the land or development, this approach is considered low risk. Generally, we would not have cause to apply compliance resources to these arrangements, other than to confirm that they fall within the parameters of the green zone. | Example 4: – landowner and developer in partnership apply trading stock provisions 32. The landowner and developer, which are related entities, operate as a general law partnership and jointly contract with the builder. The partnership pays construction costs progressively to the builder. The partnership applies the trading stock provisions (either at cost price, market selling value or replacement value under subsection 70-45(1) of the ITAA 1997), thus progressively recognising income over the duration of the development. Diagram 5: Landowner and developer in partnership applies trading stock provisions 33. Where the landowner and developer have characterised their arrangement as a general law partnership and applied the trading stock provisions accordingly, we consider this a low-risk approach. Generally, we would not have cause to apply compliance resources to these arrangements, other than to confirm that they fall within the parameters of the green zone. | Example 5: – no progress payments made but landowner applies trading stock provisions using either market selling value or replacement value 34. The landowner engages the developer, which is a related entity, but the landowner does not make progress payments to the developer during the development phase. The developer does not recognise income progressively during the development phase but claims deductions for construction costs progressively. 35. Despite this, the landowner does not elect to value its land at cost, but rather recognises income for tax purposes based on the increase in the value of trading stock using either the market selling value or replacement value under subsection 70-45(1) of the ITAA 1997. 36. This means deductions claimed by the developer progressively are offset by income recognised by the landowner. Diagram 6: No progress payments made but landowner applies trading stock provisions using either market selling value or replacement value 37. This approach recognises income for tax purposes on a progressive basis and is considered low risk. Generally, we would not have cause to apply compliance resources to these arrangements, other than to confirm that they fall within the parameters of the green zone. Red zone (high risk) | Example 6: – no invoicing or progress payments where the property development agreement does not preclude it 38. The landowner interposes a developer entity, which is a related party (and a member of the same family group for tax purposes), between the landowner and builder. The developer does not have any assets or other resources of its own. The developer cannot carry out the development work itself without outsourcing the construction work, and without the landowner providing the land as security for the developer to obtain finance. The developer enters into a contract with the builder to undertake the construction work and is required to pay for construction costs progressively. The PDA between the landowner and developer allows for the developer to invoice the landowner progressively as costs are incurred and seek payment of the invoice within 30 days. 39. The developer chooses not to invoice the landowner until project completion. As a result, the landowner does not make progress payments, and the developer does not return income progressively, but claims deductions for costs incurred. This results in the developer being in a tax loss position for that project during the years prior to completion. 40. Losses made by the developer in the years before the project's completion are applied against trust income injected into the developer entity from a related trust (within the same family group for tax purposes). 41. Although the landowner elects to use the cost method under paragraph 70-45(1)(a) of the ITAA 1997, no income is returned by the landowner under the trading stock provisions because, under the scheme, the relevant costs are treated as not having been incurred, and therefore not brought to account, until the project is completed. Diagram 7: No invoicing or progress payments when property development agreement does not preclude it 42. Based on the terms of the contract between the landowner and developer it is likely that income has been derived by the developer progressively. 43. In such cases, we will apply compliance resources to the arrangement and may consider the potential application of Part IVA. 44. Our approach will be the same regardless of whether this outcome arises because the developer elects not to issue invoices progressively despite being permitted to do so, or because the PDA prohibits the issuing of invoices until project completion. In either scenario, consideration may be given to the potential application of Part IVA. | Example 7: – losses made by the developer are utilised and indicia of partnership exist 45. The landowner engages the developer, which is a related entity, to develop its land. The landowner does not make progress payments during the development phase. The developer does not return income progressively for tax purposes, but claims deductions for costs incurred progressively, meaning the developer is in a tax loss position in respect of that project in the years before the project's completion. 46. The losses generated by the developer on this project prior to its completion are offset against income derived from other projects that have been completed by the same developer. 47. Although the landowner elects to use the cost method under paragraph 70-45(1)(a) of the ITAA 1997, no income is returned by the landowner under the trading stock provisions because, under the scheme, the relevant costs are treated as not having been incurred, and therefore not brought to account, until the project is completed. 48. The parties do not consider that they are in a general law partnership, however the terms of the contract and the conduct of the parties indicate that there are some indicia of a partnership that exist. Diagram 8: Losses made by the developer are utilised and indicia of partnership exist 49. In such cases, we will apply compliance resources to the arrangement. Where the structure or conduct of the arrangement raises concerns about tax avoidance, we may consider the potential application of Part IVA. 50. In the course of conducting our Part IVA analysis, our review of the arrangement may extend to considering whether or not the landowner and developer are operating as a general law partnership, for the purposes of determining the correct application of the trading stock provisions under the tax law. | Example 8: – arrangement replicated across multiple property development projects in the same economic group 51. The landowner engages the developer, which is a related party, under an arrangement that replicates the features of Examples 6 or 7 of this Guideline and is implemented across multiple projects. Under this arrangement, the landowner does not make progress payments during the development phase, and the developer does not return income progressively. The developer claims deductions for costs incurred progressively, and as a result is in a tax loss position in the years before completion of the respective projects. Additionally, the landowner does not return income in respect of the increase in value of trading stock. 52. This structure enables the developer's tax losses to be consistently utilised to offset income generated elsewhere in the group. This is typically achieved through either the formation of a tax consolidated group that the developer but not the landowner is a member of, or the developer receiving trust distributions from a trust within the economic group or a combination of both. Diagram 9: Arrangement replicated across multiple property development projects in the same economic group 53. What distinguishes this scenario is the replication of the arrangement across a broader portfolio of developments, resulting in the continuous deferral of income tax. 54. In these circumstances, we will apply compliance resources to examine the arrangements in detail, and where appropriate, consider the application of Part IVA.","Appendix 1: – Evidence requirements 55. This Appendix outlines the types of evidence we are likely to consider when reviewing your property development arrangements. We generally expect taxpayers to be able to provide this evidence to support their arrangements. 56. As part of our business-as-usual process, we typically begin by requesting foundational information such as financial statements and information about the taxpayer's group structure. This helps us understand the taxpayer's overall financial position and activities. If we identify a potential risk involving a property development project, we may seek further evidence to determine whether that risk is real and whether it is material. 57. As explained in this Guideline and in our compliance approach, the level of evidence we seek depends on whether your arrangement falls within the green or red zone. For arrangements that fall within the green zone, our focus is typically on verifying that your self-assessment is appropriate. In contrast, arrangements that fall within the red zone will generally require more extensive evidence, not only to substantiate the arrangement itself, but also to demonstrate how it is practically implemented and operated. 58. The evidence listed in this Appendix is intended as a general guide and is not exhaustive. This Guideline is only to provide transparency as to the types of evidence you should already hold and what we may request. 59. We may ask for the following types of evidence: 60. You are invited to comment on this draft Guideline. Forward your comments to the contact officer by the due date. 61. A compendium of comments is prepared as part of the finalisation of this Guideline. An edited version of the compendium (names and identifying information removed) is published to the ATO Legal database on ato.gov.au. 62. Advise the contact officer if you do not wish for your comments to be included in the edited compendium. © AUSTRALIAN TAXATION OFFICE FOR THE COMMONWEALTH OF AUSTRALIA You are free to copy, adapt, modify, transmit and distribute this material as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).",,,False,True,https://www.ato.gov.au/law/view/document?docid=DPC/PCG2026D2/NAT/ATO/00001
PCG 2021/4,Final PCG,Allocation of professional firm profits - ATO compliance approach,,,1 July 2022,,,PS LA 2005/24 | TR 2001/7 | TR 2001/8,"Case References: Commissioner of Taxation (Cth) v Galland [1986] HCA 83 162 CLR 408 18 ATR 33 86 ATC 4885 Taxation, Commissioner of (Cth) v Everett [1980] HCA 6 143 CLR 440 10 ATR 608 80 ATC 4076","1. This Guideline sets out the ATO's compliance approach to the allocation of profits or income from professional firms in the assessable income of the individual professional practitioner (IPP). 2. This Guideline is concerned with whether there is a risk that income earned by an IPP is not appropriately taxed to the IPP. The approach assists the ATO to differentiate risk in order to tailor our engagement. It uses 2 'gateways' and a risk assessment framework of objective factors to rate IPP arrangements as low (green), moderate (amber) or high (red) risk. Analysis of the facts and circumstances of individual arrangements in the high and moderate risk zones would then be undertaken to determine investment of compliance resources where appropriate. 3. Historically, most professional firms were partnerships of natural persons. Professional firms are now structured in a variety of ways, reflecting the economic and legal choices made by owners of those firms. This Guideline uses the term 'professional firm' to refer to all business structures providing professional services. In some cases, these structures may be used in ways that give rise to different tax consequences and resulting tax compliance risks. 4. The ATO is concerned about arrangements involving taxpayers who redirect their income to an associated entity from a business or activity which includes their professional services where it has the effect of significantly reducing their tax liability. 5. The use of companies, trusts and other business structures do not of themselves give rise to avoidance concerns. Further, the profit generated by the business may not be wholly generated by the individual and there may also be good non-tax reasons as to why the IPP receives significantly less of the business' profits than would otherwise be the case. However, the use of those structures can provide the IPP with an opportunity to redirect income from them. When the business involves the provision of services, we will be concerned with arrangements where the compensation received by the individual is artificially low while associated entities benefit (or the individual ultimately benefits) and commercial reasons do not justify the arrangement. 6. Our concern increases the more the actual return to the IPP is linked to the individual performance of the IPP during the year in question (as contrasted to a given share of the overall profit of the professional firm, a share which may increase over time as the partner's contribution to the partnership accumulates) but is not reflected in the actual direct compensation to the individual. At an extreme, the overall remuneration arrangements of an IPP may reflect that the role is more akin to a highly paid employee (with bonus entitlements or remuneration at risk) rather than a partner in a professional firm. In this case, our concern is that the partnership structure may be used to provide artificial tax advantages. 7. The Commissioner's view is that the profit or income of a professional firm may comprise different components, reflecting a mixture of income from the efforts, labour and application of skills of the firm's IPPs (that is, personal exertion) and income generated by the business structure. 8. We are aware that in some cases, professional firm income has been treated as being derived from a business structure, even though the source of that income remains, (to a significant extent) the provision of professional services by one or more individuals. In that context, we may look to apply Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) [1] where income is redirected away from the individuals, despite the existence of a business structure. 9. This Guideline explains the ATO's risk-based approach to IPPs and how their professional firms allocate profits. The application of Part IVA requires consideration of the matters identified in subsection 177D(2). A consideration of Part IVA would go beyond the gateways, including, for example, an IPP's profit allocation arrangement. It is only after having passed the gateways in this Guideline that an IPP (or the firm more generally) can assess their risk rating under this Guideline. The Commissioner will use the 'risk assessment factors' in this Guideline to determine whether there is cause to allocate compliance resources to structures or transactions after gateways have been satisfied. 10. The Guideline only applies if the 2 gateways are passed: 11. Where an IPP's circumstances pass Gateways 1 and 2, the risk assessment framework explained in this Guideline may be used by the IPP and the ATO to understand whether further attention may be given to the arrangement. 12. Where an IPP's circumstances do not pass Gateways 1 and 2, the risk assessment framework is not available to them. If you need advice on how the law applies to you, you can submit an Early engagement advice request . 13. Overall, schemes which are designed to ensure that the IPP is not directly rewarded for the services they provide to the business, or receives a reward which is substantially less than the value of those services, are considered high risk by the ATO. Where an IPP attempts to alienate amounts of income flowing from their personal exertion (as opposed to income generated by the business structure), the Commissioner will consider applying the anti-avoidance provisions under Part IVA or other integrity rules - see paragraphs 36 to 38 of this Guideline. 14. This Guideline does not replace, alter or affect the operation of the law in any way. It does not relieve you of your legal obligation to comply with all relevant tax laws or create any safe harbour administrative concessions. This Guideline is not a technical analysis of the judicial decisions in this area. 15. The ATO is continuing work to identify taxpayers whose circumstances fall outside of this Guideline or who wish to nominate themselves as a test case to obtain further judicial guidance. 16. This Guideline does not replace, alter or affect the ATO view as expressed in public rulings and other publications. A list of related public rulings is contained in the References section of this Guideline.","Scope: 28. This Guideline applies if all of the following criteria are met: 29. However, if all of the criteria in paragraph 28 of this Guideline are not satisfied, this Guideline is not appropriate in your circumstances. If you need advice on how the law applies to you, you can submit an Early engagement advice request . Arrangements to which this Guideline applies 30. The ATO recognises there is a wide variety of businesses of all sizes where equity holders contribute to the business through the provision of their skilled labour. However, this Guideline only formally applies to tax compliance risks arising from the particular commercial and regulatory contexts for professional firm arrangements. That said, other similar businesses may find this Guideline useful in understanding whether their income or profit allocation arrangements may attract the attention of the ATO. 31. This Guideline applies to relevant arrangements within professional firms including, but not limited to, those providing services in the accounting, architectural, engineering, financial services, legal, medical and management consulting professions. 32. This Guideline does not apply to professions where the IPP is not permitted to provide services through an entity but must provide those services directly. 33. A professional is a member of a recognised profession. The term 'profession' is not defined by tax legislation. For the purpose of this Guideline, the Australian Council of Professions provides useful reference for defining a profession. [2] From this guidance, we consider the following as indicators of a professional: Income of the firm that is not personal services income 34. This Guideline only applies where an IPP has received an amount of income from a practice which generates its income from a business carried on in a business structure that is not subject to the PSI regime. 35. For the purposes of determining whether income earned by an IPP from a professional practice is PSI, the ATO will continue to apply the views set out in its existing rulings. [3] Part IVA and this Guideline 36. We consider that Part IVA may apply to schemes which are designed to ensure that the IPP is not appropriately rewarded for the services they provide to the business or receives a reward which is substantially less than the value of those services in order to reduce the tax payable on their overall economic return. Where an IPP attempts to alienate amounts of income flowing from their personal exertion (as opposed to income generated by the business structure), the ATO may consider the application of the anti-avoidance provisions under Part IVA. 37. The application of anti-avoidance provisions depends on a broad survey of the circumstances in each case. Just because a Gateway is not satisfied, or the arrangement is in the higher risk zone (red zone), does not necessarily mean Part IVA applies. The relevance of failing a Gateway, or being in the red zone (or the amber zone), is that the Commissioner is likely to give closer attention to the individual facts and circumstances of the arrangement, including a deeper consideration of whether anti-avoidance provisions apply. 38. Where an audit team is considering the potential application of Part IVA, there are various procedures and safeguards that the ATO has put in place to ensure a consistent approach to Part IVA, including the General Anti-Avoidance Rules (GAAR) panel. Reference should be had to Law Administration Practice Statement PS LA 2005/24 Application of General Anti-Avoidance Rules. Gateway 1 – commercial rationale 39. Gateway 1 considers whether the implemented arrangement and the way in which it operates are commercially driven. This means there must be a genuine commercial basis for the arrangement and also for the way in which profits are distributed. 40. There must be a genuine commercial rationale for the arrangement for all parties involved and the arrangement must achieve that end. The arrangement should reflect the commercial needs of the business. For example, the arrangement is likely to enhance, assist or improve the business' ability to produce income or make profits or the commercial benefits asserted to be achieved by the arrangement are justified. 41. There must be evidence that the stated commercial purpose was achieved as a result of the arrangement. For example, the mere assertion of 'asset protection' for an IPP is not sufficient if the arrangement does not actually provide improved asset protection. The ATO considers it is best practice to record the commercial rationale for the decision to adopt the arrangements used and for the way in which profits are distributed. 42. Where there are aspects of the arrangement that would not be expected to be present in a more straightforward or commercial dealing, there must be a commercial rationale for the arrangement. 43. The legal form and documentation must be consistent with the economic substance of how the professional firm operates in practice. The presence of discrepancies may indicate artifice or contrivance in the manner in which the arrangement is carried out. For example, arrangements that are not legitimately implemented or are operating in a manner contrary to or outside the scope of the relevant constituent documents would not adequately demonstrate a commercial rationale for the arrangement. We may consider other documents, such as internal management documents, procedures and practices as well as the firm's constituent documents, in our analysis. 44. When considered in its entirety, any change in tax performance, absent any other non-tax related practical changes, is a strong indicator of a lack of commercial rationale for the arrangement. 45. Indicators to the Commissioner that an arrangement lacks a sound commercial rationale include: 46. There must also be a genuine commercial basis for the way in which profits are distributed between the IPP and related parties, especially in the form of remuneration paid. Relevant considerations are whether: Gateway 2 – high-risk features 47. If, after considering Gateway 1, you conclude that your arrangement is commercially driven, you must then assess whether your arrangement contains any high-risk features, such as those arrangements covered by a Taxpayer Alert. We also consider the following as potentially high-risk features: 48. [Omitted.] 49. These features are described in more detail in paragraphs 50 to 59 of this Guideline.",,"Intro: This Practical Compliance Guideline sets out a practical administration approach to assist taxpayers in complying with relevant tax laws. Provided you follow this Guideline in good faith, the Commissioner will administer the law in accordance with this approach. | Note: [ This is a consolidated version of this document. Refer to the Legal database (ato.gov.au/law) to check its currency and to view the details of all changes.]","Example 1: – financing arrangements relating to non-arm's length transactions 51. An IPP disposes of a portion of their interest in a professional firm to an associated discretionary trust which borrows money from a bank to pay for the transaction. The borrowing is secured and guaranteed by the IPP as an individual. The trust obtains a deduction for the interest paid on the borrowing. The IPP uses the money received from the trust for the interest in the firm to pay off mortgage debt on their primary residence. The effect of this financing arrangement is to convert non-deductible debt to deductible debt through the use of a non-arm's length transaction. Exploitation of the difference between accounting standards and tax law 52. The ATO has identified arrangements that create artificial differences between taxable income and accounting income. Some arrangements create differences which are exploited to have the income assessed to individuals or businesses that pay little or no tax while allowing others to enjoy the economic benefits. 53. Work-in-progress and employee leave provisions would not ordinarily give rise to any concern under this factor. | Example 2: – amortising an intangible asset 54. An IPP may utilise the different treatment between accounting and tax for amortising an intangible asset (for example, the assigned portion of the IPP's interest in the firm). Pursuant to accounting standards, the intangible asset should be tested for impairment or amortisation each year. Where the book cost exceeds the net realisable value, the asset should be impaired. The impairment or amortisation is a non-cash accounting expense and does not give rise to a tax deduction. This will likely generate a situation where there is a difference (not otherwise being a temporary difference) between the taxable income, the accounting income and the cash available for distribution resulting in the ability to distribute the taxable income to certain entities, with the cash being distributed by other means to other entities. Arrangements that are materially different in principle to Everett and Galland 55. The Commissioner considers the following arrangements to be materially different in principle to Everett and Galland where a partner assigns a portion of their partnership interest: 56. Factors we consider may indicate there has been a departure from Everett and Galland include but are not limited to: | Example 3: – non-equity partner assigns income 57. An individual is made a non-equity partner in a professional firm. The non-equity partner is not required to make a capital contribution, has a fixed draw component of $130,000, and has no right to vote or participate in the management of the firm. The non-equity partner undertakes an Everett assignment of their income to their family discretionary trust. The ATO does not consider this arrangement to be in line with the principles in Everett and Galland. In these circumstances, this Guideline does not apply. Multiple classes of shares and units held by non-equity holders 58. The ATO considers the issuing of multiple classes of shares in a company or units in a unit trust in a professional firm, without the accompanying voting rights, to be a high-risk feature due to the potential for alienation of income by professionals that are non-owner or non-equity holders in a structure. Further, the discretionary nature of these shares or units is usually linked to the personal performance of the non-owner or non-equity holder in order to receive any distribution or dividends. 59. An example is a dividend access share arrangement which pays dividends, at the discretion of the directors of the firm, to the dividend access shareholders or unit holders (who are associated entities of a professional who is not an owner or equity holder). The entitlement to receive any distribution or dividends is linked to the personal performance of the non-owner/non-equity holder. Gateway 2 – summary 60. The ATO considers the arrangements in paragraphs 50 to 59 of this Guideline illustrate high-risk features. We would expect the IPP to engage with the ATO where any of these features appear in their arrangement. 61. The ATO signals its concerns about particular arrangements to the public by releasing Taxpayer Alerts. If you have arrangements which are similar to, or the subject of, a Taxpayer Alert, you should contact the ATO prior to applying this Guideline. A complete list of Taxpayer Alerts is available on our Legal database. 62. The high-risk features outlined in paragraphs 50 to 59 of this Guideline are not exhaustive and will be subject to amendment and addition as the ATO becomes aware of further high-risk arrangements. 63. The absence of any published guidance on a specific arrangement or a variation on an arrangement does not mean that the ATO accepts or endorses that arrangement or variation or the underlying tax consequences. 64. [Omitted.] The risk assessment framework 65. The Commissioner's compliance approach will vary depending on the risk rating of your allocation of profit arrangement. The following principles will assist you to understand how the Commissioner assesses risk in relation to allocation of profit arrangements and generally allow you to assess your compliance risk. 66. This Guideline adopts a risk assessment methodology made up of 3 risk zones (low, moderate and high) to assess your profit allocation arrangement. The risk zone applicable to your arrangement is determined by combining your scores for each of the 3 risk assessment factors in paragraph 76 of this Guideline. In most cases, it is only necessary to consider the first 2 risk assessment factors, but in some cases it may be appropriate to consider all 3. The risk zones are determined in paragraph 78 of this Guideline. 67. If your arrangement does not have a low (green zone) risk rating (per paragraph 78 of this Guideline), we consider your arrangement, or your treatment of that arrangement, is at risk of giving rise to an inappropriate tax outcome. Therefore, we will generally conduct some form of compliance activity to understand the facts and circumstances of your arrangement and the resulting tax outcome. 68. Where other compliance issues are present, the Commissioner may apply compliance resources to address those risks. Such issues could include but are not limited to: 69. Relying on this Guideline does not preclude the Commissioner from considering other compliance issues relevant to the IPP or their associated entities. How to risk assess your arrangement 70. Where you satisfy Gateways 1 and 2, you may self-assess your risk level against each of the risk assessment factors described in paragraphs 82 to 105 of this Guideline. Your performance against that risk assessment factor has a corresponding score. The aggregate of your score against each risk assessment factor determines which risk zone you fall within. Part-time IPPs 71. If you are a part-time IPP or only work part year, your assessment under risk assessment factor 2 should be made on a pro-rata basis. Part-time IPPs should adjust their profit allocation to a full-time equivalent in order to self-assess their level of risk. Remuneration 72. All components of remuneration are to be included in your risk assessment (including cash, superannuation, fringe benefits and any other non-cash benefits). Fringe benefits tax 73. Fringe benefits are included in your risk assessment as they form part of your overall remuneration. Where fringe benefits tax (FBT) is paid by the firm, the tax paid will be included in calculating the risk assessment factor. Other relevant considerations 74. The Commissioner recognises there may be a number of other relevant factors pertaining to individual arrangements which will affect an IPP's self-assessed risk rating. These may include timing differences, retention of income within a firm in a particular year for commercial purposes, access to tax concessions and provisions including accelerated depreciation and instant asset write-off, and other extraordinary business factors. 75. [Omitted.] Risk assessment scoring table 76. The following table sets out the score for each risk assessment factor: Risk zones 77. You can self-assess your profit allocation arrangement using: 78. The following table sets out the risk rating depending on whether you risk assess against 2 factors or all 3 factors in the table at paragraph 76 of this Guideline: *Note: The use of the third risk assessment factor is optional as we recognise that it is difficult to determine accurately. 79. If using all 3 risk assessment factors, to be considered low risk (green zone), your score must be 10 or less. 80. The first 2 risk assessment factors may be used (instead of all 3) where it is impractical to accurately determine an appropriate commercial remuneration against which to benchmark. To be considered low risk (green zone), in that circumstance, your aggregate score for those 2 factors must be 7 or less. 81. Where an IPP returns 100% of the profit, there is no need to assess against the other risk factors. The arrangement is low risk because none of the income is diverted to other entities. Explanation of the risk assessment factors Risk assessment factor 1 - proportion of profit entitlement from the whole of firm group returned in the hands of the IPP 82. Risk assessment factor 1 provides a score based on the proportion of the profit entitlement included in the IPP's assessable income to the total amount of income to which the IPP and their associated entities are collectively entitled (whether directly or indirectly) from the whole of firm group. 83. Income from the whole of firm group will include the income from the service entity and other associated businesses to the firm to which the IPP or their associated entities are entitled. Risk assessment factor 2 - effective tax rate 84. Risk assessment factor 2 provides a score based on the total effective tax rate paid by the IPP and their associated entities. 85. The total effective tax rate is calculated using the following formula: Where: 86. Your total effective tax rate is not the marginal rate applicable to the last dollar of income you derive. Rather, it is referrable to the average rate of tax paid across the entire income from the firm. | Example 4: – calculation of effective tax rate 87. An IPP receives $600,000 of firm income and pays $240,667 in tax (based on 2020-21 income tax rates) on this income. As the IPP has no other income or deductions, the IPP's total tax paid is the same under both subparagraphs (a) and (b) of paragraph 85 of this Guideline. 88. Associate 1 of the IPP receives $100,000 of firm income and pays $22,967 in tax (based on 2020-21 income tax rates) on this income. As Associate 1 has no other income or deductions, Associate 1's total tax paid is the same under both subparagraphs (a) and (b) of paragraph 85 of this Guideline. 89. Associate 2 of the IPP receives $100,000 of firm income and has $50,000 of other income. Under: As (b) is greater than (a), the amount for (b) of $33,850 is used as Associate 2's total tax paid. 90. Associate 3 of the IPP receives $100,000 of firm income and has $50,000 of deductible donations. Under: As (a) is greater than (b), the amount for (a) of $22,967 is used as Associate 3's total tax paid. 91. Associate 4 of the IPP receives $100,000 of firm income and has $100,000 of carried forward losses. Under: As (a) is greater than (b), the amount for (a) of $22,967 is used as Associate 4's total tax paid. 92. Associate 5 receives $100,000 of firm income and has $100,000 in other income and $100,000 in other deductions and losses. Under: As (a) is equal to (b), the amount of $22,967 is used as Associate 5's total tax paid. 93. Therefore, for the IPP and their associates, the total effective tax rate is 33.3%, calculated as follows: | Example 5: – calculation of effective tax rate where IPP has firm-related deductions 94. An IPP receives $600,000 from the firm and has a $40,000 interest deduction in relation to a working capital loan made to the firm. The IPP also has $50,000 in other income unrelated to the firm. Under subparagraph 85(a) of this Guideline, tax is assessable on firm income of $560,000 only, and the tax on that income would be $222,667 (based on 2020-21 income tax rates). The tax payable on all income (of $610,000) would be $245,167. However, if the firm income was disregarded, the IPP would pay $6,717 in tax. Therefore, under subparagraph 85(b) of this Guideline, the IPP is considered to have paid a total of $238,450 (being the difference between $245,167 and $6,717). As (b) is greater than (a), the IPP has a total tax paid of $238,450. IPP's superannuation contributions received by a fund that may or may not be an associated entity 95. An IPP's superannuation contributions are included, whether or not made by the firm, in the calculation for the purpose of the effective tax rate measure. This is because the amount would otherwise have flowed directly through to the IPP as a profit distribution, in the absence of a partnership of discretionary trust or other business structuring arrangement. 96. Where these superannuation contributions are deductible to the IPP or the firm, they will be subject to tax in the hands of the superannuation fund at a rate of 15%. We will recognise the 15% tax paid as part of the calculations. Risk assessment factor 2 and fringe benefits tax 97. Fringe benefits are included as they form part of the IPP's overall remuneration and part of their share of the firm's profits. Where FBT is paid by the firm, the tax paid will be included in calculating the risk assessment factor. | Example 6: – calculation of effective tax rate where IPP has reportable fringe benefits 98. An incorporated practice has 2 IPPs. IPP 1 receives their share of income as a salary totalling $200,000, and pays $60,667 in tax (based on 2020-21 income tax rates), resulting in an effective tax rate of 30.33%. 99. IPP 2 receives $75,000 in salary and $75,000 in reportable fringe benefits. IPP 2 pays $14,842 in tax (based on 2020-21 income tax rates) resulting in an effective rate of 19.79% on the salary and FBT is paid on their reportable fringe benefits. The grossed up taxable value of the reportable fringe benefits is $156,015 (assuming they are Type 1 GST-creditable benefits - gross up rate 2.0802). The company pays FBT of $73,327.05 on these benefits provided (47%). This means that IPP 2 has: Risk assessment factor 3 - appropriate remuneration 100. Risk assessment factor 3 requires consideration of the remuneration returned in the hands of the IPP as a percentage of the commercial benchmark for the services provided to the firm. 101. The IPP should receive assessable income from the firm in their own hands which reflects an appropriate return for the services they provide to the firm. To establish an appropriate benchmark you may consider, among other things: 102. Where you do not have an immediately comparable rate of remuneration, the rate of remuneration being utilised to establish the benchmark should be adjusted to reflect differences in duties performed, responsibilities, personal risk and liability. Some relevant factors to consider for this purpose are: 103. Benchmarking should reflect the market comparability of remuneration for the role, using a fact-based methodology. All components of remuneration are to be included (including cash, superannuation, fringe benefits and any other non-cash benefits) to reflect the true cost to the business of employing a comparable individual. 104. The assessment of the appropriate remuneration benchmark must be reviewed annually. 105. An acceptable benchmark may be established if the business approached an employment agency and negotiated remuneration based on the considerations outlined in paragraphs 101 and 102 of this Guideline. The remuneration agreed with the employment agency should provide a reasonable benchmark of the true value of hiring a comparable individual. The ATO's compliance approach 106. We will assess your level of risk pursuant to the criteria set out in this Guideline. 107. We will monitor outcomes for profit allocation arrangements to ensure there is no 'drift' to the limit of the green zone without commercial drivers. For example, where arrangements are in place such that the income from a firm results in 85% of profit entitlement being returned personally by an IPP over a period of time, and the operation of the arrangement changes, resulting in 55% of the profit entitlement being returned personally by the IPP, we may engage with you to determine the commercial rationale of this change, notwithstanding the arrangement may still result in a low risk assessment. 108. [Omitted.] 109. If you satisfy Gateways 1 and 2 outlined in this Guideline and your aggregate risk score is in the green zone, your arrangement will be treated by the ATO as low risk. 110. You can expect the following treatment depending on your risk zone. Where there has been no material change, then we will generally only apply compliance resources to the arrangement to: We may contact you to understand the arrangement and resolve any areas of difference. If further analysis confirms the facts and circumstances of your arrangement remain high risk, we may proceed to audit where appropriate. Evidencing your self-assessment 111. We may fact-check your assessment of your profit allocation. If you are unable to provide evidence to support your assessment, we may undertake further compliance activity. Transitional arrangements 112. We encourage willing and cooperative compliance and recognise that the publication of this Guideline may cause taxpayers to review their existing arrangements. Consequently, some taxpayers may modify their arrangements to prospectively come within the green zone. 113. Taxpayers with pre-existing arrangements are able to continue to rely on the suspended Assessing the risk: allocation of profits within professional firms guidelines (Suspended Guidelines) (published on ato.gov.au in 2015) for the years ending 30 June 2018, 30 June 2019, 30 June 2020, 30 June 2021 and 30 June 2022, as long as their arrangement: 114. In recognition that certain IPP's arrangements considered low risk under the Suspended Guidelines may have a higher risk rating under this Guideline, we are allowing a transitional period for those IPPs to continue to apply the Suspended Guidelines to their arrangements until 30 June 2024. 115. If, upon reviewing your arrangements, it is identified that you are no longer low risk, and you wish to transition your arrangements to a lower risk zone, you can inform us of your intentions at any time. If you engage with us in good faith, this engagement will be on a 'without prejudice' basis. 116. If you need advice about how the law will apply to you, including the tax consequences of any proposed restructure of your arrangements, you can submit an Early engagement advice request . 117. We recognise that there will be different requirements for transition depending on the current arrangements of the IPP and their firm. 118. Some arrangements will have flexibility and sufficient discretion in terms of distribution of firm income. For arrangements with these characteristics, compliance with this Guideline can be achieved by making suitable resolutions in relation to the distributions of income for the year ending 30 June 2025 and subsequent years. 119. [Omitted.] Who to contact 120. If you are considering restructuring in a way that may not be assessed as low risk pursuant to this Guideline and would like to mitigate your compliance risk or to obtain a greater level of certainty, we encourage you to engage with the ATO about your proposed restructure. 121. You can submit an Early engagement advice request if you have questions on how the law applies to your particular circumstances.","Appendix 1: – Case studies 122. The tax calculations in the following case studies are based on 2020-21 income tax rates. 123. The case studies that feature trusts assume that the trust's distributable income is the same as the net income for tax purposes. Case study 1 – IPP disposes of 45% of partnership interest 124. Nicolas is an IPP in a partnership. His total income entitlement from the partnership is $600,000. Nicolas has disposed of 45% of his partnership interest to an associated company. 125. Nicolas returns 55% of the partnership income ($330,000) in his personal tax return. Nicolas's tax liability on this amount is $119,167. 126. The company receives a total of $270,000 from the distribution and is liable for tax of $70,200 (26% of $270,000). 127. Together Nicolas and the company have a total effective tax rate of 31.56%. 128. The risk assessment is: The associated company pays tax of $70,200 on the $270,000 received by it, at a rate of 26%. [7] The calculation of total effective tax rate is as follows: The total effective tax rate is 31.56%. 129. The aggregate score of 7 places Nicolas' arrangement in the green zone (per paragraph 78 of this Guideline). Case study 2 – IPP disposes of 40% of partnership interest and receives service trust income 130. Donald is an IPP in a partnership. The partnership has a service trust entity in its group that provides services to the partnership. Donald has disposed of 40% of his interest in the partnership to a discretionary trust. The beneficiary of the discretionary trust is an associated company. An adult individual associated with Donald is a beneficiary of the service trust. 131. Donald's income entitlement from the partnership is $800,000. There is also an entitlement to $80,000 profit from the service trust. Therefore, the total profit entitlement is $880,000. 132. Donald includes $480,000 of the partnership income in his tax return, the corporate beneficiary includes $320,000 in its tax return and the service trust income of $80,000 is distributed to the adult individual beneficiary. 133. The risk assessment is: The associated corporate beneficiary pays tax of $83,200 on the $320,000 it received. The individual beneficiary pays tax of $16,467 on their $80,000 distribution from the service trust. The calculation of total effective tax rate is: The total effective tax rate is 32.54%. 134. The aggregate score of 7 places Donald's arrangement in the green zone (per paragraph 78 of this Guideline). Case study 3 – IPP disposes of 35% of partnership interest 135. Hilary is an IPP in a partnership and has disposed of 35% of her partnership interest to a discretionary trust. The beneficiary of the discretionary trust is an associated company. Hilary's total income entitlement from the partnership is $250,000. 136. Hilary includes $162,500 (65%) from the partnership in her tax return. The tax liability on this is $45,192. 137. The corporate beneficiary includes $87,500 (35%) in its tax return. The company's tax liability on this is $22,750. 138. The risk assessment is: The corporate beneficiary pays tax of $22,750 on the $87,500 received by it. The calculation of total effective tax rate is: The total effective tax rate of 27.18% is used. 139. The aggregate score of 7 places Hilary's arrangement in the green zone (per paragraph 78 of this Guideline). Case study 4 – IPP disposes of 35% of partnership interest and has a jointly-held negatively-geared rental property 140. Bernie is an IPP in a partnership. Bernie has assigned 35% of his interest in the partnership to a discretionary trust. The beneficiaries of the discretionary trust include Bernie's spouse, Jane. 141. Bernie's income entitlement from the partnership is $500,000. 142. Bernie and Jane jointly (in equal shares) own a rental property which is negatively geared and which generated a net rental loss of $40,450. 143. Bernie includes $325,000 (65% of the partnership income) in his tax return and the discretionary trust includes $175,000 (35% of the partnership income) as net income in the trust tax return. All of the trust income is distributed to Jane, who includes the $175,000 trust net income in her tax return. 144. Bernie and Jane claim the rental loss equally – that is, $20,225 each. For the purposes of calculating the total effective tax rate, deductions not related to the professional income are disregarded. 145. The risk assessment is: Jane pays tax of $49,817 on the $175,000 received by her (her rental loss of $20,225 is disregarded). The calculation of total effective tax rate is: The total effective tax rate is 33.35%. 146. The aggregate score of 6 places Bernie's arrangement in the green zone (per paragraph 78 of this Guideline). Case study 5 – IPP is a trustee partner 147. Frank is an IPP in a professional firm that operates as a partnership of discretionary trusts with three equal discretionary trust partners (with individual representative IPPs as trustees, of which Frank is one) and 10 employees. 148. The professional firm generates a profit of $1.5 million for the year. 149. The partnership distributes Frank's $500,000 profit share to his discretionary trust. The discretionary trust subsequently distributes to its beneficiaries as: 150. The risk assessment is: The corporate beneficiary pays tax of $52,000 on the $200,000 distributed to it. The calculation of total effective tax rate is: The total effective tax rate is 31.53%. 151. The aggregate score of 7 places Frank's arrangement in the green zone (per paragraph 78 of this Guideline). Case study 6 – IPP returns 100% of the profit received after a less profitable year 152. Felix is an IPP in a firm which operates as a partnership of discretionary trusts. Due to some adverse business impacts, the firm income is significantly decreased. Felix's total income entitlement from the firm is $65,000. He returns 100% (that is, $65,000) of the income in his personal tax return. Felix has a tax liability of $11,592 on this income. 153. The risk assessment is: 154. As Felix has returned 100% of his profit entitlement in his personal tax return, he is automatically in the green zone and there is no requirement to assess against the other risk factors. Case study 7 – IPP disposes of 40% of partnership interest and assesses against the appropriate remuneration factor 155. Jacinta is an IPP in a partnership. Her total income entitlement from the partnership is $600,000. Jacinta disposes of 40% of her partnership interest to a discretionary trust. Therefore, Jacinta returns 60% of her entitlement in her personal tax return (that is, $360,000). The tax liability on this amount is $132,667. 156. The discretionary trust's beneficiaries are Jacinta's spouse and a corporate beneficiary. The beneficiaries receive a total of $240,000 (being 40% of $600,000) from the firm. Jacinta's spouse receives $180,000 and the corporate beneficiary receives $60,000. Jacinta's spouse has a $51,667 tax liability on their distribution and the corporate beneficiary has a tax liability of $15,600 on its distribution of $60,000 (26% of $60,000). 157. The risk assessment is: Jacinta's spouse pays tax of $51,667 on $180,000 received by them. The corporate beneficiary pays tax of $15,600 on the $60,000, at a rate of 26%. The calculation of total effective tax rate is: The total effective tax rate is 33.32%. Jacinta considered the additional duties, responsibilities, risks and roles she undertakes in the firm and the commercial remuneration that she has arrived at for her role is $350,000. Jacinta's remuneration as a percentage of the commercial benchmark for her services is calculated as: That is: 158. The aggregate score of 10 places Jacinta's arrangement in the green zone for assessment against all 3 factors (per paragraph 78 of this Guideline). Case study 8 – IPP disposes of 40% of partnership interest 159. Maria is an IPP in a partnership. Her total income entitlement from the partnership is $600,000. Maria disposes 40% of her partnership interest to a discretionary trust. Therefore, Maria returns in her personal income tax return $360,000 (60% of $600,000) of the total income entitlement from the partnership. The tax liability on this amount is $132,667. 160. The discretionary trust's beneficiaries are Maria's spouse and a corporate beneficiary. The beneficiaries receive a total of $240,000 (40% of $600,000) from the firm. Maria's spouse receives $180,000 and the corporate beneficiary receives $60,000 of the $240,000. Maria's spouse has a $51,667 tax liability on the distribution and the corporate beneficiary has a tax liability of $15,600 on the distribution of $60,000 (26% of $60,000). 161. The risk assessment is: Maria's spouse pays tax of $51,667 on the $180,000 received by them. The corporate beneficiary pays tax of $15,600 on the $60,000, at a rate of 26%. The calculation of total effective tax rate is: The total effective tax rate is 33.32%. 162. The aggregate score of 7 places Maria's arrangement within the green zone (per paragraph 78 of this Guideline). Case study 9 – IPP disposes of 50% of partnership interest 163. David is an IPP in a partnership. David's total income entitlement from the partnership is $600,000. David has disposed of 50% of his partnership interest to an associated company. Therefore, David returns 50% of the partnership income in his tax return personally ($300,000 of $600,000). David's tax liability on this amount is $105,667. 164. The corporate beneficiary receives a total of $300,000 from the distribution. The corporate beneficiary has a tax liability of $78,000 on this amount (26% of $300,000). 165. The risk assessment is: The corporate beneficiary pays tax of $78,000 on the $300,000, at a rate of 26%. The calculation of total effective tax rate is: The total effective tax rate is 30.61%. 166. The aggregate score of 7 places David's arrangement within the green zone (per paragraph 78 of this Guideline). Case study 10 – IPP in a company firm structure 167. Astrid is an IPP in a professional firm that operates through a company structure. Astrid is a director and the Astrid Family Trust is a shareholder of the company. 168. Astrid's total entitlement from the company is $400,000. 169. Astrid receives salary and wages of $200,000 and the Astrid Family Trust receives fully franked dividends from the company of $200,000 ($140,000 in cash and $60,000 in franking credits). 170. The Astrid Family Trust distributes the dividend as: 171. The risk assessment is: Astrid's spouse pays tax of $40,567 on the $150,000 received by him. The corporate beneficiary, Astrid Investments Pty Ltd, pays tax of $13,000 on the $50,000, at a rate of 26%. The calculation of total effective tax rate is: The total effective tax rate is 28.56%. 172. The aggregate score of 8 places Astrid's arrangement within the amber zone (per paragraph 78 of this Guideline). Case study 11 – IPP in a company firm structure 173. Yan is an IPP in a professional firm that operates through a company structure. Yan's total profit entitlement from the company is $400,000. The company pays a salary of $100,000 to Yan and franked dividends of $300,000 to a discretionary trust. 174. The discretionary trust distributes $200,000 to Yan and $100,000 to a corporate beneficiary. 175. The risk assessment is: The corporate beneficiary pays tax of $26,000 on the $100,000, at a rate of 26%. The calculation of total effective tax rate is: The total effective tax rate is 32.92%. 176. The aggregate score of 6 places Yan's arrangement within the green zone (per paragraph 78 of this Guideline). Case study 12 – IPP trades via a trust structure 177. Benjamin is an IPP in a professional firm that trades via a unit trust. Benjamin's units in the unit trust are held by an associated discretionary trust. 178. Benjamin's profit entitlement from the firm is $600,000. 179. The associated discretionary trust distributes $300,000 to Benjamin, $100,000 to Benjamin's spouse and $200,000 to a corporate beneficiary. 180. The risk assessment is: The corporate beneficiary pays tax of $52,000 on $200,000, at a rate of 26%. Benjamin's spouse pays tax of $22,967 on the $100,000 reported in their return. The calculation of total effective tax rate is: The total effective tax rate is 30.11%. 181. The aggregate score of 7 places Benjamin's arrangement within the green zone (per paragraph 78 of this Guideline).",,/law/view/document?LocID=%22COG%2FPCG20214EC%2FNAT%2FATO%2F00001%22&PiT=99991231235958,False,False,https://www.ato.gov.au/law/view/document?docid=COG/PCG20214/NAT/ATO/00001
PCG 2017/13,Final PCG,Division 7A - PS LA 2010/4 sub-trust arrangements maturing in or after the 2016-17 income year,,,,,,PS LA 2010/4 | TD 2022/11 | TR 2010/3,,1. This Guideline applies to a private company (or trustee [1] ) beneficiary of a trust and sub-trust where the trustee:,Scope: 2. This Guideline only applies where a UPE:,"3. Division 7A of Part III of the Income Tax Assessment Act 1936 contains integrity provisions that aim to prevent tax-free distributions of private company profits to shareholders and their associates. 3A. All legislative references in this Guideline are to the Income Tax Assessment Act 1936. 4. Broadly speaking, it does this by deeming a private company to have paid a dividend [6] to a shareholder, or shareholder's associate, if it makes a loan to the shareholder or associate and that loan is not repaid in full or put on complying terms [7] before the private company's lodgment day. [8] 5. For the purposes of Division 7A, a 'loan' includes the provision of credit or any other form of financial accommodation. [9] 6. Taxation Ruling TR 2010/3 Income tax: Division 7A loans: trust entitlements (now withdrawn) contains the Commissioner's former view of how Division 7A applies where a private company beneficiary has, or had, a present entitlement to an amount of income from an associated trust that is part of the same family group as the private company. 7. Relevantly, TR 2010/3 stated that a UPE that has not been satisfied from a trust to a private company beneficiary in the same family group is the provision of financial accommodation and therefore a 'loan' where: 7A. On 13 July 2022, the Commissioner issued Taxation Determination TD 2022/11 Income tax: Division 7A: when will an unpaid present entitlement or amount held on sub-trust become the provision of 'financial accommodation'?. This Determination describes when a private company beneficiary made presently entitled to income of a trust provides financial accommodation. It replaces both TR 2010/3 and PS LA 2010/4 in respect of trust entitlements arising on or after 1 July 2022. 7B. Taxpayers will be able to continue to rely on both TR 2010/3 and PS LA 2010/4 for trust entitlements arising on or before 30 June 2022. Administrative guidance in PS LA 2010/4 8. PS LA 2010/4 provides guidance on the administrative aspects of TR 2010/3, including where the UPE funds remain intermingled with funds of the trust but are claimed to be held on sub-trust for the sole benefit of the private company beneficiary. 9. For arrangements in respect of which it continues to apply, PS LA 2010/4 states that the Commissioner will consider that the UPE funds in the sub-trust are held for the sole benefit of the private company beneficiary if they are lent to the main trust under either a 7-year interest-only loan or under a 10-year interest-only loan with the principal of the respective loan repayable at the end of the 7-year interest-only loan (investment Option 1) or at the end of the 10-year interest-only loan (investment Option 2). [11] 10. A trustee adopting either investment Option 1 or investment Option 2 must document the terms of the investment agreement and the investment agreement must be legally binding. The terms of the investment must include the obligation to repay the principal of the loan at the end of the term. [12] Obligation to repay the principal of the loan, entered into under either investment Option 1 or investment Option 2, is not met at the end of the loan term in the relevant income year 11. Those trustees who adopted investment Option 1 or investment Option 2 will, under the terms of the investment agreement, be obligated to repay the principal of the loan in the 2016-17 or a subsequent income year, whichever is applicable. PS LA 2010/4 makes it clear that to comply with either investment Option 1 or investment Option 2, the trustee must actually repay the principal of the loan at the end of the loan term and meet this term of the investment agreement. [15] 12. The Commissioner maintains the clear expectation that this term of the respective investment agreements be met and that the principal of the loan, entered into under either investment Option 1 or investment Option 2, must be repaid at the end of the loan term. 13. If the trustee fails to meet this term of the investment agreement, when an investment Option 1 or Option 2 matures, any unpaid principal of the loan will be treated by the Commissioner as the provision of financial accommodation and therefore a Division 7A loan. 14. If all, or part, of the principal of the loan is not repaid on or before the date of maturity, the Commissioner will accept that a 7-year loan on complying terms in accordance with section 109N may be put in place between the sub-trust and the private company beneficiary prior to the private company's lodgment day. This will provide a further period for the amount to be repaid with periodic payments of both principal and interest. 15. However, if such a 7-year loan on complying terms in accordance with section 109N is not put in place between the sub-trust and the private company beneficiary prior to the private company's lodgment day, a deemed dividend will arise at the end of the income year in which the loan matures (to the extent that it remains unpaid). 16. The following tables outline the key dates of which the relevant parties to sub-trust arrangements under this Guideline (where the investment Option 1 or Option 2 is not repaid by the relevant due date) must take note. The following table outlines the key dates that the relevant parties must note where the investment Option 1 is not repaid by the due date in the relevant income year. Table 1: investment Option 1 not repaid on maturity The following table outlines the key dates that the relevant parties must note where the investment Option 2 is not repaid by the due date in the relevant income year. Table 2: investment Option 2 not repaid on maturity 17. [Omitted.] 18. The Commissioner will not accept that the rolling over of all or part of either the investment Option 1 or the investment Option 2 that is not repaid into a further investment option described in PS LA 2010/4 will prevent the provision of financial accommodation to which Division 7A may apply. Consequently, the approach in PS LA 2010/4 will cease in respect of existing (original) sub-trust arrangements at the time either the investment Option 1 or the investment Option 2 matures. 19. Where the facts and circumstances indicate that there has never been an intention to repay the principal of the loan at the end of either the 7-year interest-only loan or the 10-year interest-only loan, the sub-trust arrangement was not entered into in accordance with PS LA 2010/4 and this may lead the Commissioner to consider that the purported arrangement was a sham, and/or that there was fraud or evasion. In these circumstances, the Commissioner may go back beyond the standard period of review [16] and deem a dividend in the income year in which the provision of financial accommodation originally arose. Application of section 109R to complying loans entered into after maturity of sub-trust arrangements 20. Section 109R can apply in some circumstances to not treat a payment as a repayment of a loan for Division 7A purposes.",,,,,,False,False,https://www.ato.gov.au/law/view/document?docid=COG/PCG201713/NAT/ATO/00001
PCG 2023/2,Final PCG,Classifying workers as employees or independent contractors - ATO compliance approach,,,19,,,MT 2008/2 | TR 2005/16 | TR 2023/4,"Case References: Construction, Forestry, Maritime, Mining and Energy Union v Personnel Contracting Pty Ltd [2022] HCA 1 279 FCR 631 ZG Operations Australia Pty Ltd v Jamsek [2022] HCA 2 Raftland Pty Ltd as trustee of the Raftland Trust v Commissioner of Taxation [2008] HCA 21 238 CLR 516 2008 ATC 20-029 68 ATR 170 246 ALR 406 WorkPac Pty Ltd v Rossato [2021] HCA 23 271 CLR 456 392 ALR 39","1. This Guideline outlines the Commissioner's compliance approach for businesses that engage workers and classify them as either employees or independent contractors. It sets out how we allocate our compliance resources, based on the risks associated with the classification. 2. The Commissioner is also the Registrar of the Australian Business Register (the Registrar). To the extent that this Guideline discusses matters of Australian business number (ABN) registration, the Registrar's approach aligns with the Commissioner's. 3. Unless otherwise stated, all references to an 'employee' in this Guideline refer to the ordinary meaning of an 'employee'.",,"4. When a business engages a worker, the arrangement will generally be one of either: 5. Determining which kind of arrangement is entered into is known as 'worker classification'. A business' tax and superannuation obligations, and a worker's tax obligations and entitlement to an ABN, can vary greatly depending on how the worker is classified. 6. Correctly determining whether a worker is an employee or independent contractor is important to ensure that both the business and the worker get their tax, superannuation, ABN registration and reporting obligations right. 7. It is not always easy to identify a worker's classification. The classification is determined by the totality of the contractual arrangement between the parties (including any implied or oral terms). The characterisation of the parties' relationship will generally be guided by the question of whether a worker is serving in the business of the engaging entity, as distinct from conducting an independent business of their own. [1] 8. It is the substance of a contractual arrangement that will dictate a worker's classification, rather than the labels used in it. Sometimes an entity that is carrying on a business will engage a worker with a written contract that describes the worker as an independent contractor, but when all rights and obligations in the totality of the contractual arrangement are considered, the arrangement is actually one of employment, or vice versa. A label in a contract, written or otherwise, cannot deem the relationship to be something it is not. [2] 9. Many arrangements will clearly be one of employment or of independent contracting. However, sometimes the totality of a contractual arrangement may have some indicators that point to an employment relationship and others that point towards independent contracting. This can make the correct classification difficult to ascertain. 10. The Commissioner's view of who is an employee is outlined in Taxation Ruling TR 2023/4 Income tax: pay as you go withholding - who is an employee?, which explains when an individual is an employee of an entity for the purposes of section 12-35 of Schedule 1 to the Taxation Administration Act 1953. 11. Further to the ordinary meaning of employee, being its meaning under common law, the Superannuation Guarantee (Administration) Act 1992 (SGAA) contains an extended definition of employee for superannuation guarantee purposes. This extends beyond traditional employment relationships to take into account some independent contractors. Most relevantly, subsection 12(3) of the SGAA provides that if a person works under a contract that is wholly or principally for the labour of the person, the person is an employee for superannuation purposes. 12. The Commissioner's view of who is an employee under the extended definition is outlined in Superannuation Guarantee Ruling SGR 2005/1 Superannuation guarantee: who is an employee? Who this Guideline applies to 13. This Guideline applies in situations where an entity that carries on a business (engaging entity) engages a worker and describes how and when we will allocate compliance resources to cases investigating the worker's classification. 14. This Guideline is relevant for a variety of tax and superannuation obligations for both the engaging entity and the worker, where the worker contracts directly with the engaging entity. Tables 1 and 2 of this Guideline summarises the tax, superannuation and reporting consequences for the engaging entity and the worker, depending on the worker's classification. Table 1: Consequences of a worker's classification where worker is an employee of the engaging entity Table 2: Consequences of a worker's classification where worker is an independent contractor 15. This Guideline does not replace, alter or affect our interpretation of the law in any way. It does not relieve the parties of their obligation to comply with all relevant tax or superannuation laws but is designed to give confidence that we will allocate compliance resources in line with the risk approach detailed in paragraph 23 of this Guideline. 16. The Guideline will be most relevant for situations where a worker's correct classification is less obvious and the engaging entity or worker (or both) want to understand how the ATO will allocate its compliance resources in such circumstances. If the arrangement is clearly one of employment or independent contracting, the parties may choose not to rely on this Guideline but self-assess based on their confidence that the correct classification has been applied. 17. This Guideline does not extend to the income tax affairs of a worker, including whether they are entitled to claim deductions or concessions associated with carrying on a business or whether the personal services income rules apply to their arrangement. [3] 18. This Guideline does not apply to matters that are not tax and superannuation-related and are outside the scope of the laws administered by the Commissioner. This includes matters concerning:","Intro: This Practical Compliance Guideline sets out a practical administration approach to assist taxpayers in complying with relevant tax laws. Provided you follow this Guideline in good faith, the Commissioner will administer the law in accordance with this approach.","Example 1: – very low risk – engaging entity and worker acting consistently with an agreed and understood relationship 46. A manufacturing business entered into a contract with a software engineer, Brett, to design, develop, test and install a new software program. The business intended to engage Brett as an independent contractor and the terms of the comprehensive written agreement between the business and Brett indicated this classification. 47. In seeking to rely on this Guideline, the business identified the following facts that show it satisfied the very low-risk criteria listed in Table 4 of the Guideline in determining the risk zone of the arrangement: 48. The arrangement is rated in the very low-risk zone. No further compliance resources will be applied to scrutinise whether Brett should instead have been classified as an employee of the engaging entity. | Example 2: – very low risk – engaging entity engages both contractors and employees - relationships are agreed and understood 49. Aussie Building Cleaners Pty Ltd (ABC) operates a cleaning business. The business does not have established premises; rather, cleaners attend a client's premises to undertake their duties. Some of the cleaners were employed by ABC under conventional contracts of employment, while other cleaners were engaged as independent contractors. While similar duties were undertaken by both kinds of cleaners, the terms and conditions differed significantly between the 2 kinds of arrangements. 50. Maria was one of ABC's window cleaners who was engaged as an independent contractor. After working for ABC for several years, Maria ceased her engagement with them. Subsequently, she lodged an unpaid superannuation query with the ATO claiming she should actually have been classified as an employee of ABC. 51. When Maria was engaged, ABC gave Maria the choice of entering into either kind of arrangement, noting that she would not be required to do the work herself if she was engaged as an independent contractor. Maria chose the independent contractor arrangement. 52. ABC also identified the following facts that show it satisfied the very low-risk criteria in Table 4 of this Guideline in determining the risk zone of the arrangement: 53. The arrangement is rated in the very low-risk zone. While the ATO investigates Maria's unpaid superannuation query to determine the risk zone, no further compliance resources will be applied to scrutinise whether Maria should instead have been classified as an employee of the business. The ATO will notify Maria of this outcome in response to her unpaid superannuation query. | Example 3: – low risk – extended definition of employee for superannuation purposes not considered 54. CCC Pty Ltd engages workers to deliver pamphlets of their products to encourage local sales. Frank was offered a job and signed a written contract stating he was an independent contractor. CCC Pty Ltd did not pay Frank superannuation and complied with all relevant tax and reporting obligations regarding Frank as an independent contractor. 55. CCC Pty Ltd has minutes of a meeting with Frank in which they discussed the independent contractor classification with him and its consequences, and he indicated his understanding and acceptance. 56. CCC Pty Ltd had previously obtained professional advice regarding the classification of workers in Frank's role as being independent contractors and discussed Frank's classification based on this advice with him. 57. However, CCC Pty Ltd did not consider or obtain any advice concerning whether a contractor in Frank's role would be captured under the extended definition of 'employee' in the SGAA. 58. Although he follows the duties outlined in the contract, given the nature of the role, Frank considered he might be entitled to superannuation and lodged an unpaid superannuation query with the ATO. 59. As CCC Pty Ltd has not taken action to obtain advice on the extended definition of an employee under the SGAA, or discussed any conclusion on that extended definition with Frank, the arrangement cannot be rated in the very low-risk zone. The arrangement is instead rated in the low-risk zone and compliance resources will be applied to consider whether Frank satisfied the extended definition of an employee. | Example 4: – medium risk – engaging entity and worker agreed to relationship but no comprehensive written agreement 60. Truck Takers Pty Ltd (Truck Takers) operates a courier service for parcels. It engages some workers as employees while others that are engaged for 'overflow' delivery services during busy periods are classified as independent contractors. 61. The following facts show that Truck Takers satisfied the medium-risk criteria in Table 4 of this Guideline in determining the risk zone of the arrangement: 62. The arrangement is rated in the medium-risk zone, as while there is evidence the parties intended for the overflow workers to be engaged as independent contractors, there is no comprehensive written contract governing the entire relationship. 63. The ATO identified Truck Takers' arrangements with their workers for review, based on risk factors and known information. Based on the arrangement being rated in the medium-risk zone, compliance resources would be applied to consider whether the overflow workers have been correctly classified. | Example 5: – high risk – changing circumstances not considered 64. Sasha entered into a fixed-term contract with a mining company to undertake a safety audit. Sasha was engaged as an independent contractor and the written contract between Sasha and the company reflected this relationship. 65. At the time, the arrangement was rated in the very low-risk zone as the actions of Sasha and the company demonstrated they intended to enter into an independent contracting relationship and that all parties fully understood the consequences of this classification. The mining company had also obtained professional advice from an employment lawyer regarding their arrangement with Sasha and their resulting tax and superannuation obligations. This indicated that the classification was correct and Sasha did not satisfy the extended definition of employee for superannuation purposes. 66. When the project concluded, the company decided to engage Sasha on a permanent basis. Her role and responsibilities changed, however, this was not reflected in a new or updated written contract between the parties. At no time did the company obtain professional advice regarding how the changed circumstances may impact their classification of Sasha as a worker. Nor did they discuss with Sasha whether the new arrangement might mean that she became their employee. 67. When Sasha ultimately left the company, she was concerned that the company may owe her superannuation. She lodged an unpaid superannuation query with the ATO. 68. While the arrangement may have previously been rated in the very low-risk zone, given the events that occurred when Sasha's engagement with the company changed, the arrangement is now rated in the high-risk zone as the company cannot demonstrate any agreement, professional advice or understanding about the classification of the new engagement. Compliance resources will be given the highest priority to scrutinise whether Sasha should instead have been classified as an employee from the time her role and responsibilities changed. | Example 6: – high risk – no evidence of an agreed relationship 69. A restaurant hires Sam, however, no formal agreement is entered into. Sam is unsure if he is an employee or independent contractor. The restaurant simply asserts to Sam that he is working as an independent contractor and will require an ABN. Sam is told to accept the arrangement if he wants to be hired. 70. Sam becomes concerned his remuneration does not include superannuation. After reading guidance on the ATO website, he reflects on the relationship and suspects he is actually an employee of the restaurant. 71. Sam lodges an unpaid superannuation query with the ATO. 72. Given the lack of a written contract and lack of evidence of the characteristics of the arrangement that were agreed to, the restaurant is unable to demonstrate that the contractual rights and obligations of the parties resulted in an independent contractor relationship. 73. Furthermore, the restaurant could not demonstrate they obtained professional advice from an appropriately qualified professional about the classification or that they worked with Sam to ensure he understood the classification and consequences. 74. The working arrangement is rated in the high-risk zone and compliance resources will be given the highest priority to scrutinise whether Sam should instead have been classified as an employee of the restaurant.",,,,False,False,https://www.ato.gov.au/law/view/document?docid=COG/PCG20232/NAT/ATO/00001
PCG 2025/5,Final PCG,Personal services businesses and Part IVA of the Income Tax Assessment Act 1936,,,14. This Guideline applies both before and after its date of issue.,,,PS LA 2005/24 | TR 2001/8 | TR 2003/10 | TR 2003/6 | TR 2019/1 | TR 2022/3 | TR 2023/4,"Case References: Commissioner of Taxation v Hart [2004] HCA 26 217 CLR 216 20024 ATC 4599 55 ATR 712 Commissioner of Taxation (Cth) v Gulland; Watson v Commissioner of Taxation (Cth); Pincus v Commissioner of Taxation (Cth) [1985] HCA 83 160 CLR 55 85 ATC 4765 17 ATR 1 62 ALR 545 Commissioner of Taxation v Mochkin [2003] FCAFC 15 127 FCR 185 2003 ATC 4272 52 ATR 198 Tupicoff, Gary v The Commissioner of Taxation [1984] FCA 382 4 FCR 505 84 ATC 4851 56 ALR 151","1. This Guideline explains when we will be more likely to have cause to apply compliance resources to consider the potential application of Part IVA of the Income Tax Assessment Act 1936 (the general anti-avoidance provisions of the income tax law) to an alienation arrangement where personal services income (PSI) of an individual is derived through a personal services entity (PSE) that is conducting a personal services business (PSB). 2. All further legislative references in this Guideline are to the Income Tax Assessment Act 1936, unless otherwise indicated. 3. This Guideline provides practical guidance on the types of alienation arrangements that we consider to be of 'low' or 'higher' [1] risk of Part IVA applying and the likelihood of us having cause to apply compliance resources to review those arrangements. 4. In this Guideline: 5. For the purposes of this Guideline, alienation of PSI occurs when the services of an individual are provided by an interposed entity (the PSE) controlled by or associated with the individual, rather than directly by the individual who performs the services. Alienation arrangements create a compliance risk when they are used to retain income in the PSE (referred to as 'retention of profits' arrangements) or divert income to associates (referred to as 'income splitting' arrangements), or both, such that the income is taxed at an overall lower rate. 6. We have a long-standing view on the treatment of PSI according to ordinary tax rules and the potential application of Part IVA, and its predecessor, former section 260, to income splitting and retention of profits arrangements. [3] There have been many cases where those provisions have been found to apply to the alienation of PSI. [4] Nevertheless, and despite the note to section 86-10 of the Income Tax Assessment Act 1997 (ITAA 1997) [5] , we are aware that some taxpayers incorrectly assume that where a PSB is being conducted, and the provisions of Division 86 of the ITAA 1997 do not apply, that Part IVA will also not apply to their income splitting or retention of profits arrangements. 7. Existing guidance and judicial decisions have made clear that Part IVA can apply to alienation arrangements involving income splitting and retention of profits where the dominant purpose of a participant in a scheme [6] was to obtain a tax benefit. In an alienation arrangement, a tax benefit will generally arise because an amount is not included in the assessable income of the individual, being an amount that would have been included, or might reasonably be expected to have been included, in the assessable income of the individual if the scheme had not been entered into. 8. While the introduction of the PSI rules in Part 2-42 of the ITAA 1997 had the practical effect of narrowing the scope for Part IVA to apply to alienation arrangements (because where the PSI rules apply, no tax benefit is obtained), it did not otherwise affect the continued operation of Part IVA. Today, where a PSE qualifies as a PSB and therefore the PSI rules do not apply, it remains possible that Part IVA will apply to the scheme under which the services are provided. [7] 9. Although this Guideline addresses the likelihood (risk) that an alienation arrangement will bring Part IVA into question, it does not provide detailed guidance on when Part IVA will apply to arrangements involving income splitting or retention of profits. Existing guidance material covering the administration and application of Part IVA more broadly is available in Law Administration Practice Statement PS LA 2005/24 Application of General Anti-Avoidance Rules. 10. An arrangement is considered low risk where the net PSI received through the PSE is assessed in the form of assessable income [8] to the individual whose personal efforts or skills generated that income and tax is not deferred. In contrast, a higher-risk arrangement will include either, or both, an income splitting or retention of profit arrangement which diverts PSI away from the individual or facilitates the deferral of tax. 11. While Part IVA can apply to any higher-risk arrangement, the materiality of the PSI diverted will always be a relevant factor we consider when deciding whether to review an arrangement or pursue Part IVA. We are more likely to target arrangements where there are substantial distributions or payments made to associated lower-tax persons or entities. Further, taxpayers should not be concerned that we will apply compliance resources to pursue Part IVA where they have made a genuine attempt to move into a low-risk arrangement by 30 June 2027. 12. This Guideline is limited to the matters described herein and does not affect our compliance approach to other tax issues that might arise in connection with your PSE arrangements – for example, whether Division 7A of Part III [9] applies to an arrangement within the PSE's group. If we consider that your arrangement poses a risk under other tax provisions, we will have cause to apply compliance resources to address those risks. 13. This Guideline does not replace, alter, or affect the operation of law in any way. It does not relieve you of your legal obligation to comply with all the relevant tax laws and it does not create any safe harbour administrative concessions.",,,,"Example s: 48. These examples are provided to assist taxpayers and their advisers in identifying the types of arrangements that would be considered to have a low or a higher risk of review activity, including a deeper consideration of Part IVA. They are not intended to be an exhaustive list of all possible low-risk and higher-risk arrangements. Low-risk arrangements | Example 1: – interposed trust, no inappropriate diversion or retention of income 49. Eddy is an accountant who provides his personal services through a family trust, Eddy's Accounting Practice (the Trust). Eddy is also the sole director and shareholder of Eddy Accounts Co (EA), which he set up to be the corporate trustee of the Trust. EA employs Eddy to provide accounting services. The beneficiaries of the Trust are Eddy, his wife and 2 school-aged children. 50. EA (in its capacity as trustee) enters into contracts with unrelated clients for Eddy's personal services. No services are provided by any other beneficiary. EA employs Maggie, who is an associate of Eddy. Maggie provides administrative support under the contracts but does not perform any principal work. [36] The Trust has no substantial income-producing assets or other employees. The Trust is a PSE because its income includes the PSI of Eddy, the individual who does the work. 51. For the income year, the Trust self-assesses as a PSB because it meets one of the PSB tests, and accordingly determines that the PSI rules do not apply to Eddy's PSI. EA pays Eddy a fixed salary which is less than the fee income received for his services and withholds tax and superannuation from those salary payments. Maggie is paid a wage which is commensurate with the administrative work she performs. After claiming allowable business deductions, EA distributes the balance of the Trust's net income to Eddy and remits the prescribed amount of superannuation to his superannuation fund and the associated withholding amount to the ATO. 52. This is a low-risk arrangement in the relevant income year because the entire net PSI received by the Trust has been included as assessable income in Eddy's individual tax return, through the salary paid by the Trust and the trust distribution to Eddy. | Example 2: – interposed company, no inappropriate diversion or retention of income 53. Ellen is an engineering consultant who provides her personal services through a private company, EBEC Co (EBEC). Ellen and her de facto, Brody, are both directors and joint shareholders in the company. 54. EBEC enters contracts with unrelated clients for Ellen's personal services. Ellen is an employee of the company, engaged to perform all principal work. EBEC has no substantial income-producing assets and only one other employee, Hooper, who provides administrative support under the contracts, but does not perform any principal work. Hooper is not an associate of Ellen or EBEC. The income received by the company under contracts is mainly a reward for Ellen's personal efforts and skills and is therefore her PSI. 55. In the income year, the company self-assesses as a PSB because it meets one of the PSB tests, and accordingly determines that the PSI rules do not apply to Ellen's PSI. EBEC pays Ellen a fixed salary which is less than the fee income it receives for her personal services and withholds tax and superannuation from those salary payments. Hooper is paid a wage that is commensurate with the work he performs. After claiming allowable business deductions, the company resolves to distribute the net PSI to Ellen as a director's fee, remit the prescribed amount of superannuation to her superannuation fund and the associated withholding amount to the ATO. 56. This is a low-risk arrangement in the relevant income year because the entire net PSI has been included as assessable income in Ellen's individual tax return through the salary paid by the company and director's fees paid to Ellen. | Example 3: – interposed trust, multiple test individuals, no inappropriate diversion or retention of income 57. Adam, Olivia, and Yang are IT consultants. They establish a discretionary trust called the Kika Trust. The corporate trustee of the Kika Trust is OYA Co (OYA), a company of which Adam, Olivia and Yang are each a director and equal shareholder. Adam, Olivia, and Yang are also beneficiaries of the Kika Trust. 58. OYA, as trustee of the Kika Trust, engages Adam, Olivia, and Yang as principals, via a contractor arrangement, to provide IT services to unrelated clients and enters into contracts with those clients for their services. 59. The income the Kika Trust earns under the contracts is mainly a reward for the personal efforts and skills of the principals and is therefore PSI of each principal. The Kika Trust has no substantial income-producing assets or employees. [37] Kika Trust is a PSE, because its income comprises the PSI of the principals. 60. Adam, Olivia and Yang each have their own PSI to which there will have to be a separate assessment of the PSB tests to determine if the PSI rules will apply. 61. In the income year, Adam, Olivia and Yang are each paid a fee in line with industry norms for their skill and experience: 62. The Kika Trust meets one of the PSB tests in respect of the PSI of both Adam and Olivia and therefore self-assesses as a PSB in relation to those 2 individuals. Accordingly, it is determined that the PSI rules do not apply to Adam and Olivia's PSI. 63. The Kika Trust resolves to distribute net income to Adam ($170,000) and Olivia ($450,000) as beneficiaries, in amounts that are both commensurate with the value of the services each provided to the Kika Trust and represent the net PSI of that individual received by the Kika Trust. 64. The Kika Trust self-assesses that it does not pass a PSB test in relation to the PSI of Yang, and therefore, the PSI rules do apply. During the year, the Kika Trust has been withholding amounts from the PSI it has been earning and not paying to Yang. It attributes the net PSI to Yang, which she includes as assessable income in her individual tax return. The Kika Trust remits to the ATO the withholding amounts in relation to the net PSI attributed to Yang. 65. This is a low-risk arrangement in the relevant income year because the entire net PSI of Adam and Olivia has been included as assessable income in their respective individual tax returns. Further, the PSI rules have been correctly applied in respect of Yang's PSI. | Example 4: – interposed company, temporary deferral of tax 66. Tran is a solicitor who provides his personal services through his company, Tran Prac Co (TP), of which he is the sole director and shareholder. 67. TP employs Tran to provide his services as a solicitor and enters contracts with clients to provide Tran's personal services. All principal work is performed by Tran and TP has no substantial income-producing assets or other employees. [38] TP is a PSE because its income includes the PSI of Tran, the individual who does the work. 68. During each year, TP pays Tran a monthly salary and, shortly before 30 June each year, Tran works out an annual bonus amount that is equal to the amount of net profit generated by TP in the income year. This amount is paid to Tran before 30 June each year, with appropriate withholding and superannuation contributions made by TP and recorded in its annual financial statements. Tran includes the bonus payment in his tax return. 69. The company self-assesses as a PSB because it meets one of the PSB tests, and accordingly determines that the PSI rules do not apply to Tran's PSI. In these circumstances, Tran is at low risk of us having cause to apply compliance resources to review his affairs because the entire net PSI derived by TP has been included in Tran's individual tax return each year. 70. However, in May 2021, Tran undergoes a serious medical procedure that requires a lengthy recovery period. This means he is unable to do any client work or complete administrative requirements during the rest of that income year, including calculating net PSI for TP before the end of the income year. 71. In July 2021, when Tran recovers, he undertakes the relevant calculation for the year ended 30 June 2021 and directs TP to pay out the retained net PSI amount as a franked dividend to himself by 30 July 2021. For the 2021–22 and subsequent income years, TP resumes its normal profit analysis and distribution pattern. 72. This circumstance results in a franked dividend and franking credit being reported in Tran's 2021–22 individual tax return, being the franked dividend paid in July for the 2020-21 income year net PSI. 73. This is considered a low-risk arrangement in the relevant income year, because the one-off deferral of distribution of the net PSI derived in the 2020–21 income year was temporary and clearly driven by factors outside the control of the taxpayer. Further, the normal pattern of behaviour resumed in the following years, demonstrating the timing difference was an isolated occurrence. | Example 5: – interposed company, superannuation benefit for individual 74. Maxine is an audio engineer who provides her personal services through her company, Maximum Acoustics Co (MAPL). Maxine is an employee and the sole director and shareholder of MAPL. 75. MAPL enters into contracts with clients for Maxine's personal services. Maxine performs all principal work under these contracts. MAPL has no substantial income-producing assets or other employees [39] and depends on the personal efforts of Maxine to derive income. MAPL is a PSE because its income includes the PSI of Maxine, the individual who does the work. 76. In the income year, the company self-assesses as a PSB because it meets one of the PSB tests, and accordingly determines that the PSI rules do not apply to Maxine's PSI. MAPL derives $80,000 under the contracts, and Maxine directs MAPL to make a superannuation contribution for her benefit, to her complying self-managed super fund. The amount of the contribution corresponds to the level of Maxine's concessional contributions cap. MAPL distributes the balance of net PSI to Maxine as a salary. MAPL complies with its PAYG withholding obligations in relation to the salary paid to Maxine. 77. This example involves the derivation of PSI through a private company and the use of that entity to make a superannuation contribution, for which a deduction is available to the company. 78. However, this is considered a low-risk arrangement in the relevant income year because the superannuation contribution made on behalf of Maxine, who is an employee of MAPL, is clearly for the purpose of providing a superannuation benefit, and not for the dominant purpose of obtaining a tax benefit. Further, the remaining PSI is distributed to Maxine as a salary on which she pays tax at her marginal rate. | Example 6: – interposed company, retention of profits for commercial purpose 79. Hayley is a specialist medical practitioner, who provides her services to clients through Hayley Medical Co (Hayley Medical). She is the sole director and shareholder of the company. 80. Hayley Medical enters into contracts with clients for Hayley's personal services and she performs all principal work under these contracts. Hayley Medical has no substantial income-producing assets or other employees. [40] The income Hayley Medical earns under the contracts is mainly a reward for the personal efforts and skills of Hayley and is therefore Hayley's PSI. The company is a PSE because its income comprises the PSI of Hayley. 81. For this income year, Hayley Medical self-assesses as a PSB because it meets one of the PSB tests, and accordingly determines that the PSI rules do not apply to Hayley's PSI. 82. In each year that it has operated, Hayley Medical has generated profits of over $250,000. During this time, Hayley Medical has paid 100% of the profits of the business to Hayley as either salary, bonuses [41] , or directors fees, and each year Hayley has included those amounts in her assessable income. 83. During the 2022–23 income year, Hayley Medical identifies an opportunity to purchase a customer relationship management (CRM) platform that will enable Hayley to provide more efficient personal services to clients. The estimated cost of the equipment is $7,000 (excluding GST). 84. To fund the purchase, Hayley Medical retains $7,000 of post-tax profits derived from Hayley's personal services in the 2022–23 income year instead of paying the amount to Hayley. The acquisition is made in August of the 2023–24 income year. Due to a sale offer, the purchase price of the CRM platform is $5,000 (excluding GST), rather than the provisioned $7,000. Hayley Medical resolves to pay the post-tax $2,000 saving as a franked dividend to Hayley, with the payment made one week later. 85. This is considered a low-risk arrangement in the relevant income year because the temporary retention of profits to acquire the asset has a clear commercial purpose, being the potential for Hayley to charge more for her personal services, take on more clients, and thereby increase future profits. At the time of retention, the purchase of the equipment was seriously contemplated, with the purchase finalised shortly thereafter. Further, the deferral of tax relating to the $2,000 saving was temporary, with the prompt payment to Hayley indicating that there was no ongoing tax deferral strategy in place. | Example 7: – interposed company, cash flow issues, retention of profits to pay upcoming debts 86. Andrea is a web designer and runs her own business through her company, Andrea Web Works Co (AWW). 87. When Andrea first starts her business, AWW does not have any capital, so she takes out a commercial business loan for $50,000 to pay for a new powerful laptop with a bigger screen, a desk, ergonomic chair and to fund her wages through the first year. 88. The company self-assesses as a PSB because it meets one of the PSB tests, and accordingly determines that the PSI rules do not apply to Andrea's PSI. 89. After a few years of successfully running her business, there is a downturn in the industry. During the relevant income year, AWW enters a number of contracts for Andrea's services and through these contracts, the business earns total PSI income of $80,000. This is about 20% below the average amount of PSI income that AWW has earned in previous years. 90. AWW pays Andrea a wage of $60,000 and, after other additional expenses are deducted, AWW is left with $15,000 net profit before tax. 91. AWW is concerned that, because of the downturn in the industry, it will not be successful in obtaining jobs in the first months of the following income year. The company has interest costs of $500 per month, plus wages for Andrea and other administrative costs. 92. AWW decides to retain the $15,000, less corporate income tax of $3,750, in the company to help guard against the potential lack of income and so that it can continue paying interest and wages costs for the first couple of months of the following income year. This decision and justification is supported by contemporaneous records. 93. In the following income year, AWW carries out its intention to apply the retained profit to cover its costs and pay Andrea her wages. 94. This is considered a low-risk arrangement in the relevant income year because the retention of profits to keep the company afloat during a downturn is for a clear commercial purpose and AWW carries through with that purpose. | Example 8: – interposed company, start-up costs, retention of profit for reasonable commercial purposes, low and higher risk arrangements 95. Brooke is an IT specialist who decides to start her own business as a cybersecurity consultant, providing advice to businesses on improving their cybersecurity strategies. Brooke has recently been employed as a cybersecurity expert and was earning $130,000 per year. 96. Brooke has developed a business plan which outlines the income she hopes to generate, and estimates the expenses she'll need to cover during the first 5 years of business. Brooke estimates expenses will be higher than income for the first 2 years of business until she develops a solid customer base and reputation. 97. Brooke sets up a company through which she provides her personal services, Brooke Cybersecurity Co (BC). Brooke is the sole director and shareholder of BC. BC engages Brooke as a cybersecurity consultant. 98. In the income year, BC successfully tenders for 2 three-month projects to provide Brooke's services. BC earns $85,000 in total from these 2 contracts. BC also incurs expenditure of $6,000 on web design and digital marketing for the new business. It also has travel and other costs totalling $3,000. BC pays Brooke a wage of $65,000. 99. BC self-assesses as a PSB as it meets one of the PSB tests, and accordingly determines that the PSI rules do not apply to Brooke's PSI. 100. After paying Brooke's wages of $65,000 and other expenses, BC's net profit before tax is $11,000. BC decides to retain this profit, less corporate income tax of $2,750, in the company, rather than pay it to Brooke in the current income year because it is uncertain when it will obtain new clients and wants to use it to cover its start-up costs, particularly Brooke's wages, in the following income year. 101. In the following income year, BC carries out its intention to apply the retained profit to cover its start-up costs. It uses the retained profit to pay its expenses, including Brooke's wages. 102. This is considered a low-risk arrangement in the relevant income year because the retention of profits to fund the operating expenses of the company has a clear commercial purpose, evidenced by appropriate business records and the carrying through with that purpose. 103. By way of contrast, suppose that, in the following income year, BC unexpectedly receives more contracts for Brooke's services than it anticipated. It is able to cover its costs for the income year and increase Brooke's wages to an amount commensurate with her skills. 104. BC does not carry out its intention to apply the retained profit to pay its expenses, including Brooke's wages, in the income year but continues to retain the profit for no sound commercial reasons. 105. This alternative scenario is considered a higher-risk arrangement because BC does not follow through on its plan to apply the retained profit to pay its expenses, including Brooke's wages, in the following income year. There is no sound commercial reason for it to continue to hold onto the retained profit and not pay it out to Brooke. This means that we are more likely to have cause to apply compliance resources to review this arrangement, including a consideration of whether Part IVA should apply. | Example 9: – interposed company, silent investor 106. Logan is a landscaper and wants to start his own company, Meadow Vine Landscape Co (MVL). He has a vision to provide top-notch gardening and landscaping services but lacks the finances to get the business up and running. 107. To support his son's entrepreneurial venture, Ian invests $25,000 into Logan's business as a silent investor. Ian, however, does not want to involve himself into the day-to-day operations or perform any gardening or landscaping work. 108. Logan is the director and is an equal shareholder of MVL with Ian, each holding 50% of the company's shares. MVL has no other employees. Logan has an option to purchase Ian's shares once he has accumulated sufficient financial means to do so. 109. In the 2022–23 income year, MVL enters a few contracts with various clients for Logan's personal gardening and landscaping services and Logan performs all the principal work under these contracts. 110. Logan's work under the contracts is mainly for his personal services and skills and not for supplying rocks, pavements and plants. 111. In order to get the business started and build a reputation, MVL charges its customers less than what other suppliers are charging for the same services that Logan provides. Over the income year, the number of contracts obtained comprise the equivalent of 8 months work for Logan. The total income from the contracts over the income year is $60,000. MVL enters a contract with Logan to pay wages of $52,000. 112. MVL also has significant start-up expenses including $18,000 for a second-hand ute, $5,000 for a second-hand trailer, $1,000 for a reliable lawn mower and $3,000 for sundry items such as chainsaw, wheelbarrow, whipper snipper and leaf blower. In addition, MVL incurs marketing, publicity and other costs of $3,000. 113. MVL self-assesses as a PSB as it meets one of the PSB tests, and accordingly determines that the PSI rules do not apply to Logan's PSI. 114. MVL's total costs for the income year of $82,000 are significantly more than its PSI of $60,000, and MVL must apply $22,000 of Ian's investment into the business to cover its costs. There is no profit distribution to shareholders and the company incurs a loss of $22,000. 115. In the 2022–23 income year, the arrangement is low-risk because MVL has paid Logan all of the net PSI in the form of wages. 116. In the following 2023–24 income year, MVL successfully bids for more contracts at a higher price and earns $100,000. It pays Logan a wage of $80,000. Its other expenses, which are less this year because it has no significant equipment costs, total $10,000. It therefore has a net PSI profit of $10,000. 117. MVL self-assesses as a PSB in the 2023–24 income year, as it meets one of the PSB tests, and accordingly determines that the PSI rules do not apply to Logan's PSI. 118. MVL decides to carry forward its loss and distributes $5,000 each in dividends to Ian and Logan. 119. In the 2023–24 income year, the arrangement is considered low-risk because MVL has paid Logan a significant part of the PSI it derived, and paid the remaining net PSI as a dividend to Ian as a return on his investment. Although a closer examination of the facts might reveal a case for the application of Part IVA if the return to Ian appeared to be inexplicably disproportionate to the investment risk he undertook, we would be less likely to apply compliance resources to it. Higher-risk arrangements | Example 10: – interposed trust, income splitting arrangement 120. Kelly is a broker who has previously provided her personal services as a sole trader. During this time, Kelly was found personally liable for defaults of her clients and having made good those defaults, resolves to no longer carry on her business in her own right. 121. Kelly establishes a discretionary trust, the Kelly Trust, through which she will provide her personal services going forward. Beneficiaries of the Kelly Trust include Kelly, her de facto partner, and a family trust (KLY Family Trust) controlled by Kelly. A private company, FTK Co (FTK), is also established to act as corporate trustee of the Kelly Trust. FTK (in its capacity as trustee) enters into new agreements with each of Kelly's previous clients for her personal services and all principal work is done by Kelly. FTK also enters into a contract with Kelly for the provision of her services. 122. The Kelly Trust does not have any substantial income-producing assets or employees [42] and depends upon the rendering of Kelly's personal services to generate income. The Kelly Trust is a PSE because its income includes the PSI of Kelly, the individual who performs the principal work. 123. In the income year, a self-assessment determines that the Kelly Trust is a PSB because it meets one of the PSB tests, and accordingly, that the PSI rules do not apply to Kelly's PSI. FTK does not remunerate Kelly for her personal services and resolves to distribute the trust's net income to Kelly and KLY Family Trust in equal amounts. The KLY Family Trust (of which Kelly, her partner and their 2 adult children are beneficiaries) subsequently resolves to distribute its net income to Kelly and the children. Kelly and the children pay tax on their respective trust distributions at their marginal tax rates. 124. The amounts Kelly receives as trust distributions from the Kelly Trust and KLY Family Trust are not commensurate with the value of the personal services that Kelly provided. 125. In this example, although entities have been interposed between Kelly and the clients for commercial purposes (to limit personal liability), Kelly has utilised the interposed entities to distribute Kelly Trust's net income (the net PSI) without regard to the value of her personal services. 126. The total amount of tax paid between Kelly and the other beneficiaries is less than would have been paid if Kelly had returned the entire net PSI in her individual tax return. The splitting of Kelly's PSI with an associate, being the KLY Family Trust (and ultimately her 2 adult children) results, overall, in less tax being paid. This is because there is an amount of assessable income which is not included by Kelly in her individual tax return for the year, which is a tax benefit to which Part IVA may apply. 127. This example involves the splitting of an individual's PSI and is therefore considered a higher-risk arrangement that brings Part IVA into question. This means that we are more likely to have cause to apply compliance resources to review this arrangement, including a consideration of whether Part IVA should apply. | Example 11: – interposed company, salary under highest marginal tax rate, retention of profits 128. Jai is a licensed electrician who provides his personal services through his company, Jai Electrical Services Co (JES). Jai is the sole director and shareholder of JES. JES engages Jai as an electrician. 129. During the 2024–25 income year, JES enters subcontracts with a number of electrical contractors to provide electrical installation in new homes. These subcontracts form the bulk of JES's income for the income year. 130. The electrical wiring, cabling and appliances are provided by the electrical contractors, but JES uses its own tools and equipment to install them. JES leases a commercial vehicle and owns basic equipment required to do the job. 131. The income JES earns under the subcontracts is mainly a reward for the personal efforts and skills of Jai and is therefore PSI. JES has self-assessed that it meets one of the PSB tests for the income year and is a PSB. 132. JES generates a total income of $250,000 in the income year. 133. Jai is paid wages of $189,000 during the 2024–25 income year, in order that he remain under the top marginal income tax rate of 45% which applies from $190,000. There is a remaining profit of $26,000 after deductions for Jai's wages, lease payments, tools and materials and this profit is retained in JES and taxed at the lower corporate rate of 25%. 134. This example involves the retention of a significant part of an individual's PSI in a lower-taxed entity and is therefore considered a higher-risk arrangement that brings Part IVA into question. This means that we are more likely to have cause to consider applying compliance resources to reviewing this arrangement, including a consideration of whether Part IVA should apply. 135. By way of variation, suppose that JES pays Jai an annual wage amount which is commensurate with the work performed (and not with reference to the applicable personal income tax rate), and that his salary is therefore $200,000 over the income year. After deduction of other costs such as lease payments, insurance, tools and materials, JES has a remainder profit of $15,000. 136. JES pays the $15,000 profit to Jai as an end-of-year bonus, and Jai includes this amount in his assessable income. 137. This variation would be considered a low-risk arrangement in the relevant income year because JES has paid the whole of the net PSI to Jai, which Jai has reported as his assessable income. | Example 12: – interposed company, retention of profits arrangement 138. Chester is a corporate consultant who has provided his personal services to unrelated corporate clients, Company X, Company Y, and Company Z, since 2018. In each income year, Chester receives a combined total of approximately $400,000 under contracts with these clients for his services. 139. At the beginning of 2022, Chester meets with his accountant to get advice on how to minimise the tax he must pay. Following this advice, at the beginning of the 2022–23 income year, Chester sets up a private company, Consult Chester Co (CC), through which he will provide his personal services going forward. Chester is the sole director of CC, and the shareholder is a corporate trustee of a discretionary trust controlled by Chester. 140. CC enters into new agreements with Company X, Y, and Z, under which CC agrees to provide Chester's personal services. CC also enters into a contract with Chester for the provision of his services to CC. The income CC earns under the contracts is mainly a reward for Chester's personal efforts and skills and is therefore his PSI. CC has no substantial income-producing assets or employees [43] and is therefore a PSE because its income comprises the PSI of Chester. 141. During the 2022–23 income year, CC self-assesses as a PSB as it meets one of the PSB tests, and accordingly determines that the PSI rules do not apply to Chester's PSI. CC pays Chester $20,000 for his services, an amount that is less than the income it receives for his personal services and which is not commensurate with the value of the services he provided. The net profit is retained by CC and Chester borrows this money from CC on Division 7A-compliant terms for his private purposes. 142. In this example, the use of the interposed entity does not provide Chester with any additional material, commercial or practical benefit as compared to the previous arrangement whereby he was paid directly by clients for services provided. Absent the arrangement, Chester might reasonably have been expected to have continued to personally derive the income from his services. The retention of profits in CC results, overall, in less tax being paid. By interposing CC, Chester did not include amounts which would have otherwise been included in his assessable income, which is a tax benefit to which Part IVA may apply. 143. This example involves the retention of an individual's PSI in a lower-taxed entity and is therefore considered a higher-risk arrangement that brings Part IVA into question. This means that we are more likely to have cause to apply compliance resources to reviewing this arrangement, including a consideration of whether Part IVA should apply. 144. By way of variation, had CC paid Chester an amount that represented a significant part of the PSI derived, for example, $380,000, then although Part IVA could still apply, we would be less likely to have cause to apply compliance resources to pursuing Part IVA, based on the relative materiality of income retained in the lower-taxed entity. In this example, Chester would be provided with education regarding his compliance obligations and should expect monitoring to ensure future compliance. | Example 13: – interposed company, retention of profit without commercial purpose 145. Diana is an IT consultant who is employed by JDIT Co (JDIT), a private company owned and controlled by Diana and her husband, Joe. Diana and Joe are employees of the company, with Joe undertaking small amounts of administrative tasks one day a month for a fixed salary. Joe has other employment income of $174,000 a year from an unrelated employer. 146. JDIT enters into contracts with 5 clients to provide Diana's consultancy services and all principal work is performed by Diana. The company does not have any substantial income-producing assets or other employees. [44] The income received by JDIT under contracts is mainly a reward for Diana's personal efforts and skills and is therefore her PSI. 147. For each income year, the company self-assesses as a PSB as it meets one of the PSB tests, and accordingly determines that the PSI rules do not apply to Diana's PSI. 148. Due to the nature of the IT consulting services Diana provides to clients, she must have access to the latest computer software and hardware (IT equipment). The IT equipment that Diana uses is owned by JDIT, and JDIT incurs capital expenditure of $12,000 every 2 years on equipment upgrades. 149. In each income year, JDIT receives between $350,000 and $400,000 from contracts for Diana's personal services. Diana is paid a salary of $80,000, which is not commensurate with the value of the services she provides. Joe is paid a salary of $5,000, which represents a market value salary for his administrative services. JDIT always retains any remaining profit and invests it in a share portfolio. JDIT has not distributed profits in any year. Diana and Joe live off their respective employment incomes. 150. Although JDIT incurs capital expenditure in upgrading the IT equipment, this simply means that it must retain at least the post-tax cost of the equipment every 2 years. However, the fact that JDIT incurs this expenditure cannot explain the overall scheme as having a non-tax purpose because the amount JDIT retains each year is significantly more than what is needed to fund the IT equipment upgrades. 151. The total amount of tax paid between JDIT, Diana and Joe is less than what would have been paid if Diana had returned the entire net PSI from her personal efforts and skills in her individual tax return. This amount which is not included in her assessable income is a tax benefit to which Part IVA may apply. The retention of profit in JDIT results, overall, in less tax being paid. 152. This example involves the retention of profits in a lower-taxed PSB and is therefore considered a higher-risk arrangement that brings Part IVA into question. This means that we are more likely to have cause to apply compliance resources to reviewing this arrangement, including a consideration of whether Part IVA should apply. | Example 14: – interposed trust, diversion of income to controlled entity with carry forward losses 153. Terry is an environmental engineer who provides his services through his discretionary trust, Terry Trust. Beneficiaries of the Terry Trust are Terry, his wife Anita, a private company, and a unit trust which has carried forward losses. Both the private company and unit trust are controlled by Terry. Terry also establishes a private company, Terry EE Co (TEE) to be the corporate trustee of Terry Trust, with Anita the sole director and shareholder. Terry agrees to provide his services gratuitously under a verbal agreement with TEE. 154. TEE enters into a written contract with Company Z for Terry to provide personal services. TEE does not have any substantial income-producing assets or employees. [45] Company Z only pays TEE when the required specified outcome agreed to in the contract is achieved. TEE is dependent upon the rendering of Terry's personal services to generate income, and therefore the income received is Terry's PSI. The Terry Trust is a PSE because its income includes the PSI of Terry, the individual who performs the principal work. 155. For the income year, it is determined that the Terry Trust is a PSB because it meets one of the PSB tests, and accordingly, that the PSI rules do not apply to Terry's PSI. Terry does not receive any remuneration from the Terry Trust for the services provided to Company Z. The Terry Trust resolves to distribute the net trust income to the unit trust beneficiary. This distribution is completely offset by the carried forward losses in the unit trust. 156. This example involves the derivation of PSI through a discretionary trust with that income paid to a tax-advantaged beneficiary. As the income derived by the Terry Trust is sheltered by losses available to the beneficiary unit trust, the tax results of the arrangement are a reduction in what would otherwise have been Terry's assessable income (which is a tax benefit to which Part IVA may apply), and, overall, less tax being paid. The fact that Terry has entered into a verbal agreement with TEE to provide his services for free does not alter the fact that the arrangement results in income earned from the personal efforts of Terry being diverted to an associated entity, and a lower amount of tax being paid. 157. This example involves an arrangement to divert an individual's PSI to a lower-taxed associate and is therefore considered a higher-risk arrangement that brings Part IVA into question. This means that we are more likely to have cause to apply compliance resources to reviewing this arrangement, including a consideration of whether Part IVA should apply. | Example 15: – interposed company, remuneration to associate not commensurate with services provided 158. Adam is an IT specialist who, in the previous 5 income years, has provided his personal services directly to clients as a sole trader. Adam received income of approximately $250,000 in each of those years. 159. After speaking with a friend in the same profession who has set up a private company through which to provide their services, Adam decides to set up XYZ Co (XYZ) through which he will provide his personal services going forward. Adam and his wife Emily are the only directors and shareholders in the company. Emily is a childcare educator who is employed by a local council service. She is currently on unpaid leave caring for their one-year-old daughter. 160. XYZ enters into contracts for Adam's personal services with the same clients Adam previously worked with. Under the contracts, all work is performed by Adam, although Emily provides some assistance, under his supervision and instruction, one day per fortnight. Emily is contracted by XYZ to provide her services but does not perform any principal work. XYZ does not have any substantial income-producing assets. The company is a PSE because its income includes the PSI of Adam, the individual who does the work. 161. For the income year, XYZ self-assesses as a PSB because it meets one of the PSB tests, and accordingly determines that the PSI rules do not apply to Adam's PSI. The clients make payments of $256,000 to XYZ for Adam's services and Adam directs XYZ to distribute the net income to himself and Emily on a 70:30 basis. Emily is allocated $77,000 from XYZ by way of a nominal salary and fully franked dividends on which she pays tax at her marginal tax rate. The amounts paid to Emily are disproportionate to the value of the services she has provided during the year. Adam receives a salary of $179,000 on which he pays tax at his marginal tax rate. 162. This example involves the derivation of PSI through a private company that is used to enable a significant part of that income to be paid to an associate on a lower tax rate. The remuneration received by both Adam and Emily is not commensurate with the value of the respective services they provided. The tax results of the arrangement are a reduction in what would otherwise have been Adam's assessable income (which is a tax benefit to which Part IVA may apply), and, overall, less tax being paid. 163. This example involves an arrangement to divert an individual's PSI to a lower-taxed associate, and is therefore considered a higher-risk arrangement that brings Part IVA into question. This means that we are more likely to have cause to apply compliance resources to reviewing this arrangement, including a consideration of whether Part IVA should apply. | Example 16: – interposed trust, income splitting to family members, remuneration not commensurate with services provided 164. Daniel is a lawyer and the sole director and shareholder of Law Prac Co, the corporate trustee for the DA Family Trust (DAFT). Daniel provides his personal services through DAFT under a contract for service. He is also employed separately by Q University as a part-time law lecturer, for which he earns a salary of $80,000. 165. The trustee for DAFT enters into contracts with unrelated clients to provide Daniel's legal services. This includes a contract with Why Lee Co (WL), pursuant to which DAFT would be paid an annual amount of $300,000 for the provision of legal services. Daniel is named in the WL contract and performs all the work. DAFT does not employ or engage any other persons other than Daniel to provide the services and does not have any substantial income-producing assets. [46] DAFT is a PSE because its income includes the PSI of Daniel, the individual who performs the principal work. 166. In the income year, it is determined that DAFT is a PSB because it meets one of the PSB tests, and accordingly, that the PSI rules do not apply to Daniel's PSI. Daniel receives a trust distribution of $35,000 as remuneration for the services he provided under the WL contract. The distribution is significantly less than the annual fee received by DAFT for the provision of his services. DAFT resolves to distribute the remainder of the net income to the other beneficiaries of the trust who are the immediate family members of Daniel and in a lower tax bracket. Each beneficiary pays tax on their trust distribution at their marginal rate. 167. The total amount of tax paid by Daniel and his associates is less than what would have been paid if Daniel had returned the entire net PSI from his personal services in his individual tax return. The splitting of Daniel's PSI to his associates has reduced Daniel's assessable income, which is a tax benefit to which Part IVA may apply. 168. This example involves the use of an interposed company to divert an individual's PSI to lower-taxed associates and is therefore considered a higher-risk arrangement that brings Part IVA into question. This means that we are more likely to have cause to apply compliance resources to reviewing this arrangement, including consideration of whether Part IVA should apply. | Example 17: – interposed company with historical losses, retention of profits without commercial purpose 169. Tom is a civil engineer who provides his personal services through his company, BLD Co (BLD). Tom is the sole director and shareholder of BLD. 170. BLD enters into contracts with numerous clients in the years 2018 to 2023, for the provision of engineering services. Tom is named in each contract and is the only person that provides engineering services on behalf of BLD. During this time, BLD also has another business operation selling goods, which are accounted for separately. BLD does not have any substantial income-producing assets and its other employees are employed entirely in the operation for the selling of goods. The company is a PSE because its income includes the PSI of Tom, the individual who does the work. 171. During the relevant years, it is determined that BLD is a PSB because it meets one of the PSB tests, and accordingly, that the PSI rules do not apply to Tom's PSI. BLD receives payments for the personal services that Tom provides, and these payments are retained within the company each year. Tom does not receive a salary, dividend, or other remuneration for his services during this time. 172. In each income year, the retained income is applied to accounting losses accrued by BLD's other business operations. 173. The total amount of tax paid between Tom and BLD is less than would have been paid if Tom had returned the entire net PSI in his individual tax return. The failure of Tom to include any PSI in his assessable income, and instead include the PSI in the company's assessable income, is a tax benefit to which Part IVA may apply. The retention of Tom's PSI in an entity that has tax losses, and the offsetting of those losses against that PSI, results, overall, in less tax being paid by both Tom and BLD. 174. This example involves the failure to adequately remunerate Tom for his personal efforts in providing his services and the retention of profits in a tax-advantaged PSB and is, therefore, considered a higher-risk arrangement that brings Part IVA into question. This means that we are more likely to have cause to apply compliance resources to reviewing this arrangement, including a consideration of whether Part IVA should apply.",,,,False,False,https://www.ato.gov.au/law/view/document?docid=COG/PCG20255/NAT/ATO/00001
PCG 2025/D6,Draft PCG,Draft Practical Compliance Guideline,Draft,,7,,,TR 2000/2,Case References: Commissioner of Taxation (Cth) v Kowal 84 ATC 4001 79 FLR 75 15 ATR 125,,,,"Intro: This Practical Compliance Guideline is a draft for consultation purposes only. When the final Guideline issues, it will have the following preamble: This Practical Compliance Guideline sets out a practical administration approach to assist taxpayers in complying with relevant tax laws. Provided you follow this Guideline in good faith, the Commissioner will administer the law in accordance with this approach. | What this draft Guideline is about: 1. When you use a property to produce assessable income and hold it for another use (for example, part of a property is rented out and part of the property is your residence), losses and outgoings related to the property will need to be apportioned on a 'fair and reasonable' basis to work out the deduction that can be claimed under section 8-1 of the Income Tax Assessment Act 1997. 2. It may be difficult to determine what is 'fair and reasonable' because it will depend on the facts and circumstances that relate to how you use your rental property. [1] This draft Guideline [2] sets out methodologies that we will accept as fair and reasonable in common situations. If you are eligible to use this Guideline and work out your apportionment using the most appropriate methodologies detailed in this Guideline, the Commissioner would not have cause to apply compliance resources to investigate your claim. [3] You will need to keep records to support your view that the Guideline applies to you, and how you made your apportionment calculations. 3. The methodologies set out in this Guideline build on and are consistent with the approach taken in TR 2025/D1 Income tax: rental property income and deductions for individuals who are not in business and previously in Taxation Ruling IT 2167 Income Tax: rental properties – non-economic rental, holiday home, share of residence, etc. cases, family trust cases (now withdrawn). They are not exhaustive of methods that may be appropriate to your circumstances. You can use a different method to work out your apportionment of expenses, but you will not be covered by this Guideline, and you will need to establish why the method that you have chosen is 'fair and reasonable' in your circumstances. You will need to keep records to support how you made your apportionment calculation, and why the method that you have chosen is 'fair and reasonable'. 4. All further legislative references in this Guideline are to the Income Tax Assessment Act 1997, unless otherwise indicated. | What is not covered by this Guideline: 5. This Guideline does not apply to: 6. This Guideline does not apply to deductions that relate to the ownership or use [5] of your property which is a holiday home. [6] There is an exception to deductions being denied in full where you use your holiday home (or hold it for use) mainly to produce income in the nature of rents, lease premiums, licence fees or similar charges. [7] When this exception applies, you can use this Guideline to apportion your deductions for any private use of your rental property.","Example 1: – agent fees 12. Fleur rents out her property through an agent who charges her an ongoing property management fee and a letting fee when they find new tenants for the property. In total Fleur pays $3,180 in agent fees which will be fully deductible against her rental income. There is no need to apportion the expense. Where apportionment is required 13. For deductions which are not denied in full because your property is a holiday home [8] , expenses which relate to deriving income from your property and for another use (such as private or domestic use) [9] will need to be apportioned on a fair and reasonable basis. What is fair and reasonable usually depends on the: You may need to use a combination of the time-based apportionment and the area-based method if you rented out part of your property for part (or parts) of the year. Time-based method 14. You can work out your deductions related to your property according to the following formula during periods when your property is used (or held) for income-producing purposes at any point during the year. 15. In determining the days held to produce income, whether your property is available for rent on commercial terms (for the periods that your property is unoccupied) will depend on the facts and circumstances. Where you are renting out a room in your home, the number of days your property is unoccupied but available for rent on commercial terms will be zero. This is because when a room in your home is not being rented out, it is treated as being used privately as part of your home and is not considered available for rent on commercial terms. 16. Factors that indicate, on an objective analysis, that your property is available for rent on commercial terms include: 17. Factors that indicate, on an objective analysis, that your property is not available for rent on commercial terms include: | Example 2: – private use by owners during peak periods with little or no demand for property at other times 18. In summer, chefs Daniel and Kate relocate to and live in a cottage they own so they can work at a nearby restaurant. Because Daniel and Kate do not use the house for their holidays and recreation, it is not their holiday home. The house is located in an area that is popular with summer holidaymakers but has limited rental potential during the colder seasons. 19. When they are not living in the house, Daniel and Kate list the property on an online sharing platform, but due to their lack of active management, do not receive many bookings. Daniel and Kate only rent the house out for 14 days of the year. 20. On an objective assessment of the relevant factors, the property is not held to produce income during the periods the property is unoccupied. Daniel and Kate can claim a deduction for a proportion of their expenses based on the days the property was used to produce income, being 14 out of 365 days. | Example 3: – private use of property by owner where property is actively rented at other times 21. Gail and Craig jointly own a rental property. They advertise the property for rent through a real estate agent. Gail and Craig can show that the rental terms, including the amount of rent, for the property are similar to comparable properties in the area. Gail and Craig have instructed the real estate agent to actively monitor requests for rental so as to maximise occupancy for the property. 22. Gail and Craig use the property themselves for 30 days during the year. 23. During the year, Gail and Craig's expenses for the property are $36,629. This includes $1,828 for the agent's commission and the cost of advertising for tenants. It also includes interest on the funds borrowed to purchase the property, property insurance, maintenance costs, council rates, the decline in value of depreciating assets and capital works deductions. 24. Gail and Craig claim the full $1,828 as a deduction for the agent's commission and costs of advertising for tenants. They can also claim deductions for their other expenses ($34,801) based on the time-based method. Gail and Craig will need to apportion their deduction for the year (which is not a leap year) as follows: 25. This calculation removes the portion of total expenses attributable to private usage. Time-based method when there is a change in use of the property 26. Where there is a clear change in use of a property during the year, such as when the property is first used as a rental or stops being used as a rental, the time-based method can be used to apportion expenses between these periods. The change in use of the property should be definite and is determined on the particular facts and circumstances of the actual use of the property. The use of the property is not considered to change merely due to fluctuations in use due to seasonal patterns, such as with a ski lodge or beach house. | Example 4: – change in use of the property during the income year 27. Sachin owns a property in Tasmania which he has rented out for long-term rentals for 10 years. After he retires, he decides to move into the Tasmanian property. He moves into the Tasmanian property on 1 March as his main residence. From that day the property is being solely used for private purposes and he would need to apportion his deductions for that income year. 28. Because Sachin's property stopped being used for income-producing purposes during the year (which is not a leap year), he uses the time-based method. Sachin paid interest of $28,000 in the year, and he will need to apportion it as follows: Area-based method 29. If only part of your property is rented out to a tenant or used to produce income, you apportion expenses to reflect the area of the property that is used to produce income using the following formula: | Example 5: – shared property usage 30. Kim owns a 2-storey townhouse and rents out the bottom floor to a long-term tenant. They each have exclusive possession of their floor. They share the use of the gardens around the house. The top floor has a large deck and is 55 square metres, the bottom floor is 45 square metres, and the gardens are 35 square metres. Kim would work out her apportionment percentage as follows. 31. Kim can claim 46.3% of the expenses as a deduction related to the property. Combined area-based and time-based methods 32. In situations where part of a property is used for only part of a year, you will need to combine the time-based method and the area-based method to apportion the expenses by time and area. | Example 6: – combined area-based method and time-based method 33. Jane has a 2-bedroom, 2-bathroom unit in a popular downtown area. Jane lives alone and mainly uses the master bedroom and the ensuite bathroom. The second bedroom and main bathroom is accessible from the common areas of the unit including the lounge, kitchen and balcony and are mainly used by visitors. 34. Part way through the year, Jane decides to let out the second bedroom using a sharing economy platform to earn extra income. She actively monitors replies from the listing and does not refuse guests when the room is available. The unit is 80 square metres in total. The second bedroom being let is 10 square metres. Jane also gives paying guests access to common areas including the main bathroom, kitchen, lounge and balcony, which totals 50 square metres. She also offers her guests access to her wi-fi for free. 35. For the period guests are staying and have access to the common areas (along with Jane), Jane can claim 50% of the deductible portion of associated costs related to the common areas. 36. The spare room is 10 square metres and the house is 80 square metres, with common areas being 50 square metres. Step 1 – apply the area-based method 37. Jane works out the percentage of the house her guests have access to when they are there using the area-based method. 38. Applying this formula for Jane, the percentage of the house her guests have access to when they are there, using the area-based method, is 43.75%. Step 2 – apply the time-based method 39. Jane lets out the spare bedroom of her property, being her home, for 100 days of the year (which is not a leap year). She will also need to apportion by time and uses the time-based method (as set out in paragraph 14 of this Guideline) using the following formula: 100 days used to produce income ÷ 365 days 40. Because the room is part of her home, when it is not being rented out it is treated as being used privately as part of Jane's home. The number of days held to produce income will always be zero, even if the room is advertised for rental while it is unoccupied. 41. By multiplying the time-based method and area-based method together, Jane will be able to work out what percentage of her yearly expenses are deductible. 43.75% × 100 ÷ 365 = 11.99% 42. This means Jane can deduct 11.99% of her ownership expenses such as interest on her mortgage, insurance and council rates. She can claim 100% of the expenses associated solely with renting out the second bedroom, such as the sharing economy platform's service fees or commission. Renting to family or friends at non-market rates 43. If you are renting your property to family or friends and not charging rent at a market rate, it is likely your property has a mixed use of producing assessable income and a private or domestic use of providing accommodation for your family or friends. In these situations, your deductions should be apportioned to exclude the private or domestic use of the property. Where your expenses that would otherwise be deductible exceed the rent received, we will accept that it is fair and reasonable for you to limit those deductions to the amount of the rental income derived from the property [10] , resulting in no net rental taxable income or loss. | Example 7: – non-arm's length rental to mother 44. Jana rents a property to her mother for her to live in. While her mother signed a standard lease agreement, Jana has set the rent at a below market non-arm's length rate. Jana provides the discount for private or domestic reasons to assist her mother who cannot afford to pay rent at the market rate. Jana includes the amount she receives as rent from her mother as assessable income and claims deductions for her expenses related to the house, such as mortgage interest, capital works and council rates up to the amount of rent received from her mother. 45. Similarly, if you are renting out your property to others at non-market rates and the property is being held for multiple purposes including one that has a non-income-producing element, apportionment of expenses will be required. Renting to family or friends at market rates 46. If you are renting the property out to family or friends at a market rate, you do not need to apportion the outgoings when determining your deductions. 47. To establish that the property has been rented at a market rate, you will need to provide evidence of how that market rate was calculated at the time the rent amount was set (for example, a real estate rent valuation or contemporaneous house listings of similar properties in the area). | Example 8: – market rate rental to son 48. Bartolo owns a residential property that he rents to his son and his family who live in the property. The rent is charged at market rates (obtained from a real estate rental valuation) and the lease operates under a standard lease arrangement. No apportionment of expenses is required for Bartolo in claiming his deductions as he has charged rent at market rates and the only use of the property was to derive assessable income. Mortgage has multiple purposes 49. Where a mortgage is taken out against a rental property, (or the property is re-mortgaged) and the funds are not all used for an income-producing purpose, you cannot claim a deduction for all of the interest expenses. In these circumstances it is important to work out the proportion of the loan that is for income-producing purposes and the proportion that is not. [11] 50. Although beyond the scope of this Guideline, where a loan to purchase a rental property has a redraw facility, amounts withdrawn are not treated as relating to the original purchase of the loan, that is, the rental property, but instead to what was purchased with the withdrawn amounts. [12] Independent pursuit of an objective other than income-producing purpose associated with your property 51. Where there is an independent pursuit of an objective other than an income-producing purpose associated with your property, as explained in TR 95/33, we consider it fair and reasonable to claim deductions up to the amount of any income from your property. Applying the principles from TR 95/33 to a rental property:",,,,False,True,https://www.ato.gov.au/law/view/document?docid=DPC/PCG2025D6/NAT/ATO/00001
PCG 2018/9,Final PCG,Central management and control test of residency: identifying where a company's central management and control is located,,,21 June 2018,,,PS LA 2009/4 | PS LA 2011/19 | TR 2004/15 | TR 2018/5,Case References: Bywater Investments Limited v Commissioner of Taxation [2016] HCA 45 2016 ATC 20-589 Cesena Sulphur Co Ltd v Nicholson; The Calcutta Jute Mills Company Ltd v Nicholson [1876] 1 Ex D 428 De Beers Consolidated Mines Ltd v Howe [1903-1911] 5 TC 198 Esquire Nominees Ltd as Trustee of Manolas Trust v Commissioner of Taxation (Cth) [1973] HCA 67 129 CLR 177 47 ALJR 489 1 ALR 145 4 ATR 75 73 ATC 4076 Koitaki Para Rubber Estates Limited v Federal Commissioner of Taxation [1940] HCA 33 64 CLR 15 6 ATD 42 Koitaki Para Rubber Estates Limited v Federal Commissioner of Taxation [1941] HCA 13 64 CLR 241 6 ATD 82 [1941] ALR 125 North Australian Pastoral Company Limited v Federal Commissioner of Taxation [1946] HCA 17 71 CLR 623 8 ATD 121 [1946] ALR 341 Union Corporation Limited v Commissioners of Inland Revenue 34 TC 207 [1953] All ER 729 32 ATC 73,"1. This Guideline contains practical guidance to assist foreign-incorporated companies and their advisors to apply the principles set out in Taxation Ruling TR 2018/5 Income tax: central management and control test of residency. This will help these companies determine whether they are resident under the central management and control test of company residency in subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936). 2. This Guideline must be read in conjunction with TR 2018/5, which sets out the Commissioner's views on the meaning of central management and control, and the principles relevant to determining whether a company incorporated outside Australia is a resident under the central management and control test of residency. 3. The examples and guidance contained in this Guideline are general in nature. They cannot, and do not, cover every possible circumstance relevant to determining whether a company is resident, or non-resident, under the central management and control test of company residency. 4. Foreign-incorporated companies who are unsure whether they are resident after having considered TR 2018/5 and this Guideline are encouraged to approach the ATO to discuss their circumstances. 5. This Guideline does not deal with the associated questions of: 5A. This Guideline sets out a transitional and an ongoing compliance approach relevant to some companies. 5B. In addition, it is acknowledged that the residence of a company will often be a 'low-risk' issue for the ATO. This is because, where a company has its operating business wholly offshore but is also a resident of Australia, permanent establishment or branch exemption rules will generally apply in determining the taxation treatment of the profits and losses of the offshore operating business. [1A] This may mean that the company's tax position is similar to what it would be if the company were not resident – for example, where the company is a subsidiary of an Australian company, the resulting taxation position may be sufficiently similar to the position that would arise where the offshore operations formed part of a controlled foreign company (CFC) with attribution under the CFC regime. [1B] Accordingly, it is unlikely the Commissioner would apply resources to review the residence of such companies (other than where there are integrity concerns such as those discussed in paragraph 107A of this Guideline). 5C. For further information regarding the Commissioner's risk assessment framework for the central management and control test of residency for foreign-incorporated companies refer to the Appendix to this Guideline. The purpose of the risk assessment framework is to assist companies with managing their compliance risks for this test of residency. Companies may use the risk assessment framework to understand the likelihood of the ATO applying compliance resources to review their residency. 5D. Certain public companies may be required to produce a Consolidated Entity Disclosure Statement (CEDS). The CEDS requires disclosure of both the Australian and foreign tax residency position of the company and its subsidiaries in annual financial reports for each financial year commencing on or after 1 July 2023. This Guideline may assist companies completing the CEDS. However, a company will not be considered 'low-risk' under this Guideline if the company self-assesses and reports as a non-resident for Australian tax purposes but has inconsistently reported as an Australian tax resident in the CEDS. This applies for financial years commencing on or after 1 July 2024. [1C] Disclosures in the CEDS are expected to align with income tax return disclosures, to improve multinational tax transparency. [1D]",,"6. A company is a resident or resident of Australia [2] if: 7. As noted in paragraph 7 of TR 2018/5, if a company carries on business and has its central management and control in Australia, it will carry on business in Australia within the meaning of the central management and control test of residency. It is not necessary for the substantive trading or investment activities of the business that generate its profits to take place in Australia. [3] 8. The location of a company's central management and control is a question of fact that is determined by reference to: 9. Normally, a company's directors exercise its central management and control where they execute their duties and comply with the standards expected of directors under the applicable Australian or foreign company law. This will normally be where its directors make their decisions. Most companies will have little difficulty identifying where it is located and little reason to consider the examples set out in this Guideline. The exceptions to this involve either some lapse in directorial standards or corporate governance, unusual facts such as the director's role being usurped by outsiders, or the company's control and direction being exercised in more than one place. Establishing where a company's central management and control is located – relevant evidence 10. Board minutes are the starting point for identifying who exercises and where a company's central management and control is exercised. Only when a company has not kept board minutes, it makes high-level decisions outside of board meetings, the board minutes do not disclose where directors are making a company's high-level decision or the board minutes are false (including where they record the rubber stamping of decisions made elsewhere), will it be necessary to look at other evidence of who makes and where they make the company's high-level decisions. This may include documents that identify who has the formal power to make high-level decisions, for example, the company's constitution (or other founding documents) or other instruments delegating this power and evidence of the relevant provisions of those documents being followed in practice. Where a company has kept board minutes 11. If a company has board minutes showing a complete record of where all its high-level decisions were made and who made them, the Commissioner will accept them as prima facie establishing where the company's central management and control was located. 12. A company's board minutes do not need to record board deliberations, why decisions were made, and whether any alternatives were considered or rejected to demonstrate the exercise of central management and control. However, including this material would be valuable evidence that supports matters recorded by the board minutes. 13. Board minutes that are a true account of where and by whom company decisions are made will generally be treated as conclusive, for practical purposes, of where a company's central management and control is exercised. In the absence of board minutes or where details of board minutes are shown to be false or misleading, the Commissioner will rely on other evidence to make a determination of where central management and control is exercised. Where a company has not kept board minutes 14. If a company has not kept board minutes recording who made its decisions or where they were made, or not all of the company's high-level decisions are made in board meetings, then other evidence will be considered in determining where central management and control is exercised. This may include papers circulated to board members in advance of meetings, contemporaneous emails and correspondence that show the board's deliberations and the role played by each director in the company's decision-making. The Commissioner will also consider oral evidence and statements by those involved in the company's decisions. Identifying high-level decision-making – the relevance of a company's activities 15. What constitutes high-level decision-making of a company is a question of fact to be determined in light of the company's overall business activities. It is also necessary to consider whether a particular act is properly characterised as an exercise of central management and control, or an exercise of the day-to-day management of a company's business under the authority and supervision of a higher-level control (see paragraphs 50 to 72 of this Guideline). 16. The more extensive a company's business activities, the more likely it is that high-level decisions that are an exercise of its central management and control will be distinct from day-to-day management decisions about business operations or transactions. This is particularly the case if the decisions in question are made by employees or agents of the company under the supervision of, and under authority granted to them by, the board of directors (whether directly or indirectly) (see paragraphs 50 to 72 of this Guideline). 17. The smaller the scale of the company's business activities, particularly where there is no division between those who make the high-level decisions and those who execute them, the more likely it is that the high-level decisions will overlap with, or be the same as, the company's decisions to undertake a particular business operation or transaction.","Intro: 102. This administrative arrangement applied for the transitional period of a foreign-incorporated company that, immediately prior to the withdrawal of Taxation Ruling TR 2004/15 Income tax: residence of companies not incorporated in Australia – carrying on business in Australia and central management and control: 103. The Commissioner will not apply resources to review or seek to disturb a foreign-incorporated company's status as a non-resident for the transitional period (see paragraph 104 of this Guideline) where the criteria in paragraph 102 of this Guideline were met, and during this period it: 104. The transitional period is the period between and including: 104A. The transitional period ended on 30 June 2023. 104B. The transitional arrangement at paragraph 103 of this Guideline extends to the Commissioner not applying resources to pursue penalties for failing to lodge taxation documents in the approved form, in respect of the income years within the transitional period, as a result of residency status where a company satisfied the criteria in paragraph 102 of this Guideline. | Ongoing compliance approach for public groups: 105. As referred to in paragraph 5B of this Guideline, the Commissioner acknowledges that for some foreign-incorporated companies there may not be much difference in Australian taxation outcomes whether the company is treated as a resident of Australia under the central management and control test of residency or not. This can be the case for public groups [4] with strong established governance practices and internal tax processes. 105A. It is recognised that commercial practicalities may result in unintended or unplanned circumstances arising from time to time. Such circumstances may cause the location of central management and control to be subject to question and result in some concern that the Commissioner may seek to dispute a company's residency position. This ongoing compliance approach sets out circumstances where there is a very low risk that the Commissioner would seek to treat a foreign-incorporated company as a resident under the central management and control test of residency to provide ongoing certainty for public groups. [4A] 106. This ongoing compliance approach for public groups sets out a series of conditions in paragraph 107 which, if met by a foreign-incorporated company, means the Commissioner will not allocate resources to review the company's residency position under the central management and control test of residency. Additionally, the Commissioner will not apply resources to review the residency position of these companies as a result of one-off or temporary changes to their established governance practices that result in either board meetings being held in Australia or directors attending meetings from Australia via modern communications technology. Simply because a company does not meet these criteria does not automatically mean that the Commissioner considers it will be a resident of Australia. 107. The Commissioner will not apply resources to review or seek to treat a foreign-incorporated company as a resident applying the central management and control test of residency for Australian tax purposes merely because part of the company's central management and control is exercised in Australia, where all the circumstances described in either subparagraph (a) or (b) apply on an ongoing basis: 107A. However, a public group cannot rely on the ongoing compliance approach where a company has undertaken or entered into: 107B. Nothing in paragraphs 106 and 107 of this Guideline prevents the Commissioner from applying resources to review a company's residency position when the Commissioner considers there is a risk that any arrangements or schemes mentioned in paragraph 107A have been undertaken or entered into. 107C. Additionally, where a company that satisfies the criteria in paragraph 107 of this Guideline fails to lodge a return as a result of an honest but mistaken belief that the company was a non-resident, the Commissioner will not apply resources to pursue penalties for failing to lodge taxation documents in the approved form. [10] | Evidencing falling within the ongoing compliance approach: 107D. The Commissioner acknowledges that for many public groups there are corporate governance controls and processes that occur outside of local board processes for a foreign-incorporated subsidiary and inform local directors' deliberations and decision-making in the relevant foreign jurisdiction. For example, a regional investment committee approval process or a project steering committee process. 107E. The Commissioner accepts that public groups that maintain effective corporate governance with established controls and practices in relation to their foreign-incorporated subsidiaries, should be able rely on these processes to demonstrate that local directors exercise independent consideration and judgment for the purposes of this ongoing compliance approach. This includes circumstances where some Australian staff are involved in group and regional review and steering processes alongside local directors. This also includes circumstances in which local director approvals occur in the relevant foreign jurisdiction via circular resolution based on deliberations, processes and approvals completed outside of board meetings under the group's corporate governance controls. 107F. The Commissioner may make enquiries in the course of ordinary engagement and assurance activities to confirm that the criteria in subparagraphs 107(a) or (b) is met and no circumstances in paragraph 107A exist. Such enquiries will typically commence with regard to existing information available to the Commissioner obtained through routine lodgment obligations and existing engagement and assurance activities. Where circumstances in paragraph 107A exist, a public group cannot rely on established governance controls and processes to demonstrate that local directors exercise independent consideration and judgment. 107G. Foreign-incorporated companies that do not meet the conditions in paragraph 107 may refer to the Appendix to this Guideline for further information regarding the Commissioner's risk assessment framework for the central management and control test of residency. Foreign-incorporated companies that meet the conditions in paragraph 107 do not need to further consider the Appendix to this Guideline. For avoidance of doubt, foreign-incorporated subsidiaries of public groups that have undertaken or entered into arrangements or schemes listed in paragraph 107A fall within the high-risk zone of the risk assessment framework.","Example 1: – large investment business 18. InvestFund Co carries on a large investment business. It has an extensive portfolio of Australian investments including Australian Securities Exchange shares, bonds, debentures and non-portfolio holdings in private companies. InvestFund Co frequently buys and sells these investments, often making several hundred trades per month. 19. InvestFund Co's day-to-day trading decisions on its investments are made by employees located in Sydney and 2 foreign jurisdictions. These employees make trading decisions acting under the authority granted to them by and under the ongoing supervision of the board, in line with the investment policies and strategies set by the board. The investment policies and strategies put in place by the board include a risk framework, and identify the type of investments to be made, the criteria for when they are to be made, and limits on the size of investments that may be made. 20. The setting by the board of InvestFund Co's investment policies and strategies are the high-level decisions amounting to an exercise of its central management and control. In contrast, the making of individual trading decisions by the company's employees within these policies and under the authority granted to them by and under the supervision of the board of directors are not (see paragraphs 50 to 72 of this Guideline). | Example 2: – small investment business 21. PrivateInvest Co conducts a small passive investment business. At any given time, it holds 2 to 3 investments in listed and unlisted companies. These investments are held for long periods. Each holding represents a significant part of PrivateInvest Co's overall holdings. Capital raisings, takeovers and demergers conducted by these companies, their performance and general market conditions require decisions about whether to hold or sell these investments to be made. Share sales and purchases are otherwise only made once or twice every few years. Possibility A – PrivateInvest Co's directors make but do not execute investment decisions 22. The directors of PrivateInvest Co conduct regular reviews of its investments in light of prevailing conditions and make decisions about selling or otherwise dealing with them. These decisions are the high-level decisions amounting to the exercise of central management and control. PrivateInvest Co has a small number of administrative staff that execute the decisions made by its directors. It has no other staff. The administrative staff executing those decisions are not exercising central management and control. Possibility B – PrivateInvest Co's directors make and execute investment decisions 23. Apart from its directors, PrivateInvest Co has no employees who both make the decisions on which investments are bought and sold, and execute those decisions. The decisions on which investments are bought and sold are PrivateInvest Co's high-level decisions and are an exercise of its central management and control. | Example 3: – large trading business 24. Widgets Inc is a manufacturer of Widgets. It sells Widgets directly to consumers and through wholesale distributors in a number of countries around the world. The high-level decisions that amount to an exercise of its central management and control include determining: 25. In contrast, the day-to-day sales and production management decisions made by Widget Inc's employees that follow the high-level trading and production policies are not exercises of its central management and control. | Example 4: – special purpose vehicle 26. SPV Co is a special purpose vehicle established to enter into a set of pre-determined transactions before being wound up. These comprise the decision to buy, hold and sell a single investment. SPV Co conducts no other business. After selling the investment, the SPV Co is to be wound up. The decisions to enter into the buy and sell transactions and wind up the company are the key high-level decisions that amount to the exercise of SPV Co's central management and control. Is a person merely influential or the real decision-maker? 27. As stated at paragraph 26 of TR 2018/5, a person who is merely influential over a company's directors or other decision-makers with legal authority to control and manage the company does not exercise the company's central management and control, even if they have a strong influence over the directors or other decision-makers. 28. There may be individuals who, while not being directors of a company and lacking any formal power to manage or control it, have an apparent role in making its high-level decisions. Where this is the case, it is necessary to consider who really exercises the company's central management and control. This turns on whether the persons that have an apparent role in making the company's high-level decisions are the real decision-makers, or are merely influential over its directors or other persons who have formal power to manage and control the company. | Example 5: – board of directors decides to implement a proposal put forward by its owner 29. Company Inc carries on a computing business. Kirk owns 80% of Company Inc. He has had a long and distinguished career in computer engineering and often advises Company Inc's board on global technological trends and advances in this area. He has become increasingly aware of the popularity and potential of a new development in computing called widgets. 30. Kirk prepares and provides a lengthy report, business plan and verbal presentation to Company Inc's board on the benefits of investing in the development and sale of widgets. After Kirk's presentation, the board considers Kirk's report and business plan. The directors decide to adopt Kirk's proposed business plan, as they consider the proposed investment to be in Company Inc's best interests. In doing so, they take into account the merits of the proposal, including its impact on Company Inc's financial position, and how it fits within its broader business. Company Inc's board is the real decision-maker. 31. Although as an industry technological expert and majority owner of Company Inc, Kirk's advice is given great weight, he was not the actual decision-maker. 32. If Kirk was an employee, the outcome would be the same. While he might exercise great influence over the directors, he would merely be influential and not the actual decision-maker. | Example 6: – is a parent company merely influential or the real decision-maker? 33. Abroad Co is a privately held investment company incorporated in Foreignland. Abroad Co's ultimate parent is an Australian company. Abroad Co carries on a small-scale investment business. It makes approximately 2 to 3 large transactions per year, involving the acquisition and disposal of shares which are normally held for long periods. Its directors are provided by a corporate services provider and are resident in Foreignland. 34. Abroad Co's directors regularly receive written and oral proposals from its ultimate Australian owner, detailing the transactions that its Australian owner wants Abroad Co to make. The decisions on whether to enter these transactions represent the high-level decisions of Abroad Co's business. Possibility A – Abroad Co's directors merely rubber-stamp decisions made by its Australian owners 35. The directors habitually follow directions received from Abroad Co's ultimate Australian owner. On examination, they are shown to have no knowledge of Abroad Co's business, financial position or the implications of the transactions they claim to have made the decision to enter. They are also unable to articulate why these decisions were made. The evidence establishes that they would not have been able to determine whether any of the decisions were illegal or improper, or whether they were in the best interests of the company. The evidence establishes that at all times Abroad Co's directors have: 36. The directors are merely 'rubber-stamping' high-level decisions made by Abroad Co's Australian owner. The Australian owner is the real decision-maker and exercises central management and control in Australia. Abroad Co is therefore a resident of Australia under the central management and control test of residency. Possibility B – Abroad Co's directors independently consider directions given to it by its Australian owners 37. Abroad Co's owner regularly sends proposals regarding investments to its directors. While the directors regularly implement transactions suggested by the owners, the evidence shows that they actively consider them and seek independent advice where necessary prior to doing so. The directors meet in Foreignland, where they decide whether to make the proposed investments. They do so based on information in the proposal and any independent advice they obtain. Where the local advice indicates that a proposal is unlawful or has adverse consequences for the company or owner, the directors do not decide to implement it. 38. The Australian owner is merely, albeit strongly, influential. Abroad Co's directors are the real decision-makers and exercise central management and control of Abroad Co in Foreignland. Abroad Co is therefore not a resident of Australia under the central management and control test of company residency. Decision-making within a corporate group 39. It may often be in the best interests of a company and its shareholders to further the policies, interests and proposals of the corporate group of which it is a member, and its ultimate parent. The Commissioner accepts that the directors of a subsidiary company do not cease to exercise its central management and control merely because in making decisions they conclude that it is in the best interest of the company to: 40. A foreign-incorporated subsidiary of an Australian-resident company may also have employees of its parent as directors. This is not, of itself, conclusive of where the subsidiary's central management and control is exercised. | Example 7: – decision-making by a subsidiary of a corporate group 41. Sub Co is a company incorporated in Foreignland and is a wholly-owned subsidiary of Aust Co, an Australian listed company. Aust Co requires Sub Co to comply with its policies where lawful in conducting its business. Possibility A – Sub Co's directors make decisions in line with its parent's policies 42. Sub Co's board meets in Foreignland where it makes all its high-level decisions. The board considers the business activities and financial position of Sub Co in addition to any consequences of the transactions. There is a process of discussion and consultation before any decisions are made. 43. The decisions of Sub Co's board comply with Aust Co's policies. However, the Board exercises central management and control, as it makes independent decisions within Aust Co's policy framework only after deciding it is in the best interests of Sub Co to do so. Sub Co is not a resident of Australia under the central management and control test of residency. Possibility B – Sub Co's Chief Financial Officer is an employee of its parent 44. Assume the same facts as Possibility A. However, one of Sub Co's directors is the Chief Financial Officer (CFO) of Aust Co and an Australian resident. The CFO travels to Foreignland to attend board meetings. The board considers the business activities and financial position of Sub Co in addition to any consequences of the transactions. There is a process of discussion and consultation before any decisions are made. 45. Aust Co's CFO does not control the decisions of Sub Co or exercise its central management and control independently of the other directors. No instance or pattern of decision-making exists where the CFO exercises central management and control to the exclusion of the other directors. There is no evidence of the parent otherwise usurping the board and exercising central management and control. Sub Co is not a resident of Australia under the central management and control test of residency. Possibility C – Sub Co's board merely implements the decisions of its parent, Aust Co 46. Aust Co's board sets global policies containing highly detailed operational and trading policies that Sub Co's board must follow. These policies cover the entirety of Sub Co's activities. Sub Co must also comply with any directions received from Aust Co's board. 47. Sub Co's board holds meetings where it mechanically follows directions from Aust Co's board on what decisions it is to make and policies to adopt. Its directors do so without giving any consideration as to the merits of those directions. It does not make any independent decisions regarding Sub Co's business or affairs. Sub Co's board is merely rubberstamping the decisions made by Aust Co's board. Aust Co's board is the real decision-maker and makes the decisions as to what decisions Sub Co is to make and what policies to adopt in Australia. Aust Co's board therefore exercises central management and control of Sub Co in Australia. Sub Co is therefore a resident of Australia under the central management and control test of company residency. | Example 8: – board is required to obtain approval for major items of expenditure or decisions 48. Worldwide Co is incorporated in Foreignland and is a subsidiary of Aust Co which is incorporated in Australia. Worldwide Co holds all of its board meetings in Foreignland, where its directors make all the high-level strategic decisions about its business. Aust Co controls the finance it provides to Worldwide Co, and Worldwide Co must obtain Aust Co's approval for major items of expenditure and financing decisions proposed by the board. Aust Co does not have any other involvement in the high-level decisions regarding the operations of Worldwide Co. 49. The ultimate decisions of Worldwide Co's board comply with Aust Co's expenditure approvals and decisions relating to the finance it provides. It does not make decisions contrary to its parent company's wishes, unless to do so would be illegal or improper. However, these decisions are made by the Board only after deciding it is in the best interests of Worldwide Co to make them. Worldwide Co's central management and control is exercised by its board of directors in Foreignland, where Worldwide Co is therefore resident. Worldwide Co is not a resident of Australia under the central management and control test of company residency. Exercising central management and control vs day-to-day management of a company's operations 50. As stated at paragraph 12 of TR 2018/5, the day-to-day management of a company's business under the authority and supervision of the board of directors, or other higher-level managers or controllers, is not an exercise of central management and control. The Commissioner accepts the board may grant wide and extensive powers of management to the company's employees, yet still retain and exercise central management and control of the company. | Example 9: – manager conducting business on company's behalf 51. Multinational Co is incorporated in Ostasia and carries on business solely in Australia. The shareholders and directors of Multinational Co are residents of and live in Ostasia. Its directors hold board meetings and perform their duties as the company's high-level decision-makers in Ostasia. 52. Multinational Co's board of directors establish an overarching framework and policies for how its operations are to be run. It also appoints an Australian-based manager to manage its Australian business activities and gives them wide authority to do so under its supervision. This includes the authority to make decisions on major contracts, as well as financing and general trading policies for its Australian business. Despite the wide authority granted to the Australian manager, the board retains the power to override any proposed decisions before they are made. It also retains the power to direct the Australian manager on how they are to conduct the Australian operations. 53. During board meetings, the board makes high-level decisions about Multinational Co's Australian business. The board reviews Multinational Co's Australian business and the Australian manager's performance. The board concludes that the business and Australian manager are performing competently and in line with how it wants the business run. The evidence shows that the board has the power to, has historically, and is prepared to intervene if it is not satisfied with the decisions of the Australian manager, or how they are running the business. Where the board deems it necessary, it further directs the Australian manager on how to conduct the business. 54. Multinational Co's central management and control is exercised by its board of directors in Ostasia, not the Australian manager. It is therefore not a resident of Australia under the central management and control test of company residency. | Example 10: – importance of location of directors' decision-making, rather than their residence 55. ByteT Co is a small company incorporated in Foreignland. Its business is the provision of computer consultancy services. Stuart is its sole shareholder, director and employee. Stuart lives in Foreignland and is also a non-resident for Australian income tax purposes. Stuart performs all the services provided by the company and controls every aspect of ByteT Co's decision-making. 56. ByteT Co is offered and, while in Foreignland, Stuart (acting on behalf of the company) decided to accept a contract to provide consultancy services in Australia over a 4-month period. Possibility A – Stuart makes day-to-day business decisions while in Australia 57. While performing the contract in Australia, ByteT Co is offered 2 small consulting contracts to be performed in Australia for its usual services. As sole director and employee of ByteT Co, Stuart accepts these contracts while he is in Australia. After completing the 3 contracts in Australia, Stuart returns to Foreignland where he continues to run ByteT Co's business as before. 58. Stuart's decision to accept 2 small contracts in Australia for services that are within the ordinary scope of ByteT Co's existing business are day-to-day management decisions. They are not high-level strategic decisions that amount to an exercise of central management and control in Australia. ByteT Co's central management and control is therefore not located in, and nor is it a resident of, Australia under the central management and control test of company residency. Possibility B – Stuart begins to make high-level decisions of ByteT Co solely in Australia 59. While performing the contract in Australia, ByteT Co is offered a major ongoing contract in Australia that would greatly increase the size of its business. The contract is for services that ByteT Co has never previously offered and would require it to establish a substantial Australian operation, including hiring staff and leasing premises. Due to the significant change in focus for the business, in accepting the contract ByteT Co considers it would be unable to continue actively running the business in Foreignland for the period of the contract. 60. While still in Australia, and after consulting with his professional advisors and banks, Stuart decides to accept the contract and change ByteT Co's business while he is in Australia. He signs the contract and makes arrangements to set up the Australian operation. This includes appointing a local manager to run it under his supervision. From this time, Stuart ceases making any high-level decisions about ByteT Co's business in Foreignland. 61. Stuart's decisions to accept the contract and change ByteT Co's business by setting up a new Australian operation, and halt its Foreignland business operation, are an exercise of its central management and control. 62. ByteT Co will be a resident of Australia under the central management and control test of company residency from the time Stuart makes the decision to change ByteT Co's business and starts making all its high-level decisions while he is in Australia. Possibility C – Stuart continues to make high-level decisions of ByteT Co in Foreignland 63. Assume the same facts as possibility B, however ByteT Co considers that it can continue its Foreignland business. Prior to making the decision to expand ByteT Co's business to Australia, Stuart returns to Foreignland. While in Foreignland, he consults with his professional advisers and banks, and makes the decision to accept the contract and commence carrying on business in Australia. Once the Australian operations are set up, Stuart does not visit Australia, and makes all the high-level decisions relating to ByteT Co's Australian and Foreignland business in Foreignland. Stuart exercises ByteT Co's central management and control in Foreignland. ByteT Co is not a resident of Australia under the central management and control test of company residency. | Example 11: – ForInvest Co 64. ForInvest Co is an investment company incorporated in Foreignland which carries on business running an investment fund. Its directors are based in Foreignland. 65. ForInvest Co engages another entity, AusManager Co, to manage its investment fund. AusManager Co's authority to make decisions, negotiate and conclude contracts is limited by the authority granted to it by ForInvest Co's board of directors, including the investment framework they set. It manages the investment fund under that authority and the ongoing supervision of ForInvest Co's board of directors. The decisions it makes are the conduct of ForInvest Co's day-to-day business under the authority and supervision of ForInvest Co's board of directors. They do not constitute the exercise of ForInvest Co's central management and control. 66. The minutes of ForInvest Co's board meetings record that the board of directors meet in Foreignland where they: 67. There is no evidence that the board minutes are false or misleading in any respect. The Commissioner accepts that ForInvest Co's high-level decisions are made by its directors in Foreignland, that its central management and control is located in Foreignland and that ForInvest Co is not an Australian resident under the central management and control test of company residency. | Example 12: – SPV Co 68. SPV Co is a special purpose vehicle incorporated in Foreignland to acquire a single asset. The board of SPV Co makes the decision at a meeting in Foreignland in its first year to buy and hold the asset. It also resolves that no distributions will be made during the holding period of the investment, which is anticipated to be 3 years. 69. The decision to buy the asset and the distribution decision are an exercise of central management and control. SPV Co's central management and control is located in Foreignland and it is not an Australian resident under the central management and control test of residency. 70. During the 3 years where SPV Co holds the investment, the directors do not meet and no strategic decisions are made. 71. SPV Co continues to be a non-resident of Australia in these years as nothing has occurred to cause the central management and control of SPV Co to be exercised somewhere other than Foreignland. 72. After holding the asset for 3 years, the board of SPV Co meets in Foreignland and decides to sell the investment and that the SPV Co is to be wound up. The decisions to sell the investment and to wind up the company are the key high-level decisions that amount to the exercise of SPV Co's central management and control. SPV Co's central management and control is located in Foreignland and it is not an Australian resident under the central management and control test of residency. Decisions made in more than one place 73. In circumstances where a company's high-level decisions are made in more than one place, special care must be taken to identify where its central management and control is located. In these situations, it may be that the central management and control of the company is divided and located in multiple places. 74. The underlying considerations are: 75. Both are questions of fact to be determined by reference to the circumstances of each case. The central management and control test of residency is focused on identifying where a company's control and direction is exercised in substance. This is regardless of whether decisions are made in traditional face-to-face meetings or with the aid of modern communications technology. 76. A company's decisions may be made in more than one place in 2 basic situations. The directors may: 77. Where decision-makers are in multiple places, the Commissioner does not accept that a decision is necessarily made in the place it is formalised, or where the last signature is placed on a resolution or vote on it is cast. For the purpose of determining the location of the central management and control of the company, the key question is where the decisions are being made as a matter of substance. 78. Where board meetings are conducted via electronic facilities (rather than physical attendance) the focus is on where the participants contributing to the high-level decisions are located rather than where the electronic facilities are based. 79. The question of where central management and control is located is determined by reference to how it is exercised over time. An occasional or one-off exercise of high-level decision-making in a particular place outside the normal course of how a company's central management and control is exercised, does not cause it to be in that place for the purpose of the central management and control test, unless: 80. If there is any doubt about whether a company's central management and control is exercised in Australia because there are instances of it being exercised in Australia, careful consideration must be given to the company's overall pattern of decision-making including: | Example 13: – decision-making outside the normal course of how central management and control is exercised 81. SR Co is a company incorporated in Ostasia. It carries on its substantive trading business in Ostasia. It has 3 directors – 2 are resident in Ostasia and one in Australia. In exercising their duties, the directors of SR Co meet face-to-face with the Australian director, Chris, in Ostasia. Chris travels to Ostasia to make the high-level strategic decisions of the company during regular board meetings. The central management and control of SR Co is ordinarily exercised in Ostasia. Possibility A – one-off meeting of SR Co due to special circumstances 82. Shortly before one of these regular board meetings, Chris injures his ankle in a skiing accident and is unable to fly to Ostasia for the board meeting. A one-off video conference is organised so that Chris can attend the board meeting from his home in Sydney. The board collectively makes decisions which amount to an exercise of central management and control. 83. Chris' participation in the board meeting from Sydney is a one-off and is inconsistent with the normal manner in which SR Co's central management and control is typically exercised at the face-to-face board meetings held in Ostasia. Central management and control of the company is not exercised to a substantial degree in Australia. Therefore, SR Co is not a resident of Australia under the central management and control test of company residency. Possibility B – Bob makes a one-off decision due to special circumstances 84. Bob, SR Co's managing director, is in Australia attending a conference. While he is here, a major investment opportunity arises for SR Co, which requires an urgent decision to be made before he returns to Ostasia. The decision whether to make the investment is, in the context of SR Co's business, a strategic one and not a day-to-day operational decision. It is therefore a high-level decision of the company. The decision is referred to Bob as managing director and he makes the decision while he is in Australia without the involvement of the other directors. 85. The relevant high-level decision is made in Australia. However, this is a one-off, and inconsistent with the regular pattern of how SR Co's central management and control is ordinarily exercised. 86. The Commissioner accepts that SR Co's central management and control is not exercised to a substantial degree in Australia and that SR Co is therefore not a resident of Australia under the central management and control test of residency. | Example 14: – decision-making equally split between more than one place 87. OS Package Co, a company incorporated in Ostasia carrying on a delivery business, has a board of 4 directors. Two of the 4 directors are located in Ostasia and 2 are located in Australia. Possibility A – OS Package Co's directors participate equally in decision-making 88. Board meetings are always conducted by video conference with directors participating equally from where they are based. No single director controls the decision-making to the exclusion of the others. 89. High-level decisions are also made outside board meetings by resolution, which are passed via email circulars with all 4 directors participating equally in the company's high-level decision-making from their respective locations. 90. The central management and control of OS Package Co is exercised to a substantial degree in Australia. It is therefore a resident of Australia under the central management and control test of residency (even if also a resident in Ostasia) because: Possibility B – Sadie makes high-level decisions alone 91. Sadie is the managing director of OS Package Co and makes the high-level strategic decisions of the company alone. The remaining 3 directors simply assent to her decisions and have no input in the decision-making. 92. Key strategic decisions are not made during board meetings of the company. Email correspondence shows that Sadie makes these decisions from her home in Ostasia. Sadie is therefore exercising OS Package Co's central management and control there. OS Package Co's central management is not being exercised to any degree in Australia as its remaining directors, including the 2 Australian directors, do not play any substantive role in its decision-making. 93. OS Package Co is not an Australian resident under the central management and control test of company residency. | Example 15: – exercise of central management and control by beneficial owner 94. Boom Co is an investment company incorporated in Foreignland. Ben, who lives in and is a resident of Australia, is Boom Co's ultimate beneficial owner. Boom Co has 2 directors who are resident in Foreignland. 95. Boom Co conducts a real property investment business outside Australia, holding property for the purpose of deriving rent. The constitution of Boom Co provides that the decisions of the directors are only effective if Ben agrees with them. 96. The directors undertake the company's day-to-day operational matters such as collecting rent, paying commission, finding tenants and entering leases, and maintaining the buildings it leases. Possibility A – Ben does not exercise the power given to him by the constitution 97. The directors hold Boom Co's board meetings in Foreignland, at which they make all the high-level strategic decisions about the company's business, including finance, the acquisition and disposal of investment properties, and leasing policies. 98. Despite the constitution requiring Ben to agree with the decisions of the board for them to be effective, Ben never does this. He leaves the directors to make whatever decisions they see fit. Ben's involvement in Boom Co is limited to irregularly contacting the directors for updates on the business and receiving regular management reports. 99. Boom Co's directors make its high-level strategic decisions without reference to Ben, and therefore exercise its central management and control. The mere fact that Ben has a power under Boom Co's constitution to have the final say on its high-level strategic decisions does not, of itself, mean Ben exercises central management and control. As the central management and control of Boom Co is not actually exercised by Ben in Australia, Boom Co is not a resident of Australia under the central management and control test of company residency. Possibility B – Ben makes all final high-level strategic decisions 100. The directors meet in Foreignland, and make tentative decisions about the company's business, including finance, the acquisition and disposal of investment properties, and leasing policies. 101. Ben exercises the power given to him under the constitution and has the final say on all the tentative decisions made by the directors. This includes all Boom Co's high-level decisions, covering leasing policies, funding and general corporate strategies, and Ben does so solely from Australia. Ben does not always accept the views of the directors, and occasionally makes decisions different to the tentative decisions proposed by Boom Co's board. Ben exercises the central management and control of Boom Co. Therefore, Boom Co is a resident of Australia under the central management and control test of company residency. Transitional compliance approach 102. This administrative arrangement applied for the transitional period of a foreign-incorporated company that, immediately prior to the withdrawal of Taxation Ruling TR 2004/15 Income tax: residence of companies not incorporated in Australia – carrying on business in Australia and central management and control: 103. The Commissioner will not apply resources to review or seek to disturb a foreign-incorporated company's status as a non-resident for the transitional period (see paragraph 104 of this Guideline) where the criteria in paragraph 102 of this Guideline were met, and during this period it: 104. The transitional period is the period between and including: 104A. The transitional period ended on 30 June 2023. 104B. The transitional arrangement at paragraph 103 of this Guideline extends to the Commissioner not applying resources to pursue penalties for failing to lodge taxation documents in the approved form, in respect of the income years within the transitional period, as a result of residency status where a company satisfied the criteria in paragraph 102 of this Guideline. Ongoing compliance approach for public groups 105. As referred to in paragraph 5B of this Guideline, the Commissioner acknowledges that for some foreign-incorporated companies there may not be much difference in Australian taxation outcomes whether the company is treated as a resident of Australia under the central management and control test of residency or not. This can be the case for public groups [4] with strong established governance practices and internal tax processes. 105A. It is recognised that commercial practicalities may result in unintended or unplanned circumstances arising from time to time. Such circumstances may cause the location of central management and control to be subject to question and result in some concern that the Commissioner may seek to dispute a company's residency position. This ongoing compliance approach sets out circumstances where there is a very low risk that the Commissioner would seek to treat a foreign-incorporated company as a resident under the central management and control test of residency to provide ongoing certainty for public groups. [4A] 106. This ongoing compliance approach for public groups sets out a series of conditions in paragraph 107 which, if met by a foreign-incorporated company, means the Commissioner will not allocate resources to review the company's residency position under the central management and control test of residency. Additionally, the Commissioner will not apply resources to review the residency position of these companies as a result of one-off or temporary changes to their established governance practices that result in either board meetings being held in Australia or directors attending meetings from Australia via modern communications technology. Simply because a company does not meet these criteria does not automatically mean that the Commissioner considers it will be a resident of Australia. 107. The Commissioner will not apply resources to review or seek to treat a foreign-incorporated company as a resident applying the central management and control test of residency for Australian tax purposes merely because part of the company's central management and control is exercised in Australia, where all the circumstances described in either subparagraph (a) or (b) apply on an ongoing basis: 107A. However, a public group cannot rely on the ongoing compliance approach where a company has undertaken or entered into: 107B. Nothing in paragraphs 106 and 107 of this Guideline prevents the Commissioner from applying resources to review a company's residency position when the Commissioner considers there is a risk that any arrangements or schemes mentioned in paragraph 107A have been undertaken or entered into. 107C. Additionally, where a company that satisfies the criteria in paragraph 107 of this Guideline fails to lodge a return as a result of an honest but mistaken belief that the company was a non-resident, the Commissioner will not apply resources to pursue penalties for failing to lodge taxation documents in the approved form. [10] Evidencing falling within the ongoing compliance approach 107D. The Commissioner acknowledges that for many public groups there are corporate governance controls and processes that occur outside of local board processes for a foreign-incorporated subsidiary and inform local directors' deliberations and decision-making in the relevant foreign jurisdiction. For example, a regional investment committee approval process or a project steering committee process. 107E. The Commissioner accepts that public groups that maintain effective corporate governance with established controls and practices in relation to their foreign-incorporated subsidiaries, should be able rely on these processes to demonstrate that local directors exercise independent consideration and judgment for the purposes of this ongoing compliance approach. This includes circumstances where some Australian staff are involved in group and regional review and steering processes alongside local directors. This also includes circumstances in which local director approvals occur in the relevant foreign jurisdiction via circular resolution based on deliberations, processes and approvals completed outside of board meetings under the group's corporate governance controls. 107F. The Commissioner may make enquiries in the course of ordinary engagement and assurance activities to confirm that the criteria in subparagraphs 107(a) or (b) is met and no circumstances in paragraph 107A exist. Such enquiries will typically commence with regard to existing information available to the Commissioner obtained through routine lodgment obligations and existing engagement and assurance activities. Where circumstances in paragraph 107A exist, a public group cannot rely on established governance controls and processes to demonstrate that local directors exercise independent consideration and judgment. 107G. Foreign-incorporated companies that do not meet the conditions in paragraph 107 may refer to the Appendix to this Guideline for further information regarding the Commissioner's risk assessment framework for the central management and control test of residency. Foreign-incorporated companies that meet the conditions in paragraph 107 do not need to further consider the Appendix to this Guideline. For avoidance of doubt, foreign-incorporated subsidiaries of public groups that have undertaken or entered into arrangements or schemes listed in paragraph 107A fall within the high-risk zone of the risk assessment framework. Date of effect 108. This Guideline applies from 21 June 2018.","Appendix 1: – Risk assessment framework 109. This Appendix sets out the Commissioner's risk assessment framework for the central management and control test of residency for foreign-incorporated companies. Companies may use this framework to understand the likelihood of the ATO applying compliance resources to review their residency status. Where a company has self-assessed as being a resident or a non-resident consistent with the view in TR 2018/5 and this Guideline, particularly where its central management and control is ordinarily only exercised in one jurisdiction, or the requirements of the ongoing compliance approach for public groups are met [11] , the company may choose not to consider this framework. 110. As outlined in this Guideline, it is acknowledged that the residency of a foreign-incorporated company will often be a 'low-risk' issue for the ATO. ATO engagement relating to this issue will continue to form part of ordinary engagement and assurance activities. 111. The risk assessment framework must be read together with TR 2018/5, which outlines the Commissioner's interpretation of the relevant law. Foreign-incorporated companies will also need to consider the application of the voting power test of company residency. [12] Risk zones 112. The following tables outline the Commissioner's compliance approach for the central management and control test of residency. Where a company has relied on this framework for an income year, the Commissioner may, in the course of ordinary engagement and assurance activities, seek to verify the risk zone that a company has determined it falls within. This framework applies both before and after its date of issue. 113. Where a company's circumstances are not within this framework, this does not mean there is a high risk of the company being a resident of Australia under the central management and control test; however, the Commissioner may engage with the company to understand its circumstances. 114. This risk assessment framework is made up of 3 risk zones. A company can expect the following treatment depending on its risk zone. Where a company meets one of the moderate-risk zone factors, this does not necessarily indicate the Commissioner has concerns with the residency position that has been self-assessed, rather there may be potential for residency risks to arise (particularly where additional factors in this zone are present). Companies in this risk zone may wish to monitor and address applicable factors, and improve their reporting and governance practices and documentation, so that they can move within the lower-risk zone. Evidencing falling within a risk zone 115. Companies need to have kept contemporaneous board minutes and governance documents that accurately reflect high-level decision-making and support the company's consideration that it falls within the low-risk zone of this risk assessment framework. This could include contemporaneous records documenting high-level decisions, who made those decisions, and the location where such decisions were made, including any decisions taken outside of ordinary board processes. 116. The guidance provided in paragraphs 107D to 107F of this Guideline also applies for public groups [13] seeking to evidence falling within a risk zone. 117. For companies that do not meet the governance standards in paragraphs 107D to 107E of this Guideline, where evidence of high-level decision-making is not available, inconclusive, or incomplete, a company's residency position is likely to be considered moderate or high risk, subject to the particular facts and circumstances of the company, and consideration of the risk factors outlined in this Guideline. For example, where a closely held private company's board minutes do not provide complete, contemporaneous or sufficient evidence of where high-level decision-making occurred as a matter of fact and substance, the Commissioner would not accept board minutes as prima facie establishing where the company's central management and control was located. Other supporting documentation to demonstrate high-level decision-making and governance controls and processes would be sought to understand the company's residency position. Factors for risk zones 118. The factors for determining whether companies fall within each zone are set out in the following table: This zone includes a company that self-assesses as non-resident (and has supporting evidence as outlined in paragraphs 115 and 116 of this Guideline) and is a resident of a foreign jurisdiction (that is not a tax haven), where one or more of the following apply: This zone includes a company that self-assesses as non-resident, is a resident of a foreign jurisdiction, in particular a resident of a specified country [16] and one or more of the following apply:",,/law/view/document?LocID=%22COG%2FPCG20189EC5%2FNAT%2FATO%2F00001%22&PiT=99991231235958,False,False,https://www.ato.gov.au/law/view/document?docid=COG/PCG20189/NAT/ATO/00001
PCG 2019/5,Final PCG,Capital gains tax and deceased estates - the Commissioner's discretion to extend the 2-year period to dispose of dwellings acquired from a deceased estate,,,7. This Guideline applies both before and after its date of issue.,,,,,"A1. This Guideline is about how the capital gains tax (CGT) main residence exemption may apply where you dispose of a dwelling that passed to you either as an individual beneficiary or trustee of a deceased estate. A2. All legislative references in this Guideline are to the Income Tax Assessment Act 1997. 1. Section 118-195 disregards capital gains and capital losses made from certain CGT events that happen in relation to a dwelling that: 2. If you dispose [3] of an ownership interest in a dwelling that passed to you as an individual beneficiary or as the trustee of the deceased's estate within 2 years of the deceased's death, any capital gain or loss you make on the disposal is disregarded. The Commissioner has the discretion to extend the 2-year period. 3. Generally, we will allow a longer period where the dwelling could not be sold and settled within 2 years of the deceased's death due to reasons beyond your control that existed for a significant portion of the first 2 years. 4. This Guideline outlines a safe harbour compliance approach that allows you to manage your tax affairs as if we had exercised the discretion to allow you a longer period. 5. This Guideline also outlines the factors we will consider when deciding whether to exercise the discretion to extend the 2-year period. 6. You may be entitled to a partial exemption for any capital gain or loss made from the disposal of your ownership interest in a dwelling if section 118-195 does not apply. [4] This Guideline applies equally in relation to the Commissioner's discretion to extend the 2-year period for partial exemptions.",,,"Intro: 8. If your circumstances satisfy the conditions listed in paragraph 11 of this Guideline, you can manage your tax affairs as if we had allowed you a period longer than 2 years. The Diagram 1 of this Guideline illustrates how the safe harbour can be relied on: Diagram 1: Guideline operation 9. If you choose to use this safe harbour and are subsequently chosen for an ATO compliance check, we will seek to ensure that you satisfy the conditions in paragraph 11 of this Guideline, including checking that the additional period is no longer than 18 months. We will not allocate compliance resources to determine whether or not we would have actually exercised the discretion where you have satisfied the conditions in paragraph 11 of this Guideline. 10. You should maintain all records necessary to support your claim that you are eligible for the safe harbour. | Safe harbour – conditions: 11. To qualify for the safe harbour, you must satisfy all of the following conditions: | Circumstances that took more than 12 months to resolve: 12. As per subparagraph 11(a) of this Guideline, one or more of the following circumstances must have taken more than 12 months to address: | Circumstances that cannot be material to delays in disposal: 13. In order to qualify for the safe harbour, none of the following circumstances can have been material to the delay in disposing of your interest per subparagraph 11(d) of this Guideline: | Extending the 2-year period – exercising the Commissioner's discretion: 14. In considering whether to extend the 2-year period, we weigh up all of the factors (both favourable and adverse) having regard to the facts and circumstances of the case. 14A. In practice, the facts we would consider in deciding whether to exercise the discretion would be fully understood only once the sale of the dwelling is completed. Ordinarily, it would be difficult for us to exercise our discretion prior to that time. 14B. Our general administrative approach is to exercise our discretion after the settlement of the sale of the dwelling. However, in some circumstances we may consider exercising our discretion prior to settlement of the sale of the dwelling where clarity is needed to resolve a matter. 15. Factors that would weigh in favour of us allowing a longer period include those listed in paragraph 12 of this Guideline. The absence of some or all of those favourable factors does not necessarily preclude us from allowing a longer period. 16. Factors that would weigh against us allowing a longer period include those listed in paragraph 13 of this Guideline. 17. Other factors that may be relevant to the exercise of our discretion (but are not relevant for the safe harbour) include but are not limited to: 18. How much weight we give to each factor will depend upon the circumstances of each particular case. The circumstances that caused the delay in disposing of the ownership interest are more important than the length of the delay. The amount of any potential capital gain or loss is not relevant to whether the discretion is exercised. 19. We will not allow a longer period for even a very short delay beyond 2 years if there are no relevant circumstances present. Likewise, a lengthy delay will not prevent us from allowing a longer period where relevant circumstances caused the delay and persisted for the overwhelming majority of the total period.","Example s: 20. Examples 1 to 10 of this Guideline illustrate how the safe harbour can apply in various situations and how we would approach exercising our discretion. | Example 1: – safe harbour – life tenancy 21. Mr Bishop acquires a dwelling before 20 September 1985. He dies on 22 March 2014 and his will grants a life tenancy to his wife. Title to the property remains in the hands of the trustee of the estate. Mr Bishop's 2 adult children from a previous marriage are the beneficiaries of his estate. 22. Mrs Bishop continues to live in the dwelling until she dies on 18 April 2017. 23. The trustee has the dwelling cleaned and placed on the market as soon as practically possible after Mrs Bishop dies. A contract for the sale of the property is signed on 11 July 2017 and settlement occurs on 14 August 2017. 24. Because the delay in disposing of the dwelling was caused by the life tenancy (circumstances described as a favourable factor) and the property was marketed and sold as soon as was practical after the death of Mrs Bishop, the trustee could rely on the safe harbour (provided no materially adverse factors were present). | Example 2: – no safe harbour – family member residing in dwelling 25. Ms Evans lives with Bevan (her adult son and full-time carer) in her main residence until she dies on 1 September 2013. Ms Evans acquires the dwelling after 20 September 1985 and it was not being used to produce assessable income when she died. 26. On the basis the dwelling would be sold and settled within a 2-year period, the trustee of the estate allows Bevan to continue to live in the dwelling until he finds full-time employment. Bevan is not given any right to occupy the house under Ms Evans' will. 27. In June 2016, Bevan obtains full-time employment and moves out of the dwelling. The trustee then sells the dwelling. 28. Because the delay in selling the dwelling was not caused by any of the circumstances described as favourable factors, the trustee cannot rely on the safe harbour. The decision to allow Bevan to reside in the dwelling was a matter of choice within the control of the trustee. | Example 3: – no safe harbour – storm damage and renovations 29. Mr Wong lives in a dwelling that is his main residence until he dies on 1 January 2016. Mr Wong acquired the dwelling before 20 September 1985. 30. On 14 July 2016, a severe storm damages the dwelling, which requires repairs before it can be advertised for sale. As well as completing repairs, the trustee also engages builders to undertake other significant renovations to improve the value of the dwelling before sale. Work is completed on 18 May 2017. 31. The dwelling is listed for sale on 26 June 2017 and actively managed until eventually sold. Settlement occurs on 17 January 2018. 32. Although the storm damage was outside of the control of the trustee and the property was sold shortly after the 2-year period, the trustee cannot rely on the safe harbour because the most significant factor in delaying the sale was the decision to renovate the dwelling, which was entirely within the control of the trustee. | Example 4: – no safe harbour – subdivision of land 33. Mrs Papageorgiou lives in her main residence until she dies on 1 June 2015. Mrs Papageorgiou acquired the dwelling after 20 September 1985 and it was not being used to produce assessable income when she died. 34. The trustee completes its administration of Mrs Papageorgiou's estate and the dwelling is owned by the beneficiaries of that estate (Mrs Papageorgiou's 4 adult children) as joint owners. 34A. The beneficiaries of Mrs Papageorgiou's estate decide to subdivide the property to increase the sale price. A plan is submitted to the council on 30 November 2015. On 1 July 2016, the council advises that the plan is not approved. 35. The beneficiaries appeal the decision on 22 July 2016 and attend a hearing on 12 October 2016. On 28 February 2017, a tribunal advises that a new subdivision application should be lodged with the council. A new application is submitted to the council on 24 March 2017, but by 1 June 2017 the council has not made a decision. 36. While the resolution of the subdivision application is beyond the control of the beneficiaries, they cannot rely on the safe harbour because the delay is due to the decision to subdivide, which is not necessary for the resolution of the estate or the disposal of the dwelling. | Example 5: – safe harbour – legal challenges 37. Mr Hawke acquires a dwelling before 20 September 1985, which is his main residence until he dies on 3 October 2013. Mr Hawke's will states that the dwelling is to pass (in equal shares) to his 2 adult children from his first marriage. The will also makes separate provisions for both his first and second wives. 38. Both the first and second wives commence legal proceedings to challenge the terms of the will. The children receive legal advice that they cannot dispose of the dwelling until those legal challenges have been resolved. Negotiations take place between all beneficiaries and a settlement is eventually reached, with Supreme Court orders handed down on 21 July 2015. In accordance with the order, the dwelling is to be disposed of and the proceeds distributed between the beneficiaries. 39. The dwelling is placed on the market on 1 September 2015 and sold, with settlement occurring on 16 November 2015. 40. The children could rely on the safe harbour because: | Example 6: – no safe harbour – inactivity 41. Ms Kahn lives in her main residence until she dies on 6 May 2013. Prior to her passing, her spouse moves into the dwelling. Her will states that the dwelling is to pass in equal shares to her 3 children. 42. After Ms Kahn's death, her spouse continues to live in the dwelling and the children commence legal proceedings to remove Ms Kahn's spouse from the property. The matter is settled on 8 July 2014. 43. After the matter is settled, the property remains vacant for 18 months while the children decide what to do with the property. The property is eventually put on the market in January 2016 and sold, with settlement occurring on 3 April 2016. 44. While there was a delay in disposing of the property due to the legal action to remove the deceased's spouse from the dwelling, the children cannot rely on the safe harbour because the dwelling was not listed for sale as soon as practically possible after those circumstances were resolved. | Example 7: – no safe harbour – serious illness of legal personal representative 45. Mr Hubbard acquires a dwelling before 20 September 1985. He lives in his main residence until he dies on 19 September 2014. Mr Hubbard's son, Richard, is the sole executor and beneficiary of Mr Hubbard's will. The house is the estate's only asset. 46. Shortly after probate is granted, Richard is diagnosed with a serious illness and spends a large period of time hospitalised. As soon as Richard's health improves, he cleans out the property and places the house on the market in January 2017, with settlement occurring on 2 April 2017. 47. Because the delay in selling the dwelling was not caused by any of the circumstances described as favourable factors, Richard could not rely on the safe harbour. However, if asked to exercise our discretion, we would take into account the fact that: | Example 8: – safe harbour – complexity of deceased estate 48. Mr and Mrs Harrison acquire their main residence after 20 September 1985. Mr Harrison dies in July 2008 and Mrs Harrison becomes the sole owner of the dwelling. Mrs Harrison dies on 29 February 2016 and is survived by her 2 daughters, Jane and Sally. The dwelling is not used to produce assessable income prior to Mrs Harrison's death. The daughters are unsure whether Mrs Harrison had a will. 49. Jane moves into the property without Sally's knowledge soon after Mrs Harrison dies. Sally wants to sell the dwelling and seeks Jane's agreement to sell. No agreement is reached and Jane becomes increasingly obstructive. 50. During January 2017, Sally engages solicitors in an attempt to resolve the issue. A number of court actions follow. During this period, Jane makes 2 unsuccessful attempts to have the title transferred into her name solely. Letters of administration are also issued to Sally and subsequently revoked during this period. In early 2018, Jane seeks to obtain finance to acquire Sally's interest in the property but is unable to do so. 51. In October 2018, on the basis that Mrs Harrison had no will, the Supreme Court rules that the property be sold. Jane is evicted and the property is sold, with settlement occurring on 14 May 2019. 52. Because the delay in disposing of the property was caused by the complexity of the estate (including uncertainty about the will and the multiple legal proceedings) and the property was listed and sold as soon as practicable after those issues were resolved, the sisters could rely on the safe harbour. | Example 9: – safe harbour – complexity of deceased estate 52A. Mr O'Connor acquires his main residence after 20 September 1985. The dwelling is not being used to produce assessable income when he dies in December 2015. Mr O'Connor's will provides that the dwelling is to pass to his only son David, in his capacity as the sole executor and beneficiary. The dwelling is never David's main residence. 52B. In administering the estate, the trustee discovers that the dwelling is intrinsically tied to Mr O'Connor's business as it was being used as security for the deceased's business debt. It takes an extended time for the trustee to untangle the deceased's financing and business arrangements in order to be able to sell the dwelling free from encumbrances. 52C. As soon as the dwelling is free from those encumbrances, it is listed for sale in February 2019 and sold with settlement occurring on 30 March 2019. 52D. Because the delay in disposing of the property was caused by the complexity of the estate (complex asset and liability position of the estate) and the property was listed and sold as soon as practicable after those issues were resolved, David can rely on the safe harbour. | Example 10: – safe harbour – more than one circumstance 52E. Mr Smith acquires his main residence after 20 September 1985. Mr Smith dies in April 2019. Mr Smith's will provides that the dwelling pass to his adult children. 52F. The children list the dwelling for sale in June 2019 but are immediately approached by a neighbour claiming that the driveway and part of the garage are occupying the neighbour's property. The children withdraw the dwelling from sale until the issue can be resolved. 52G. In April 2020, the issue with the neighbour is resolved. The dwelling is relisted for sale. 52H. In July 2020, COVID-19 restrictions come into effect, including a lockdown and limits on real estate viewings and auctions. There is very little interest in the dwelling during the lockdown and no offers are received. 52I. In December 2020, the lockdown is lifted and restrictions on real estate sales removed. In April 2021, the property sold, with settlement occurring in June 2021. 52J. Because the delay in disposing of the property was caused by the complexity in administration of the deceased estate (10 months) and the impact of COVID-19 measures (5 months), and they took longer than 12 months to resolve in total, the children can rely on the safe harbour. Further considerations 53. Where your circumstances fall outside of the safe harbour, but you want us to consider exercising our discretion, you should write to us directly – see Request discretionary extension to sell an inherited dwelling . 53A. Where an application for the discretion is made, and granted, it will apply regardless of whether the disposal of the ownership interest results in a capital gain or a capital loss. Where section 118-195 applies, the capital gain or capital loss is disregarded. How this may impact you in your circumstances should be considered before an application is made. 54. Where the safe harbour is not available and we do not exercise our discretion, your capital gain or capital loss will be calculated on the basis that the dwelling was acquired for its market value as at the date of the deceased's death. [6]",,,/law/view/document?LocID=%22COG%2FPCG20195EC%2FNAT%2FATO%2F00001%22&PiT=99991231235958,False,False,https://www.ato.gov.au/law/view/document?docid=COG/PCG20195/NAT/ATO/00001
PCG 2017/10,Final PCG,Application of paragraphs 215-10(1)(c) and 215-10(1)(d) of the Income Tax Assessment Act 1997,,,5 June 2017,,,PS LA 2011/27 | TD 2012/19 | TR 2005/11,,"1. Taxation Determination TD 2012/19 Income tax: when is a non-share equity interest 'issued at or through a permanent establishment' for the purposes of paragraph 215-10(1)(c) of the Income Tax Assessment Act 1997? provided guidance on when a non-share equity interest is 'issued at or through a permanent establishment' under paragraph 215-10(1)(c). 2. The view outlined in TD 2012/19 created unintended practical difficulties for banks in legitimately gaining access to the concession provided by section 215-10 of the Income Tax Assessment Act 1997 (ITAA 1997). [1] As a result, TD 2012/19 was withdrawn on 8 October 2014, with the intention for design of a replacement product, which would also address other areas of uncertainty that had been articulated by banking industry representatives in relation to the permitted purpose test in paragraph 215-10(1)(d). 3. This Guideline provides guidance, from a compliance perspective, on the Commissioner's expectations in relation to the application of paragraphs 215-10(1)(c) and 215-10(1)(d). 4. Taxpayers can use the compliance risk framework in this Guideline to assess the extent to which their facts, circumstances and associated tax treatment are perceived by the Commissioner as presenting a risk of non-compliance. In order to illustrate some of the more common tax issues that can arise, the guidance is provided in a series of scenarios. These scenarios are examples only and do not preclude the application of this Guideline to other arrangements involving the issue of a non-share equity interest in terms of the application of section 215-10. 5. From a compliance perspective, the Commissioner will find as acceptable, those scenarios in the low risk category. As scenarios move from low risk to high risk there is an increasingly higher threshold for taxpayers to justify compliance from both a technical and evidentiary perspective. 6. Any expectations on taxpayers, from a compliance perspective, are not meant to be prescriptive. The Commissioner's decision-making process in relation to risk assessment, and any associated compliance activity, is guided by the facts, complexity and materiality present in any scenario. As such, while this Guideline provides some guidance on the Commissioner's perception of the relative level of risk, and the associated degree of analysis required to justify the tax treatment, taxpayers need to exercise judgment about how the guidance applies to their own facts and circumstances, and the nature and extent of documentation appropriate to justify the tax outcome in their particular circumstances. Reliance on this Guideline 7. This Guideline is not a public ruling for the purposes of the Taxation Administration Act 1953 and therefore cannot offer protection under the law. 8. The Commissioner accepts that taxpayers will rely on the approach set out in this Guideline in assessing the extent to which their practices present any risk of non-compliance. 9. Where a taxpayer follows this Guideline in good faith, and the Commissioner subsequently changes his view and/or these materials are altered or withdrawn, the Commissioner will apply the principles set out under Law Administration Practice Statement PS LA 2011/27 Matters the Commissioner considers when determining whether the ATO view of the law should only be applied prospectively and, in appropriate circumstances, will not take action to apply any changed view of the law to prior years or periods. 10. This Guideline will form the basis by which the Commissioner will assess the extent of risk in relation to the issues covered by this Guideline, as part of the Commissioner's banking and finance compliance strategy, which may include follow up review activity at the taxpayer level. 11. This Guideline does not preclude the application of Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) or other tax anti-avoidance provisions, including anti-streaming rules. Particular attention should be given to the application of section 177EA of the ITAA 1936 and section 204-30 (refer to paragraphs 156 to 162 of this Guideline).","Scope: This Practical Compliance Guideline sets out a practical administration approach to assist taxpayers in complying with relevant tax laws. Provided you follow this guideline in good faith, the Commissioner will administer the law in accordance with this approach.",,,,"Appendix 1: Summary of risk assessment factors General permitted purpose, with evidence that funds have not been applied for a non-permitted purpose (that is, funds applied for a non-permitted purpose shortly after capital raising) © AUSTRALIAN TAXATION OFFICE FOR THE COMMONWEALTH OF AUSTRALIA You are free to copy, adapt, modify, transmit and distribute this material as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).",,,False,False,https://www.ato.gov.au/law/view/document?docid=COG/PCG201710/NAT/ATO/00001
PCG 2025/3,Final PCG,Capital raised for the purpose of funding franked distributions - ATO compliance approach,,,28 November 2023,,,TA 2015/2,,"1. This Guideline outlines when we are likely to have cause to apply our compliance resources in relation to the integrity measure in section 207-159 of the Income Tax Assessment Act 1997 (ITAA 1997). It sets out the framework we use to assess the level of risk that this provision applies to deny franking credits attached to a distribution. 2. The integrity measure is intended to discourage arrangements that feature the raising of capital to fund the payment of franked distributions and the release of franking credits in a way that generally does not significantly change the financial position of the entity. It addresses arrangements that are entered into for a purpose (other than an incidental purpose) and with the principal effect of accelerating the release of franking credits to members of entities in circumstances that cannot be explained by existing distribution practices, and which are typically artificial or contrived. [1] 3. The integrity measure addresses the concerns raised in Taxpayer Alert TA 2015/2 Franked distributions funded by raising capital to release franking credits to shareholders. This Guideline will assist taxpayers to understand our compliance approach to those issues. 4. The application of section 177EA of the Income Tax Assessment Act 1936 (ITAA 1936), or any provision other than section 207-159 of the ITAA 1997, is outside the scope of this Guideline. 5. This Guideline applies to corporate tax entities [2] that have made a distribution which purports to be a frankable distribution as defined in section 202-40 of the ITAA 1997. 6. All further legislative references in this Guideline are to the Income Tax Assessment Act 1997, unless otherwise indicated. How to use this Guideline 7. You can use the framework in this Guideline to understand the: 8. You may be required to, or we may ask you to, report your risk rating under this Guideline through the reportable tax position schedule.",,,"Intro: This Practical Compliance Guideline sets out a practical administration approach to assist taxpayers in complying with relevant tax laws. Provided you follow this Guideline in good faith, the Commissioner will administer the law in accordance with this approach.","Example 1: – dividends that are consistent with an established practice 32. Chung Group, a company listed on the Australian Securities Exchange (ASX), publishes a dividend policy. 33. Chung Group's dividend policy in respect of ordinary shares seeks to pay fully franked dividends biannually in a range of 40% to 50% of its free cash flow per annum. Its practice of paying dividends during the past 3 years is consistent with this dividend policy. Free cash flow is defined as cash from operating activities and investing activities (but excluding major growth projects). 34. Chung Group is also implementing several long-term growth projects. Chung Group raises new share capital as an additional source of funding for the growth projects and to maintain the company's target capital structure and gearing ratio. 35. While waiting for the project contractors to render their invoices (which are dependent on the achievement of milestones), the funds from the new capital raising are temporarily applied towards repayment of revolving debt facilities. 36. The capital raising is undertaken to ensure that the company's net debt to EBITDA [10] gearing ratio (measured on a rolling 12-month basis) will not go above a certain target range which is considered prudent by the board of directors. 37. The funds that Chung Group will use to pay the dividends will be sourced from the company's operations and income from its investments as well as by drawing down on the revolving debt facilities (for any cash shortfall). 38. Chung Group concludes that the franked distribution it is proposing to pay in respect of ordinary shares falls under scenario 1 of the green zone under this Guideline. This is because the franked distribution is in respect of ordinary shares and is fundamentally consistent with its past practice over the preceding 3 years in terms of timing, amount, and franking percentage. 39. We will generally not have cause to apply compliance resources to review the arrangement with respect to section 207-159. Green zone arrangement examples – scenario 2 | Example 2: – dividend reinvestment plan undertaken for normal commercial purposes 40. Timlin Manufacturing, an ASX-listed company, has had a dividend reinvestment plan (DRP) for ordinary dividends that has been in operation for a significant period of time. 41. The DRP encourages investment by retail investors as it enables eligible shareholders to increase their shareholding by reinvesting the dividends payable on their ordinary shares to obtain new ordinary shares issued by the company (without transaction costs). 42. Timlin Manufacturing determines that the distributions under the DRP will fall under scenario 2 of the green zone under this Guideline, as the DRP is undertaken for normal commercial purposes, and is not an artificial or contrived arrangement. This is due to the DRP being in place for an extended period of time, ongoing for ordinary dividends and designed to support retail investors to increase their shareholdings. 43. While Timlin Manufacturing can rely solely on scenario 2 of the green zone to determine that the arrangement is low risk under this Guideline, it is noted that: 44. We will generally not have cause to apply compliance resources to review the arrangement with respect to section 207-159. | Example 3: – dividend reinvestment plan undertaken for normal commercial purposes 45. TigerLand Developers, an ASX-listed company, recommences a DRP that has been suspended for a number of years. TigerLand Developers' ASX announcement states that the DRP has been recommenced on an ongoing basis to raise capital to invest in its upcoming property development projects. 46. The DRP encourages investment by retail investors as it enables eligible shareholders to increase their shareholding by reinvesting the dividends payable on their ordinary shares to obtain new ordinary shares issued by the company (without transaction costs). Under the DRP, TigerLand Developers issue the new shares at a small discount to the market price at the time the dividend is declared. Small Joe Brokers underwrite the DRP to a certain participation rate. 47. TigerLand Developers declare a fully franked dividend of 30c per ordinary share in September 2025. The declared dividend amounts to $70 million, in relation to which $8 million of shares are issued under the DRP and underwriting arrangement. 48. TigerLand Developers determines that the distribution falls under scenario 2 of the green zone under this Guideline, as the DRP is undertaken for normal commercial purposes, and is not an artificial or contrived arrangement. 49. We will generally not have cause to apply compliance resources to review the arrangement with respect to section 207-159. | Example 4: – dividend reinvestment plan not undertaken for normal commercial purposes (red zone arrangement example) 50. In February 2024, Pink Maple Enterprises (Pink Maple), an ASX-listed company, announces a special dividend of $3 per share that it purports to fully frank. In conjunction with the announcement, the company launches a new temporary DRP which only applies to the special dividend, giving shareholders the option to reinvest the special dividend to obtain additional ordinary shares. The DRP is fully underwritten by Shark Capital (in the event of a shortfall if shareholders elect to receive cash rather than additional shares). 51. The special dividend does not align with an increase in Pink Maple's profits. 52. In March 2024, Pink Maple pays $50 million via the special dividend. 53. Shareholders owning approximately 50% of Pink Maple's issued shares participate in the temporary DRP for the special dividend. Pink Maple raise approximately $50 million in capital through participation in the DRP and the issue of remaining shares to the underwriter. The entire special dividend amount is funded by the capital raised. 54. Pink Maple determines that the distribution does not fall within scenario 2 of the green zone of this Guideline. Although the issue of equity is through the DRP, it does not meet the requirement that the DRP be undertaken for normal commercial purposes and not be an artificial or contrived arrangement. 55. The factors that demonstrate that the arrangement is artificial and contrived include: 56. We would apply compliance resources to review the arrangement as a matter of priority, as the distribution meets all of the requirements to be within the red zone per paragraph 84 of this Guideline. Green zone arrangement examples – scenario 4 57. Note that all references to APRA's minimum regulatory requirements in paragraphs 58 to 78 of this Guideline are illustrative only and intended to reflect the principles expressed in this Guideline. When applying this Guideline, we expect you to have reference to the current APRA (or ASIC) regulatory framework at the time of application. | Example 5: – equity raised to meet minimum regulatory requirements, including maintaining a reasonable buffer beyond minimum requirements 58. Savings Bank of Australia (Savings) is an Australian authorised deposit-taking institution for the purposes of the Banking Act 1959 and is subject to minimum regulatory requirements as administered by APRA, including maintenance of mandatory levels of Tier 1 capital. 59. APRA's minimum regulatory requirements mean that Savings needs to maintain Tier 1 capital of 11% of risk-weighted assets, of which 1.5% can be additional Tier 1 capital (AT1). APRA requires boards to set internal capital targets as part of their Internal Capital Adequacy Assessment Process and, as part of this, it expects banks to set a buffer beyond the minimum regulatory requirement reflective of their circumstances (in the case of Savings, the board considers the appropriate buffer is 1%). 60. The board of Savings is also maintaining a conservative policy to ensure it maintains a level above this buffer as part of its approach to capital management, which generally means it will maintain a level of Tier 1 capital between 12% and 13%. In addition, Savings generally maintains 1.75% to 2% AT1 capital as part of its approach to capital management, noting only 1.5% can be counted towards meeting its minimum Tier 1 capital requirements. 61. One of Savings' previously issued AT1 capital instruments – $200 million of Capital Notes 1 – will be redeemed on 1 September 2024. To ensure Savings continues to maintain an adequate amount of Tier 1 capital (and specifically AT1 capital), it proposes to issue a new AT1 instrument – Capital Notes 3 – on 1 July 2024 to raise $200 million. 62. The issue of Capital Notes 3 is a new capital raising. The proceeds from the issue of Capital Notes 3 are expected to effectively replace funding previously provided by Capital Notes 1 to: 63. Savings has a policy of paying fully franked dividends on its ordinary shares twice a year. In addition, under the terms of its various capital notes instruments, if a distribution is paid, it is franked. 64. Savings announces that it will pay a fully franked special dividend in respect of its ordinary shares on 1 October 2024, in line with its capital management plan. This will reduce the level of Common Equity Tier 1 capital (which includes retained profits) on its balance sheet, which is a different category of Tier 1 capital to AT1 capital. 65. The issue of Capital Notes 3, in combination with the payment of the special dividend, will fall under scenario 4 of the green zone under this Guideline, as the Capital Notes 3 have been issued to ensure Savings meets APRA's regulatory requirements. 66. We will generally not have cause to apply compliance resources to review the arrangement with respect to section 207-159. | Example 6: – anticipation of changes in Australian Prudential Regulation Authority requirements 67. In late 2025, APRA changes the minimum regulatory requirements for Savings Bank in response to supervisory concerns. These changes, which will come into effect on 1 July 2026, increase the amount of Tier 1 capital required from 11% to 12%. 68. In anticipation of the increase in capital requirements, Savings undertakes a new ordinary share capital issuance on 1 February 2026 to increase the amount of its Tier 1 capital. 69. After the capital raising, Savings' Tier 1 capital ratio sits at 13.75%, as APRA's new requirement is 12%, and the board recommends maintaining a buffer of at least 1%. As in Example 5 of this Guideline, Savings also apply a conservative approach to maintaining this buffer, resulting in it carrying more than 13%. 70. In December 2026, Savings undertakes a divestment of a major business for $2 billion. As a result, it reassesses its capital position and realises it is carrying too much Common Equity Tier 1 capital. In February 2027, Savings announces a fully franked special dividend to reduce the amount of Common Equity Tier 1 capital it is holding on its balance sheet. 71. The issue of new ordinary shares in combination with the payment of the special dividend, will fall under scenario 4 of the green zone under this Guideline, as the new issuance of ordinary shares is made to ensure Savings meets APRA's minimum regulatory requirements. 72. We will generally not have cause to apply compliance resources to review the arrangement with respect to section 207-159. | Example 7: – adhering to the Australian Prudential Regulation Authority's minimum regulatory requirements in changing economic conditions 73. In mid-2026, there is distress in financial markets, with analysts suggesting potential financial market volatility emanating from offshore in the latter half of the 2026 calendar year. 74. In anticipation of tightening in liquidity and capital markets, Savings undertakes a new share capital issuance on 1 September 2026 to increase the amount of ordinary share capital. This is done to safeguard their balance sheet and liquidity position through the period of anticipated market volatility and to lower any risk of not meeting APRA's minimum regulatory requirements. 75. After the new capital raising, Savings' Tier 1 capital ratio sits at 14.25% which creates a temporary significant buffer above APRA's Tier 1 minimum regulatory requirement of 12%. 76. After a period of volatility, on 1 September 2027, liquidity and capital market conditions return to a more normal state and Savings decides to lower its capital buffer to reduce its cost of capital. It announces a fully franked special dividend on 1 December 2027 to reduce the amount of Common Equity Tier 1 capital. 77. The issue of new ordinary shares in combination with the payment of the special dividend will fall under scenario 4 of the green zone under this Guideline, as the new issuance of ordinary shares was made to ensure a conservative capital position through the period of anticipated financial market volatility and to lower the risk of not being able to meet APRA's minimum regulatory requirements. 78. We will generally not have cause to apply compliance resources to review the arrangement with respect to section 207-159. Green zone arrangement example – scenario 5 | Example 8: – sale of a business 79. Hawks Harvest is a private company wholly owned by the trustee of the Richards Family Trust. Hawks Harvest has built a successful manufacturing business, specialising in the production of farm machinery. Hawks Harvest generally reinvests all its profits in the business and has only paid a dividend once in its ten-year history. 80. The sole shareholder of Hawks Harvest completes negotiations with ABC Equity Ltd (ABC), a private equity firm, for the sale of 100% of the shares in Hawks Harvest for a purchase price of $100 million minus a permitted dividend amount approximating the balance of retained profits. Completion of the contract is subject to: 81. ABC successfully completes the capital raising and combines the funds raised with its own existing funds to finance the loan to Hawks Harvest (which is used to pay the pre-sale dividend) and the payment of the purchase price. Without ABC's capital raising and subsequent loan, Hawks Harvest would not have had the cash resources to pay the dividend. 82. This arrangement will fall under scenario 5 of the green zone under this Guideline, as Hawks Harvest is a private company, and the arrangement is properly regarded as an arrangement where the principal effect and purpose of the capital raising is to facilitate the departure of a shareholder. 83. We will generally not have cause to apply compliance resources to review the arrangement with respect to section 207-159. Red zone arrangements 84. You are in the red zone in relation to a distribution where all of the following apply. This is relevant to the third criterion – principal effect and purpose of funding a substantial part of the distribution. This does not apply if there has been a comparable increase in the company's profit that aligns with the special dividend or unusually large distribution. This is relevant to the first criterion – not consistent with established practice. Red zone arrangement examples 85. Refer to Example 4 – dividend reinvestment plan not undertaken for normal commercial purposes, at paragraphs 50 to 56 of this Guideline, for an additional red zone example. | Example 9: – pro rata renounceable entitlement offer 86. In November 2023, Bontempel Sports announces a pro rata renounceable entitlement offer under which it will issue new ordinary shares at $2 per share, with existing shareholders entitled to subscribe for 1 new share for every 20 existing shares they hold. 87. The entitlement offer is taken up by all shareholders. It is completed in December 2023 and raises a total of $80 million. The funds raised under the entitlement offer are not used by Bontempel Sports in its business but are deposited in an interest-bearing account. 88. In May 2024, Bontempel Sports uses the proceeds from the entitlement offer to pay a special dividend equating to a total of approximately $75 million, that it fully franks. 89. The distribution meets all of the requirements to be within the red zone under this Guideline, as: 90. We would apply compliance resources to the arrangement. | Example 10: – franked dividend income not taxed because of deductible trust losses 91. The trustee of the Border Family Discretionary Trust (the Border Trust) owns all the shares in Suns Merchandising, which conducts a successful retail operation. Suns Merchandising is profitable, with a significant franking account balance, but has minimal cash reserves and no relevant history of dividend payments. 92. Separately, the trustee of the Border Trust conducts a property development business which has been performing poorly, accumulating significant tax losses. 93. Following a decision of its board, Suns Merchandising undertakes a capital raising under which it raises $2 million in additional funds, for the stated purpose of facilitating expansion of the retail business. However, the genuine plans made for expansion are minimal. 94. Soon after the capital raising is completed, the board determines that the funds raised exceed the amount needed to finance the expansion. It resolves to return surplus funds of $1.7 million as a franked dividend. The balance of $300,000 is invested in the expansion program. 95. The Border Trust fully deducts its carried forward tax losses (having satisfied the relevant trust loss recoupment test) against the $1.7 million dividend income and its other assessable income, leaving it with a nominal amount of trust income and net income for the income year. 96. The distribution does not meet any of the requirements to be within the green zone under this Guideline. 97. The distribution meets all of the requirements to be within the red zone under this Guideline, as: 98. We would apply compliance resources to the arrangement. Record keeping relevant to the purpose of capital raising 99. Paragraphs 100 to 121 of this Guideline outline, and provide examples of, the types of documentation we consider relevant to determining whether any entity that issued or facilitated the issue of any of the relevant equity interests did so for a purpose (other than an incidental purpose) of funding a substantial part of the relevant distribution or the relevant part of a distribution. 100. Documentation prepared by the entity on the reasons for undertaking the capital raising will be taken into account. However, the purpose of the capital raising as asserted by the entity will not in itself be determinative. The totality of factors must be objectively considered, including whether the documentation reflects the substance of the arrangement and the conduct of the party or parties involved. 101. The types of documents that will be relevant to this test, where they are relevant to the matters listed in subsection 207-159(4), will include but are not limited to: | Example 11: – documentation relevant to the purpose of capital raising for a public company 102. Giannakis Mining announces in January 2024 that it has received a proposal from Interlandi Minerals, an unrelated entity, to acquire all the ordinary shares in Giannakis Mining via a scheme of arrangement under Part 5.1 of the Corporations Act 2001. The scheme of arrangement is implemented in May 2024. 103. As permitted (but not required) by the scheme of arrangement, and at the discretion of the directors, a special dividend of 45c per share is paid by Giannakis Mining in March 2024 (prior to the scheme implementation date). The aggregate amount of the special dividend is $80 million. The special dividend is significantly higher than any past dividend paid by Giannakis Mining over the last 3 years, which has ranged from 1.5c to 6.5c per share. 104. In May 2023, Giannakis Mining had undertaken a capital raising of $78 million through the issue of ordinary shares. The relevant ASX announcement details the capital raising offer and states that the purpose of the capital raising was to fund debt repayments following the successful expansion of its iron ore mining operations. 105. Giannakis Mining's 2023 annual report states that the amount from the capital raising was predominantly used to repay bank debt. 106. The distribution does not fall within the green zone under this Guideline, because it is not covered by any of scenarios 1 to 5 listed in Table 2 of this Guideline. However, it is also not in the red zone, because none of the factors in that zone relevant to the third criterion apply. 107. Giannakis Mining is able to demonstrate the commercial purpose of the equity issuance and the use of funds by reference to documentation such as the ASX announcements and its annual report, which reflect the substance of the arrangement and conduct of the parties. Therefore, these records will assist Giannakis Mining to demonstrate that section 207-159 does not apply in its circumstances. | Example 12: – documentation relevant to an established practice affected by economic conditions for a public company 108. Callaway Ecocharge Co is an ASX-listed company specialising in renewable energy solutions and has a practice of paying 60–70% of its annual profits after tax as bi-annual franked dividends over the past 3 and a half years. This practice is consistent with its published dividend policy. 109. In March 2028, there are major global supply chain disruptions due to growing political instability and an imminent threat of war between nations on the major global shipping routes that Callaway Ecocharge uses. There is no certainty on when tensions will subside. 110. Callaway Ecocharge announces to shareholders that they will temporarily halt paying their bi-annual franked dividends to preserve cash as the adverse trading conditions have been impacting business operations and profits. Callaway Ecocharge intends to recommence paying dividends once global trade conditions improve, which is outlined in its board minutes and published on its website's announcement page. 111. Due to the ongoing uncertainty and geopolitical tensions, Callaway Ecocharge anticipates that it will require additional cash to fund its debt repayments to third parties. In January 2029, Callaway Ecocharge undertakes a capital raising through the issue of ordinary shares. The relevant ASX announcement and the prospectus lodged with ASIC details the capital raising offer and states the purpose is to fund its debt repayments. 112. The supply chain disruptions continue to the end of 2030. Callaway Ecocharge does not pay any dividend during this period. Its annual report states that the amount from the capital raising is predominantly used to repay third-party debt during the 2029 and 2030 financial years. 113. At the beginning of February 2031, global supply chain conditions begin to improve and continue to stabilise until May 2031. Callaway Ecocharge's operations recover quickly and it announces that it will recommence paying dividends in accordance with its pre-existing policy. It pays its first fully franked dividend in August 2031. A residual portion of the capital raised indirectly contributed to the funding of its subsequent distributions. 114. The distribution does not fall within the green zone under this Guideline, because it is not covered by any of scenarios 1 to 5 listed in Table 2 of this Guideline. It does not fall under scenario 1 as there has not been a consistent dividend practice in accordance with its pre-existing policy due to distributions halting for 3 years due to geopolitical conflicts. However, it is also not in the red zone, because none of the factors in that zone relevant to the first and third criterion apply. 115. Callaway Ecocharge can demonstrate the commercial purpose of the capital raising and the use of funds to repay its debts to third parties by reference to documentation such as the ASX announcements, ASIC prospectus, its 2029 and 2030 annual report, meeting minutes, announcements on its website. The documentation reflects the substance of the arrangement and Callaway Ecocharge's conduct. Therefore, these records will assist Callaway Ecocharge to demonstrate that section 207-159 does not apply in its circumstances. | Example 13: – documentation relevant to the purpose of capital raising for a private company 116. Byting Edge Software was once a leading player in the technology and software development industry, known for its innovative products. The company enjoyed several years of profitability. During this time, it adopted a policy of paying semi-annual dividends to its shareholders of 60% of its net profit after tax (excluding extraordinary items). 117. Over the past few years, Byting Edge Software has faced significant challenges, including increased competition, market saturation and internal management issues. As a result, the company has suffered persistent financial losses, with declining revenues and mounting debts. Byting Edge Software has a significant franking account credit balance but lacks the financial capacity to pay dividends to its shareholders. 118. To rehabilitate the business and return it to profitability, Byting Edge Software proposes to undertake a capital raising by issuing new shares. The funds raised will be used to restructure the company, invest in new product development and improve operational efficiency. This is reflected in the board meeting minutes and relevant correspondence. 119. Byting Edge Software completes the capital raising and commences its business rehabilitation program. The program is successful, the funds obtained under the capital raising are predominantly expended and Byting Edge Software becomes profitable within 3 years. The board is now planning to resume paying dividends in accordance with its pre-existing policy. 120. The board considers this Guideline and determines that a distribution does not fall within the green zone under this Guideline, because it is not covered by any of scenarios 1 to 5 listed in Table 2 of this Guideline. (In particular, it does not fall under scenario 1 as there has not been a consistent established dividend practice for 3 years and at least 20% of the proposed dividends will be financed by the capital raising.) However, it is also not in the red zone, because none of the factors in that zone relevant to the third criterion apply. 121. Byting Edge Software ensures that it is in a position to demonstrate the commercial purpose of the equity issuance and the use of funds with relevant documentation such as the business plans, financial projections, minutes of board meetings, and correspondence relating to the capital raising. The documentation reflects the substance of the arrangement and Byting Edge Software's conduct. Therefore, these records will assist Byting Edge Software to demonstrate that section 207-159 does not apply in its circumstances.",,,/law/view/document?LocID=%22COG%2FPCG20253EC%2FNAT%2FATO%2F00001%22&PiT=99991231235958,False,False,https://www.ato.gov.au/law/view/document?docid=COG/PCG20253/NAT/ATO/00001
PCG 2018/8,Final PCG,"Enterprise Tax Plan: small business company tax rate change: compliance and administrative approaches for the 2015-16, 2016-17 and 2017-18 income years",,,9,,,,,"1. This Guideline sets out the ATO's compliance and administrative approaches for corporate tax entities that have faced practical difficulties in determining their corporate tax rate and corporate tax rate for imputation purposes in the 2015-16, 2016-17 and 2017-18 income years. 2. The Commissioner acknowledges that uncertainty may have arisen as a result of changes to the tax laws that set out eligibility for the reduced corporate tax rate and the subsequent release of Draft Taxation Ruling TR 2017/D7 Income tax: when does a company carry on a business within the meaning of section 23AA of the Income Tax Rates Act 1986?",,"3. Tax Laws Amendment (Small Business Measures No. 1) Act 2015 amended the Income Tax Rates Act 1986 (ITRA 1986) to reduce the corporate tax rate to 28.5% for the 2015-16 income year for small business entities that were carrying on a business and had an aggregated turnover of less than $2 million. 4. Treasury Laws Amendment (Enterprise Tax Plan) Act 2017 amended the ITRA 1986 to reduce the corporate tax rate to 27.5% for the 2016-17 income year for small business entities that were carrying on a business and had an aggregated turnover of less than $10 million. 5. To assist corporate tax entities interpret the phrase 'carrying on a business' to determine eligibility for the reduced corporate tax rate, the ATO released TR 2017/D7 on 18 October 2017. 6. On 18 October 2017, the Government introduced the Treasury Laws Amendment (Enterprise Tax Plan Base Rate Entities) Bill 2017. The Bill was passed on 23 August 2018 and received Royal Assent on 31 August 2018. The Treasury Laws Amendment (Enterprise Tax Plan Base Rate Entities) Act 2018 removed the 'carrying on a business' requirement. Under the new law, a corporate tax entity will be eligible for the reduced rate from the 2017-18 income year, if: 7. Given the timing of the passage of these Acts and the timing of the release of TR 2017/D7, some corporate tax entities may have made decisions about their eligibility for the reduced corporate tax rate without knowledge, or in anticipation, of the operation of the law under these Acts and the ATO view of what constitutes 'carrying on a business'. This may have led to some corporate tax entities lodging tax returns for the 2015-16 and 2016-17 years without certainty of the correct position. It may also have led to some corporate tax entities issuing distribution statements to members based on a franking rate that is incorrect. 8. In light of this uncertainty, the Commissioner will apply two approaches to assist affected corporate tax entities.","Intro: 10. Under self-assessment, the Commissioner expects taxpayers to fulfil their obligations under the tax laws and assumes that the information provided by taxpayers in their tax returns is complete and accurate. As is always the case, the Commissioner may undertake review activity to ensure compliance, particularly where there is reason to believe a taxpayer's self-assessment, or the information provided, is incorrect. 11. Given the uncertainty around the 'carrying on a business' test prior to the release of TR 2017/D7, the Commissioner will adopt a facilitative approach to compliance in relation to the application of this test. This means that the Commissioner will not allocate compliance resources specifically to conduct reviews of whether corporate tax entities have applied the correct rate of tax or franked at the correct rate in the 2015-16 and 2016-17 income years. Under this approach, the Commissioner will not allocate resources to review the affairs of members in so far as it relates to the franking of distributions in these circumstances. However, this approach will not apply where: 12. In addition, the approach will not apply where a corporate tax entity has attracted ATO compliance activity for reasons unrelated to whether the correct corporate tax rate has been applied by the corporate tax entity. | Written notification informing members: 13. The maximum franking credit entitlement for a member in receipt of a franked distribution is determined by applying the formula in section 202-60 of the Income Tax Assessment Act 1997 (ITAA 1997). Under this section, the corporate tax rate for imputation purposes is used to calculate the maximum franking credit for a distribution. 14. An entity that makes a frankable distribution must give the recipient a distribution statement that includes the amount of the franking credit on the distribution. [2] Ordinarily, where a corporate tax entity has issued an incorrect distribution statement, it would need to apply to the Commissioner for permission to amend and reissue the distribution statement. [3] 15. A corporate tax entity may have issued an incorrect distribution statement for a frankable distribution in the 2016-17 or 2017-18 income years due to: 16. In these circumstances the corporate tax entity may inform its members of the correct franking credit to which they are entitled under the revised corporate tax rate in writing without reissuing the distribution statement. 17. This administrative approach applies in relation to affected frankable distributions made by corporate tax entities in the 2016-17 and 2017-18 income years. 18. The Commissioner will not impose penalties on the corporate tax entity for giving a member an incorrect distribution statement provided it gives written notice to each of its members clearly showing the correct amount of the franking credit. The notice should be provided in the same way as the distribution statement was provided (which may be electronically by email). 19. The corporate tax entity can provide this notice to their members without seeking an exercise of the Commissioner's discretion to allow amendment of the distribution statement. 20. The notice should indicate that the distribution statement previously provided was incorrect and should contain the following details, such that the recipient has enough information to meet their tax obligations for the distribution: 21. The corporate tax entity must adjust its franking account to reflect the fact that the franking debit to the account should be calculated by reference to the correct corporate tax rate. | Amended distribution statement: 22. Alternatively, the corporate tax entity may apply to the Commissioner for permission to amend the distribution statement under section 202-85 of the ITAA 1997. 23. If the Commissioner grants permission, the corporate tax entity would then be able to provide the member with a new distribution statement and no penalty would be imposed for the initial incorrect statement. Example 1 24. ABC Co pays a fully franked distribution to a member of $100. The distribution was made on 31 December 2016 before the Treasury Laws Amendment (Enterprise Tax Plan) Act 2017 became law. Applying the 30% tax rate that applied at that time to ABC Co, the company calculated the franking credit to be allocated to the distribution to be: [$100 * 0.30] / [1 - 0.30] = $42.86 25. ABC Co provides a distribution statement to the member that states that the franking credit on the distribution is $42.86. 26. Subsequently the Treasury Laws Amendment (Enterprise Tax Plan) Act 2017 was passed which reduced the corporate tax rate for small businesses with an aggregated turnover of less than $10 million to 27.5% for their 2016-17 income year. ABC Co meets the criteria for the lower corporate tax rate and maximum franking credit of 27.5% for distributions in the 2016-17 income year. The result is the initial franking credits allocated to the distribution exceed the maximum franking credit for the distribution and the distribution statement is incorrect. 27. Instead of seeking an exercise of the Commissioner's discretion to allow an amended distribution statement, ABC Co sends a letter to each of its members containing the details set out in paragraph 20 of this Guideline, and explaining that the distribution statement was incorrect. 28. When members lodge or amend their tax return, they will be able to use the information in this letter to determine the maximum franking credit on the distribution based on the 27.5% tax rate. Applying section 202-65 of the ITAA 1997 to these facts, this would be calculated as: [$100 * 0.275] / [1 - 0.275] = $37.93 29. No penalty is imposed by the ATO for either the entity or its members.",,,,/law/view/document?LocID=%22COG%2FPCG20188EC%2FNAT%2FATO%2F00001%22&PiT=99991231235958,False,False,https://www.ato.gov.au/law/view/document?docid=COG/PCG20188/NAT/ATO/00001
PCG 2019/4,Final PCG,Retirement villages: ATO compliance approach - exit allocable cost amount calculation at step 4 for certain resident liabilities under lease premium or loan/lease occupancy agreements,,,9. This Guideline applies both before and after its date of issue.,,,TR 2002/14,,"1. This Guideline outlines the ATO's administrative approach to the taxation treatment of certain resident liabilities on exit of a subsidiary member of a consolidated group where that member had entered into a lease premium or participating loan/lease occupancy agreement to which Taxation Ruling TR 2002/14 Income tax: taxation of retirement village operators applies. 2. The resident liabilities that are the subject of this Guideline are: 3. In accordance with the views expressed in TR 2002/14, payments made to discharge a lease surrender liability or an increase entry price liability are deductible in the year in which the operator becomes liable to make the payment to the resident on termination of the lease. [3] These liabilities can, therefore, represent a future income tax deduction. 4. The lease surrender liability or the increase entry price liability are amounts that would be recognised by retirement village operators under the Australian Accounting Standards and principles. Generally, retirement villages are revalued with a lease surrender liability or increase entry price liability recognised at each relevant balance date having regard to fair values and individual resident contract terms. 5. When a subsidiary member that is a retirement village operator leaves the consolidated group ( leaving entity ), the head company of the group must calculate the cost of those membership interests of the leaving entity, under the exit allocable cost amount (ACA) calculation process to work out the capital gain or loss on its disposal. As part of the exit ACA calculation, the group has regard to the leaving entity's accounting liabilities at the leaving time [4] (the step 4 amount). 6. However, the particular accounting treatment of the lease surrender liability and the increase entry price liability and the difference in the treatment of these liabilities for accounting and income tax purposes can create some uncertainty in the calculation of the step 4 exit ACA amount and specifically in the application of subsection 711-45(5) of the ITAA 1997. [5] 7. This Guideline sets out the Commissioner's approach to ensure appropriate adjustments are made at step 4 of the exit ACA calculation for the lease surrender liability or the increase entry price liability that are the subject of this Guideline. Who this Guideline applies to 8. The head company of a tax consolidated group may rely on this Guideline if:",,,"Intro: This Practical Compliance Guideline sets out a practical administration approach to assist taxpayers in complying with relevant tax laws. Provided you follow this Guideline in good faith, the Commissioner will administer the law in accordance with this approach.","Example s: Example 1 - lease surrender liability 11. Company A is incorporated with $100,000 equity and develops an independent living unit for $100,000. 12. A resident commences occupying the unit under a lease premium occupancy agreement and pays a lease premium of $100,000 to Company A. 13. Under the agreement between Company A and the resident, the resident is entitled to 100% of the increase in the entry price payable by a new resident for the unit upon exit. Company A recognises, for accounting purposes, a lease surrender liability owing to the resident for $100,000. The receipt of the lease premium, and the corresponding recognition of the lease surrender liability, are not reflected in Company A's profit and loss account. 14. Company A is acquired by a tax consolidated group for $100,000. 15. At the end of year one, Company A recognises an increase in the value of the unit of $50,000. The lease surrender liability is also increased by $50,000 to $150,000. The change in the lease surrender liability is reflected in Company A's profit and loss account. 16. The tax consolidated group sells its interests in Company A for $100,000. 17. The cost bases for the membership interests in Company A are calculated in accordance with Division 711. For the purposes of the exit ACA calculation, the Commissioner will accept the change in the future deductible lease surrender liability as an amount taken into account for income tax purposes at a later time than under accounting principles when applying subsection 711-45(5). [8] Example 2 - increase entry price liability 18. Company A is established with $100,000 equity and develops an independent living unit for $100,000. 19. A resident commences occupying the unit under a loan/lease occupancy agreement and provides a loan of $100,000 to Company A. 20. Under the agreement between Company A and the resident, the resident is entitled to 100% of the increase in the entry price payable by a new resident for the unit upon exit. Company A recognises a loan liability to the resident for $100,000. 21. Company A is acquired by a tax consolidated group for $100,000. There was no increase entry price liability recognised at the joining time in accordance with its accounting principles for tax cost setting. 22. At the end of year one, Company A recognises an increase in value of the unit of $50,000. Company A recognises a future deductible unrealised increase entry price liability to the resident of $50,000. The change in the increase entry price liability is reflected in Company A's profit and loss account. 23. The tax consolidated group sells its interests in Company A for $100,000. 24. The cost bases for the membership interests in Company A are calculated in accordance with Division 711. For the purposes of the exit ACA, the Commissioner will accept the unrealised increase entry price liability is an amount taken into account for income tax purposes at a later time than under accounting principles, in applying subsection 711-45(5). [9]",,,,False,False,https://www.ato.gov.au/law/view/document?docid=COG/PCG20194/NAT/ATO/00001
PCG 2020/4,Final PCG,Schemes in relation to the JobKeeper payment,,,8. This Guideline applies before and after the date of issue.,,,LCR 2020/1,,,,"9. Section 19 provides that if one or more entities enter into or carry out a scheme for the sole or dominant purpose of obtaining a JobKeeper payment, or an increased amount of a JobKeeper payment, the Commissioner may determine: 10. The Commissioner will be able to recover any overpayments and will have the power to impose significant penalties and interest. This specific integrity provision is aimed at contrived and artificial arrangements that technically satisfy the eligibility requirements, but have been implemented for the sole or dominant purpose of accessing a JobKeeper payment. 11. The Commissioner's determination may be made by having regard to a range of factors, including: 12. Section 19 protects the integrity of the JobKeeper payment framework. It ensures that entities that enter into contrived schemes do not obtain a payment (including an increased amount of payment) they would otherwise not be entitled to.",,"Example s: of schemes to obtain access to a JobKeeper payment 13. This section sets out the ATO's approach to how it will apply its compliance resources to certain schemes that result in an entity obtaining access to the JobKeeper payment, or an increased amount of a JobKeeper payment. The examples are concerned only with the allocation of compliance resources and should not be taken to express a conclusion as to whether the Commissioner should make a determination in any case. The application of the integrity provision would necessarily require careful consideration of all the circumstances. [2] | Example 1: deferring the making of supplies 14. Company A nominates the quarter ending 30 June 2020 to test its projected GST turnover. Its projected GST turnover for that quarter is $1 million, and its GST turnover for the quarter ending 30 June 2019 is $900,000. 15. Due to the industry in which Company A is operating, there is no anticipation of any material impact on its revenue for the period ending 30 June 2020. 16. Despite this, Company A agrees with third-party customers to defer the making of supplies until after 30 June 2020. This results in Company A's projected GST turnover for that quarter being $500,000. The decline in GST turnover from $900,000 to $500,000 meets Company A's relevant decline in turnover threshold. 17. Because Company A's business and operating environment is not significantly affected by external factors beyond its control and the scheme is not entered into in response to any such factors, there is a high risk the Commissioner would apply his compliance resources to consider the application of section 19. 18. For the avoidance of doubt, the Commissioner will apply his compliance resources to schemes of this type regardless of the method by which Company A purports to defer its turnover for a period, for example by not deferring when supplies are made, but deferring the payment of cash, or the issuing of invoices. | Example 2: bringing forward the making of supplies 19. Company B is considering enrolling in the JobKeeper scheme from July. It nominates the quarter ending 30 September 2020 to test its projected GST turnover. Its projected GST turnover for that quarter is $1 million, and its GST turnover for the quarter ending 30 September 2019 is $900,000. 20. Due to the industry in which Company B is operating, there is no anticipation of any material impact on its revenue for the period ending 30 September 2020. 21. Despite this, Company B agrees with third-party customers to bring forward the making of supplies to the quarter ending 30 June 2020. This results in Company B's projected GST turnover for the quarter ending 30 September 2020 declining to $500,000. The decline in GST turnover from $900,000 to $500,000 meets Company B's relevant decline in turnover threshold. 22. Because Company B's business and operating environment is not significantly affected by external factors beyond its control and the scheme is not entered into in response to any such factors, there is a high risk the Commissioner would apply his compliance resources to consider the application of section 19. 23. For the avoidance of doubt, the Commissioner will apply his compliance resources to schemes of the this type regardless of the method by which Company B purports to defer its turnover for a period, such as for example by not bringing forward when supplies are made, but bringing forward the payment of cash, or the issuing of invoices. | Example 3: transfer without any decline in external revenue 24. Company D leases assets to third parties. There is no reduction in the company's projected GST turnover. 25. In order to satisfy the decline in turnover test, Company D transfers all of its assets to a recently incorporated subsidiary. That subsidiary will not pay dividends to Company D until after 30 September 2020. 26. Because Company D's business and operating environment is not significantly affected by external factors beyond its control and the scheme is not entered into in response to any such factors, there is a high risk the Commissioner would apply his compliance resources to consider the application of section 19. | Example 4: employer entity that reduces a service fee 27. Service Company E employs 100 individuals. These employees perform activities on behalf of Operating Company E. 28. For a typical period, Operating Company E will pay a service fee of $750,000 to Service Company E. Service Company E in turn will pay wages of $738,000 to the 100 employees. 29. Operating Company E's GST turnover for the quarter ended 30 June 2019 is $1 million. This turnover is from external parties. Operating Company E's projected GST turnover for the quarter ended 30 June 2020 is $200,000. 30. Service Company E's GST turnover for both quarters remains at $750,000 - because the agreement between Service Company E and Operating Company E provides for that result. 31. Without any change to the agreement between Service Company E and Operating Company E, Service Company E would not have satisfied the decline in turnover test in subsection 8(1) of the Coronavirus Economic Response Package (Payments and Benefits) Rules 2020 (the Payment and Benefit Rules) as there had been no reduction in its projected GST turnover. 32. The group of entities then enter into a scheme the result of which is a reduction in the service fee by an amount that is proportional to the reduction in Operating Company E's external turnover. This scheme results in a reduction of the service fee from $750,000 to $150,000. 33. This means Service Company E does satisfy the decline in turnover test in subsection 8(1) of the Payments and Benefits Rules. 34. Because this scheme is entered into in response to the significant impact the external operating environment has had on the business of Operating Company E where the employees of Service Company E serve (and those external factors are beyond the group's control), there is a low risk the Commissioner would apply his compliance resources to consider the application of section 19. | Example 5: employer entity stands down employees 35. This example involves the same facts as Example 4 except that, due to the changed operations of Operating Company E, Service Company E reduces the amount of labour it provides to Operating Company E under the service agreement and stands down employees or reduces their work hours. This in turn results in a reduction in service fees not by way of a renegotiation between the companies, but simply by virtue of the service agreement itself. 36. Even if the reduction in services fees was a scheme within the meaning of paragraph 1 of this Guideline, because that scheme was entered into in response to the significant impact the external operating environment has had on the business of Operating Company E where the employees of Service Company E serve (and those external factors are beyond the group's control), there is a low risk the Commissioner would apply his compliance resources to consider the application of section 19. | Example 6: employer entity unable to pay 37. This example involves the same facts as Example 4, except Service Company E and Operating Company E are unable or unwilling to enter into a scheme that results in a reduction in the amount of the service fee Operating Company E is obliged to pay. 38. Despite this, it remains possible, depending on the facts and circumstances, that Service Company E will satisfy the decline in turnover test in subsection 8(1) of the Payments and Benefits Rules. This is will be the case if it is reasonable for Service Company E to project that it is unlikely to receive payment for the service fee from Operating Company E. Ascertaining a reasonable estimate can include: 39. Therefore, provided Service Company E can satisfy the requirement that there be a reasonable projection of a decline in projected GST turnover, the Commissioner will be unlikely to apply compliance resources to consider the application of section 19. | Example 7: parent company of a corporate group that reduces management fees 40. Company F is the parent company of a corporate group, and is also the main employer of that group. 41. Subsidiary F1, Subsidiary F2 and Subsidiary F3 are subsidiaries of Company F, and carry on external market-facing businesses. 42. In the past, Company F has charged Subsidiary F1, Subsidiary F2 and Subsidiary F3 management fees on an annual basis. These fees are substantially all of Company F's current and projected GST turnover. 43. The business of each of Subsidiary F1, Subsidiary F2 and Subsidiary F3 is severely impacted by COVID-19, such that the operations of most of the subsidiaries are closed. Individually, all subsidiaries would satisfy the decline in turnover test. 44. Subsidiary F1, Subsidiary F2 and Subsidiary F3 do not pay the management fees or pay a significantly smaller management fee before 30 June such that the decline in turnover test is satisfied. 45. However, if the management fees had been reduced on a pro rata basis throughout the year, the decline in turnover test would not be satisfied. This is because the group had had no decline in revenue for the first nine months of the year. 46. Even if the reduction in management fees was a scheme within the meaning of paragraph 1 of this Guideline, because that scheme was entered into in response to the significant impact the external operating environment has had on Subsidiary F1, Subsidiary F2 and Subsidiary F3 (and those external factors are beyond the group's control), there is a low risk the Commissioner would apply his compliance resources to consider the application of section 19. | Example 8: parent company of corporate group manipulates timing of management fee 47. This example involves the same facts as Example 7, except the business of the group has not been adversely impacted by COVID-19. Instead, the group alters the timing of the payment of management fees merely so that Company F would satisfy the decline in turnover test. 48. Because Company F's business and operating environment is not significantly affected by external factors beyond its control and the scheme is not entered into in response to any such factors, there is a high risk the Commissioner would apply his compliance resources to consider the application of section 19. | Example 9: deferral or reduction of price paid to suppliers so that suppliers obtain a JobKeeper payment 49. Company G carries on a business in an industry that has not been significantly impacted by external factors beyond its control. The company does not satisfy the decline in turnover test and therefore is not entitled to a JobKeeper payment. 50. The company engages subcontractors to perform some of the activities of the business. 51. The company enters into a scheme the result of which is to reduce or defer the consideration paid to the subcontractors for the performance of services. 52. Company G does this so that the subcontractors will satisfy the decline in turnover test and therefore will be eligible for a JobKeeper payment as an eligible business participant. 53. The effect of the scheme is that the JobKeeper payment is being or is intended to be used to finance a temporary or permanent reduction in Company G's expenses, rather than to ensure the maintenance of pre-existing employment relationships (see paragraph 3 of this Guideline), if any. As such, there is a high risk the Commissioner would apply his compliance resources to consider the application of section 19. 54. The Commissioner may also apply compliance resources to investigate whether the subcontractors are eligible business participants on the basis that the relevant individuals are actually employed by Company G. | Example 10: deferral, reduction or waiver of revenue paid to company so a company can obtain a JobKeeper payment 55. Company H enters into a scheme the intended result of which is that the JobKeeper payment will be used to finance a temporary deferral, reduction or waiver of the consideration for the supply of goods and services to its customers. 56. The first step of the scheme is to agree with its customers on the temporary deferral, reduction or waiver. 57. The second step is to rely on the agreed upon deferral, reduction or waiver of consideration to reasonably estimate a reduction in Company H's projected GST turnover. This results in Company H satisfying the decline in turnover test. 58. The third step is to obtain, or attempt to obtain, access to the JobKeeper payment, and use it, or intend to use it, to finance, in whole or in part, the temporary deferral, reduction, or waiver of consideration. 59. The intended effect of the scheme is to cause Company H to become eligible to receive JobKeeper payments in a situation where obtaining JobKeeper payments does not or would not result in the maintenance of pre-existing employment relationships that would not otherwise have been maintained. 60. Further, Company H's business and operating environment has not been significantly affected by external factors beyond its control, and the scheme is not entered into in response to any such factors. Nor is the temporary deferral, reduction or waiver an ordinary commercial offer that would be made outside of the intended access to JobKeeper payments. As a result, there is a high risk the Commissioner would apply his compliance resources to consider the application of section 19.",,,,False,False,https://www.ato.gov.au/law/view/document?docid=COG/PCG20204/NAT/ATO/00001
PCG 2023/1,Final PCG,Claiming a deduction for additional running expenses incurred while working from home - ATO compliance approach,,,1 July 2022,,,PS LA 2001/6 | TR 2011/5 | TR 2020/1,Case References: Kidston Goldmines Ltd v Commissioner of Taxation [1991] FCA 351 30 FCR 77 91 ATC 4538 22 ATR 168,"1. Prior to 1 July 2022, to calculate a deduction for expenses incurred as a result of working from home, taxpayers [1] had the choice of using one of the following methods: 2. From 1 July 2022, taxpayers can continue to claim their actual expenses or, alternatively, they can use the fixed-rate method outlined in paragraphs 23 to 26 of this Guideline. 3. This Guideline outlines the fixed-rate method for calculating the work-related additional running expenses [4] incurred as a result of working from home. It should be read in conjunction with Taxation Ruling TR 93/30 Income tax: deductions for home office expenses, which explains when working from home expenses are deductible. 4. If, on reviewing your deduction for additional running expenses, you are found to have satisfied the requirements set out in paragraph 27 of this Guideline, the Commissioner will not have cause to apply additional compliance resources to reviewing your deduction. 5. If you are found not to have satisfied the requirements set out in paragraph 27 of this Guideline, you will not be able to use the fixed-rate method to calculate your expenses. You will only be able to claim a deduction for your actual expenses. This means you must keep adequate records from the start of the income year to demonstrate: 6. Irrespective of paragraph 5 of this Guideline, if you lodge an objection [6] in relation to your working from home expenses for whatever reason, you cannot rely on using the fixed-rate method in this Guideline to determine whether you are entitled to a deduction for your expenses. Only the actual expenses you incurred as a result of working from home and for which you have adequate records will be allowed as a deduction. [7] 7. This Guideline does not cover occupancy expenses such as rent, mortgage interest, property insurance and land tax. For further information on when you can claim a deduction for and how to apportion occupancy expenses, refer to TR 93/30. 8. All legislative references in this Guideline are to the Income Tax Assessment Act 1997, unless otherwise indicated.",,"9. To be deductible under section 8-1, a working from home expense must be: 10. Further, the expense must not be: 11. Although expenses of capital or of a capital nature are not deductible under section 8-1, a decline in value deduction is allowable under section 40-25 for depreciating assets that are used for the purpose of producing assessable income. [9] 12. Where an expense is only partly incurred in gaining or producing your assessable income, it must be apportioned. Where there is no obvious method of apportioning expenses, it must be done on a fair and reasonable basis. [10] 13. Expenses associated with your home are inherently private and domestic in nature and generally are not deductible. An exception is where you incur additional running expenses as a direct result of working from home. Such expenses are additional to your private and domestic expenditure in relation to your home. 14. The practical compliance approach outlined in this Guideline overcomes difficulties associated with apportioning and calculating the additional expense you actually incur as a result of working from home in respect of: 15. The actual decline in value deduction for the depreciating assets used while working from home (for example, a computer or similar electronic device, desk and office chair), along with any other running expenses not outlined in paragraph 14 of this Guideline, can be claimed separately, provided the requirements of section 8-1 and Divisions 40 and 900, or section 262A of the Income Tax Assessment Act 1936 (ITAA 1936), are satisfied.","Intro: This Practical Compliance Guideline sets out a practical administration approach to assist taxpayers in complying with relevant tax laws. Provided you follow this Guideline in good faith, the Commissioner will administer the law in accordance with this approach.","Example 1: – using the practical compliance approach 29. Gerry is employed as a bookkeeper. He goes into the office to work 3 days a week and works from home 2 days a week. When he is working from home, Gerry uses his employer-provided laptop, his home internet connection and his personal mobile phone. He also turns on the light and the air conditioning or the ceiling fan in the room in which he is working. The cost of the chair and desk that Gerry uses was reimbursed by his employer. 30. As Gerry uses his employer-provided laptop, he is not entitled to claim a decline in value deduction for it. Gerry also cannot claim a decline in value deduction for the chair and desk he uses at home. 31. During the 2024–25 income year, Gerry keeps and retains all relevant records. Based on his record of hours, Gerry worked from home for 768 hours during the income year. 32. As Gerry meets all the criteria in paragraph 18 of this Guideline, he decides to calculate his working from home expenses using the fixed-rate method. He calculates his deduction as: 33. No additional amount is added to the hourly rate as Gerry is not entitled to a decline in value deduction for any of the depreciating assets he uses when he works from home. [20] 34. In his tax return for the 2024–25 income year, Gerry claims a deduction of $537 for his working from home expenses. | Example 2: – cannot rely on the practical compliance approach 35. Dan is employed as a financial adviser. Under the terms of his employment agreement, Dan must be in the office at least 3 days per week and can either work in the office or from home for the other 2 days per week. Dan only works from home if he does not have client meetings, so he does not always work 2 days per week from home. 36. In his tax return for the 2024–25 income year, Dan claims a deduction of $838 for his working from home expenses using the fixed-rate method. 37. In February 2026, Dan's claim for his working from home expenses for the 2024–25 income year is subject to review by the ATO. When he responds to the request to substantiate his claim of $838, Dan sends a document setting out the following calculation: 38. Dan does not provide any records to demonstrate that he worked from home for 784 hours during the income year, nor does he provide any evidence to show he incurred any running expenses. However, he does provide his purchase receipt for the chair that shows it was purchased on 10 December 2024 for $290. 39. When questioned about how he calculated the number of hours he worked from home, Dan indicates that he estimated that he worked from home on average for 2 days each week for around 8 hours a day and that he had 3 weeks' leave during the year. In relation to his running expenses, Dan indicates he incurred electricity, internet and mobile phone expenses and that he might have some documents to demonstrate he incurred them but he would need to look for them. 40. When Dan is asked if he was able to locate one bill for his electricity, internet and mobile phone expenses, Dan indicates that he has been able to locate a mobile phone and internet bill but not any of his electricity bills. However, Dan is able to provide one of his credit card statements showing a payment to an electricity provider on 10 February 2025. 41. Dan cannot rely on the practical compliance approach because he has not kept a record of the hours he worked from home during the income year. Instead, an estimate was provided. 42. However, Dan can claim the actual expenses he incurred as a result of working from home. Based on the evidence Dan has been able to provide, his only deduction will be for his office chair. As the office chair costs less than $300 and was only used for work purposes, Dan's deduction for working from home expenses is reduced from $838 to $290. 43. If Dan objects to his Notice of Amended Assessment for the 2024–25 income year, he is not able to use the fixed-rate method as the basis for his objection. He must use the actual expenses method. The objection would only be allowed if he is able to substantiate that these expenses were incurred as a result of working from home. Explanation of criteria 44. The remainder of this Guideline explains the criteria outlined in paragraph 18 of this Guideline and includes a full worked example which sets out how to calculate your additional running expenses using the fixed-rate method. First criterion – working from home 45. To satisfy this criterion, you must be working from home while carrying out your employment duties or while carrying on your business on or after 1 July 2022. The work has to be substantive and directly related to your income-producing activities. As such, minimal tasks such as occasionally checking emails or taking phone calls while at home will not qualify as working from home for the purposes of subparagraph 18(a) of this Guideline. | Example 3: – not working from home 46. Amanda is employed as a paramedic. Her rosters are sent to her by email each week. If Amanda does not check her roster while she is on duty at her usual station, she checks the roster at home using her laptop. 47. This would not qualify as working from home as Amanda only occasionally uses her laptop to check her roster for the upcoming week. As such, this Guideline will not apply to Amanda. | Example 4: – working from home 48. Zachary is employed as a salesperson. He works from his employer's office 4 days per week and he works from home one day per week. Zachary does not have a separate room in his house set up as a home office. He works at a desk in his lounge room. Zachary is working from home one day per week when he is working in his lounge room and can rely on this Guideline if he meets the other criteria outlined in paragraph 18 of this Guideline. Second criterion – incurring deductible additional running expenses 49. To satisfy this criterion, you must incur one or more additional running expenses of the kind outlined in paragraph 23 of this Guideline which are deductible under section 8-1 as a result of working from home. You do not have to incur every running expense listed at paragraph 23 of this Guideline. An additional running expense will be incurred when the amount of the expense is actually paid or a definitive obligation to pay the amount of the expense arises. [22] 50. In circumstances where a third party (for example, your employer) reimburses you for all your additional running expenses or is incurring all the additional running expenses on your behalf, you will not satisfy this criterion. 51. Records of the hours you worked from home during the income year and invoices or bills [23] in the name of the home owner or service recipient represent evidence that additional running expenses have been incurred. Where invoices and bills are in the name of one member of the household but the cost is shared, each member of the household who contributes to the payment of that expense will be taken to have incurred it. For example, this can include family circumstances such as a husband and wife, or where 2 unrelated parties share accommodation and both contribute to the cost of expenses jointly. This does not include paying board as these arrangements are generally private in nature. | Example 5: – incurring additional running expenses 52. Pierre runs a plumbing business. When he gets home each day, he sends out invoices to his clients, calls clients, orders or purchases parts that he will need for certain jobs he has booked in, checks his bank account for client payments and emails a reminder to clients whose payments are overdue. He does this work using his computer, his home internet connection and his mobile phone. Pierre's mobile phone bill is in his name so he has incurred the expense. However, his electricity bills are in his partner's name and the internet bill is in his and his partner's name. All of Pierre's household expenditure is paid from a joint bank account, so Pierre is considered to have incurred the electricity and internet expenses as well. 53. If Pierre meets the other requirements in paragraphs 18 of this Guideline, he can rely on this Guideline to calculate his additional running expenses. | Example 6: – not incurring additional running expenses 54. Sergei is employed as a graphic design artist. He works in the office 3 days per week and works from home 2 days per week. Sergei lives with his parents and when he works from home, he works in his bedroom using his employer-provided laptop and mobile phone. Sergei does not pay his parents any rent and he does not contribute to any of the household bills. 55. Although Sergei is carrying out his employment duties while working from home, he is not incurring additional running expenses. Accordingly, Sergei is not entitled to a deduction for additional running expenses and he cannot rely on this Guideline. Third criterion – keeping and retaining relevant records 56. To satisfy this criterion and to rely on this Guideline, you must keep: 57. If, in addition to the fixed rate per hour outlined in subparagraph 26(a) of this Guideline, you are claiming a deduction for the decline in value of depreciating assets used while working from home, you must keep: Hours worked 58. For the 2023–24 and later income years, you must keep a record for the entire income year of the number of hours you worked from home during that income year. An estimate for the entire income year [29] or an estimate based on the number of hours you work from home during a particular period and applied to the rest of the income year will not be accepted. A record of your hours for the income year can be in any form, provided it is kept contemporaneously. For example, records may be kept in one of the following forms: 59. For the 2022–23 income year only, you need to keep: Running expenses covered by rate per hour 60. You must also keep evidence, as outlined in paragraphs 61 and 62 of this Guideline, for each of the additional running expenses [30] that you incurred. [31] The documents you need to keep to demonstrate that you have incurred additional running expenses must show what the expense is and that you incurred the expense. 61. For energy, mobile and home phone usage and internet expenses, you must keep one monthly or quarterly bill. [32] If the bill is not in your name, you will also have to keep additional evidence showing you incurred the expenses – for example, a joint credit card statement showing payment or a lease agreement showing you share the property, and therefore the expenses, with others. 62. For stationery and computer consumables, which are occasional expenses, you must keep one receipt for an item purchased. 63. If you do not keep evidence of the total hours you worked from home and for each of the running expenses you incurred, you will not be able to rely on this Guideline to calculate your additional running expenses. Decline in value 64. As the decline in value of depreciating assets is not covered by the fixed rate per hour outlined in paragraph 26A of this Guideline, to claim a deduction for decline in value you must keep the written evidence required by Division 900 and also section 262A of the ITAA 1936. [33] 65. For each depreciating asset used as an employee to carry out your employment duties, you must keep a document which shows the: 66. If the document given to you by the supplier does not specify the nature of the asset, you may write in the missing details yourself before you lodge your tax return for the income year in which you first claim a deduction for the decline in value of the asset. [35] You must also keep records which demonstrate your work-related use of the depreciating asset. This can be evidenced by records of a representative 4-week period that show personal and income-producing use of the depreciating assets. 67. For depreciating assets used in carrying on a business, you must keep records that record and explain all transactions. [36] These records include any documents that are relevant for the purpose of ascertaining your expenditure and documents containing any election, choice, determination or calculation and particulars showing the basis of any calculations made. [37] | Example 7: – keeping and retaining relevant records 68. Pamela is employed as a solicitor. She works from home some evenings or on the weekend, in order to meet deadlines. The number of hours Pamela works from home varies from week to week. 69. During the income year, Pamela keeps a record of the total number of hours she spends working from home. She does this by making an entry in her electronic calendar when she starts and finishes working from home on a particular day. 70. When she is working from home during the income year, Pamela incurs electricity and internet expenses. Pamela is also claiming the decline in value of a desk and a laptop computer she uses when she works at home. 71. To show she has incurred additional running expenses, Pamela keeps: 72. Pamela has kept relevant records for the income year. If Pamela meets the other criteria in paragraph 18 of this Guideline, she can rely on this Guideline to calculate her additional running expenses. Worked example 73. A full worked example has been set out in paragraphs 74 to 89 of this Guideline to assist you in determining whether you can apply the practical compliance approach outlined in paragraph 27 of this Guideline. | Example 8: – employee who meets requirements and uses the fixed-rate method 74. Piruntha is employed as software engineer. In November 2024, Piruntha's employer decides to give their employees some flexibility by allowing them to work from home. However, each employee must work from the office at least 3 days per week. Piruntha decides to take advantage of this arrangement and work at the office 3 days per week and from home 2 days per week. To work from home, Piruntha sets up a room in her home as an office. 75. On 1 December 2024, Piruntha purchases a laptop for $1,499, a desk for $250 and an office chair for $299. She also purchases some stationery to use while she is working from home. 76. On 6 December 2024, Piruntha commences working from home. When working from home, she uses the lights in her home office, as well as her laptop, her personal internet connection and her personal mobile phone (which she also uses when she is working at her employer's office and for private purposes). 77. Up until the end of February 2025, Piruntha uses her air conditioning to cool her home office and from around April 2025 until 30 June 2025, she uses her gas heating to warm the room. 78. Piruntha keeps a record of the time she spends working from home during the 2024–25 income year, which shows she worked a total of 560 hours at home. For a representative 4-week period, Piruntha keeps records which show that she uses her laptop, desk and office chair for around 5 hours per week while she is gaming and internet shopping and around 20 hours per week for work purposes. 79. Piruntha also keeps one quarterly invoice for her electricity and gas expenses, one monthly internet bill and one monthly mobile phone bill for the period 6 December 2024 to 30 June 2025. She also keeps the receipt for the stationery she purchased on 1 December 2024. 80. At the end of the 2024–25 income year, Piruntha determines that she meets all the criteria set out in paragraph 18 of this Guideline because she: 81. As such, she decides to calculate her additional running expenses using the fixed-rate method. 82. First, Piruntha multiplies the total number of hours she worked from home by the hourly rate. Her calculation is: 83. This is Piruntha's deduction for her electricity, gas, mobile phone, internet and stationery expenses. 84. As the desk and office chair Piruntha purchased cost less than $300, she can claim the full purchase price of them in the 2024–25 income year. However, she must reduce her deduction for her private use of those items. [38] Piruntha works out her private and work-related use of her depreciating assets as follows: 85. The decline in value deduction (related to her work-related use) for the desk and chair is: 86. To calculate the decline in value of her laptop, Piruntha uses the depreciation and capital allowances tool on the ATO's website and chooses to use the diminishing value method. The tool calculates the decline in value of the laptop as: 87. To work out the total amount of her deduction for the additional running expenses she incurred as a result of working from home during the 2024–25 income year, Piruntha adds the amount calculated using the hourly rate to the work-related decline in value of her laptop, desk and chair. This is calculated as: 88. When she lodges her 2024–25 tax return, Piruntha includes a deduction of $1,527 for her working from home expenses at the other work-related expenses question. 89. Even though Piruntha also uses her personal mobile phone for work when she is in the office, she cannot claim any additional deduction for this work-related use of her phone in her 2024–25 tax return.",,,/law/view/document?LocID=%22COG%2FPCG20231EC%2FNAT%2FATO%2F00001%22&PiT=99991231235958,False,False,https://www.ato.gov.au/law/view/document?docid=COG/PCG20231/NAT/ATO/00001
PCG 2024/1,Final PCG,Intangibles migration arrangements,,,17 January 2024,,,PS LA 2005/24 | PS LA 2017/2 | TA 2018/2 | TA 2022/2 | TR 2004/1 | TR 2014/6 | TR 2014/8,,"1. This Guideline explains when we are likely to apply resources to consider the potential application of the general anti-avoidance rules (GAARs) or the transfer pricing rules to certain cross-border related party Intangibles Migration Arrangements with respect to structuring issues and tax risks associated with: 2. Our compliance approach in relation to the pricing aspects of Intangibles Migration Arrangements is not covered by this Guideline. Where the basic rule in section 815-130 of the Income Tax Assessment Act 1997 (ITAA 1997) applies, transfer pricing in respect of, and valuation of, an intangible asset is dependent on the facts and circumstances. It is therefore beyond the scope of this Guideline to specify the level of risk associated with the pricing or valuation outcomes for particular related party dealings which arise in connection with properly characterised Intangibles Migration Arrangements. 3. In this Guideline: 4. This Guideline does not address our compliance approach to other tax issues that might arise in connection with Intangibles Migration Arrangements (for example, tax risks associated with amounts not being appropriately characterised as royalties, including but not limited to those outlined in Taxpayer Alerts TA 2018/2 Mischaracterisation of activities or payments in connection with intangible assets [4] , or TA 2022/2 Treaty shopping arrangements to obtain reduced withholding tax rates). [5] 5. For the avoidance of doubt, our compliance approach with respect to the proposed multinational tax integrity measure (Denying deductions for payments relating to intangible assets connected with low corporate tax jurisdictions) [6] is not covered by this Guideline. 6. Additional schedules or changes to the Risk Assessment Framework may be included in this Guideline in the future to provide further guidance about Intangibles Migration Arrangements in response to what the ATO is seeing. How to use this Guideline 7. You can use the framework set out in this Guideline to understand: Structure of this Guideline 8. This Guideline is divided into the following parts:",,,"The ATO's role and compliance approach: 11. We will have regard to our risk assessment framework in assessing and identifying compliance risks in scope of this Guideline that are associated with these arrangements. If we review your Intangibles Migration Arrangements, we may consider other factors beyond those contained in this Guideline, having regard to the relevant facts and circumstances of your Intangibles Migration Arrangements. 12. This Guideline sets out our compliance approach in relation to the tax risks in scope of this Guideline. The risk assessment framework of this Guideline does not assess the level of risk associated with other tax risks that might arise in connection with Intangibles Migration Arrangements, or the pricing or valuation outcomes. A risk rating under this Guideline therefore will not affect our compliance approach in relation to those issues and risks. 13. This Guideline does not reflect a statement of the Commissioner's interpretation of the taxation laws. [7] The information provided in this Guideline does not replace, alter or affect our interpretation of the law in any way or relieve you of your legal obligations in complying with all relevant tax laws. 14. Australia's income tax law places an onus on taxpayers to self-assess their compliance with relevant tax laws. In some cases, Subdivision 815-B may require the identification of arm's length conditions with regard to arrangements or circumstances different from the form of your Intangibles Migration Arrangements (the exceptions to the basic rule contained in subsections 815-130(2) to (4)). In these cases, we will have specific regard to relevant ATO views, such as Taxation Ruling TR 2014/6 Income tax: transfer pricing – the application of section 815-130 of the Income Tax Assessment Act 1997. 15. To the extent relevant and appropriate, any action we may take in applying the transfer pricing provisions will be made so as to best achieve consistency with the relevant transfer pricing guidelines published by the OECD. [8] This includes our risk assessment approach to the application of transfer pricing provisions in relation to the tax risks in scope of this Guideline. Of particular relevance are Chapters I, VI and IX of the OECD Transfer Pricing Guidelines. [9] 16. While valuation and pricing outcomes are outside the scope of this Guideline and are not part of the risk assessment framework, in reviewing Intangibles Migration Arrangements, we also review Intangibles Migration Arrangements to ensure they properly comply with other Australian tax obligations with regards to the recognition of gains associated with intangible assets and Australian DEMPE activities, such as those imposed by the capital gains tax (CGT), capital allowance provisions and provisions in relation to the recognition of gains from the results of certain R&D activities under Division 355. [10] We will have regard to evidence relevant to the tax and profit outcomes of your Intangibles Migration Arrangement in doing so. 17. We may also consider the application of the GAARs (including the diverted profits tax (DPT)) [11] , particularly in circumstances where an arrangement (or a part of an arrangement) lacks substance or there is insufficient objective probative evidence of the stated non-tax or commercial rationale for the arrangement (or any part of the arrangement). In these circumstances, we will have specific regard to our administrative processes and published guidance including Law Administration Practice Statements PS LA 2005/24 Application of General Anti-Avoidance Rules and PS LA 2017/2 Diverted profits tax assessments, and Practical Compliance Guideline PCG 2018/5 Diverted profits tax. The application of the GAARs might preclude the application of the transfer pricing, CGT or capital allowance provisions, for example, if the alternative postulate is that there would have been no transfer or licensing of intangible assets rather than a dispute about the conditions or the consideration that should have applied to the transfer or licensing of intangible assets. 18. Our compliance approach will vary depending on the risk zone of your Intangibles Migration Arrangement. The risk rating will influence whether and how we are likely to engage with you to understand your Intangibles Migration Arrangement: 19. If your arrangement is in the green zone (lower risk), we will not apply our resources to further examine or audit your arrangement with respect to tax risks in scope of this Guideline, other than to verify your self-assessment. 20. If your arrangement is in the blue zone (lower to medium risk) or amber zone (medium risk), we may engage with you to understand the compliance risks of your Intangibles Migration Arrangement. In our engagement with you, we will have regard to the risk rating of your arrangement. The higher the risk rating, the more likely it is that we will seek evidence beyond your risk assessment as part of any review. 21. If your arrangement is in the red zone (higher risk), we will prioritise our resources to review your arrangement. This may involve commencing a further review or audit. The red zone is a reflection of the features that we consider indicate greater risk; however, it is not a presumption that there is necessarily non-compliance with Australian tax law. We will have regard to the relevant facts and circumstances, including evidence verifying the commercial or non-tax rationale, when we review your Intangibles Migration Arrangement. 22. If your Intangibles Migration Arrangement is in the white zone, you do not need to apply the risk assessment framework. We are unlikely to apply compliance resources to further re-examine your arrangement beyond verifying that you can substantiate that the conditions for white zone have been met. 23. Your Intangibles Migration Arrangement is in the white zone if any of the following apply to your Intangibles Migration Arrangement for the current year: AND 24. Where you are seeking entry to the advance pricing arrangement (APA) program, we will have regard to your risk rating in accordance with our risk assessment framework. [13] We will also have regard to evidence of the nature identified in this Guideline with respect to your Intangibles Migration Arrangements both when you are seeking entry to the APA program, as well as during the APA period. 25. If, having considered the compliance risks presented by your arrangements in accordance with our risk assessment framework, you consider there is a potential compliance risk associated with your Intangibles Migration Arrangements, you can engage with us by contacting IntangiblesArrangements@ato.gov.au . Alternatively, if you have a dedicated relationship manager, you may approach them directly for assistance with your Intangibles Migration Arrangement. Engaging with us early, including prior to entering into your Intangibles Migration Arrangements, will assist us to cooperatively work with you to assure your arrangement or resolve any issues that may be associated with your Intangibles Migration Arrangements. | Reporting your self-assessment: 26. You may be required to report your risk rating for each Intangibles Migration Arrangement or on another basis. For example, you may have other disclosure requirements if you are required to complete a reportable tax position schedule. 27. It is best practice to apply this Guideline to assess your Intangibles Migration Arrangements, however, we will not require reporting of the risk rating in relation to past Migration in reportable tax position schedules beyond a period specified in the relevant instructions. 28. While we may not require the reporting of risk rating for past Migration in reportable tax position schedules, we may still review such arrangements and you should consider our evidence expectations. | Evidencing your self-assessment: 29. We may engage with you to verify your self-assessment, having regard to your application of our risk assessment framework and our evidence expectations (as outlined in Part 3 and Appendix 2 to this Guideline). 30. We may also prioritise our resources to further examine or audit your Intangibles Migration Arrangements where we are unable to obtain evidence to substantiate your self-assessment against our risk assessment framework, notwithstanding that your Intangibles Migration Arrangement may be in a lower risk zone based on the risk assessment framework. | PART 2 – Our risk assessment framework: 31. This Part is designed to explain how to assess the compliance risks of your Intangibles Migration Arrangements. 32. Our risk assessment framework includes an assessment of the risk of your Intangibles Migration Arrangements based on risk factors set out in Risk Assessment Framework Tables 1 and 2 in this Part, which cover the features of arrangements that we consider indicate compliance risks. 33. In this risk assessment framework: 34. Your self-assessment will involve an assessment of your Intangibles Migration Arrangements against each of the risk factors in the applicable table to determine the risk rating of your arrangement with respect to that risk. | each: 35. You should apply our risk assessment framework to Intangibles Migration Arrangement that you have during the income year before tax returns for the relevant income year are lodged. | Identifying Intangibles Migration Arrangements: 36. For the purposes of applying this Guideline, arrangements (whether or not in writing) relating to the DEMPE or Migration of multiple intangible assets should be treated as one Intangibles Migration Arrangement if, having regard to the facts and circumstances, it is more reasonable and appropriate to treat them as one Intangibles Migration Arrangement. For example: 37. There can be more than one Relevant Entity [15] in relation to one Intangibles Migration Arrangement – for example, if you have engaged different entities to perform contract R&D and contract manufacturing activities related to the same product, those entities are relevant entities in relation to the one Intangibles Migration Arrangement. 38. The examples in Appendix 1 to this Guideline illustrate how the principles of grouping can be applied to identify Intangibles Migration Arrangements in applying the risk assessment framework. | Excluded Intangibles Arrangements: 39. An arrangement is an Excluded Intangibles Arrangement if, once you have identified your Intangibles Migration Arrangements in accordance with paragraphs 36 to 38 of this Guideline, it is in one of the following 3 categories. 40. These exclusions from the scope of the Guideline are to make it easier for you to apply this Guideline. These exclusions do not represent an assessment of other tax and transfer pricing risks that are outside of the scope of this Guideline (such as the characterisation of payments or receipts, for example, the tax risks described in TA 2018/2). 41. The exclusions do not preclude us from reviewing your arrangements if consideration of the facts and circumstances indicate that further compliance activities are appropriate. | Excluded Outbound Distribution Arrangement: 42. An arrangement is an Excluded Outbound Distribution Arrangement if all of the following criteria are satisfied: | Excluded Inbound Distribution Arrangement: 43. An arrangement is an Excluded Inbound Distribution Arrangement if all of the following criteria are satisfied: | Excluded Low Value Services Arrangement: 44. It is important to note that this exclusion only applies if your self-assessment reflects the substance of the arrangement as a low value adding intra-group service arrangement. 45. An arrangement is an Excluded Low Value Services Arrangement if it is an arrangement under which you receive or provide low value adding intra-group services that: | or: 46. The materiality threshold f outbound low value services arrangement is met if the costs of the relevant services you provide under the arrangement is $2 million or less, or not more than 10% of the total expenses of your Australian economic group [18] , whichever is lower. 47. Examples of low value adding intra-group services arrangements include: 48. For the purposes of this Guideline, a service between related parties is not a low value adding intra-group service if it: | not: 49. Services that are low value adding intra-group services [19] include: | each: 50. If you have more than one Intangibles Migration Arrangement, complete the risk assessment framework in relation to Intangibles Migration Arrangement. [20] The risk assessment framework is also depicted in Diagram 1: Diagram 1: Roadmap to the risk assessment framework 51. Answer the following questions to apply the risk assessment framework to each of your Intangibles Migration Arrangements: | Risk rating: 52. For each of your Intangibles Migration Arrangements, your risk zone rating is determined by the number of points you score in either RAF Tables 1 or 2 of this Guideline: 53. The risk rating under each RAF table reflects the assessment of the compliance risks posed by an arrangement with respect to a Migration of intangible assets or the mischaracterisation or non-recognition of Australian activities connected with intangible assets respectively. 54. If you achieve a different risk rating under the 2 RAF tables, the higher risk rating would be the overall risk rating for an Intangibles Migration Arrangement. | Definition of terms used in the risk assessment framework: 55. The following terms are used in the risk assessment framework. A reference to the singular is also a reference to the plural. 56. For the purpose of RAF Table 1, related arrangements are arrangements that are connected to the restructure or change. Examples include but are not limited to: | Risk Assessment Framework Table 1 – risk factors – Migration of your intangible assets: 57. Complete RAF Table 1 to assess the compliance risks in relation to a Migration of intangible assets. 1. Did you have a restructure or change associated with intangible assets held by you or from which you benefit (whether in legal form or in substance), where any of the following apply? For example, there has been a change in your activities such that you are no longer considered to be an 'entrepreneur' and have become a 'distributor' or 'service provider', or where the activities of your international related party in relation to those intangible assets have changed such that they have become an 'entrepreneur' instead of a 'service provider' to you. Examples include but are not limited to: 3. Following the restructure or change identified in Question 1, what is the category that best describes the circumstances of the Relevant Entity in connection with the Relevant Intangible Assets? In this question, references to Relevant Intangible Assets include intangible assets related to the Relevant Intangible Assets that Question 2 applies to. Where there is more than one Relevant Entity in your Intangibles Migration Arrangement, include the score for the Relevant Entity with the highest number of points. | Category 1 (assign 15 points ): if any of the following apply: | Category 2 (assign 10 points ): if any of the following apply: | Category 3 (assign 5 points ): if all of the following apply in relation to the current income year: | Category 4 (assign 0 points ): if any of the following apply: 4. Is the Relevant Entity a tax resident in the jurisdiction which is also the jurisdiction in which the products or services related to the Relevant Intangible Assets are predominantly sold to unrelated or third parties? | and 5 points.: If yes, and if the circumstances of the Relevant Entity are best described as Category 2 or 3, you can subtract 5 points. | 10 points 20 points: 5. Do any of the following apply to the Intangibles Migration Arrangement? Assign 10 points if one of the following apply, assign 20 points if 2 or more apply. In this question, references to Relevant Intangible Assets include intangible assets related to the Relevant Intangible Assets that Question 2 applies to. | 15 points.: If only (g) applies, your risk score for this question is | 10 points: 6. Where there is more than one Relevant Entity in your Intangibles Migration Arrangement, include the score for the Relevant Entity with the highest number of points for this question. Assign if, as a result of the restructure or change identified in Question 1, excluding the upfront gains arising from the restructure or change in the year of the transaction (whether capital or revenue) [31] , your taxable income is, or might reasonably be expected to be, less than it would have been if the restructure or change had not been entered into. In considering your response to this question, take into account the outcomes of the restructure or change over the life of the arrangement or the life of the intangible assets. | 15 points: 7. Assign if your arrangement is of the kind described in Example 3 in Appendix 1 to this Guideline, where the Relevant Entity is substantially using or directly benefiting from your intangible assets and: While this is dependent on the facts and circumstances, examples of where this can apply include: | Risk Assessment Framework Table 2 – risk factors – other Intangibles Migration Arrangements: 58. Complete RAF Table 2 if, during the income year, you had an Intangibles Migration Arrangement involving Australian activities in connection with intangible assets held offshore. 59. If you have applied RAF Table 1 to a Migration that took place in the current year, you do not need to apply RAF Table 2 in relation to the resulting arrangement in the same year. However, you should apply RAF Table 2 to assess any ongoing arrangement in subsequent years. 60. You may need to also complete RAF Table 1 if your current Intangibles Migration Arrangement is connected to a past restructure or change (see Section D). Refer to paragraphs 26 to 28 of this Guideline for our expectations regarding reporting of your self-assessment in relation to a past restructure or change. 1. Under the arrangement, do you undertake development, enhancement, maintenance or protection (DEMP) activities in connection with intangible assets for the benefit of an international related party (Relevant Entity) that holds, or has legal or economic ownership of the intangible assets (Relevant Intangible Assets)? | yes, 1 – 10 points 2 – 15 points 3 – 20 points),: If your answer is yes, assign the following risk score depending on how many of the following DEMP activities apply to you (that is, 1 – 10 points , 2 – 15 points , 3 – 20 points), and proceed to the next question. Examples include manufacturing activities, marketing activities, installation, customisation or other support services for digital products, conducting regulatory functions [32] to seek market access and authorisation. | no,: If your answer to this question is apart from considering whether or not you need to also complete RAF Table 1 in relation to a connected Migration in the past (see Question 5), you do not need to proceed with the rest of this Risk Assessment Framework Table for this arrangement. 2. What is the category that best describes the activities of the Relevant Entity in connection with the Relevant Intangible Assets? In answering this question, the 'Relevant Entity' is the related party that has granted the right to use, or otherwise made available the intangible assets to you. [33] Where there is more than one Relevant Entity in your Intangibles Migration Arrangement, include the score for the Relevant Entity with the highest number of points. | Category 1 (assign 15 points ): if any of the following apply: | Category 2 (assign 10 points ): if any of the following apply: | Category 3 (assign 0 points ): if any of the following apply: | and 5 points.: 3. If the circumstances of the Relevant Entity are considered to be Category 1 or 2, and you receive and include residual profits [36] (or a share of the residual profits) associated with the use of the Relevant Intangible Assets in your Australian assessable income in the current income year, you can subtract 5 points. | 5 points: 4. Do any of the following apply to the Intangibles Migration Arrangement? Assign if one or more of the following apply: 5. Do any of the following apply to your Intangibles Migration Arrangement? | yes,: If you need to also complete RAF Table 1 of this Guideline in relation to the past restructure or change. | PART 3 – Our evidence expectations: 61. Appendix 2 to this Guideline sets out the types of evidence that we are likely to have regard to when examining your Intangibles Migration Arrangements and would typically expect taxpayers to be able to produce to substantiate their arrangements. 62. As explained in Part 1 of this Guideline and our compliance approach, the higher the risk rating, the more likely it is that we will seek evidence beyond your self-assessment as part of any review of an arrangement. The risk rating of your arrangement will also influence the type and level of evidence we expect from you to substantiate the arrangement. 63. The evidence outlined in Appendix 2 to this Guideline is intended to serve as a general guide and should not be treated as an exhaustive list. It is not the intention of this Guideline to unnecessarily impose burdensome requirements on you in respect of the evidence required to substantiate your Intangibles Migration Arrangements. However, setting out the kinds of information and documents we are likely to request may assist you to mitigate the level of compliance risk posed by your Intangibles Migration Arrangements and ensure that any engagement with us is as efficient as possible. 64. We recognise that certain evidence identified in Appendix 2 to this Guideline may not be relevant to the facts and circumstances of your Intangibles Migration Arrangements or that it may be difficult for you to assess the degree of evidence that is expected. In these circumstances, your substantiation should focus on whether there is sufficient evidence to enable us to verify the information and to reach a proper assessment of your Intangibles Migration Arrangements. 65. The type and level of evidence we expect from you will be influenced by the complexity of your business and the extent to which your Intangibles Migration Arrangements contribute to that business. We will also consider your business systems and governance processes, including any appropriate materiality thresholds that you apply or follow in your business in relation to the management or governance of your, or your global group's, intangible assets, to focus on evidence that can reasonably be expected to be created and relied on in your business. 66. The expectations outlined in this Part and Appendix 2 to this Guideline should not be viewed as replacing or substituting the requirements for transfer pricing documentation under Subdivision 284-E of Schedule 1 to the TAA (refer to Taxation Ruling TR 2014/8 Income tax: transfer pricing documentation and Subdivision 284-E). Notwithstanding that, our Evidence Expectations may assist you in being able to support and verify your transfer pricing documentation for the purposes of Subdivision 284-E of Schedule 1 to the TAA.",,"Appendix 1: – Examples of Intangibles Migration Arrangements 67. This Appendix provides examples of Intangibles Migration Arrangements to illustrate the kinds of matters we will generally consider in assessing the compliance risks relating to your Intangibles Migration Arrangements. The application of the risk assessment framework is also included to illustrate how the framework applies to arrangements. They highlight the circumstances in which we consider the compliance risks that may be associated with your Intangibles Migration Arrangements and the facts that may support this assessment. 68. It is important to note that any reference to a particular intangible asset, industry or commercial activity in the examples is illustrative and does not limit the particulars of an example arrangement to any one industry. Example 2 – bifurcation of intangible assets Example 3 – non-recognition of Australian intangible assets and DEMPE activities Example 4 – Migration of pre--commercialised intangible assets Example 5 – Migration of pre-commercialised intangible assets Example 6 – transfer of intangible assets to a foreign hybrid entity Example 7 – bifurcation of intangible assets Example 8 – cost contribution arrangement Example 11 – contract research and development arrangement Example 13 – contract research and development arrangement Example 14 – cost contribution arrangement Example 1 – centralisation of intangible assets – red zone Diagram 2: Example 1 – overview of original arrangement Original arrangement 69. AusCo is part of a global group that manufactures, markets and sells goods and provides services associated with those sales. AusCo and its international related parties exploit valuable intangible assets in undertaking their operations. The intangible assets include patents, know-how, trade marks, copyright and other intangible assets or rights (Existing Intangibles). These Existing Intangibles are naturally grouped together in the internal systems and governance processes of the AusCo's global group. 70. AusCo owns, manages and controls DEMPE activities associated with the Existing Intangibles and assumes associated risks. AusCo derives royalties from its international related parties for the exploitation of the Existing Intangibles globally under licence agreements between AusCo and its international related parties (Original Licence Agreements). Decision to centralise intangible assets 71. AusCo and the global group decide that the Existing Intangibles and any new or future intangible assets that are created or developed (New Intangibles) should be centralised in a new entity (NewCo) to be located in a foreign jurisdiction, where NewCo is expected to qualify for a tax concession for income derived from intangible assets. The New Intangibles will initially comprise adaptations of the patents, know-how, trade marks, copyright and other intangible assets or rights that form part of the Existing Intangibles. 72. As a result of the decision to centralise, AusCo enters into a licence agreement (Existing Intangibles Licence) with NewCo to transfer the rights to the Existing Intangibles to NewCo. The term of the Existing Intangibles Licence is based on a period determined to reflect the remaining useful life of the Existing Intangibles at the time. Under the Existing Intangibles Licence, NewCo will pay royalties to AusCo for the right to exploit and sub-licence the Existing Intangibles to other international related parties, including AusCo. These royalties decline over the term of the Existing Intangibles Licence and are based on a formula designed by staff in AusCo's finance department to reflect the declining value of the Existing Intangibles over the term of the Existing Intangibles Licence. 73. The Original Licence Agreements between AusCo and its international related parties are terminated. No payments are made to AusCo as a result of the termination. AusCo and its international related parties subsequently execute a master Licence Agreement with NewCo (New Intangibles Licence). Under this agreement, NewCo receives worldwide royalty income from the rights to exploit the Existing Intangibles and any New Intangibles developed. 74. NewCo and AusCo also enter into a contract R&D Services Agreement. Under this agreement, AusCo will provide R&D services to NewCo in relation to the New Intangibles in return for a fee determined with regard to the costs incurred by AusCo in the provision of the R&D services. Any New Intangibles that are developed as a result of the R&D undertaken by AusCo under the R&D Services Agreement will be owned by NewCo. Diagram 3: Example 1 – overview of new arrangement New arrangement 75. In the first year following the centralisation of the intangible assets in NewCo, the functions performed, assets used, and risks assumed by AusCo do not substantially change. AusCo continues to employ the same specialised staff and use its expertise and assets to manage, perform and control DEMPE activities associated with the New Intangibles. While the development of the Existing Intangibles ceased as a result of the New Arrangement, AusCo continued to perform and control the management and exploitation of the Existing Intangibles. The functions performed, assets used, and risks assumed by AusCo under the R&D Services Agreement with NewCo result in the development of New Intangibles. The R&D Services Agreement states that the New Intangibles are owned by NewCo. The use of the New Intangibles is subject to the New Intangibles Licence, where AusCo and its international related parties pay royalties to NewCo. NewCo manages and performs limited DEMPE activities and assumes limited risks in connection with the Existing Intangibles or the New Intangibles. 76. In the second year following the centralisation of the intangible assets to NewCo, NewCo hires some additional staff and acquires additional assets to assist it in the management of DEMPE activities. These staff and assets are not sufficient to allow NewCo to wholly manage, perform or control the DEMPE activities connected with the New Intangibles and the Existing Intangibles and assume the associated risks. AusCo continues to undertake the majority of the DEMPE activities while receiving cost-based remuneration under the R&D Services Agreement and declining royalties under the Existing Intangibles Licence. NewCo receives royalty income from AusCo and its international related parties for the use and exploitation of the Existing Intangibles and New Intangibles. Risk assessment 77. This is a Migration of intangible assets. The relevant Intangibles Migration Arrangement includes all dealings with international related parties in relation to Existing Intangibles and New Intangibles, which are closely related intangible assets. 78. This is not an Excluded Intangibles Arrangement. It is not an Excluded Outbound Distribution Arrangement because NewCo does not merely have limited rights to the intangible assets for the purposes of distribution in that jurisdiction only, nor is it an Excluded Low Value Services Arrangement. 79. According to RAF Table 1 of this Guideline, the risk assessment is as follows: 80. The total risk score in relation to the New Arrangement is 40. [39] The New Arrangement would be regarded as a red zone (higher-risk) Intangibles Migration Arrangement. 81. AusCo continued to perform and control DEMPE activities with respect to the Existing Intangibles and the New Intangibles. The New Arrangement does not appropriately recognise AusCo's contributions to the New Intangibles, either through a recognition of the intrinsic link between the Existing and New Intangibles or a recognition of the DEMPE activities performed by AusCo in substance in relation to the New Intangibles. 82. Had the New Arrangement not occurred, AusCo would have continued to own and derive income from the exploitation of the Existing Intangibles and the New Intangibles. AusCo would not have been required to pay royalties to NewCo for the use of the New Intangibles that AusCo developed after entering into the New Arrangement. 83. We will consider the potential application of the transfer pricing provisions, including the exceptions to the basic rule within Subdivision 815-B, and the CGT or capital allowances provisions where relevant. Additionally, we will consider whether the arrangement was entered into or carried out for the dominant or principal purpose of obtaining a tax benefit. This may attract the operation of the GAAR in Part IVA of the ITAA 1936, the application of the DPT, or both. Interaction and application of RAF Table 2 84. In the year of the Migration, only RAF Table 1 needs to be applied. In subsequent years, RAF Table 2 of this Guideline will also be relevant. Question 5 of RAF Table 2 requires an assessment of a connected past Migration under RAF Table 1. In this example, that would involve an assessment of the entry into the New Arrangement, which is shown in Table 3 above. The higher risk rating out of RAF Tables 1 and 2 will apply, therefore, the risk rating under RAF Table 1 for the connected past Migration will apply regardless of the risk rating under RAF Table 2. That is, the New Arrangement will be in the red zone (higher risk). 85. For illustration purposes, the application of RAF Table 2 to the New Arrangement in subsequent years after the Migration is also included below. As such, the Relevant Entity may be best described as Category 2 – unless those personnel undertaking DEMPE functions were initially from AusCo, in which case the circumstances of NewCo would be considered to fall within Category 1. 86. If NewCo's circumstances remain in Category 1, the risk rating under RAF Table 2 will also be in the red zone. Example 2 – bifurcation of intangible assets – red zone Diagram 4: Example 2 – overview of original arrangement Original arrangement 87. AusCo is part of a global group that manufactures, markets and sells goods. AusCo and its international related parties exploit valuable intangible assets in undertaking their operations. The intangible assets include patents, know-how, trade marks, copyright and other intangible assets or rights (Existing Intangibles), which are grouped together in the internal systems of AusCo's global group. 88. AusCo manages, performs and controls the DEMPE activities associated with the existing intangibles and assumes associated risks. AusCo derives royalties from the international related parties for the exploitation of the existing intangibles globally under licence agreements between AusCo and the international related parties (Original Licence Agreements). Diagram 5: Example 2 – overview of new arrangement New arrangement 89. AusCo and its global group decide that a new entity located in a foreign jurisdiction (NewCo) should exploit the Existing Intangibles in offshore markets by owning the relevant intangible assets (Offshore Intangibles). NewCo is in a specified country. [40] 90. As part of this decision, AusCo will continue to exploit the Existing Intangibles in Australia only and will own the relevant intangible assets and undertake the associated DEMPE activities as a result (Australian Intangibles). 91. The decision to transfer the Offshore Intangibles to NewCo (and bifurcate the Existing Intangibles into Australian Intangibles and Offshore Intangibles) is stated to be based on a desire to facilitate expansion into emerging markets and establish a global centre of expertise for new product development (New Arrangement). While AusCo has prepared transfer pricing documentation that focuses on determining whether the cost-based R&D services income received under the R&D arrangement is arm's length, it is not able to evidence the commercial rationale in making the decision to transfer the Offshore Intangibles to NewCo. 92. To implement the New Arrangement, AusCo enters into a sale agreement (Sale Agreement) with NewCo, transferring the Offshore Intangibles to NewCo for an amount of consideration. This amount was determined by reference to a valuation that was undertaken by AusCo in relation to the Offshore Intangibles. The Sale Agreement provides that any entitlement to royalties connected with the Offshore Intangibles will be novated to NewCo. This includes the royalties AusCo received from the international related parties under the Original Licence Agreements. No payments are made to AusCo as a result of the termination. 93. NewCo and AusCo also enter into an agreement where AusCo will provide R&D services to NewCo for cost-based remuneration (R&D Agreement). Under the R&D Agreement any new Offshore Intangibles that are developed as a result of the R&D undertaken by AusCo will be owned by NewCo. 94. At the time the New Arrangement is implemented, NewCo does not have sufficient assets or employ sufficiently qualified staff to wholly manage, perform or control the DEMPE of the Offshore Intangibles and assume the associated risks. 95. Some members of AusCo's management relocate to the jurisdiction of NewCo to facilitate the New Arrangement. However, AusCo continues to otherwise employ specialised staff and use its expertise and assets to manage, perform and control DEMPE activities associated with the bifurcated Australian Intangibles and the Offshore Intangibles, and assume the associated risks. AusCo is remunerated for these activities with a cost-based service fee pursuant to the R&D Agreement with NewCo. 96. AusCo continues to own the Australian Intangibles, which allows it to manufacture, market and sell goods in the Australian market. AusCo continues to manufacture, market and sell goods associated with the Australian Intangibles in the Australian market and derive associated profits, but no longer receives royalties from international related parties for the exploitation of the Offshore Intangibles in undertaking similar functions offshore. 97. In subsequent years, AusCo continues to primarily manage, perform and control the DEMPE of both the Australian Intangibles and the Offshore Intangibles. There is limited new product development undertaken by NewCo independent of the DEMPE activities outsourced to, and managed and controlled by, AusCo in relation to the Offshore Intangibles. Risk assessment 98. This is a Migration of intangible assets. The Migration involves the transfer of Offshore Intangibles to NewCo. NewCo is the Relevant Entity. 99. According to RAF Table 1 of this Guideline, the risk assessment is as follows. AusCo also continues to conduct DEMPE on intangibles that are connected or closely related to Offshore Intangibles, being the Australian Intangibles. The relocation of staff who had previously performed the same activities in Australia would not result in this being in a category other than Category 1. 100. The total risk score in relation to the New Arrangement is 40. The New Arrangement would be regarded as a red zone (higher-risk) Intangibles Migration Arrangement. 101. There is a risk that the New Arrangement has artificially bifurcated the Existing Intangibles into Australian Intangibles and Offshore Intangibles such that the New Arrangement is not arm's length in nature or is structured to avoid tax obligations. The risk in this regard is emphasised where AusCo is not able to provide evidence substantiating its decision-making for entering into this arrangement or does not recognise or provide evidence referring to anticipated or potential Australian tax impacts that were considered in making the decision to enter into the arrangement. 102. AusCo continued to manage and control the DEMPE activities of the Offshore Intangibles, which in economic substance was inconsistent with the form of the New Arrangement. We may take the view that an independent entity dealing wholly independently in circumstances comparable to AusCo would not have entered into the New Arrangement with NewCo, as it involved AusCo disposing of the Offshore Intangibles and associated income streams under non-arm's length conditions. 103. We may also take the view that the distinction between the Australian Intangibles and the Offshore Intangibles and the separation of DEMPE activities in relation to these assets lacks commercial rationale and economic substance. 104. We will consider the potential application of the transfer pricing provisions, including the exceptions to the basic rule within Subdivision 815-B, the CGT provisions and the capital allowances provisions. Additionally, we will consider whether the arrangement was entered into or carried out for the dominant or principal purpose of obtaining a tax benefit. This may attract the operation of the GAAR in Part IVA of the ITAA 1936, the application of the DPT, or both. Example 3 – non-recognition of Australian intangible assets and DEMPE activities – red zone Diagram 6: Example 3 – overview of arrangement 105. AusCo is part of a global group that manufactures and sells goods and provides associated services. AusCo and its international related parties have historically recognised the use of minimal valuable intangible assets in undertaking their operations, aside from certain trade marks and intangible assets associated with the global group's brand and product lines. A number of these trade marks are owned by AusCo and connected with products and services exclusively distributed in Australia. AusCo manages, performs and controls DEMPE activities connected with its Australian trade marks and assumes associated risks. 106. Over a number of years, AusCo's DEMPE activities increase in intensity, resulting in the development and commercialisation of a number of new and improved products and services. Several new identifiable intangible assets are developed from these activities. AusCo does not account for any additional intangible assets in its financial statements or register the relevant intangible assets for legal protection. The relevant intangible assets include patentable products and processes, know-how, copyright and other intangible assets or rights. These intangible assets and the Australian trade marks are developed, maintained, enhanced and owned by AusCo (Australian Intangibles). 107. AusCo does not formally recognise any Australian Intangibles or engage in annual review or analysis of its processes and activities associated with the Australian Intangibles. Likewise, AusCo's global group does not maintain a comprehensive contemporaneous R&D or intellectual property policy or other relevant processes or guidelines. 108. In the following years, a number of AusCo's international related parties (IRPCos) are granted access to the Australian Intangibles and use these assets to develop and improve equivalent products and services in offshore jurisdictions. AusCo does not enter into any legal agreements for the transfer or licensing of these assets with its international related parties or update its transfer pricing policy or documentation in connection with these dealings. 109. The profitability of AusCo's international related parties increases as a result of accessing and exploiting the Australian Intangibles and the functions performed, assets used, and risks assumed by AusCo in connection with the DEMPE of the Australian Intangibles. AusCo does not receive compensation or remuneration from its international related parties in connection with their access to, and use of, the Australian Intangibles. Risk assessment 110. This is a Migration of intangible assets. According to RAF Table 1 of this Guideline, the risk assessment is as follows. 111. The total risk score for this arrangement is 35. This arrangement would be regarded as a red zone (higher-risk) Intangibles Migration Arrangement. 112. There is a risk that the dealings entered into by AusCo may not be consistent with AusCo's best economic interests having regard to the commercial options realistically available to AusCo. AusCo granted access to and use of the Australian Intangibles to its international related parties where no agreements or form of remuneration were considered or recognised. 113. The effect of the arrangement is that AusCo has allowed its international related parties to exploit and derive benefits in connection with the Australian Intangibles for nil consideration. The arrangement fails to appropriately recognise DEMPE activities managed, performed and controlled by AusCo, development of Australian Intangibles from AusCo's activities and exploitation of assets developed by AusCo by AusCo's international related parties. The risk is heightened where the DEMP activities undertaken by AusCo are extensive, or where the intangible assets are of particular commercial value and substantially used by IRPCos, such that it can be reasonably expected that the use of, or access to them would give rise to remuneration to AusCo. 114. We will consider the potential application of the transfer pricing provisions, including the exceptions to the basic rule within Subdivision 815-B. Additionally, we will consider whether the arrangement was entered into or carried out for the dominant or principal purpose of obtaining a tax benefit. This may attract the operation of the GAAR in Part IVA of the ITAA 1936, the application of the DPT, or both. Example 4 – Migration of pre-commercialised intangible assets – red zone Diagram 7: Example 4 – overview of arrangement 115. AusCo is part of a global group that develops, manufactures, markets and sells products globally. AusCo and its international related parties engage in the DEMPE of valuable intangible assets in undertaking their operations. These intangible assets include patents, know-how, trade marks, copyright and other intangible assets or rights. In the global group's internal systems, such intangible assets are grouped together by product line. 116. AusCo spent a number of years undertaking R&D in Australia to develop a new product range, which resulted in the development of pre-commercialised intangible assets (Product Intangibles). AusCo owns the Product Intangibles. AusCo considers the Product Intangibles to be strategically important to their business. 117. Prior to the Product Intangibles being commercialised, AusCo and the global group decide to incorporate a new entity in an offshore jurisdiction (which is a specified country), NewCo, for the stated purpose of further developing, manufacturing and commercialising the new products associated with the Product Intangibles (New Products). While AusCo has the capability and capacity to develop, manufacture and commercialise the New Products, the global group decides that NewCo should instead own the rights to the Product Intangibles. 118. In addition, at the time of this decision, the global group decides that NewCo 2, another new entity incorporated in the offshore jurisdiction, should ultimately own the rights to the Product Intangibles. The plan for the Product Intangibles to be transferred from NewCo to NewCo 2 is set out in a step plan for the restructure. 119. As a result of this decision, AusCo and NewCo first enter into a licence agreement (Licence Agreement). The Licence Agreement grants NewCo the exclusive rights to develop, manufacture and commercialise the Product Intangibles, including the associated New Products. Under the Licence Agreement, NewCo pays ongoing royalties to AusCo in relation to worldwide sales of the New Products. As a result of the Licence Agreement, the effective control of the Product Intangibles is transferred from AusCo to NewCo and, as a consequence, all of the worldwide income that will be received from the global commercial sales of the New Products will be derived by NewCo. 120. At the time of entering into the Licence Agreement, NewCo does not have sufficient assets or employ sufficiently qualified staff to undertake the DEMPE activities which are undertaken by AusCo. NewCo subsequently enters into various service agreements (Service Agreements) with AusCo, under which AusCo agrees to provide services for the development, manufacture and distribution of the New Products. The Service Agreements remunerate AusCo with a cost-based service fee. Post-transfer of the rights to the Product Intangibles 121. Following the transfer of the rights to the Product Intangibles to NewCo, the functions performed, assets used, and risks assumed by AusCo do not substantially change. AusCo continues to employ specialised staff and uses its expertise and assets to manage, perform and control DEMPE activities associated with the Product Intangibles. The functions performed, assets used, and risks assumed by AusCo in connection with activities covered by the Services Agreements with NewCo results in the commercialisation of the Product Intangibles. NewCo has limited relevantly qualified staff and manages and performs limited activities, owns limited assets and assumes limited risks in connection with the Product Intangibles. 122. Once the New Products are commercialised, under a novation agreement. NewCo transfers the exclusive rights to the Product Intangibles to NewCo 2, which also has limited relevantly qualified staff and capacity to manage and perform DEMPE activities related to the Product Intangibles. NewCo 2 owns limited assets and has limited capacity to assume risks in connection with the Product Intangibles. Intercompany agreements related to the New Products and Product Intangibles were also novated by NewCo to NewCo 2. 123. AusCo manufactures, distributes and markets the New Products on behalf of NewCo 2 under the Service Agreements. In undertaking these activities, AusCo employs specialised staff and uses its expertise and assets to manufacture and sell the New Products to the global market. However, AusCo only receives cost-based remuneration from NewCo 2 in accordance with the terms of the Service Agreements and royalties from the commercial sales of the New Products. NewCo 2 continues to have limited qualified staff, manages and performs limited activities, and assumes limited risks in connection with the manufacture, distribution and marketing of the New Products. NewCo 2 derives the worldwide income from the sale of the New Products. AusCo derives a royalty income under the Licence Agreement, now with NewCo 2. Risk assessment 124. This is a Migration of intangible assets and not an Excluded Outbound Distribution Arrangement because NewCo has the exclusive rights to develop, manufacture and commercialise the Product Intangibles worldwide. 125. The Relevant Entity includes both NewCo and NewCo 2. NewCo 2 is a Relevant Entity because the Relevant Intangibles Assets were transferred to NewCo as part of a related arrangement to the initial transfer, as evidenced in a step plan for the overall restructure. In addition, NewCo 2 engages AusCo to undertake further development of the Product Intangibles as well as the distribution of New Products under the Service Agreements. 126. According to RAF Table 1 of this Guideline, the risk assessment is as follows. 127. The total risk score for this arrangement is 40. This arrangement would be regarded as a red zone (higher-risk) Intangibles Migration Arrangement. 128. In subsequent years, RAF Table 2 of this Guideline will also be relevant in assessing the risks associated with mischaracterisation of Australian activities connected with DEMPE of the intangible assets. In summary, the risk score under this Table will also result in a red zone (higher-risk) rating – a total of 40 points, based on overall characterisation (20 points as AusCo continues to manufacture, market and perform other DEMP activities in connection with the New Products and Product Intangibles), circumstances of NewCo (or NewCo 2) – Category 1 (15 points) and tax outcomes – NewCo and New Co2 are tax residents of a Specified jurisdiction according to the definition in paragraph 55 of this Guideline (5 points). 129. There is a risk that AusCo's entry into the Licence Agreement and Service Agreements with NewCo (and NewCo 2) lacks commercial and economic substance, is structured to avoid tax, or may not be an arrangement that independent entities dealing wholly independently in comparable circumstances to that of AusCo and NewCo would have entered into. This risk is emphasised where AusCo is not able to evidence its decision-making for entering into these arrangements. 130. AusCo owned and developed the Product Intangibles and had the capability, expertise and capacity to continue to develop, manufacture and commercialise them for market. The Product Intangibles were strategically important to AusCo's business. AusCo did not require NewCo as a partner to develop or commercialise the Product Intangibles. NewCo did not have the capability or capacity to develop or commercialise the Product Intangibles at the time the arrangements were implemented. 131. As a consequence of AusCo transferring the rights to control or use its Product Intangibles to NewCo, AusCo did not derive the worldwide income from the sale of the New Products. 132. We will consider the potential application of the transfer pricing provisions, including the exceptions to the basic rule within Subdivision 815-B. Additionally, we will consider whether the arrangement was entered into or carried out for the dominant or principal purpose of obtaining a tax benefit. This may attract the operation of the GAAR in Part IVA of the ITAA 1936, the application of the DPT, or both. Example 5 – Migration of pre-commercialised intangible assets – red zone Diagram 8: Example 5 – overview of arrangement 133. AusCo is an Australian company that was recently incorporated. AusCo's founder, an Australian tax resident, is a software designer and developer and is in the process of developing a source code for a new software application. AusCo employs a small team of software developers in Australia to assist the founder with developing the new software application. AusCo manages, performs and controls all DEMPE activities associated with the intangible assets and assumes associated risks. AusCo, however, has not valued the intangible assets and it has also not registered the intangible assets for legal protection. 134. As AusCo's business grows, the founder considers expanding AusCo overseas. AusCo opens an offshore office and incorporates ForCo in that foreign jurisdiction, which is a specified country. Prior to commercialisation, AusCo transfers the legal ownership of the intangible assets associated with the software application via a sale agreement to ForCo. At the time of the transfer of the intangible assets ForCo had no or limited qualified employees and no evidence around its business decision and commercial rationale to transfer the intangible assets. 135. Post transfer of the intangible assets, the founder frequently travelled to ForCo and changed their residency status for Australian tax purposes. ForCo also became the global headquarters for the business. The software application was subsequently commercialised and was available to download on global distribution platforms, generating income from in-application purchases and advertising which was derived by ForCo. 136. While the founder is involved in the development and enhancement of the software application including the ongoing maintenance and programming updates, AusCo, via its team of employees continue to manage and perform DEMPE activities under a Service Agreement with ForCo. In return, AusCo receives cost-based remuneration for the development activities under the Service Agreement. Risk assessment 137. This is a Migration of intangible assets. According to RAF Table 1 of this Guideline, the risk assessment is as follows. 138. The total risk score for this arrangement is 40. The arrangement between AusCo and ForCo would be regarded as a red zone (higher-risk) Intangibles Migration Arrangement. 139. In subsequent years, RAF Table 2 of this Guideline will also be relevant in assessing the risks associated with mischaracterisation of Australian activities. The risk rating under RAF Table 2 will not impact the risk rating under RAF Table 1 of this Guideline, which is in relation to the initial Migration. 140. There is a risk that AusCo's decision to transfer the ownership of the intangible assets to ForCo, an entity with no employees at the time of transfer, and the subsequent entry into the Service Agreement with ForCo is not commercially realistic and is unlikely to be an arrangement that independent entities dealing wholly independently in comparable circumstances to that of AusCo and ForCo would have entered into. 141. AusCo also continued to manage and control DEMPE activities post transfer of the intangible assets and had the capacity to commercialise the software application. AusCo did not require ForCo to commercialise the intangible assets. Understanding the business rationale for transferring the ownership of the intangible assets to ForCo and ForCo's capacity, including the founder's role, to undertake the associated DEMPE activities will be essential to our risk assessment. 142. We will consider the potential application of the transfer pricing provisions, including the exceptions to the basic rule within Subdivision 815-B, and the CGT or capital allowances provisions where relevant. Additionally, we will consider whether the arrangement was entered into or carried out for the dominant purpose of obtaining a tax benefit. This may attract the operation of the GAAR in Part IVA of the ITAA 1936. Example 6 – transfer of intangible assets to a foreign hybrid entity – red zone Diagram 9: Example 6 – overview of original arrangement Original arrangement 143. AusCo is part of a global group that manufactures, markets and sells goods and provides services associated with those sales. AusCo and its international related parties exploit valuable intangible assets in undertaking their operations. The intangible assets include technology, customer relationships, brand, and other intangible assets or rights (Intangibles). 144. AusCo has historically owned, managed and controlled DEMPE activities associated with the Intangibles and assumes associated risks. AusCo derives the world-wide sales income from third parties for the exploitation of the Intangibles through direct sales and through licensing or distribution agreements entered into with international related parties. AusCo also has contract services agreements with international related parties to perform certain activities. Diagram 10: Example 6 – overview of new arrangement New arrangement 145. AusCo decides that the Intangibles should be centralised in a new entity, NewCo, in a foreign jurisdiction. 146. The transfer of the Intangibles to NewCo involves the following steps and features: 147. Following the transfer of the Intangibles to NewCo, NewCo receives the worldwide sales income from the exploitation of the Intangibles. The existing contracts and agreements with the international related parties associated with the Intangibles are novated from AusCo to NewCo. NewCo also enters into a contract service agreement with AusCo, with AusCo now performing sales distribution, R&D, and other services on behalf of NewCo. Other international related parties previously undertaking certain activities for AusCo continue to perform the same activities, under new agreements entered into with NewCo. AusCo and other entities in the global group receive a routine return for their activities, while NewCo now retains all of the residual profits. 148. As NewCo is a member of the AusCo TCG operating in a foreign jurisdiction, its operations and presence are considered to be a foreign branch of the AusCo TCG and the income attributable to NewCo is returned as non-assessable non-exempt income under section 23AH of the ITAA 1936. 149. Under specific tax rules in the foreign jurisdiction, Aus NewSub, as the 'regarded' entity, is eligible to claim amortisation deductions in that foreign jurisdiction for the value of the Intangibles over a period of time. Risk assessment 150. This is a Migration of intangible assets. The Intangibles Migration Arrangement identified includes all dealings and arrangements associated with the same group of intangible assets – therefore, the Intangibles Migration Arrangement which needs to be reviewed in RAF Table 1 includes the transfer of Intangibles, the novation of existing contracts, and new service agreements between NewCo and AusCo. 151. According to RAF Table 1 of this Guideline, the risk assessment is as follows. Amortisation is available in the foreign jurisdiction to substantially offset the income in relation to the intangible assets. While the intangible assets are recognised as being acquired in the foreign jurisdiction, no CGT gains were recognised in Australia. 152. The total risk score for the New Arrangement is 35. [41] It would be regarded as a red zone (higher-risk) Intangibles Migration Arrangement. 153. There is a risk that AusCo's entry into the New Arrangement is not commercially rational and may not be consistent with the substance of the group's arrangement or is structured to achieve particular tax outcomes in Australia or the foreign jurisdiction. The tax outcomes include the avoidance of CGT on the transfer of the Intangibles and the non-inclusion of the worldwide sales income in AusCo. There is also a tax risk that the profits associated with the Intangibles have not been appropriately attributed between AusCo and its foreign branch under Australia's transfer pricing rules. 154. This risk is emphasised where AusCo does not maintain documentation meeting the evidence expectations, set out in Part 3 and Appendix 2 to this Guideline. 155. The New Arrangement does not materially change the way DEMPE activities are performed within the global group, other than resulting in additional deductions available in the foreign jurisdiction and shifting the worldwide sales income (residual profit) from AusCo to the foreign jurisdiction. Other international related entities continue to perform the same activities pre- and post-restructure, with the only change being the counterparty of their intercompany agreements. 156. Had the New Arrangement not occurred, AusCo would have continued to own and derive income from the exploitation of the Intangibles, as opposed to a routine service return. 157. We will consider the potential application of the transfer pricing provisions, specifically Subdivision 815-C, in relation to the attribution of profit between AusCo and its foreign branch. Additionally, we will consider whether the arrangement was entered into or carried out for the dominant or principal purpose of obtaining a tax benefit. This may attract the operation of the GAAR in Part IVA of the ITAA 1936, the application of the DPT, or both. Example 7 – bifurcation of intangible assets – red zone Diagram 11 – Example 7 – overview of old arrangement Old arrangement 158. An Australian company (AusCo) managed, performed and controlled activities and risks associated with the DEMPE of valuable patents, trade marks, knowhow, copyright and like assets (Existing Intangibles). AusCo owned the Existing Intangibles and derives income from their exploitation. Diagram 12 – Example 7 – overview of current arrangement Current Arrangement 159. AusCo enters into a contract R&D arrangement with a foreign related company (ForCo). Pursuant to this arrangement, AusCo provides services to ForCo associated with the DEMPE of potentially new or future intangible assets (New Intangibles). AusCo is remunerated by ForCo on a cost-plus basis. All New Intangibles produced under the arrangement are owned by ForCo. ForCo derives all income generated from the exploitation of the New Intangibles. 160. AusCo continues to receive income derived from the exploitation of the Existing Intangibles but reduces or ceases its DEMPE activities associated with the Existing Intangibles. 161. The New Intangibles are intrinsically linked to AusCo's Existing Intangibles comprising updated versions and enhancements of the patents, trade marks, knowhow, copyright and like assets, which form part of, and are connected to, AusCo's Existing Intangibles. 162. The functions performed, assets used and risks assumed by AusCo do not materially change in substance following the execution of the contract R&D arrangement. AusCo continues to employ the same specialised staff and use its expertise and assets associated with the Existing Intangibles to manage, perform and control DEMPE activities associated with the New Intangibles. 163. ForCo manages and performs limited activities and assumes limited risks in connection with the New Intangibles. At the time the contract R&D arrangement commences, ForCo does not have sufficient assets or employ sufficient suitably qualified staff to properly or primarily manage, perform or control the DEMPE of the New Intangibles. AusCo continues to be best placed to manage, perform and control DEMPE activities given the functions performed, assets used and risks assumed by AusCo. 164. The value of the Existing Intangibles and income derived by AusCo from their exploitation declines due to the reduction in or cessation of DEMPE activities in connection with the Existing Intangibles. The value of the New Intangibles and associated income streams derived by ForCo increases as a result of the DEMPE activities performed by AusCo. Risk assessment 165. The Current Arrangement is considered to be an Intangibles Migration Arrangement because the arrangement involves AusCo carrying out DEMPE activities in connection with New Intangibles held by ForCo. 166. According to RAF Table 2 of this Guideline, the risk assessment is as follows. The functions performed, assets used and risks assumed by AusCo do not materially change in substance following the restructure or change. AusCo continues to employ the same specialised staff and use its expertise and assets associated with the Existing Intangibles to manage, perform and control DEMPE activities associated with the New Intangibles. 167. The total risk score in relation to the New Arrangement is 35 (or 40 if a tax outcome applies). The arrangement would be regarded as a red zone (higher-risk) Intangibles Migration Arrangement. Application of Risk Assessment Framework Table 1 – the change from Old Arrangement to Current Arrangement 168. While there might not have been a written intercompany agreement for the transfer (or grant of rights) of intangible assets from AusCo to ForCo, the change in the overall arrangement is a Migration to which RAF Table 1 would apply under Question 1(d), which covers situations where AusCo has ceased or discontinued development, enhancement or maintenance activities in relation to Existing Intangibles and the intangible assets are made available to another entity. 169. In this example, since New Intangibles are intrinsically connected to Existing Intangibles or are updated versions of Existing Intangibles, it is reasonable to conclude that rights or know-how related to Existing Intangibles were made available to ForCo. We note that this would also fall within Question 1(b) of RAF Table 1, notwithstanding that there might not have been a written agreement. 170. Where there is a connection to a past Migration, a risk assessment under RAF Table 1 should also be done in relation to the past restructure or change. The higher of the 2 risk ratings under RAF Table 1 or 2 will apply as the overall risk rating of this arrangement. 171. Applying RAF Table 1 to the restructure or change identified in paragraph168: Instead of earning a return as a service provider, AusCo may also derive income in relation to updated versions of Existing Intangibles had its previous arrangements in connection with Existing Intangibles not changed. 172. As can be seen in Table 11 of this Guideline, the change from the past arrangement to the current arrangement will be in the higher-risk (red) zone if one of the tax outcomes in Question 5 apply, or if Question 7 applies. 173. AusCo's remuneration under the contract R&D arrangement with ForCo does not reflect the extent or character of functions performed, assets used and risks assumed by AusCo in connection with the New Intangibles or the connection between the New Intangibles and AusCo's Existing Intangibles, which are intrinsically linked. In these circumstances, the conditions operating in connection with the arrangement may not be consistent with its best economic interests having regard to the commercial options realistically available or may lack commercial rationale. 174. Additionally, AusCo may not have properly complied with Australian CGT and capital allowances obligations (or provisions regarding recognition of R&D results), including where intangible assets have been migrated to ForCo as a result of the arrangement. 175. We will consider the potential application of the transfer pricing provisions, including the exceptions to the basic rule within Subdivision 815-B, and the CGT or capital allowances provisions where relevant. Additionally, we will consider whether the arrangement was entered into or carried out for the dominant or principal purpose of obtaining a tax benefit. This may attract the operation of the GAAR in Part IVA of the ITAA 1936, the application of the DPT, or both. Example 8 – cost contribution arrangement – red zone Diagram 13: Example 8 – overview of arrangement 176. An Australian company (AusCo) is party to a cost contribution arrangement (CCA) with a number of related foreign companies. The CCA agreements (CCA Agreement) provide that the participants will contribute resources and perform activities associated with the DEMPE of intangible assets (CCA Contributions) for the mutual benefit of all participants. 177. The CCA Agreement states that one of the foreign related companies (ForCo), which is a tax resident of a specified country: 178. In exchange for the CCA Contributions, the participants, including AusCo, each obtain from ForCo the right to exploit all intangible assets associated with the CCA in their respective jurisdictions. The intangible assets covered by the CCA Agreement include patents, trade marks, copyright, know-how, and like assets. 179. The form of the CCA Agreement states that AusCo: 180. In substance, AusCo undertakes and manages extensive R&D activities relative to the other participants in the CCA, assumes associated risks, and develops and commercialises new patents, trade marks, copyright, know-how and like assets. To do this, AusCo uses assets and employs specialised staff. AusCo applies its specialist expertise to manage risks and is subject to minimal direction and oversight from ForCo. This results in the development and enhancement of valuable intangible assets that are exploited by ForCo and the other related foreign companies party to the CCA Agreement (IRP Cos) in other jurisdictions to derive income. 181. ForCo employs limited staff and contributes limited funds or assets under the CCA arrangement. Limited contributions are also made by the IRP Cos to the DEMPE of intangible assets under the CCA. 182. The expected benefits received by AusCo under the CCA Agreement do not reflect the value of AusCo's contributions to the CCA including the extent or character of functions performed, assets used and risks assumed by AusCo in connection with the intangible assets covered by the CCA. AusCo's proportionate share of overall contributions to the CCA is not consistent with the expected benefits received. Specifically, AusCo does not obtain benefits proportionate with its contributions to the derivation of global income from the exploitation of the intangible assets covered by the CCA, where those intangible assets are used and exploited by ForCo and the IRP Cos in other jurisdictions. Risk assessment 183. This is a Migration of intangible assets. The Migration involves entry into a CCA by AusCo, ForCo and IRP Cos whereby ForCo and IRP Cos obtain certain rights to AusCo's intangible assets. 184. According to RAF Table 1 of this Guideline, the risk assessment is as follows. AusCo continues to develop and use the Relevant Intangible Assets, as well as related intangible assets subject to the CCA that are made available to AusCo under the CCA. ForCo employs limited staff, contributes limited funds or assets. There are also limited contributions made by IRP Cos to the DEMPE of intangible assets under the CCA. ForCo in particular appears to be best described as Category 1. By contrast, AusCo has specialist staff and undertakes and manages extensive DEMPE activities relative to other participants in the CCA. If AusCo did not enter into the CCA, it might reasonably be expected to have derived the worldwide income instead of ForCo (particularly since, in substance, ForCo and IRP Cos contributed little relative to AusCo). As such, It can be concluded that its taxable income might reasonably be less as a result of entering into the CCA. 185. The total risk score in relation to this arrangement is 40. The CCA arrangement would be regarded as a red zone (higher-risk) Intangibles Migration Arrangement. 186. In these circumstances, AusCo's entry into the CCA Agreement may not be commercially rational or consistent with its best economic interests having regard to the commercial options realistically available. The arrangement may therefore be inconsistent with that which might reasonably be expected to be agreed between independent parties dealing at arm's length for the purposes of Australia's transfer pricing laws. 187. We will consider the potential application of the transfer pricing provisions, including the exceptions to the basic rule within Subdivision 815-B, and the CGT or capital allowances provisions where relevant. Additionally, we will consider whether the arrangement was entered into or carried out for the dominant or principal purpose of obtaining a tax benefit. This may attract the operation of the GAAR in Part IVA of the ITAA 1936, the application of the DPT, or both. Example 9 – transfer of rights to intangible assets under a licence agreement – amber zone Diagram 14: Example 9 – overview of arrangement 188. Similarly to Example 4 of this Guideline, AusCo is part of a global group that develops, manufactures, markets and sells products globally. AusCo and its international related parties engage in the DEMPE of valuable intangible assets in undertaking their operations. These intangible assets include patents, know-how, trade marks, copyright and other intangible assets or rights. 189. AusCo undertakes R&D activities to develop a new product range resulting in the development of early-stage intangible assets (Product Intangibles). AusCo owns the Product Intangibles. 190. AusCo's ability to further develop and commercialise the Product Intangibles, including the capability and capacity to manufacture and market the products that may be associated with the Product Intangibles (New Products), is limited. AusCo requires a partner to continue with the development of the Product Intangibles so that they can be commercialised into New Products that are able to be manufactured and marketed to customers. 191. ForCo, a related party located in a foreign jurisdiction, has the capability to further develop and commercialise the Product Intangibles including the capacity to manufacture the New Products. AusCo decides that it is in its best interest to partner with ForCo to further develop and commercialise the Product Intangibles, otherwise it may have to cease further development of the Product Intangibles given its limited expertise and capability. 192. As a result of this decision, AusCo and ForCo enter into a licence agreement (Licence Agreement). The Licence Agreement grants the exclusive rights of the Product Intangibles to ForCo for the development and commercialisation of the Product Intangibles and for the manufacturing and marketing of the associated New Products. Under the Licence Agreement, AusCo negotiates with ForCo to receive upfront, milestone and royalty payments based on an independent valuation of the Product Intangibles and associated New Products. 193. As a result of the Licence Agreement, ForCo assumes the risks associated with further developing and commercialising the Product Intangibles, including manufacturing and marketing the New Products. Any income generated from the commercial sales of the New Products will be derived by ForCo. Post-Licence Agreement 194. ForCo, with its expertise and capability, manages, performs and controls the DEMPE activities connected with the Product Intangibles and assumes the associated risks. ForCo continues to develop the Product Intangibles and is able to commercialise them into New Products. Once commercialised, ForCo manufactures and markets the New Products to customers, derives the worldwide income from the sale of the associated Products and pays to AusCo the amounts payable under the Licence Agreement. 195. AusCo distributes the New Products in Australia under an agreement with ForCo. Risk assessment 196. This is a Migration of intangible assets. This is not an Excluded Inbound Distribution Arrangement because the Product Intangibles were transferred by AusCo to ForCo. 197. According to RAF Table 1 of this Guideline, the risk assessment is as follows. AusCo distributes New Products once Product Intangibles have been commercialised. However, if the substance of the Relevant Entity is inconsistent with the form of the arrangement, the risk score would be higher for this risk factor (as demonstrated in this table). For example, despite ForCo having specialised staff and capability, it does not wholly perform, manage and control the DEMPE activities involved in the commercialisation, manufacturing and marketing of the New Products, and AusCo continues to have some involvement. This would not be the conclusion if AusCo has the capacity to continue development while overseeing and outsourcing certain activities to other entities such as ForCo. 198. The total risk assessment score for this arrangement is 25. It would be regarded as an amber zone (medium-risk) Intangibles Migration Arrangement. 199. As demonstrated in the analysis in Table 13, , if either of the following factors applies, the arrangement between AusCo and ForCo would be regarded as a medium-risk Intangibles Migration Arrangement: 200. A risk that may arise with respect to this arrangement is that the substance of the Licence Agreement may not align with the form of the arrangement. As shown in the application of the risk assessment framework in this Example, the level of substance in ForCo's operations following the transfer of the Product Intangibles will inform the level of risk associated with the arrangement. 201. The tax outcomes of the arrangements (including the tax attributes of ForCo) are also an indicator of the risk that the arrangement might have been driven by tax outcomes. This includes whether, excluding upfront gains, AusCo's taxable income would be less as a result of the restructure or change, which would inform our assessment of whether independent parties would have entered into the arrangement instead of other alternative options. In assessing this risk, we will consider any evidence demonstrating a genuine and substantiated (non-tax) commercial rationale to enter into the Licence Agreement with ForCo. 202. Another risk that may arise in relation to this arrangement relates to whether the payments made by ForCo and AusCo under any arrangements in connection with the restructure are arm's length, such as the pricing and terms of the Licence Agreement. 203. We may consider the potential application of the transfer pricing provisions, and where relevant, the CGT or capital allowance provisions. Where relevant, the potential application of Part IVA of the ITAA 1936 (including the DPT) may also be considered. Example 10 – centralisation of intangible assets – blue zone Diagram 15: Example 10 – overview of original arrangement Original arrangement 204. Similarly to Example 1 of this Guideline, AusCo undertakes manufacturing, marketing and distribution functions and owns, manages and controls DEMPE activities associated with a suite of valuable intangible assets, including patents, know-how, trade marks, copyright and other intangible assets or rights (Intangible Assets). 205. The Intangible Assets are used in the business of the global group to which AusCo belongs and AusCo derives royalties from its international related parties from the global exploitation of the Intangible Assets under licence agreements between AusCo and the international related parties (Original Licence Agreements). Entities within the global group in other jurisdictions have also undertaken manufacturing, marketing and distribution functions and managed and controlled DEMPE activities associated with a suite of valuable intangible assets over a similar historical period. These other overseas entities also derive royalties from related parties within the global group, including Australia, from the exploitation of their intangible assets under licence agreements. Decision to centralise intangible assets 206. AusCo and the global group determine that the Intangible Assets should be centralised in an entity (OneCo) to be located in a foreign jurisdiction. AusCo's transfer of the Intangible Assets to OneCo forms part of a broader global centralisation under which intangible assets held by other international related parties are also transferred and centralised in OneCo. OneCo is located in a jurisdiction which is the global group's largest market in terms of product sales. 207. AusCo and the global group consider a number of commercial and legal factors in making the decision to centralise, including considering alternative options, and determine that centralising their intangible assets in one entity has a number of commercial benefits which have been quantified. AusCo maintains documentation to substantiate the commercial rationale underpinning its decision to centralise. 208. As a result of the decision to centralise, AusCo enters into a Sale Agreement with OneCo to transfer the Intangible Assets to OneCo. As part of the sale, the Original Licence Agreements between AusCo and its international related parties are novated to OneCo with OneCo as the licensor. AusCo undertakes an independent valuation to value the Intangible Assets prior to this sale and to ensure that the transfer is made on arm's length terms. OneCo is located in a jurisdiction which has the largest market in terms of third-party customer revenue from the products. 209. As a result of the sale, OneCo receives worldwide income from the exploitation of the Intangible Assets. AusCo maintains some documentation to support the arm's length nature of the pricing and terms of all arrangements in connection with the restructure, including, but not limited to, the Sale Agreement and the novation of the Original Licence Agreements. 210. As part of the decision to centralise, AusCo decided that it was no longer commercially viable for it to continue with its manufacturing and R&D functions. As a result, AusCo decided to cease these operations and continue with its distribution functions only. 211. AusCo enters into a transitional R&D Services Agreement with OneCo. Under this agreement, AusCo will provide R&D services to OneCo in relation to the Intangible Assets in return for a fee determined with regard to the costs incurred by AusCo in the provision of the R&D activities. This arrangement is intended to operate as a transitional feature of the centralisation to allow AusCo to assist OneCo with managing the Intangible Assets as OneCo builds up the necessary capability and expertise to undertake these functions. Any New Intangibles that are developed as a result of the R&D undertaken by AusCo under the R&D Services Agreement will be owned by OneCo. Diagram 16: Example 10 – overview of new arrangement New arrangement 212. In Year 1 following the decision to centralise, AusCo performs R&D activities under the R&D Services Agreement under the direction and oversight of OneCo, which employs sufficiently skilled staff to manage DEMPE activities. AusCo receives remuneration for the functions it performs under the R&D Services Agreement. 213. By Year 2 following the decision to centralise, OneCo has employed additional staff and acquired additional assets to assist in the management of DEMPE activities for the Intangible Assets. These staff and assets are sufficient to allow OneCo to wholly manage, perform and control the DEMPE activities connected with the Intangible Assets and assume all associated risks. The R&D Services Agreement between AusCo and OneCo is terminated and AusCo ceases performing R&D services with respect to the Intangible Assets. Risk assessment 214. This is a Migration of intangible assets. In assessing the Migration, the Sale Agreement, the novation of the Original Licence Agreement and the service agreements entered into by AusCo with OneCo are considered to be one Intangibles Migration Arrangement. 215. According to RAF Table 1 of this Guideline, the risk assessment in relation to the Migration is as follows. 216. The total risk assessment score of the New Arrangement is 20. It would be regarded as a blue zone (lower- to medium-risk) Intangibles Migration Arrangement. 217. A risk that may arise with respect to this arrangement is that the substance of the New Arrangement may not align with the form of the arrangement. The level of substance in OneCo's operations following the decision to centralise and OneCo's ability to demonstrate that it has built up the additional capacity necessary to manage, perform and control DEMPE functions connected with the Intangible Assets will inform the level of risk associated with the arrangement. 218. In the year of the Migration, only RAF Table 1 needs to be applied. In subsequent years, RAF Table 2 of this Guideline should also be completed to assess the risks associated with the non-recognition of Australian DEMPE activities in the ongoing arrangement. Because the Intangibles Assets were previously held by AusCo, the ongoing arrangement cannot be an Excluded Inbound Distribution Arrangement even when AusCo ceases all other activities other than distribution. 219. Under RAF Table 2 of this Guideline, the outcome can be summarised as follows: 220. Based on these 2 risk factors, the Intangibles Migration Arrangement would be considered blue zone (lower- to medium-risk) (20 points) under RAF Table 2 of this Guideline. In subsequent years, once the transitional R&D activities cease, and the degree of OneCo's substance with respect to the Intangible Assets increase, the risk score assigned to Questions 2 and 3 of RAF Table 2 of this Guideline may be reduced, resulting in a lower risk rating with respect to the risk associated with non-recognition of Australian activities connected with intangible assets. 221. We may consider the potential application of the transfer pricing provisions, and where relevant, the CGT provisions or the capital allowance provisions. Where relevant, the potential application of Part IVA of the ITAA 1936 (including the DPT) may also be considered. Example 11 – contract research and development arrangement – blue zone Diagram 17: Example 9 – overview of arrangement 222. AusCo is part of a group which provides technical services globally. AusCo and its international related parties each employ technical experts who exploit valuable intangible assets of the group in performing services. The intangible assets include patents, know-how, trade marks, copyright and other intangible assets or rights (Existing Intangibles). 223. ForCo, a related party located in a foreign jurisdiction, is the entity that has always undertaken, managed and been responsible for the DEMPE activities associated with the Existing Intangibles. ForCo derives worldwide income from the services provided by the global group. 224. In connection with its services business, ForCo is responsible for managing the global group's operations, which consist of R&D centres, located both within and outside of ForCo's jurisdiction, that perform contract R&D services for or on behalf of ForCo. 225. ForCo employs specialised staff and has the expertise and capability to manage the various contract R&D centres. AusCo is an established R&D centre within the global group and employs experienced and specialised staff to perform R&D activities. 226. AusCo is party to an R&D services agreement with ForCo (R&D Services Agreement), under which it is remunerated with a service fee. 227. Under this arrangement: Risk assessment 228. This is not a restructure or change associated with intangible assets. 229. According to RAF Table 2 of this Guideline, the risk assessment is as follows. The more DEMP activities AusCo performs, the higher the risk score under this question may be. 230. The total risk assessment score for this arrangement is 20. The arrangement between AusCo and ForCo would therefore be regarded as a blue zone (lower- to medium-risk) Intangibles Migration Arrangement. 231. The risks that arise from this arrangement are that the substance of the arrangement may not align with its form (that is, AusCo may, in fact, control certain DEMPE activities such as R&D) and AusCo may not receive a return commensurate with its contributions to the Existing Intangibles or any new intangible assets developed under the arrangement, including under the R&D Services Agreement. The extent of AusCo's actual involvement in DEMPE activities will inform the level of risk associated with the arrangement. 232. We may consider the potential application of the transfer pricing provisions. Where relevant, the potential application of Part IVA of the ITAA 1936 (including the DPT) may also be considered. Example 12 – centralisation of intangible assets – green zone Diagram 18: Example 12 – overview of arrangement 233. AusCo is part of a global group that develops, manufactures, markets and sells products globally. AusCo and its international related parties exploit valuable intangible assets in undertaking their operations. These intangible assets include patents, know-how, trade marks, copyright and other intangible assets or rights (Group Intangibles). 234. The Group Intangibles are centralised in a foreign related party, OneCo. OneCo has always owned, managed and controlled all DEMPE activities associated with the Group Intangibles. OneCo has material operations, including many specialised staff with the expertise and skill to manage, perform and control DEMPE activities with respect to the Group Intangibles. 235. AusCo does not perform DEMP activities with respect to any of the Group Intangibles, including R&D activities. AusCo pays a royalty to OneCo under a Royalty Agreement for the right to licence and exploit the Group Intangibles in its ordinary business operations. The royalty paid under this agreement is determined as a percentage of sales. Both AusCo and OneCo comply with their Australian withholding tax obligations. AusCo maintains evidence that substantiates the arm's length nature of the royalty paid under this agreement. Acquisition and transfer 236. AusCo acquires business assets from a third-party Australian entity. The acquired assets include intangible assets (New Intangibles). The New Intangibles are considered to complement the global group's existing Group Intangibles. The purchase price for the assets includes a value attributable to the New Intangibles, determined by an independent valuation of the New Intangibles, carried out just prior to the acquisition. 237. Shortly after AusCo acquires the New Intangibles, it transfers the New Intangibles to OneCo. The price at which OneCo purchases the New Intangibles from AusCo is not materially different to the independent value that was attributable as part of the purchase price when AusCo acquired the New Intangibles. 238. The decision to transfer the New Intangibles reflects the fact that OneCo has the appropriate expertise, staff and infrastructure to continue to own, manage and perform DEMPE functions with respect to the New Intangibles and that AusCo does not have the appropriate expertise, staff and infrastructure to perform DEMPE functions with respect to the New Intangibles. Following the transfer, AusCo does not perform any control functions relating to the maintenance, development, enhancement or protection of the New Intangibles. AusCo does exploit the New Intangibles in its ordinary business operations following the transfer and AusCo and OneCo amend their existing Royalty Agreement to include and factor in the New Intangibles to the Group Intangibles licensed by AusCo under the Royalty Agreement. Risk assessment 239. This is a Migration of intangible assets. According to RAF Table 1 of this Guideline, the risk assessment is as follows. AusCo exploits the New Intangibles in its ordinary business operations following the transfer. OneCo has material operations, including many specialised staff with the expertise and skill to manage, perform and control DEMPE activities with respect to the Group Intangibles. AusCo is not involved in the DEMPE activities of Group Intangibles post-transfer. 240. The total risk assessment score for this arrangement is 15. The arrangement between AusCo and OneCo would be regarded as a green zone (lower-risk) Intangibles Migration Arrangement. 241. It will be relevant to consider the valuation of the New Intangibles at the point at which AusCo acquired the New Intangibles and at the point at which the New Intangibles are transferred to OneCo. It will also be relevant to consider the pricing and terms of AusCo's Royalty Agreement, both pre- and post-transfer of the New Intangibles. 242. When assessing the risk, we would expect specific consideration be given to the transfer pricing provisions. 243. In subsequent years, in addition to RAF Table 1, RAF Table 2 will also need to be completed. Following the restructure or change, there is one agreement between AusCo and OneCo, the Royalty Agreement, for the right to licence and exploit both the Group Intangibles and the New Intangibles in Australia. This can be assessed as one Intangibles Migration Arrangement. 244. The Intangibles Migration Arrangement includes dealings with OneCo regarding New Intangibles, which was transferred by AusCo to OneCo. Therefore, this Intangibles Migration Arrangement does not satisfy the criteria for being an Excluded Inbound Distribution Arrangement and RAF Table 1 should be applied to assess the original transfer of New Intangibles. This is the case regardless of whether AusCo's functions in Australia are subsequently limited to the distribution of goods in Australia. 245. Under RAF Table 2 of this Guideline, the risk assessment will be as follows: The overall risk rating is low (0 or 10 points) under RAF Table 2 of this Guideline. Example 13 – contract research and development arrangement – green zone Diagram 19: Example 13 – overview of arrangement 246. AusCo is part of a global group that manufactures and sells goods and provides associated services globally. AusCo and its international related parties exploit valuable intangible assets in undertaking their operations. The intangible assets include patents, know-how, trade marks, copyright and other intangible assets or rights (Existing Intangibles). 247. ForCo, a related party located in a foreign jurisdiction, is the entity that has always undertaken, managed and been responsible for the DEMPE activities associated with the Existing Intangibles. ForCo derives worldwide income from the exploitation of the Existing Intangibles by the global group. 248. In connection with managing and controlling the DEMPE activities associated with the Existing Intangibles, ForCo is responsible for managing the global group's R&D operations. The R&D operations consist of primary R&D centres which are located within ForCo's jurisdiction and several secondary R&D centres located outside of ForCo's jurisdiction, which perform R&D services for or on behalf of ForCo. 249. AusCo is party to an R&D services agreement with ForCo (R&D Services Agreement), under which it is remunerated with a service fee. AusCo maintains evidence substantiating the arm's length nature of the service fee and the terms of the R&D Services Agreement. 250. Under the R&D Services Agreement: 251. ForCo employs specialised staff and holds the necessary expertise and capability to manage the various contract R&D centres and undertake DEMPE activities. AusCo does not manage and control the risks associated with the relevant DEMPE activities and performs R&D activities under the close supervision of ForCo. AusCo's R&D staff conduct their R&D activities solely within scope of work orders received from ForCo and are monitored by relevant staff employed by ForCo, attending regular management and milestone reviews in connection with their project work. Risk assessment 252. This is not a restructure or change of intangible arrangements. According to RAF Table 2 of this Guideline, the risk assessment is as follows. 253. The total risk assessment score for this arrangement is 10. The arrangement between AusCo and ForCo would be regarded as a green zone (lower-risk) Intangibles Migration Arrangement. 254. We would expect specific consideration be given to the transfer pricing provisions. Example 14 – cost contribution arrangement – green zone Diagram 20: Example 14 – overview of original arrangement Original arrangement 255. AusCo is part of a global group headed by HeadCo, located in a foreign jurisdiction. HeadCo's subsidiary, ForCo, is located in another foreign jurisdiction. AusCo, HeadCo and ForCo act as regional heads for the global group. The regional heads exploit a suite of valuable intangible assets comprising AusCo's Intangibles, HeadCo's Intangibles and ForCo's Intangibles in undertaking business operations in their respective regions. 256. AusCo manages and controls DEMPE functions associated with its Intangibles. AusCo derives royalties from its international related parties HeadCo and ForCo under licence agreements for the exploitation of its Intangibles in each of HeadCo's and ForCo's respective regions. 257. ForCo manages and controls DEMPE functions associated with its Intangibles. ForCo derives royalties from its international related parties HeadCo and AusCo under licence agreements for the exploitation of its Intangibles in each of HeadCo's and AusCo's respective regions. 258. HeadCo manages and controls DEMPE activities associated with its Intangibles, which comprise the majority of the global group's intangible assets. HeadCo derives royalties from AusCo and ForCo under licence agreements for the exploitation of its Intangibles in each of AusCo's and ForCo's respective regions. Diagram 21: Example 14 – overview of cost contribution agreement Cost contribution arrangement 259. AusCo, HeadCo and ForCo decide to enter into a cost contribution arrangement (CCA) to pool their expertise and share the risks of improving each of their respective Intangibles for the mutual benefit of all participants. 260. Under the terms of the CCA: 261. Each of HeadCo, AusCo and ForCo employs specialised R&D staff, who use their expertise in performing their functions. The activities and risks borne by AusCo per the CCA accurately reflect the substance of its R&D contribution (based on an assessment of its functions, assets and risks). AusCo's proportionate share of costs is consistent with the expected benefits to be received by AusCo under the CCA as compared to HeadCo and ForCo. 262. AusCo, HeadCo and ForCo terminate their pre-existing cross-licensing agreements as a result of entering into the CCA. Risk assessment 263. This is a Migration of intangible assets. According to RAF Table 1 of this Guideline, the risk assessment is as follows. ForCo and HeadCo both have specialised staff who use their expertise in performing, managing and controlling the DEMPE activities they are responsible for. 264. The total risk assessment score for this arrangement between AusCo, HeadCo and ForCo is 5. The arrangement would be regarded as a green zone (lower-risk) Intangibles Migration Arrangement. 265. If, under the CCA, the contribution by AusCo is extensive whereas the relative contribution by either HeadCo or ForCo is of limited value, this will impact the rating for the substance risk factor and the arrangement may be regarded as a high-risk Intangibles Migration Arrangement. These will include: 266. Example 8 in this Appendix is an example of a higher-risk CCA. We also refer to Taxation Ruling TR 2004/1 Income tax: international transfer pricing – cost contribution arrangements for more extensive discussions of compliance risks associated with cost contribution arrangements. 267. Additionally, the tax attributes of other cost sharing agreement participants are considered to be indicators that the restructure could be driven by the tax outcomes. In this example, no tax attributes or other tax outcomes in RAF Table 1 apply to either ForCo or HeadCo. Where such tax attributes are present, a CCA may result in a higher-risk rating. 268. Where relevant, we may consider the potential application of the transfer pricing provisions, and the CGT provisions in relation to AusCo's entry into the CCA. For higher-risk CCA arrangements, the potential application of Part IVA of the ITAA 1936 (including the DPT) will also be considered. Example 15 – service arrangement – out of scope Diagram 22: Example 15 – overview of arrangement 269. AusCo is an Australian-headquartered company with subsidiaries in offshore locations, ForCo 1 and ForCo 2. AusCo's founder, an Australian tax resident, developed a software product that has been commercialised and distributed globally. AusCo employs 15 staff, ForCo 1 employs 3 staff and ForCo 2 employs 2 staff. 270. AusCo owns the intangible assets associated with the software product and under the direction of the founder, AusCo manages, performs and controls all of the related DEMPE activities and assumes associated risks. Worldwide income from the distribution of the software products is derived by AusCo. 271. ForCo 1 and ForCo 2 provide support activities to assist AusCo. ForCo 1 and ForCo 2 receive cost-based remuneration from AusCo under Service Agreements. AusCo maintains evidence substantiating the arm's length nature of the pricing and terms of each of the Service Agreements. Risk assessment 272. There is no Migration of intangible assets and the Australian DEMPE activities are not for the benefit of any other international related party who holds or has legal or economic ownership of the intangible assets (AusCo owns the intangible assets). 273. The arrangements between AusCo and its subsidiaries would be regarded as out of scope of this Guideline. Accordingly, the compliance approach in relation to this arrangement will not be affected by this Guideline, including the risk assessment framework. 274. In any potential review of this arrangement, we would consider the transfer pricing provisions. | Appendix 2: – Evidence expecations 275. As a preliminary matter, we will typically review the following information in our possession, where relevant, including (and depending on) whether you have relevant international related party dealings, are a significant global entity or country-by-country reporting entity or have disclosed a relevant Category C reportable tax position [43] : 276. The evidence expectations outlined in this Appendix focus on: Evidencing the commercial considerations and your decision-making process 277. In circumstances where you have restructured or had a change associated with your Intangibles Migration Arrangements, we will typically require an understanding of the broader circumstances in which the restructure or change was entered into or carried out. We will typically require information, including contemporaneous documents, to: This information is integral to our assessment of the commerciality of your Intangibles Migration Arrangements and potential compliance risks. 278. The evidence we may require includes: Evidencing the legal form and substance of your Intangibles Migration Arrangements 279. To assess the compliance risks presented by your Intangibles Migration Arrangements, we must understand the specific transactions entered into as part of your Intangibles Migration Arrangements. We will require information and documents that evidence the detailed legal form of your Intangibles Migration Arrangements to assist us in understanding your Intangibles Migration Arrangements in totality. 280. The evidence we may require to understand the legal form of your Intangibles Migration Arrangements includes: Legal agreements 281. Obtaining the legal agreements, memorandums and other documents associated with your Intangibles Migration Arrangements allows us to form a preliminary view of your Intangibles Migration Arrangements, which includes all relevant intangible assets, associated activities and entities involved in the arrangements. This includes, for example, relevant asset purchase agreements, sale agreements, royalty or licensing agreements, associated contract R&D service agreements with international related parties, including any amendments to, or restatements of, such agreements. 282. Where legal agreements are not yet drafted or are subject to change, we may require available draft or interim agreements, memorandums or like documents. If relevant agreements and documents are subject to change, this will impact our ability to determine the level of risk presented by your Intangibles Migration Arrangements. 283. We may also request relevant agreements or other documents between other international related parties and, in certain circumstances, third parties to allow us to obtain a holistic understanding of your global group's Intangibles Migration Arrangements. For example, where international related parties with which the Australian entity has entered into agreements have similar or dissimilar arrangements with other international related parties in connection with intangible assets. Guidelines, manuals, policies and governance-like documents 284. Obtaining your internal guidelines, manuals, policies, procedures, specifications, governance and like documents relevant to your Intangibles Migration Arrangements allows us to establish whether you and your associates have policies and work processes in place that are relevant to your arrangements. This includes relevant group intellectual property management policies evidencing whether intangible assets are managed by a central team, R&D policies or other policies concerning the development, management and commercialisation of your intangible assets. 285. These facts and documents enable us to understand the broader circumstances surrounding your Intangibles Migration Arrangements and inform our assessment of risk. For example, we may have concerns where your group intellectual property management and R&D policies appear to be inconsistent with your legal agreements or your actual conduct or dealings with other parties in relation to the intangible assets. Transfer pricing documentation 286. Obtaining your transfer pricing documentation allows us to gain an overall understanding of the operation of your Intangibles Migration Arrangements, including the identification of all relevant intangible assets, entities, activities and associated transfer pricing outcomes. This documentation allows us to assess the degree to which your transfer pricing analysis supports the arm's length nature of your Intangibles Migration Arrangements, which would inform our risk assessment. 287. We may also compare your transfer pricing documentation with your group intellectual property management and R&D policies, legal agreements with international related parties or your actual conduct or dealings with other parties in relation to the intangible assets to better understand your Intangibles Migration Arrangements. Country-by-country reporting documentation 288. If you are a significant global entity or country-by-country reporting entity, we will also consider information provided as a part of any available CBC reporting documentation, such as agreements provided in Part B of your local file and Master file documentation. We may request further information, such as the underlying data and records that you used to prepare your CBC reporting. Identifying and evidencing the intangible assets and connected DEMPE activities 289. The identification of relevant intangible assets and connected DEMPE activities is critical to assessing the level of compliance risks presented by your Intangibles Migration Arrangements. As such, in addition to obtaining an understanding of the legal form of your Intangibles Migration Arrangements, we will seek to identify or clarify relevant intangible assets and connected DEMPE activities in more specific detail. We will do so to clarify how your Intangibles Migration Arrangements operate in substance and mitigate any uncertainty arising from documents and evidence establishing the legal form of your arrangements (legal form documents). 290. We may also require specific documents and evidence to identify and clarify your intangible assets and DEMPE activities due to the: 291. These issues may require discussions or interviews of relevant personnel or the review of specific documentation to inform our risk assessment. Identifying intangible assets 292. The evidence we may require you to maintain to identify and clarify intangible assets relevant to your Intangibles Migration Arrangements include documents which detail the names or identifiers and functions of relevant intangible assets and the products, processes or other relevant commercial activities they are associated with. We will also seek to obtain evidence of the nature of relevant assets (for example, copyright, patent, design or model, plan, know-how, secret formula or process, trade mark or other like property or right) and whether such assets have been registered. Our document and evidence expectations extend to know-how assets relating to business processes, interpretation of data, a valuable concept or business innovation not able to be registered. 293. The evidence we may require includes: Identifying DEMPE activities 294. We may require contemporaneous documentation and evidence to clarify the DEMPE activities connected with your Intangibles Migration Arrangements in more specific detail. We expect that the functions performed, assets used and risks assumed by relevant entities in connection with the DEMPE of intangible assets will be detailed in your transfer pricing documentation. We may seek to clarify this information, for example, by obtaining correspondence of persons involved in DEMPE activities or by identifying and interviewing personnel involved in DEMPE activities, relevant decision-makers and approval points and any activities outsourced to third or related parties. 295. The evidence we may require includes: Evidencing intangible assets and DEMPE activities 296. We may also seek to obtain evidence to substantiate aspects of your legal form documents, the nature of relevant intangible assets and aspects of DEMPE activities. We will request this information to obtain assurance that the substance of your Intangibles Migration Arrangements aligns with the legal form of the arrangement and consider whether there are any associated compliance risks. 297. We may require documents to ensure that the obligations outlined in your legal form documents are consistent with what is occurring in practice. We may analyse the functions performed by relevant entities in connection with the Intangibles Migration Arrangements with reference to specific clauses in legal agreements, group policies, correspondence or transfer pricing documentation. We may also require information and documents, including email correspondence, which demonstrate that entities held out to be managing, controlling or performing DEMPE activities and assuming associated risks, have the capability, financial capacity and assets to do so in substance. 298. The evidence we may require includes: Evidencing the tax and profit outcomes of your Intangibles Migration Arrangements 299. We may require documents to assess the appropriateness of the tax and profit outcomes resulting from your arrangements, including the transfer pricing method and comparability studies applied, where relevant. 300. The evidence we may require includes: Simplified record keeping 301. If you are eligible to apply any of the simplified transfer pricing record-keeping options under PCG 2017/2 , we will have regard to the record-keeping obligations outlined, where relevant. 302. PCG 2017/2 is not available to small taxpayers and distributors in relation to international-related party dealings involving royalties, licence fees or R&D arrangements. We note: 303. Some dealings for which the 'low value adding intragroup services' option has been applied under PCG 2017/2 may fall within the definition of 'Excluded Low Value Services Arrangement' and be out of scope for this Guideline.",,/law/view/document?LocID=%22COG%2FPCG20241EC%2FNAT%2FATO%2F00001%22&PiT=99991231235958,False,False,https://www.ato.gov.au/law/view/document?docid=COG/PCG20241/NAT/ATO/00001
PCG 2025/D7,Draft PCG,Draft Practical Compliance Guideline,Draft,,11,,,,,,"Scope: This Practical Compliance Guideline is a draft for consultation purposes only. When the final Guideline issues, it will have the following preamble: This Practical Compliance Guideline sets out a practical administration approach to assist taxpayers in complying with relevant tax laws. Provided you follow this Guideline in good faith, the Commissioner will administer the law in accordance with this approach. What this draft Guideline is about 1. The purpose of this draft Guideline [1] is to support taxpayers with managing their compliance risks with respect to section 26-50 of the Income Tax Assessment Act 1997, which is a tax law integrity provision. 2. All further legislative references in this Guideline are to Income Tax Assessment Act 1997, unless otherwise indicated. 3. Draft Taxation Ruling TR 2025/D1 Income tax: rental property income and deductions for individuals who are not in business expresses our view on section 26-50, which outlines that the intention of section 26-50 is to establish a firm rule to deny deductions for taxpayers obtaining a tax subsidy for what is in truth expenditure on their own recreation. 4. Section 26-50 denies deductions for losses or outgoings that relate to the ownership or use [2] of a holiday home unless an exception applies. Section 26-50 may be relevant to a broad range of properties that are a 'holiday home'. While the term 'holiday home' [3] is broad, there is a significant exception if you mainly use a holiday home (or hold it for use) to produce assessable income in the nature of rents, lease premiums, licence fees or similar charges. [4] This Guideline is concerned with the application of this exception. 5. This Guideline sets out how we differentiate risk and how we manage that risk for a range of rental property arrangements to which section 26-50 may apply. We aim to give you more certainty by setting out how we will engage with you, including how we: 6. This Guideline uses 3 coloured zones to denote risk ratings in relation to how section 26-50 may apply to your arrangements. Refer to Table 2 at paragraph 18 of this Guideline to see a summary of these zones and the corresponding compliance approach. The coloured zones in this Guideline represent a spectrum of behaviours as illustrated in Table 1 of this Guideline. (low risk) (medium risk) (high risk) 7. This Guideline is designed to give you confidence that, if your circumstances align with the principles in the green zone set out in this Guideline, the Commissioner will not have cause to apply compliance resources to consider the application of section 26-50 to your arrangements, except to confirm that your arrangements meet the requirements of the green zone. 8. This Guideline may be updated from time to time to reflect changes in identified risks relating to the application of section 26-50. 9. Note: this Guideline does not replace, alter or affect the ATO's interpretation of the law in any way. It complements, and should be read together with, TR 2025/D1, which sets out the ATO's interpretative position on the application of section 26-50. This means that if, under this Guideline, we allocate compliance resources to consider section 26-50, our consideration of section 26-50 will be in accordance with our interpretation set out in TR 2025/D1. What is not covered by this Guideline 10. This Guideline does not apply to:","15. Setting out our approach to the application of section 26-50 in this Guideline allows us to deal with the increasing risk of taxpayers inappropriately using the tax system to subsidise their private recreation through the utilisation of modern arrangements in the rental property market. Such arrangements include allowing property owners to easily and inexpensively list their holiday homes as available for rent through sharing platforms. 16. Rental investment by taxpayers in Australia is very common. This Guideline provides practical guidance to assist taxpayers who rent out their holiday homes in complying with their obligations. This Guideline provides support to individuals in determining whether the exception in subparagraph 26-50(3)(b)(ii) [7] , for using their holiday home (or holding it for use) mainly to produce assessable income in the nature of rents, lease premiums, licence fees or similar charges, may apply to their circumstances. 17. Our approach to the application of section 26-50 will not impact property owners who legitimately use their property (or hold it for use) mainly to produce assessable income in the nature or rents, lease premiums, licence fees or similar charges as explained in TR 2025/D1. In these situations, you can choose to use the apportionment methods outlined in Draft Practical Compliance Guideline PCG 2025/D6 Apportionment of rental property deductions – ATO compliance approach to apportion your deductions for any private use of your rental property.","Intro: This Practical Compliance Guideline is a draft for consultation purposes only. When the final Guideline issues, it will have the following preamble: This Practical Compliance Guideline sets out a practical administration approach to assist taxpayers in complying with relevant tax laws. Provided you follow this Guideline in good faith, the Commissioner will administer the law in accordance with this approach. | What this draft Guideline is about: 1. The purpose of this draft Guideline [1] is to support taxpayers with managing their compliance risks with respect to section 26-50 of the Income Tax Assessment Act 1997, which is a tax law integrity provision. 2. All further legislative references in this Guideline are to Income Tax Assessment Act 1997, unless otherwise indicated. 3. Draft Taxation Ruling TR 2025/D1 Income tax: rental property income and deductions for individuals who are not in business expresses our view on section 26-50, which outlines that the intention of section 26-50 is to establish a firm rule to deny deductions for taxpayers obtaining a tax subsidy for what is in truth expenditure on their own recreation. 4. Section 26-50 denies deductions for losses or outgoings that relate to the ownership or use [2] of a holiday home unless an exception applies. Section 26-50 may be relevant to a broad range of properties that are a 'holiday home'. While the term 'holiday home' [3] is broad, there is a significant exception if you mainly use a holiday home (or hold it for use) to produce assessable income in the nature of rents, lease premiums, licence fees or similar charges. [4] This Guideline is concerned with the application of this exception. 5. This Guideline sets out how we differentiate risk and how we manage that risk for a range of rental property arrangements to which section 26-50 may apply. We aim to give you more certainty by setting out how we will engage with you, including how we: 6. This Guideline uses 3 coloured zones to denote risk ratings in relation to how section 26-50 may apply to your arrangements. Refer to Table 2 at paragraph 18 of this Guideline to see a summary of these zones and the corresponding compliance approach. The coloured zones in this Guideline represent a spectrum of behaviours as illustrated in Table 1 of this Guideline. | (high risk): 7. This Guideline is designed to give you confidence that, if your circumstances align with the principles in the green zone set out in this Guideline, the Commissioner will not have cause to apply compliance resources to consider the application of section 26-50 to your arrangements, except to confirm that your arrangements meet the requirements of the green zone. 8. This Guideline may be updated from time to time to reflect changes in identified risks relating to the application of section 26-50. 9. Note: this Guideline does not replace, alter or affect the ATO's interpretation of the law in any way. It complements, and should be read together with, TR 2025/D1, which sets out the ATO's interpretative position on the application of section 26-50. This means that if, under this Guideline, we allocate compliance resources to consider section 26-50, our consideration of section 26-50 will be in accordance with our interpretation set out in TR 2025/D1. | What is not covered by this Guideline: 10. This Guideline does not apply to:","Example 1: – limited personal use with high occupancy 26. Eric lives in Victoria and owns an apartment on the Gold Coast, Queensland. The property is near the beach and is managed by property managers as part of the apartment complex rental pool. All rental enquiries are managed and responded to by a dedicated property manager. The property is regularly rented on a short-stay basis and consistently has a high occupancy rate. Eric usually blocks out 4 weeks a year for personal use of the apartment for his annual holiday when rental demand for the property is low. 27. Eric lives interstate but will also occasionally stay at the apartment when visiting the area if the apartment happens not to be already booked out or rented. 28. Eric's claim for deductions relating to the Gold Coast apartment would not be denied because it is a holiday home that he uses (or holds for use) mainly to produce income from rent. Eric's use of the property shows clear prioritisation of income-producing activity over personal use. He will be required to apportion deductions under section 8-1 for his incidental personal use of the property. | Example 2: – limited personal use of seasonal property with high occupancy 29. Natalie and Scott own a house in the Barossa Valley. They advertise the property year-round on a sharing economy platform. The property has a high occupancy rate during the usual 4-month peak period, and a low occupancy rate at other times. 30. Each year, while on holiday, Natalie and Scott stay at the property for one week during peak period, otherwise they actively manage the property to maximise rental income. 31. Natalie and Scott's claim for deductions for their house would not be denied because it is a holiday home that they use (or hold for use) mainly to produce income from rent. Natalie and Scott's attitude towards the marketing of the property shows an intent to prioritise income derived from the property, and their personal use is incidental to this. If Natalie and Scott do stay at the property, they will be required to apportion deductions under section 8-1 for their personal use of the property. Amber zone factors and arrangements 32. Amber zone arrangements usually have factors that point to lower commercial exploitation of a property to produce rents, lease premiums, licence fees or similar charges and an increase in other uses, most commonly, personal use. 33. Factors that could point to an amber zone arrangement include, but are not limited to: 34. No single factor is decisive, and the weight given to each of these (or other) factors will vary depending on your individual circumstances. | Example 3: – personal use during peak period 35. Leonie owns an apartment in Hobart which she markets on a sharing economy platform. When the property is available to guests, it is occupied more often than not. 36. For a few months each year during peak periods, Leonie uses the apartment as a retreat while she is on holiday. Leonie does not respond to enquiries from potential tenants for the periods she wants to use it. Because Leonie uses the apartment for her holidays and recreation, the apartment is a holiday home. 37. Should Leonie want to shift to the green zone, she could reconsider her private usage and make attempts to maximise income from the use of the property by more actively managing the apartment year-round to ensure that it remains used (or held for use) mainly to produce income at all times in the year. | Example 4: – prioritising personal use during peak periods 38. Ryan and Tom live in Adelaide and own an apartment in the Melbourne central business district which they have available for short-term rentals on various sharing economy platforms. 39. Ryan and Tom are sports fans and use the apartment at specific times when there is a sporting event taking place in Melbourne, such as the Australian Open tennis tournament, the Formula 1 Australian Grand Prix, and major Australian football league games. Because Ryan and Tom use the apartment for their holidays and recreation, the apartment is a holiday home. 40. When not needed by Ryan and Tom the apartment is mostly booked out for rental for full weeks during school holiday periods. There are other incidental bookings throughout the year. 41. If Ryan and Tom want to shift to the green zone, they could reconsider their current position of prioritising their personal usage of the property during peak periods. | Example 5: – prioritising personal use of seasonal property 42. Ling owns a luxury ski chalet in Thredbo, New South Wales. The property is advertised online via sharing economy platforms. 43. During the ski season, which lasts around 4 months, Ling uses the property for a few days per fortnight, blocking it out for her personal use so she can enjoy skiing. When the property is not used by Ling during the ski season, it is consistently booked. In the off-season, the chalet attracts occasional weekend bookings. 44. Ling's chalet is a holiday home because she uses it for holidays or recreation. Ling's approach to the chalet indicates an intention to produce some income from it. However, she extensively uses the chalet privately during the ski season which is a peak income-earning period. 45. If Ling wants to shift to the green zone, she could reconsider her personal usage of the property during peak ski season when the property has the highest income-earning potential. Red zone factors and arrangements 46. Red zone arrangements for the purposes of section 26-50 are ones where there is little or no commercial exploitation of the property to produce income through rents, lease premiums, licence fees or similar charges and the non-income-producing use is usually prioritised. 47. Factors that could point to a red zone arrangement include, but are not limited to: 48. No single factor is decisive, and the weight given to each of these (or other) factors will vary depending on your individual circumstances. | Example 6: – major features inaccessible with limited attempt to rent 49. Kristoff purchases a luxury property in Sorrento, Victoria. Rental demand for the property is at its highest during the summer months. Typically, Kristoff rents the property for 3 or 4 weeks per year. 50. The house is listed on one sharing economy platform and is managed by Kristoff, who does not respond to queries in a timely manner, if at all. 51. Kristoff stays at the property for 1 or 2 weeks each year while he is on leave, around the New Year's Eve holiday period. The property is furnished with high-end furniture, and houses Kristoff's extensive wine and fine art collections as well as his boat and jet-ski, which are all inaccessible to guests. 52. Because Kristoff uses the house for holidays or recreation, it is a holiday home. Kristoff cannot rely on the exception to the application of subsection 26-50(1) in subparagraph 26-50(3)(b)(ii). Subsection 26-50(1) will therefore apply to deny deductions relating to property ownership. [12] | Example 7: – prioritising private use, times blocked out for personal use 53. Josh lives in Perth and owns a beach house in Busselton, Western Australia. The beach house is advertised for rent year-round through an agent and on sharing economy platforms. The beach house is highly desirable during the summer months and is rented at a higher rate during this time. The beach house is always blocked out for use by Josh and his family and friends at Christmas and Easter, and during summer school holiday periods. 54. Josh and his family do not always use the property for the blocked-out dates, but Josh has instructed his agent not to let the property during these times just in case they wish to use it at short notice. Josh is very selective about who can rent the property and rejects many of the booking enquiries he receives. On average, the beach house is rented out to unrelated guests about 10 weeks per year. 55. Because Josh uses the beach house for holidays and recreation, it is a holiday home. Josh is prioritising his personal use of the property over any income-earning use. The beach house is a holiday home that is not mainly being used to produce assessable income. The exception in subparagraph 26-50(3)(b)(ii) will not apply and subsection 26-50(1) will apply to deny deductions relating to property ownership. [13] | Example 8: – unreasonable restrictions, prioritising private use 56. Andy is an avid golfer. He purchases a property on a golf course in the Hunter Valley, New South Wales. The property is advertised online via sharing economy platforms. Andy stays at the property approximately 1 or 2 Sundays each month to play golf. 57. The property has a minimum stay requirement of 4 nights but has a recurring block-out period on Sundays to allow Andy to use the property when he wishes on those days. Andy also ensures that prospective tenants are made aware that the property has poor mobile phone reception and does not have any internet available for use by tenants. The property is let approximately 5 or 6 times per year for the minimum 4-night stay. 58. Because the property is used for Andy's holidays or recreation, it is a holiday home. Andy is prioritising his personal use of the property over any income-producing use. The property is a holiday home that is not mainly being used to produce assessable income, and subsection 26-50(1) will apply to deny deductions relating to property ownership. [14] | Example 9: – mainly used for holidays and recreation by owners 59. Shane and Carmen live in rural South Australia, and own a property in Glenelg Beach, South Australia. They have owned the property for many years, and it has always been let as an income-producing long-term rental property. 60. Shane and Carmen both retire from work and begin to travel more. They decide to evict their long-term tenants and shift their rental strategy for the property to short-term rentals so that they can visit the property on weekends and for holidays on a regular basis. 61. The property is only very occasionally rented out via several sharing economy platforms, with Shane and Carmen seldom responding to enquiries. They tend to make their holiday and travel plans at the last minute, so rarely block out specific dates, but will cancel a booking if it conflicts with their plans to utilise the property. 62. The property is considered a holiday home. Because of their prioritisation of their personal use of the property over any income-producing use, Shane and Carmen will not be able to rely on the exception in subparagraph 26-50(3)(b)(ii). Subsection 26-50(1) will apply to deny deductions relating to property ownership. [15]",,,,False,True,https://www.ato.gov.au/law/view/document?docid=DPC/PCG2025D7/NAT/ATO/00001
PCG 2020/3,Final PCG,Claiming deductions for additional running expenses incurred whilst working from home due to COVID-19,,,1 March 2020,,,PS LA 2001/6,,"1. As a result of COVID-19, a significant number of employees and business owners are working from home and incurring additional running expenses in relation to their income-producing activities. Additional running expenses include lighting, heating, cooling and cleaning costs, electricity for electronic items used for work, the decline in value and repair of home office items such as furniture and furnishings in the area used for work [1] , phone and internet expenses, computer consumables, stationery and the decline in value of a computer, laptop or similar device. 2. Law Administration Practice Statement PS LA 2001/6 Verification approaches for home office running expenses and electronic device expenses states that taxpayers can calculate certain of their additional running expenses by using a fixed rate of 52 cents per hour [2] ( current fixed rate per hour ) or by keeping records and written evidence to determine their work-related proportion of actual expenses incurred. 3. The current fixed rate per hour covers home office electricity (lighting and cooling/heating, running electrical items such as a computer), gas (heating), cleaning and the decline in value of home office items such as furniture and furnishings. It does not cover other expenses such as computer consumables, stationery, phone and internet expenses or the decline in value of a computer, laptop or similar device. As such, a record of the hours worked at home along with full written evidence to substantiate those expenses that are not covered by the current fixed rate per hour must still be kept when using this methodology. 4. This Guideline provides a simpler alternative to the approach in PS LA 2001/6 by specifying a fixed rate per hour that covers all of the running expense items referred to in paragraph 1 of this Guideline for taxpayers covered by paragraph 7 of this Guideline. This alternative shortcut rate (described in paragraphs 26 and 27 of this Guideline) is expected to be particularly helpful for taxpayers now working from home because of the COVID-19 emergency. 5. This Guideline does not cover occupancy expenses. Occupancy expenses relating to your home such as rent, mortgage interest, property insurance and land taxes will not become deductible only because you are required to work from home temporarily as a consequence of COVID-19. Occupancy expenses are only deductible if part of the home has the character of a place of business. Whether part of an employee's or business owner's home has the character of a place of business is covered in TR 93/30. Although entitlement to claim mortgage interest expenses may impact a taxpayer's ability to claim the full main residence exemption when they sell their home, this will not be relevant for taxpayers only working at home temporarily due to COVID-19 and not otherwise using their home to earn income.",,,,"Example 1: not working from home 13. Abed's employer has requested staff take leave while the business is suffering a downturn due to COVID-19. Abed takes four weeks annual leave. During that period he occasionally checks his email to see if there is anything he needs to keep abreast of while he is on leave. His employer also sends him text messages to keep him up to date on changes to the business. 14. This would not qualify as working from home as Abed is on leave and not actively working; he is just occasionally checking in. As such, Abed cannot rely on this Guideline. | Example 2: working from home 15. Bianca is a sole trader who works as a copy writer and editor. She usually works out of a shared workspace in the central business district as it is easier to meet with her clients face-to-face. Bianca decides to work from home as a result of COVID-19 and replaces her face-to-face meetings with online video conferencing. Bianca continues to operate her business and would meet the criteria for working from home. As such, Bianca can rely on this Guideline to claim her additional running expenses. Second criterion - incurring additional running expenses 16. The second criterion requires taxpayers to have incurred additional running expenses as a result of working from home. This means that the employee or business owner must be paying or be liable to pay for additional running expenses that are deductible. In circumstances where a third party is reimbursing the taxpayer for their additional running expenses or incurring the additional running expenses on the taxpayer's behalf, the taxpayer would not meet this criterion. 17. Incurring additional running expenses may take a number of forms. It may be an increased usage in electricity as more electronic devices are plugged in while working from home, heating and cooling costs incurred during days when taxpayers would not be at home or the purchase of additional office supplies and equipment to use while working at home. 18. An additional running expense may also arise as a consequence of a previously non-deductible private expense now becoming deductible due to a change in the way it is being used. For example, if a home computer had only ever been used for private purposes and is now being used to fulfil employment duties or in running a business, it would be an additional running expense that is incurred. 19. For the purposes of this Guideline, incurring additional running expenses does not require having a separate or dedicated area of your home set aside for working such as a private study, but having a dedicated space makes it easier to show additional running expenses have been incurred. Incurring additional running expenses does not mean the taxpayer has to have all the expenses listed in paragraph 26 of this Guideline, just that they have incurred additional running expenses in some of those categories as a result of working from home. | Example 3: additional running expenses incurred - existing arrangement 20. Duyen is an employee of an online trading business. Up until the end of February, Duyen spent two days working from home and three days working at the office of her employer. As a result of COVID-19, she starts working from home five days per week from 1 March 2020. For the period from 1 July 2019 to 29 February 2020, Duyen uses the current fixed rate of 52 cents per hour to calculate her additional running expenses including electricity expenses, cleaning expenses and the decline in value and repair of her office furniture. She also calculates her work-related phone and internet expenses using the itemised phone bill for one month on which she has marked her work-related phone calls and the four-week representative diary of internet usage that she kept. 21. As Duyen is working from home she can rely on this Guideline to claim her additional running expenses for the period from 1 March 2020. 22. Duyen ends up working from home for five days per week until 30 June 2020 as a result of COVID-19. Rather than continuing to use the current fixed rate and working out the actual expenses she incurred on her phone and internet expenses from 1 March 2020 to 30 June 2020, Duyen decides, for simplicity, to calculate all of her running expenses using the shortcut rate. Duyen uses the timesheets she is required to provide to her employer to calculate the number of hours she works from home in the period from 1 March 2020 to 30 June 2020 and keeps those timesheets as evidence of her claim. | Example 4: additional running expenses incurred - business owner 23. Elizabeth runs a small business selling art and framing pictures. She has a store with a workshop to display the art and frames. She also does all her bookkeeping and administrative tasks in the office at the store. As a result of the downturn in people coming into her store due to COVID-19, Elizabeth decides to close her store and continue running her business online from home. As Elizabeth continues to run her business from home due to COVID-19, she can rely on this Guideline to claim her additional running expenses. [3] The practical approach 24. If a taxpayer meets both of the criteria outlined in paragraph 7 of this Guideline a taxpayer can rely on this Guideline and use the shortcut rate to calculate their additional running expenses for the period they work from home. However, if a taxpayer would rather claim their actual additional running expenses, they do not have to use the shortcut rate. They can claim their actual expenses and keep all records necessary to substantiate their claim, as per normal record-keeping rules. 25. Taxpayers can also choose to use the fixed rate of 52 cents per hour for relevant expenses and keep records of other expenses in accordance with PS LA 2001/6, instead of using the shortcut rate. The shortcut rate 26. The shortcut rate is 80 cents per hour. This rate can be claimed for every hour that is worked at home. The hourly rate covers all additional running expenses, namely: 27. If a taxpayer uses the shortcut rate to claim a deduction for their additional running expenses, they cannot claim a further deduction for any of the expenses listed at paragraph 26 of this Guideline. Record keeping 28. If a taxpayer wishes to rely on the shortcut rate to calculate their additional running expenses they will need to keep a record of the hours they have worked at home. This could be in the form of timesheets, rosters, a diary or similar document that sets out the hours worked. Tax return description 29. Taxpayers who: must include the notation 'COVID-hourly rate' next to their deduction for home office expenses in their 2019-20, 2020-21 and 2021-22 tax returns. | Example 5: calculating additional running expenses using shortcut rate 30. Ephrem is an employee and as a result of COVID-19 he is working from his home office. In order to work from home, Ephrem purchases a computer on 15 March 2020 for $1,299. He intends to use the shortcut rate to claim his additional running expenses. 31. During the entire period he is working from home as a result of COVID-19, Ephrem notes in the calendar on his computer, when he starts and finishes each day along with a note about any breaks he has and how long those breaks were. 32. When it comes to lodging his 2019-20 tax return, Ephrem works out that during the period he worked from home as a result of COVID-19, he worked a total of 456 hours. 33. Ephrem calculates his deduction for the 2019-20 income year for additional running expenses as: 456 hours × 80 cents per hour = $364.80 34. As Ephrem has claimed his additional running expenses using the shortcut rate, he cannot claim a separate deduction for the decline in value of his computer. Ephrem keeps a record of the calendar entries he has made to demonstrate how he calculated the number of hours he worked from home. Ephrem also keeps the receipts for his computer purchase in case he will need to claim depreciation in future. 35. When he lodges his 2019-20 tax return using myTax, Ephrem includes the notation 'COVID-hourly rate'.",,,,False,False,https://www.ato.gov.au/law/view/document?docid=COG/PCG20203/NAT/ATO/00001
PCG 2019/7,Final PCG,Compliance approach for large APRA-regulated superannuation funds in respect of pension tax bonuses not included in members' opening account balances on commencement of a pension,,,1 July 2017,,,TR 2013/5,,1. This Guideline provides a transitional compliance approach for large Australian Prudential Regulation Authority (APRA) regulated superannuation funds that provide a pension tax bonus to members where the superannuation funds are facing practical difficulties in complying with certain legislative requirements.,,"6. A superannuation fund may account for deferred tax liabilities attributable to members who hold a superannuation interest that is in the accumulation phase. When the member commences an RP superannuation income stream, the superannuation fund may recognise a reduction in the fund's deferred tax liability as attributable to that member. This is due to the operation of the exempt current pension income provisions as set out in Subdivision 295-F of the ITAA 1997. In this situation, the superannuation fund may pay a pension tax bonus to the member. 7. A pension [2] is a superannuation income stream where it satisfies the requirements of subregulation 1.06(1) of the SISR. [3] One of these requirements is that specified minimum annual pension payments are made. [4] When a pension is commenced, the member's pension account balance on commencement day must be determined for the purposes of calculating those required minimum pension payment amounts. [5] 8. Where the superannuation fund agrees to pay the pension tax bonus into the superannuation interest supporting the RP superannuation income stream at the commencement of the income stream, the value of the pension tax bonus needs to be taken into account in determining the member's pension account balance to ensure that the required minimum pension payments are made. A consequence of not doing so is that it is possible that the superannuation fund will not pay the required minimum annual pension payment, resulting in the trustee being taken not to have paid an RP superannuation income stream to the member in the relevant income year. [6] This would consequently impact the superannuation fund's calculation of its exempt current pension income. 9. The important feature is that the superannuation fund agrees to pay the pension tax bonus, including by way of a credit or additional units or other form of augmentation, from the day the RP superannuation income stream commences. The fact that a superannuation fund, due to system constraints, may credit this amount to the member's superannuation interest after the commencement of the RP superannuation income stream does not alter the requirement to recognise the value of the credit in determining the member's pension account balance for the purposes of calculating the required minimum pension amount. 10. Further, for the purposes of the transfer balance cap regime, the member will have a transfer balance credit equal to the value of the superannuation interest that supports the RP superannuation income stream on the day that the superannuation income stream commences. [7] Accordingly, the amount of the transfer balance credit will incorporate the value of the pension tax bonus as part of the value of the superannuation interest. 11. We recognise that some superannuation funds that wish to provide pension tax bonuses to members may need to modify existing systems to ensure full automation, and integration with core processing and integrity controls with respect to having the value of the pension tax bonus correctly reflected in the member's pension account balance.","Intro: This Practical Compliance Guideline sets out a practical administration approach to assist taxpayers in complying with relevant tax laws. Provided you follow this Guideline in good faith, the Commissioner will administer the law in accordance with this approach.",,,,,False,False,https://www.ato.gov.au/law/view/document?docid=COG/PCG20197/NAT/ATO/00001
PCG 2022/1,Final PCG,"Non-commercial business losses - Commissioner's discretion regarding flood, bushfire or COVID-19",,,13,,,TR 2007/6,,"1. Division 35 of the Income Tax Assessment Act 1997 prevents an individual's losses [1] from non-commercial business activities being offset against the individual's other assessable income in the year the loss is incurred. [2] 2. All legislative references in this Guideline are to the Income Tax Assessement Act 1997. 3. Division 35 operates in relation to the business activities carried on by a business, rather than the business itself. A business may be made up of more than one business activity. 4. Broadly, a loss from each business activity that an individual (alone or in partnership) carries on in a year is deferred to be offset against future income from the same business activity, unless: 5. The discretion can be exercised in relation to a business activity for one or more income years if the Commissioner is satisfied that it would be unreasonable, by reference to the circumstances specified, to defer the losses. 6. One of the circumstances in which the discretion may be exercised is where the business activity was or will be affected by special circumstances outside the control of the operators of the business activity, including drought, flood, bushfire or some other natural disaster. [7] 7. This discretion is for situations where the business activity was or will be affected by special circumstances that caused it to fail to satisfy one of the 4 tests or make a profit in the relevant year. [8] 8. Special circumstances outside of the control of the operator of the business activity are those which are sufficiently different to distinguish them from the circumstances that occur in the normal course of conducting a business activity. Ordinary economic, weather or market fluctuations (which are expected to occur on a regular or recurrent basis and could reasonably be predicted to affect the business activity) will not normally be considered special circumstances. [9] 9. Ordinarily, special circumstances are those which have materially affected the business activity, causing it to not satisfy any of the 4 tests. [10] In addition to drought, flood and bushfire, examples of special circumstances (depending on the facts) may include government restrictions, explosions and disturbances to energy supplies. 10. In recent years, special circumstances such as flood, bushfire and COVID-19 impacts may have caused the non-commercial loss rules to apply to a taxpayer's business. If this happens and a taxpayer does not meet one of the other requirements for the loss to be offset against their other income, the taxpayer will need to seek the Commissioner's discretion to allow them to do so. 11. This Guideline outlines a safe harbour that, provided you satisfy the relevant conditions, allows you to manage your tax affairs as if the Commissioner had exercised the discretion in paragraph 35-55(1)(a). It does not, however, apply to amounts deferred in previous income tax years under the non-commercial loss rules. This Guideline also does not prevent you from applying for an exercise of the discretion in the usual way if your circumstances do not fall within the terms of the safe harbour. 12. This Guideline does not apply to the Commissioner's discretions in:",,,"Intro: 14. If your circumstances satisfy the conditions listed in paragraph 16 of this Guideline, you can manage your tax affairs as if we had exercised the discretion. There is no need to apply for the discretion to be exercised. 15. If you choose to use this safe harbour and are subsequently selected for an ATO compliance check, we may seek to confirm that you satisfy the relevant safe harbour conditions. | Safe harbour – conditions: 16. You qualify for the safe harbour if you satisfy all of criteria (a) to (f) listed in this paragraph in an income year and you made a tax profit from your business activity in the immediately preceding income year [12] :","Example s: 17. The following examples illustrate how the safe harbour can apply in various situations. | Example 1: – bushfire – eligible to use the safe harbour 18. Ismoth operates an established beekeeping business. At the commencement of the 2019–20 income year, the business maintained 100 hives that provided pollination services to agricultural enterprises and produced honey for sale. The business had generated small tax profits in recent years, including in the 2018–19 income year. 19. In December 2019, the business activity was impacted by bushfire resulting in a loss of approximately half the hives. In previous years, the average loss of hives was approximately 5% per year. 20. Ismoth's other income remained stable and she met the income requirement in the 2019–20 income year. 21. Ismoth's beekeeping business returned a loss in the 2019–20 income year. 22. Ismoth maintains evidence of the loss of hives to demonstrate the impact of the bushfire on her business activity. 23. In this case, Ismoth is eligible to use the safe harbour. | Example 2: – flood – not eligible to use the safe harbour 24. Steve runs a coffee roasting business from the garage of his home. He has not made a profit in recent years, including in the 2019–20 income year. Steve meets the income requirement in the 2020–21 income year. 25. In the 2020–21 income year, the town where Steve lives was inundated with flood water and Steve closed his business for 3 months to undertake repairs to his garage, where the business activity was conducted. 26. Even though the flood would be a special circumstance, which impacted Steve's business activity, Steve did not make a tax profit in the income year before the event. In this case, Steve is not eligible to apply the safe harbour. However, Steve can apply for the exercise of the discretion in the usual way. | Example 3: – COVID-19 – eligible to use the safe harbour for current year's loss only 27. Mary operates a food truck and meets the income requirement in the 2019–20 income year. 28. The business activity made a loss of $15,000 in the 2017–18 income year. Mary was not eligible to use the losses and they were deferred. The business generated a tax profit of $10,000 in the 2018–19 income year. Mary offset $10,000 of her carried forward losses against that income; however, the remaining $5,000 was deferred and carried forward. 29. A government-imposed lockdown in response to COVID-19 meant that Mary could not operate her business from March to June 2020. In the 2019–20 income year, the business made a loss of $7,000. Mary maintains evidence of the lockdown's impact on her business. 30. In this case, Mary is eligible to use the safe harbour to offset the $7,000 loss from the 2019–20 income year against her other income but cannot use the safe harbour to offset the $5,000 loss previously deferred. | Example 4: – COVID-19 – income requirement – not eligible to use the safe harbour 31. Virat operates a successful boutique clothing design and manufacture business, which supplies several independent retail stores across Australia. In recent income years, the business has made tax profits. 32. During a number of months in the 2020–21 income year, a series of government-imposed COVID-19 restrictions limited Virat's ability to manufacture and supply clothes to his customers. Virat's business activity made a loss in that year. 33. Virat's other taxable income and net investment losses were greater than the income requirement of $250,000. 34. In this case, while Virat's business activity was affected by special circumstances outside his control and the business made a loss, he is not eligible to apply the safe harbour because he did not meet the income requirement. However, Virat can apply for the exercise of the discretion in the usual way. | Example 5: – COVID-19 – able to carry on the business activity – not eligible to use the safe harbour 35. Bert conducts a share trading business activity, which has made a tax profit in the last income year. The share trading business activity is for his own benefit. 36. In the 2020–21 income year, the values of Bert's holdings fluctuated and he made a loss from his share trading activity. The area where Bert lived was subject to extended periods in government-imposed lockdown due to COVID-19 but this did not prevent Bert from conducting his share trading business activity as normal. Bert meets the income requirement in the 2020–21 income year. 37. Bert was able to continue his share trading business activity as normal despite COVID-19 and therefore is not eligible to apply the safe harbour. | Example 6: – calculating if a business activity has made a loss – not eligible to use the safe harbour 38. Jana carries on a 3D-printing business activity from home. In the 2019–20 income year, she made a loss of $20,000, which was deferred under the non-commercial loss rules. 39. In the 2020–21 income year, Jana's business activity made a profit of $5,000. Jana used part of the loss from the 2019–20 income year to offset this profit. Jana does not satisfy Division 35 to offset the remaining $15,000 against her other income and that amount continues to be deferred. 40. In the 2021–22 income year, Jana's home was inundated by flood water causing her to cease her business activity for 3 months and therefore the profit from her business activity reduced to $3,500. Jana can offset $3,500 of her deferred losses against this profit. 41. However, Jana does not qualify to use the safe harbour in the 2021–22 income year because she cannot include the remaining $11,500 in calculating whether her business activity made a loss in that year. 42. Jana did not make a loss in the 2021–22 income year and therefore is not eligible to apply the safe harbour to offset the remaining $11,500 of losses against her other income in that year.",,,/law/view/document?LocID=%22COG%2FPCG20221EC%2FNAT%2FATO%2F00001%22&PiT=99991231235958,False,False,https://www.ato.gov.au/law/view/document?docid=COG/PCG20221/NAT/ATO/00001
PCG 2024/3,Final PCG,Section 99B of the Income Tax Assessment Act 1936 - ATO compliance approach,,,8. This Guideline applies both before and after its date of issue.,,,TD 2024/9,,"1. With increasing globalisation and migration flows into and out of Australia, we have observed an increase in resident taxpayers who receive an amount of trust property (being a payment or a benefit) from non-resident trusts. The purpose of this Guideline is to support taxpayers in complying with section 99B of the Income Tax Assessment Act 1936. As per paragraphs 6 and 7 of this Guideline, when considering the application of section 99B our current focus is on trust property accumulated by a trust during any period that it was a non-resident of Australia for tax purposes. 2. All legislative references in this Guideline are to the Income Tax Assessment Act 1936. 3. This Guideline provides you with guidance on our approach to section 99B in respect of arrangements where property of a non-resident trust (or trust property accumulated while the trust was a non-resident) is paid to or applied for the benefit of a resident beneficiary. This Guideline aims to provide clarity on: 4. Where your arrangement does not meet the low-risk criteria outlined in this Guideline, we may engage with you to better understand your arrangement. It does not mean of itself that section 99B necessarily applies. 5. This Guideline does not replace, alter or affect our interpretation of the law in any way. It does not relieve the parties of their obligation to comply with section 99B but is designed to give confidence on how we will have cause to dedicate our compliance resources to consider the application of section 99B.","Scope: 6. This Guideline applies to trust property accumulated by a trust during any period that it was a non-resident of Australia for tax purposes. Under this Guideline, we will consider section 99B in respect of a payment or benefit to a resident beneficiary from a trust that accumulated property while the trust was a non-resident of Australia for tax purposes. [1] 7. Unless otherwise stated, all references to a trust in this Guideline are to a non-resident trust, which for the purposes of this Guideline is taken to include a resident trust to the extent that it is dealing with amounts accumulated during a period while the trust was a non-resident of Australia.","9. Section 99B may apply where a resident beneficiary receives an amount of trust property from a non-resident trust estate, including: 10. Where section 99B applies, subsection 99B(1) includes in the resident beneficiary's assessable income the amount of trust property paid to, or applied for the benefit of, that beneficiary reduced by amounts specified in subsection 99B(2). The reductions include amounts representing: Application of section 99B – common scenarios 11. Section 99B may need to be considered in the following common scenarios. [2] In each scenario, information and documentation would need to be obtained where the resident beneficiary wants to determine if subsection 99B(2) applies to reduce the amount included by subsection 99B(1) in their assessable income.","Intro: This Practical Compliance Guideline sets out a practical administration approach to assist taxpayers in complying with relevant tax laws. Provided you follow this Guideline in good faith, the Commissioner will administer the law in accordance with this approach.","Example 1: – non-resident migrates to Australia 12. Marty migrates to Australia during the year ended 30 June 2024. After migrating to Australia, Marty begins the process of winding up his overseas interests, including a non-resident trust which holds listed shares. The trust continues to be a non-resident trust as the trustee is a non-resident of Australia. 13. Since the establishment of the trust, all income earned from the listed shares has been accumulated and reinvested in further shareholdings. During the year ended 30 June 2025, the trustee of the non-resident trust, distributes the listed shares to Marty. 14. As Marty is a resident beneficiary who has received trust property from a non-resident trust, he needs to consider the application of section 99B with respect to the 2025 income year, including whether one of the reductions in subsection 99B(2) apply. | Example 2: – resident beneficiary receives a distribution 15. XVB Trust is an Australian-resident discretionary trust and requires funds for investment purposes. Alice, an Australian resident, is the trustee of the XVB Trust and asks her parents for financial assistance. 16. During the year ended 30 June 2025, Alice's parents, in their capacity as trustees of a non-resident trust, appoint an amount totalling $500,000 to Alice in her capacity as trustee for the XVB Trust. The trustees advise Alice that the XVB Trust is a beneficiary of the non-resident trust and that the amount has been paid from the non-resident trust. However, the trustees do not advise whether the amount was sourced from accumulated profits. 17. As Alice in her capacity as trustee for the XVB Trust receives a distribution from a non-resident trust, Alice as trustee for the XVB Trust will need to consider the application of section 99B with respect to the 2025 income year, including whether one of the reductions in subsection 99B(2) apply. | Example 3: – resident beneficiary receives a gift 18. Jack is a resident of Australia and during the year ended 30 June 2025, he receives a gift of $200,000 from his grandmother who resides overseas. Upon receiving the gift, Jack's grandmother advises that the money was paid from a non-resident trust that she controls and of which Jack is a beneficiary. 19. As Jack has received an amount from a non-resident trust and is a beneficiary of the trust, he needs to consider the application of section 99B with respect to the 2025 income year, including whether one of the reductions in subsection 99B(2) apply. | Example 4: – resident beneficiary receives a loan 20. Vicky is an Australian-resident taxpayer and needs funds to renovate her property. During the year ended 30 June 2025, Vicky receives a $500,000 loan from her father, a non-resident of Australia. 21. The funds are lent by Vicky's father as trustee of a non-resident trust of which Vicky is a beneficiary. 22. As Vicky has received a benefit from a non-resident trust, she needs to consider the application of section 99B with respect to the 2025 income year, including whether one of the reductions in subsection 99B(2) apply. | Example 5: – trustee allows resident beneficiary to use non-resident trust property 23. A non-resident trust has a rare artwork collection. Adam is a resident of Australia, and his uncle controls the non-resident trust. Adam asks his uncle if he can borrow one of the artwork pieces to hang in his business for a 2-year period. 24. Adam's uncle agrees, and the trustee allows Adam to borrow the artwork. Adam's uncle also advises him that he is a beneficiary of the trust. 25. As Adam has received a benefit from a non-resident trust, he needs to consider the application of section 99B, including whether one of the reductions in subsection 99B(2) apply. | Example 6: – beneficiary receives amount from a deceased estate 26. Amanda is a resident beneficiary of a non-resident deceased estate. Amanda's grandfather was a non-resident and recently passed away. 27. At the time of her grandfather's death, the assets included in his estate consisted of cash and listed shares. During the 2025 income year, the non-resident trustee, as permitted by the will of the deceased, liquidates the listed shareholdings, and makes a payment in US dollars to Amanda. 28. As Amanda has received an amount of trust property from a non-resident trust, she needs to consider the application of section 99B with respect to the 2025 income year, including whether one of the reductions in subsection 99B(2) apply. | Example 7: – beneficiary changes residency and receives an amount from a non-resident trust 29. During the 2025 income year, Christine migrates to Australia and becomes a resident for tax purposes. A week before Christine migrates, her father in his capacity as trustee of a non-resident trust, distributes $500,000 to Christine to assist her with the move. 30. The non-resident trust has been in existence for many years and the profits generated are normally reinvested in the trust assets. 31. As Christine has received an amount of trust property from a non-resident trust during a year of income in which she is a resident of Australia for tax purposes (at any point during the income year), she needs to consider the application of section 99B with respect to the 2025 income year, including whether one of the reductions in subsection 99B(2) apply. Record keeping for the hypothetical resident taxpayer tests 32. Evidence is required to substantiate that paragraph 99B(2)(a) or (b) applies to reduce the amount included in assessable income under subsection 99B(1). 33. The hypothetical resident taxpayer tests contained in paragraphs 99B(2)(a) and (b) and factors taken into account in applying the tests are considered in Taxation Determination TD 2024/9 Income tax: factors taken into account in applying paragraphs 99B(2)(a) and (b) of the Income Tax Assessment Act 1936. 34. The corpus reduction excludes an amount representing corpus from the amount assessable under subsection 99B(1), except to the extent to which it is attributable to amounts derived by the trust that, if they had been derived by a hypothetical resident taxpayer, would have been included in the taxpayer's assessable income (paragraph 99B(2)(a)). 35. In most instances, capitalised income or gains accumulated by the trust are taxed under subsection 99B(1) and are not further reduced by paragraph 99B(2)(a). 36. For the 'corpus' reduction in paragraph 99B(2)(a), TD 2024/9 provides that corpus, in the context in which it is used in section 99B and Division 6 more broadly refers to trust capital which is represented by the assets of the trust, excluding income which has not been accumulated. [3] 37. Similarly, the 'non-taxable' reduction in paragraph 99B(2)(b) excludes amounts from being assessable under subsection 99B(1), but only to the extent that they would not have been assessable to a hypothetical resident taxpayer if they had instead been derived by such a taxpayer. | Example 8: – identification of amounts removed by the hypothetical resident taxpayer tests 38. The trustee of a non-resident trust purchases a property for $1 million. This is solely funded from the settled trust sum. The trustee sells this property several years later for $1.1 million. Following the sale of the property and pursuant to a power in the trust deed, the trustee appoints and pays $1.1 million to Chris, a resident of Australia and beneficiary of the non-resident trust. 39. Upon receiving the funds from the non-resident trust, Chris obtains confirmation from the trustee that the amount paid is sourced entirely from the sale of the property. 40. The $1.1 million amount distributed to Chris is initially included in his assessable income under subsection 99B(1). However, in applying the hypothetical resident taxpayer tests, that amount is reduced to $100,000 because the $1 million cost base of the property is corpus and is not otherwise assessable to a hypothetical resident taxpayer. Therefore, Chris is required to include $100,000 in his assessable income in the year in which he receives the payment. 41. We recognise that it can be challenging to obtain the relevant documents and information from a non-resident trustee to evidence or substantiate that an amount or benefit received from a non-resident trust that would be assessable under subsection 99B(1) is reduced in part or in full by either paragraphs 99B(2)(a) or 99B(2)(b). 42. We also acknowledge that the ability for a resident beneficiary to obtain documents and information from a non-resident trustee can be hindered depending on the relationship between the resident beneficiary and the non-resident trustee, and the relevant laws in the overseas jurisdiction. 43. However, the onus is on the resident beneficiary to provide information and documentation to us to evidence that a relevant reduction is satisfied. Where the onus is not discharged, we will administer section 99B on the basis that the full amount should be included in the beneficiary's assessable income. 44. The core documents and information that a resident beneficiary should obtain to demonstrate that the source of an amount received from a non-resident trust is attributable to corpus and which satisfies the corpus reduction includes: 45. Further documentation and information required to support that the corpus reduction or non-taxable reduction applies will be determined on a case-by-case basis and includes, but is not limited to, any one or more of the following: 46. All information and documentation provided to us should be in English or be accompanied with an English translation. | Example 9: – records to substantiate the corpus reduction applies 47. A non-resident trust is settled with $500,000 cash. Shares are acquired for $100,000 and real property is acquired for $400,000. 48. The trustee makes a resolution to transfer the shares to a resident beneficiary, Steven, who is the son of the controller of the non-resident trust. 49. Upon receiving the shares, Steven obtains the following documents from the trustee: 50. In this example, Steven is able to provide documents that evidence the amount he receives is sourced from the trust corpus and that the corpus reduction applies. | Example 10: – records to substantiate the corpus reduction applies 51. We receive information from AUSTRAC that Lisa, a resident of Australia, received funds totalling $300,000 from an overseas source. Upon commencing our review of Lisa's affairs, Lisa informs us that the amount is a payment sourced from trust corpus of a non-resident deceased estate and that she received the amount as a beneficiary under the will. The trustee of the deceased estate is an independent third party. 52. Lisa advises us that she is a distant relative of the deceased and cannot obtain all the core documents listed in paragraph 44 of this Guideline from the independent trustee. Lisa provides us with evidence of the communications with the independent trustee as well as a letter from the trustee confirming the amount of the bequest, and a copy of the deceased estate's financial accounts confirming that the amount has not been paid from income or gains made on the realisation of assets. 53. In this example, Lisa provides sufficient evidence that the amount she receives was from trust corpus and that the corpus reduction applies. | Example 11: – insufficient records to substantiate a relevant reduction applies 54. We receive a private ruling request. The particulars of the request include that John, a resident of Australia, received funds totalling $500,000 from a non-resident trust, of which he is a beneficiary. John also informs us that the non-resident trust is controlled by his grandmother and that the amount is a payment sourced from trust corpus. 55. John provides us with a copy of the trustee resolution which confirms that an amount of $500,000 was to be paid to him from trust corpus. 56. John advises us that he is unable to obtain additional records from the trustee, including a copy of the trust deed or relevant financial accounts, and that no further documentation or information can be provided. 57. John is unable to provide enough evidence to substantiate that the amount he receives from the non-resident trust is attributable to trust corpus or otherwise reduced due to the hypothetical resident taxpayer tests. This means that neither the corpus reduction, nor the non-taxable reduction applies. As John cannot establish that a reduction applies, we will administer section 99B on the basis that the full amount should be included in his assessable income. | Example 12: – insufficient records to substantiate a relevant reduction applies 58. We receive information from AUSTRAC that Kate, a resident of Australia, has received $800,000 from an overseas source. Upon commencing our review of Kate's affairs, Kate informs us that the amount is a payment sourced from trust corpus of a non-resident trust, of which she is a beneficiary. Kate also confirms that the controller of the non-resident trust is her brother. 59. Kate provides us with a copy of the trustee resolution which confirms that an amount of $800,000 was to be paid to her from trust corpus. Kate also provides a copy of the trust deed and the trust's financial statements to support her assertion. 60. Kate advises us that she is unable to obtain additional records from the trustee, such as general ledger accounts, bank statements or information showing the property used to settle the trust, and that no further documentation or information can be provided. 61. Kate is unable to provide enough evidence to establish that the amount she receives from the non-resident trust is attributable to trust corpus or otherwise reduced due to the hypothetical resident taxpayer tests. This means that neither the corpus reduction, nor the non-taxable reduction applies. As Kate cannot establish that a reduction applies, we will administer section 99B on the basis that the full amount should be included in her assessable income. Compliance approach for low-risk arrangements 62. Our compliance approach considers 2 common scenarios where section 99B may apply. Where an arrangement meets the outlined criteria, that arrangement will be considered low risk. 63. Where an arrangement does not meet the outlined criteria, this does not mean that section 99B applies, but we may engage with you to better understand the arrangement, including whether a reduction to section 99B applies. 64. Where an arrangement satisfies the outlined criteria and is considered low risk, we will not have cause to dedicate compliance resources to consider the application of section 99B, other than to confirm that the low-risk features of the relevant arrangement are present in the circumstances. 65. To confirm that an arrangement meets the criteria outlined in each low-risk arrangement detailed, you will need to provide to us the information and documentation outlined for those criteria. 66. Where you cannot provide the required information and documentation, this does not mean that section 99B applies, but the arrangement will not be considered low risk, and further compliance resources may be dedicated to understanding the arrangement. 67. An arrangement will not be considered low risk where: 68. Diagram 1 of this Guideline provides an outline of the compliance approach for low-risk arrangements. Diagram 1: Compliance approach for low-risk arrangements Compliance approach – deceased estates 69. The corpus of a non-resident deceased estate is typically comprised of the assets that had been owned by the deceased individual. Section 99B may apply to distributions or benefits provided from the deceased estate where the estate has derived income and gains after the date of death. 70. We acknowledge that a period of time is required to properly administer a deceased estate. Where a short amount of time has lapsed between the date of death and the distribution being paid or applied for the benefit of a resident beneficiary, we will consider the arrangement to be low risk provided that the requirements in paragraph 71 of this Guideline are met. 71. An arrangement will be considered low risk where the trustee [4] distributes an amount or benefit of trust property from a non-resident deceased estate of a deceased who was a non-resident at their date of death, to a resident beneficiary and both of the following criteria are satisfied: 72. The compliance approach outlined in this Guideline is confined to a non-resident deceased estate of a non-resident deceased and does not extend to any testamentary trust established under the will of the deceased. 73. The beneficiary should obtain all relevant information and documentation to evidence that the amount received meets the criteria in paragraph 71 of this Guideline. The type of documentation and information that may be provided to substantiate the criteria includes: | Example 13: – beneficiary receives amount from a deceased estate that is within scope of the compliance approach 74. Simon is a resident beneficiary of his father's estate. Simon's father passes away on 1 December 2023 and is a non-resident at the time of his death. Upon his death, the assets included in his estate are cash, shares in listed entities and artwork. On 1 September 2025, the non-resident trustee, as permitted by the will, sells the listed shares and transfers the proceeds to Simon. 75. Simon obtains a copy of a document which confirms the date of death of his father and the will which confirms Simon's entitlement to the proceeds from the sale of the listed shares. These documents meet the evidentiary requirements outlined in paragraph 73 of this Guideline. 76. The proceeds from the sale of the shares are equal to A$950,000. 77. This arrangement is considered low risk under the compliance approach as the transfer of trust property from the non-resident deceased estate occurs within 24 months of the death of Simon's non-resident father, and the value of the property received by Simon is A$2 million or less. | Example 14: – multiple beneficiaries receive an amount from a deceased estate that is within scope of the compliance approach 78. Three resident individuals, Tim, Sally and Leo, are beneficiaries of their mother's estate. Their mother passes away on 1 March 2023 and is a non-resident at the time of her death. Upon her death, the assets included in her estate consist of cash and real property situated overseas. On 30 July 2024, the non-resident trustee, as permitted by the will of the deceased, makes separate payments to Tim, Sally and Leo. 79. Tim, Sally and Leo obtain all the relevant information and documentation to substantiate that they meet the evidentiary requirements outlined in paragraph 73 of this Guideline. 80. Tim, Sally and Leo each receive a payment equal to A$800,000 from the deceased estate. 81. This arrangement is considered low risk under the compliance approach as each beneficiary receives an amount from the non-resident deceased estate within 24 months of the death of their non-resident mother and the amount received by each resident beneficiary is A$2 million or less. | Example 15: – multiple beneficiaries receive an amount from a deceased estate that is outside the scope of the compliance approach 82. Catherine, Harry and their 2 children, George and Sophia, are resident beneficiaries of Harry's mother's estate. Harry's mother passes away on 1 July 2022 and is a non-resident at the time of her death. Upon her death, the assets in her estate consist of substantial real estate situated overseas as well as listed shares and cash. As permitted by the will, the non-resident trustee sells the assets in the estate and makes a substantial gain. 83. On 1 February 2023, the non-resident trustee, as permitted by the will of the deceased, makes separate payments of A$2 million each to Catherine, Harry, George and Sophia. The beneficiaries obtain all the relevant information and documentation to substantiate that they meet the evidentiary requirements outlined in paragraph 73 of this Guideline. 84. During our review, we identify that upon receiving the payments from the deceased estate, both George and Sophia transferred their payment to their parents' joint bank account. The funds were then used at the discretion of Catherine and Harry. 85. This arrangement does not meet the criteria to be considered low risk under the compliance approach. The overall arrangement is contrived to facilitate Catherine and Harry each receiving the equivalent of a trust distribution that is in excess of A$2 million. We may dedicate compliance resources to consider the application of section 99B. | Example 16: – beneficiary receives amount from a deceased estate more than 24 months after the date of death 86. Jason is a resident beneficiary of his aunt's estate. Jason's aunt passes away on 30 July 2022 and is a non-resident at the time of her death. Upon her death, the assets included in her estate consist of cash and real property situated overseas. Following her death and as permitted by the will, the non-resident trustee sells the property, invests the cash and proceeds from the sale and makes a substantial profit. On 30 June 2025, the non-resident trustee, as permitted by the will of the deceased, makes a payment to Jason. 87. Jason obtains the relevant information and documentation to confirm the date of death of his aunt, that the payment is sourced from funds and the realisation of assets held by his aunt at the time of death, and that the distribution has been paid, in accordance with the will, out of the assets of the deceased estate. 88. The amount received by Jason from the deceased estate is equal to A$750,000. 89. The arrangement does not meet the criteria to be considered low risk under the compliance approach. The transfer of trust property from the non-resident deceased estate occurs more than 24 months after the death of Jason's aunt. We may dedicate compliance resources to consider the application of section 99B. | Example 17: – beneficiary receives amount from a deceased estate, and evidentiary requirements not met 90. Mary is a resident beneficiary of her brother's estate. On 1 May 2024, the non-resident trustee as permitted by the will, makes a payment to Mary. 91. Mary advises us that her brother passed away on 1 August 2023 and was a non-resident at the time of his death. However, she can only obtain a letter from the executor outlining her entitlement. No other information or documentation can be obtained to confirm the date of death of Mary's brother, or whether the payment was sourced from assets owned by her brother at the date of his death. 92. The amount received by Mary from the deceased estate is equal to A$500,000. 93. This arrangement does not meet the criteria to be considered low risk under the compliance approach. Mary cannot obtain the relevant information and documentation required to substantiate that the arrangement falls within the compliance approach. We may dedicate compliance resources to consider the application of section 99B. | Example 18: – beneficiary receives amount from a deceased estate in excess of A$2 million 94. Denise is a resident beneficiary of her aunt's estate. Denise's aunt passes away on 1 February 2023 and is a non-resident at the time of her death. Upon her death, the only asset included in her estate is real property situated overseas. Following her death, and as permitted by the will, the non-resident trustee sells the property, invests the proceeds and makes a substantial profit. On 1 January 2025, the non-resident trustee, as permitted by the will of the deceased, makes a payment to Denise. 95. Denise obtains all the relevant information and documentation to evidence that she meets the evidentiary requirements outlined in paragraph 73 of this Guideline. 96. The amount received by Denise from the deceased estate is equal to A$2,500,000. 97. This arrangement does not meet the criteria to be considered low risk under the compliance approach. The trust property received by Denise exceeds A$2 million. We may dedicate compliance resources to consider the application of section 99B. | Example 19: – multiple payments from a deceased estate in excess of A$2 million 98. Arthur is a resident beneficiary of his sister's estate. Arthur's sister passes away on 2 April 2024 and is a non-resident at the time of her death. Upon her death, the assets included in her estate consist of real property situated overseas, listed shares and cash. As permitted by the will, Arthur is entitled to receive the proceeds from the sale of the listed shares and the cash. The non-resident trustee, as permitted by the will, sells the listed shares and makes a substantial gain. The proceeds from the sale of the shares are equal to A$2,500,000 and the cash is equivalent to A$1,500,000. 99. As permitted by the will, the non-resident trustee transfers the amount to Arthur in multiple payments, within 24 months of the deceased's date of death. Each payment is less than A$2 million. 100. This arrangement does not meet the criteria to be considered low risk under the compliance approach. Although the amounts are received within the 24 months following the death of Arthur's non-resident sister, Arthur receives an aggregated amount or benefit in excess of A$2 million. We may dedicate compliance resources to consider the application of section 99B. Compliance approach – provision of trust property on commercial terms 101. Section 99B may apply where a trustee of a non-resident trust allows a resident beneficiary to use or borrow trust property, including loans of monetary amounts. 102. Examples include where a resident beneficiary has a short-term agreement to use real property owned by the trust or borrow an amount from the trust. 103. We will consider an arrangement to be low risk where the trustee of a non-resident trust provides trust property to a resident beneficiary as part of an agreement for the beneficiary to borrow, hire or use that property on commercial terms and each of the following are satisfied: 104. We will accept that an agreement is on commercial terms where the resident beneficiary is able to provide documentation objectively evidencing that at the time of entering into the agreement: 105. To further reduce compliance costs, a safe harbour option is available for monetary amounts loaned from a trustee of a non-resident trust, for the purposes of this compliance approach to section 99B to objectively evidence that an agreement is on commercial terms. Under the safe harbour option, the resident beneficiary and trustee of the non-resident trust can rely upon: 106. The safe harbour option cannot be relied on for any other purposes and use of the terms does not of itself result in the application of Division 7A to the arrangement. 107. The beneficiary should retain all contemporaneous evidence that an agreement exists, which may include: 108. Where a beneficiary and trustee only have a verbal agreement, evidence to substantiate the commercial terms of the agreement will still be required. This can include: 109. The beneficiary should also retain any other documentation to evidence that the agreement was made on commercial terms, and that they have complied with those terms. This includes supporting documentation to evidence the payment of the interest, hire or use amount to the trustee of the non-resident trust in each of the relevant income years during the agreement period. | Example 20: – renting a house owned by the trust as part of an agreement on commercial terms 110. Chris is a resident beneficiary of a non-resident trust. The trustee allows Chris to occupy a house that is trust property for an 18-month period. The trustee enters into a written agreement with Chris, on commercial terms. 111. Chris provides a copy of the written agreement, a copy of the market rental appraisal from a local licensed real estate agent confirming the rent included under the agreement is market rent, and bank statements to confirm the rental amount is paid to the trustee. 112. This arrangement is considered low risk under the compliance approach. The agreement is on commercial terms and the rent on the property is fully paid to the trustee of the non-resident trust. | Example 21: – loan from a trust as part of an agreement on commercial terms 113. Anthony is a resident beneficiary of a non-resident trust. The trustee allows Anthony to borrow $500,000 from trust property. The trustee and Anthony enter into a verbal agreement on commercial terms. 114. Anthony provides evidence confirming that the interest is paid at a rate equal to the rate prescribed under Division 7A and provides emails between him and the trustee confirming the term of the loan is consistent with the term prescribed for Division 7A. Anthony also provides bank statements to confirm the interest amount is paid to the trustee. 115. This arrangement is considered low risk under the compliance approach. Although a verbal agreement was made between Anthony and the trustee, Anthony is able to provide evidence that the agreement is on commercial terms using the safe harbour option. An amount of interest, equal to interest calculated using Division 7A rates, is also paid to the trustee of the non-resident trust. | Example 22: – use of trust property as part of an agreement on commercial terms 116. Belinda is a resident beneficiary of a non-resident trust. The trust property includes a rare collection of artworks. The trustee allows Belinda to hang the artwork in her place of business for a 3-year period. 117. The trustee and Belinda enter into an agreement on commercial terms where the hire amount is equivalent to the rate the trustee could obtain from leasing the artwork to an independent third party. Belinda pays the hire amount to the trustee. 118. Belinda provides a copy of the trustee minute evidencing the agreement to hire the artwork, documentation from artwork dealers confirming the hire rate applied is equal to the market rate, and bank statements to confirm the hire amount is paid to the trustee. 119. This arrangement is considered low risk under the compliance approach. The agreement is on commercial terms and the amount equal to the hire of the artwork is paid to the trustee of the non-resident trust. | Example 23: – use of trust property outside of an agreement on commercial terms 120. Andrew is a resident beneficiary of a non-resident trust. The trust property includes a yacht. The trustee allows Andrew to hire the yacht for a period of 6 months. 121. The trustee and Andrew enter into an agreement on commercial terms where the hire amount is equivalent to the rate the trustee can obtain from leasing the yacht to an independent third party. Andrew pays the hire amount to the trustee. 122. The yacht is ordinarily moored at a marina near Andrew's home. At the conclusion of the lease period, the beneficiary continues to have control of and access to the yacht for his enjoyment. 123. This arrangement does not meet the criteria to be considered low risk under the compliance approach. The trust property continues to be available for the benefit of the beneficiary outside of the agreed hire period and no hire amount is paid to the trustee for the period beyond the agreed hire period. We may dedicate compliance resources to consider the application of section 99B. | Example 24: – record keeping insufficient to evidence a commercial arrangement 124. Sarah is a resident of Australia and receives $10,000 from the trust property of a non-resident trust estate, of which she is a beneficiary. The trustee documents a written resolution setting out the decision to lend the $10,000 from trust property to Sarah. Sarah asserts that payments for interest are made as and when funds permit but has no records to substantiate her claims. 125. This arrangement does not meet the criteria to be considered low risk under the compliance approach. There is no evidence confirming that an agreement on commercial terms has been put in place and complied with. We may dedicate compliance resources to consider the application of section 99B. | Example 25: – artwork valued below market value 126. Rachel is a resident beneficiary of a non-resident family trust. The trust property includes artwork. The trustee allows Rachel to display the artwork at her place of residence for a period of 12 months. 127. The trustee and Rachel enter into a written lease agreement. The lease agreement is not on commercial terms as the lease payments are below commercial rates due to the artwork being undervalued. 128. This arrangement does not meet the criteria to be considered low risk under the compliance approach. The terms of the lease agreement are not commercial. We may dedicate compliance resources to consider the application of section 99B | Example 26: – forgiveness of loan due to extenuating circumstances 129. Charlotte is a resident and receives $10,000 from the property of a non-resident trust estate, of which she is a beneficiary. 130. Charlotte has supporting documentation to confirm that the payment of $10,000 from trust property is a loan from the trustee, and all relevant loan terms are consistent with it being on commercial terms. 131. During our review, we identify that the loan is subsequently forgiven by the non-resident trust as Charlotte is unable to repay it due to extenuating circumstances. 132. This arrangement does not meet the criteria to be considered low risk under the compliance approach. Charlotte's obligation to pay the debt is released or waived or is otherwise extinguished other than by repaying the debt in full. We may dedicate compliance resources to consider the application of section 99B. | Example 27: – loan to a beneficiary with interest payments returned to the beneficiary 133. Louis is a resident beneficiary of a non-resident family trust. The trustee allows Louis to borrow $500,000 from trust property for a 5-year period. 134. The trustee and Louis enter into a written agreement on commercial terms. Apart from the written agreement, Louis has evidence confirming the interest rate is the market rate, and bank statements to confirm the interest amount is paid to the trustee. 135. During our review, we identify a round robin arrangement whereby the trustee applies the funds received in respect of the interest to make payments back to Louis. The payments to Louis are not treated by the trustee or Louis as a trust distribution. The effect of this is that no interest is being paid in accordance with the written agreement. 136. This arrangement does not meet the criteria to be considered low risk under the compliance approach. There are elements of a contrived nature that seek to enable the resident beneficiary to fall within the compliance approach. We may dedicate compliance resources to consider the application of section 99B.",,,/law/view/document?LocID=%22COG%2FPCG20243EC%2FNAT%2FATO%2F00001%22&PiT=99991231235958,False,False,https://www.ato.gov.au/law/view/document?docid=COG/PCG20243/NAT/ATO/00001
PCG 2018/4,Final PCG,Income tax - liability of a legal personal representative of a deceased person,,,50,,,PS LA 2011/16,Case References: Barkworth Olives Management Ltd v Deputy Commissioner of Taxation [2010] QCA 80 2010 ATC 20-172 238 FLR 465 78 ATR 827 Binetter v Commissioner of Taxation [2016] FCAFC 163 2016 ATC 20-593 249 FCR 534 104 ATR 145 Cardaci v Filippo Primo Cardaci as executor of estate of Marco Antonio Cardaci [No 5] [2021] WASC 331 Deputy Commissioner of Taxation (NSW) v Brown [1958] HCA 2 100 CLR 32 11 ATD 374 [1958] ALR 285 Deputy Commissioner of Taxation (Cth) v Taylor 12 FLR 173 15 ATD 118 Green & Ors v Wilden Pty Ltd & Ors [2005] WASC 83 Gritzman v McRae [2022] NSWSC 745 Christina Maree Parnell as Executor of the Estate of Thomas Warnock Walker v Hinkley & Ors [2007] WASC 102 2007 WL 1367503 Investa Properties [2001] NSWSC 1089 Taylor v Deputy Commissioner of Taxation (Cth) [1969] HCA 25 123 CLR 206 1 ATR 97 69 ATC 4072 15 ATD 292,"1. This Guideline is intended to enable certain legal personal representatives (LPRs) [1] of less complex estates [2] to finalise those estates before the expiration of the relevant review period [3] without concern that they may have to fund an outstanding tax-related liability of the deceased person from their own assets. It sets out when an LPR will be treated as having notice of a claim by the ATO (including a claim arising from an amended assessment). 2. An LPR includes an executor who has obtained probate of a deceased person's will, or an administrator who has obtained letters of administration of a deceased person's estate. 3. An LPR is: 4. If the LPR fails to lodge a return or provide relevant information, the ATO can assess the amount of the deceased person's outstanding tax-related liability. [5] 5. The LPR may have to meet the deceased person's liabilities personally if they distribute estate assets in situations where the LPR is considered to have notice of any such amounts that the deceased owed to the ATO at the date of their death (referred to in this Guideline as 'notice of a claim by the ATO'). 6. Such liability may relate to either an assessment or an amended assessment that is made after the death of the deceased person. Feedback from practitioners has been that distributions of estate assets are sometimes delayed until after the relevant review period (either 2 or 4 years from the date of an assessment), to ensure that the LPR does not have to personally satisfy a liability relating to an amended assessment. 7. This Guideline does not deal with outstanding tax-related liabilities that an LPR may have in relation to the deceased estate, that is, for the period after the death of the deceased person. [6] Who this Guideline applies to 8. This Guideline applies only in the following circumstances: 9. A deceased person's estate is considered less complex if all of the following apply. 10. This Guideline does not apply if probate or letters of administration have not been obtained. This is because in these cases an LPR is not made personally liable for the deceased person's outstanding tax-related liabilities. A different collection mechanism applies under sections 260-145 and 260-150 of Schedule 1 to the Taxation Administration Act 1953 (TAA). [10] When a legal personal representative has notice of a claim by the ATO 11. It is a question of fact whether an LPR has notice of a claim by the ATO. Paragraphs 12 to 51 of this Guideline set out the circumstances when we consider an LPR has such notice and those when we will treat an LPR as not having notice. Notice of amounts owing at date of death 12. Because an LPR 'stands in the shoes of the deceased person' regarding the deceased person's outstanding tax-related liabilities [11] , the ATO considers that an LPR has notice of any amount that the deceased person owed to the ATO at the date of their death (in addition to charges accruing in respect of those amounts following death, such as interest). Notice of liabilities from outstanding assessments 13. Similarly, the ATO considers that an LPR has notice of any outstanding tax-related liabilities arising from the assessment of income tax on returns that the deceased person had lodged, where that assessment had not been issued at the time of the deceased person's death. Notice of liabilities arising in respect of outstanding returns 14. An LPR is required by law to lodge all tax returns that the deceased person has not lodged, including for the period up to the date of their death. [12] The ATO considers that an LPR has notice of any outstanding tax-related liability arising from assessments relating to these returns. An LPR should also notify the ATO if a particular outstanding return is not required to be lodged because, for example, the amount of the deceased person's taxable income was below the tax-free threshold. Notice of liabilities arising from amendments or other changes 15. An LPR will be notified where the ATO has decided to review or examine the affairs of a deceased person's estate. At that point, the LPR will have notice of liabilities that may arise from the review. Where any outstanding tax-related liability arises, such as from omissions of rental income from the assets of the deceased person's estate, the ATO will amend assessments relating to the relevant returns. Legal personal representative acting reasonably 16. The ATO will treat an LPR as not having notice of any further claim by the ATO relating to returns the LPR lodged (or advised were not necessary) if: 17. 'Acted reasonably' in the context of ensuring that the deceased person's outstanding tax returns were lodged correctly, or in otherwise advising the ATO that a tax return was not necessary, means exercising sound judgment or good sense and requires an LPR to act with a degree of prudence. [13] An LPR who abdicates responsibility and relies in blind faith on their co-LPR, a solicitor, accountant or other person is not considered to be acting reasonably. [14] Reliance on relevant written professional advice that they have sought about a particular matter may, however, be a relevant factor in establishing that an LPR has acted reasonably. [15] Legal personal representatives and material irregularities 18. An LPR may become aware (or should reasonably have become aware) of a material irregularity (or irregularities) in a tax return lodged by the deceased person prior to their death. When this occurs, the LPR will be required to bring it to the attention of the ATO in writing by requesting an amendment. [16] 19. Generally, the ATO will treat an LPR as not having notice of an ATO claim relating to that irregularity if:",,"Deceased estates and legal personal representatives 51. Succession law in Australia is state and territory-based. While the laws of each state and territory operate in a broadly similar manner, there are differences. For example, in most states, assets that a deceased person owned and which form part of their estate vest in their LPR once a grant of probate or letters of administration have been obtained. However, in Queensland, those assets vest automatically in the deceased's executor if they died leaving a will. This can mean that section 260-140 of Schedule 1 to the TAA applies to some, but not all executors. 52. An LPR is responsible for collecting the assets of the deceased person, paying their debts and funeral and testamentary expenses, and distributing the residue to the beneficiaries. An LPR will always remain such, so that if further assets of the deceased are identified after the estate was thought to have been fully administered, the LPR's duties continue in respect of those assets. 53. Not all assets that a person owned when they died will form part of their deceased estate. Most significantly, assets which they owned as a joint tenant will pass by survivorship to the surviving joint tenant or tenants, and superannuation benefits may be paid directly to a dependant. These assets are not available to satisfy the debts of the deceased including outstanding tax-related liabilities. 54. Relevant Acts of the various states and territories ensure that an LPR who has satisfied certain advertising requirements is protected from certain claims of which they did not have notice at the time they distribute the assets of the estate. It is not the case that an LPR has notice only of the claims made in response to an advertisement. For example, if an LPR has notice of a claim prior to advertising, that notice persists even if the creditor does not respond to the advertisement. 55. If estate debts (including the funeral and testamentary expenses) exceed the value of the assets, then the estate is insolvent. An insolvent deceased estate may be administered in bankruptcy (under the Bankruptcy legislation or provisions in state and territory Acts dealing with insolvent estates). See Law Administration Practice Statement PS LA 2011/16 Insolvency – collection, recovery and enforcement issues for entities under external administration. Collection of outstanding tax liabilities of deceased persons 56. Income tax on a person's income, though not assessed until after their death, has been held to answer the description of an outstanding tax-related liability. [17] 57. In the absence of fraud or evasion, the Commissioner cannot seek to recover estate assets that have been distributed to beneficiaries in order to satisfy outstanding tax-related liabilities of a deceased person. In Deputy Commissioner of Taxation (NSW) v Brown [18] , the High Court held that the liability of any person to pay a debt for unpaid income tax is conditional upon the right of the Commissioner to assess that person and upon the correlative right of that person to appeal against the assessment (which right the beneficiaries did not possess). 58. The scope of an LPR's liability was considered in Deputy Commissioner of Taxation (Cth) v Taylor [19] and on appeal in Taylor v Deputy Commissioner of Taxation (Cth). [20] The LPR was paid an amount which it understood to be a repayment of a gambling debt. In fact, the amount was attributable to a share trading profit which had not been returned by the deceased or the LPR. 59. The Deputy Commissioner in that case argued that the LPR should have been on notice of a claim for additional income tax in respect of the profit. 60. The LPR in that case was able to discharge the onus that rested on them of showing that they had no notice of any claim, contingent or otherwise, against the estate by the Deputy Commissioner when they distributed the estate assets. [21]",,"Example 1: – less complex estate 20. Alfred died on 1 June 2017. Bill was appointed executor of Alfred's will. He obtained probate in July 2017. Alfred's estate consists of his main residence (in Australia), shares in publicly listed companies and money in a bank account. The collective market value of the estate is less than $10 million. Up until his death, Alfred had been receiving a pension. Alfred had advised the ATO in 2012 that he was not required to lodge further returns. 21. Based on all the information available to him, Bill determines that no return is necessary for the period from 1 July 2016 to 1 June 2017. Bill lodged a Return Not Necessary (RNN) Advice with the ATO on 31 October 2017. If the ATO did not notify Bill that it intended to review Alfred's tax affairs by 30 April 2018 (6 months from the time Bill lodged his RNN advice), the ATO will treat Bill as not having notice of any claim relating to Alfred's estate. Bill can distribute the estate to beneficiaries without risk of personal liability. | Example 1: A – notice of liabilities of LPR arising from review of the tax affairs of the deceased person 21A. Jeff died on 14 February 2021 without a will. Doug was appointed the administrator of Jeff's estate. He obtained letters of administration in April 2021. 21B. Jeff's estate consisted of his main residence, (in Australia), cash and some other personal assets. The collective market value of the estate was less than $10 million. 21C. In the course of discharging his duties as administrator, Doug lodged all Jeff's outstanding tax returns including the date of death tax return and paid the tax liability when the ATO issued a notice of assessment. 21D. Five months after lodgment of the date of death tax return, the ATO notified Doug that it intended to review Jeff's tax affairs for a number of years before he died. Doug will have a notice of claim by the ATO and will be liable to pay any outstanding tax-related liabilities of Jeff up to the market value of Jeff's assets that come into Doug's hands. | Example 2: – legal personal representative acting reasonably to complete the tax affairs of the deceased person 22. Mario died on 1 March 2018. Sergio was appointed executor of Mario's will. He obtained probate in May 2018. 23. In the course of discharging his duties as executor, Sergio discovered that Mario's estate consisted of his main residence, 2 rental properties and shares in publicly listed companies. The collective market value of the estate was less than $10 million and the main residence and rental properties are located in Australia. 24. Sergio obtained documentation from the ATO about Mario's tax affairs, documentation from the bank, property manager and share trading platform. Based on all the information available to him, including tax returns for earlier years, Sergio determined that all tax returns had been lodged except for the final period to Mario's date of death. Sergio reviewed Mario's tax returns within the relevant review period and identified that: 25. Sergio also examined Mario's records for the 4-year period prior to his death and found that he was a beneficiary of a discretionary trust. Following Sergio's enquiry of the trustee, they provided trust resolutions and documents evidencing that Mario was not assessable on any share of the net income of the trust in the 4-year period prior to his death, and that the trustee considered that Mario was not a default beneficiary in the trust. Sergio has acted reasonably in undertaking these steps and is entitled to act upon the information provided by the trustee. 26. As Sergio did not discover any material irregularities in earlier year tax returns within the relevant review period, he is acting reasonably in completing Mario's tax affairs by ensuring that the date of death tax return and the returns for the preceding 4 income years are lodged. 27. On 22 June 2018, Sergio lodged a final date of death tax return for Mario. In this return, Sergio reported rental income, dividend income and capital gains from sales of shares reconciling this income with statements from the bank, property manager and share trading platform. 28. On 1 July 2018, the ATO issued a notice of assessment relating to the date of death tax return that Sergio lodged. Sergio promptly paid the tax liability out of the estate's assets. 29. If the ATO did not notify Sergio that it intended to review Mario's tax affairs by 22 December 2018 (6 months from the time Sergio lodged the date of death tax return), the ATO will treat Sergio as not having notice of any claim relating to Mario's estate. Sergio can distribute the estate to beneficiaries without risk of personal liability. | Example 3: – material tax irregularity identified by the legal personal representative 30. Peter died on 12 December 2016. Jill was appointed executor of his will. She obtained probate in January 2017. 31. In the course of discharging her duties as executor, Jill confirmed with the ATO that all of Peter's tax returns had been lodged other than the returns for the 2015–16 year and the final period to Peter's date of death. 32. In preparing those returns, Jill discovered that Peter had never returned rental income from a property that he had owned in Sydney since 2010. Jill included rental income from that property in the returns for the 2016 income year ($20,000) and the period to Peter's date of death ($10,000). She lodged both returns on 3 March 2017. Jill did not seek to amend any of Peter's earlier year assessments or otherwise bring the irregularities to the ATO's attention. 33. On 4 April 2017, the ATO issued notices of assessment relating to the returns that Jill had lodged. Jill paid those assessments out of the estate's assets. 34. On 1 July 2017, Jill published a Notice of Intended Distribution (under State succession laws) for claims to be made within 30 days. On 4 August 2017, Jill distributed the remaining assets of the estate. 35. On 20 October 2017, the ATO wrote to Jill advising that Peter's assessments for the 2014 and 2015 years were being reviewed because of the non-reporting of rental income. 36. Jill had become aware of a material irregularity for those income years because she had discovered that Peter had not included rental income in his returns. Jill will be personally liable for any outstanding tax-related liabilities resulting from the amendment of Peter's 2014 and 2015 income tax assessments. Jill cannot avoid liability on the basis that she had no notice of it. 37. If Jill had brought the prior year irregularities to the ATO's attention when she lodged the outstanding returns, Jill would not be personally liable because the ATO did not advise her within 6 months that it was intending to review the assessments. | Example 4: – legal personal representative acting reasonably when irregularity is discovered 38. Wing died on 18 May 2018. Wing's daughter, Trang, was appointed executor of Wing's will. She obtained probate in July 2018. 39. In the course of discharging her duties as executor, Trang examined the assets of Wing's estate and found that it comprised cash, public company shares, a rental property and a main residence (with all real property located in Australia). The collective market value of the estate was less than $10 million. After reviewing Wing's tax records, Trang identified that all but the tax return for the 2016–17 year and the return for the final period to Wing's date of death had been lodged. Trang also discovered a material irregularity, being unreported rental income from the rental property that Wing owned in Brisbane over the past 10 years. 40. On 15 August 2018, Trang lodged the outstanding tax returns and amended the returns still within the relevant review period for the unreported rental income. On the same day, Trang also lodged a voluntary disclosure with the ATO to inform them of rental income unreported in the returns outside the relevant review period. 41. The ATO did not advise Trang within 6 months of Trang lodging the relevant return and voluntary disclosure, that it was intending to review the lodgments or Trang's voluntary disclosure. As Trang acted reasonably when the material irregularity was discovered, she can distribute the estate to beneficiaries without risk of personal liability. Trang can finalise the estate without waiting for the expiry of the period for amending tax returns. | Example 5: – what is not a material irregularity 42. Susan died on 1 June 2017. John was appointed executor of her will. He obtained probate in July 2017. 43. In the course of discharging his duties as executor, John confirmed with the ATO that Susan had lodged all her tax returns other than for the final period to Susan's date of death. John prepared and lodged a date of death tax return and paid the tax liability when the ATO issued a notice of assessment. 44. When preparing the date of death tax return, John identified that there was an error in the information disclosed to the ATO for the 2015 income year, noting that the tax return for that year disclosed that Susan's rental property was rented for half a year when in fact the property was rented for a full year. Following enquiries with Susan's property manager, John confirmed that the reported rental income for the 2015 income year was still correct. 45. John does not need to bring this disclosure error to the ATO's attention as this disclosure error does not impact on the calculation of Susan's income tax liability for the 2015 income year. If, instead, the disclosure error had been an error in the calculation of Susan's income tax liability, the error would be a material irregularity and would need to be brought to the ATO's attention. Notice of liabilities where further assets discovered 46. If further assets come into the hands of an LPR after what was thought to be the completion of the estate's administration, the LPR must reconsider the deceased person's tax position. The identification of further assets might suggest that the deceased person's taxable income was understated previously. The ATO will treat the LPR as having notice of a claim by the ATO to the extent of those further assets. | Example 6: – further assets identified 47. Vincent died on 26 November 2016. Ben was appointed executor of Vincent's will and obtained probate. To the best of Ben's knowledge, the assets included in Vincent's estate consist of his main residence, (in Australia), a number of rental properties that Vincent acquired using his superannuation lump sum, and some money in a bank account. Based on all the information available to him including tax returns for earlier years, Ben determined that no return was necessary for the period from 1 July 2016 to 26 November 2016 because Vincent's income was below the tax-free threshold. Six months after advising the ATO that no return was necessary, Ben proceeded to distribute the estate's assets. 48. In 2019, the ATO receives information that Vincent owned further assets, the income from which was not disclosed by Vincent or Ben (due to Ben not knowing of their existence). 49. The ATO issues amended assessments for the 2017 and 4 preceding income years. The ATO is not bound by this Guideline to refrain from issuing an assessment or amended assessment to reflect the income from the further assets. The ATO will seek to recover tax-related liabilities from Ben up to the market value of the further assets that come into Ben's hands as LPR. Date of effect 50. This Guideline applies both before and after its date of issue. It will be reviewed from time to time under the ATO's standard review process to ensure the currency and relevance of the content, and that the content remains aligned with Australian taxation requirements and industry practice. Background and additional information Deceased estates and legal personal representatives 51. Succession law in Australia is state and territory-based. While the laws of each state and territory operate in a broadly similar manner, there are differences. For example, in most states, assets that a deceased person owned and which form part of their estate vest in their LPR once a grant of probate or letters of administration have been obtained. However, in Queensland, those assets vest automatically in the deceased's executor if they died leaving a will. This can mean that section 260-140 of Schedule 1 to the TAA applies to some, but not all executors. 52. An LPR is responsible for collecting the assets of the deceased person, paying their debts and funeral and testamentary expenses, and distributing the residue to the beneficiaries. An LPR will always remain such, so that if further assets of the deceased are identified after the estate was thought to have been fully administered, the LPR's duties continue in respect of those assets. 53. Not all assets that a person owned when they died will form part of their deceased estate. Most significantly, assets which they owned as a joint tenant will pass by survivorship to the surviving joint tenant or tenants, and superannuation benefits may be paid directly to a dependant. These assets are not available to satisfy the debts of the deceased including outstanding tax-related liabilities. 54. Relevant Acts of the various states and territories ensure that an LPR who has satisfied certain advertising requirements is protected from certain claims of which they did not have notice at the time they distribute the assets of the estate. It is not the case that an LPR has notice only of the claims made in response to an advertisement. For example, if an LPR has notice of a claim prior to advertising, that notice persists even if the creditor does not respond to the advertisement. 55. If estate debts (including the funeral and testamentary expenses) exceed the value of the assets, then the estate is insolvent. An insolvent deceased estate may be administered in bankruptcy (under the Bankruptcy legislation or provisions in state and territory Acts dealing with insolvent estates). See Law Administration Practice Statement PS LA 2011/16 Insolvency – collection, recovery and enforcement issues for entities under external administration. Collection of outstanding tax liabilities of deceased persons 56. Income tax on a person's income, though not assessed until after their death, has been held to answer the description of an outstanding tax-related liability. [17] 57. In the absence of fraud or evasion, the Commissioner cannot seek to recover estate assets that have been distributed to beneficiaries in order to satisfy outstanding tax-related liabilities of a deceased person. In Deputy Commissioner of Taxation (NSW) v Brown [18] , the High Court held that the liability of any person to pay a debt for unpaid income tax is conditional upon the right of the Commissioner to assess that person and upon the correlative right of that person to appeal against the assessment (which right the beneficiaries did not possess). 58. The scope of an LPR's liability was considered in Deputy Commissioner of Taxation (Cth) v Taylor [19] and on appeal in Taylor v Deputy Commissioner of Taxation (Cth). [20] The LPR was paid an amount which it understood to be a repayment of a gambling debt. In fact, the amount was attributable to a share trading profit which had not been returned by the deceased or the LPR. 59. The Deputy Commissioner in that case argued that the LPR should have been on notice of a claim for additional income tax in respect of the profit. 60. The LPR in that case was able to discharge the onus that rested on them of showing that they had no notice of any claim, contingent or otherwise, against the estate by the Deputy Commissioner when they distributed the estate assets. [21]",,,/law/view/document?LocID=%22COG%2FPCG20184EC1%2FNAT%2FATO%2F00001%22&PiT=99991231235958,False,False,https://www.ato.gov.au/law/view/document?docid=COG/PCG20184/NAT/ATO/00001
PCG 2016/16,Final PCG,Fixed entitlements and fixed trusts,,,7. This Guideline applies both before and after its date of issue.,,,PS LA 2002/11 | TR 2006/7,Case References: Colonial First State Investments Ltd v. Commissioner of Taxation [2011] FCA 16 (2011) 192 FCR 298 2011 ATC 20-235 (2011) 81 ATR 772 Gartside v. Inland Revenue Commissioners [1968] AC 553 [1968] 1 All ER 121 [1968] 2 WLR 277 [1967] TR 309 Queensland Trustees Ltd v. Commissioner of Stamp Duties (Queensland) (1952) 88 CLR 54,"1. This Guideline outlines the factors the Commissioner will consider when deciding whether to exercise the discretion [1] to treat an interest in the income or capital of a trust as being a fixed entitlement. This can result in a trust being treated as a fixed trust under the trust loss provisions and is also relevant when applying other provisions in the tax legislation which rely on the concept of 'fixed entitlement' (listed in Attachment A of this Guideline). [2] 2. In practice, it may be difficult for many trusts to satisfy the definition of 'fixed trust' unless the Commissioner exercises his discretion to treat the beneficiaries' interests as fixed entitlements. 3. This Guideline also outlines (at Attachment B) a safe harbour compliance approach for trustees of certain trusts that allows them to manage the trust's tax affairs as if the Commissioner had exercised the discretion to treat beneficiaries as having fixed entitlements to income and capital of the trust. 4. This Guideline does not apply: 5. Law Administration Practice Statement PS LA 2002/11 Issues concerning fixed entitlements to a share of the income or capital of a trust continues to instruct ATO officers about how to ensure that such issues are decided consistently. Structure of this Guideline 6. The structure of this Guideline is represented in the following flowchart which outlines the process for determining if beneficiaries have fixed entitlements to all of the income and capital of a trust.",,,"Attachment B: 23. The trustee of a trust described in can manage the trust's tax affairs as if the Commissioner has exercised the discretion to treat the beneficiaries as having fixed entitlements to the income and capital of the trust. 24. The 'safe harbours' in this Guideline can only be satisfied in relation to known facts. A trustee that requires certainty as to whether or not the beneficiaries of the trust have fixed entitlements in relation to a future time must request the exercise of the Commissioner's discretion. | Discretion to treat an interest as a fixed entitlement in subsection 272-5(3): 25. Where a trust is not a fixed trust, because all of the beneficiaries' interests in the income and capital of the trust are not fixed entitlements, and the trust does not satisfy the requirements for a 'safe harbour' in this Guideline, the trustee may request that the Commissioner exercise the discretion to treat beneficiaries' interests as being vested and indefeasible. Note: the Commissioner is not able to exercise the discretion in relation to: 26. A trust can both rely on the savings rule in relation to some trustee powers in a trust instrument (the power to issue or redeem units), and request that the Commissioner exercise the discretion in the context of other powers that may defeat a beneficiary's interest (such as in relation to a power to amend). 27. In deciding whether or not to exercise the discretion, the Commissioner must consider: [19] 28. The Commissioner will also consider factors relevant in the context of the trust loss rules. | Circumstances in which the interest is capable of not vesting or being defeated: 29. When examining the circumstances in which a beneficiary's interest is capable of not vesting or being defeated, the Commissioner will have regard to any factor that may affect the defeasance of any beneficiary's interest, including: 30. This includes having regard to: | The likelihood of the interest not vesting or the defeasance happening: 31. When considering the likelihood of the interest not vesting or being defeated, the Commissioner must form a view as to the probability that the contingency or defeasance will happen. Where the likelihood of the contingency or event of defeasance occurring is low, this will weigh towards a favourable exercise of the discretion. 32. Where the trustee or manager of the trust has a particular power to defeat a beneficiary's interest, it is relevant to consider how often, if at all, they have exercised that power over a relevant period. 33. Any preconditions or caveats that affect the likelihood of a beneficiary's interest not vesting or being defeated are also relevant. | The nature of the trust: 34. The nature of the trust refers to its basic legal characteristics and its economic function, both actual and intended. The ability of the trustee or manager of the trust to adversely affect the interests of beneficiaries could be limited where: | Other contextual factors: 35. Having regard to the subject matter, scope and purpose of the trust loss rules, it is relevant for the Commissioner to consider whether the exercise of the discretion would allow a person to obtain a tax benefit from a trust claiming a deduction for a tax loss, bad debt deduction or debt/equity swap deduction when the person did not bear the economic loss incurred by the trust. 36. The concept of a fixed entitlement is central to the operation of the trust loss rules, the purpose of which is to prevent the transfer of the tax benefit of those losses or deductions. The tax benefit of a loss is transferred when a person who did not bear the economic loss at the time it was incurred by the trust obtains a benefit from the trust being able to deduct the loss. [21] | Attachment A.: 37. Because the discretion to treat beneficiaries' interests as being a fixed entitlement is part of the trust loss rules, and because of the resultant consequences of being treated as a fixed trust, these contextual factors are also relevant even when the reason for requesting that the Commissioner exercise the discretion is related to one of the other legislative provisions listed in | Attachment C: 38. to this Guideline contains a non-exhaustive list of the factors that the Commissioner will consider when deciding whether or not to exercise the discretion. 39. In each case the Commissioner will weigh up all factors (favourable and unfavourable) in the context of the facts and circumstances of the case. The presence of more favourable factors will increase the likelihood that the Commissioner will exercise the discretion. 40. However, a single power in a trust instrument may pose such a serious threat to beneficiaries' interests that, in the absence of any mitigating factors, the Commissioner will not exercise the discretion. | Attachment C: 41. Conversely, the absence of some or all of the favourable factors described in does not necessarily preclude the exercise of the discretion.","Example s: 42. The following examples illustrate the application of the savings rule and how the Commissioner would consider the exercise of the discretion in various situations. | Example 1: savings rule applies 43. The interests in the income and capital of a trust are defeasible only because the trustee may issue or redeem units for a price determined on the basis of the net asset value of the trust. The savings rule will apply in this circumstance to ensure that the beneficiaries' interests are not defeasible, and are fixed entitlements. | Example 2: savings rule applies 44. The trustee of a trust issues units for a price that is higher than a price determined on the basis of the net asset value of the trust. The higher price is attributable to transaction costs associated with the issue of the units. The savings rule will apply in this circumstance to ensure that the beneficiaries' interests are not defeasible and are fixed entitlements. | Example 3: savings rule and a safe harbour apply 45. If, in relation to the trust in Example 1, the trustee also had an unlimited power to amend the trust deed, the beneficiaries' interests would be defeasible and would not constitute fixed entitlements. However, if the requirements of one of the safe harbours in the compliance approach in Attachment B are satisfied, the trustee can manage the trust's tax affairs as if the Commissioner has exercised the discretion to treat the beneficiaries as having fixed entitlements to the income and capital of the trust. | Example 4: savings rule does not apply but a safe harbour applies 46. The beneficiaries' interests in the trust are not fixed entitlements, and the savings rule does not apply, because the trustee may issue or redeem units for a price not determined on the basis of the net asset value of the trust. If the requirements of one of the safe harbours in the compliance approach in Attachment B are satisfied, the trustee can manage the trust's tax affairs as if the Commissioner has exercised the discretion to treat the beneficiaries as having fixed entitlements to the income and capital of the trust. | Example 5: exchange of interests in a trust under Subdivision 124-M of the ITAA 1997 47. Two trustees are contemplating a transaction whereby all of the units in one trust (the selling trust) will be acquired by the trustee of the other trust (the acquiring trust) in return for new units in the acquiring trust. The scrip for scrip roll-over provisions require that entities have fixed entitlements to all of the income and capital of each trust immediately before, during and immediately after the exchange of units. 48. The beneficiaries' interests in the selling trust are not fixed entitlements, and because of the prospective nature of the proposed transaction, the safe harbours in the compliance approach cannot be relied upon. 49. Accordingly, before entering into the transaction, the trustee of the selling trust applies to the Commissioner for a ruling in relation to whether the requirements of scrip for scrip roll-over will be satisfied, including whether fixed entitlements will exist at a future date. The trustee asks the Commissioner to exercise the discretion if the beneficiaries' interests at the future date are not fixed entitlements. Attachment A - Other provisions 50. Other provisions that, directly or indirectly, rely upon the meaning of 'fixed entitlement' in section 272-5 Attachment B - Compliance approach - safe harbours Safe harbour - Administration 51. The trustee of a trust that satisfies the conditions for one of the categories below can manage its tax affairs as if the Commissioner had exercised the discretion to treat the beneficiaries as having a fixed entitlement to the income and capital of the trust for the purposes of section 272-5. 52. Accordingly, other than ensuring that a trust satisfies the relevant conditions of the category relied upon, the Commissioner will not allocate compliance resources to determine whether beneficiaries have fixed entitlements in cases where one of the categories below is met. A safe harbour only has application during the period in which the conditions for the relevant category are satisfied. A trustee that requires certainty as to whether or not the beneficiaries of the trust have fixed entitlements in relation to a future time must request the exercise of the Commissioner's discretion. 53. Taxpayers should maintain relevant records that support their claim that they meet the relevant conditions being relied on. Safe harbour - Conditions 54. To qualify for access to a safe harbour, a trust must, at all relevant times, satisfy the conditions of one of the categories below: Attachment C - Relevant factors in the exercise of the Commissioner's discretion to treat an interest in a trust as being a fixed entitlement Factors favourable to the exercise of the Commissioner's discretion 55. The Commissioner regards the following factors favourably when deciding whether to exercise the discretion: Factors adverse to the exercise of the Commissioner's discretion 56. The Commissioner regards the following factors unfavourably when deciding whether to exercise the discretion:",,,,False,False,https://www.ato.gov.au/law/view/document?docid=COG/PCG201616/NAT/ATO/00001
PCG 2022/2,Final PCG,Section 100A reimbursement agreements - ATO compliance approach,,,53,,,TA 2013/1 | TA 2016/12 | TA 2022/1 | TD 2022/11 | TR 2022/4,,"1. The use of trusts as business and investment vehicles in Australia is common. We recognise that most trustees appropriately comply with their obligations. The purpose of this Guideline is to support trustees with managing their compliance risks with respect to section 100A of the Income Tax Assessment Act 1936 [1] , a tax law integrity provision. 2. This Guideline sets out how we differentiate risk and how we manage that risk through our compliance approach for a range of trust arrangements to which section 100A may potentially apply. We aim to give you more certainty by setting out how we will engage with you; in particular, how we: 3. This Guideline uses 3 coloured zones to denote risk ratings. Table 1 at paragraph 13 of this Guideline summarises each of these zones and the corresponding compliance approach. The Appendix to this Guideline contains examples of how to apply the risk zones. 4. This Guideline is designed to give you confidence that, if your circumstances align with the principles in the white zone or green zone set out in this Guideline, we will not allocate compliance resources to test the tax outcomes of your arrangement, except to confirm that your arrangements meet the requirements of the zone. 5. This Guideline will be updated from time to time to reflect modifications to our risk framework. 6. Note: This Guideline does not replace, alter or affect the ATO's interpretation of the law in any way. It complements, and should be read together with, Taxation Ruling TR 2022/4 Income tax: section 100A reimbursement agreements, which sets out the ATO's interpretative position on the application of section 100A. This means that if, under this Guideline, we allocate compliance resources to consider section 100A, our consideration of section 100A will be in accordance with our interpretation set out in TR 2022/4. 7. We have published further guidance about section 100A that complements this Guideline on our website.",,"8. Section 100A may be relevant to a broad range of arrangements involving a beneficiary's present entitlement to trust income. 9. Where a beneficiary's present entitlement [2] has arisen from a reimbursement agreement, the beneficiary is deemed not to be, and never to have been, presently entitled to the relevant trust income. In these cases, section 100A generally applies to make the trustee, rather than the presently entitled beneficiary, liable to tax at the top marginal rate. One element of the definition of a reimbursement agreement is that the entitlement has arisen out of, or in connection with, an agreement, arrangement or understanding that provides for a payment or benefit to another person. [3] 10. There is no reimbursement agreement and section 100A will not apply to a beneficiary's present entitlement to trust income where any of the following apply: 11. An agreement is not a reimbursement agreement where it has been entered into in the course of ordinary family or commercial dealing. [4] The Commissioner's view in TR 2022/4 is that ordinary family or commercial dealing is a dealing explained by the family or commercial objectives it will achieve. If the objective of a dealing can be explained as the payment of less tax to maximise group wealth, rather than a family or commercial objective, it is not an ordinary family or commercial dealing. 12. For example, an agreement that includes the creation of a present entitlement to funds that are retained by a trustee will satisfy some of the basic elements of a reimbursement agreement, as it will involve a present entitlement and the provision of a benefit to the trustee. However, whether such an agreement is a reimbursement agreement will depend on whether it meets the other elements of a reimbursement agreement. This will include a consideration of whether it was entered into in the course of ordinary family or commercial dealing (in which case it is not a reimbursement agreement). [5] This consideration will be undertaken against a background which acknowledges that it is regular for the controllers of an entity that conduct income-earning activities to re-invest in that entity so that it can derive further income.","Intro: This Practical Compliance Guideline sets out a practical administration approach to assist taxpayers in complying with relevant tax laws. Provided you follow this Guideline in good faith, the Commissioner will administer the law in accordance with this approach.",,"Appendix 1: – Examples Arrangements that commenced before 1 July 2014 Example 1 – arrangement ceased before 1 July 2014 56. Reformed Trust acquires investment assets. Xavier Co is the trustee of Reformed Trust. Mr Xavier is a beneficiary of Reformed Trust and the sole director of Xavier Co. 57. In income years ending before 1 July 2014, Reformed Trust and Mr Xavier entered into arrangements in relation to present entitlements conferred on Mr Xavier which are red-zone arrangements in this Guideline. 58. Reformed Trust and Mr Xavier changed the nature of their arrangements in relation to present entitlements conferred on Mr Xavier from the 2014-15 income year onward. None of the exclusions in paragraph 16 of this Guideline apply. 59. The entitlements conferred in income years before 1 July 2014 are white-zone arrangements and we will not dedicate new compliance resources to consider the application of section 100A to them. The risk rating of the arrangement modified in July 2014 would need to be tested separately. Example 2 – arrangement continues before and after 1 July 2014 60. Zed Co is a resident company that acts as the trustee of Zed Family Trust. 61. Mr Zed, a resident individual, is the controller of Zed Family Trust given that he is both the appointor of Zed Family Trust and he is the sole director of Zed Co. 62. Between the 2012-13 and 2019-20 income years, the trustee of Zed Family Trust has been paid $300,000 franked dividends each year. In each of these income years, the dividend income was appointed by Zed Co as trustee to Ms Lee, a non-resident beneficiary who is the sister-in-law of Mr Zed. 63. Ms Lee's entitlements to the dividend income remains unpaid while Zed Co has permitted Mr Zed to use the corresponding dividend receipts of the trust to both meet his personal expenses and to repay debt that he owes to other private companies that he controls. The arrangement is not within the green zone. 64. The arrangement is not in the white zone as the arrangement commenced before 1 July 2014 and continued after that date. That is, the arrangement in respect of Ms Lee's present entitlement to trust income for 2012-13 and 2013-14 income years appears to have continued into the 2014-15 and following income years. Example 3 – taxpayer under audit for fraud or evasion 65. The ATO is undertaking an audit of Cash Discount Trust for the period 1 July 2010 to 30 June 2014. 66. The focus of the audit is the understatement of the assessable income of Cash Discount Trust, with the trustee of Cash Discount Trust having omitted significant cash receipts from its reported assessable income as a result of evasion. 67. During the course of the audit, the ATO ascertains that the beneficiaries used their trust entitlements to make gifts in each year under audit. The recipient of the gifts is the beneficiaries' mother who controls Cash Discount Trust. The arrangement satisfies the criteria of Red zone: scenario 1. 68. The arrangement is not in the white zone as we are otherwise considering the income tax affairs of Cash Discount Trust in connection with evasion that resulted in understating of net income in the trust tax returns. Green-zone arrangements Example 4 – funds used for family purposes 69. Greater Trust is a discretionary trust controlled by Ms Great. The beneficiaries of Greater Trust include Ms Great, her spouse Mr Better and members of their extended family. The trustee of Greater Trust is Greater Pty Ltd. The director and shareholder of Greater Pty Ltd is Ms Great. 70. Greater Trust holds a number of investment assets. 71. Ms Great and Mr Better have 2 children – Hubert (aged 15) and Violet (aged 17). 72. On 30 June 2023, the trustee of Greater Trust makes a determination to appoint 50% of the trust income to Ms Great and appoint 50% to Mr Better. Funds representing the entitlement are paid to a bank account jointly held by Ms Great and Mr Better. The funds are subsequently used for purposes which benefit both of them and their children. 73. Diagram 5 of this Guideline illustrates the facts in this Example. Diagram 5 74. We would not dedicate compliance resources to the arrangement in this Example, on the basis that it meets the conditions in Green zone: scenario 1 of this Guideline and it does not have any features that excludes it from the green zone under paragraph 32 of this Guideline. The entitlements were used for joint family purposes and to benefit the beneficiaries' dependent children. 75. The facts of this Example should be contrasted with Red zone: scenario 1 and Example 14 of this Guideline, both of which describe situations when an arrangement involving children of a beneficiary will be high risk. Example 5 – time lag between a beneficiary becoming presently entitled and that entitlement being satisfied 76. Tortoise Trust holds a number of investment assets and is controlled by Mr Hare Senior. 77. On 30 June 2023, the trustee of Tortoise Trust makes a determination to appoint 100% of the trust income to Mr Hare Junior. 78. On 15 March 2024, the trustee of Tortoise Trust finalises its accounts for the 2022-23 income year. In doing so, the trustee ascertains that the amount of trust income to which Mr Hare Junior is presently entitled for the 2022-23 income year is $120,000. 79. On 18 March 2024, Mr Hare Junior is informed by the trustee of Tortoise Trust as to the amount of his trust entitlement. 80. On 31 March 2024, Mr Hare Junior lodges his 2022-23 tax return and includes his trust entitlement of $120,000 from Tortoise Trust in his assessable income. That same day, he calls for a $30,000 part-payment of his trust entitlement, which is then paid by Tortoise Trust so that Mr Hare Junior can pay his tax liability. 81. By 30 April 2025 (which is within 2 years of the entitlement being conferred), Mr Hare Junior has received the $90,000 balance of the $120,000 from the trustee of Tortoise Trust in satisfaction of Mr Hare Junior's trust entitlement for the 2022-23 income year. 82. Mr Hare Junior uses the funds representing his trust entitlement to invest in a new florist business he has commenced as a sole trader. 83. Prior to satisfying Mr Hare Junior's trust entitlement, the $120,000 income receipts had been retained by the trustee of Tortoise Trust as part of the investment portfolio maintained by the trustee. 84. We would not dedicate compliance resources to this arrangement as it meets the conditions in Green zone: scenario 2 of this Guideline and the arrangement does not have any features that excludes it from the green zone under paragraph 32 of this Guideline. Example 6 – time lag between a loss trustee beneficiary becoming presently entitled and that entitlement being satisfied 85. Doctor Evergreen controls and is a beneficiary of both Top Trust and Bottom Trust. 86. Doctor Evergreen is the specified individual in the FTEs made by each of the trustees of Top Trust and Bottom Trust. 87. Top Trust undertakes investment activities. 88. Bottom Trust undertakes a business that has prior year tax losses, with the trustee of Bottom Trust indebted to other parties – the debts arose in the course of carrying on the business. 89. For the 2022-23 income year, the trustee of Top Trust appoints all the income of that trust to Bottom Trust. 90. On 30 September 2023, the trustee of Top Trust finalises its accounts for the 2022-23 income year and ascertains that the unpaid trust entitlement owing to the trustee of Bottom Trust is $250,000 for that year. The trustee of Bottom Trust is informed of the amount of its trust entitlement on the same day. 91. On 31 October 2023, the trustee lodges the trust tax return for Bottom Trust and includes the $250,000 as assessable income. Bottom Trust has nil taxable income as its deductions exceed its assessable income. 92. On 1 December 2023, the trustee of Top Trust receives cash in respect of a 6-month interest-bearing term deposit that has matured. $250,000 is transferred by the trustee of Top Trust into the bank account of Bottom Trust in satisfaction of the entitlement (which is within 2 years of when the beneficiary was made presently entitled). 93. The trustee of Bottom Trust uses the $250,000 in first repaying debts incurred in carrying on the business it undertakes and uses the balance to make a capital distribution to the beneficiaries. 94. We would not dedicate compliance resources to this arrangement as it meets the conditions in Green zone: scenario 2 of this Guideline and the arrangement does not have any features that exclude it from the green zone under paragraph 32 of this Guideline. Example 7 – use of funds condition and part-payment of unpaid present entitlement 95. Homewares Trust is a discretionary trust controlled by Ms Retail. The trustee of Homewares Trust is Homewares Pty Ltd (and all references to Homewares Pty Ltd are in that capacity). The director and shareholder of Homewares Pty Ltd is Ms Retail. The beneficiaries of Homewares Trust include Ms Retail, her spouse Mr Retail and members of their extended family. 96. Homewares Trust carries on a retail business selling homewares. 97. On 30 June 2023, Homewares Pty Ltd resolves to appoint 50% of the trust income to Ms Retail and to appoint the remaining 50% to Mr Retail. 98. Mr Retail and Ms Retail use some of their trust entitlements for the 2022-23 income year to meet their personal expenses during the 2023-24 income year. The balance of their entitlements remain unpaid and are used to supplement the working capital of the business carried on by Homewares Trust. 99. Diagram 6 of this Guideline illustrates the facts in this Example. Diagram 6 100. Ms Retail and Mr Retail expect to be paid the remainder of their entitlements but they have no firm plans on the timing of payment. They allow the trustee to use those funds in the homewares business for working capital purposes. 101. Funds representing Ms Retail and Mr Retail's trust entitlements have been either paid to them or retained by the trustee for working capital of the business. 102. We would not dedicate compliance resources to this arrangement as it meets the conditions in Green zone: scenario 3A of this Guideline and the arrangement does not have any features that excludes it from the green zone described in paragraph 32 of this Guideline. Example 8 – distributions from a family business 103. Newsagent Trust is a discretionary trust controlled by Ms Magazine. The trustee of Newsagent Trust is Newsagent Pty Ltd. Ms Magazine is the director and shareholder of Newsagent Pty Ltd. The beneficiaries of Newsagent Trust include Ms Magazine, her spouse Mr Magazine and members of their extended family. 104. Newsagent Trust carries on a business as a newsagent. 105. Danny is aged 18 and is the daughter of Ms Magazine. 106. During the 2022-23 income year, Newsagent Trust derives income of $150,000 (the trust's net income is also $150,000). On 30 June 2023, the trustee of Newsagent Trust makes a determination to appoint $18,000 to Danny and 50% of the remainder to each of Ms Magazine and Mr Magazine. 107. Funds representing Danny's entitlement are paid into her bank account and she subsequently uses them to pay her university fees. 108. Ms Magazine and Mr Magazine do not call for their entitlements to be satisfied and funds representing each of their entitlements are retained by the trustee and used in the working capital of the newsagent business. 109. We would not dedicate compliance resources to the arrangement in this Example, on the basis that: Example 9 – distributions involving a trustee undertaking a farming business 110. McDonald Family Trust is a discretionary trust controlled by Old McDonald. 111. The trustee of McDonald Family Trust carries on a farming business. 112. The management of the farming business is undertaken by Old McDonald and his daughter Young McDonald. 113. It is intended that Young McDonald will take control of McDonald Family Trust when her father passes away. 114. During the 2022-23 income year, Old McDonald and Young McDonald each draw on funds from the trust bank account to meet their private outgoings. 115. On 30 June 2023, the trustee of McDonald Family Trust makes Old McDonald and Young McDonald each presently entitled to a 50% share of the income of the trust for that year. 116. The entitlements of both Old McDonald and Young McDonald are first set-off against the amounts each drew throughout the year with the balance remaining unpaid. The funds representing the unpaid entitlements are retained by the trustee and used to maintain and improve the farm. 117. It is intended that Old McDonald and Young McDonald will each call on so much of their trust entitlements to meet future private outgoings, with funds representing any unpaid entitlements used by the trustee in the farming business and expected to benefit them through future profitability of the enhanced business. 118. We would not dedicate compliance resources to this arrangement as it meets the conditions in Green zone: scenario 3A of this Guideline and the arrangement does not have any features described in paragraph 32 of this Guideline. 119. Diagram 7 of this Guideline illustrates the facts in this Example. Diagram 7 Example 10 – testamentary trust 120. A trust established under a will provides that Gemini, the daughter of the deceased, is entitled each year to all of the trust income and to receive the trust corpus once she reaches 30 years of age or (if she dies before attaining the age of 30) to her estate. 121. Gemini is 18 years of age at the time the trust is created. 122. Gemini's entitlement to trust income is not immediately satisfied in full each year. Instead, the trustee pays Gemini a weekly allowance of $500 with the balance of funds representing Gemini's income entitlement retained by the trustee. 123. Gemini uses her allowance to pay her personal living expenses. This includes paying $250 per week to her aunt for food and board. 124. The funds representing so much of Gemini's income entitlement that is retained by the trustee is invested in income-producing assets for Gemini's direct future benefit. 125. The arrangement does not have any features that excludes it from the green zone under paragraph 32 of this Guideline. We would not dedicate compliance resources to this arrangement as it meets the conditions in Green zone: scenario 3A of this Guideline. Example 11 – use of funds condition and unpaid present entitlement 126. Investment Trust is a discretionary trust controlled by Ms Alia. The trustee of Investment Trust is Investment Pty Ltd. The beneficiaries of Investment Trust include Ms Alia, her spouse Mr Aarif, their extended family and Beneficiary Pty Ltd. Ms Alia is the director and shareholder of Investment Pty Ltd and Beneficiary Pty Ltd. 127. Investment Trust holds a number of investment assets including shares in listed companies and commercial property from which it derives dividend and rental income respectively. 128. In the 2022-23 income year, Investment Trust derives income comprised of dividends from listed companies. The income is used to purchase further shares pursuant to dividend reinvestment plans. 129. On 30 June 2023, Investment Pty Ltd resolves to appoint 60% of the trust income to Beneficiary Pty Ltd, 20% to Ms Alia and 20% to Mr Iarif. At the time of appointment, there is an understanding between the parties that each of the beneficiaries will use their entitlement to lend money back to Investment Trust. The unpaid entitlements are used by Investment Trust to purchase listed shares. 130. The arrangement between Investment Trust and Beneficiary Pty Ltd amounts to financial accommodation. [21] Ms Alia and Mr Aarif expect to be paid their entitlements, but they have no firm plans on the timing of payment. 131. During the 2023-24 income year, Investment Pty Ltd enters into an arrangement with Beneficiary Pty Ltd to borrow an amount equal to the funds that Beneficiary Pty Ltd is entitled to receive from the Investment Trust on commercial terms. [22] 132. During the 2023-24 income year and subsequent income years, Investment Pty Ltd uses trust receipts to meet its principal and interest obligations under the loan agreement. 133. Funds representing the beneficiaries' present entitlements that have been retained satisfy the use of funds condition and a written loan agreement has been entered into between Investment Pty Ltd and Beneficiary Pty Ltd on commercial terms. We would not dedicate compliance resources to this arrangement as it meets the conditions in Green zone: scenarios 3A and 3B of this Guideline and does not have any features that exclude it from the green zone under paragraph 32 of this Guideline. Example 12 – trustee retains funds and services loan agreement 134. Flower Trust is a discretionary trust controlled by Ms Rose. The trustee of Flower Trust is Flower Pty Ltd. The beneficiaries of Flower Trust include Ms Rose, her spouse Mr Rose, their extended family and Plant Pty Ltd. Ms Rose is the director and shareholder of Flower Pty Ltd and Plant Pty Ltd. 135. Flower Trust carries on a business as a florist. 136. During the 2022-23 income year, Flower Trust derives income of $100,000 (the trust's net income is also $100,000). 137. On 30 June 2023, Flower Pty Ltd resolves to make Plant Pty Ltd presently entitled to all of the income of Flower Trust. 138. Flower Trust partially satisfies the entitlement of Plant Pty Ltd to enable it to pay its tax on the $100,000. The balance of the entitlement remains unpaid and is used by the trustee of Flower Trust in funding the working capital of the business. The arrangement amounts to financial accommodation [23] and Flower Pty Ltd and Plant Pty Ltd put in place a loan agreement on commercial terms that comply with section 109N. 139. Diagram 8 of this Guideline illustrates the facts in this Example. Diagram 8 140. Flower Pty Ltd uses the receipts from the trust's business to make interest and principal payments to Plant Pty Ltd to comply with the terms of the loan agreement. 141. Funds representing Plant Pty Ltd's present entitlement have been retained by the trustee for working capital of the business and a written loan agreement has been entered into on commercial terms. 142. The arrangement does not have any features described in the red zone. We would not dedicate compliance resources to this arrangement as it meets the conditions in Green zone: scenario 3B of this Guideline. Example 13 – distributions to a company beneficiary with tax losses 143. Ms Willow is the appointor of Black Trust and her spouse controls Red Pty Ltd. 144. Noir Co is the trustee of Black Trust (all references to Noir Co are in that capacity) and is controlled by Ms Willow. 145. Black Trust carries on a manufacturing business. 146. Red Pty Ltd has prior year tax losses as a result of operating a business venture that continues to operate and has a nil distributable surplus. 147. On 30 June 2023, Noir Co makes a determination to appoint 100% of the trust income to Red Pty Ltd, being $300,000. 148. Red Pty Ltd includes $300,000 in its assessable income, being the net income of Black Trust. After deducting tax losses of $300,000, the taxable income of Red Pty Ltd is nil. 149. The funds representing Red Pty Ltd's trust entitlement were retained by Noir Co for the purpose of funding the working capital for the manufacturing business. Noir Co and Red Pty Ltd subsequently enter into a loan agreement on commercial terms that comply with section 109N. 150. Diagram 9 of this Guideline illustrates the facts in this Example. Diagram 9 151. Noir Co uses the receipts from the business to make interest and principal payments to Red Pty Ltd to comply with the terms of the loan agreement. 152. The arrangement does not have any features that excludes it from the green zone under paragraph 32 of this Guideline. We would not dedicate compliance resources to this arrangement as it meets the conditions in Green zone: scenario 3B of this Guideline. Red-zone arrangements Example 14 – amounts provided to the parent in respect of expenses incurred before the beneficiary turns 18 years of age 153. Patel Trust's beneficiaries include the members of the Patel Family. Patel Co is the trustee of Patel Trust and Lila Patel is the sole shareholder and director of the trustee. 154. Lila is the parent of 3 adult children – Sima (aged 26), Kumar (aged 21) and Jai (aged 19). 155. During the 2022-23 income year, Sima is self-employed and has a taxable income of $90,000. Kumar and Jai study full time and derive no income during the income year. Lila's children live at home with her at all times throughout the income year. 156. During the 2022-23 income year, Patel Trust derives $240,000 in income (the trust's net income is also $240,000). Throughout that year, Patel Co makes regular payments totalling $240,000 into Lila's bank account. Those payments are recorded as a 'beneficiary loan' in the accounts of Patel Trust. Lila uses these amounts throughout the year to meet her personal living expenses and those of the household. 157. On 30 June 2023, Patel Co resolves to make Kumar and Jai each presently entitled to $120,000 of the Patel Trust income. 158. Patel Co applies their entitlements against the beneficiary loan owed by Lila. The entitlements of Kumar and Jai are each recorded as having been fully paid in the accounts of Patel Trust. Lila assists in the preparation of Kumar and Jai's tax returns and pays the tax liability arising in relation to their entitlements from her personal funds. 159. The entitlements of Kumar and Jai are applied in this manner because they each purportedly have an outstanding debt owed to Lila in respect of education expenses and their share of the Patel household expenses that Lila paid before they each turned 18. 160. Diagram 10 of this Guideline illustrates the facts in this Example. Diagram 10 161. On the basis that this arrangement meets the conditions in Red zone: scenario 1 of this Guideline, we would apply compliance resources to consider the application of section 100A in these circumstances. Example 15 – non-resident beneficiary makes a loan or gift to another party 162. Oberon Trust is a discretionary trust with beneficiaries including the members of the Oberon Family. Oberon Co is the trustee of Oberon Trust, and Titan Oberon is the sole shareholder and director of the trustee. Both Oberon Co and Titan Oberon are residents of Australia. 163. Oberon Trust has made an FTE and Titan Oberon is the specified individual in that election. 164. Titan is aged 44 and his parents are Sylvia (aged 66) and Sylvester (aged 67). His parents reside outside of Australia and are non-residents for tax purposes. 165. During the 2022-23 income year, Oberon Trust derives $400,000 income that is comprised of fully franked dividends. The dividends are paid directly into Titan's bank account. Titan uses these amounts to meet his personal expenses and mortgage repayments. The trust income is recorded as a 'beneficiary loan' in the accounts of Oberon Trust. 166. On 30 June 2023, Oberon Co exercises its power to appoint income to make Sylvia and Sylvester each entitled to $200,000 of Oberon Trust's income. Oberon Trust is not required to pay or withhold tax in respect of the distribution to Sylvia and Sylvester. 167. At the time income is appointed to Sylvia and Sylvester, they have agreed to use their entitlements to lend $400,000 to Titan on interest-free at-call terms. 168. In the accounts of Oberon Trust, Oberon Co records that Sylvia's and Sylvester's entitlements are fully satisfied in being applied to repay the $400,000 beneficiary loan owed by Titan. 169. Diagram 11 of this Guideline illustrates the facts in this Example. Diagram 11 170. On the basis that this arrangement meets the conditions in Red zone: scenario 1 of this Guideline, we would apply compliance resources to consider the application of section 100A in these circumstances. Example 16 – the presently entitled beneficiary is issued units by the trustee (or related trust) and the amount owed for the units is set-off against the beneficiary's entitlement 171. Johnson Trust is a hybrid trust that carries on a profitable business providing building repair services to the public. Johnson Co is the corporate trustee of Johnson Trust and Lauren Johnson is its sole shareholder and director. 172. Hammer Co is a private company with Lauren Johnson as the sole director and shareholder. 173. As a hybrid trust, Johnson Trust has 2 classes of beneficiaries. One class is comprised of the unit holders and the second class are the discretionary beneficiaries. 174. The terms of the trust deed for Johnson Trust include the following: 175. During the 2022-23 income year, Johnson Trust derives income of $500,000 (the trust's net income is also $500,000) from its business activities. The trust reinvests the net income into its business activities as working capital. 176. On 30 June 2023, Johnson Trust resolves to distribute 100% of the trust income to Hammer Co which is within the class of discretionary beneficiaries. 177. On 1 October 2023, the trustee of Johnson Trust exercises its power to issue new units to Hammer Co for $500,000. The accounts of Hammer Co and Johnson Trust recognise a set-off of Hammer Co's $500,000 UPE against the unit subscription amount. The market value of the units is significantly less than $500,000. 178. Diagram 12 of this Guideline illustrates the facts in this Example. Diagram 12 179. On the basis that this arrangement meets the conditions in Red zone: scenario 3 of this Guideline, we would apply compliance resources to consider the application of section 100A in these circumstances. Example 17 – the share of net income included in a beneficiary's assessable income is significantly more than the beneficiary's entitlement 180. Since before 2023, a private group controlled by Ms Day has consisted of Operating Trust, Passive Pty Ltd and Holding Trust. 181. Holding Trust is a discretionary trust and the shareholder of Passive Pty Ltd. The deed of Holding Trust defines trust income as being equal to the net income of the trust calculated under section 95. 182. Passive Pty Ltd receives trust distributions from Operating Trust which represent the annual profits from Operating Trust's business. Passive Pty Ltd has retained profits that reflect distributions from Operating Trust over the past 5 years. 183. Passive Pty Ltd uses its retained profits to make loans to Ms Day. 184. During the 2022-23 income year, the private group undertakes the following steps so that most of the retained profits in Passive Pty Ltd can be distributed to Ms Day: 185. Operating Trust continues to appoint its trust income to Passive Pty Ltd and there are no other changes to the group structure. 186. The tax outcome regarding the share buy-back is that the assessable income of Holding Trust includes $2.8 million dividends and $1.2 million franking credits. This is included in the assessable income of New Bucket Pty Ltd since it is presently entitled to the entire $1,000 trust income of Holding Trust. New Bucket Pty Ltd obtains no benefit from the share buy-back. 187. The economic outcome regarding the share buy-back is that Holding Trust has received $2.8 million which is ultimately distributed as capital to Ms Day. 188. Diagram 13 of this Guideline illustrates the facts in this Example. Diagram 13 189. On the basis that this arrangement meets the conditions in Red zone: scenario 4 of this Guideline, we would apply compliance resources to consider the application of section 100A in these circumstances. Example 18 – the presently entitled beneficiary has losses 190. Rouge Trust is controlled by Mr Rouge and has historically distributed to Mr Rouge and members of his family. 191. During the 2022-23 income year, Mr Rouge meets Ms Loss who has significant tax losses from prior years. They agree that Ms Loss will be made entitled to income of Rouge Trust and that only 10% of her entitlements will ever be paid. 192. As Ms Loss is not part of Mr Rouge's family, the trust deed of Rouge Trust is amended to include Ms Loss as a beneficiary of the trust on 1 June 2023. 193. On 30 June 2023, Rouge Trust has $500,000 trust income (the trust's net income is also $500,000) to which Ms Loss is made presently entitled. 194. Ms Loss includes the $500,000 net income of Rouge Trust as assessable income in her tax return for the 2022-23 income year and reports taxable income of nil after applying deductions for prior year tax losses. 195. Only $50,000 of Ms Loss' entitlement to the $500,000 income of Rouge Trust is paid. The remaining $450,000 is used by the trustee to make loans to Mr Rouge in lieu of the trust distributions that have historically been made to him and his family. 196. Diagram 14 of this Guideline illustrates the facts in this Example. Diagram 14 197. On the basis that this arrangement meets the conditions in Red zone: scenario 5 of this Guideline, we would apply compliance resources in these circumstances.",,/law/view/document?LocID=%22COG%2FPCG20222EC%2FNAT%2FATO%2F00001%22&PiT=99991231235958,False,False,https://www.ato.gov.au/law/view/document?docid=COG/PCG20222/NAT/ATO/00001
PCG 2025/D2,Draft PCG,Draft Practical Compliance Guideline,Draft,,1 July 2023,,,TR 2014/6 | TR 2014/8,,"13. The Act amended section 815-140 such that the existing modification for thin capitalisation within the transfer pricing rules no longer applies to entities which, for the purposes of Division 820, are: 14. For these affected entities, prior to the amendment, section 815-140 modified the way in which an entity that gets a transfer pricing benefit worked out its taxable income or tax loss for an income year, if the operation of the arm's length conditions involved applying a rate to a debt interest to work out costs that are debt deductions of the entity. This provision required that the relevant rate was worked out on the basis that the arm's length conditions operated, and that arm's length rate was then applied to the debt interest actually issued by the entity, instead of the debt interest that would have been issued had the arm's length conditions operated. [6] 15. As the new thin capitalisation tests deny debt deductions on an earnings basis, the identification of arm's length conditions is not modified for affected entities (those using the new earnings-based tests or third party debt test). For these entities, the amount of debt is a relevant condition for the purpose of considering the commercial or financial relations that operate between the respective parties. [7] 16. The arm's length conditions applying to a debt interest are determined in accordance with the rules contained in section 815-130. [8] The identification of an arm's length amount of debt, as with the identification of the arm's length conditions, is based on an assessment of '… the conditions that might be expected to operate between independent entities dealing wholly independently with one another in comparable circumstances'. [9] 17. Affected entities can therefore get a transfer pricing benefit where:",,,"Intro: This Practical Compliance Guideline is a draft for consultation purposes only. When the final Guideline issues, it will have the following preamble: This Practical Compliance Guideline sets out a practical administration approach to assist taxpayers in complying with relevant tax laws. Provided you follow this Guideline in good faith, the Commissioner will administer the law in accordance with this approach. | What this draft Guideline is about: 1. This draft Guideline [1] has been prepared following the enactment of the Treasury Laws Amendment (Making Multinationals Pay Their Fair Share — Integrity and Transparency) Act 2024 (Act) on 8 April 2024. The Act applies to an entity that: 2. The Act amended section 815-140 of the ITAA 1997 such that the actual amount of a cross-border financing arrangement of such affected entities is no longer preserved when applying Subdivision 815-B of the ITAA 1997. Specifically, such affected entities will need to work out both the amount and rate of their cross-border financing arrangements as if arm's length conditions operated. 3. This Guideline outlines our compliance approach to assessing the tax risk associated with the amount of your inbound, cross-border related party financing arrangement under Subdivision 815-B of the ITAA 1997. A 'cross-border related party financing arrangement' in this context refers to an arrangement that is a 'financing arrangement' as defined in subsection 995-1(1) of the ITAA 1997 or a related transaction or contract, entered into with a cross-border related party. [5] 4. This Guideline only applies to inbound, cross-border related party financing arrangements. Practical Compliance Guideline PCG 2017/4 ATO compliance approach to taxation issues associated with cross-border related party financing arrangements and related transactions continues to set out our compliance approach to determining the rate (or pricing) of cross-border related party financing arrangements. 5. This Guideline does not cover financing arrangements between entities that are not related. While Subdivision 815-B of the ITAA 1997 is capable of applying to these arrangements, they are not within the scope of this Guideline. 6. You can use this Guideline to: 7. All legislative references in this Guideline are to the ITAA 1997, unless otherwise indicated. | Structure of this Guideline: 8. This Guideline is structured as follows:","Example 1: – entity has third party debt and related party debt and has made a choice to apply the third party debt test 102. The following facts apply: 103. As the amount of debt deductions disallowed by the thin capitalisation provisions effectively include the whole amount of debt deductions Aus Co incurs on the inbound, cross-border related party financing arrangement, we will not have cause to devote compliance resources to consider transfer pricing risks associated with the amount of that related party arrangement. This is a low-risk arrangement for the purpose of this Guideline. | Example 2: – leverage and serviceability indicators 104. The following facts apply: 105. As Aus Co's financial ratios (as defined in Table 2 of this Guideline) are equal to, or better than independent comparable entities and its global group, the ATO will not have cause to devote compliance resources to consider transfer pricing risks associated with the amount of that arrangement. This is a low-risk arrangement for the purpose of this Guideline. High-risk examples 106. Examples 3 to 5 of this Guideline reflect our view of risk associated with the amount of an inbound, cross-border related party financing arrangement. Generally, we consider any of the following circumstances to be high risk: | Example 3: – use of cross-border related party finance while holding significant cash reserves 107. The following facts apply: 108. As Aus Co holds significant cash reserves relative to the amount of its inbound, cross-border related party financing arrangements, and debt deductions generated from those arrangements materially exceeds the interest income earned on an equivalent amount of the cash reserves, there is an increased likelihood that it has not considered its options realistically available. This is a high-risk arrangement for the purpose of this Guideline. | Example 4: – related party explicit guarantee in place to support the amount of an inbound, cross-border related party financing arrangement 109. The following facts apply: 110. As the amount of Aus Co's inbound, cross-border related party financing arrangement is the product of more than one controlled transaction, there is an increased risk that the arrangement is not consistent with arm's length conditions. This is a high-risk arrangement for the purpose of this Guideline. | Example 5: – using cross-border related party finance to utilise excess capacity under the fixed ratio test 111. The following facts apply: 112. As Aus Co has utilised excess capacity under the fixed ratio test to generate an expected below cost return, there is an increased likelihood that the arrangement is one that has been undertaken to maximise the amount of its debt deductions. This is a high-risk arrangement for the purpose of this Guideline. Documentation and evidence 113. If you have entered into an inbound, cross-border related party financing arrangement, you should maintain documentation and evidence to support your transfer pricing position, for each income year that financing arrangement remains on issue. [18] If we review your arrangement, we will request to see your transfer pricing documentation. 114. We may also request the following documentation: 115. Our view on transfer pricing documentation and a suggested framework for satisfying Subdivision 284-E of Schedule 1 to the Taxation Administration Act 1953 is set out in Taxation Ruling TR 2014/8 Income tax: transfer pricing documentation and Subdivision 284-E. Definitions 116. Table 2 of this Guideline defines terms and financial metrics that are relevant to the examples contained in this Guideline. Where, according to the financial statements: To the extent, any outbound, intercompany loans are being held on deposit as part of a global group cash management or cash pooling arrangement are not reflected in 'cash or cash equivalents', include those amounts in calculating 'internally generated funds', on the same measurements basis as otherwise set out in this Table. Interest coverage ratio = EBIT ÷ interest expense Where, according to the relevant financial statements: It includes amounts accrued, accumulated, or capitalised. Note that interest income is not included. For: Leverage ratio = debt ÷ EBITDA Where, according to the relevant financial statements:",,,,False,True,https://www.ato.gov.au/law/view/document?docid=DPC/PCG2025D2/NAT/ATO/00001
PCG 2017/4,Final PCG,ATO compliance approach to taxation issues associated with cross-border related party financing arrangements and related transactions,,,1 July 2017,,,PS LA 2006/8 | PS LA 2011/13 | PS LA 2011/30 | PS LA 2012/4 | PS LA 2012/5 | PS LA 2014/2 | PS LA 2014/4 | PS LA 2016/2 | TA 2016/1 | TA 2016/10 | TA 2016/3 | TA 2016/9 | TA 2019/1 | TA 2020/2 | TD 2019/10 | TR 2014/6,,"1. This Practical Compliance Guideline outlines our compliance approach to the taxation outcomes associated with: entered into with a cross-border related party. Such an arrangement, transaction or contract is referred to in this Guideline as a 'related party financing arrangement'. This Guideline does not cover financing arrangements characterised as equity in accordance with Division 974 of the ITAA 1997. 2. We use the framework in this Guideline and the accompanying schedules to assess risk and tailor our engagement with you according to the features of your related party financing arrangement, the profile of the parties to the related party financing arrangement and the choices and behaviours of your group. The tax risk associated with your related party financing arrangement is assessed having regard to a combination of quantitative and qualitative indicators. 3. If your related party financing arrangement is rated as low risk, then you can expect the Commissioner will generally not apply compliance resources to review the taxation outcomes other than to fact check the appropriate risk rating. If your related party financing arrangement falls outside the low risk category, you can expect the Commissioner will monitor, test and/or verify the taxation outcomes. The higher the risk rating, the more likely your arrangements will be reviewed as a matter of priority. 4. You can use the framework set out in this Guideline to: Structure of this Guideline 5. This Guideline is structured as follows: 6. You will need to read and apply the schedules in conjunction with the general principles set out in the Guideline. 7. This Guideline does not provide advice or guidance on the technical interpretation or application of Australia's transfer pricing rules or other taxation provisions. 8. Additional schedules may be included as part of this Guideline providing specific risk indicators for particular types of entities or other financing arrangements, for example, financial guarantees. 9. Where more than one schedule applies to you or your financing arrangement, you should use the schedules in a manner which most specifically addresses your circumstances. For example, Schedule 3 will modify how Schedule 1 is used to assess the risk rating where you have an outbound interest-free loan with a related party.","Scope: 44. Generally, we expect pricing of a related party debt to align with the commercial incentive of achieving the lowest possible 'all in' cost to the borrower. We also expect in most cases, the cost of financing to align with the costs that could be achieved, on an arm's length basis, by the parent of the global group to which the borrower and lender both belong. The indicators in this Schedule and their weighting have been developed with this expectation in mind. 45. This Schedule is limited to risks relating to the application of the transfer pricing rules in Division 815 of the ITAA 1997 or an international tax agreement, as defined in section 995-1 of the ITAA 1997. It does not set out our approach reviewing other taxation issues that might arise in relation to related party debt such as the: Interaction with future schedules 46. The risk indicators contained in paragraphs 55 and 56 of this Schedule may be modified by future schedules to this Guideline. The exact nature and extent of any modification or further interaction between this Schedule and others will be contained in the subsequent schedules. For example, Schedule 3 modifies how this Schedule is to be used to determine the risk zone for an outbound interest-free loan between related parties. Review of Schedule 47. We may review and modify the indicators contained in this Schedule to align it with changes in the Australian debt market conditions. Our review will be contingent on the movement of certain indicators contained in the 'Aggregate Measures of Australian Corporate Bond Spreads and Yields' statistical table maintained by the Reserve Bank of Australia. 48. For example, the basis points applied in the Price indicator reflects the current Australian debt capital market conditions. If these market conditions significantly change, the score and the basis points applied to this indicator will be reviewed and may be modified to reflect those changes. 49. Any changes to the scoring will align with the change in the underlying indicator. The changes will be prospective and will not be applicable to any tax return completed prior to the change being published. Related party financing risk indicator guide 50. Determining your risk zone requires you to: 51. Where the indicator is expressed as a range, your score for that indicator will be determined by reference to where you sit in that range. 52. An indicator with a score of 10 or 15 is individually capable of resulting in a risk score outside the green zone. 53. Your risk zone is determined by combining your outcomes under the pricing and motivational risk scoring tables (paragraphs 55 and 56 of this Schedule, respectively) according to the following matrix: 54. An explanation of each indicator (including how to calculate, where relevant) is given at paragraphs 58 to 96 of this Schedule. 55. Pricing risk scoring table: 56. Motivational risk scoring table: Evidencing your self-assessment of your risk zone 57. The following are examples of evidence, which would be prudent to have in place in order to minimise the burden of any such fact checking, as described in paragraph 37 of this Guideline. Relevant executed legal agreements setting out these terms Relevant executed legal agreement setting out the terms of that external loan Contemporaneous records, such as Board minutes, indicating the funds drawn down under the external loan were on lent via the related party debt Bank statements Industry data (supported by financial statements) Major sales contracts indicating the currency used Evidence of registration under the relevant legislation in the jurisdiction of incorporation Constitutions (or equivalent legal agreements) of the parties to the related party debt Audited financial accounts of the Australian group or the audited consolidated financial accounts of the group's parent entity (or the equivalent to such accounts where such accounts, or a single set of such accounts, are not prepared) Evidence of the jurisdiction of incorporation or registration Other evidence of central management and control Documentation as to the arm's length conditions applied and how the pricing was determined (usually contained within transfer pricing documentation) Definitions Global group 58. The definition of global group differs based on the structure of the group. Consistent with the global consolidated group 59. 'Consistent with global consolidated group' means a ratio that has been calculated in accordance with their respective definition, which is either equal to or within a 10% differential. For example, if your leverage is within a factor of 0.9 to 1.1, they will be taken as consistent. Priced relative to traceable third-party debt, relevant third-party debt of the group, or global group cost of funds 60. This indicator requires a comparison of the 'all in' cost of debt under the related party financing arrangement to the cost of debt issued to an unrelated third party. 'All in' cost is all the cost associated or connected to the pricing of the debt. For example, guarantee fees, associated hedging cost, line fees and any anticipated foreign exchange gains or losses. 61. Three options for comparison are available, which must be considered in the following order of priority: 62. The comparison can only be in respect of one of the options. For example, where traceable third-party debt is available for use it must be used and the other two options cannot be used. 63. Related party debt is considered traceable third-party debt when: 64. Relevant third-party debt of the borrowing entity exists where the nature of the third party and the related party borrowing are consistent. For example, medium or long-term bonds issued by the borrowing entity would be relevant third-party debt for long-term debt provided by a related party. By way of contrast, working capital or overdraft facilities with banks would not be considered relevant third-party debt. Any third-party debt of the borrowing entity should be considered first and then that of other members of the global group. 65. Global group cost of funds is defined as: Group interest / Average of opening and closing debt balances where: OR For a newly issued debt instrument, the global cost of funds is what the group's cost of debt would be for that particular instrument at the time it is entered into, where the taxpayer can provide evidence of this. 66. If the currency of the relevant reference rate is different to the currency of the related party borrowing the reference rate will require adjusting. For example, if traceable third-party debt is borrowed in Euros and the related party borrowing is in Australian dollars (A$), the traceable third-party debt would need to be converted to an A$ equivalent rate. 67. You calculate the A$ equivalent rate for the purpose of determining your pricing risk score by taking the average of either the: 68. If you have no third-party debt arrangements, we recommend you contact us to discuss an appropriate pricing indicator for your specific circumstances. Appropriate collateral 69. Appropriate collateral refers to the appropriate levels of protection that would be expected to be provided by the borrower to the lender in independent dealings. From our observations of market activity, this will generally depend on the credit rating of the issuing entity. For example, it is more common for non-investment grade entities to offer security over assets than for investment grade entities. 70. Appropriate collateral may include: 71. Answer yes if the lack of appropriate collateral has not been taken into account in pricing the financial arrangement. Subordinated debt (including mezzanine debt) 72. Subordinated debt is defined as a loan or security that ranks below other loans and securities with regard to claims on a company's assets or earnings in the event of a default. Subordination may arise from the terms of the debt itself or through structural subordination. 73. Answer no if subordination has not been taken into account in pricing the financial arrangement. Currency of debt is not consistent with operating currency 74. The operating currency of the borrower is either: Presence of exotic features or instruments 75. Exotic features or instruments include: 76. Answer no if the exotic features or instruments included in the arrangement have not been factored into the pricing of the financial arrangement. Sovereign risk of borrower entity 77. Sovereign rating of the jurisdiction of the borrower is determined as per Moody's, Standard and Poor's (S&P), or Fitch. The equivalent ratings of these agencies are provided in paragraph 78 of this Schedule. If no sovereign rating is provided by any of the credit rating agencies then assume a CC rating or equivalent. 78. Equivalent ratings: Investment grade Non-investment grade 79. If your pricing arrangements have made reliable adjustments for the sovereign risk of the borrower entity relative to Australian sovereign risk, then assume the sovereign risk is AAA. 80. For example, for a loan made between an Australian entity (AAA rated) and an entity in a jurisdiction where the sovereign risk is BB, the difference in rate between AAA and BB is calculated at equivalent to 125 bps. This difference (125 bps) is then added to the lending rate to compensate for the sovereign risk. 81. If Australia's credit rating falls below AAA and a jurisdiction is rated equal to or higher than Australia, no adjustment for sovereign risk is required. Leverage of borrower 82. This indicator requires comparison of the leverage of the Australian taxpayer and the global group or other leverage ranges listed in the motivational risk score table. 83. Leverage of taxpayer is defined as: tax debt / total Australian assets where: The value of these assets shall be the amount recorded in audited financial reports or historic cost where those reports are not available. 84. Leverage of group is defined as: Debt / Total assets as contained in the groups consolidated accounts where: 85. Where your leverage is consistent with or lower than your global group's consolidated leverage your score for this indicator is zero and the motivational risk scoring table in paragraph 56 of this Schedule is not applied to your 'stand alone' leverage. 86. If you are a financial entity for thin capitalisation purposes, you may substitute the 60% leverage benchmark in this indicator for your pre-asset revaluation safe harbour gearing ratio. For example, an inward-investing financial entity that has a pre-asset revaluation safe harbour gearing ratio of 78% may replace the 60% leverage benchmark in this indicator with their safe harbour gearing ratio. 87. Pre-asset revaluation safe harbour gearing ratio defined as: Pre-asset revaluation safe harbour debt amount / Total Australian assets where: Interest coverage ratio 88. The interest coverage ratio is calculated as follows: Interest coverage ratio = EBITDA / interest where: and Applicable tax rate of lender entity jurisdiction 89. The applicable tax rate is the corporate rate of taxation for the jurisdiction to which the lending entity is a tax resident. 90. Where the tax rate applied to the lending entity or the lending entity's interest income (for example, tax holidays or concessional tax treatment of certain income) is different to the headline rate (even temporarily) the actual rate applied should be used for this indicator. 91. If the lending entity is not a tax resident of any jurisdiction, assume the headline tax rate is 0%. 92. No points should be assigned for the purpose of this indicator where the lending entity is either: 93. Where the ultimate parent entity is exempt from paying income tax in the jurisdiction it is a tax resident of (for example, sovereign wealth funds, pension funds), no points should be assigned for the purposes of this indicator. Involves an arrangement covered by a taxpayer alert 94. Answer yes if you have an arrangement that can reasonably be described as being covered by any of the following taxpayer alerts: Involves a hybrid arrangement 95. Answer yes if the income (gain) or expenditure (loss) from your financial arrangements (including derivatives or spot transactions) is not subject to consistent or symmetrical tax treatment under the laws of the relevant overseas tax jurisdiction(s). Inconsistent treatment includes that due to tax deferral, or the treatment of the entity or other ownership arrangement in connection with holding or issuing of the financial arrangement. Tax treatment does not refer to differences in tax rates between jurisdictions.",,"Intro: Under the new thin capitalisation rules: ADIs, securitisation vehicles and certain special purpose entities are excluded from the debt deduction creation rules. Entities that are Australian plantation forestry entities are excluded from the new rules. For these entities, the previous rules will continue to apply. This Practical Compliance Guideline sets out a practical administration approach to assist taxpayers in complying with relevant tax laws. Provided you follow this Guideline in good faith, the Commissioner will administer the law in accordance with this approach.","Example s: of how to determine your risk zone | Example 1: Australian subsidiary of a US oil and gas company 96. ForCo Inc. is a company incorporated in the United States of America (US) and is the parent of the global group. AusCo Pty Ltd is an Australia subsidiary of ForCo Inc. 97. Relevant aspects of ForCo Inc. and AusCo's profiles are detailed in the following table: 98. AusCo Pty Ltd is in the oil and gas industry, primarily undertaking exploration for, and extraction of, gas. It has an accounting and tax functional currency of U.S. dollars (USD). On 1 January 2016 AusCo Pty Ltd receives a loan from a related party. The relevant terms of the loan, as set out in the executed legal agreement, are: 99. The loan: 100. The lender is in Hong Kong, which has a headline tax rate of 16.5%. 101. AusCo claims a 3.16% interest rate on its USD loan as the loan is priced as a senior debt for tax purposes. 102. The risk indicator guide is applied to the circumstances of AusCo Pty Ltd as follows: 103. AusCo Pty Ltd's score of four for both indicators places it in zone 3 for pricing and zone A for behaviour. It's combined score places it in the yellow zone - moderate risk. 104. AusCo Pty Ltd would likely be in the green zone if it: | Example 2: New Zealand subsidiary of an Australian asset management company 105. AusCo Limited is an Australian incorporated asset management company listed on the ASX and is the parent of the global group. ForCo Ltd is a New Zealand subsidiary of AusCo Limited. 106. Relevant aspects of AusCo Limited and ForCo Ltd.'s profiles are as follows: (accounting and tax) (accounting and tax) 107. ForCo Ltd is in the real estate industry, primarily undertaking management and investment in real estate. 108. On 1 January 2016 AusCo Limited provides a loan to ForCo Ltd; the relevant terms of the loan as set out in the executed legal agreement are an interest rate of 0% and currency of Australian dollars. 109. The loan: 110. The risk indicator guide is applied to the circumstances of AusCo Pty Ltd as follows: 111. AusCo Limited's score of 11 for pricing and zero for behavioural places it in zone 4 and zone A, respectively. Their combined score places them in the amber zone - high risk. 112. AusCo Limited could be in the green zone if it: 113. In this example, a review would consider the application of Australia's transfer pricing rules and potentially the application of general deductibility provisions to the extent that AusCo incurred financing costs in order to on-lend to its New Zealand subsidiary. This Schedule originally published 18 December 2017 | Example s: of how to determine your risk zone | Example 1: Australian subsidiary of a US oil and gas company 165. AusCo Pty Ltd is an Australian subsidiary of ForCo Inc., a company incorporated in the state of Delaware in the US. 166. AusCo Pty Ltd is in the oil and gas industry primarily undertaking exploration for, and the extraction of gas. It has an accounting and tax functional currency of US dollars (US$). 167. On 1 January 2017 a related party raised finance in the EURO commercial bond market and then on-lent EURO to Aus Co. The relevant terms of AusCo Pty Ltd's loan and the bond issuance are identical. The terms as set out in the executed legal agreements, were: 168. On 1 January 2017 AusCo Pty Ltd entered into a cross-currency interest rate swap with ForCo Inc. to swap USD fixed for Euro fixed. The relevant terms of this cross currency interest rate swap, as set out in the executed legal agreement are as follows: 169. At the same time, ForCo Inc. entered into a derivative transaction to back out the exposure to the market with a third-party bank that mirrored the arrangement entered into with AusCo Pty Ltd. 170. Other key details relevant to the AusCo Pty Ltd and ForCo Inc. group are detailed here: 171. There is no need to score this arrangement further than the first five indicators ((i) to (v) of the risk indicator guide) for AusCo Pty Ltd as the internal derivative associated with the underlying transaction was ultimately backed out to the market to a non-related party (Third Party Bank) with another derivative that mirrored the same terms. 172. AusCo Pty Ltd's risk score for this transaction would be three points. AusCo Pty Ltd had a previous history of prematurely closing out these types of transactions and this attracts three points under indicator (iii). Indicators (i), (ii), (iv) and (v) each score zero points. Therefore, Ausco Pty Ltd's risk rating would likely be in the green zone on this fact scenario. Note if the current transaction is also prematurely closed out then we reserve the right to apply compliance resources to review your related party derivative arrangement (see paragraphs 143 to 144 of this Schedule). | Example 2: Australian subsidiary of a US automotive company 173. AusLLP is a limited liability partnership formed in Australia by two subsidiary companies of ForCo Inc. 174. ForCo Inc. is a company incorporated in the state of Delaware in the US. 175. As a limited liability partnership operating in Australia, AusLLP is treated as an Australian resident company under Division 5A of the ITAA 1936 but still treated as a partnership for US tax purposes. 176. AusLLP is the head of the AusLLP tax consolidated group (TCG); this group has an Australian dollar (A$) functional currency. 177. AusCo Pty Ltd is an Australian resident subsidiary of Forco Inc. and is treated as a member of the AusLLP TCG. AusCo Pty Ltd operates in the automotive industry and is primarily involved in the distribution of automotive parts to the Australian market and derives most of its income in A$. 178. On 1 January 2017, AusCo Pty Ltd received financing from ForCo Inc. The relevant terms of this financing facility to AusCo Pty Ltd., as set out in the executed legal agreement were: 179. The ForCo Inc. group's policy is to fully hedge group currency exposures. 180. On 1 January 2017, AusLLP entered into a cross currency interest rate swap with USCo, a subsidiary of ForCo Inc., to swap US$ fixed for A$ fixed. The relevant terms of this swap, as set out in the executed legal agreement are as follows: 181. Other key details relevant to the ForCo Inc. group are: 182. The risk indicator guide is applied to the circumstances of AusCo Pty Ltd in the following manner: The AusLLP TCG falls into the red 'very high risk' zone. AusLLP TCG can expect priority compliance activity. 183. The AusLLP TCG would likely be in the blue zone if: 184. The transaction would likely be in the green zone if the exposure to the group was removed via a hedge with an external party in the market on mirror terms as that of the internal derivative. | Example 3: Australian subsidiary of a US asset management company 185. AusCo Pty Ltd is an Australian subsidiary of ForCo Inc., a company incorporated in the state of Delaware in the US. ForCo Inc. has not 'checked the box' for AusCo Pty Ltd so therefore AusCo Pty Ltd is not fiscally transparent for US tax purposes. 186. AusCo Pty Ltd is in the infrastructure and property development industry, primarily involved in the investment and development of commercial properties in Australia. It has an accounting and tax functional currency of A$. 187. On 1 January 2015, AusCo Pty Ltd entered into a loan with third-party banks to fund the acquisition and development of the property. 188. On 1 December 2015, AusCo Pty entered into a total return asset swap with ForCo Inc. The relevant terms of this swap for ForCo Inc. as set out in the executed legal agreements are as follows: 189. ForCo Inc. subsequently entered into a second total return asset swap with an unrelated overseas collective investment vehicle (CIV) in another tax jurisdiction with the same terms except a premium was also paid to ForCo Inc. by the CIV when entering into the second total return asset swap. 190. The risk indicator guide is applied to the circumstances of AusCo Pty Ltd as follows: 191. AusCo Pty Ltd falls into the red 'very high risk' zone. AusCo Pty Ltd can expect priority compliance activity. 192. AusCo Pty Ltd would likely be in the green zone if it did not enter into the total return asset swap but instead entered into a direct sale of the property to ForCo Inc. or the CIV at an arm's length market price. This Schedule originally published 27 November 2019 | Example s: 227. The following examples may assist you in understanding the analysis required to determine whether the factors contained within this Schedule apply to your circumstances. 228. These examples highlight some of the factors which we may consider in assessing whether an arrangement remains or falls out of the amber zone of the risk matrix outlined in this Guideline. 229. To assess whether your arrangement remains or falls out of the amber zone, you will need to exercise judgment having regard to the factors provided in this Schedule. For an arrangement to be considered lower risk, it must be reasonable to conclude that either the zero interest rate is an arm's length condition of the loan, that the loan is in substance an equity contribution, or that independent entities would not have entered into the actual loan but would have entered into an equity funding arrangement. 230. While some of the examples are considered low risk in the context of the factors contained in this Schedule, a low risk assessment will not necessarily preclude the application of other tax provisions, such as the anti-hybrid rules and other anti-avoidance rules of the income tax legislation. | Example 1: Country A subsidiary of an Australian mining company 231. AusCo Limited is an Australian incorporated company that is the parent of a global mining group. 232. ForCo Ltd is a Country A incorporated company and is a subsidiary of AusCo Limited. 233. Under Country A's legal framework, there are requirements in respect of local government involvement and restrictions on foreign ownership for ForCo Ltd when conducting mining exploration projects. 234. The project is at the early stage of development and there is no positive cash flow. The local government does not have sufficient funds to contribute to the exploration project. Furthermore, although third-party debt is available, the conditions of the debt are not commercially viable and do not fall within the acceptable policies and practices of the group. 235. On 1 January 2018, AusCo Limited provided a documented loan to ForCo Ltd, with the intention of providing funding with preferential payment status. 236. The loan funding will be used by ForCo Ltd to undertake a mining exploration and extraction project in the Country A. 237. The pricing risk matrix at paragraph 209 of this Schedule is applied to the arrangement between AusCo Limited and ForCo Ltd as follows: 238. AusCo Limited's total score of 10 places the entity in Zone 4A. This score places them in the amber zone - high risk. 239. The factors contained in this Schedule are applied to the facts and circumstances of AusCo Limited's arrangement as follows: ForCo Ltd is a subsidiary of AusCo Limited. Under the legal framework in Country A, AusCo Limited is not allowed to inject capital funds as there are restrictions on foreign ownership. The loan is documented with the evidence demonstrating that there is a legal obligation to repay, as well as Ausco's right to receive the balance of the loan in the event of default. Both the form and substance of the arrangement is akin to that of a debt interest. AusCo Limited issued the documented loan to ForCo Ltd with the intention of having a preferential payment status for ForCo Ltd to repay the invested funds when the project starts producing positive cash flows. Although third-party debt is available to ForCo Ltd, the terms and conditions offered are not in accordance with the policies and practices of the group. Therefore it is unlikely ForCo Ltd would have taken on additional debt from a third party. 240. The response to at least one of the factors in subparagraph 214(a) of this Schedule and one of the factors in subparagraph 214(b) would be a 'yes' in this example. Accordingly, the pricing indicator can be reduced from 10 to three. The result will reduce AusCo Limited's score for this arrangement from Zone 4A, amber zone - high risk to Zone 2A, blue zone - low to moderate risk. 241. Other additional factors which could further reduce the risk rating to nil may include the fact that it is a common funding practice for the mining industry in Country A to borrow from their parent entities at the early development stage of a mining exploration project. This consideration, combined with the expectation that the invested funds will only be repaid when project starts producing positive cash flows, may go towards indicating that independent entities would only have entered into an equity funding arrangement. | Example 2: Country B subsidiary of an Australian manufacturing company 242. AusCo Limited is an Australian incorporated company that is the parent of a global manufacturing group specialising in mining equipment. 243. ForCo Ltd is a Country B incorporated company that is wholly owned by AusCo Limited. It is a well-known, established company in Country B. 244. ForCo Ltd has a good credit rating and has third-party interest-bearing loans from local banks. The company is profitable and has positive net cash flows sufficient to repay additional borrowings. 245. Due to increasing commodity prices, there is a high demand for mining equipment. The increasing commodity prices has resulted in both AusCo Limited and ForCo Ltd being profitable companies with high earnings before interest, taxes, depreciation and amortisation. 246. On 1 January 2018 AusCo Limited provided a documented loan to ForCo Ltd, with the following terms: 247. The purpose of the loan was to enable ForCo Ltd to acquire land holdings in Country B for investment. 248. The pricing risk matrix at paragraph 207 of this Schedule is applied to the circumstances of AusCo Limited as follows: 249. AusCo Limited's total score of 10 [11] places the entity in Zone 4A. This score places them in the amber zone - high risk. 250. The minimum required factors contained in this Schedule are applied to the facts and circumstances of AusCo Limited as follows: ForCo Ltd is a wholly-owned subsidiary of AusCo Limited. There is a documented loan in place with the intention to create a debtor-creditor relationship as there is a legal obligation to repay for ForCo Ltd. ForCo Ltd's healthy financial position and good creditworthiness demonstrates clear evidence of ForCo Ltd's ability to make repayments on the loan. The arm's length conditions would be identified on this basis, including that an independent lender dealing wholly and independently in comparable circumstances would have charged an arm's length interest rate on the loan. These factors, along with low default risk, all go towards establishing that the substance of the commercial and financial relations would be regarded as a debt interest. Based on the facts, ForCo Ltd has a good credit rating and has external interest-bearing bank loans. Commercially, it is unlikely that an independent party dealing on arm's length terms would provide the financing on an interest-free basis, but would only lend on an interest bearing basis. Furthermore, ForCo Ltd has sufficient cash flow to meet repayment obligations, as evidenced by its overall profitability. 251. All the required factors listed in this Schedule would not be satisfied in this example as only subparagraph 214(a) is satisfied. Accordingly, the indicator relating to pricing will remain unchanged at a score of 10 as the arrangement is a debt interest and not in substance equity. AusCo Limited's risk rating for this arrangement will stay in Zone 4A, amber - high risk. 252. The factors overall, along with low default risk, all go towards establishing that the substance of the commercial and financial relations would be regarded as a debt interest. 253. AusCo Limited could transition to the green zone if it charged an appropriate arm's length interest rate on the loan to ForCo Ltd. | Example 3: Country C subsidiary of an Australian infrastructure company 254. AusCo Limited is an Australian incorporated company that is the parent of an investment group dealing in large scale infrastructure projects. 255. MinCo Limited is a Country D incorporated company that is wholly owned by AusCo Limited. 256. ForCo Ltd is a Country C incorporated company that is wholly owned by MinCo Limited, which owns and operates a major toll road. ForCo Ltd has third-party financing secured against its assets, which takes its gearing levels to within industry norms. 257. ForCo Ltd is operating at a loss and is not forecasted to be in a net positive cash flow position for another 20 years. 258. On 1 July 2018, AusCo Limited provided a loan to ForCo Ltd, the purpose of the loan being to invest in the expansion of the existing toll road (that is, the 'investment'). 259. The relevant terms of the loan as set out in the executed legal agreement include: 260. The pricing risk matrix at paragraph 207 of this Schedule is applied to the arrangement between AusCo Limited and ForCo Ltd as follows: 261. AusCo Limited's total score of 10 [12] places the entity in Zone 4A. This score places them in the amber zone - high risk. 262. The minimum required factors contained in this Schedule are applied to the facts and circumstances of AusCo Limited's arrangement as follows: ForCo Ltd is an indirect subsidiary of AusCo Limited. (ForCo Ltd is a wholly-owned subsidiary of MinCo Limited, which is a subsidiary of AusCo Limited). There is an intention to create a debtor-creditor relationship and that repayment would be made once there is positive cash flows from the investment. The fact that the funds are provided interest-free, are being used for investment in a long-term asset for use in the core business and assuming that this is customary in that industry, may go towards establishing the substance of the commercial and financial relations as equity in nature. The nature and purpose of the project and industry of the taxpayer indicates a long-term expectation in respect of a return on investment, including the evidence of the forecasted positive cash flows in 20 years. ForCo Ltd is currently operating at a loss and is not forecasted to be in a net positive cash flow position for another 20 years, evidencing that it is not in a position to repay and it is unlikely that it would be able to secure funds externally. 263. At least one of the required factors listed in paragraph 214 of this Schedule would be satisfied in this example. Accordingly, the pricing indicator can be reduced from a score of 10 to three. The result will reduce AusCo Limited's score for this arrangement from Zone 4A, amber zone - high risk to Zone 2A, blue zone - low to moderate risk. 264. In terms of additional factors which could reduce the risk rating further, ForCo Ltd has existing third-party debt secured against its assets and the purpose of the loan is for the expansion of its existing core business. These considerations, combined with the likelihood that repayments would be contingent on the investment generating positive cash flow, may go towards indicating that independent entities would only have entered into an equity funding arrangement. | Example 4: Country D subsidiary of an Australian commercial property management company 265. AusCo Limited is an Australian incorporated company that is the parent of a global commercial property management company. 266. ForCo Ltd is a Country D incorporated company that is wholly owned by AusCo Limited and is in the business of long-term development of several shopping centres and buildings. 267. On 1 January 2017 AusCo Limited provided a loan to ForCo Ltd, the relevant terms of the loan as set out in the executed legal agreement are: 268. The purpose of the loan was to acquire and develop commercial infrastructure. At the time of the entering into the loan, ForCo Ltd was profitable and had positive net cash flows. 269. In March 2018, due to falling property prices, liquidity dried up and local lending at commercial rates was no longer available. ForCo Ltd continues with construction plans but the entity has a negative cash flow and forecasts a difficult economic climate for the next few years. 270. On 1 June 2018, AusCo Limited ceased charging interest on the loan. 271. The pricing matrix at paragraph 207 of this Schedule are applied to the facts and circumstances of AusCo Limited, post amendment, as follows: 272. AusCo Limited's total score of 10 places the company in Zone 4A. This score places them in the amber zone - high risk. 273. Application of the minimum required factors to the circumstances of AusCo Limited is as follows: ForCo Ltd is a wholly-owned subsidiary of AusCo Limited. Although the economic environment has changed, the intention of the parties to enter into a loan are taken to be unchanged from the time the transaction was entered into. As evidenced in the executed loan agreement, the intention of the parties was to enter into a debtor-creditor relationship. Notwithstanding ForCo Ltd's poor financial performance, there remains a legal and equitable obligation to repay, as well as AusCo Limited's right to receive the balance of the loan in the event of default. Prima facie, both the form and substance of the arrangement is akin to that of a debt interest. Commercially, it is unlikely that an independent party dealing wholly independently in comparable circumstances would cease charging interest on the loan. It is possible the lender would charge and accrue the interest or initiate action to obtain repayment of the outstanding principal, which are not the actions of AusCo Limited in this scenario. However, though not determinative in and of itself, if evidence can be provided that an interest moratorium would be granted by an independent lender in similar circumstances (that is, in similar industries or economies), in order to protect the right to receive the principal, this may demonstrate that the zero interest rate is an arm's length condition of the loan. The evidentiary burden on the taxpayer under these circumstances is higher because in the ordinary course an independent lender would need assurance that the interest moratorium would be an effective short-term measure in order to increase the likelihood of future repayments. Based on the facts, ForCo Ltd has a good credit rating and has external interest-bearing bank loans. Commercially, it is unlikely that an independent party dealing on arm's length terms would provide the financing on an interest-free basis at the time of entering into the loan but would only lend on an interest-bearing basis. Furthermore, at the time of entering into the loan arrangement ForCo Ltd has sufficient cash flow to meet standard repayment obligations, as evidenced by its overall profitability. 274. None of the required factors listed in paragraph 214 of this Schedule would be satisfied in this example, as only subparagraph 214(a) is satisfied. Accordingly, the indicator relating to pricing will remain unchanged from a score of 10 as the arrangement is a debt interest and not in substance equity. AusCo's risk rating for this arrangement will remain in Zone 4A, amber - high risk. 275. AusCo Limited could transition to the green zone if: This Schedule published 10 December 2020. | Example 4: Country D subsidiary of an Australian commercial property management company 265. AusCo Limited is an Australian incorporated company that is the parent of a global commercial property management company. 266. ForCo Ltd is a Country D incorporated company that is wholly owned by AusCo Limited and is in the business of long-term development of several shopping centres and buildings. 267. On 1 January 2017 AusCo Limited provided a loan to ForCo Ltd, the relevant terms of the loan as set out in the executed legal agreement are: 268. The purpose of the loan was to acquire and develop commercial infrastructure. At the time of the entering into the loan, ForCo Ltd was profitable and had positive net cash flows. 269. In March 2018, due to falling property prices, liquidity dried up and local lending at commercial rates was no longer available. ForCo Ltd continues with construction plans but the entity has a negative cash flow and forecasts a difficult economic climate for the next few years. 270. On 1 June 2018, AusCo Limited ceased charging interest on the loan. 271. The pricing matrix at paragraph 207 of this Schedule are applied to the facts and circumstances of AusCo Limited, post amendment, as follows: 272. AusCo Limited's total score of 10 places the company in Zone 4A. This score places them in the amber zone - high risk. 273. Application of the minimum required factors to the circumstances of AusCo Limited is as follows: ForCo Ltd is a wholly-owned subsidiary of AusCo Limited. Although the economic environment has changed, the intention of the parties to enter into a loan are taken to be unchanged from the time the transaction was entered into. As evidenced in the executed loan agreement, the intention of the parties was to enter into a debtor-creditor relationship. Notwithstanding ForCo Ltd's poor financial performance, there remains a legal and equitable obligation to repay, as well as AusCo Limited's right to receive the balance of the loan in the event of default. Prima facie, both the form and substance of the arrangement is akin to that of a debt interest. Commercially, it is unlikely that an independent party dealing wholly independently in comparable circumstances would cease charging interest on the loan. It is possible the lender would charge and accrue the interest or initiate action to obtain repayment of the outstanding principal, which are not the actions of AusCo Limited in this scenario. However, though not determinative in and of itself, if evidence can be provided that an interest moratorium would be granted by an independent lender in similar circumstances (that is, in similar industries or economies), in order to protect the right to receive the principal, this may demonstrate that the zero interest rate is an arm's length condition of the loan. The evidentiary burden on the taxpayer under these circumstances is higher because in the ordinary course an independent lender would need assurance that the interest moratorium would be an effective short-term measure in order to increase the likelihood of future repayments. Based on the facts, ForCo Ltd has a good credit rating and has external interest-bearing bank loans. Commercially, it is unlikely that an independent party dealing on arm's length terms would provide the financing on an interest-free basis at the time of entering into the loan but would only lend on an interest-bearing basis. Furthermore, at the time of entering into the loan arrangement ForCo Ltd has sufficient cash flow to meet standard repayment obligations, as evidenced by its overall profitability. 274. None of the required factors listed in paragraph 214 of this Schedule would be satisfied in this example, as only subparagraph 214(a) is satisfied. Accordingly, the indicator relating to pricing will remain unchanged from a score of 10 as the arrangement is a debt interest and not in substance equity. AusCo's risk rating for this arrangement will remain in Zone 4A, amber - high risk. 275. AusCo Limited could transition to the green zone if: This Schedule published 10 December 2020.",,,/law/view/document?LocID=%22COG%2FPCG20174EC%2FNAT%2FATO%2F00001%22&PiT=99991231235958,False,False,https://www.ato.gov.au/law/view/document?docid=COG/PCG20174/NAT/ATO/00001
PCG 2017/8,Final PCG,Income tax - the use of internal derivatives by multinational banks,,,31 October 2014,,,TR 2001/11 | TR 2005/11 | TR 2014/8,,"1. The Commissioner's views on the operation of Australia's permanent establishment attribution rules and the application of those attribution rules to certain funding activities of banks are set out in detail in Taxation Rulings TR 2001/11 Income tax: international transfer pricing - operation of Australia's permanent establishment attribution rules and TR 2005/11 Income tax: branch funding for multinational banks respectively. 2. This Guideline extends the Commissioner's practical approach to applying the arm's length principles adopted in those taxation rulings to internal derivatives of multinational banks. It sets out the circumstances in which internal derivatives, that represent arm's length dealings, can be used as an appropriate proxy for the purposes of allocating or attributing a bank's income (gains), expenses (losses) or profit [1] for the purposes of Subdivision 815-C of the Income Tax Assessment Act 1997 (ITAA 1997). 3. This Guideline also provides guidance on the Commissioner's compliance expectations for banks seeking to rely on it. It considers a number of scenarios involving the use of internal derivatives and groups them according to their complexity level. Complexity is an indication of the level of analysis the Commissioner expects a bank to have undertaken in order to support the attribution outcome produced by reference to the internal derivative. Banks should also expect that higher complexity transactions will be subject to a greater level of scrutiny by the Commissioner in any review of the bank's activities. 4. For the purposes of this Guideline, internal derivatives are derivative transactions between the head office of a bank and a permanent establishment (branch), or between two branches of the bank. 5. When a bank enters into a transaction with a third party in which it assumes exposure to some form of financial risk, the bank might use a notional internal derivative to reflect the fact that some, or all, of that risk is managed in its head office and/or one or more of its branches that are located in another jurisdiction. As these internal derivatives are entered into by different parts of the same legal entity, they are not legal transactions and are only internally characterised and recorded as derivatives. They are used by the bank, among other things, to allocate (for its own internal purposes) the gains and losses from third party transactions to the appropriate jurisdiction in accordance with its risk management approach.",,,,"Example s: of complexity Low complexity scenarios Scenario 1 37. A third party enters into a derivative with Bank Co's sales/marketers located in the Bank Co Branch (Country A). There is a matching internal derivative recorded contemporaneously between Bank Co Branch and Bank Co (head office in Country B), which is the location of the trader managing the risk on that particular class of derivative. The internal derivative mirrors the third party derivative, or mirrors it in all factors other than price, such as to leave an arm's length sales margin in Bank Co Branch. 38. The proper attribution and allocation of gains and losses as between different parts of the bank based on the arm's length separate enterprise principle can be easily ascertained, and the arrangement should be considered low complexity. Scenario 2 39. Third parties enter into a derivative with sales/marketers located in various Bank Co branches. Each branch enters into a matching internal derivative that contemporaneously records the position into a global trading book where traders in multiple jurisdictions manage the risk on that particular class of derivative. Each internal derivative mirrors a third party derivative, or mirrors it by all factors other than price, such as to leave an arm's length sales margin in the respective branch. 40. The proper attribution and allocation of gains and losses of the sales and marketing function as between different parts of the bank based on the arm's length separate enterprise principle can be easily ascertained, and the arrangement should be considered low complexity in respect of the sales/marketing functions. 41. However, unlike the sales and marketing function, the attribution of gains and losses of the trading function is more complex than in Scenario 1 and would not be considered low complexity. A more detailed functional and comparability analysis is required to determine whether the attribution outcome determined by reference to the internal derivative is appropriate based on the functional profile. Medium complexity scenarios Scenario 3 42. A third party enters into a cross currency interest rate swap with Bank Co Branch (Country A). The risk is separated into different components that are hedged individually. An internal foreign exchange derivative is entered into with a trader managing foreign exchange risk in Bank Co Branch (Country A). An internal interest rate swap is entered into with a trader in Bank Co (Country B) who manages interest rate risk. 43. The proper attribution and allocation of gains and losses as between different parts of the bank based on the arm's length separate enterprise principle is more complex than the low complexity scenarios. The bank should expect that the Commissioner will undertake a more detailed functional and comparability analysis to determine if the outcome produced, by reference to the internal derivative, is in line with the arm's length separate enterprise principle. Scenario 4 44. Bank Co Branch (Country A) makes a fixed rate loan to, or purchases a bond from, a third party. Bank Co Branch funds the loan (or bond) with a floating rate loan in a different currency from a third party financier. The interest rate and currency risk associated with the two third party transactions are hedged under a single internal derivative with Bank Co (Country B) who manages interest rate and currency risk. 45. The proper attribution and allocation of gains and losses as between different parts of the bank is more complex than the low complexity scenarios. The bank should expect that the Commissioner will undertake a more detailed functional and comparability analysis in determining whether the outcome produced, by reference to the internal derivative, is in line with the arm's length separate enterprise principle. Scenario 5 46. Bank Co Branch, in Country A, makes a loan to, or purchases a bond from, a third party. The Bank Co Branch funds the loan (or bond). The Bank Co Branch hedges the credit or default risk of the loan (or bond) using a total return swap, a credit default swap or a put option. The Bank Co Branch enters into this internal derivative with the head office of Bank Co (Country B). 47. The proper attribution and allocation of gains and losses as between different parts of the bank is more complex than the low complexity scenarios. The bank should expect that the Commissioner will undertake a more detailed functional and comparability analysis in determining whether the outcome produced by the internal derivative is in line with the arm's length separate enterprise principle. Scenario 6 48. Bank Co Branch (Country A) obtains Australian dollar (AUD) funding and purchases an American Depositary Receipt (ADR). The Bank Co Branch hedges the long ADR position by taking an offsetting short position in the underlying Australian shares. Bank Co Branch has residual interest rate or currency risk which is hedged by an internal cross currency swap and/or internal currency forwards and interest rate hedges with Bank Co (Country B), which manages those risks. Economically the bank has reduced its market risk as it has simultaneously bought and sold the shares (or exposure to the shares) in different markets and in different trading formats. The internal derivative(s) may result in gains or losses in Bank Co Branch depending on changes in the AUD/USD interest and foreign exchange rates, which may offset the gains or losses on the third party transactions. 49. The proper attribution and allocation of gains and losses as between different parts of the bank is more complex than the low complexity scenarios. The bank should expect that the Commissioner will undertake a more detailed functional and comparability analysis in determining whether the outcome produced by reference to the internal derivative is in line with the arm's length separate enterprise principle. High complexity scenarios Scenario 7 50. A third party enters into a derivative with Bank Co Branch (Country A). There is a matching internal derivative recorded contemporaneously between Bank Co Branch (Country A) and Bank Co (head office in Country C), which is a central booking location. The internal derivative mirrors the third party derivative, or mirrors in all factors other than price (priced to leave an arm's length sales margin in Bank Co Branch in Country A). 51. The financial risk transferred to Bank Co (Country C) is managed by Bank Co Branch (Country B). Bank Co Branch (Country B) is compensated for the trading function it performs through another mechanism, such as a transfer pricing adjustment. 52. The internal derivative between Bank Co Branch (Country A) and Bank Co (Country C) would appear to meet the characteristics of a low complexity scenario outlined in paragraph 30 of this Guidelin e, from the perspective of the sales/marketing function. However, the overall arrangements involving the internal derivative and the transfer pricing adjustment are more complex than the low complexity scenarios. The bank should expect that the Commissioner will undertake a more detailed functional and comparability analysis of all locations in determining whether the outcome produced by reference to the internal derivative and the transfer pricing adjustment is in line with the arm's length separate enterprise principle. Scenario 8 53. A number of mismatched positions arising from various transactions with third parties are managed by a trader in Bank Co Branch (Country A). The trader in Country A enters into internal derivative(s) with a trader located in Bank Co (Country B). The transfer may be motivated by a variety of factors including risk limits, capital issues or naturally offsetting positions in other trading books of Bank Co (Country B). The internal derivatives reflect the transfer of the market risk exposures, shifting all or a portion of the risk to Bank Co (Country B). This may take the form of transferring some positions in a form similar to the original transactions, a macro or proxy hedge, or a combination. In the case of a macro or proxy hedge, transaction(s) is/are entered into to neutralise market risk, as measured by generic risk measures rather than specific matching of underlying risk exposures by similar transactions. 54. The proper attribution and allocation of gains and losses as between different parts of the bank is more complex than the low and medium complexity scenarios. The bank should expect that the Commissioner will undertake an even more detailed functional and comparability analysis in determining whether the outcome produced by reference to the internal derivative is in line with the arm's length separate enterprise principle. Scenario 9 55. Like Scenario 8, a number of market risk exposures are managed by a trader in Bank Co Branch (Country A). This trader enters into internal derivative(s) with another trader located in Bank Co (Country B) to reflect the fact that part of the risk, in this case, 20% of the net market risk exposure, is managed by Bank Co Branch (Country A). 56. The proper attribution and allocation of gains and losses as between different parts of the bank is more complex than the low and medium complexity scenarios. The bank should expect that the Commissioner will undertake an even more detailed functional and comparability analysis in determining whether the outcome produced by reference to the internal derivative is in line with the arm's length separate enterprise principle. Scenario 10 57. This scenario relates to a derivative between a related party and a Bank Co Branch or alternatively, two Bank Co Branches, each located in a different jurisdiction. An internal derivative is entered into between Bank Co Branch (Country B) and Bank Co (Country C) that mirrors the original derivative. 58. The proper attribution and allocation of gains and losses as between different parts of the bank is more complex than the low and medium complexity scenarios because all transactions involve related parties. The bank should expect that the Commissioner will undertake an even more detailed functional and comparability analysis in determining whether the outcome produced by the internal derivative is in line with the arm's length separate enterprise principle. Scenario 11 59. The foreign branch makes loans or purchases bonds from third parties, which are funded by third party borrowings of the Bank Co Branch (Country A). The head office in Country B (Bank Co) consolidates and manages its credit risk through a central credit portfolio trading book. The Bank Co Branch (Country A) hedges the credit or default risk of the loans or bonds with Bank Co (head office in Country B). In turn, the central credit risk centre within the head office manages the portfolio using a variety of instruments, including a total return swap, credit default swap or put option with third parties. 60. The proper attribution and allocation of gains and losses as between different parts of the bank is more complex than the low and medium complexity scenarios. The bank should expect that the Commissioner will undertake an even more detailed functional and comparability analysis in determining whether the outcome produced by reference to the internal derivative is in line with the arm's length separate enterprise principle. Scenarios Dealing with Transactions that are Outside the Scope of this Guideline Scenario 12 61. Bank Co Branch (Country A) enters into AUD/Japanese Yen (JPY) currency swaps with a third party to undertake a carry trade that is designed to take advantage of the differential between AUD and JPY interest rates. Bank Co Branch (Country A) transfers the currency risk to Bank Co (head office in Country B), which, in turn, enters into a series of transactions with third parties. This results in all of the market risk being defeased. The bank, as a whole, is fully hedged. However, the transactions leave the bank with an internal position between an AUD floating exposure and a JPY floating exposure, which, depending on movements in currencies and interest rates, will result in different income profiles as between Bank Co Branch and Bank Co. 62. This scenario is not within this Guideline as, based on a functional and comparability analysis, there is no commercial reason for the overall transaction. The outcome produced by reference to the internal derivative will not be accepted as representing arm's length dealings that are an appropriate proxy for the purposes of allocating or attributing the gains and losses generated by the transaction. Scenario 13 63. Bank Co Branch (Country A) records the transaction with the third party but the risk associated with the third party transaction is managed in Bank Co (head office in Country B). No internal derivatives have been recorded in this scenario and this Guideline therefore does not apply to the arrangements. 64. The proper attribution and allocation of gains and losses as between different parts of Bank Co must be based on the arm's length separate enterprise principle and requires a functional and comparability analysis to support the attribution. In the absence of an internal derivative, other transfer pricing adjustments should be made to compensate Bank Co (head office in Country B) for its risk management function and to ensure Bank Co Branch (Country A) does not derive gains or losses related to market risk where it does not perform such a function. Scenario 14 65. As with Scenario 13, no internal derivative is recorded. Bank Co Branch (Country A) records the transaction with the third party but the risk associated with the third party transaction is being managed in Bank Co (head office in Country B). The Commissioner would need to consider the proper attribution and allocation of the gains and losses of the third party transaction. 66. The proper attribution and allocation of gains and losses as between different parts of the bank is more complex than the low, medium and high complexity scenarios. In the absence of an internal derivative other transfer pricing adjustments should be made to compensate Bank Co (head office in Country B) for its risk management function and to ensure Bank Co Branch (Country A) does not derive gains or losses related to market risk where it does not perform such a function.",,,,False,False,https://www.ato.gov.au/law/view/document?docid=COG/PCG20178/NAT/ATO/00001
PCG 2016/6,Final PCG,Determining source of certain hedging gains for the purposes of section 770-75,,,1 July 2015,,,TR 2014/7,,"1. These Guidelines set out the ATO's compliance approach to working out the source of certain hedging gains for the purposes of calculating the foreign income tax offset limit in section 770-75 of the Income Tax Assessment Act 1997 (ITAA 1997) [1] . You do not have to rely on these Guidelines, but if you do, these Guidelines provide additional, practical certainty that you are acting in accordance with the ATO's view of the law.",,,"Intro: 13. Hedging transactions can be carried out by various means. Which entity receives communication of the acceptance may be different depending on the means used, how the parties interact with each other and the terms and conditions upon which they do so. Further, the location of the entity receiving the communication of the acceptance may be different depending on when and how the transaction is carried out. Therefore, for the transactions the subject of these guidelines, we accept that it is impractical to work out the location of the person within the entity receiving the communication and hence the source of a gain on a transaction by transaction basis. 14. The ATO will accept an approximation based on a reasonable approach as a means of determining the source of hedging gains. The ATO considers that an approach is reasonable if it takes into account matters which are likely to reflect which person is receiving communication of the acceptance and the location of the person receiving the communication of the acceptance. This is the fundamental principle upon which an approach must be based to be considered reasonable. Paragraphs 20-21 set out assumptions the ATO derived from extensive consultation, and will accept. Paragraphs 26-28 set out examples of what the ATO considers to be a reasonable approach, and will accept. However, should a taxpayer's factual circumstances differ from those set out in the assumptions, the taxpayer may instead choose to rely on their factual circumstances, as long as the approach adopted reasonably reflects the location of the person receiving communication of the acceptance. 15. Whatever approach is chosen, it will need to be decided in advance and consistently adopted until there is a material change which would affect its accuracy. 16. Generally, an Australian entity can take a sample of representative transactions to determine the source using appropriate indicators and assumptions to reflect the common law principles that where the contract is formed is likely to be the most important factor in determining the source of the gain. 17. The remainder of these Guidelines sets out the following: | Indicators which are not appropriate: 18. For the purpose of these guidelines in relation to these transactions, we do not consider an approach based on the following demonstrates reasonable compliance with the Commissioner's view of the law as set out in TR 2014/7: | Determining a representative sample of transactions: 19. An Australian entity can take a sample of representative transactions to determine the source. The sample must be capable of reflecting the larger population from which it is drawn. Therefore, the period for which the sample is taken should reflect trading patterns more generally and be of sufficient length to incorporate a range of settlement dates with a range of counterparties. Where there are a very small number of especially large transactions, it would not normally be appropriate to use such a transaction in the sample. It would normally be appropriate to work out the source of very large transactions individually, and rely on the sample for the mass of smaller transactions. 20. In analysing this sample of transactions, the matters we consider relevant should be used. A methodology based on indicators we consider to be not relevant will not be accepted as a reasonable approach. 21. The Australian entity may need to rely on its hedge manager and other market participants to obtain and provide the relevant information. [8] For example, they may need to request from their hedge manager what percentage of trades are conducted by a particular means. In this regard, we will accept samples conducted on reasonable assurances from the hedge manager and samples on the basis of information from a variety of sources which are reasonably capable of approximating the location of the person receiving the communication of the acceptance. In this regard, the Australian entity could use an approach based either on a simple proportion of trades, or a proportion of trades weighted for value, as long as the sample reasonably reflects the total population. | Determining who receives communication of the acceptance of the offer: 22. The method of trading determines who receives communication of the offer. The main methods of trading are: 23. In determining who is making the offer, we will accept an approach based on the following assumptions: [9] | Determining the location of the person within, or on behalf of, the entity receiving communication of the acceptance: 24. We consider that the following would need to be considered: 25. What is relevant depends on the circumstances and manner in which the hedging strategy is routinely carried out. For example, if the only methods of trading used mean that it is likely that the liquidity provider is always receiving communication of the acceptance of the offer, their location is more likely to provide an accurate approximation of source. If the counterparties conduct trades through both Australian and offshore branches, the time of the trade would also be relevant. 26. A reasonable basis for working out the location of the entity acting for the liquidity provider receiving the communication of the acceptance would include considering where the liquidity provider has their operations, the hours of those operations and the time of the trade. For these purposes the ATO considers that adopting a bandwidth of 8am to 6pm by Australian Eastern Time is acceptable as an approximation of when trades would be conducted in Australian business hours. 27. Examples of what might be a reasonable basis for approximating source are set out below. These are not the only methods that can be used. Taxpayers can use any reasonable basis. However, any method used must reflect the relevant indicators of where the contract is formed.","Example s: 28. An example of a reasonable methodology might be as follows where all types of trading are used: 29. Where an Australian entity only conducts trades in a particular way such that it is always the liquidity provider making the offer then it may be reasonable to conduct a sample using the following indicators: An approach if dealings known to be all Australian or all foreign 30. Where an Australian entity can obtain reasonable assurance from its hedge manager (if used) or counterparties that all trades are routinely conducted between persons all in Australia (or all off-shore), the source will be all Australian (or foreign). This approach could be applied to all trades or it could be applied to all trades conducted with a particular counterparty (with a different, reasonable approach applied to trades with other counterparties). This would need to be revised where there was a change in counterparties or hedge manager or material change in the manner in which transactions are conducted.",,,,False,False,https://www.ato.gov.au/law/view/document?docid=COG/PCG20166/NAT/ATO/00001
PCG 2021/5,Final PCG,Imported hybrid mismatch rule - ATO's compliance approach,,,4. This Guideline applies both before and after its date of issue. [4],,,LCR 2019/3 | MT 2008/1 | MT 2008/2 | PS LA 2006/8 | PS LA 2008/3 | PS LA 2011/30 | PS LA 2012/4 | PS LA 2012/5,,"1. This Guideline contains practical guidance as to the ATO's assessment of the relative levels of tax compliance risk associated with hybrid mismatches addressed by Subdivision 832-H of the Income Tax Assessment Act 1997. [1] This Guideline does not deal with the core hybrid mismatch rules in Subdivisions 832-C to 832-G, which must be considered prior to the application of Subdivision 832-H. [2] 2. This Guideline sets out the expectations regarding the Commissioner's assessment of risk in connection with the imported hybrid mismatch rules, including the Commissioner's approach to reviewing whether a taxpayer has undertaken reasonable enquiries in relation to the rules for non-structured arrangements. [3] This includes the level of supporting information the Commissioner requires in order to demonstrate compliance in connection with non-structured arrangements and will also assist you to prepare for any compliance reviews. This Guideline also explains what it means for a payment to be made directly and indirectly to an offshore deducting entity. 3. This Guideline does not limit the operation of the law, and it does not replace, alter or affect our interpretation of the law in any way. It does not relieve you of your legal obligation to comply with all relevant tax laws.",,,"Intro: This Practical Compliance Guideline sets out a practical administration approach to assist taxpayers in complying with relevant tax laws. Provided you follow this Guideline in good faith, the Commissioner will administer the law in accordance with this approach.","Example 1: payments made indirectly via an interposed entity 16. Aus Co, B Co and C Co are members of a Division 832 control group. 17. On 30 June 2010, C Co granted B Co a license for the use of C Co's intellectual property. In carrying out its business, Aus Co does not use any of C Co's intellectual property. 18. On 31 May 2019, B Co borrows money from external bank lenders. On the same day, B Co on lends the money to Aus Co on back-to-back terms for the purpose of financing the construction of a manufacturing plant. 19. During the 2022 income year: 20. In this case, it would be identified for the purpose of section 832-625 that Aus Co will have made a payment indirectly to C Co. Taxpayer's obligation in respect of the imported hybrid mismatch rule for non-structured arrangements 21. Where a taxpayer seeks a deduction for a cross-border payment made to a member of its Division 832 control group [14] they need to consider the imported hybrid mismatch rule in Subdivision 832-H. For a taxpayer to be satisfied that they are entitled to deductions for cross-border payments that they make to members of its Division 832 control group, the taxpayer must determine whether any of their cross-border payments result in an offshore hybrid mismatch being directly or indirectly imported into Australia. 22. In relation to non-structured arrangements, the Commissioner expects that the taxpayer would document their enquiries and obtain the information prior to lodgment of the income tax return. This documentation would therefore be capable of being provided to the Commissioner within a reasonable time of a request being made. 23. The Commissioner also expects that the members of the taxpayer's Division 832 control group will provide the taxpayer with full and complete disclosure of all relevant information. [15] The Division 832 control group should have robust processes in place to identify any relevant hybrid mismatch outcomes and inform the taxpayer accordingly. 24. A taxpayer should not claim a deduction for a payment unless they are able to obtain sufficient information to support a conclusion that the deduction in respect of the payment is not disallowed under Subdivision 832-H. Where the taxpayer later obtains further information that confirms entitlement to a deduction for that payment, they can lodge an amendment request to claim the deduction. The ATO's compliance approach for non-structured arrangements 25. The ATO's compliance approach will be based on reviewing the extent to which taxpayers have obtained information to establish that the imported hybrid mismatch rule does not apply to their circumstances, or that they have correctly 'neutralised' any imported hybrid mismatch in respect of non-structured arrangements. The relevant information includes the adequate and complete responses to written enquiries to suitably qualified and responsible individuals or representatives, in accordance with this Guideline. The ATO's approach to shortfall penalties for non-structured arrangements 26. The Commissioner will consider that a taxpayer has taken reasonable care to comply with their income tax obligations relating to the imported hybrid mismatch rule for non-structured arrangements when the taxpayer follows the ATO's recommended approach to making enquires (including obtaining responses to the requested information and the taxpayer has no reasonable basis to consider that the information obtained is not adequate and complete). 27. In all other circumstances, the Commissioner will assess the circumstances that resulted in tax shortfall on a case-by-case basis based on the taxpayer's individual circumstances. [16] A taxpayer should not just assume that responses to requested information are adequate and complete. For example, if at the time the statement was made to the Commissioner there is information known, or that should have been known, by the taxpayer or their agent, and the failure to consider that information results in a tax shortfall, the Commissioner considers that a taxpayer will generally not be able to demonstrate they took reasonable care. Similarly, if a member of a taxpayer's Division 832 control group has deliberately withheld information from the taxpayer or deliberately provided the taxpayer with false or misleading information, the taxpayer will need to demonstrate that they had no reasonable way of knowing that the relevant information was withheld or was false or misleading (as relevant). 28. In addition, the Commissioner considers that a taxpayer will generally not be able to demonstrate they took reasonable care if: 29. A taxpayer that the Commissioner treats as having taken reasonable care in respect of the imported hybrid mismatch rule could still be liable to a: The ATO's recommended approach to demonstrating that reasonable enquiries have been undertaken for non-structured arrangements 30. The ATO's recommended approach to undertaking enquiries for non-structured arrangements involves the taxpayer making and documenting formal requests for information and the adequate and complete responses. Taxpayers need to make requests to the responsible individuals or suitably qualified representatives responsible for the relevant Division 832 control group. [18] 31. This could be achieved by reviewing the: 32. For taxpayers to be considered to have followed the ATO's recommended approach, they are not required to follow the steps in the order specified in the methods in paragraphs 39 and 41 of this Guideline, as long as the outcome of the enquiries provides sufficient evidence to demonstrate compliance with the imported hybrid mismatch rule. 33. The Appendix to this Guideline sets out the information the Commissioner considers may be relevant to demonstrating compliance with the imported hybrid mismatch rule. It is intended as a general guide for your enquiries and is not an exhaustive list. 34. The information listed in the Appendix to this Guideline may be requested when we are assessing risk during engagement or assurance activity. | Example 2: followed the ATO approach 35. Aus Co is a subsidiary of US Inc. The tax manager of Aus Co requests the head of tax for US Inc to provide the information described in Category 1 in the Appendix to this Guideline. 36. Based on the information provided, the tax manager identifies: 37. The tax manager concludes that to the extent that payments made by Foreign Co may result in a deduction/deduction mismatch, the neutralising amount for any offshore hybrid mismatch will be nil. As a consequence, the tax manager concludes that payments made by Aus Co to Foreign Co (either directly or indirectly) cannot be importing payments. The ATO's recommended approach for non-structured arrangements - top-down Suitably qualified or responsible individuals 38. The appropriately qualified responsible individuals or suitably qualified representatives within the relevant Division 832 control group (the Group) must include the person primarily responsible for the Group's tax obligations, such as the Head of Tax for the Group, and may also include other appropriate qualified responsible individuals or suitably qualified representatives [19] ; for example: Method 39. For a taxpayer to be considered to have followed the ATO's recommended approach for making enquiries for the purposes of this Guideline, the person responsible for preparing the taxpayer's Australian income tax return should undertake the following steps [20] : The ATO's recommended approach for non-structured arrangements - bottom-up Suitably qualified or responsible individuals 40. The appropriately qualified responsible individuals or suitably qualified representatives within the relevant Division 832 control group may include the persons responsible for the taxation obligations for the applicable jurisdictions where the cross-border transactions have been paid and received (that is, country or regional tax manager or suitably qualified advisors within the Division 832 control group). Method 41. For a taxpayer to be considered to have followed the ATO's recommended approach for making enquiries for the purposes of this Guideline, the person responsible for preparing the taxpayer's Australian income tax return should undertake the following steps [25] : Foreign importing payments for non-structured arrangements 42. Where the amount of the imported hybrid mismatch is reduced as the result of the application of foreign hybrid mismatch rules in another jurisdiction (in either the current or prior income years) [31] , the taxpayer should request that the person responsible for taxation obligations in the applicable jurisdictions provide in writing: Reliance on analysis undertaken in a foreign jurisdiction for non-structured arrangements 43. Other members of a Division 832 control group may have undertaken analysis based on the OECD principles or a foreign jurisdiction's equivalent of the imported hybrid mismatch rule. However, given each country's implementation of the rules and their statutory positions, the outcome of that analysis may not necessarily be consistent with the application of Subdivision 832-H. 44. The person responsible for preparing the Australian income tax return should review the analysis undertaken (including all working papers) to determine whether Subdivision 832-H results in a different outcome. It is not sufficient to only rely on the analysis performed for the other jurisdiction. The taxpayer must ensure that its obligations under Subdivision 832-H are met. | Example 3: analysis of a corresponding foreign hybrid mismatch rules 45. Head Co is resident in a country with corresponding foreign hybrid mismatch rules. 46. Head Co has three subsidiaries - Aus Co, B Co and C Co. 47. Head Co and Aus Co both make a payment to B Co. 48. B Co makes a payment to C Co. 49. Head Co reviews the payment it makes to B Co under its imported hybrid mismatch rule and concludes that the payment it made to B Co does not result in an imported hybrid mismatch. 50. The review undertaken by Head Co is not a sufficient basis to conclude that the payment made by Aus Co to B Co does not result in an imported hybrid mismatch under Division 832. Aus Co must consider if there are any differences between Division 832 and the corresponding foreign hybrid mismatch rule that may result in a different outcome. The risk assessment framework 51. The ATO's compliance approach varies with the risk rating of your international related-party dealings. The following principles will assist you to understand how we assess risk in relation to your related-party arrangements and generally allow you to self-assess your compliance risk. 52. If you are outside the low risk zone, we do not presume that your related-party arrangements fail to comply with the Australian tax law. However, where a taxpayer is outside a low risk zone, we consider that there is a greater risk that your related-party arrangements will give rise to inappropriate tax outcomes. In these cases, we are more likely to conduct some form of engagement and assurance activity to further test the taxation outcomes of your arrangements. 53. The ATO's imported hybrid mismatch rule risk framework is made up of seven risk zones, including two different red zones: Reporting your self-assessment 54. If you are required to complete a Reportable Tax Position (RTP) schedule, you may be asked to disclose: 55. If you have undertaken the self-assessment of your risk zone and you satisfy the requirement for more than one risk zone, for the purposes of completing the RTP you would disclose the risk zone with the highest risk level. Voluntary disclosure 56. We encourage willing and cooperative compliance and recognise that the publication of this Guideline may prompt you to review your arrangements for prior income years. 57. For the period of 18 months from the date of publication of this Guideline, we will consider reducing shortfall penalties and shortfall interest charge to the base rate if certain pre-conditions are met. The conditions are that you make a voluntary disclosure in relation to all income years where your arrangements are in place. If you do so, we will view this as a strong factor in favour of exercising the Commissioner's discretion to remit. [34] 58. You can inform us of your intentions to make a voluntary disclosure in respect of your arrangements at any time before you are notified of the commencement of an audit. [35] Evidencing your self-assessment 59. We may, in the course of our ordinary engagement and assurance activities, or any specific assurance activity relating to this Guideline, fact-check your self-assessment of your risk zone. If you are unable to provide adequate evidence to support your assessment or the ATO disagrees with your assessment, we may undertake further engagement and assurance activity. What you can expect given your risk zone 60. You can expect the following treatment depending on your risk zone. Cases might proceed directly to audit. We are likely to use formal powers for information gathering. The risk zones Definitions 61. In this section: Importing payments made under a structured arrangement 62. If you have either: proceed to paragraph 63 of this Guideline. Otherwise, you will be in red zone 1. Reasonable enquiries for payments made to members of your Division 832 control group for non-structured arrangements White zone 63. You are in the white zone if you are in any of the following categories: Green zone 64. You are in the green zone if you are in any of the following categories: Blue zone 65. You are in the blue zone if you are in any of the following categories: Yellow zone 66. You are in the yellow zone if all of the following apply: Amber zone 67. You are in the amber zone if both of the following apply: Red zone 1 68. You are in red zone 1 if you are in any of the following categories: Red zone 2 69. You will be in red zone 2 if you have made a deductible payment to a member of your Division 832 control group, you have claimed the deduction and you do not fit into any of the other risk zones. This includes where you have sought information from your Division 832 control group and have received insufficient information to determine the application of the imported hybrid mismatch rule to your circumstances.","Appendix 1: Information guide 70. This Appendix sets out the categories of information the Commissioner considers may be relevant to demonstrating compliance with the imported hybrid mismatch rule at Steps 1, 3 and 4 of the top-down approach (described at paragraph 38 of this Guideline) applicable to non-structured arrangements. The information in Category 1 and Category 3 of this Appendix may also be relevant for applying the bottom-up approach (described at paragraph 40 of this Guideline) applicable to non-structured arrangements. It is intended as a general guide for your enquiries and is not an exhaustive list. 71. The information listed in this Appendix may be requested when we are assessing risk during engagement or assurance activity. Category 1 - obtain the core information from the Head of Tax 72. The person responsible for preparing the Australian income tax return should request the person primarily responsible for the Group's tax obligations to provide the information necessary to identify any payments made by members of the Division 832 control group that result in a deduction/non-inclusion mismatch or deduction/deduction mismatch. 73. The information requested should include: Category 2 - obtain further information from the Head of Tax if required 74. If there are any offshore hybrid mismatches that are identified under Category 1 of this Appendix that are hybrid payer mismatches or deducting hybrid mismatches, the person responsible for preparing the Australian income tax return should request that the person primarily responsible for the Group's tax obligations provide further information necessary to quantify the amount of offshore hybrid mismatch. 75. The information requested should include Category 3 - identify any interposing payments and quantify the imported mismatch 76. If there are any offshore hybrid mismatches and the amount of offshore hybrid mismatches exceeds the dual inclusion income that is eligible to be applied against that mismatch, the person responsible for preparing the Australian income tax return must request the person primarily responsible for the Group's tax obligations to provide further information necessary to determine if there is an importing payment. 77. The information requested should include: © AUSTRALIAN TAXATION OFFICE FOR THE COMMONWEALTH OF AUSTRALIA You are free to copy, adapt, modify, transmit and distribute this material as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products). Paragraph 832-625(3)(a) clarifies that: We are concerned about views being taken that a payment is not made indirectly through one or more interposed entities despite payments existing between the entities involved in the relevant sense. For example, if a taxpayer is preparing an Australian income tax return for the year ended 30 June 2022, it is necessary to consider foreign income tax deductions in a foreign tax period that ended anytime between 1 July 2021 and 30 June 2022. Previously issued in draft format as PCG 2021/D3",,/law/view/document?LocID=%22COG%2FPCG20215EC%2FNAT%2FATO%2F00001%22&PiT=99991231235958,False,False,https://www.ato.gov.au/law/view/document?docid=COG/PCG20215/NAT/ATO/00001
PCG 2025/4,Final PCG,Global and domestic minimum tax lodgment obligations - transitional approach,,,1 January 2024,,,MT 2008/1 | MT 2008/2 | PS LA 2005/2 | PS LA 2011/14 | PS LA 2011/15 | PS LA 2011/19 | PS LA 2012/4 | PS LA 2012/5 | PS LA 2014/4,,"1. Australia's implementation of a 15% global and domestic minimum tax (Minimum Tax) introduces additional lodgment obligations for in-scope multinational enterprise groups (MNE Groups [1] ). The Minimum Tax implements the Organisation for Economic Co-operation and Development's (OECD's) Global Anti-Base Erosion Model Rules [2] (GloBE Rules). The GloBE Rules are a key aspect of Pillar Two of the OECD/G20 Two-Pillar Solution to address tax challenges arising from the digitalisation of the economy. The Minimum Tax lodgment obligations were inserted by the Treasury Laws Amendment (Multinational—Global and Domestic Minimum Tax) (Consequential) Act 2024 into Schedule 1 to the Taxation Administration Act 1953 (TAA). Failure to comply with these obligations can incur significant penalties. 2. This Guideline outlines our practical administrative approach to the enforcement of penalties during a transition period. This approach aims to balance the need to support taxpayers to understand and comply with their Minimum Tax obligations with the need to administer the legislation in a manner which is consistent with the OECD's GloBE Rules. 3. This Guideline is intended to complement existing ATO guidance relating to our administration of lodgment obligations and penalties. It provides tailored advice to assist in-scope taxpayers to meet their obligations during the transition period. 4. This Guideline does not limit the operation of the law, nor replace, alter or affect our interpretation of the law in any way. It does not relieve you of your legal obligation to comply with all relevant tax laws. 5. All legislative references in this Guideline are to Schedule 1 to the TAA, unless otherwise indicated.","Scope: 34. The existing administrative penalty regime in the TAA will apply to the Minimum Tax obligations. This includes: 35. The base penalty amount (BPA) of the penalty imposed on Group Entities is aligned with those which apply to significant global entities. That is, the: Organisation for Economic Co-operation and Development's common understanding on transitional penalty relief 36. The OECD has released a common understanding on transitional penalty relief, which reflects the need to provide relief to taxpayers in cases where an MNE Group has taken reasonable measures to ensure the correct application of the GloBE Rules. It recommends (emphasis added) [47] : 37. The OECD common understanding is intended to outline a best practice for implementing jurisdictions. It contemplates that in many cases implementing jurisdictions already provide, as a matter of law or administrative practice, for penalty relief in their existing rules and practice.","9. The GloBE Rules are a global initiative. Over 135 jurisdictions joined the Two-Pillar Solution in 2021 [4] to reform international taxation rules and ensure that multinational enterprises pay a minimum level of tax in the jurisdictions in which they operate. 10. The Minimum Tax applies to Applicable MNE Groups, which are MNE Groups that have annual revenue in their Consolidated Financial Statements [5] equal to or greater than EUR750 million for at least 2 of the 4 Fiscal Years immediately preceding the tested fiscal year. [6] 11. The Minimum Tax comprises: 12. Australia's IIR and DMT apply in relation to Fiscal Years starting on or after 1 January 2024. The UTPR applies in relation to Fiscal Years starting on or after 1 January 2025. 13. The Treasury Laws Amendment (Multinational—Global and Domestic Minimum Tax) (Consequential) Act 2024 introduces 4 lodgment obligations in respect of the Minimum Tax: 14. The foreign lodgment notification, AIUTR and DMTR are separate lodgment obligations. However, for ease of lodgment, we have combined them into the Combined Global and Domestic Minimum Tax Return (CGDMTR). The GIR is a stand-alone form (and lodgment obligation) and is not combined into the CGDMTR. 15. The due date for these lodgment obligations is aligned, being 18 months after the end of the Applicable MNE Group's GloBE Transition Year [16] and 15 months after the end of subsequent Fiscal Years. [17] 16. Australian IIR tax, Australian UTPR tax and Australian DMT tax are due and payable on the last day of the 18th month after the end of the Applicable MNE Group's GloBE Transition Year and on the last day of the 15th month in subsequent Fiscal Years. [18] GloBE Information Return 17. Where an MNE Group is an Applicable MNE Group for a Fiscal Year, each Group Entity that is located in Australia and each foreign Group Entity that has a GloBE Permanent Establishment [19] in Australia is required to lodge a GIR in Australia for that Fiscal Year. [20] 18. A GIR must be lodged [21] : 19. Consistent with the GloBE Rules, we do not have a discretion to defer the lodgment due date for the GIR. [22] 20. Each Group Entity with an Australian GIR lodgment obligation can nominate one Group Entity located in Australia to be the Designated Local Entity (DLE) to lodge the GIR with us for a Fiscal Year. [23] This is a 'one-in, all-in' nomination, meaning that all of those Group Entities must appoint the DLE. [24] At any one time, there can only be one DLE appointed to lodge the GIR for a Fiscal Year. 21. Where a DLE is appointed, each Group Entity is taken to have lodged the GIR at the time the DLE lodges the GIR with us. [25] If the DLE lodges late, each Group Entity is taken to have lodged late. 22. MNE Groups also have the option of lodging the GIR in a foreign jurisdiction. The jurisdiction must have a Qualifying Competent Authority Agreement (QCAA) [26] in place with Australia. If the Ultimate Parent Entity (UPE) of the MNE Group or a Designated Filing Entity (DFE) [27] located in such a jurisdiction lodges the GIR with a foreign government agency of that jurisdiction, each Group Entity with an Australian GIR lodgment obligation will be taken to have lodged the GIR at the time the UPE or DFE lodges the GIR with the foreign government agency. However, this treatment only applies if the UPE or DFE lodges the GIR with that foreign government agency by the due date specified in Australia's legislation. [28] 23. If the UPE or DFE lodges the GIR with the foreign government agency after the due date specified in Australia's legislation, Group Entities will not be treated as having lodged the GIR in Australia at the time of foreign lodgment and their Australian GIR lodgment obligations will remain unsatisfied. In that case, Group Entities will be taken to have lodged the GIR at the time we receive it from the foreign government agency on exchange or at the time it is otherwise lodged directly with us. We may require the GIR to be lodged locally before the GIR is exchanged with us. 24. Where a GIR is filed on time by a UPE or DFE with the foreign government agency but it has not been exchanged with us within the time specified in the QCAA, we may require Australian Group Entities to lodge the GIR with us within 21 days after we give written notice of this request. [29] Under these circumstances, we will generally contact the foreign government agency first to find out the reason for the delay and to request a copy of the GIR. If the attempts to obtain the GIR from the foreign government agency are unsuccessful, we will then seek to obtain the GIR locally. 25. Where the GIR is lodged in a foreign jurisdiction, each Group Entity with an Australian GIR lodgment obligation is required to lodge a foreign lodgment notification with us. [30] These Group Entities may appoint a DLE, on a one-in, all-in basis, to lodge the foreign lodgment notification. [31] Combined Global and Domestic Minimum Tax Return 26. Each Group Entity of an Applicable MNE Group is required to lodge: 27. We may, by legislative instrument, make a determination specifying circumstances in which an entity need not lodge an AIUTR or DMTR. [35] 28. These returns must be lodged [36] : 29. The AIUTR, DMTR and foreign lodgment notification are contained in the CGDMTR. 30. MNE Groups have the option to appoint a DLE to file the AIUTR and DMTR. Group Entities with a lodgment obligation may nominate one Australian Group Entity, being the same DLE that is appointed to lodge the GIR or foreign lodgment notification, to lodge the return on their behalf, on a one-in, all-in basis. At any one time, there can only be one DLE appointed to lodge the AIUTR and DMTR for a Fiscal Year. [37] 31. Where a DLE has been nominated, each Group Entity is taken to have lodged the relevant return at the time the DLE lodges with us. [38] If the DLE lodges late, each Australian Group Entity in the MNE group is taken to have lodged late. 32. We have the power to defer the due date for the AIUTR and DMTR but not the foreign lodgment notification. [39] 33. We expect that the majority of MNE Groups will appoint a DLE to lodge the relevant returns with us to streamline their Australian compliance processes. Therefore, throughout this Guideline we have made references to lodgments through a DLE. However, the principles in this Guideline equally apply to MNE Groups that choose not to appoint a DLE. Application of penalties in relation to lodgment obligations 34. The existing administrative penalty regime in the TAA will apply to the Minimum Tax obligations. This includes: 35. The base penalty amount (BPA) of the penalty imposed on Group Entities is aligned with those which apply to significant global entities. That is, the: Organisation for Economic Co-operation and Development's common understanding on transitional penalty relief 36. The OECD has released a common understanding on transitional penalty relief, which reflects the need to provide relief to taxpayers in cases where an MNE Group has taken reasonable measures to ensure the correct application of the GloBE Rules. It recommends (emphasis added) [47] : 37. The OECD common understanding is intended to outline a best practice for implementing jurisdictions. It contemplates that in many cases implementing jurisdictions already provide, as a matter of law or administrative practice, for penalty relief in their existing rules and practice.","Transition Period: 38. The transition period to which this Guideline applies is the 'Transition Period' as defined in the OECD common understanding. It covers Fiscal Years commencing on or before 31 December 2026 and ending on or before 30 June 2028. [48] 39. Table 1 of this Guideline provides examples of Fiscal Years covered by the Transition Period, for MNE Groups with 31 December and 30 June Fiscal Year ends. 40. Our compliance approach applies to an MNE Group's lodgment obligations in respect of Fiscal Years covered by the Transition Period. This means, for example, that the approach applies in respect of a GIR for the Fiscal Year ended 31 December 2026, even though the lodgment due date is not until 15 or 18 months later. 41. During the Transition Period, we will adopt a compliance approach which integrates the OECD's common understanding on transitional penalty relief. We will seek to balance our focus on providing education and assistance to taxpayers, to help them comply with their obligations, with the need to administer the Minimum Tax in a manner consistent with the GloBE Rules. 42. This includes taking a 'soft-landing' approach to penalties where MNE Groups can demonstrate that they have acted in good faith and taken reasonable measures to understand and comply with their lodgment obligations. We will not be providing a blanket penalty concession to all MNE Groups during the Transition Period, as the onus is on MNE Groups to demonstrate that they have taken reasonable measures. 43. At an Australian level, we have and will continue to take steps to inform and educate taxpayers about their Minimum Tax compliance obligations, including: 44. Implementing jurisdictions have adopted a common approach to implementing and administering the GloBE Rules in their domestic law. The common approach requires, among other things, recognising the qualified status of the laws of implementing jurisdictions. 45. To ensure Australia's qualification status is maintained, where possible, we will be administering the Minimum Tax in a manner that is consistent with the GloBE Rules and associated OECD Commentary. [49] As a result, we expect Australian Group Entities to demonstrate that they have taken reasonable measures to understand and comply with their Minimum Tax obligations. | Taking reasonable measures to prepare to meet lodgment obligations: 46. MNE Groups within scope of the GloBE Rules have extensive operations across jurisdictions. Therefore, we expect the tax functions of relevant MNE Group Entities are aware of these measures and are developing systems and capabilities to ensure compliance with the relevant reporting and lodgment obligations. 47. Reasonable measures include, but are not limited to: 48. MNE Groups can demonstrate that reasonable measures have been taken where, for example, they can provide evidence of some or all of the following: 49. Our expectation around 'taking reasonable measure s' is the same regardless of whether MNE Groups have their headquarters in Australia or overseas. This expectation is applied to how the MNE Group's tax function manages the obligations of each Australian Group Entity. 50. For the avoidance of doubt, reasonable measures do not include actions taken for the purpose of avoidance, fraud or evasion. | Delays in lodging – compliance approach: 51. Law Administration Practice Statements PS LA 2011/15 Lodgment obligations, due dates and deferrals and PS LA 2011/19 Administration of the penalty for failure to lodge on time provide guidance on the administration of lodgment obligations, due dates and deferrals, and our administration of the penalty for FTL, respectively. These practice statements apply to our administration of the Minimum Tax. 52. This Guideline adds to those practice statements by outlining our practical administrative approach to lodgment obligations and penalties in respect of the Minimum Tax during the Transition Period. 53. As part of our transitional compliance approach: 54. We expect MNE Group Entities to take reasonable measures to lodge both the GIR and all required sections of the CGDMTR on time. Where delays in lodgment are anticipated, unless we have communicated a broader lodgment concession process, we expect that relevant entities or the nominated DLE will contact us before the lodgment due date. Early engagement with us is important because it will enable us to take the appropriate course of action to assist MNE Groups. | Request for lodgment deferral and suspension of lodgment enforcement actions: 55. The principles for granting lodgment deferrals and suspension of lodgment enforcement action are detailed in PS LA 2011/15. 56. If MNE Groups anticipate delays in lodgment, the DLE may request: 57. We do not have the discretion to grant lodgment deferral for the GIR or the foreign lodgment notification. However, during the Transition Period, we may agree to suspend lodgment enforcement action by not undertaking compliance action on overdue lodgments for a period of time. These requests will be considered in view of Australia's ability to administer the Minimum Tax in a manner that is consistent with the GloBE Rules. 58. The onus is on MNE Groups to demonstrate that they have taken reasonable measures. MNE Groups should ensure requests include information regarding the circumstances that prevent lodgment by the due date and the steps taken to mitigate those circumstances. Requests should include supporting information to demonstrate how the MNE Group has taken reasonable measures to comply with its lodgment obligations. 59. When we grant a request for a deferred due date for lodgment, this does not automatically defer the due date for payment of any associated liability. [51] Where entities require a deferral for both lodgment and payment, they must request each separately. [52] These requests can be made at the same time. | Failure to lodge on time penalty: 60. As outlined in PS LA 2011/19, where the lodgment deferral request or suspension of lodgment enforcement action request is granted: 61. However, during the Transition Period, we will generally remit any applicable FTL penalties in full where the Australian Group Entities fulfill their obligation prior to the suspension lapsing. 62. At law, each entity with a lodgment obligation can be liable to a separate FTL penalty for each separate obligation. During the Transition Period, in circumstances where we do impose FTL penalties, we will typically remit them down as follows: 63. Notwithstanding this transitional approach, we may consider it reasonable to impose FTL penalties in circumstances where there is a failure to undertake reasonable measures to comply, including where there is:","Example 1: – first year – no failure to lodge on time penalty imposed 64. Kodiak Co (Kodiak) is the UPE of an Australian-headquartered MNE Group which is first in scope of the Minimum Tax for the Fiscal Year ended 31 December 2024. The Australian Group Entities' due date for their first Minimum Tax lodgment obligations is 30 June 2026. Kodiak has been nominated as the DLE for the MNE Group's Minimum Tax lodgment obligations. 65. On 1 June 2026, Kodiak contacts us to advise that the group has recently upgraded their information technology (IT) system to capture and store data for GloBE administration and reporting purposes. During this process, they identified technical issues which caused delays in the preparation of the GIR and the CGDMTR. As a result, the group will not be able to lodge the returns by the due date of 30 June 2026. 66. Kodiak requests an extension of time to 20 August 2026 to lodge the CGDMTR. They also request a suspension of lodgment enforcement action until 20 August 2026 in relation to the GIR and remission of any associated penalties. Kodiak provides evidence to support its requests. 67. As part of our transitional approach, we grant Kodiak's requests. In upgrading its IT system for its Minimum Tax reporting requirements, the Kodiak MNE Group demonstrated that it had taken reasonable measures to comply with its lodgment obligations. 68. Kodiak lodges the outstanding GIR and CGDMTR on 20 August 2026. 69. In respect of FTL penalties: | Example 2: – second year – no failure to lodge on time penalty imposed 70. Further to the scenario in Example 1 of this Guideline, Kodiak continues to be nominated as the DLE for the Fiscal Year ended 31 December 2025, being the second year the Kodiak MNE Group is in scope of the Minimum Tax. Relevant Kodiak MNE Group Entities are required to fulfill their Minimum Tax lodgment obligations by 31 March 2027. 71. Despite meeting some internal milestones for the preparation of the returns, during February 2027 it becomes apparent that the lodgment of the returns will be delayed. Although the Kodiak MNE Group has appropriate systems in place, the delay is mainly due to unforeseen complexity in obtaining and analysing the necessary data to correctly report certain adjustments in the GIR which did not arise in the first year. 72. On 1 March 2027, Kodiak contacts us to seek assistance regarding the possibility of not being able to lodge the GIR by the due date. Kodiak requests a lodgment deferral for the CGDMTR and suspension of lodgment enforcement action for the GIR, and remission of any associated penalties. Kodiak provides supporting information with the requests. 73. We grant an extension of time until 28 April 2027 to lodge the CGDMTR and agree to suspend lodgment enforcement action until the same day. Kodiak has taken reasonable measures to attempt to lodge by the due date and the delay is due to unforeseen circumstances. 74. On 28 April 2027, Kodiak lodges the CGDMTR and GIR for the Fiscal Year ended 31 December 2025. 75. Under these circumstances, no FTL penalty will apply in relation to the AIUTR or DMTR because Kodiak had lodged the CGDMTR by the deferred due date. In addition, we will consider remitting any FTL penalty in full for the delay in lodgment of the GIR because: 76. We will be more likely to grant requests where unforeseen circumstances arise which did not occur in prior years. In addition, as taxpayers become more familiar with their Minimum Tax obligations, our approach to taxpayer requests for additional time to comply will be to grant shorter extension periods. This is because we expect, over time, taxpayers will have the systems and knowledge in place to better ensure on-time lodgment of their obligations. | Example 3: – failure to take reasonable measures – failure to lodge on time penalty imposed 77. Wilbur Enterprises (Wilbur) is the UPE of an Australian MNE Group with operations in Australia, Europe and Asia. The group is an Applicable MNE Group for its Fiscal Year ended 31 December 2024. 78. Despite the ATO's educational campaign and the Minimum Tax being enacted in 2024, Wilbur does not devote resources until shortly before 30 June 2026 to considering whether its in-scope entities have Minimum Tax lodgment obligations. They also fail to take any action to consider data collection and systems needed to comply with those obligations on time. 79. Barney Co (Barney) is nominated by the other 4 Australian Group Entities to be the DLE for the Wilbur MNE Group. On 20 June 2026, Barney contacts us to request a 3-month extension to lodge the AIUTR and DMTR sections of the CGDMTR and a 3-month suspension of lodgment enforcement action for the GIR. 80. Barney is unable to: 81. A 3-month lodgment deferral is highly unlikely in these circumstances. We will not generally consider the granting of such a request to be fair and reasonable. 82. Delayed consideration of the potential application of the Australian GloBE Rules is an indication that reasonable measures were not taken by the Wilbur MNE Group to understand and comply with its obligations. Therefore: 83. At law, FTL penalties apply to each obligation and to each entity that fails to lodge on time. Therefore, the Wilbur MNE Group is potentially liable to 15 FTL penalties. This is because the 5 Australian Group Entities each have an obligation to lodge: 84. However, our approach to FTL penalty remission during the Transition Period will result in the 15 FTL penalties being remitted down to 2 FTL penalties (one FTL penalty in respect of the reporting obligations in the CGDMTR and one FTL penalty in respect of the GIR). [53] This is consistent with, and worked out as follows: 85. We may consider further remission based on grounds detailed in PS LA 2011/19. | Example 4: – delayed lodgment of the GloBE Information Return and Combined Global and Domestic Minimum Tax Return – demonstrated reasonable measures undertaken – no failure to lodge on time penalty 86. Yogi Industries (Yogi) is the UPE of a foreign MNE Group. Ranger Australia Co (Ranger) is nominated by the other 4 Australian Group Entities as the group's DLE. For the first 2 Fiscal Years in scope of the Minimum Tax, Yogi and Ranger have lodged the GIR and all sections of the CGDMTR on time, respectively. 87. During the Fiscal Year ended 31 December 2026, Yogi acquires a competitor, another MNE Group. The integration of both groups' IT systems and tax governance frameworks results in delays in preparation of the GIR and CGDMTR. 88. On 15 March 2028, Ranger contacts us to advise that the GIR and CGDMTR will be lodged late in both the foreign jurisdiction and with us. They advise the delay is due to the acquisition of the competitor. Ranger expects that both the GIR and CGDMTR will be ready for lodgment by 30 April 2028. We grant Ranger's requests for a suspension of lodgment enforcement action for the GIR and a lodgment deferral for the AIUTR and DMTR until 30 April 2028. 89. Yogi lodges the GIR for the Fiscal Year ended 31 December 2026 one month late on 30 April 2028. Yogi lodges the GIR in a jurisdiction with which Australia has a QCAA. Ranger also lodges the CGDMTR on the same day. 90. Under these circumstances, no FTL penalty will arise in respect of the AIUTR and DMTR contained in the CGDMTR because Ranger has lodged by the deferred due date. 91. The delay in lodgment of the GIR in the foreign jurisdiction means that all 5 Australian Group Entities will not be able to lodge their GIR with us by the due date. We do not have the discretion to extend the due date of the GIR and may require Ranger to lodge the GIR in Australia. However, under these circumstances, we will: 92. At law, the 5 Australian Group Entities would each be liable for one FTL penalty for the delay in lodging the GIR. However, our approach to FTL penalty remission during the Transition Period will result in the 5 FTL penalties being remitted down to one FTL penalty. We would likely remit the sole remaining FTL penalty in full because: Errors or mistakes in forms and taking reasonable care – compliance approach 93. Law Administration Practice Statements PS LA 2012/4 Administration of the false or misleading statement penalty – where there is no shortfall amount and PS LA 2012/5 Administration of the false or misleading statement penalty – where there is a shortfall amount provide guidance on our administration of penalties associated with false and misleading statements. See also Miscellaneous Tax Ruling MT 2008/1 Penalty relating to statements: meaning of reasonable care, recklessness and intentional disregard, which explains concepts relevant to these practice statements. This guidance also applies in respect of our administration of the Minimum Tax. 94. This Guideline provides our practical administrative approach to false or misleading statement penalties [55] in the Minimum Tax context during the Transition Period. 95. As part of our transitional compliance approach: 96. All other things being equal, we expect an MNE Group that is in scope of the Minimum Tax for its third Fiscal Year would have the systems and knowledge in place to ensure a much lower likelihood of errors than an MNE Group in its first Fiscal Year in scope. This approach is consistent with our expectation that, as MNE Groups become more familiar with the Minimum Tax, the level of support required from us is reduced. 97. This approach is irrespective of whether the error was identified by the relevant MNE Group Entity or by us. | Example 5: – ATO identifies mistakes resulting in a shortfall – no penalty imposed 98. Paddington Creative (Paddington) is the DLE for the Paddington MNE Group, which is in scope of the Minimum Tax. We identify errors with statements made in Paddington's GIR and CGDMTR. The statements understate the Australian DMT tax liabilities of the group. 99. In the course of engaging with us, Paddington demonstrates: 100. False and misleading statements arising from errors in returns can result in penalties being applied. In this example, given Paddington's conduct meets our expectations of what a similarly resourced taxpayer would do in the same circumstances, we will not seek to impose any penalties. | Example 6: – ATO identifies mistakes resulting in a shortfall – penalty imposed 101. We identify errors with statements in Jasper Enterprises' (Jasper) GIR and CGDMTR. Jasper is the DLE for the Jasper MNE Group, which is in scope of the Minimum Tax. The statements underestimate the Australian DMT tax liabilities of the group. 102. We request details of Jasper's conduct leading up to the making of these statements. As part of the information gathering process, we find evidence to show: 103. Given the conduct of Jasper falls short of what we expect a similarly resourced taxpayer would do in the same circumstances, this is a situation where we will impose penalties. Other penalties 104. As part of our transitional compliance approach, taxpayers will generally be provided with an opportunity to engage with us before we impose other applicable penalties. 105. Our existing guidance material covering the administration of these penalties also applies in respect of the Minimum Tax law. This guidance includes:",,,/law/view/document?LocID=%22COG%2FPCG20254EC%2FNAT%2FATO%2F00001%22&PiT=99991231235958,False,False,https://www.ato.gov.au/law/view/document?docid=COG/PCG20254/NAT/ATO/00001
PCG 2026/D1,Draft PCG,Draft Practical Compliance Guideline,Draft,,7,,,TR 2001/11 | TR 2005/11,,,,"10. Prior to the release of this Guideline, we discovered that several different factors were taken into account by foreign banks in deciding where RWAs were attributed, and, in general, there was not a consistent approach. These factors are listed in Appendix B to this Guideline. In addition, some taxpayers were unable to adequately explain their decision-making process around RWA attribution. [4] Overview of legislation 11. The thin capitalisation rules apply to foreign banks that conduct their banking business in Australia through one or more branches. [5] Branches are treated as if they are separate entities that require a minimum level of capital to operate a banking business in Australia. 12. Debt deductions will not be disallowed under these rules if the bank allocates a minimum amount of capital to the branch. Typically, foreign banks use the safe harbour rule in section 820-405 to work out the minimum capital amount. This requires a foreign bank to work out the part of its RWAs that are attributable to its Australian branch. 13. The rules are broadly based on the methodology of the capital adequacy requirements prescribed by prudential regulators. 14. Step 1(a) of the method statement in section 820-405 requires an entity to (emphasis added): 'Risk-weighted assets' is defined in section 995-1 as the sum of the entity's risk exposures as determined by the prudential standards of the Australian Prudential Regulation Authority (APRA) or the prudential regulator in the bank's country of residence. 15. The term 'attributable' is not defined in the legislation, though is used in other parts of the legislation including in other parts of Division 820. Taxation Ruling TR 2005/11 Income tax: branch funding for multinational banks (which deals with issues relating to the funding of a branch of a multinational bank) recognises the allocation of equity in an Australian bank's books of account as a basis for the attribution of equity amounts to the bank's foreign branches for Division 820 purposes. Part II of TR 2005/11 deals with the attribution of equity capital to a branch of a bank and focuses on the interaction of Australia's permanent establishment (PE) attribution rules and Division 820. TR 2005/11 states at paragraphs 11 to 12 that: 16. The reference to the books of account is qualified in 2 important ways and there are 2 instances where the amount may be substituted. First, as noted in paragraph 35 of TR 2005/11, accounts are acceptable only if they have been 'properly maintained in accordance with applicable accounting laws and standards'. Secondly, if the amount allocated in the books of account is adjusted for foreign tax purposes or by us for other tax purposes, that adjusted amount is to be used. It has therefore never been our position that the books of account per se are acceptable to determine the equity capital attributable to a branch and, similarly, we do not consider that books of account per se would necessarily reflect what is required to demonstrate that RWAs are attributable to a branch in compliance with section 820-405. Rather, what is important is the principles that inform those accounts and that those accounts could always be adjusted by the ATO to reflect our view on the appropriate amount of RWAs that ought to be attributed to a PE. [6] We note, in this regard, that while the Corporations Act 2001 requires you to maintain accounts, it does not require you to prepare those accounts at a stand-alone branch level in accordance with applicable accounting standards. 17. We will seek to administer section 820-405 on the basis of our view that the RWAs attributable to the PE should reflect the geographical location of the economically significant activities relevant to the assets.","Intro: This Practical Compliance Guideline is a draft for consultation purposes only. When the final Guideline issues, it will have the following preamble: This Practical Compliance Guideline sets out a practical administration approach to assist taxpayers in complying with relevant tax laws. Provided you follow this Guideline in good faith, the Commissioner will administer the law in accordance with this approach. | What this draft Guideline is about: 1. This draft Guideline [1] outlines our compliance approach to determining the risk-weighted assets (RWAs) attributable to a branch for the purposes of section 820-405 of the Income Tax Assessment Act 1997 (ITAA 1997). It also highlights several other tax issues you should actively consider relevant to assigning a location to assets. [2] 2. We will use a risk assessment framework to decide whether to devote compliance resources to further examine your arrangements. The framework is summarised at Table 1 of this Guideline. Appendix A to this Guideline contains examples of how we apply the framework. 3. If we assess your arrangement to be low risk, we will generally not allocate compliance resources to review your arrangement, except to confirm that your arrangement satisfies the low-risk requirements. 4. Where relevant [3] , this Guideline applies to the attribution of notional RWAs arising from interbranch dealings (that is, internal RWAs) in the same way it applies to the attribution of actual external RWAs. 5. This Guideline does not replace, alter or affect our interpretation of the law in any way. It does not relieve you of your obligation to comply with the relevant tax law. It is designed to give you confidence that we will allocate compliance resources in line with the risk approach outlined in this Guideline. 6. All further legislative references in this Guideline are to the ITAA 1997 unless otherwise indicated.",,"Appendix A: – Examples 47. This Appendix sets out examples to illustrate the practical application of our compliance approach. [18] The facts in the examples are limited to the funding arrangements and functions relevant to the specific RWA that is the focus of the example. In practice, Australian branches of foreign banks use a mix of debt and equity funding, including funding sourced from head office or related parties, or funding obtained from the market such as wholesale Australian customer deposits and notes issued to the market. In addition, banks may provide a variety of financial services including but not limited to lending, global derivative trading, and assisting in merger and acquisitions. 48. However, for the purposes of illustrating the principles in this Guideline, the examples focus solely on loan assets and assume that the Australian branch of the foreign bank is entirely funded by interest-bearing debt from head office, or other branches of the same legal entity, or both. We acknowledge that, in most cases, the branch balance sheet would in fact only be in part funded through intra-entity funding from the parent. 49. Any change to the location of asset attribution – for example, changing the attribution of an RWA from the foreign parent to the Australian branch, will also require changes to the associated debt or equity funding. 50. In addition, for the abundance of clarity, despite the examples only using loan assets as the RWAs, this Guideline applies equally to other classes of RWAs such as derivatives. Example 1 – Australian branch with Australian customers – economically significant activities performed in Australia Diagram 1: Australian branch performs economically significant activities and provides loans to Australian customers 51. AusBranch is the Australian branch of a foreign bank. All of the economically significant activities of the banking business in relation to the client loans are performed in Australia. 52. The foreign bank books its client loans in AusBranch's accounts and attributes the relevant RWAs to AusBranch for thin capitalisation purposes based on where the economically significant activities relevant to the RWAs (the client loans) are performed. The bank has maintained documentation and evidence in line with paragraphs 35 to 41 of this Guideline. 53. We consider this scenario falls within the green zone as the bank's approach is that relevant RWAs are attributed to the place where the economically significant activities relevant to the RWAs are performed. In addition, the bank has met the requirements in paragraphs 35 to 41 of this Guideline. Consequently, we would not dedicate compliance resources to further review this approach to the attribution of RWAs. Example 2 – attribution of risk-weighted assets based on location of attribution of profit Diagram 2: Client loan is attributed to an offshore branch based where the profits associated with the client loan are located 54. AusBranch is the Australian branch of a foreign bank. The foreign bank has told the ATO that its approach to the attribution of RWAs is based on the location where the majority of the arm's length profit from each particular RWA is attributed under Subdivision 815-C. The foreign bank contends that this should produce an appropriate outcome and one that would be consistent with the attribution outcomes expected under the green zone. In this example, the foreign bank has attributed an Australian client loan to the offshore branch on the basis that the majority of the profit associated with the client loan is attributed to the offshore branch. 55. The foreign bank has prepared documentation and evidence based on its approach of attributing RWAs to the location where the majority of the profit is attributed under Subdivision 815-C. The documentation and evidence addresses any scenarios that do not produce an outcome consistent with that expected under the green zone. 56. As such, the documentation and evidence have sufficient information to explain that AusBranch's approach will produce an outcome consistent with that expected under the green zone. 57. This example falls into the amber zone. The bank's approach to attribution of RWAs is not explicitly based on where economically significant activities are located and therefore further work would be required to confirm the approach adopted produces outcomes consistent with the green zone. Example 3 – attribution of risk-weighted assets based on Australian Prudential Regulation Authority guidelines Diagram 3: Client loan is attributed to an offshore branch based on grounds that align with APRA guidelines 58. AusBranch is the Australian branch of a foreign bank. The foreign bank has told the ATO that its approach to the attribution of RWAs is based on an approach consistent with APRA guidelines on asset booking. The foreign bank contends that this should produce an appropriate outcome that would be consistent with the outcomes expected under the green zone. 59. In this example, a particular offshore client loan is booked in the accounts of Offshore Branch, which has been permitted by APRA, on grounds that align with APRA guidelines. 60. The foreign bank prepares documentation and evidence based on its approach of attributing RWAs to a location that is consistent with the booking location allowed under APRA guidelines. 61. The documentation and evidence have sufficient information to explain that AusBranch's approach will produce an outcome consistent with that expected under the green zone. 62. This example falls into the amber zone. The bank's approach to attribution of RWAs is not explicitly based on where economically significant activities are located and therefore further work would be required to confirm the approach adopted produces outcomes consistent with the green zone. Example 4 – risk-weighted assets attributed offshore based on infrastructure and loan currency Diagram 4: Loan with Australian clients is attributed to an offshore branch based on the location of the bank's infrastructure platforms, and the loan's currency 63. AusBranch is the Australian branch of a foreign bank. The foreign bank conducts lending activity and has branches in Australia and offshore. The bank books and manages all loans denominated in a particular currency in one location, for example, all loans denominated in Yen are booked and managed by individuals in a Japanese branch. Centralisation of booking on this basis and loan management technology and infrastructure produces cost savings and other benefits for the bank. 64. Consequently, non-A$ loans to Australian clients are booked and managed where the relevant booking and loan management technology and infrastructure for the relevant currency reside. 65. AusBranch receives a service fee for assisting in the origination of the client loan and back-office support services. 66. The foreign bank has not attributed its RWAs explicitly based on where economically significant activities are located, and has instead used an approach involving the attribution of RWAs based on the currency the loan is denominated in. This is because their platforms and infrastructure are set up so that loans of a particular currency can only be booked in the location of the natural home for that currency. The foreign bank has assessed that the economically significant activities associated with the ongoing management of the loans are the most important functions and therefore the majority of the economically significant activities are located in the relevant branch. The foreign bank contends that this approach should produce an outcome consistent with the green zone on the basis that the majority of economically significant activities are located in the location that manages its country's currency. 67. The bank has maintained documentation and evidence in line with its own approach to the attribution of RWAs. 68. The documentation and evidence has sufficient information to evidence that AusBranch's approach will produce an outcome consistent with that expected under the green zone. 69. This example falls into the amber zone. The bank's approach to attribution of RWAs is not based on where economically significant activities are located and therefore further work would be required to confirm the approach adopted produces outcomes consistent with the green zone. Example 5 – risk-weighted assets attributed offshore based on client preference – economically significant activities performed in Australia Diagram 5: Australian branch performs economically significant activities. The client loans are booked and attributed offshore based on client preference 70. AusBranch is the Australian branch of a foreign bank. All of the economically significant activities of the banking business in relation to the client loans are performed in Australia. 71. Some of the bank's global clients have subsidiaries in Australia. It is the preference of one particular offshore client that loans taken out by their Australian subsidiary are recorded as being contracted with Offshore Branch. To accommodate this preference, these client loans are booked in, and the relevant RWAs are attributed to, the accounts of Offshore Branch, despite all the economically significant activities relating to these loans being performed in Australia. 72. The foreign bank has prepared documentation and evidence to support the approach it has applied to this arrangement. However, because of the facts and circumstances in this example, the documentation and evidence cannot explain that their approach will produce an outcome consistent with that expected under the green zone. This is because all the economically significant activities in relation to the client loans are performed in Australia. 73. This example falls into the red zone. While there is a documented approach, it is not one that would appear to produce results consistent with the green zone and we are therefore likely to prioritise compliance resources to investigate the taxpayer's approach to the attribution of RWAs. This approach still falls within the red zone even if treating the client loans as attributable to Australia would result in AusBranch having a significant amount of average equity capital in excess of its minimum capital amount. 74. Finally, as this arrangement falls within the red zone, it may not align with APRA's expectations on asset booking. AusBranch is encouraged to approach APRA to disclose and clarify their asset booking arrangement. Example 6 – transactions booked offshore – interbranch funding from Australian branch attributed as risk-weighted assets Diagram 6: Australian branch performs economically significant activities and provides interbranch funding to an offshore branch. Client loans are booked offshore 75. AusBranch is the Australian branch of a foreign bank. AusBranch has a team of loan specialists and loan management personnel, among other professional staff. Offshore Branch has only 2 (administrative) staff. Loans to Offshore Clients are booked in the accounts of Offshore Branch, but the loans are originated and structured by the AusBranch team in Australia and the loan risk management functions are performed mainly by AusBranch staff – that is, the economically significant activities are performed in Australia. 76. To fund its lending activity, Offshore Branch sources its funding via an interbranch loan from AusBranch, which, in turn, is debt funded by its overseas head office (in addition to other external funding sources). 77. AusBranch uses the approach in the green zone to determine its attribution of RWAs and ensures it also applies this approach to notional interbranch loans. AusBranch records the interbranch loan to Offshore Branch as an asset in its accounts. The notional interbranch loan is included as an RWA for thin capitalisation purposes, and because the bank is able to trace the funding for the external client loan, the risk weighting of the actual external client is applied. Applying a risk weighting on the interbranch loan equal to the risk weighting on the external client loan is critical as the economically significant activities are carried out in AusBranch and therefore AusBranch is exposed to the key risks. This notional RWA is attributed to AusBranch based on where the economically significant activities related to the external loan are located. 78. The bank has maintained documentation and evidence in line with paragraphs 35 to 41 of this Guideline and the documentation and evidence extends to internal RWAs. 79. This example falls in the green zone as the bank's approach is that relevant RWAs are attributed to the place where the economically significant activities relevant to the external client loan are performed. In addition, the bank has met the requirements paragraphs 35 to 41 of this Guideline. Consequently, we will not dedicate compliance resources to further review the approach to the attribution of RWAs. Example 7 – risk-weighted assets attributed offshore – no interbranch funding from Australian branch Diagram 7: Australian branch performs economically significant activities and client loans are booked and attributed offshore 80. Assume the same facts as in Example 6 of this Guideline, except in certain limited scenarios, the foreign bank has not attributed any RWAs to AusBranch. In this example, the foreign bank records the funding for the client loan as being provided by head office to Offshore Branch. Consequently, there is no interbranch loan booked as an asset in the accounts of AusBranch. 81. The documentation and evidence maintained by the foreign bank explains its departure from attribution based on economically significant activities in certain situations. 82. This example falls into the red zone because the bank's approach to attribution is not based on where economically significant activities are located. Despite the fact that this occurs only in limited scenarios, and the foreign bank has documentation and evidence to explain its approach to attribution, it does not comply with the requirements of the green zone. We are therefore likely to prioritise compliance resources to investigate the taxpayer's approach to the attribution of RWAs. 83. Finally, as this arrangement falls within the red zone, it may not align with APRA's expectations on asset booking. AusBranch is encouraged to approach APRA to disclose and clarify their asset booking arrangement. Example 8 – risk-weighted assets attributed based on client location Diagram 8: Offshore branch performs economically significant activities and loans are booked and attributed to Australia based on client location 84. AusBranch is the Australian branch of a foreign bank. In this example, in relation to some specific loans, the clients are in Australia, client loans are booked in the accounts of AusBranch and the relevant RWAs are also attributed to AusBranch for Australian tax purposes. The AusBranch accounts are prepared on the basis that AusBranch borrowed internal funding from Head Office to fund the client loan assets. 85. However, these client loans are originated by Offshore Branch and the majority of the economically significant activities such as risk monitoring, loan management, and all decision-making in respect of the loans are performed by Offshore Branch. 86. The foreign bank has explained to the ATO that its approach to the attribution of RWAs is to attribute the RWA to the same location of the client. The foreign bank has maintained documentation and evidence in line with its client location approach. 87. This example falls into the red zone because the approach to attribution is not based on where economically significant activities are located and it is not one of the approaches which satisfy the amber zone. We are therefore likely to prioritise compliance resources to investigate the taxpayer's approach to the attribution of RWAs. 88. AusBranch is also encouraged to approach APRA to disclose and clarify this asset booking arrangement. Example 9 – risk-weighted assets attributed to Australia – economically significant activities in both Australia and offshore Diagram 9: Both offshore branch and Australian branch perform economically significant activities 89. AusBranch is the Australian branch of a foreign bank. The foreign bank has indicated it attributes its RWAs based on the location of economically significant activities. The foreign bank runs a globally integrated business with valuable functionality occurring in more than one jurisdiction. Loan transactions are booked in the location where the majority of the economically significant activities occur – that is, loan assets are not split between 2 locations. 90. In this example, a client loan is originated by Offshore Branch, while the remaining and majority of the economically significant activities such as risk monitoring, loan management, and decision-making in respect of the loans are performed in Australia by AusBranch. Following a factual and functional analysis of the business, the bank determines that around 60% of the total economically significant activities associated with the client loans are performed in Australia and around 40% of the functions are performed offshore. Accordingly, in this example, the client loan is attributed to AusBranch for thin capitalisation purposes. 91. The bank has maintained documentation and evidence in line with paragraphs 35 to 41 of this Guideline and the documentation and evidence clearly articulates the process and analysis undertaken to determine where the majority of the economically significant activities are occurring. 92. This example falls in the green zone as the bank's approach is that relevant RWAs are attributed to the place where the majority of the economically significant activities relevant to the RWAs are performed. In addition, the bank has met the requirements in paragraphs 35 to 41 of this Guideline. Consequently, we will not dedicate compliance resources to further review the approach to the attribution of RWAs. Example 10 – risk-weighted assets attributed offshore – support services provided from Australia Diagram 10: Economically significant activities in relation to client loans are performed offshore, and the Australian branch provides back-office support services to the offshore branch 93. AusBranch is the Australian branch of a foreign bank. The foreign bank conducts lending activity and has branches in Australia and offshore jurisdictions. Loan transactions with offshore clients are booked in the accounts of the respective offshore branches where the loans are originated and risk managed, along with other functions critical to the management of the loans – that is, the economically significant activities are performed offshore. 94. AusBranch provides some back-office support services such as information technology, human resources and legal and accounting support to the regional loans desk. AusBranch is paid a service fee for the back-office support provided to the region. The client loans are attributed offshore because the economically significant activities occur offshore with the functions in Australia being only low value support functions. The bank has followed the approach in the green zone. The low value support functions performed by AusBranch are not economically significant activities. 95. The bank has maintained documentation and evidence in line with paragraphs 35 to 41 of this Guideline. 96. This example falls in the green zone as the bank's approach is that relevant RWAs are attributed to the place where the majority of the economically significant activities relevant to the RWAs are performed. In addition, the bank has met the requirements in paragraphs 35 to 41 of this Guideline. Consequently, we will not dedicate compliance resources to further review the approach to the attribution of RWAs. | Appendix B: – Factors historically considered by foreign banks in attribution of risk-weighted assets 97. This Appendix provides historical context to assist in understanding the rationale for developing this Guideline. 98. During historical review activity, we observed that foreign banks had regard to a number of different factors and weighting of factors in deciding where RWAs are attributed. The factors used differed between and within classes of RWAs. The factors listed in this paragraph are a non-exhaustive list of the factors used by foreign banks. It should be noted that there can be a high degree of overlap and relationship between these factors because they are not mutually exclusive. | Appendix C: – Other tax issues 99. There are other tax issues which you may need to consider if you have made changes to your approach to attribution of RWAs as a result of adopting an approach based on economically significant activities: 100. You are invited to comment on this draft Guideline including the proposed date of effect. Forward your comments to the contact officer by the due date. 101. A compendium of comments is prepared as part of the finalisation of this Guideline. An edited version of the compendium (names and identifying information removed) is published to the ATO Legal database on ato.gov.au. 102. Advise the contact officer if you do not wish for your comments to be included in the edited compendium. © AUSTRALIAN TAXATION OFFICE FOR THE COMMONWEALTH OF AUSTRALIA You are free to copy, adapt, modify, transmit and distribute this material as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products). There would also be instances where the Australian branch is transacting with an offshore client where the asset should be booked in Australia (that is, activity related to an offshore banking unit business of a bank). Not previously issued as a draft.",,,False,True,https://www.ato.gov.au/law/view/document?docid=DPC/PCG2026D1/NAT/ATO/00001
PCG 2025/2,Final PCG,Restructures and the thin capitalisation and debt deduction creation rules - ATO compliance approach,,,22 June 2023,,,TR 2025/2,,"1. The Treasury Laws Amendment (Making Multinationals Pay Their Fair Share—Integrity and Transparency) Act 2024 (Act) introduces thin capitalisation rules in Division 820 of the Income Tax Assessment Act 1997 (ITAA 1997) and the debt deduction creation rules (DDCR) in Subdivision 820-EAA of the ITAA 1997. 2. This Guideline primarily sets out our compliance approach to the restructures [1] carried out in response to the Act. 3. This Guideline provides a risk assessment framework rating on the application of certain anti-avoidance provisions to restructuring in response to the Act. [2] 4. The risk assessment framework sets out matters that we will take into account in deciding whether or not we will have cause to devote our compliance resources to further examine your restructures. It does not mean that any anti-avoidance provision necessarily applies. 5. This Guideline does not replace, alter or affect our interpretation of the law in any way. 6. All further legislative references in this Guideline are to the ITAA 1997, unless otherwise indicated. Structure of this Guideline 7. This Guideline is structured as follows: 8. The DDCR schedules to this Guideline are: 9. The thin capitalisation schedules to this Guideline are: 10. Schedules 3 and 4 to this Guideline should be read in conjunction with Taxation Ruling TR 2025/2 Income tax: aspects of the third party debt test in Subdivision 820-EAB of the Income Tax Assessment Act 1997. 11. You will need to read and apply the schedules in conjunction with the general principles set out in this Guideline.","Scope: 67. The DDCR applies to debt deductions arising in income years starting on or after 1 July 2024, regardless of whether those debt deductions are connected to arrangements arising prior to, or after, the start of such an income year. 68. This Schedule provides you with guidance on: 69. The examples in this Schedule provide guidance to assist taxpayers considering whether to restructure. The examples do not consider the DDCR SAAR or any other provision. 70. Schedule 2 to this Guideline provides examples of restructures in response to the DDCR, some of which build on the examples in this Schedule.",,"Intro: This Practical Compliance Guideline sets out a practical administration approach to assist taxpayers in complying with relevant tax laws. Provided you follow this Guideline in good faith, the Commissioner will administer the law in accordance with this approach. [Note: This is a consolidated version of this document.]","Example s: where the debt deduction creation rules will need to be considered 71. The DDCR will need to be considered in the following examples. In each example, information and documentation would need to be obtained where the taxpayer wants to determine if the DDCR (and whether an exception in section 820-423AA) applies to the arrangement. 72. If the DDCR needs to be considered, in the course of compliance activity we would ordinarily expect to have cause to allocate resources to ensure that the correct amount of debt deductions were disallowed. | Example 1: – timing and the 'associate pairs' conditions Diagram 1: Timing and the 'associate pairs' conditions 73. Aus Co is an Australian tax resident and general class investor wholly owned by B Co, which is a tax resident of Country B. 74. Aus Co acquires a 50% interest in land from Third Party Co, an unrelated Australian company. Aus Co borrows from B Co to fund the acquisition of its 50% interest in the land. 75. Aus Co and Third Party Co hold their respective shares in the land as tenants in common. 76. Aus Co and Third Party Co subsequently enter into a joint venture arrangement to develop the land for residential purposes. Aus Co and Third Party Co become associate pairs. 77. Aus Co will not need to consider the application of the DDCR for this arrangement as Aus Co and Third Party Co were not associate pairs at the time Aus Co acquired its interest in the land from Third Party Co. We are unlikely to apply compliance resources in this example. 78. There is no need to test at a later point in time unless there are factors indicating contrivance or artificiality in relation to the timing of entering into the acquisition or the borrowing. | Example 2: – funding capital expenditure with related party debt Diagram 2: Funding capital expenditure with related party debt 79. Aus Co is an Australian tax resident and general class investor that is a holding company with 2 Australian subsidiaries (Aus Sub Co 1 and Aus Sub Co 2). 80. Aus Co is a subsidiary of B Co, a multinational enterprise which is tax resident in Country B. 81. Aus Sub Co 1 owns and operates a gold mine in Australia (Gold Mine 1). It does not have any borrowings and regularly pays dividends to Aus Co from its retained earnings. In turn, Aus Co regularly pays dividends to B Co. 82. The board of B Co resolves to use Aus Sub Co 2 to mine gold in Australia from a separate mining lease (Gold Mine 2) recently acquired from an unrelated third party. 83. Aus Sub Co 2 does not carry on any other business. 84. B Co's subsidiary, Treasury Co, which is resident in Country B, issues $1 billion of interest-bearing debt interests to foreign banks for the specific purpose of funding Gold Mine 2's development. The borrowed funds are lent through Aus Co to Aus Sub Co 2 on back-to-back terms. Aus Co has no other borrowings. 85. While Gold Mine 2 is in development: 86. Aus Co will not need to consider the application of the DDCR while Gold Mine 2 is in development, as Aus Co's borrowings are not used to fund or facilitate the funding of any dividends. We are unlikely to apply compliance resources while Gold Mine 2 is in development to determine the application of the DDCR. | Example 3: – funding capital expenditure with related party debt Diagram 3: Funding capital expenditure with related party debt 87. Assume the same facts as Example 2 of this Guideline. 88. Once Gold Mine 2 has completed development and begins to generate assessable income, Aus Sub Co 2 begins to pay down the $1 billion debt using the proceeds of the operations in accordance with the principal and interest repayment conditions in the external borrowings (that is, on back-to-back terms). 89. We are unlikely to apply compliance resources to determine the application of the DDCR after Gold Mine 2 has completed development if the debt is being paid down using the cash generated by the operations. | Example 4: – bridging finance Diagram 4: Bridging finance 90. Aus Co SPV is an Australian-incorporated entity and general class investor. It is commencing a new project in Australia for which capital expenditure is forecast to be approximately $300 million. 91. Due to commercial issues causing delays in external funding, $50 million bridging finance is obtained from the SPV's shareholders to make initial capital acquisitions. None of the initial capital acquisitions are covered by subsection 820-423A(2). 92. Once external finance is obtained, Aus Co SPV repays the $50 million shareholder bridging finance with the proceeds of the external financing. 93. Aus Co will not need to consider the DDCR as no related party debt deductions arise in relation to acquisitions from associate pairs. We are unlikely to apply compliance resources in this example to determine the application of the DDCR. | Example 5: – related party transactions to recharge outcomes arising from swaps Diagram 5: Related party transactions to recharge outcomes arising from swaps 94. Aus Co is a general class investor and the head company of an Australian tax consolidated group. The group raises debt financing by issuing debt interests to third-party banks to fund its commercial activities (which does not include any acquisitions from associate pairs or payments to associate pairs). 95. The bank debt is denominated in various currencies at fixed rates. To manage the associated interest rate and exchange rate risks, the group enters into interest rate swaps (IRS) and cross currency interest rate swaps when it issues the debt interests to the third-party banks in order to convert the group's fixed interest rate exposure under the debt to floating United States dollar interest rate exposure. 96. A related party (not within the tax consolidated group), Finance Co, undertakes all swap transactions for the group. It executes the swaps under International Swaps and Derivates Association agreements with third-party banks. 97. When entering into these swaps, Finance Co and Aus Co also enter into internal arrangements which recharge or pass through the actual costs and payments of the external bank swaps to Aus Co which effectively hedge the bank debt. The recharge costs are debt deductions. 98. Aus Co will not need to consider the DDCR for this arrangement as the debt deductions in relation to the recharge arrangement are not in relation to a transaction with an associate pair. We are unlikely to apply compliance resources in this example to determine the application of the DDCR. | Example 6: – cash pooling Diagram 6: Cash pooling 99. Aus Co is an Australian company with a foreign parent, Foreign Co. 100. Foreign Co operates a global cash pooling arrangement with numerous offshore cash pool participants and an offshore cash pool leader. The cash pool leader is an associate pair of Foreign Co and Aus Co. The arrangement requires all accounts to be nil, with positive balances transferred (or 'swept') to the cash pool leader and negative balances replenished by the cash pool leader daily. 101. If a participant has its cash swept to the offshore cash pool leader, the leader pays interest on the balance owed to the participant at a rate determined under the arrangement. 102. If a participant is transferred an amount from the offshore cash pool leader in order to make its account balance nil, unless any amount is owed by the leader, the participant pays interest on the balance owed to the leader. 103. Aus Co has no other borrowings. 104. Aus Co uses its cash pool account to acquire CGT assets from associate pairs and to fund dividends, royalties and returns of capital to associate pairs. 105. Throughout the 2024–25 income year, Aus Co's cash pool balance always remains positive. In the 2025–26 income year, Aus Co's balance fluctuates between negative and positive. 106. Aus Co does not need to consider the application of the DDCR in relation to the 2024–25 income year as Aus Co's cash pooling account did not give rise to debt deductions and we are unlikely to apply compliance resources in this example. 107. However, Aus Co does need to consider the application of the DDCR to the debt deductions arising in the 2025–26 income year and we are likely to consider applying compliance resources to verify the correct application of the DDCR for this year. | Example 7: – funding working capital and dividends with related party debt Diagram 7: Funding working capital and dividends with related party debt 108. Aus Co is an Australian tax resident and a subsidiary of B Co, a multinational enterprise which is tax resident in Country B. B Co runs a global motor vehicle sales business. 109. Aus Co carries on the multinational enterprise's business operations in Australia. It regularly pays dividends to B Co out of cash generated from the sales of motor vehicles to Australian customers. 110. In a particular year, Australian cash reserves are not sufficient for Aus Co to fund dividends and its continuing operations. 111. Aus Co issues a $100 million debt interest to B Sub Co, a subsidiary of B Co which is tax resident in Country B. The funds raised under the debt interest are used by Aus Co to pay a dividend to B Co and to fund its commercial operations. 112. Aus Co will need to consider the application of the DDCR for the extent to which the financial arrangement funded or facilitated the funding of the dividends to B Co. We are likely to consider applying compliance resources to determine the correct application of the DDCR. | Example 8: – funding working capital and dividends with related party debt Diagram 8: Funding working capital and dividends with related party debt 113. Assume the same facts as Example 7 of this Guideline. 114. Once the $100 million debt interest is due to expire, Aus Co and B Sub Co decide to refinance the debt interest for $100 million for a further 9 years. 115. Aus Co will need to consider the application of the DDCR to the refinanced loan for the extent it refinanced a financial arrangement which funded or facilitated the funding of the dividend to B Co in Example 7 of this Guideline. We are likely to consider applying compliance resources to determine the correct application of the DDCR. | Example 9: – refinancing third-party debt Diagram 9: Refinancing third-party debt 116. Aus Co 1 and Aus Co 2 are both Australian-incorporated entities and general class investors. They are also associate pairs. 117. In 2020, Aus Co 1 borrows $100 million from Third Party bank. The loan is used for multiple purposes, including the acquisition of existing shares in an associate pair for $40 million. 118. In 2024, the loan is due to expire and has a remaining balance of $35 million owing. 119. Aus Co 1 chooses to refinance the debt by borrowing from associate pair Aus Co 2 for $35 million. 120. Aus Co 1 will need to consider the application of the DDCR to the related party loan. Aus Co 1's debt deductions will be disallowed to the extent they trace to the Type 1 acquisition, being the $40 million acquisition of shares in Aus Co 2. We are likely to consider applying compliance resources to determine the correct application of the DDCR. | Example 10: – related party financing of related party acquisition Diagram 10: Related party financing of related party acquisition 121. Aus Co SPV is an Australian incorporated entity and general class investor. It commences a new property project in Australia and acquires real property from an associate pair for approximately $300 million. 122. Debt interests of $50 million in total are issued by Aus Co SPV to SPV's shareholders which are an associate pair in relation to Aus Co SPV. 123. Aus Co SPV will need to consider the application of the DDCR to debt deductions arising in relation to the $50 million associate pair financing. We are likely to consider applying compliance resources to determine the correct application of the DDCR. | Example 11: – debt deductions in relation to an acquisition from an associate pair Diagram 11: Debt deductions in relation to an acquisition from an associate pair 124. Aus Co is an Australian tax resident and general class investor. 125. Aus Co acquires a CGT asset directly from B Co (an associate pair). The acquisition is not covered by section 820-423AA. 126. Aus Co finances the acquisition with an interest-bearing loan from B Co of $100 million. 127. In order to swap its exposure to interest rate risk in relation to the loan, Aus Co enters into an IRS with another associate pair, C Co. 128. Aus Co would need to consider the application of the DDCR to the debt deductions in relation to the loan and the interest rate swap. We are likely to consider applying compliance resources to determine the correct application of the DDCR. | Example 12: – acquisition from a related trust Diagram 12: Acquisition from a related trust 129. AAA Trust is a general class investor and is part of a privately owned group which predominantly carries on business in Australia. AAA Trust, together with its associates, has more than $2 million in debt deductions in a single income year. 130. BBB Co is a private company that holds a significant amount of funds in the group. 131. CCC Trust is a trust that holds a CGT asset. 132. AAA Trust, BBB Co and CCC Trust are part of a privately owned group and are associate pairs of each other. 133. In the 2024–25 income year, the trustee of the AAA Trust acquires the CGT asset held by CCC Trust to be used in its business. 134. AAA Trust does not have sufficient working capital to both acquire the CGT asset and fund its business operations. 135. The trustee of AAA Trust and BBB Co enters into a Division 7A (of the ITAA 1936) complying loan agreement [26] under which the trustee borrows an amount from BBB Co equal to the amount of the CGT asset's purchase price (Division 7A complying loan). The loan agreement stipulates that the trustee of AAA Trust must make minimum yearly repayments to BBB Co, and the rate of interest payable on the loan is equal to the benchmark interest rate for each year. 136. The trustee of AAA trust pays the CCC Trust the purchase price for the CGT asset using the funds provided under the Division 7A complying loan for the CGT asset acquired. 137. The trustee of AAA trust will need to consider the application of the DDCR to the debt deductions arising in relation to the acquisition from CCC Trust. We are likely to consider applying compliance resources to determine the correct application of the DDCR. | Example 13: – loan funding distribution by trustee Diagram 13: Loan funding distribution by trustee 138. Zinc Trust is a discretionary trust and a general class investor that, together with its associates, has more than $2 million in debt deductions. 139. Mr Zinc is the appointor and primary beneficiary of Zinc Trust. 140. Gold Co is a private company of which Mr Zinc is the sole director and shareholder. 141. The 2 entities are part of a privately owned group and are associate pairs of each other. 142. In the 2021–22 income year, the trustee of Zinc Trust makes Mr Zinc presently entitled to 100% of the trust income. Mr Zinc agrees for the trustee to retain the amount to which his present entitlement relates in Zinc Trust as working capital. 143. On 30 June 2023, Mr Zinc calls for payment of his unpaid present entitlement (UPE). After reviewing the financial affairs of the Zinc Trust, the trustee decides to refinance the amount contributed by Mr Zinc by borrowing the same amount from Gold Co rather than reducing the working capital of the business. The loan is structured in accordance with Division 7A of the ITAA 1936 complying terms. The rate of interest payable on the loan from Gold Co is equal to the benchmark interest rate for each year. 144. The trustee uses the amount borrowed from Gold Co to pay off Mr Zinc's UPE. 145. The trustee will need to consider the application of the DDCR to Zinc Trust's debt deductions arising in relation to the borrowing from Gold Co used to fund or facilitate the funding of the payment of Mr Zinc's UPE. We are likely to consider applying compliance resources to determine the correct application of the DDCR. | Example 14: – related party lending between multinational subsidiaries Diagram 14: Related party lending between multinational subsidiaries 146. Aus Co is an Australian tax resident and general class investor, wholly owned by B Co, a tax resident of Country B. Aus Co issued a $100 million debt interest to B Co. 147. Using the proceeds of the debt interest, Aus Co acquires a $100 million debt interest from Aus Co 2, another wholly owned subsidiary of B Co and Australian tax resident. No other entity has previously held the debt interest. 148. Aus Co 2 uses the proceeds to acquire CGT assets from unrelated entities in the ordinary course of its commercial operations. 149. Aus Co and Aus Co 2 will not need to consider the application of the DDCR for this arrangement as no related party debt deductions arise in relation to transactions with associate pairs other than the debt interests that are covered by the exception in subsection 820-423AA(3). We are unlikely to apply compliance resources in this example. 150. Aus Co and Aus Co 2 will need to consider the application of the DDCR to their respective debt deductions in relation to any other transactions Aus Co 2 enters with associate pairs, including whether those transactions were indirectly made by Aus Co. Where such transactions occur, we are likely to consider applying compliance resources to determine the correct application of the DDCR. Debt deduction creation rules records and evidence 151. The DDCR requires taxpayers to trace the use of debt funding transactions that are covered by subsections 820-423A(2) and (5), including both direct and indirect transactions. 152. In order to determine whether the DDCR has application to your arrangements, you and your associate pairs will need to obtain sufficient information to trace the use of related party debt and whether it funds transactions that are covered by subsections 820-423A(2) and (5), including both direct and indirect transactions. For example, the information should be sufficient to establish whether an arrangement has the characteristics of the examples in Schedules 1 and 2 to this Guideline. Historical transactions 153. Stakeholders have raised practical concerns when seeking to comply with the DDCR where business records about historical transactions and related party debt may be limited. 154. We recognise that it can be challenging to obtain relevant documents and information to evidence or substantiate use of related party debt funding for historical transactions. 155. However, the onus is on the taxpayer to prove that the DDCR does not apply and you can prove this through the provision of information and documentation to us. 156. We anticipate that the following documents and information may assist taxpayers to demonstrate whether the DDCR applies to debt deductions in relation to your historical transactions: 157. Stakeholders have requested that we do not allocate compliance resources to ongoing related party funding of historical transactions that occurred before a certain period (for example, more than 5 years before enactment). We do not consider such an approach is available and appropriate. We will assist taxpayers seeking to comply with the DDCR. 158. All information and documentation provided to us should be in English or be accompanied with an English translation. 159. In the course of our compliance activities, we may request the documents mentioned in paragraph 156 of this Guideline or similar information from you as evidence of relevant tracing. 160. Where the onus to prove that the DDCR does not apply to you is not discharged, we may have cause to apply compliance resources to determine whether the correct amount of debt deductions have been disallowed under subsection 820-423A(1). Transactions since enactment 161. Since the enactment of the DDCR, best practice record-keeping practices have changed. We would expect taxpayers to keep contemporaneous documentation and associated analysis on the operation of the DDCR (including evidentiary support for tracing the use of funds). 162. We also expect associate pairs to provide taxpayers with full disclosure of all relevant information to work out whether the DDCR applies to debt deductions in relation to transactions covered by subsections 820-423A(2) and (5), including for indirect arrangements. 163. A deduction should not be claimed unless sufficient information is available to support a conclusion that the DDCR does not apply. Tracing of funds and apportionment 164. Stakeholders have requested guidance on methodologies to trace and apportion the disallowance of debt deductions under subsection 820-423A(1). Tracing of funds 165. We consider that tracing is a factual exercise and should be the method used to determine the disallowed debt deduction under subsection 820-423A(1) wherever possible. Apportionment 166. Apportionment does not replace tracing. However, apportionment may be appropriate where it is not possible to trace, such as where funds from various sources that were used for different purposes were combined into a single debt interest. 167. Whether an apportionment methodology is appropriate will depend on whether it is fair and reasonable in the relevant facts and circumstances. 168. An example of fair and reasonable apportionment is where the debt deductions under a facility are disallowed in the same proportion of the 'DDCR debt' to total debt in circumstances where related party debt that funded transactions covered by subsections 820-423A(2) or (5) is refinanced into a single related party debt facility that also includes debt in relation to other purposes. This includes any repayments of principal and capitalisation of interest. 169. We are aware of potential methodologies, including: 170. We do not consider such approaches are designed to provide a fair and reasonable apportionment as they do not reflect the facts and circumstances of taxpayers' affairs. We would apply compliance resources to investigate any such apportionment approach. | Example 15: – fair and reasonable identification of disallowed debt deductions Diagram 15: Fair and reasonable identification of disallowed debt deductions 171. Aus Co 1 is an Australian tax resident and general class investor. It is wholly owned by Foreign Head Co. 172. Aus Co 1 has a $100 million historical loan from a related party, Aus Co 2. Aus Co's information and documents indicate the loan refinanced 2 prior loans from associate pairs, a $90 million borrowing used to acquire real property from a third party and a $10 million borrowing used to fund a dividend to Foreign Head Co. 173. Aus Co 1 is able to identify, using contemporaneous loan and dividend documentation from the time that the dividend was paid, that 10% of the $100 million loan proceeds were used to refinance a borrowing originally used to fund a Type 2 payment (that is, the dividend to Foreign Head Co). It is appropriate to conclude that 10% of the debt deductions in relation to the refinanced loan are disallowed under the DDCR based on the historical use of the original $10 million borrowing. 174. The remaining $90 million of the $100 million loan proceeds did not fund or arise in relation to a Type 1 or Type 2 transaction. 175. Aus Co has disallowed debt deductions on a fair and reasonable basis for the purpose of applying the DDCR having regard to their circumstances. | Example 16: – fair and reasonable apportionment of debt used for multiple purposes Diagram 16: Fair and reasonable apportionment of debt used for multiple purposes 176. Aus Co 1 and Aus Co 2 are Australian tax residents and general class investors. They are both wholly owned by Foreign Head Co, a foreign tax resident. 177. In the 2024–25 income year, Aus Co 1 issues a debt interest to Foreign Head Co permitting a maximum drawdown of $100 million. Interest is payable on any drawdowns at a 10% annual interest rate. [27] 178. In the same income year, Aus Co 1 draws down and uses $40 million of the debt interest to acquire trading stock from Aus Co 2. Aus Co 1 incurs $4 million of debt deductions in relation to the debt interest, which were all incurred in relation to the trading stock acquisition. 179. Aus Co 1 identifies that the debt deductions relating to the acquisition of trading stock from Aus Co 2 is a Type 1 transaction and will be denied under the DDCR, thereby resulting in a $4 million denial. 180. In the 2025–26 income year, Aus Co 1 draws down and uses $10 million of the debt proceeds to effectively pay a dividend to Foreign Head Co. 181. In the 2025–26 income year, Aus Co 1 incurs $10 million of debt deductions. $4 million of those debt deductions relate to the trading stock acquisition, thereby resulting in a $4 million denial. In the 2025–26 income year, Aus Co also uses 10% of the debt interest to fund the dividend to Foreign Head Co. Aus Co identifies that this is a Type 2 transaction, thereby resulting in an additional $1 million of the debt deductions being denied. 182. Aus Co 1 maintains documentation to evidence the use of the remaining funds for other purposes that are not Type 1 or Type 2 transactions in future years and continues to consider the portion of debt deductions to be disallowed each year. 183. Aus Co 1 has apportioned the debt deductions between debt deductions disallowed under the DDCR and debt deductions not disallowed under the DDCR on a fair and reasonable basis having regard to their circumstances. | Example 17: – borrowing under a cash pool for dividend and refinancing Diagram 17: Borrowing under a cash pool for dividend and refinancing 184. Aus Sub Co is an Australian tax resident subsidiary of Foreign Head Co. Foreign Head Co is a foreign tax resident company and an associate pair of Aus Sub Co. 185. Aus Sub Co has a cash pool with Fin Co (a foreign-resident subsidiary of Foreign Head Co and associate pair) that includes 'cash sweeping' (swept on a daily basis). Generally, cash inflows comprise receipts from sales to customers, and cash outflows comprise operating and capital expenditures. 186. Interest accrues on a daily basis and is calculated by reference to the daily balance of the facility. 187. On 27 June 2024, Aus Sub Co pays a dividend of $50 million to Foreign Head Co which was funded with a borrowing from Fin Co for the same amount through the cash pool facility. No other transactions occurred in the cash pool on that day and, as a result, the cash sweeping gives rise to a $50 million debt interest issued by Aus Sub Co to Fin Co under the cash pooling arrangement. 188. On 30 June 2024, the balance of the cash pool is net payable, with Aus Sub Co owing $70 million to Fin Co (including the $50 million debt interest issued to Fin Co). Aus Sub Co refinances its cash pool borrowings to a new debt interest issued to Fin Co 2 (also a foreign-resident subsidiary of Foreign Head Co and associate pair), borrowing $70 million ('replacement loan'). 189. Aus Sub Co uses the proceeds of the replacement loan to repay the cash pool facility. 190. Aus Sub Co enters into a new cash pooling arrangement with Fin Co. 191. As at 1 July 2024 (the start date for the DDCR), the replacement loan remains owing by Aus Sub Co to Fin Co 2. 192. Aus Sub Co identifies that debt deductions in relation to $50 million of the $70 million owing under the cash pool facility would have been denied under the DDCR. Aus Sub Co further identifies that the same proportion of debt deductions in relation to the refinancing will be denied under the DDCR and denies the apportioned 71% [28] ($50 million out of the $70 million) of debt deductions accordingly. 193. Aus Sub Co has apportioned the debt deductions between debt deductions disallowed under the DDCR and debt deductions not disallowed under the DDCR on a fair and reasonable basis having regard to their circumstances. | Example 18: – low risk: repaying debt interest 204. Aus Co is an Australian tax resident and general class investor, with a wholly owned subsidiary B Co which is a tax resident of Country B. 205. Aus Co identifies debt deductions which are expected to be incurred in the 2024–25 income year that are in relation to acquisitions of CGT assets from an associate pair and financial arrangements used to fund dividends paid to associate pairs that occurred in prior income years. 206. Aus Co repays all of the debt interests under which the debt deductions arise from retained earnings and dividends received from B Co. 207. There are no debt deductions arising from its restructured arrangements. 208. This is a low-risk restructure. | Example 19: – low risk: repaying bridging finance Diagram 18: Low risk: repaying bridging finance 209. Assume the facts in Example 10 of this Guideline. 210. Aus Co SPV determines that the DDCR will apply to debt deductions in relation to the acquisition of real property from an associate pair arising from the $50 million debt interests that Aus Co SPV issues to its shareholders (shareholder debt). 211. Based on contemporaneous documentation and correspondence with financial institutions and intermediaries, the shareholder debt is issued in anticipation of additional external financing being secured by Aus Co SPV to fund the acquisition of the real property. Upon the provision of external financing in October 2024, the $50 million 'bridging' shareholder debt is repaid by Aus Co SPV. 212. This is a low-risk restructure. 213. The use of the shareholder debt as related party bridging finance was commercially necessary and its replacement with external financing always intended and documented. 214. Aus Co SPV will need to consider the correct amount of debt deductions disallowed under the bridging finance due to the operation of the DDCR until it is repaid. | Example 20: – low risk: replacing related party debt with third-party debt Diagram 19: Low risk: replacing related party debt with third-party debt 215. Aus Co is an Australian tax resident and a general class investor. It is the head of an Australian economic group of entities with operations in New Zealand operating through a foreign-resident subsidiary (NZ Co). 216. Aus Co acquires a CGT asset directly from Aus Sub Co 1 (an associate pair). The acquisition is covered by section 820-423A and is not included in an exemption in section 820-423AA. 217. Aus Co finances the acquisition with an interest-bearing loan from Aus Sub Co 2 of $50 million. 218. Aus Co considers the application of the DDCR and determines that it will apply to deny deductions on the related party loan from Aus Co 2. Aus Co's broader economic group does not have the financial capacity to repay the loan due to loss making operations and disposals of Aus Co. Aus Co's economic group therefore needs to obtain a third-party loan from Australian Bank of $50 million to repay the loan. Aus Co uses the newly borrowed funds to repay that related party loan, including any unpaid accrued interest. 219. Aus Co's broader economic group will now incur interest expenditure due to the third-party borrowings from the Australian bank and the restructure is not associated with: 220. This is a low-risk restructure. | Example 21: – low risk: replacing Division 7A loan with third-party debt Diagram 20: Low risk: replacing Division 7A with third-party debt 221. Assume the same facts as Example 12 of this Guideline. Assume that AAA Trust is not otherwise indebted. 222. AAA Trust is not controlled by another entity and is not part of a broader economic group. 223. AAA Trust repays BBB Co the outstanding amount owing on the Division 7A complying loan. AAA Trust does not have the financial capacity to repay the loan itself due to its loss making operations and obtains a third-party loan from Australian Bank in order to fund the repayment of the Division 7A loan. Australian Bank does not have any arrangements with any of AAA Trust's associates impacted by these arrangements. 224. AAA Trust will now incur interest expenditure due to the introduction in third-party borrowings and the restructure is not associated with: 225. This is a low-risk restructure. | Example 22: – low risk: disposing of foreign assets Diagram 21: Low risk: disposing of foreign assets 226. Aus Co is a general class investor that satisfies section 820-37 (known as the 90% Australian assets threshold). 227. Aus Co has a single foreign subsidiary. 228. In anticipation of the DDCR applying, Aus Co liquidates the foreign subsidiary. There is no capital gain or capital loss on the liquidation. 229. In the following income year, Aus Co will no longer be a general class investor. 230. This is a low-risk restructure. 231. Aus Co has disposed of a dormant entity and its business operations are not otherwise impacted as a result of the restructure. | Example 23: – low risk: repaying debt interest, terminating swaps, recapitalising subsidiary Diagram 22: Low risk: repaying debt interest, terminating swaps, recapitalising subsidiary 232. Assume the facts in Example 11 of this Guideline. 233. Aus Co determines that the DDCR will apply to its debt deductions in relation to its purchase of tangible assets from B Co (that is, Aus Co's debt deductions relating to its $100 million debt issued to B Co and its swap with C Co). 234. Aus Co repays its $100 million debt, funded by an injection of equity by B Co and terminates the IRS. 235. Subsequently, Aus Co and B Co reconsiders their approach to funding the acquisition of tangible assets and Aus Co is sufficiently capitalised to pay B Co in accordance with its payment terms, preventing potential further related party debt arising through the transfer of assets between the entities. 236. This is a low-risk restructure. 237. Debt deductions are no longer incurred in relation to the acquisition from an associate pair. 238. Aus Co will need to consider the correct amount of debt deductions disallowed under the arrangement due to the operation of the DDCR until the debt to B Co is repaid and the swap terminated (including any deductible costs arising on termination of the swap). | Example 24: – low risk: repaying debt interest Diagram 23: Low risk: repaying debt interest 239. Assume the facts in Example 7 of this Guideline. 240. Aus Co determines that the DDCR will apply to disallow debt deductions in relation to the $100 million debt interest used to fund the dividends paid to an associate pair. 241. Aus Co repays its $100 million debt interest held by B Sub Co by issuing additional equity interests to B Co. 242. This is a low-risk restructure. 243. Aus Co will need to consider the correct amount of debt deductions disallowed under the $100 million debt interest due to the operation of the DDCR until it is repaid. | Example 25: – low risk: cash pooling 244. Assume the facts in Example 6 of this Guideline. 245. Aus Co determines that the DDCR will apply in the 2024–25 income year to disallow debt deductions for the cash pooling arrangement in relation to acquiring CGT assets from associate pairs or funding dividends, royalties and returns of capital to associate pairs. 246. During the 2024–25 income year, Aus Co repays its cash pool to a nil balance. 247. Subsequently, Aus Co and B Co reconsider funding of Aus Co's transactions with associate pairs and: 248. This is a low-risk restructure. 249. Aus Co will need to consider the correct amount of debt deductions disallowed for Foreign Co's global cash pooling arrangement due to the operation of the DDCR until Aus Co repays its negative cash pool balance. High-risk restructures 250. We expect the highest-risk restructures would involve arrangements where debt deductions are expected to be disallowed under subsection 820-423A(1) and a similar level of debt deductions are contended to be available under restructured or recharacterised arrangements. 251. For example, higher-risk arrangements may include round robin financing, contended change in 'use' of debt under other related party arrangements or a contrived arrangement to choose and use the TPDT under subsection 820-46(4) with the purported effect of preventing the DDCR from applying. 252. The following examples are restructures that are high risk and should be expected to attract intensive compliance action. | Example 26: – high risk: contending to change the character of costs incurred Diagram 24: High risk: contending to change the character of costs incurred 253. Assume the facts in Example 7 of this Guideline. 254. Aus Co determines that the DDCR would apply to disallow debt deductions in relation to the $100 million debt interest issued by Aus Co to B Sub Co used to fund dividends paid to B Co (an associate pair). 255. B Sub Co enters into a factoring arrangement with C Co, another subsidiary of B Co, which is also a tax resident of Country B. C Co acquires the $100 million debt interest from B Sub Co at its face value less an agreed factoring fee of 5% of face value. 256. Aus Co contends that the debt deductions for the debt factored by B Sub Co to C Co does not relate to the underlying funding of the dividends paid by A Co to B Co. 257. This restructure presents risks that the contended change in use does not reflect the underlying arrangement. 258. This is a high-risk restructure. | Example 27: – high risk: replacing related party debt with third-party debt Diagram 25: High risk: replacing related party debt with third-party debt 259. Assume the facts in Example 11 of this Guideline. 260. Aus Co determines that the DDCR will apply to its debt deductions in relation to its purchase of tangible assets from B Co (that is, Aus Co's debt deductions relating to its $100 million debt issued to B Co and its swap with C Co). 261. Aus Co repays its $100 million debt, funded by the proceeds of issuing a $100 million debt interest to Bank Co. 262. Around the same time, B Co repays $100 million worth of debt owed to Bank Co. 263. This restructure presents risks associated with the effective reallocation of group third-party debt to Australia, in response to the operation of the DDCR in relation to Aus Co's debt interest issued to its associate B Co. The refinancing of related party debt with third-party debt has the effect of 'dumping' debt into Australia going forward, with an associated reduction in the third-party debt issued by B Co's offshore group. 264. This is a high-risk restructure. This restructure would also be high risk if the IRS arrangement was not present. | Example 28: – high risk: using related party debt to fund offshore operations Diagram 26: High risk: using related party debt to fund offshore operations 265. Aus Co is an Australian tax resident and general class investor. Aus Co has significant offshore operations in Country B, through its subsidiary, B Co. B Co is very profitable. 266. Aus Co also operates in Country C through its subsidiary, C Co. C Co is a loss-making company. C Co has funded the acquisition of trading stock and intellectual property (IP) from associate pairs by issuing equity interests to Aus Co. Aus Co borrows from B Co to acquire those equity interests. 267. Subsequent to the enactment of the DDCR, Aus Co issues additional debt interests to B Co to fund the acquisition of further equity interests in C Co. 268. Aus Co contends that, rather than acquiring C Co equity interests, it uses the proceeds of issuing debt interests to B Co to pay down an existing third-party debt facility from Bank Co. Aus Co immediately redraws an identical amount from the debt facility to acquire equity interests in C Co and C Co's subsequent acquisition of assets from associate pairs. 269. Aus Co will need to consider the application of the DDCR to the related party loan from B Co because it has funded the equity contribution into C Co and C Co's subsequent acquisition of related party assets. 270. This is a high-risk restructure. This restructure presents risks that the contended use of funds does not reflect the underlying arrangement. | Example 29: – removing recourse to foreign assets from obligor group Diagram 27: Removing recourse to foreign assets from obligor group 280. Aus Co is a general class investor. 281. Aus Co has Australian assets and a wholly owned foreign subsidiary entity (CFC). Consistent with Example 16 of TR 2025/2, the shares in CFC are not Australian assets. 282. CFC carries on business in the foreign jurisdiction and owns foreign assets. 283. Aus Co issues a debt interest held by Money Bank, a financial institution that is not an associate entity of Aus Co. 284. Under the terms of the arrangement, Money Bank has recourse for payment of the debt to all of the assets of Aus Co, including the shares in CFC. 285. Aus Co restructures its arrangement to satisfy paragraph 820-427A(3)(c) of the third party debt conditions, by amending the terms of all arrangements so that Money Bank does not have recourse to the shares in CFC or any of its assets. | Example 30: – removing recourse to foreign assets from obligor group Diagram 28: Removing recourse to foreign assets from obligor group 286. Assume the same facts as Example 29 of this Guideline, except: 287. Aus Co restructures its arrangement to satisfy paragraph 820-427A(3)(c) of the third party debt conditions, by transferring its shares in CFC to an associate entity that is not in the obligor group in relation to Aus Co's debt interest. | Example 31: – amending the terms of a credit support agreement to satisfy subparagraph 820-427A(5)(a)(iii) Diagram 29: Amending the terms of a credit support agreement to satisfy subparagraph 820-427A(5)(a)(iii) 288. Head Trust and Sub Trust are Australian entities and general class investors. Sub Trust is wholly owned by Head Trust, which is owned by Unitholder 1 and Unitholder 2, both Australian entities. 289. Sub Trust is in the business of property investment and development in Australia. Its assets include Australian real property. 290. Unitholder 2, Head Trust and Sub Trust enter into a cost overrun support deed in relation to one of Sub Trust's Australian real property developments. Under the terms of the deed, Unitholder 2 agrees to provide additional equity capital to Sub Trust on a predetermined basis if called upon by Sub Trust or Head Trust. The equity, if provided, will be used as overall project financing and is not limited to the development stage of the project. 291. Subparagraph 820-427A(5)(a)(iii) provides an exception from subsection 820-427A(5) for credit support rights that relate wholly to the creation or development of a CGT asset that is, or is reasonably expected to be, land situated in Australia. 292. To streamline their compliance and analysis in assessing whether the development concession in subparagraph 820-427A(5)(a)(iii) applies, Sub Trust amends the terms of the cost overrun support deed to be limited to the development phase. The rights being granted are now for the phase of the project corresponding to the development of a CGT asset, with no such rights arising for the operational phase. Paragraphs 820-427A(3)(c) and 820-427A(4)(b) – minor or insignificant assets 293. Paragraph 820-427A(3)(c) disregards recourse to minor or insignificant assets when limiting the recourse of the holder of a debt interest in satisfying the third party debt conditions. Consistent with TR 2025/2, an asset is minor or insignificant if it is of a minimal or nominal value. 294. Consistent with Example 13 in TR 2025/2, under paragraph 820-427A(4)(b), recourse to Australian assets that are membership interests in the entity is not permitted if the entity has a legal or equitable interest, whether directly or directly, in an asset that is not an Australian asset. 295. This compliance approach is intended to facilitate taxpayers determining whether to restructure their affairs to comply with the TPDT as it comes into operation. 296. It is limited to income years starting on or after 1 July 2023 and ending on or before 1 January 2027. At the end of the compliance period, we will consider if this approach needs to be extended. 297. It applies only for the purpose of considering whether paragraph 820-427A(3)(c) or 820-427A(4)(b) is satisfied in the period prior to the restructure (as set out in Examples 32 and 33 of this Guideline). 298. Where taxpayers satisfy the following criteria prior to the restructure, we will only apply compliance resources to verify that this compliance approach applies: | Example 32: – compliance approach for small asset holding Diagram 30: Compliance approach for small asset holding 299. Aus Hold Co wholly owns 2 Australian subsidiaries, Aus Sub Co 1 and Aus Sub Co 2, and one foreign-resident subsidiary, CFC. All entities are general class investors. 300. Aus Hold Co borrows $1 billion from Bank, not an associate entity. Under the terms of the loan, Bank has recourse to all of assets of the Aus Hold Co group, including foreign assets held by CFC. 301. Aus Hold Co's shares in CFC are not Australian assets. The market value of CFC is approximately 1% of all of assets of the entities to which the lender has recourse. 302. In order to comply with the TPDT after the compliance period ends, Aus Hold Co amends the terms of the loan so that Bank does not have recourse to the CFC. | Example 33: – compliance approach for small asset holding and subsection 820-427A(4) Diagram 31: Compliance approach for small asset holding and subsection 820-427A(4) 303. Head Trust, Finance Trust and Asset Trust are Australian entities and general class investors. Head Trust holds all the units in Finance Trust. Finance Trust holds all the units in Asset Trust. Asset Trust holds Australian real property and a minor or insignificant non-Australian asset. 304. Finance Trust borrows $50 million from an unrelated entity, Bank. Under the terms of the borrowing, Bank has recourse for payment of the debt to all of the: 305. The minor or insignificant asst held by Asset Trust is less than 1% of all of the assets to which the holder of the debt interest has recourse for the payment of the debt. 306. In order to comply with the TPDT after the compliance period ends, Finance Trust and Bank agree to amend the terms of the loan so that Bank does not have recourse to any non-Australian assets (including those that are minor or insignificant), or to the membership interests in Finance Trust. Alternatively, Asset Trust could dispose of its non-Australian asset. Paragraph 820-427A(3)(d) – commercial activities in connection with Australia 307. Paragraph 820-427A(3)(d) requires that the borrowing entity uses all, or substantially all, of the proceeds of issuing the debt interest to fund its commercial activities in connection with Australia. Consistent with TR 2025/2, this requirement is not satisfied if the proceeds are used to fund other activities, such as distributions including dividends or returns of capital, or the indirect purchase of foreign assets through an Australian entity. 308. This compliance approach is intended to facilitate taxpayers determining whether to restructure their affairs to comply with the TPDT as it comes into operation. 309. It is limited to income years starting on or after 1 July 2023 (the date the Act was introduced into parliament) and ending on or before 1 January 2027. At the end of the compliance period, we will consider if this approach needs to be extended. 310. It applies only for the purpose of considering whether paragraph 820-427A(3)(d) is satisfied in the period prior to the restructure (being the changes to the taxpayer's affairs set out in Example 34 of this Guideline). 311. Where taxpayers satisfy the following criteria, we will only apply compliance resources to verify that this compliance approach applies: | Example 34: – trust distribution to investors Diagram 32: Trust distribution to investors 312. Project Trust is an Australian entity and general class investor. Project Trust has a debt facility with unrelated third-party lenders which it uses predominantly to fund the acquisition and development of Australian real property (including infrastructure). 313. Prior to and during the compliance period, Project Trust uses the debt facility for the payment of annual trust distributions to its investors. Those annual trust distributions do not exceed 10% of the available balance of the debt facility at the time they are made. Prior to and during the compliance period, Project Trust makes repayments towards its debt facility out of the revenues from its Australian business that equal or exceed the total of its annual trust distributions. 314. Before the compliance period ends, Project Trust amends its governance documents and procedures and no longer pays distributions using the debt facility. 315. In these circumstances, we will not devote compliance resources to determine whether paragraph 820-427A(3)(d) is satisfied with respect to the use of the proceeds of the debt facility to fund the annual distributions. Compliance with paragraph 820-427C(1)(d) 316. The conduit financing conditions modify the third party debt conditions to accommodate certain arrangements where a debt interest that otherwise would not satisfy the third party debt conditions is on-lent to its associate entities. Under paragraph 820-427C(1)(d), the terms of the relevant debt interest (being the on-lent amount) between the conduit financer and its associate entity to the extent that those terms relate to costs incurred by the borrower in relation to the relevant debt interest, must be the same as the corresponding terms of the ultimate debt interest. 317. This compliance approach is intended to facilitate taxpayers determining whether to restructure their affairs to comply with the TPDT as it comes into operation. 318. It is limited to restructures undertaken between 22 June 2023 (the date the Act was introduced into parliament) and 1 January 2027, and applies only for the purpose of considering whether paragraph 820-427C(1)(d) is satisfied in the period prior to the restructure. 319. Where restructures are consistent with examples in this section and the requirements of paragraph 274 of this Guideline are also met, we will only allocate compliance resources to verify that this compliance approach applies. | Example 35: – removing margin on project finance – back-to-back Diagram 33: Removing margin on project finance – back-to-back 320. Aus Head Co has 2 Australian subsidiaries, Aus Co and Fin Co. These entities are not consolidated for tax purposes. 321. Fin Co borrows funds from Invest Bank, not an associate entity, entering into a loan agreement on arm's length terms (external loan) to use the proceeds wholly to fund a project that is the creation and development of a CGT asset to be undertaken by Aus Co. 322. Fin Co on-lends the entire amount of the external loan funds to Aus Co (intercompany loan) that is used in the project. 323. The intercompany loan is on the same terms as the external loan except that Fin Co charges a higher rate interest (that is, it includes a 'mark-up'). 324. Fin Co and Aus Co amend the terms of the intercompany loan to remove the mark-up so that the interest rates on the intercompany and external loan are the same. | Example 36: – creating separate intercompany loans Diagram 34: Creating separate intercompany loans 325. Assume the same facts as Example 35 of this Guideline, except that Fin Co borrows from 3 separate lenders to use the proceeds wholly to fund a project that is the creation and development of a CGT asset to be undertaken by Aus Co. Fin Co on-lends the entire amount of the external loans to Aus Co that is used in the project under a single intercompany loan. 326. Fin Co and Aus Co amend the intercompany loan arrangement to create 3 separate intercompany loans, with no mark up. Each intercompany loan has the same terms as the corresponding Ultimate loan. 327. Overall, the debt deductions of Aus Co under the intercompany loans are equal to the debt deductions of Fin Co under the Ultimate loans. | Example 37: – back-to-back lending facility Diagram 35: Back-to-back lending facility 328. Head Trust is an Australian trust with a sub-trust, Asset trust, and resident subsidiary, Fin Co. 329. Fin Co borrows from Bank to use the proceeds wholly to fund a project that is the creation and development of a CGT asset to be undertaken by Asset Trust and on-lends to Asset Trust on the same terms. 330. Separately, Fin Co enters an interest rate swap with Swap Co to hedge the interest rate risk in respect of the loan (external swap). Fin Co and Asset Trust also enter into an interest rate swap to hedge the on-loan on the same terms (back-to-back internal swap). 331. As a result of the introduction of the conduit financing conditions, Fin Co and Asset Trust amend the terms of the on-lent debt so that Asset Trust's interest expenditure is equal to what its payments would have been under the on-lent debt and back-to-back internal swap. At the same time, the back-to-back internal swap is closed out. 332. We will not apply compliance resources for the purposes of determining whether the costs under the on-lent debt and back-to-back internal swap are included in the third party earnings limit, other than to verify: | Example 38: – low risk: restructuring to account for differing individual tax EBITDA of entities within a group Diagram 36: Low risk: restructuring to account for differing individual tax EBITDA 337. Aus Co, an Australian tax resident company, has 2 wholly owned subsidiaries, Sub 1 Co and Sub 2 Co, who are also Australian tax resident companies. The company has not entered into new debt financing in the current income year. 338. Under the thin capitalisation rules, Sub 2 Co's net debt deductions exceed its fixed ratio earnings limit. 339. Aus Co makes a choice to become the head company of an Australian tax consolidated group, the Aus Co Consolidated Group, with Sub 1 Co and Sub 2 Co identified as 2 subsidiary members of the consolidated group. 340. Due to the single entity rule, the Aus Co Consolidated Group's net debt deductions are below its fixed ratio earnings limit, and no debt deductions incurred with respect to any of the entities are disallowed. 341. This scenario is a low-risk restructure. 342. While consolidating has reduced the group's disallowed debt deductions, the group availed itself of a choice open to it and did not otherwise restructure its affairs to produce this result. | Example 39: – low risk: amending conduit financing interest rates Diagram 37: Low risk: amending conduit financing interest rates 343. Aus Head Co, an Australian tax resident company, has 3 Australian subsidiaries, Dev Co, Ops Co and Fin Co. 344. Dev Co and Ops Co each have separate long-term development projects under way that are financed through intercompany loans with the Group's treasury entity, Fin Co. 345. These intercompany loans are funded via external loans between Fin Co and third-party lenders. There are multiple external loans, and they comprise of a variety of interest rates and maturity dates. 346. While the entire quantum of the external loans is on-lent through the intercompany loans to Dev Co and Ops Co, none of the intercompany loans are entered into on the same terms as any of the external loan agreements. For example, none of the loans match in terms of tenor or interest rate. 347. Fin Co, Dev Co and Ops Co agree to formally amend the intercompany loan agreements so that the terms of the tenor and interest rate match that of each of the relevant external loan agreements. 348. This is a low-risk restructure. | Example 40: – high risk: introducing debt to maximise debt deductions under the fixed ratio test Diagram 38: High risk: introducing debt to maximise debt deductions under the fixed ratio test 349. Global Inc. is a foreign tax resident entity and the ultimate parent entity of the International Group. 350. Aus Co, a wholly owned subsidiary company of Global Inc., is the only Australian tax resident entity of the International Group. Aus Co was an inward investment vehicle (general) for the purposes of the former thin capitalisation rules, and is a general class investor for the purposes of the current thin capitalisation rules. 351. Finance Corp, a wholly owned foreign incorporated subsidiary entity of Global Inc., performs all treasury functions for the International Group. 352. Finance Corp provides Aus Co access to its common global group facility. Access is subject to the facility's terms of agreement, which state that interest accrues daily and is payable to Finance Corp for any outstanding drawdown of facility funds by an International Group entity, until repayment of such funds. 353. Since accessing the facility, Aus Co, on average, incurs $3 million annually in net debt deductions. Under the former thin capitalisation rules, these amounts did not result in Aus Co having an excess debt amount. 354. Under the current thin capitalisation rules, Aus Co has a tax EBITDA of $30 million and annual net debt deductions of $3 million. No debt deductions are denied under the fixed ratio test as Aus Co's fixed ratio earnings limit is $9 million (30% × $30 million). 355. Aus Co restructures its capital in response to the current thin capitalisation rules. It undertakes a round robin financing with the result that Aus Co draws down a further $100 million from Finance Corp through the common global group facility. 356. The restructure does not result in any change to Aus Co's business operations, nor does it result in a material change in the International Group's global leverage. Aus Co's net debt deductions are still less than its fixed ratio earnings limit despite the additional interest expense incurred with respect to the further drawdowns. 357. This is a high-risk restructure. 358. The additional debt appears to have been introduced for the purpose of maximising debt deduction 'capacity' under the FRT and has no apparent commercial purpose. Aus Co may also need to consider the DDCR. | Example 41: – high risk: amending conduit financing interest rates Diagram 39: High risk: amending conduit financing interest rates 359. Assume the same facts as Example 39 of this Guideline. 360. Fin Co, Dev Co and Ops Co agree to formally amend the intercompany loan agreements. However, their terms are all changed to that of the highest interest rate of all the external loans. 361. This is a high-risk restructure. 362. The decision to adopt the highest interest rate indicates it was done to maximise debt deductions. | Example 41: – high risk: amending conduit financing interest rates Diagram 39: High risk: amending conduit financing interest rates 359. Assume the same facts as Example 39 of this Guideline. 360. Fin Co, Dev Co and Ops Co agree to formally amend the intercompany loan agreements. However, their terms are all changed to that of the highest interest rate of all the external loans. 361. This is a high-risk restructure. 362. The decision to adopt the highest interest rate indicates it was done to maximise debt deductions.",,,/law/view/document?LocID=%22COG%2FPCG20252EC1%2FNAT%2FATO%2F00001%22&PiT=99991231235958,False,False,https://www.ato.gov.au/law/view/document?docid=COG/PCG20252/NAT/ATO/00001
PCG 2020/7,Final PCG,ATO compliance approach to the arm's length debt test,,,1 January 2019,,,TR 2003/1 | TR 2020/4,,"1. This Guideline provides guidance to entities in applying the arm's length debt test in Division 820 of the Income Tax Assessment Act 1997 [1] and should be read in conjunction with Taxation Ruling TR 2020/4 Income tax: thin capitalisation - the arm's length debt test. 2. This Guideline also provides a risk assessment framework that outlines our compliance approach to an application of the arm's length debt test. 3. The arm's length debt test is one of the tests available to establish an entity's maximum allowable debt for thin capitalisation purposes. The test focuses on identifying an amount of debt a notional stand-alone Australian business would reasonably be expected to borrow, and what independent commercial lenders would reasonably be expected to lend on arm's length terms and conditions. An entity's debt deductions are reduced to the extent that its adjusted average debt exceeds its maximum allowable debt. 4. The arm's length debt test may be used to support debt deductions for commercially-justifiable levels of debt. In practice, the test is typically only used when an entity is unable to satisfy the safe harbour and worldwide gearing tests (as the compliance burden of applying these tests is generally lower). It is not common for independent Australian businesses to gear in excess of 60% of their net assets and historically, relatively few entities have applied the arm's length debt test. We consider the choice to apply the arm's length debt test carries with it the necessity to undertake more rigorous analysis than the safe harbour and worldwide gearing tests. 5. While the arm's length debt test in some respects draws upon arm's length concepts that are broadly common to transfer pricing, the test itself is not a transfer pricing analysis, nor does it necessarily proxy an outcome consistent with the arm's length conditions under Subdivision 815-B. Rather, it requires an overlay of factual assumptions that produce a hypothetical entity against which specific factors are to be assessed. 6. This Guideline is limited to providing guidance and a risk assessment framework relating to the application of the arm's length debt test contained in sections 820-105 and 820-215. It does not set out our approach to reviewing other taxation issues that might arise in relation to debt deductions, such as the: 7. This Guideline does not apply to entities considered to be authorised deposit-taking institutions (ADIs).",,,"Intro: Under the new thin capitalisation rules: ADIs, securitisation vehicles and certain special purpose entities are excluded from the debt deduction creation rules. Entities that are Australian plantation forestry entities are excluded from the new rules. For these entities, the previous rules will continue to apply. This Practical Compliance Guideline sets out a practical administration approach to assist taxpayers in complying with relevant tax laws. Provided you follow this Guideline in good faith, the Commissioner will administer the law in accordance with this approach.",,,,,False,False,https://www.ato.gov.au/law/view/document?docid=COG/PCG20207/NAT/ATO/00001
PCG 2017/2,Final PCG,Simplified transfer pricing record-keeping options,,,1 July 2018,,,TR 2011/1,,"1. Documenting your transfer pricing to meet all of the requirements of Subdivision 284-E of Schedule 1 to the Taxation Administration Act 1953 may impose an administrative burden disproportionate to your risk of not complying with the transfer pricing rules. Simplified transfer pricing record-keeping options have been developed to minimise the record-keeping for eligible taxpayers. 2. By reducing the record-keeping requirements, we have reduced the cost of compliance and compliance burden for eligible taxpayers. Offering an administrative safe harbour also allows us to better manage risks associated with international related-party dealings by directing resources to transactions and activities that we deem to be higher risk. This administrative safe harbour is an important part of administering the law in relation to international related-party dealings and transfer pricing. 3. The options contained in this Guideline reflect the types of transactions or activities we believe are low risk in the context of international related-party dealings. This Guideline specifies the criteria for you to self-assess your eligibility to use one or more of the 7 simplification options. Options available 4. There are 7 simplified transfer pricing record-keeping options available:",,,,"Example 1: – meeting the small taxpayer eligibility criteria 18. Australco is a subsidiary of HeadCo, a United Kingdom (UK) company. For the 2018–19 financial year, Australco has a turnover of $17 million and total expenses of $15.9 million. It does not undergo any restructures and has not made sustained losses. Australco is the only member of the Australian economic group. Australco pays HeadCo $2 million for administrative support and pays $100,000 in royalties. 19. Australco meets the eligibility criteria for the small taxpayers' simplified record-keeping option and can elect to apply it to the administrative support services received from HeadCo. However, it cannot apply the small taxpayers' option to its royalty transactions. Australco is still required to have an appropriate level of transfer pricing documentation for its royalty transactions. | Example 2: – not meeting the small taxpayer eligibility criteria 20. Australco is a distributor and is a subsidiary of HeadCo, a UK company. For the 2018–19 financial year, Australco has a turnover of $17 million and total expenses of $15.9 million. It does not undergo any restructures and has not made sustained losses. Australco is the only member of the Australian economic group. Australco pays HeadCo $3 million for marketing and media strategies and also pays $1 million in royalties to Manx, another subsidiary of HeadCo, registered in the Isle of Man. 21. As Australco is a distributor and has international related-party dealings involving royalties, licence fees or R&D arrangements greater than $500,000, Australco does not meet all the criteria to be eligible to apply the option. Therefore, Australco cannot use the small taxpayers' simplified record-keeping option. Distributors Eligibility criteria 22. You are a distributor , the annual turnover of your Australian economic group is under $50 million and you: Exclusions 23. This option does not reduce the documentation requirements for the following transactions: | Example 3: – meeting the distributor eligibility criteria 24. Gustal Co is a wholesale business and an Australian subsidiary of MunichCo, a German company. For the 2018–19 financial year, Gustal Co has a turnover of $47 million and total expenses of $44.4 million. Its weighted average profit-before-tax ratio over the last 3 years was 6%. Gustal Co purchases $38 million of stock from MunichCo and has no other related-party dealings. Gustal Co does not undergo any restructures and does not make sustained losses. It is the only member of the Australian economic group. 25. Gustal Co meets all of the eligibility criteria for the distributors' simplified record-keeping option and can elect to apply it to its purchases from MunichCo. | Example 4: – not meeting the distributor eligibility criteria 26. Keltali Co is an Australian subsidiary of Britai, a UK company. For the 2018–19 financial year, Keltali Co has a turnover of $49 million and total expenses of $47.9 million. Its weighted average profit-before-tax ratio over the last 3 years is 2.6%. It pays $1 million in royalties to Jerri, another subsidiary of Britai, registered in Jersey. Keltali Co does not undergo any restructures and does not make sustained losses. It is the only member of the Australian economic group. 27. Keltali Co does not meet the criterion that international related-party dealings involving royalties, licence fees or R&D arrangements must not be greater than $500,000, or the profit-before-tax ratio criterion. All criteria must be met to be eligible to apply the option. Therefore, Keltali Co cannot use the distributors' simplified record-keeping option. Low value adding intra-group services Eligibility criteria 28. You have international related-party low value adding intra-group service dealings of either: and you have: Exclusions 29. This option does not reduce the documentation requirements for international related-party dealings that are not low value adding intra-group services . | Example 5: – meeting the de minimis rule and the 25% of pre-intra-group services charges profit rule in the low value adding intra-group services option 30. Victasubb is a subsidiary of Nevadaplus, an American company. In the 2018–19 financial year, Victasubb pays Nevadaplus $850,000 for management and administration services and $20 million for stock purchases. Victasubb is charged a 4.7% mark up for the management and administration services it receives. It has a turnover of $53 million and total expenses of $42 million. Victasubb has no other related-party dealings, does not undergo any restructures and does not make sustained losses. Victasubb is the only member of the Australian economic group. 31. Victasubb meets the eligibility criteria for the low value adding intra-group services simplified record-keeping option (because total services satisfy the de minimis rule and the other criteria (including only having low value adding services expenses as 7.17% of its pre-intra-group services charges profit)) and can elect to apply it to its management and administration services from Nevadaplus. | Example 6: – meeting the 15% of dealings rule and 25% of pre-intra-group services charges profit rule in the low value adding intra-group services option 32. Victasubb is a subsidiary of Nevadaplus, an American company. In the 2018–19 financial year, Victasubb pays Nevadaplus: 33. Victasubb is charged a 4.7% mark up for the services from Nevadaplus. 34. Victasubb has a turnover of $53 million and total expenses of $42 million. Victasubb has no other related-party dealings and does not undertake any restructures in 2018–19. It does not make sustained losses and is the only member of the Australian economic group. 35. While Victasubb does not satisfy the de minimis rule (because total low value adding services are $2.17 million), the amount paid for services is less than 15% of its total expenses (being 5.17%). Victasubb's services expense is also less than 25% of its pre-intra-group services charges profit (being 16.48%). As all the other eligibility criteria for the low value adding intra-group services simplified record-keeping option have been met, Victasubb can elect to apply the option to its services from Nevadaplus. | Example 7: – not meeting either the de minimis rule or the 15% of dealings rules in the low value adding intra-group services option 36. SubCo is the only Australian subsidiary of Gottlund, a Swedish company. In the 2018–19 financial year, SubCo pays Gottlund: 37. SubCo's payment includes a 4.2% mark up on the services from Gottlund. SubCo has a turnover of $65 million and total expenses of $50 million. SubCo has no other related-party dealings and there are no restructures for the year. It does not make sustained losses and is the only member of the Australian economic group. 38. SubCo does not satisfy the de minimis rule in 2018–19, as the value of low value adding intra-group services received exceed $2 million (they are $9 million) and 15% of total expenses (they are 18%). All criteria must be met to be eligible to apply the option. Therefore, it cannot elect to apply the low value adding intra-group services simplified record-keeping option. | Example 8: – not meeting the 25% of pre-intra-group services charges profit rule in the low value adding intra-group services option 39. Richoil is the only Australian subsidiary of MapleCoy, a Canadian company. In the 2018–19 financial year, Richoil pays MapleCoy: 40. Richoil is charged a 4.3% mark-up for its services from MapleCoy. 41. Richoil has a turnover of $100 million and total expenses of $80 million. Richoil has no other related-party dealings and does not undergo any restructures in 2018–19. It does not make sustained losses and is the only member of the Australian economic group. 42. Richoil does not satisfy the de minimis rule, as its low value adding intra-group services received exceed $2 million (they are $8 million). The services are 10% of total expenses so they meet the second criteria (less than 15% of total expenses) and may still be able to apply the low value adding intra-group services simplified record-keeping option. 43. However, Richoil's low value adding intra-group services expenses ($8 million) represents 26.94% of its pre-intra-group services charges profit ($29.7 million), therefore exceeding the 25% threshold. All criteria need to be met to be eligible to apply the option. Therefore, Richoil cannot apply the low value adding intra-group services simplified record-keeping option. Low-level inbound loans Eligibility criteria 44. You have a combined cross-border loan balance of $50 million or less for your Australian economic group at all times throughout the financial year, and: and you have: Exclusions 45. This option only applies to eligible inbound loans and does not reduce the documentation requirements for other international related-party dealings including: | Example 9: – meeting the low-level inbound loans eligibility criteria 46. Victasubb is an Australian subsidiary of Nevadaplus, an American company. In the 2025–26 income year, Victasubb borrows A$10 million from Nevadaplus at an interest rate of 1.5% or A$150,000 per year. Victasubb has no other related-party dealings and does not undergo any restructures. It has not made sustained losses and is the only member of the Australian economic group. 47. The 1.5% interest charge does not exceed the maximum interest rate of 4.90% required for the 2025–26 income year to be eligible to use the low-level inbound loans simplified record-keeping option. 48. Victasubb meets all of the eligibility criteria for this simplified record-keeping option and can elect to apply it to its interest-bearing loan and interest paid to Nevadaplus. | Example 10: – not meeting the low-level inbound loans eligibility criteria 49. BettillaCo is an Australian subsidiary of HeadCo, a UK company. In the 2025–26 income year, BettillaCo borrows A$11 million at an interest rate of 8.5% or A$935,000 per year. It also makes an interest-free loan of A$40 million to Choc, a Swiss entity. BettillaCo has a turnover of $85 million and total expenses of $82.6 million. Other than stock purchases of $38 million from HeadCo, BettillaCo has no other related-party dealings. BettillaCo has not undergone any restructures, has not made sustained losses and is the only member of the Australian economic group. 50. BettillaCo neither meets the combined cross-border loan balance nor the interest rate criterion. All criteria need to be met to be eligible to apply the option. Therefore, BettillaCo cannot use the low-level inbound loans simplified record-keeping option. | Example 11: – not meeting the specified interest rate criterion for the low-level inbound loans option 51. Victasubb is an Australian subsidiary of Nevadaplus, an American company. In the 2025–26 income year, Victasubb borrows A$10 million at an annual interest rate of 7.1% or an interest payment of A$710,000. Victasubb has a turnover of $17 million, total expenses of $16 million and no other related-party dealings. Victasubb has not undergone any restructures nor made sustained losses and is the only member of the Australian economic group. 52. Given the interest rate paid in 2025–26 is higher than 4.90%, Victasubb does not meet the specified interest rate criterion. All criteria need to be met to be eligible to apply the option. Therefore, Victasubb cannot apply the low-level inbound loans simplified record-keeping option. Materiality Eligibility criteria 53. Your total international related-party dealings represent less than or equal to 2.5% of total turnover for your Australian economic group and: Exclusions 54. This option does not reduce the documentation requirements for the following transactions: | Example 12: – meeting the materiality eligibility criteria 55. Darioco is a subsidiary of Cornishire, a UK company. Darioco is the only member of the Australian economic group. For the 2018–19 financial year, Darioco has a turnover of $89 million. The only international related-party dealings are $350,000 Cornishire pays Darioco for travel expenses and $1.8 million for marketing support Darioco pays Cornishire. Darioco's total international related-party dealings are $2.15 million or 2.42% of its total turnover. 56. Darioco meets the eligibility criteria for the materiality simplified record-keeping option and can elect to apply it to the dealings with Cornishire. | Example 13: – not meeting the materiality eligibility criteria 57. Darioco is a subsidiary of Cornishire, a UK company. Darioco is the only member of the Australian economic group. For the 2018–19 financial year, Darioco has a turnover of $110 million. Cornishire pays $250,000 to Darioco for travel expenses and Darioco pays Cornishire $3 million for marketing support and $500,000 in royalties. 58. Darioco neither meets the 2.5% threshold nor the Australian economic group total turnover threshold criteria. All criteria need to be met to be eligible to apply the option. Therefore, Darioco cannot use the materiality simplified record-keeping option. Technical services Eligibility criteria 59. Your income from and expenditure on technical services must not be more than 50% of the total international related-party dealings of your Australian economic group and you have: Exclusions 60. This option does not reduce the documentation requirements for international related-party dealings that are not technical services dealings. | Example 14: – meeting the technical services eligibility criteria 61. Atkins is a subsidiary of Grande Inc, an American company. In the 2018–19 financial year, Atkins pays Grande Inc $1.7 million for technical services and $20 million for stock purchases. Atkins is charged a 7.4% mark-up for the technical services it receives. Atkins has no other related-party dealings and does not undergo any restructures, nor does it have sustained losses. It is the only member of the Australian economic group. 62. Atkins meets all of the eligibility criteria for the technical services simplified record-keeping option and can elect to apply it to its technical services from Grande Inc. | Example 15: – not meeting the technical services eligibility criteria 63. Condole is an Australian subsidiary of Globalbrit, a UK company, and is the only member of the Australian economic group. For the 2018–19 financial year, Condole sells stock to Globalbrit of $32 million and provides technical services of $2.6 million (with a 9% mark up on cost). It has no other related-party dealings, does not undergo any restructures nor makes sustained losses. 64. Condole does not meet the 10% mark-up on costs criterion for technical services provided. All criteria need to be met to be eligible to apply the option. Therefore, Condole cannot use the technical services simplified record-keeping option. Low-level outbound loans Eligibility criteria 65. You have a combined cross-border loan balance of $50 million or less for your Australian economic group at all times throughout the financial year and: and you have: Exclusions 66. This option only applies to eligible outbound loans and does not reduce the documentation requirements for other international related-party dealings, including: | Example 16: – meeting the low-level outbound loans eligibility criteria 67. GrangeCo is an Australian subsidiary of MauiCo, an American company. In the 2025–26 income year, GrangeCo lends MauiCo A$10 million with an interest rate of 6.0% or A$600,000 per year. GrangeCo has no other related-party dealings, does not undergo any restructures and does not make sustained losses. GrangeCo is the only member of the Australian economic group. 68. The 6.0% interest charge exceeds the minimum interest rate of 4.90% required for the 2025–26 income year to be eligible to use the low-level outbound loans simplified record-keeping option. 69. GrangeCo meets all of the eligibility criteria for the low-level outbound loans simplified record-keeping option and can elect to apply it to its interest-bearing loan to MauiCo. | Example 17: – not meeting the low-level outbound loans eligibility criteria 70. AustralCo is an Australian subsidiary of HeadCo, a UK company. In the 2025–26 income year, AustralCo lends HeadCo A$11 million with an interest rate of 8.5% or A$935,000 per year. It also makes an interest-free loan of A$40 million to Choc, a Swiss entity. AustralCo has no other related-party dealings and does not undergo any restructures. AustralCo does not make sustained losses and is the only member of the Australian economic group. 71. The 8.5% interest rate charged on the loan to HeadCo exceeds the minimum interest rate of 4.90% to be eligible to use the low-level outbound loans simplified record-keeping option. However, AustralCo does not meet the interest rate criterion on the loan to Choc or the combined cross-border loan balance criterion. All criteria need to be met to be eligible to apply the option. Therefore, AustralCo cannot use the low-level outbound loans simplified record-keeping option. | Example 18: – not meeting the specified interest rate criterion for the low-level outbound loans option 72. DustieCo is the Australian parent of ForCo, an American company. DustieCo lends ForCo A$10 million in the 2025–26 income year, with an interest rate of 1% or A$100,000 per year. DustieCo has no other related-party dealings and does not undergo any restructures. It does not make sustained losses and this is the only cross-border loan in DustieCo's Australian economic group. 73. The interest rate of 1% for this loan is less than the minimum interest rate of 4.90% required for the 2025–26 income year to be eligible to use the low-level outbound loans simplified record-keeping option. 74. DustieCo does not meet the specified interest rate criterion in the 2025–26 income year. All criteria need to be met to be eligible to apply the option. Therefore, DustieCo cannot apply the low-level outbound loans simplified record-keeping option. More information 75. For more information, refer to Simplifying transfer pricing record-keeping. Glossary of terms Australian economic group 76. For the purposes of the simplified record-keeping options for transfer pricing, an Australian economic group consists of an entity together with all the entities it is required by the Australian Accounting Standard AASB10 to include in its consolidated financial statements. 77. An entity can be a company, partnership, superannuation fund or trust. Combined cross-border loan balance 78. To determine your combined cross-border loan balance: Costs 79. The cost base used for the service options (low value adding intra-group and technical) should reflect all relevant costs (direct and indirect) associated with the services. 80. Pass through costs should not be included in the cost base. Pass through costs are those where the service provider merely acts as an agent facilitating the provision of the services as an intermediary but does not actually provide the services itself. Distributor 81. You are a distributor if your main business activity is recorded on your tax return using the Australian and New Zealand Standard Industrial Classification (ANZSIC) Wholesale Trade code. 82. ANZSIC, 2006 (Revision 1.0) Chapter 8 Division F – The Wholesale Trade Division covers units mainly engaged in the purchase and on-selling, the commission-based buying, and/or the commission-based selling of goods, without significant transformation, to businesses. Units are classified within the Wholesale Trade Division in the first instance if they buy finished goods and then on-sell them (including on a commission basis) to businesses. International related-party dealings 83. You have international related-party dealings if you have international commercial or financial dealings or relations between related parties – for example, an agreement with your foreign subsidiary. International related parties 84. An international related party includes any of the following: Loan 85. To be classified as a loan for the purposes of these options, the instrument must be a debt interest under Division 974 of the ITAA 1997. Low value adding intra-group services 86. Low value adding intra-group services are services between related parties that satisfy the definition outlined in paragraphs 7.43 to 7.63 of Section D of Chapter VII of the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations 2010 (OECD TP Guidelines) and other documents covered by section 815-135 of the ITAA 1997 [1] , including services that: 87. Examples of low value adding intra-group services include: Pre-intra-group services charges profit 88. Pre-intra-group services charges profit = total income − (total expenses − intra-group services expenses) 89. Total income and total expenses are as reported on your income tax return. 90. For the purposes of using these options, intra-group services expenses are all services expenses between related parties as reported in labels 8aC, 8bC, 8cC, 8dC, 8eC, 8fC, 8gC, 8hC, 8iC, 8jC and 8kC of your IDS. Profit-before-tax ratio 91. Profit-before-tax ratio = (total income − total expenses) ÷ total income. 92. Total income and total expenses are as reported on your income tax return. 93. For the purposes of using these options, the ratio is to be calculated as a weighted average of 3 consecutive years, including the year for which you are considering applying the option. Restructure 94. A restructure event for the purposes of these options, consistent with the definition in Taxation Ruling TR 2011/1 Income tax: application of the transfer pricing provisions to business restructuring by multinational enterprises , refers to arrangements in which the assets, functions or risks of a business are transferred between you and your international related parties or your branch operations. Such arrangements may include: Specified service related-party dealings 95. A specified service between related parties is any service that is not a low value adding intra-group service and: 96. These services [2] include: Sustained losses 97. Sustained losses occur where you have incurred losses for 3 consecutive years, including the year for which you are considering applying the option. 98. For the purposes of these options, a loss is made when you report a negative amount on your income tax return after subtracting the sum of the total expenses labels from the sum of the total income labels. Technical services 99. Technical services are advice, assistance or support provided by persons with relevant technical expertise for activities associated with engineering, architecture and industrial design. 100. Technical services exclude advice or assistance associated with: Total international related-party dealings 101. The calculation takes into account the following expense and revenue amounts (descriptions and labels based on the 2018 IDS), but does not include the balance of any loans recognised in your accounting records: 102. The calculation differs from that used in determining the IDS lodgment threshold of A$2 million as it does not include loan balances. For the technical services simplified record-keeping option, you also need to consider the relevant dealings for all entities within your Australian economic group. Turnover 103. For the purposes of these options, turnover is the total ordinary income you derive in the ordinary course of carrying on a business. It includes income sourced from sales, rent, dividends, interest, distributions and so on. For example, a company would use the amount reported at the total income label on its tax return. Feedback 104. If you have comments or feedback relating to this Guideline, please email TPsafeharbours@ato.gov.au",,,,False,False,https://www.ato.gov.au/law/view/document?docid=COG/PCG20172/NAT/ATO/00001
PCG 2020/1,Final PCG,Transfer pricing issues related to projects involving the use in Australian waters of non-resident owned mobile offshore drilling units - ATO compliance approach,,,19. This Guideline applies both before and after its issue.,,,PS LA 2006/8 | PS LA 2011/30 | PS LA 2012/4 | PS LA 2012/5 | PS LA 2014/4 | PS LA 2015/4 | PS LA 2016/2 | TR 2014/6,,"1. This Guideline sets out the ATO's compliance approach to transfer pricing issues for projects involving the use in Australian waters of non-resident owned mobile offshore drilling units (MODUs) such as drill-ships, drilling rigs (including but not limited to submersibles, semi-submersible and jack-up rigs), pipe-laying vessels and heavy-lift vessels. 2. While typically these assets are the subject of lease-in lease-out arrangements whereby the asset is sourced from the non-resident owner via a chain of related party bareboat leases, the scope of this Guideline may also include related party bareboat leasing direct from the non-resident (legal or in-substance) owner. This Guideline addresses transfer pricing issues related to the use of these assets in Australian waters by the Operator, be it one or more of: 3. References in this Guideline to 'the Operator' are intended to include the entity or entities who ensure the performance of the drilling (or similar) contract in satisfaction of the project specifications, coordinating both the MODU and highly skilled personnel (who operate the MODU). If you are an Operator performing these functions, this framework is intended to assist you assessing your compliance risk and understanding the ATO's compliance approach for these activities. 4. Unless otherwise specified, references in this Guideline to the Australian operations, arrangements, contract or project, and to Australian revenue, earnings, profits, losses and costs, are intended to refer to the entirety of the offshore drilling and associated activities of the Operator in Australia, and to amounts resulting from those activities. Accordingly, when considering for example, the profitability of the Australian operations, this may require the aggregation of the financial results of more than one entity to correctly apply the relevant risk indicator in this Guideline. 5. Some of the concepts presented in this Guideline may be applicable to activities other than offshore drilling but you should engage with us if you require further specific guidance in relation to activities other than offshore drilling and activities associated with offshore drilling. 6. This Guideline does not apply to: 7. Nor does the Guideline apply if the substance of the arrangements differs from their legal form. 8. You can use the framework set out in this Guideline to: 9. This Guideline provides a self-assessment risk framework that allows you to assess your transfer pricing outcomes using the ATO's risk framework. You will not need the ATO's input or sign off on your risk rating. However, you may be asked to tell us if you have self-assessed your rating and if so, what your risk rating is. At the same time it is acknowledged that you may require confirmation from the ATO regarding the applicability of the risk framework to your circumstances and activities. 10. The application of the risk framework allows us to differentiate risk, and prioritise our compliance resources. 11. It also allows us to tailor our engagement with you, having regard to the risk rating of your offshore drilling and associated activities. If your activities are assessed as being in the low risk zone you can expect that we will not generally apply compliance resources to test and assess the transfer pricing outcomes of those activities. If your activities fall outside the low risk zone, you can expect that we will monitor, test and/or verify the transfer pricing outcomes of your activities. The higher the risk rating of your offshore drilling and associated activities, the more likely they will be reviewed as a matter of priority. 12. This Guideline does not limit the operation of the law. [2] The information provided in this Guideline does not replace, alter or affect the ATO's interpretation of the law in any way. Nor does it relieve you of your legal obligation to comply with all relevant tax laws, one of which when pricing your arrangements is to use the transfer pricing methodology (or combination of methodologies) that is most appropriate and reliable for your circumstances. [3] Nor does this Guideline create any safe harbour or administrative concession. 13. It does not necessarily follow that having a low (that is, green) risk rating under this Guideline means that your transfer pricing outcomes are correct or that you have a reasonably arguable position. Equally, having a high (that is, red) risk rating under this Guideline does not necessarily mean that your offshore drilling and associated activities fail to comply with Australia's transfer pricing rules. Rather compliance with Australia's transfer pricing rules is a function of your particular facts and circumstances informed by arm's length conditions. 14. While there is no presumption that because your offshore drilling and associated activities are outside the low risk zone that your transfer pricing outcomes are incorrect, being outside the low risk zone does mean that we consider that you are at risk of obtaining a transfer pricing benefit and therefore we may conduct further compliance activity to test the outcomes of your activities. In these circumstances it would be advisable to have transfer pricing documentation and supporting evidence for the position you have taken commensurate to the risk profile of your activities. As a general proposition, the higher your risk rating the more detailed and comprehensive we would expect your transfer pricing documentation and supporting evidence to be. 15. You should not rely on the profit markers used in this Guideline to determine arm's length conditions. This Guideline does not replace an appropriate comparability analysis, selection of the most appropriate method or proper application of the transfer pricing obligations under the law. 16. The risk framework used in this Guideline is for risk assessment purposes only, and there is no requirement that you use any particular transfer pricing method in order to comply with Australia's transfer pricing rules. Those rules require that the arm's length conditions are identified using the transfer pricing method (or combination of methods) that is the most appropriate and reliable in the particular circumstances, having regard to all relevant factors. 17. If your offshore drilling and associated activities are subject to further review, you can expect that we will test the actual pricing outcomes of your arrangement and will apply the most appropriate and reliable transfer pricing method for your particular circumstances. The ATO is not limited by this risk framework when testing the actual conditions and pricing of your offshore drilling activities for compliance with Australia's transfer pricing rules. 18. We prefer to take a 'prevention before correction' compliance approach and we are committed to working with you to help you mitigate your transfer pricing risks. Therefore, if you are unsure about your transfer pricing treatment or you would like certainty in relation to your arrangements, you should contact us for assistance.",,,"Intro: This Practical Compliance Guideline sets out a practical administration approach to assist taxpayers in complying with relevant tax laws. Provided you follow this Guideline in good faith, the Commissioner will administer the law in accordance with this approach .",,,,,False,False,https://www.ato.gov.au/law/view/document?docid=COG/PCG20201/NAT/ATO/00001
PCG 2016/12,Final PCG,Petroleum Resource Rent Tax - deductibility of general project expenditure relating to the overhead component of time written costs,,,1 July 2015,,,,,1. This Guideline explains our compliance approach to applying section 38 of the Petroleum Resource Rent Tax Assessment Act 1987 (the Act) to the overhead component of time written costs charged to a joint venture billing statement or sole risk operation account.,,"4. Generally a payment is deductible under section 38 of the Act as general project expenditure where it is not excluded, exploration or closing-down expenditure, and: 5. Payments that cannot be reasonably allocated to operations, facilities and other things in subsection 19(4) are considered 'indirect' for the purposes of paragraph 44(1)(j) of the Act. Joint venture arrangements 6. A joint venture operating agreement is the standard commercial agreement that governs the relationship between joint venture participants in oil and gas exploration and developments. 7. The accounting procedure in a joint venture operating agreement sets out equitable methods for the parties to the agreement to determine the charges applicable to operations covered by the agreement. The procedure includes rights of non-operators to audit the accounts and records of the operator. 8. The accounting procedure governs charges to the joint account and joint venture billing statements. 9. Sole risk costs are incurred when a party or parties conduct an operation (also known as a sole risk operation) that is permitted under the terms of the joint venture operating agreement, and that fewer than all the participants to the agreement undertake at their sole risk, benefit, cost and liability. 10. Sole risk costs in a sole risk operation are calculated using the principles in the accounting procedure set out in the joint venture operating agreement. Despite this, the costs of a sole risk operation are accounted for separately. 11. The Commissioner recognises that in these circumstances a commercial tension exists amongst unrelated joint venture participants.","Intro: 12. In view of this commercial tension, the Commissioner will not generally devote compliance resources to examining whether payments incurred and charged to a joint venture billing statement, or a sole risk operation account, within the terms of the joint venture operating agreement between unrelated participants, are deductible under section 38 of the Act. 13. The entity must satisfy all of the following conditions for the Commissioner to apply this compliance approach. 14. This compliance approach also applies to payments made to procure the carrying on or providing of operations, facilities or other things of a kind described in section 38 of the Act by another entity, where paragraph 41(1)(d) of the Act applies. | The overhead component of time written costs: 15. Time writing is a method of allocating an individual's labour charges to the cost objects or the endpoint, based on their timesheet entries. Each time entry is translated to a cost (hours x time writing rate). 16. Overhead costs can be embedded within the time writing hourly rate by which the time written cost is determined. 17. For the purposes of this compliance approach, the Commissioner considers overhead costs to comprise the costs relating to: 18. However, the Commissioner does not consider that overhead costs include: | Are there situations where this approach is not appropriate?: 19. The compliance approach does not apply: | Will we be monitoring the application of the approach?: 20. We will be monitoring expenditure claims (including conducting post-lodgment reviews) in order to ensure that eligibility for the compliance approach has been established.",,,,,False,False,https://www.ato.gov.au/law/view/document?docid=COG/PCG201612/NAT/ATO/00001
PCG 2016/13,Final PCG,Petroleum Resource Rent Tax - deductibility of general project expenditure,,,1 July 2015,,,,,1. This Guideline explains how we will allocate compliance resources according to our assessment of risk in relation to the application of section 38 of the Petroleum Resource Rent Tax Assessment Act 1987 (the Act).,,"4. Generally a payment is deductible under section 38 of the Act as general project expenditure where it is not excluded, exploration or closing-down expenditure, and: 5. Generally a payment will not be deductible as general project expenditure where it is too remote from the physical activities of the petroleum project or future petroleum project, or only has an incidental connection with such activities. 6. Payments that cannot be reasonably allocated to the operations, facilities and other things in subsection 19(4) of the Act will be considered 'indirect' for the purposes of paragraph 44(1)(j) of the Act. 7. Section 112 of the Act requires a person to keep records that record and explain all transactions and other acts including deductions for general project expenditure, that are relevant to ascertaining the person's liability under the Act. 8. The approach set out in this Guideline also applies to payments made to procure the carrying on or providing of operations, facilities or other things of a kind described in section 38 of the Act by another entity where paragraph 41(1)(d) of the Act applies.",,,"Appendix 1: Examples An employee is stationed at a site office that services the operations of two petroleum projects. The duties of the employee are to: For any part of the employee's salary cost to constitute general project expenditure of a particular petroleum project, it is necessary to determine the part of the employee's time attributable to the activities the employee supports that are in carrying on or providing relevant operations, facilities or other things for that petroleum project. The activities set out at (i) to (vi) above will relate to the staff served by the site office employee and therefore the site office employee's salary cost, to the extent that it relates to these activities, will have a close or quite direct connection to a project. The determination of the site office employee's time attributable to a particular project will depend on that employee's time spent on supporting the technical staff. On the other hand, payments relating to investor and corporate/shareholder public relations or income tax/PRRT returns and statements will not constitute general project expenditure as they do not have a close or quite direct connection with the physical activities of a petroleum project. Where the salary cost of the site office staff cannot be reasonably allocated to the operations, facilities and other things comprising a petroleum project, that payment will be considered 'indirect' for the purposes of paragraph 44(1)(j) of the Act. Petroleum Co is the operator and participant of an unincorporated joint venture that governs the operations of a petroleum project. The joint venture operating agreement contains accounting procedures that are intended to establish equitable methods agreed between the parties for determining charges and credits applicable to operations covered under the agreement. The agreement contains provisions concerning, among other things, the allocation of costs on an equitable basis, the treatment of 'direct' and 'indirect' costs, and the audit of joint accounts, sole risk operation accounts and records of the operation. These provisions govern the basis of charges to the joint venture billing statements and sole risk operation accounts and are regularly reviewed by each party to the joint venture to ensure the accounting procedures are reasonable. We recognise that in these circumstances a commercial tension exists amongst unrelated joint venture participants, and the accounting policy in the joint venture operating agreement is a suitable reference in working out the appropriate method of apportionment for PRRT purposes. Accordingly, an overhead cost (not embedded in any time written cost) which is charged to the joint venture billing statement or sole risk operation account in accordance with the terms of the joint venture operating agreement by reference to a specific underlying upstream activity, asset or facility may be deductible. This is on the basis that the overhead is also an undisputed, direct and identifiable charge. Acceptable allocation methods may include time write allocation of personnel labour hours through timesheets, headcount, maintenance hours across facility assets and floor space. However, an overhead cost charged to joint venture participants on a generalised basis for operator support services (including IT, HR and HSSE) without reference to a specific underlying service, activity or cost will not constitute deductible general project expenditure under section 38 of the Act. Petroleum Co carries on a petroleum project and its project engineers, together with its non-operational staff, are housed in its head office that is leased and remotely located from the project site. The non-operational staff include staff in the accounting, finance, HR and other departments that provide support services. The project engineers devote 100% of their time to the petroleum project and occupy 10% of the remotely located head office building. The non-operational staff provide 6% of their time to support the project engineers and they occupy 20% of the same building. The remotely located head office is a site where the operations, facilities and other things comprising a petroleum project are carried out. Therefore, the lease payments associated with the head office building have a close or quite direct connection to the physical activities of Petroleum Co's petroleum project and are not excluded expenditure under paragraph 44(1)(k) of the Act. In determining the extent to which the lease payments associated with the remotely located office building will be deductible, Petroleum Co should have regard to: (i) the percentage of time that project engineers and non-operational staff supporting the project engineers devote to the petroleum project; and (ii) the floor space occupied by the project engineers and the non-operational staff supporting those engineers. In this instance the project engineers devote 100% of their time to the petroleum project and occupy 10% of the remotely located head office building while the non-operational staff that support those engineers spend 6% of their time on project activities and occupy 20% of the building. Consequently, 11.2% (that is [100% x 10%] + [6% x 20%]) of the lease payments was treated as being incurred in carrying on or providing the operations and facilities comprising Petroleum Co's petroleum project and deducted under section 38 of the Act. In these circumstances, the 1.2% [6% x 20%] of the lease payments that is attributable to the non-operational staff would not be excluded expenditure under paragraph 44(1)(k) as it was reasonably allocated to the petroleum project activities carried out by the project engineers. Petroleum Co is an Australian subsidiary of an overseas parent company that carries on a petroleum project as an operator and participant of an unincorporated joint venture. From time to time, senior officials and technical specialists from the parent company visit Australia to oversee its operations. The visits by the parent company officers and overseas technical experts involve: Petroleum Co bears all the costs associated with the travel of the parent company officers and technical specialists to Australia. The travel costs of the senior officials in relation to reviewing the activities of Petroleum Co and meeting with government officials will generally not constitute general project expenditure as they do not have a close or quite direct connection with the physical activities of a petroleum project. Where the senior officials review specific project activities, the travel costs would be deductible to the extent that they relate to these project activities and where they are based on a reasonable allocation method. The travel costs of the overseas technical specialists (for example, petroleum engineers) relate to visits they make to project sites in order to assist Petroleum Co to meet its obligations as an operator pursuant to programmes and budgets relating to joint operations which have been approved by the Joint Venture Operating Committee. Therefore, these costs do have a close or quite direct connection with the physical activities of a petroleum project. Petroleum Co collates expenditure information sourced from its natural systems and incorporates it into a series of excel spreadsheets that contain automated settings (for example, based on the Approval For Expenditure, general ledger account descriptions, etcetera). The spreadsheets identify and exclude obviously non-deductible PRRT expenditure including interest, provisions, corporate memberships and downstream costs. Petroleum Co manually reviews the preliminary classification of travel expenditure incurred by non-Australian based officers in order to identify any costs which were not incurred by visiting technical specialists in relation to project activities. Based on an analysis of the itineraries of the visiting parent company officers, an appropriate percentage of the remaining travel costs are excluded as not related to project activities. In these circumstances where Petroleum Co is able to demonstrate effective internal management processes which provide a fair and reasonable basis to ensure that only genuine general project expenditure is deducted, the parent company travel costs are treated as low risk. This obviates the need to take an extensive 'line by line' analysis of each item of travel expenditure. Petroleum Co carries on a petroleum project as an operator and a participant of an unincorporated joint venture. The project is currently in construction. Pursuant to an agreement with the relevant state government, Petroleum Co is required to mitigate the project's social impacts on the town by: Petroleum Co also makes voluntarily contributions by sponsoring school-based apprenticeship programs and traineeships. The project has a construction village camp located about 15 kilometres away from the town which includes a temporary power station, waste water treatment plant, temporary housing for all employees, contractors and subcontractors related to the construction of the project, and health and recreational facilities. To the extent that expenditure relates to improving or developing the town's infrastructure due to an increase in the town's population as a result of the project, the expenditure is considered to be aimed at benefiting the general community only and will not have a direct or quite close connection to the project. This would include expenditure relating to the facilities or services in (i) through (vi) inclusive above. Similarly, the voluntary expenditure on sponsoring apprenticeship and traineeship programs will not have a close or quite direct connection to the project. Where facilities such as the newly constructed road and airport referred to at (vii) and (viii) above are used as part of project operations, the related expenditure may constitute general project expenditure to the extent that it reasonably reflects the use of the facilities for or as part of the operations, facilities or other things that comprise the project as defined in subsection 19(4) of the Act. Similarly, to the extent the emergency services referred to at (ix) above are used or available for use as part of the operations, facilities or other things in subsection 19(4) of the Act, the expenditure may be deductible under section 38 of the Act subject to reasonable apportionment of the expenditure to the project. Where an expenditure cannot be reasonably allocated, it will be considered to be excluded expenditure under subparagraph 44(1)(j) of the Act.",,,False,False,https://www.ato.gov.au/law/view/document?docid=COG/PCG201613/NAT/ATO/00001
PCG 2020/6,Final PCG,Timing of income tax deductions for superannuation contributions made through the Small Business Superannuation Clearing House - ATO compliance approach,,,7. This Guideline applies both before and after its date of issue.,,,TR 2010/1,Case References: Liwszyc v Commissioner of Taxation [2014] FCA 112 218 FCR 334 2014 ATC 20-441 94 ATR 16 [2014] ALMD 4472,1. This Guideline describes circumstances in which the Commissioner will not apply compliance resources to determine which income year an employer is entitled to claim income tax deductions for super contributions made through the Small Business Superannuation Clearing House (SBSCH) to a super fund or retirement savings account (RSA).,,"2. Section 290-60 of the Income Tax Assessment Act 1997 (ITAA 1997) allows an employer to claim income tax deductions for contributions made to a super fund or RSA, on behalf of employees, where certain conditions are met. The income tax deduction is only available in the income year the contribution is made. [1] 3. Super contributions are made to a super provider or RSA when the payments are received by the trustee of a complying super fund or an RSA. [2] 4. Section 23B of the Superannuation Guarantee (Administration) Act 1992 (SGAA) specifies that employer payments made to an approved clearing house are taken to be contributions made on the day they are accepted [3] by the approved clearing house. This is only for the purpose of determining whether an employer is liable for the super guarantee charge [4] and does not extend to determining when an employer is entitled to claim a tax deduction. 5. The SBSCH is the only approved clearing house and is administered by the ATO. [5] The SBSCH is a free service that small businesses with 19 or fewer employees, or an annual aggregated turnover of less than $10 million, may use to make super contributions. The service aims to reduce compliance costs for small business employers by simplifying and streamlining the process of making employee super contributions. It allows employers to make a single lump payment of their contributions to the SBSCH each quarter. That lump sum payment is broken into individual payments to be contributed to each employee's respective super fund or RSA. 6. There may be a period of time between an employer's payment to the SBSCH and the trustee of a complying super fund receiving the contribution. The SBSCH may be unavailable over a weekend close to the end of the financial year for scheduled system maintenance. [6] Payments made towards the end of an income year may not be received by the trustee of a complying super fund or an RSA in the same income year. This may impact on when an employer is entitled to an income tax deduction for the super contributions.","Intro: This Practical Compliance Guideline sets out a practical administration approach to assist taxpayers in complying with relevant tax laws. Provided you follow this Guideline in good faith, the Commissioner will administer the law in accordance with this approach.",,,,/law/view/document?LocID=%22COG%2FPCG20206EC%2FNAT%2FATO%2F00001%22&PiT=99991231235958,False,False,https://www.ato.gov.au/law/view/document?docid=COG/PCG20206/NAT/ATO/00001
PCG 2026/1,Final PCG,Payday Super - first year ATO compliance approach,,,1 July 2026,,,,Case References: Macquarie Bank Limited v Commissioner of Taxation [2013] FCAFC 119,"1. This Guideline has been prepared following the enactment of the Treasury Laws Amendment (Payday Superannuation) Act 2025. This Act amended the Superannuation Guarantee (Administration) Act 1992 (SGAA) and other laws to give effect to the policy announcement known as Payday Super. 2. This Guideline sets out our compliance approach for the first year of operation of Payday Super in respect of investigating a superannuation guarantee (SG) shortfall for a QE day (as defined in section 17A of the SGAA) that occurs from 1 July 2026 to 30 June 2027 inclusive. 3. This Guideline does not replace, alter or affect our interpretation of the law in any way. Nor does it have any impact on obligations to pay superannuation contributions under other laws or industrial instruments and agreements, including where the obligations refer to the amount of superannuation that is to be paid for the purposes of the SGAA. 4. All references in this Guideline to Payday Super, and all legislative references in this Guideline, are to the SGAA as amended by the Treasury Laws Amendment (Payday Superannuation) Act 2025, with effect from 1 July 2026. 5. All references to an 'employee' in this Guideline refer to an 'employee' under section 12. It covers both individuals who fall within the ordinary meaning of employee and individuals who come under the extended definition of an employee in subsections 12(2) to 12(11).",,"6. The Payday Super reforms align the payment of SG contributions with the payment of relevant earnings (which is usually on a weekly, fortnightly, or monthly basis), instead of the current quarterly system, in order for an employer to avoid liability to the SG charge. 7. There is concern that employers will not have had sufficient time to deploy, test and embed changes within their payroll systems and business processes prior to the Payday Super law commencing on 1 July 2026. This increases the risk that employers will be unable to fully meet the requirements to reliably have contributions processed and accepted by super funds in the Payday Super timeframes. 8. Broadly speaking, the changes under Payday Super tax employers that pay employees qualifying earnings [1] but do not make sufficient, timely eligible contributions for their employees' benefit (or do not provide a choice of fund when making such contributions). The tax, SG charge, is imposed if the employer has an SG shortfall, which will arise if the employer has one or more 'individual base SG shortfalls' [2] or 'choice loadings' [3] greater than nil for a day on which qualifying earnings are paid. [4] 9. An employer will not have an SG shortfall [5] , and therefore will avoid the SG charge, for a QE day [6] by ensuring they have an individual base SG shortfall of nil for all their employees. [7] This occurs where sufficient 'on-time contributions' are received by the employees' super funds to offset the individual SG amount [8] for each employee for the QE day. 'On-time contributions' are eligible contributions that are made within one of the following 'allowable periods' [9] : 10. If SG charge is payable because an individual base SG shortfall amount is greater than nil, the employer can still partially reduce the amount of the charge by making eligible 'late contributions' up until the day the Commissioner make an assessment of the SG charge for the QE day. If sufficient contributions are made for each employee to fully offset the individual base SG shortfalls, the employer's individual final SG shortfalls will be nil. [10] However, the amount of the SG charge cannot be reduced to nil by late contributions because the SG shortfall (which the SG charge equals) includes notional earnings and an administrative uplift amount. [11] 11. The Commissioner does not have a discretion concerning when the Payday Super reforms apply to employers. While we will apply our compliance resources as outlined in this Guideline, if we obtain definitive information that an employer has an SG shortfall in respect of a QE day, we are required to apply the law to that employer. [12] This is the case even if they fall within the low-risk zone outlined at Table 2 of this Guideline for the relevant QE days. Who this Guideline applies to 12. This Guideline applies to all employers in respect of a QE day that occurs from 1 July 2026 to 30 June 2027 inclusive.","Intro: This Practical Compliance Guideline sets out a practical administration approach to assist taxpayers in complying with relevant tax laws. Provided you follow this Guideline in good faith, the Commissioner will administer the law in accordance with this approach.","Example s: 25. The following examples illustrate how this Guideline can apply in various factual scenarios. The examples are indicative only and do not cater for every fact pattern. The intention of these examples is to illustrate how we will prioritise the allocation of compliance resources to investigate whether an employer has an SG shortfall for one or more QE days occurring from 1 July 2026 to 30 June 2027. | Example 1: – low risk – evidence the employer attempts to reduce their individual base SG shortfall to nil by making sufficient on-time eligible contributions – rejected contributions 26. From 1 July 2026, an employer pays superannuation contributions at the same time they pay their employees. Usually, the super funds receive these contributions on time. However, on occasion, the super fund rejects a contribution. When this happens, the employer works with the fund and the employee to fix the error and re-makes the contribution as soon as possible. 27. Even though the re-made contributions are received late, the employer is considered to fall into the low-risk zone because they corrected the error as soon as reasonably practicable, resulting in all their individual final SG shortfalls being nil. The Commissioner will not have cause to apply compliance resources to this employer for any QE days occurring from 1 July 2026 to 30 June 2027. | Example 2: – low risk – evidence the employer attempts to reduce their individual base SG shortfall to nil by making sufficient on-time contributions – successor fund transfers 28. From 1 July 2026, an employer pays superannuation contributions at the same time they pay their employees. However, between July and September 2026, some employees' superannuation accounts are moved to a new fund under a successor fund transfer, and the employer does not yet have the new account details. As a result, the employer's contributions to the old fund are rejected and the employer cannot make the contributions on time for those employees. Once the employer gets the new account information, they immediately make the contributions, which are received late. 29. The employer is considered to fall in the low-risk zone because they tried to comply with Payday Super and made the late contributions as soon as it was reasonably practicable, resulting in all their individual final SG shortfalls being nil. The Commissioner will not have cause to apply compliance resources to investigate this employer for any QE days occurring from 1 July 2026 to 30 June 2027. | Example 3: – medium risk – employer moves to comply with Payday Super and contributions are made in full, some are made late 30. For 6 months from 1 July 2026, an employer, who pays employees monthly, continues paying superannuation contributions quarterly, ensuring the employees' super funds receive the contributions by the end of the 28th day after the end of each quarter. From 1 January 2027 to 30 June 2027, the employer starts to make superannuation contributions monthly but, due to reporting errors, some contributions are late in reaching the funds. These errors continue until August 2027. 31. For the QE days in the period 1 July 2026 to 31 December 2026, the employer pays sufficient eligible contributions for the QE days to ensure that they have no individual final SG shortfalls greater than nil by the end of the 28th day after the end of each quarter. However, as they have not adjusted their contribution payment frequency in line with Payday Super in that period, they are considered to fall into the medium-risk zone for QE days in that period. We may investigate this employer in respect of those QE days, but the allocation of compliance resources to this employer in respect of those QE days will be given lower priority than employers that fall within the high-risk zone. 32. For QE days in the period 1 January 2027 to 30 June 2027, if the employer remedies the errors as soon as reasonably practicable, resulting in no individual final SG shortfalls for those QE days at that time, they will be considered to fall into the low-risk zone for those periods. The Commissioner will not have cause to apply compliance resources to the employer in respect of those QE days. 33. This Guideline does not apply to the QE days from 1 July 2027 and we may investigate the employer for those QE days. | Example 4: – medium risk – employer makes sufficient contributions, no change to frequency of contributions in line with Payday Super 34. Before 1 July 2026, an employer pays their employees weekly and pays all superannuation contributions for their employees quarterly, ensuring the employees' super funds receive the contributions by the end of the 28th day after the end of each quarter. From 1 July 2026, the employer makes no adjustments. Although they pay sufficient superannuation contributions, they continue to pay those contributions quarterly, so they are received by the employees' super funds by the end of the 28th day after the end of each quarter. 35. The employer is considered to fall into the medium-risk zone because they did not change the frequency of their contributions to comply with Payday Super. We may investigate this employer for the QE days occurring from 1 July 2026 to 30 June 2027, but the allocation of compliance resources to this employer will be given lower priority than employers that fall within the high-risk zone. | Example 5: – high risk – employer makes insufficient contributions by the end of the quarter – rejected contributions 36. Before 1 July 2026, an employer pays their employees fortnightly and pays all superannuation contributions for their employees so they are received by the employees' super funds by the end of the 28th day after the end of each quarter. From 1 July 2026, the employer makes no adjustments and continues to pay superannuation contributions quarterly, even though they pay their employees fortnightly. Some contributions are rejected by the fund due to data errors, and the employer does not fix these errors by the end of the 28th day after the end of the quarter. 37. The employer is considered to fall into the high-risk zone because they still had individual final SG shortfalls greater than nil after 28 days following the end of the relevant quarter in which the qualifying earnings were paid. The Commissioner will prioritise compliance resources to investigate this employer ahead of employers in the medium-risk zone for the QE days occurring from 1 July 2026 to 30 June 2027. | Example 6: – high risk – employer incorrectly calculates qualifying earnings and makes insufficient contributions by the end of the quarter 38. Before 1 July 2026, an employer pays their employees monthly and pays all superannuation contributions for their employees so that they are received by the employees' super funds by the end of the 28th day after the end of each quarter. From 1 July 2026, the employer makes no adjustments and continues to pay superannuation contributions quarterly, even though they pay their employees monthly. The employer also misclassifies some payments and incorrectly treats them as not being qualifying earnings. As a result of this misclassification, the employer does not make sufficient contributions for some employees. 39. The employer is considered to fall into the high-risk zone because they have individual final SG shortfalls greater than nil after 28 days following the end of the relevant quarter in which the qualifying earnings were paid. The Commissioner will prioritise compliance resources to investigate this employer ahead of employers in the medium-risk zone for the QE days occurring from 1 July 2026 to 30 June 2027. | Example 7: – high risk – employer has individual final SG shortfalls for their employees 40. Before 1 July 2026, an employer pays their employees monthly and pays all superannuation contributions for their employees so that they are received by the employees' super funds by the end of the 28th day after the end of each quarter. From 1 July 2026, the employer pays superannuation contributions at the same time they pay their employees. 41. From 1 January 2027, the employer experiences cash flow difficulties and ceases making superannuation contributions for their employees. The employer does not make any superannuation contributions for their employees for QE days occurring between 1 January 2027 and 30 June 2027. 42. The employer fails to make sufficient contributions for the QE days between 1 January 2027 and 30 June 2027, leading to individual final SG shortfalls greater than nil after 28 days following the end of the relevant quarters. This places the employer in the high-risk zone. The Commissioner will prioritise compliance resources to investigate this employer ahead of employers in the medium-risk zone for those QE days. | Example 8: – movement from low-risk zone to high-risk zone 43. From 1 July 2026, an employer pays super at the same time they pay their employees and has a track record of consistent, timely payments that are received by the employees' super funds within 7 business days. They are considered to fall in the low-risk zone at that time. 44. However, from 1 January 2027, the employer's processes begin to slip – superannuation contributions are now routinely made well after the allowable period to make on-time contributions, follow-up with super funds and intermediaries about contribution errors becomes irregular, and the employer does not fix these errors. This results in those contributions being received after 28 days following the end of the relevant quarter. 45. This change in behaviour results in the employer moving from the low-risk zone to the high-risk zone for QE days between 1 January 2027 and 30 June 2027. The Commissioner will prioritise compliance resources to investigate this employer ahead of employers in the medium-risk zone for those QE days. | Example 9: – movement from medium-risk zone to low-risk zone 46. From 1 July 2026, an employer consistently calculates superannuation contributions incorrectly for its employees, resulting in the employer not making sufficient contributions for its employees for each QE day. Following complaints, the employer makes further contributions, ensuring that the individual final SG shortfalls for all employees are nil by the end of the 28th day after the end of the quarter in which the employees were paid. The employer is in the medium-risk zone for QE days from 1 July 2026. 47. After consulting a tax adviser, from 1 October 2026 the employer implements regular reconciliation checks, corrects the underpaid amounts, and introduces controls to ensure contributions are calculated accurately going forward. On occasion during this transition period, some contributions have errors and are ultimately received by the funds after 7 business days, but these are rectified as soon as is practicable. 48. This shift in behaviour results in the employer moving from the medium-risk zone to the low-risk zone for QE days between 1 October 2026 to 30 June 2027. The Commissioner will not have cause to apply compliance resources to the employer in respect of QE days occurring from 1 October 2026 to 30 June 2027.",,,/law/view/document?LocID=%22COG%2FPCG20261EC%2FNAT%2FATO%2F00001%22&PiT=99991231235958,False,False,https://www.ato.gov.au/law/view/document?docid=COG/PCG20261/NAT/ATO/00001
PCG 2020/5,Final PCG,Applying the non-arm's length income provisions to 'non arm's length expenditure' - ATO compliance approach for complying superannuation entities,,,2,,,LCR 2021/2,,"1. This Guideline provides a transitional compliance approach for a complying superannuation entity concerning the application of the amendments to section 295-550 of the Income Tax Assessment Act 1997 [1] where a superannuation entity incurs certain non-arm's length expenditure (or where expenditure is not incurred) in gaining or producing ordinary or statutory income. A complying superannuation entity refers to a complying superannuation fund, a complying approved deposit fund or a pooled superannuation trust. For the purposes of readability, a reference in this Guideline to a 'complying superannuation fund' applies equally to a complying approved deposit fund and a pooled superannuation trust.",,"3. This Guideline should be read in conjunction with Law Companion Ruling LCR 2021/2 Non-arm's length income - expenditure incurred under a non-arm's length arrangement. 4. Section 295-550 of the Income Tax Assessment Act 1997 sets out rules as to when a complying superannuation fund will derive non-arm's length income (NALI). The amendments to section 295-550 [2] result in a complying superannuation fund deriving NALI in circumstances where the entity incurs 'non-arm's length expenditure' as described in paragraphs 10 to 13 of LCR 2021/2. [3] The amendments apply in relation to income derived in the 2018-19 income year and later income years, regardless of whether the scheme was entered into before 1 July 2018. [4] 5. The ATO has previously issued draft Law Companion Ruling LCR 2018/D10 Non-arm's length income - expenditure incurred under a non-arm's length arrangement when the amendments were originally introduced. LCR 2018/D10 was withdrawn following the lapsing of Treasury Laws Amendment (2018 Superannuation Measures No. 1) Bill 2018 when the 45 th Parliament was prorogued and the House of Representatives was dissolved on 11 April 2019. 6. As a result of consultation feedback received on LCR 2018/D10, the ATO provided clarification on particular issues in draft Law Companion Ruling LCR 2019/D3 Non-arm's length income - expenditure incurred under a non-arm's length arrangement and then in LCR 2021/2. One of these issues concerned when non-arm's length expenditure will have a sufficient nexus with income derived by the complying superannuation fund for the NALI provisions to apply. In particular, the Commissioner has set out the view that certain non-arm's length expenditure incurred by a complying superannuation fund may have a sufficient nexus to all ordinary and/or statutory income derived by the fund for that income to be NALI (for example, fees for accounting services). [5] This can be contrasted to non-arm's length expenditure that has a more direct nexus to particular ordinary or statutory income derived by the fund (for example, expenditure relating to the acquisition of an income-producing asset). 7. The ATO recognises that trustees of complying superannuation funds may not have realised that the amendments will apply to non-arm's length expenditure of a general nature that has a sufficient nexus to all ordinary and/or statutory income derived by the fund in an income year, noting that it was not explicitly stated in LCR 2018/D10. It is also recognised that the amendments apply in relation to the 2018-19 and later income years which may result in all income derived by a fund during the 2018-19, 2019-20, 2020-21, 2021-22 and 2022-23 income years being classified as NALI where it has incurred non-arm's length expenditure of a general nature. 8. As there are some unresolved concerns raised by industry, the ATO considers it is appropriate to extend the transitional compliance approach to the income years outlined in paragraphs 9 and 10 of this Guideline. The ATO has also updated the compliance approach set out in paragraphs 88 to 94 of LCR 2021/2 to reflect this change.","Intro: This Practical Compliance Guideline sets out a practical administration approach to assist taxpayers in complying with relevant tax laws. Provided you follow this Guideline in good faith, the Commissioner will administer the law in accordance with this approach.",,,,/law/view/document?LocID=%22COG%2FPCG20205EC%2FNAT%2FATO%2F00001%22&PiT=99991231235958,False,False,https://www.ato.gov.au/law/view/document?docid=COG/PCG20205/NAT/ATO/00001
PCG 2017/5,Final PCG,Superannuation reform: commutation requests made before 1 July 2017 to avoid exceeding the $1.6 million transfer balance cap,,,2. This Guideline is proposed to apply both before and after date of issue.,,,TR 2013/5,,1. This Guideline outlines the circumstances in which the ATO will not apply compliance resources to review commutations made before 1 July 2017 by a member of a self-managed superannuation fund (SMSF) to avoid exceeding the $1.6 million transfer balance cap.,,"5. A member of a SMSF may need to take action before 1 July 2017 to ensure that they do not exceed the $1.6 million transfer balance cap by requesting the trustee of the SMSF to commute some or all their superannuation income stream(s) to be rolled-over as an accumulation interest within the SMSF or withdrawn from the SMSF as a lump sum payment. The member may not be in a position on 30 June 2017 to know precisely the value of the superannuation interests that support the superannuation income streams. One strategy to address this is for the member to make a request, which is subsequently accepted by the trustee of the SMSF, to commute their superannuation income stream(s) by the amount that the value of the superannuation interests that support their superannuation income streams exceeds $1.6 million. 6. A member or a dependant beneficiary commutes their superannuation income stream if they consciously and validly exercise their right to exchange some or all of their entitlement to receive future superannuation income stream benefits for an entitlement to be paid a lump sum. [1] 7. A request to commute is valid if it is consistent with the governing rules of the superannuation fund and the agreement between the member and trustee under which the superannuation income stream is provided. [2] 8. Whether and at what time a valid commutation takes effect is a question of fact to be determined from the particular circumstances. It must be clear that some or all of the member's right, or dependant beneficiary's right, to receive future superannuation income stream benefits has been exchanged for a right to receive a lump sum. [3]","Intro: 9. The Commissioner will not apply compliance resources to review the commutation of a superannuation income stream a member has in an SMSF that is made before 1 July 2017 where the request and acceptance to commute: 10. The amount of the commutation is required to be worked out by the trustee of the SMSF, and reflected in the SMSF's financial accounts for the year ended 30 June 2017, no later than the due date of the SMSF's annual return for the year ended 30 June 2017. 11. The agreement to commute cannot be subsequently revoked after the date of the agreement. If the agreement to commute or the governing rules of the superannuation fund allowed a discretion for either the member or the trustee of the SMSF to revoke the agreement, it would be questionable whether a valid commutation had in fact been effected before 1 July 2017. 12. This Guideline does not apply where: 13. An agreement to commute covered by this Guideline cannot be subsequently revoked or altered by the member or trustee of the SMSF after the date the agreement is made.","Example 1: 14. On 1 May 2017, Liz has a single superannuation interest supporting a superannuation income stream in her SMSF that is valued at $1.8 million. 15. Liz requests the trustee of her SMSF in writing to commute amounts on 30 June 2017 in excess of $1.6 million based on the value of the interest supporting her superannuation income stream valued at 30 June 2017. The trustee of the SMSF accepts the request which is documented. 16. The amount of the commutation is worked out by the trustee of the SMSF and is reflected in the SMSF's financial accounts for the year ended 30 June 2017 by the due date of the SMSF's annual return for the year ended 30 June 2017. 17. The ATO will not review the commutation as the agreement to commute is in accordance with paragraphs 9 and 10 of this Guideline. | Example 2: 18. On 1 May 2017, Jim has the following three superannuation interests supporting superannuation income streams in his SMSF: 19. Jim requests the trustee of his SMSF in writing to commute amounts on 30 June 2017 in excess of $1.6 million based on the value of the interests supporting his superannuation income streams valued at 30 June 2017. The trustee of the SMSF accepts the request which is documented. 20. The amount of the commutation is worked out by the trustee of the SMSF and is reflected in the SMSF's financial accounts for the year ended 30 June 2017 by the due date of the SMSF's annual return for the year ended 30 June 2017. 21. The ATO will not review the commutation provided the commutation request specifies the superannuation income streams that will be subject to the agreement to commute and the order in which the superannuation income streams will be commuted in accordance with paragraph 9 of this Guideline. | Example 3: 22. On 1 May 2017, Diptie has the following two superannuation interests supporting superannuation income streams in SMSF X: 23. Diptie also has a superannuation interest supporting a superannuation income stream in large APRA fund Y valued at $800,000 on 1 May 2017. 24. Diptie requests the trustee of SMSF X in writing to commute amounts on 30 June 2017 in excess of $1.6 million based on the value of all of her superannuation interests supporting her superannuation income streams valued at 30 June 2017. This includes the value of her superannuation interest supporting her superannuation income stream in APRA Fund Y. The trustee of the SMSF X accepts the request which is documented. 25. The amount of the commutation is worked out by the trustee of her SMSF and is reflected in the SMSF's financial accounts for the year ended 30 June 2017 by the due date of the SMSF's annual return for the year ended 30 June 2017. The amount of the commutation takes into account the value of Diptie's superannuation interest in APRA Fund Y. 26. The ATO will not review the commutation, provided that, in accordance with paragraph 9 of this Guideline: 27. Diptie will need to advise the trustee of SMSF X of the value of her interest supporting her superannuation income stream in large APRA fund Y as at 30 June 2017 in order to calculate the amount to be commuted from the superannuation income stream(s) in SMSF X.",,,,False,False,https://www.ato.gov.au/law/view/document?docid=COG/PCG20175/NAT/ATO/00001
PCG 2017/3,Final PCG,Income tax - supporting the implementation of the changes to the taxation of transition to retirement income streams,,,,,,,,"1. This Guideline outlines the ATO's compliance approach for certain APRA regulated superannuation funds (including exempt public sector superannuation schemes), pooled superannuation trusts (PSTs) and life insurance companies (collectively referred to as 'Funds') facing practical difficulties in complying with recent legislative amendments affecting various transition to retirement income stream products (collectively referred to as 'TRIS') [1] during the transition period. Application 2. This Guideline has effect from its date of issue for Funds that: 3. This Guideline does not apply to self-managed superannuation funds and Funds who do not deploy a full solution by the end of 30 June 2018.",Scope: 2. This Guideline has effect from its date of issue for Funds that: 3. This Guideline does not apply to self-managed superannuation funds and Funds who do not deploy a full solution by the end of 30 June 2018.,"4. Schedule 8 to the Treasury Laws Amendment (Fair and Sustainable Superannuation) Act 2016 and Schedule 1 to the Treasury Laws Amendment (2017 Measures No. 2) Act 2017 amended the Income Tax Assessment Act 1997 (ITAA 1997) by removing the tax exemption afforded the income attributable to assets supporting the payment of a non-retirement phase TRIS. The changes apply from the beginning of the 2017-18 income year. 5. Individuals who have reached their preservation age, but not retired from the workforce or attained age 65, are able to access their superannuation benefits by starting a TRIS. 6. Prior to the amendments mentioned in paragraph 4 of this Guideline, the ITAA 1997 contained earnings tax exemption provisions [2] for Funds with respect to ordinary and statutory income from those assets that support payment of superannuation income streams, including TRIS. 7. From the commencement of the 2017-18 income year, the earnings tax exemption provisions in the ITAA 1997 will apply to Funds only for a superannuation income stream in the retirement phase. [3] 7A. A TRIS will not be in the retirement phase unless a superannuation income stream benefit is currently payable from it and the recipient: 8. TRIS where certain criteria are not met are specifically excluded from being superannuation income streams in the retirement phase. [4] 9. This may cause practical compliance difficulties for Funds as they may be unable to: in time for the commencement of the 2017-18 income year. 10. Where these difficulties exist, a Fund is unlikely to be able to calculate assessable income and exempt income for that interim period before they deploy a full solution to address these implementation issues, and this has potential to impact on tax compliance. 11. The ATO understands Funds' business need to implement a full system solution to the TRIS changes as soon as possible. We also acknowledge Funds' concerns about additional costs of developing interim IT arrangements to be effective from the start date of the 2017-18 income year in advance of the implementation of Funds' full IT solutions. 12. To facilitate earliest feasible adoption of full system solutions, the ATO recognises that Funds may apply interim arrangements in respect of some products or platforms and not others, or to deploy full system solutions for different products or platforms at different times. Determining Fund assessable income 13. In calculating assessable income for the 2017-18 income year, Funds to which this Guideline applies may have the following two periods: 14. Where the full solution system deployed is forward looking only, and is unable to determine assessable income retrospectively from a reconstruction of the correct segregated asset pool with effect from the commencement of the 2017-18 income year, a specific calculation will be necessary to reflect the assessable income attributable to assets that support a non-retirement phase TRIS for the interim period (the 'interim method'). An interim method for the purposes of this Guideline consists of the following steps: 15. In determining assessable income in respect of the 2017-18 year of income, where a Fund has used this interim method, their assessable income will include three separately calculated components: 16. Where the full solution system deployed is capable of retrospectively calculating the Fund's assessable income for the income year, including assessable income derived from assets supporting payment of a non-retirement phase TRIS, based on reconstruction of a fully compliant segregated asset pool from the commencement of the 2017-18 income year, no separate interim method will be required. 17. Where a Fund adopts either approaches outlined in paragraphs 14 to 16 of this Guideline, the ATO will not allocate compliance resources to review the calculation of the actual assessable income and exempt income of the Fund's asset pools for the 2017-18 income year, to the extent that the calculations are related to the implementation of the TRIS amendments and/or interim measures to facilitate that implementation. Pay as you go instalments 18. For the 2017-18 income year, the ATO will not allocate compliance resources to review whether a Fund has correctly reported its instalment income for the purposes of imposing a penalty under subsection 284-75(1) of Schedule 1 to the Taxation Administration Act 1953 where: Segregated current pension assets and segregated exempt assets 19. Where Funds continue to have assets supporting the payment of both a non-retirement phase TRIS and income streams in the retirement phase co-mingled in an asset pool after the commencement of the 2017-18 income year, the assets will not meet the definition of segregated current pension assets [6] or segregated exempt assets. [7] 20. For the 2017-18 income year, the ATO will not allocate compliance resources to review whether the Funds' asset pools that have co-mingled assets that supports the payment of both a non-retirement phase TRIS and retirement phase income streams meet the definition of segregated current pension assets or segregated exempt assets. Alternative methods 21. Funds are entitled to self-assess their tax liability using an alternative method they believe satisfies their tax obligations under the law. The ATO's compliance response does not apply in circumstances where Funds use such other methods, and these Funds may be subject to more detailed review by the ATO. Fund assurance and governance 22. Funds that rely on this Guideline are expected to have appropriate governance, assurance and approvals by trustees or the board (collectively referred to as 'Trustee') on the method they used to determine the assessable income, and the tax liability on that income, from assets that support the payment of a non-retirement phase TRIS during the interim period. 23. The assurance should include a statement made by the Trustee. The Trustees must be satisfied that the tax payable by Funds on the income from assets that support the payment of a non-retirement phase TRIS during the interim period reflects appropriate and sufficient tax, given the TRIS changes introduced from the commencement of the 2017-18 income year. 24. Trustees of such Funds must ensure that the Fund's governance documentation is retained as this may be requested by the ATO under risk assessment or review processes. Substituted accounting periods 25. A Fund's 2017-18 income year may end before 30 June 2018 where it has a substituted accounting period. Where this occurs, the Fund's interim period discussed at paragraph 13 of this Guideline may extend for the whole of the Fund's 2017-18 year of income. In addition, the Fund may have a further interim period extending from the start of its 2018-19 year of income up to 30 June 2018. 26. In this situation, the Fund may calculate PAYG Instalments using the method described in paragraph 18 of this Guideline for each of the two separate interim periods. 27. ATO compliance resources will be allocated in a manner consistent with that described in this Guideline.",,,,,,False,False,https://www.ato.gov.au/law/view/document?docid=COG/PCG20173/NAT/ATO/00001
PCG 2017/6,Final PCG,Superannuation reform: commutation of a death benefit income stream before 1 July 2017,,,,,,TD 2013/13,,"1. An individual may choose to commute a superannuation income stream that is a superannuation death benefit (death benefit income stream). If the individual was the spouse of the deceased member and certain other criteria are met the individual may choose to roll-over the commuted amount to or within a self-managed superannuation fund (SMSF) for immediate cashing. 2. This Guideline outlines the circumstances in which the ATO will not apply compliance resources to review whether a SMSF has satisfied the requirement to cash out a death benefit in this situation where the roll-over occurred prior to 1 July 2017. 3. All references are to the Income Tax Assessment Act 1997 (ITAA 1997), unless otherwise stated. Application 4. This Guideline will have effect both before and after its issue. Who this Guideline applies to 5. This Guideline applies to an SMSF that receives a superannuation lump sum resulting from the commutation [1] of a death benefit income stream where the commutation occurred in circumstances described in paragraph 16 of this Guideline.",Scope: 4. This Guideline will have effect both before and after its issue. Who this Guideline applies to 5. This Guideline applies to an SMSF that receives a superannuation lump sum resulting from the commutation [1] of a death benefit income stream where the commutation occurred in circumstances described in paragraph 16 of this Guideline.,"6. When a member of a superannuation fund dies, a superannuation provider is required to cash the deceased member's remaining superannuation interests to their beneficiaries or their legal personal representative as soon as practicable. [2] The payment of the superannuation interest after the member's death is called a superannuation death benefit. [3] 7. For dependant beneficiaries of the deceased, superannuation death benefits can be cashed: 8. Where the superannuation provider cashes a deceased member's superannuation interest to a dependant beneficiary as a death benefit income stream, the compulsory cashing requirement is met as long as the superannuation income stream continues to be paid. 9. A superannuation provider will not comply with the compulsory cashing requirement if it allows the deceased member's superannuation interest to remain in the accumulation phase after a time when it became practicable to cash the deceased member's superannuation interest. 10. The regulatory provisions allow superannuation providers one limited exception to the requirement to cash the deceased member's superannuation interest. This is where the deceased member's superannuation is rolled over to another superannuation fund as soon as practicable for immediate cashing by the other superannuation provider. [6] 11. The Commissioner has become aware that industry participants have inferred that subsection 307-5(3) provides a mechanism for the spouse of a deceased member to roll over a death benefit income stream and retain the amounts as their own superannuation interest without the need to immediately cash-out that benefit. We understand this inference resulted from issuing public guidance [7] without explicitly clarifying the cashing requirements and led to an industry practice adopting this position. 12. The Commissioner's view is that the roll-over by a spouse of a deceased member's death benefit income stream does not change a superannuation provider's regulatory requirement to cash the deceased member's superannuation interest as soon as practicable. This means that the superannuation provider that has received the rolled over death benefit must immediately cash the deceased member's superannuation interest in the form stated in paragraph 7 of this Guideline. 13. However, the Commissioner acknowledges that the industry practice that has developed means that a number of death benefit income streams have been commuted, rolled over and treated as the spouse's own superannuation interest. This may have resulted in the amounts commuted from the death benefit income stream becoming mixed with the spouse's other superannuation interests and/or remaining in accumulation phase. 14. In recognition of the inference drawn resulting in the industry practice and the significant practical difficulties for superannuation providers that have adopted this position to trace, value and then cash superannuation death benefits if they were now to try and apply the Commissioner's position, the Commissioner will adopt the compliance approach outlined in this Guideline. 15. This approach only applies in respect of superannuation death benefits that have been rolled over before 1 July 2017.",Intro: 16. The Commissioner will not apply compliance resources to review whether a SMSF has complied with the compulsory cashing requirements relating to a death benefit as set out in regulation 6.21 of the SISR provided that:,"Example 1: 17. Henry dies on 1 January 2015. At the time of Henry's death he was in receipt of a pension from the Jackson Superannuation Fund valued at $1,000,000. This pension reverts to Henry's spouse, Kate. 18. Kate has her own accumulation phase interest ($500,000) in the Kate SMSF and wishes to consolidate all of her superannuation entitlements. Therefore, on 1 August 2015 Kate instructs the Jackson Superannuation Fund to commute the reversionary superannuation income stream in full and roll the amount over to her accumulation phase interest in the Kate SMSF. 19. The superannuation lump sum resulting from the commutation meets the conditions of subsection 307-5(3). 20. The Commissioner will not apply compliance resources to review whether or not the Kate SMSF has complied with the compulsory cashing requirements related to the death benefit. | Example 2: 21. Justin and Edwina are members of SMSF A. On 1 October 2014 Justin commenced a pension with SMSF A valued at $2,500,000. The rules of the pension do not provide that it may revert to another person on Justin's death. Justin dies on 1 January 2015. 22. On 15 June 2015, Justin's remaining superannuation interest is paid to Edwina, his spouse, as a death benefit income stream from SMSF A. Edwina also has her own accumulation interest with SMSF A. 23. The value of the superannuation interest that supports the death benefit income stream just before 1 July 2017 is estimated to be $2,300,000. 24. If Edwina does nothing, her transfer balance on 1 July 2017 will likely be $2,300,000 and exceed her transfer balance cap ($1,600,000). 25. To prevent an excess transfer balance, Edwina partially commutes the death benefit income stream by $700,000 (the amount that will exceed her transfer balance cap) before the 1 July 2017. 26. The superannuation lump sum resulting from the commutation meets the conditions of subsection 307-5(3). 27. Edwina instructs SMSF A to roll over the commuted amount to her accumulation phase interest within the SMSF A. 28. The Commissioner will not apply compliance resources to review whether or not SMSF A has complied with the compulsory cashing requirements related to the death benefit.",,,,False,False,https://www.ato.gov.au/law/view/document?docid=COG/PCG20176/NAT/ATO/00001
PCG 2016/5,Final PCG,Income tax - arm's length terms for Limited Recourse Borrowing Arrangements established by self-managed superannuation funds,,,5,,,TD 2016/16 | TD 2016/6,,"1. When a self-managed superannuation fund (SMSF) acquires an asset under a Limited Recourse Borrowing Arrangement (LRBA), the non-arm's length income (NALI) provisions in section 295-550 of the Income Tax Assessment Act 1997 (ITAA 1997) may apply to ordinary or statutory income generated from the asset if the terms of the LRBA are not consistent with an arm's length dealing. 2. This Guideline sets out the 'Safe Harbour' terms on which SMSF trustees may structure their LRBAs consistent with an arm's length dealing. That is, for income tax compliance purposes, the Commissioner accepts that an LRBA structured in accordance with this Guideline is consistent with an arm's length dealing and that the NALI provisions do not apply purely because of the terms of the borrowing arrangement. 3. As noted at paragraph 5 of this Guideline, this Guideline applies where the requirements of section 67A (or former subsection 67(4A) if applicable) of the Superannuation Industry (Supervision) Act 1993 (SISA) are met at all times and is not intended to override or replace those or any other SISA requirements that apply. 4. If SMSF trustees have entered into an arrangement which does not meet all of the 'Safe Harbour' terms set out in this Guideline, while the trustees are unable to be assured that the Commissioner will accept the arrangement to be consistent with an arm's length dealing, it does not mean that the arrangement is deemed not to be on arm's length terms. It merely means that there is no certainty provided under this Guideline. The trustees will need to be able to otherwise demonstrate that the arrangement was entered into and maintained on terms consistent with an arm's length dealing. One example of how a trustee may demonstrate this is by maintaining evidence that shows their particular arrangement is established and maintained on terms that replicate the terms of a commercial loan that is available in the same circumstances.",,"11. ATO Interpretative Decisions ATO ID 2015/27 Income tax: non-arm's length income - related party non-commercial limited recourse borrowing arrangement to acquire listed shares and ATO ID 2015/28 Income tax: non-arm's length income - related party non-commercial limited recourse borrowing arrangement to acquire real property, have been withdrawn. The Commissioner issued TD 2016/16 on 28 September 2016. 12. Parties, including an SMSF, who enter into an LRBA on terms not consistent with an arm's length dealing should consider the further matters addressed in TD 2016/16. 13. If we are asked to state formally (for example, in a private ruling or in litigation) whether a particular SMSF's LRBA gives rise to NALI for any income year, our approach will be consistent with TD 2016/16.","Intro: 14. The ATO recognises the effects of the NALI provisions and the importance of preserving assets held by an SMSF. Given this, we will not select an SMSF for an income tax review for the 2014-15 year or earlier years purely because the SMSF has entered into an LRBA. However, this is conditional on the SMSF trustee ensuring that any LRBA that their fund has is on terms consistent with an arm's length dealing by 31 January 2017 or, alternatively, is brought to an end by 31 January 2017. 15. In addition, payments of principal and interest must be made under LRBA terms consistent with an arm's length dealing. SMSF trustees who are concerned about their ability to make the required payments on commercial terms before 31 January 2017 can contact the ATO to discuss their particular circumstances. In the first instance, taxpayers can write to us, outlining their particular circumstances, at the following address: 16. In other words, SMSF trustees have an opportunity to review the terms of their funds' LRBAs before 31 January 2017. The terms of their LRBAs will not be subject to any further compliance action for the 2014-15 income years (or before) if, by 31 January 2017: 17. Furthermore, SMSF trustees who satisfy these conditions, and apply this Guideline in good faith to revise the terms of their existing LRBAs before 31 January 2017, can be assured that the terms of their LRBA will not be subject to any further compliance action by the ATO for the 2014-15 years and prior. 17A. An SMSF trustee who satisfies the condition set out in paragraph 16(i) of this Guideline with respect to an LRBA can also be assured that the Commissioner will not apply compliance resources to determine whether paragraphs 295-550(1)(b) or (c), or paragraphs 295-550(5)(b) or (c), of the ITAA 1997 apply to income derived by the SMSF for the 2018-19 and later income years from an asset that is subject to that LRBA. 18. The following examples illustrate how the Safe Harbours apply in conjunction with the opportunity for SMSF trustees to review and revise the terms of their LRBAs before 31 January 2017.","Example 1: real property 19. A complying SMSF borrowed money under an LRBA on terms consistent with section 67A of the SISA. It used the funds to acquire commercial property valued at $500,000 on 1 July 2011. 20. The loan has the following features: 21. We do not consider that this LRBA has been established or maintained on arm's length terms. The income earned from the property, which is rented to an unrelated party, may give rise to NALI. 22. As at 1 July 2015, the property was valued at $643,000. 23. The SMSF has not repaid any of the principal since the loan commenced. 24. If, after considering TD 2016/16, it is determined that the income earned from the property is in fact NALI, to avoid having to report NALI for the current year (and prior years) the Fund has a number of options. Option 1 - Alter the terms of the loan to meet guidelines 25. The SMSF and the lender could alter the terms of the loan arrangement to meet Safe Harbour 1 for real property (see paragraph 6 of this guideline). 26. To bring the terms of the loan into line with Safe Harbour 1, the trustees of the SMSF must ensure that: Option 2 - Refinance through a commercial lender 27. The fund could refinance the LRBA with a commercial lender, extinguish the original arrangement and pay the associated costs. 28. For any period after 1 July 2015 that the original loan remains in place, the SMSF must ensure that the terms of the loan are consistent with an arm's length dealing, and relevant amounts of principal and interest are paid to the original lender. 29. The SMSF may choose to apply the terms set out under Safe Harbour 1 to calculate the amounts of principal and interest to be paid to the original lender for the relevant period. Option 3 - Pay out the LRBA 30. The SMSF may decide to repay the loan to the related party and bring the LRBA to an end before 31 January 2017. 31. For any period after 1 July 2015 that the original loan remains in place, the SMSF must ensure that the terms of the loan are consistent with an arm's length dealing, and the relevant amounts of principal and interest are paid to the original lender. 32. The SMSF may choose to apply the terms set out under Safe Harbour 1 to calculate the amounts of principal and interest to be paid to the original lender for the relevant period. | Example 2: collection of listed shares 33. A complying SMSF borrowed money under an LRBA on terms consistent with section 67A of the SISA. It used the funds to acquire a collection of stock exchange-listed shares valued at $100,000 on 1 July 2011. 34. The loan has the following features: 35. We do not consider that this LRBA has been established or maintained on arm's length terms. The dividend income earned from these shares may give rise to NALI. 36. As at 1 July 2015, the parcel of shares was valued at $120,000. 37. The SMSF has not repaid any of the principal since the loan commenced. 38. If, after considering TD 2016/16, it is determined that the dividend income is in fact NALI, to avoid having to report NALI for the current year (and prior years) the SMSF has a number of options. Option 1 - Alter the terms of the loan to meet guidelines 39. The SMSF and the related party could alter the terms of the loan to comply with Safe Harbour 2 for a collection of stock exchange listed shares (see paragraph 8 of this guideline). 40. To bring the terms of the loan into line with Safe Harbour 2, the trustees of the SMSF must ensure that: Option 2 - Refinance through a commercial lender 41. The SMSF could refinance the LRBA with a commercial lender, extinguish the original arrangement and pay the associated costs. 42. For any period after 1 July 2015 that the original loan remains in place, the SMSF must ensure that the terms of the loan are consistent with an arm's length dealing, and that principal and interest amounts are paid to the original lender. 43. The SMSF may choose to apply the terms set out in Safe Harbour 2 to calculate the amounts of principal and interest to be paid to the original lender for the relevant period. Option 3 - Pay-out the LRBA 44. The SMSF may decide to repay the loan to the related party and bring the LRBA to an end before 31 January 2017. 45. For any period after 1 July 2015 that the original loan remains in place, the SMSF must ensure that the terms of the loan are consistent with an arm's length dealing, and the relevant amounts of principal and interest for that period are paid to the original lender. 46. The SMSF may choose to apply the terms set out in Safe Harbour 2 to calculate the amounts of principal and interest to be paid to the original lender for the relevant period.",,,,False,False,https://www.ato.gov.au/law/view/document?docid=COG/PCG20165/NAT/ATO/00001
PCG 2019/6,Final PCG,OECD hybrid mismatch rules - concept of structured arrangement,,,1 January 2019,,,LCR 2019/3,,"1. This Guideline contains practical guidance to assist taxpayers assessing the risk of the hybrid mismatch rules [1] applying to their circumstances, in particular in relation to the concept of 'structured arrangement' in section 832-210 of the ITAA 1997. [2] 2. The hybrid mismatch rules are intended to neutralise the effects of hybrid mismatches so that unfair tax advantages do not accrue for multinational groups as compared with domestic groups. [3] Whilst hybrid arrangements are most common in controlled group scenarios, it is also possible for a hybrid mismatch to arise between related or unrelated parties by way of a structured arrangement. [4] 3. As a result, there is scope for the rules to apply in these circumstances to deny a deduction or include an amount in assessable income where a payment giving rise to a hybrid mismatch is made under a structured arrangement. 4. This Guideline is focused on providing practical guidance to assist taxpayers in determining whether: such that the hybrid mismatch rules could apply to deny a deduction or include an amount in a taxpayer's assessable income. In addition where the taxpayer is a party to the structured arrangement the imported mismatch rule [6] can apply from 1 January 2019 whereas otherwise application of the rule will be deferred by 12 months. 5. The structured arrangement definition is satisfied in respect of a payment giving rise to a hybrid mismatch where one of the following two limbs is satisfied: 6. An outline of our views on the law is set out in Law Companion Ruling LCR 2019/3 OECD hybrid mismatch rules - concept of structured arrangement. This Guideline should be read in conjunction with LCR 2019/3. Structure of this Guideline 7. This Guideline outlines: 8. The conclusions contained in this Guideline are specific to the facts and circumstances outlined in each example. The examples cannot, and do not, cover every possible circumstance where there may be a structured arrangement. 9. Taxpayers who are unsure whether an arrangement is a structured arrangement after having considered LCR 2019/3 and this Guideline may engage with us to discuss their particular circumstances via hybridmismatches@ato.gov.au .",,,,"Example s: 36. The following examples have been included to provide practical guidance regarding when the Commissioner would consider a structured arrangement would exist and when a taxpayer would be party to the structured arrangement. This includes the types of factors that would be taken into account when determining if a hybrid mismatch has been priced into the terms or is a design feature of a scheme. 37. It is important to note that the examples outlined in this Guideline are not an exhaustive list and that the analysis of whether the scheme is a structured arrangement is dependent on the background facts and assumptions included in each example. | Example 1: hybrid financial instrument mismatch Background facts 38. Foreign Co subscribed for bonds issued by Aus Co prior to the enactment of the hybrid mismatch rules. Foreign Co is unrelated to Aus Co. Aus Co treats the bond as a debt interest for the purposes of Division 974 and, but for the hybrid mismatch rules, would have expected to be entitled to a deduction in Australia for interest on the loan from Foreign Co. Foreign Co subscribed for the bonds after receiving an investment memorandum which included a summary of the expected tax treatment of the instrument in Australia. 39. Interest on the bonds is payable annually in arrears based on the following formula: (London Inter-Bank Offered Rate + arm's length margin) × (1 - (25% × 50%)) 40. Foreign Co is a tax resident of Country B with a tax rate of 25%. In Foreign Co's hands under the laws of Country B, the bond is treated as an equity instrument and the 'interest' will be exempt from income tax in Country B. Foreign Co and Aus Co have agreed to evenly share the benefit associated with the hybrid mismatch (resulting from the deduction/non-inclusion (D/NI) mismatch). [20] Analysis 41. The relevant facts and circumstances would include the choice of instrument, the terms and the pricing of the bond issued by Aus Co to Foreign Co together with correspondence and negotiations regarding the agreed return on the bond. It would also be relevant to consider the particular features of the bond and rights / obligations of the parties whereby the instrument was treated as (deductible) debt for Australian tax purposes and (non-assessable) equity for Country B tax purposes. 42. A payment will be treated as being made under a structured arrangement where the hybrid mismatch has been priced into the terms of the scheme (that is, under the first alternative limb of the definition a structured arrangement). In this case, the terms of the bond directly reference the tax rate for Foreign Co in Country B explicitly, by way of a formula that discounts the market interest rate by an agreed proportion of the tax benefit resulting from the hybrid mismatch. Accordingly, a payment made under this scheme would satisfy the first limb of the definition. 43. The conditions under which the bonds have been issued would also indicate that the second alternative limb of the definition would be satisfied. The explicit terms of the bond including the interest formula combined with the shared understanding of the bond being a tax advantaged product (evidenced by the correspondence and dealings) would be relevant facts for the purposes of this limb. 44. Aus Co would also qualify as a party to the scheme on the basis that it was aware that the tax benefit has been explicitly priced into the return. | Example 2: securitisation vehicle Background facts 45. An Australian lender originates home loans as part of its ordinary financing business. As part of its business model by which it sources funding and manages risk, the Australian lender establishes a securitisation vehicle (SV) and then assigns to the SV in exchange for cash consideration a portfolio containing home loans it has originated. 46. The SV funds the cash consideration for the equitable assignment out of the proceeds from the issue of mortgage-backed loan notes by the SV. The SV has marketed these mortgage-backed loan notes at different risk ratings to investors in various countries. This includes investors who are residents of Country X. 47. The different tranches of notes are priced according to the degree of risk they carry, taking into account where they sit in the credit risk waterfall (that is their relative level of subordination). 48. The terms of the notes do not include any specific references to tax attributes or particular tax outcomes in any jurisdiction (apart from withholding tax warranties) issue. The term of the notes is five years from the date of their issue. 49. In Australia, for taxation purposes from the perspective of SV and any Australian resident note holders, the notes would qualify as debt interests for income tax purposes and the returns would ordinarily be expected to be deductible to SV [21] and assessable to an Australian resident note holder (subject to Division 230) on an accruals basis. There is nothing in the terms of the arrangement (beyond the risk rating of the notes) that would suggest accumulating returns on the note would not be generally be assessable on an accruals basis in investors' home jurisdictions. 50. However, from the perspective of Country X, the lowest-ranked tranche of notes would attract a different tax characterisation such that the return on the notes would be assessed to tax on a realisation basis. In other words, the interest would only be included in the tax base of residents of Country X when paid. 51. Accordingly, in the context of the hybrid financial instruments rule in Subdivision 832-C, there may be a D/NI hybrid mismatch for interest accrued, assuming the SV does not pay returns to note holders until redemption and the redemption date is later than 12 months after the end of the income year in which the deductions arise for the SV. [22] As a result, the question to be answered is whether the arrangement satisfies the structured arrangement scope requirement for Subdivision 832-C to apply. Analysis 52. The relevant facts and circumstances surrounding the scheme would include the choice of instrument, the terms, tax residency and legal form of the SV, the tax residency of each investor, the pricing of the different tranches of notes and the manner in which the notes have been marketed. 53. On the basis that the lowest-ranked tranche of notes has been marketed widely, and has been taken up by a variety of investors in different countries with consistent pricing across those jurisdictions, there would be nothing to suggest that the hybrid mismatch arising in Country X has been priced into the terms of the lowest-ranked mortgage loan notes. Nor would it be reasonable in this context to suggest, given the wide offering and the wide take up of the notes, that the deferred assessability in the hands of a Country X tax resident was a design feature of the note issue. 54. Furthermore consistent pricing across different jurisdictions (including some jurisdictions that will have assessed the income on the notes to tax on an accruals basis) may be relevant to support the position that the resultant hybrid mismatch would not satisfy the first or second limbs of the structured arrangement definition. 55. However, if for example, the SV specifically targeted investors who are resident of Country X regarding the marketing, pricing [23] or take-up of the most subordinated tranches of notes then in these circumstances, it might lead to a different conclusion. Considered as part of the facts and circumstances, this would be relevant in determining whether it is reasonable to conclude that the hybrid mismatch is a design feature of the notes issue and therefore whether the interest payments are made under a structured arrangement. 56. | Example 3: reverse hybrid mismatch Background facts 57. A fund (H Limited Partnership (HLP)) is established in Country H for the purposes of providing a collective investment vehicle for debt interests. HLP is treated as transparent for Country H purposes (that is, Country H regards the partners in HLP as liable to tax in respect of HLP's income and profits). 58. Upon review of the investment memorandum, investment vehicles (AV, BV, CV, and DV) established respectively in countries A, B, C, and D, each invest as limited partners in HLP. Country A (and thus AV) views HLP as transparent for tax purposes. However, under the laws of Country B, C and D, HLP is treated as an entity liable to tax on its own income and profits separate to the partners' liability to tax on their own income or profits. As a result, income derived by HLP is not subject to foreign income tax in Country H or Countries B, C or D. [24] Furthermore, neither BV, CV nor DV is subject to foreign income tax on amounts that are distributed to them by HLP. This is on the basis that the partnership distributions are treated as dividends paid by a controlled foreign company and accordingly attract respective participation exemptions in Countries B, C and D. [25] 59. Investing through HLP has been marketed as a tax-advantaged product to investors in Countries B, C and D. The investment memorandum includes a description of the expected tax consequences for investors in those countries, specifically including a reference to the expectation that HLP should be viewed as a separate taxable entity and that returns should be treated as exempt from tax if investors hold the requisite interests. These features were promoted in marketing materials released alongside the investment memorandum. 60. Aus Co is a tax resident of Australia, and not related in any other way to AV, BV, CV and DV other than via its arrangements with HLP. Aus Co has loan notes on issue which are acquired by HLP shortly after its establishment. The loan notes are issued on arm's length commercial terms and bear a market interest rate. The establishment of HLP and the marketing material used for the purposes of attracting its capital is not relevant to and is not used by HLP in the process of acquiring the loan notes issued by Aus Co. 61. HLP acquired the loan notes with the knowledge that they would be treated as debt in Australia and therefore the interest payment would be deducitble to Aus Co. 62. But for the potential application of the hybrid mismatch rules the interest payments on the loan would be expected to be deductible under section 8-1 to Aus Co. 63. Assume for the purposes of the hybrid mismatch rules that HLP is a reverse hybrid [26] and that the payment made by Aus Co gives rise to a D/NI mismatch (to the extent of the non-inclusion of the receipt of income from BV, CV and DV's perspectives). Analysis 64. The relevant scheme for the purposes of considering whether there is a structured arrangement includes the establishment of HLP [27] with its specific entity characteristics (that is, establishment as a limited partnership in Country H), the issue of the limited partnership interests to AV, BV, CV and DV and the lending of the funds by HLP to Aus Co which are deductible to Aus Co. 65. The facts and circumstances that exist in connection with the scheme indicate that the payment of interest by Aus Co is made under a structured arrangement on the basis that it is reasonable to conclude that the hybrid mismatch was a design feature of that scheme. In particular, the fact that the HLP investment memorandum contained specific references to the tax advantages that may be achieved via the hybrid mismatch outcome for investors from countries B, C and D suggests that the hybrid mismatch [28] was a design feature of the scheme under which the interest payment from Aus Co is made. 66. However, in determining whether Aus Co is a party to the structured arrangement [29] it is necessary to investigate the arrangement from Aus Co's perspective. This is an objective test focussed on what Aus Co could reasonably be expected to have been aware of when it entered into the scheme (that is, when its loan notes were acquired). 67. It is not expected that Aus Co would have to seek further information in respect of HLP's establishment unless it is relevant to its loan notes. That is, the Commissioner would not expect Aus Co to undertake additional due diligence above and beyond what would be reasonably expected ordinarily in this instance regarding risk and reward in relation to its own financial position. As Aus Co has not received a financial benefit (as demonstrated by its arm's length terms and market pricing), it would not be expected that Aus Co would have to make any additional general enquiries about the tax treatment of the payment for HLP. However, where Aus Co has received a financial benefit for example by way of a price at odds with the market, Aus Co would need to make enquires about how the payment is treated in Country H. 68. This conclusion can be contrasted with a situation where, for example, Aus Co was involved with the general partner of HLP prior to the establishment of HLP and was part of the establishment process in relation to HLP. Such a relationship would make it reasonable to expect that Aus Co was aware that the scheme gave rise to a reverse hybrid mismatch. As such, Aus Co could be considered a party to the structured arrangement. | Example 4: imported hybrid mismatch Background facts 69. The Big Brand Group holds intellectual property (IP) in D1 Co. D1 Co grants a licence to D2 Co to exploit the IP in exchange for royalties. In turn, D2 Co grants a sub-licence to BB Sub Co in exchange for a royalty. 70. Pursuant to the sub-licence agreement, BB Sub Co utilises the IP and manufactures goods which are sold to BB Aus Co, a wholly owned member of the Big Brand group of companies. BB Aus Co, acting as a local market limited risk distributor, sells the goods to customers in Australia and but for the potential application of the hybrid mismatch rules, would expect to be entitled to a deduction in Australia for the costs of those goods purchased. 71. The amount received by BB Sub Co for the goods is subject to foreign income tax in BB Sub Co's hands in Country B though that income will largely be offset by the amount of the foreign income tax deduction in Country B for the royalty paid to D2 Co (the amount of such royalty being subject to foreign income tax in Country D in the hands of D2 Co). D2 Co is then entitled to a deduction in Country D for the amount of the royalty paid to D1 Co. 72. D1 Co is a resident of Country D and is wholly owned by Big Brand Co (a resident of Country C). D1 Co is regarded as transparent from the perspective of Country D's income tax law but opaque from the perspective of Country C. As a result the profits of D1 Co are not subject to tax in either Country C (including under Country C's controlled foreign company (CFC) rules) or Country D. 73. Big Brand Co intended to hold IP in D1 Co so that any future payments made either directly or indirectly by Big Brand Co's foreign subsidiaries (as its global reach expanded) to D1 Co, would result in this deduction/non-inclusion outcome being imported to the relevant jurisdiction, and therefore lowering the overall effective tax rate of the group. Accordingly, the decision to exploit the IP internally and the decision to manufacture the goods in Australia were not independent. There was an overall causal nexus between the payments. The importation of the mismatch into Australia does not occur by chance but rather is by design or part of a coordinated plan, one which might pre-date the decision to include BB Aus Co in the plan. Analysis 74. D1 Co is a reverse hybrid with respect to the royalty payments from D2 Co that give rise to a D/NI mismatch. [30] 75. The royalty payments from D2 Co to D1 Co give rise to an offshore hybrid mismatch. BB Sub Co is an interposed entity, D2 Co is an offshore deducting entity and the payment by BB Aus Co to BB Sub Co for their cost of goods sold is an importing payment in relation to the offshore hybrid mismatch. 76. The importing payments made by BB Aus Co will be covered by item 1 of the table in subsection 832-615(2) (the priority table for importing payments) and thereby allocated the highest priority in the application of the importing mismatch rule in Subdivision 832-H if the importing payments are made under a structured arrangement. 77. In determining whether the importing payment is made under a structured arrangement the relevant facts and circumstances would include: 78. The royalty payments made by BB Sub Co to D2 Co and by D2 Co to D1 Co are for the exploitation of the IP. BB Sub Co utilises the IP to manufacture the goods sold to BB Aus Co which then on-sells to the local Australian market. 79. There is a clear commercial/business nexus between the licence and sub-licence agreements and royalty payments and the sale of goods by BB Sub Co to BB Aus Co. The sale of goods by BB Sub Co is commercially dependent on the sub-licence of IP by D2 Co which is in turn commercially dependent on the licence of IP by D1 Co. It would be reasonable to conclude that it was Big Brand Co's intention to import the D/NI mismatch into jurisdictions as it expanded globally (including Australia) and that there is a causal nexus between the payments, as Big Brand Co has established similar structures in other jurisdictions with importation of the hybrid mismatch into those jurisdictions also. The underlying licence agreements in permitting the use of the IP in the manner so used (that is, sub-license or manufacture and distribute) confirm that the individual arrangements comprising the scheme are not isolated and unconnected, but rather have such a nexus which could to support a reasonable conclusion that the hybrid mismatch was a feature of the scheme that also comprised the individual arrangements and the respective payments. 80. In the circumstances it is reasonable to conclude that there is a unifying thread or a nexus between the importing payment (for cost of goods sold (COGS)) made by BB Aus Co to BB Sub Co, the royalty payment by BB Sub Co to D2 Co and the royalty payment by D2 Co to D1 Co. On that basis it would be reasonable to conclude that creating the hybrid mismatch (that is, pursuant to section 832-620, the importing payment in relation to the offshore hybrid mismatch) was deliberate and therefore a design feature of the scheme. As a consequence, the importing payment should be treated as having been made under a structured arrangement pursuant to the definition in section 832-210 for the purpose of the priority table for importing payments in subsection 832-615(2). 81. The payments are all part of a scheme whereby the D/NI mismatch arising between D1 Co and Big Brand Co is imported into Australia. In effect, the result is that the deduction element of the D/NI outcome is the deduction that would otherwise have been available to BB Aus Co at 30%. 82. To be able to demonstrate that the hybrid mismatch was not a design feature in the context of the structured arrangement definition, it would require one to conclude, based on the facts, that the creation of the hybrid mismatch (including its importation into Australia) was inadvertent. It is not considered that this conclusion would be reasonable based on these facts. 83. From BB Aus Co's perspective, in order for the hybrid mismatch rules to impact its entitlement to a COGS deduction in these circumstances, it will be party to the structured arrangement for the purposes of these rules, unless it can satisfy all of the three criteria in subsection 832-210(3), that is, that: 84. In this case, BB Aus Co, BB Sub Co, D2 Co, D1 Co and Big Brand Co are all members of the same Division 832 control group, and at least one of the entities would reasonably have been expected to be aware that the scheme gave rise to the hybrid mismatch (and would have benefited financially from the mismatch). Accordingly, from BB Aus Co's perspective the payment to BB Sub Co has been made under a structured arrangement and BB Aus Co will be taken to be a party to that arrangement. As a result there will be scope for the imported mismatch rule to apply to impact BB Aus Co's entitlement to a deduction relating to its COGS expense.",,,/law/view/document?LocID=%22COG%2FPCG20196EC%2FNAT%2FATO%2F00001%22&PiT=99991231235958,False,False,https://www.ato.gov.au/law/view/document?docid=COG/PCG20196/NAT/ATO/00001
PCG 2018/7,Final PCG,Part IVA of the Income Tax Assessment Act 1936 and restructures of hybrid mismatch arrangements,,,24 August 2018,,,PS LA 2005/24 | TA 2016/10,Case References: Federal Commissioner of Taxation v. Hart (2004) 55 ATR 712 2004 ATC 4599 CPH Property Pty Ltd & Ors v. Commissioner of Taxation (1998) 40 ATR 151 98 ATC 4983 CPH Property Pty Ltd & Ors v. FC of T 98 ATC 4983,"1. This Guideline sets out the ATO's compliance approach to Part IVA of the Income Tax Assessment Act 1936 (Part IVA) and certain restructures that have the effect of preserving Australian tax benefits that would otherwise be disallowed with the enactment of the hybrid mismatch rules. [1] References throughout this document to Part IVA exclude the specific provisions that extended Part IVA to cover the Multinational Anti-Avoidance Law [2] and the Diverted Profits Tax. [3] 2. The hybrid mismatch rules implement into Australian income tax law the recommendations of the Organisation for Economic Cooperation and Development (OECD). [4] The rules are intended to deter the use of certain hybrid arrangements that exploit differences in the tax treatment of an entity or financial instrument under the income tax laws of two or more countries. 3. Consequently where taxpayers have existing hybrid arrangements and it is expected they will attract the operation of the hybrid mismatch rules, a likely response would be for affected taxpayers to restructure out of their hybrid arrangements to avoid any potential adverse impact of the rules. [5] The enactment of the hybrid mismatch rules with a deferred commencement date is intended to allow taxpayers time to review their existing hybrid arrangements and to unwind or restructure out of such arrangements in advance of the rules if they so choose. 4. Concerns have been raised about the potential for the Commissioner to apply Part IVA to cancel all or part of a tax benefit where a taxpayer restructures an existing hybrid arrangement to avoid the application of the hybrid mismatch rules. This may involve, for example, replacing a hybrid financing instrument with a debt instrument to eliminate tax benefits in another country but preserve tax benefits going forward, in the form of deductible debt, in Australia. 5. This Guideline is designed to assist taxpayers to manage their compliance risk in these circumstances where their intention is to eliminate double non-taxation outcomes, consistent with the underlying objective of the hybrid mismatch rules. [6] It does so by outlining restructuring that the Commissioner considers to be 'low risk' and to which the Commissioner would not seek to apply Part IVA. 6. The description of a low risk arrangement is illustrated by scenarios involving straight-forward restructuring that merely remove the hybrid element of existing arrangements whilst keeping the surrounding facts and circumstances unchanged (for example, relevant nexus to the derivation of assessable income). This reflects the purpose of this Guideline to provide assurance that has been sought in respect of this type of restructuring in terms of Part IVA. It is not intended to provide more detailed technical guidance on when Part IVA could potentially apply to more complex restructuring scenarios. Such guidance would be of limited practical utility given the nature of Part IVA and the overriding importance of facts and circumstances in each particular case. 7. Existing guidance material covering the administration and application of Part IVA more broadly is available in Law Administration Practice Statement PS LA 2005/24 Application of General Anti-Avoidance Rules.",,,"Intro: 10. The character of schemes before and after any change, rather than the fact of change, will generally determine the application of Part IVA. Where a taxpayer has engaged in ordinary commercial dealings before a change and engages in ordinary commercial dealings after the change, the fact that the change preserves a tax benefit will generally have no significance. This is because a tax avoidance purpose will not be inferred from normal business dealings just because a tax benefit is obtained as a result. [7] 11. For the same reason, the alteration of a contrived scheme to one that is an ordinary dealing (albeit one that results in the obtaining of a tax benefit) would not ordinarily invite an inference that the main purpose of the new dealing is to obtain the benefit. Obviously, if the scheme after the change is in itself contrived, different considerations arise, and schemes that are contrived before and after the change will naturally invite the closest examination. 12. Where, as a result of the restructure the hybrid mismatch rules will have no application (for example, a deduction/non-inclusion (D/NI) or double deduction (DD) outcome has been eliminated), an Australian tax benefit may be consequently obtained. In such a case, the replacement arrangement would be considered low risk such that the Commissioner would not seek to apply Part IVA where the restructure merely removes the double non-taxation outcome and the arrangement is itself an ordinary commercial dealing or structure without contrived features that would otherwise attract Part IVA. 13. For the purposes of this Guideline, elimination of double non-taxation outcomes means there is an expectation that if under such a restructure the Australian tax implications are preserved, then the tax implications in the other jurisdiction will be correspondingly altered. Accordingly, based on that expectation in a D/NI scenario, where the tax benefit in Australia takes the form of allowable deductions, we would expect to see that the corresponding income is subject to tax in the other country after the restructure. Alternatively, where the tax benefit in Australia takes the form of non-inclusion of assessable income, after the restructure we would expect to see that the deduction is no longer available in the other country. In a DD scenario, we would expect to see that the deduction is no longer available in the other country. 14. To help you manage your compliance risk with respect to Part IVA, this Guideline outlines a number of factors we would expect to see to qualify the restructure as low risk. Whilst ideally all of the factors should be present, we appreciate that in some circumstances that might not be possible perhaps because one of the factors might not be appropriate or relevant in the particular circumstances. Specific restructuring scenarios are included to illustrate the types of arrangements that meet the low risk description outlined in paragraph 12 of this guideline. These low risk scenarios involve restructuring that merely eliminates a D/NI or DD outcome and preserves an Australian tax benefit that would otherwise be denied under the hybrid mismatch rules. 15. It is important to note that this low risk characterisation is predicated on the replacement arrangement otherwise being an ordinary commercial dealing. This Guideline has no application to an arrangement that, regardless of the hybrid element, contains features that would otherwise have attracted the application of Part IVA. [8] In such an instance, the mere removal of the hybrid element of an arrangement will not preclude Part IVA scrutiny of an arrangement that otherwise has features of artificiality or contrivance. 16. Furthermore, it should not be assumed [9] that restructuring arrangements in anticipation of the rules will necessarily be considered low risk and not subject to scrutiny by the ATO merely because they were entered into prior to enactment of the hybrid rules, particularly where such arrangements continue to be carried out and given effect after enactment. In this regard, it is important to note the relevance of matters in subsection 177D(2) of the ITAA 1936 that specifically look forward to the result that would be achieved by a scheme in relation to the operation of the Act or in terms of changes in financial position of relevant entities. It is the character of the scheme entered into or being carried out that will generally determine the application of Part IVA. 17. Finally, it should not be inferred from this Guideline that restructuring which does not accord with the low risk characterisation outlined in this Guideline necessitates a conclusion that Part IVA applies to the restructure. Rather it means that the risk of Part IVA cannot be assumed to be low and, as a result, we may conduct further compliance activity to review the restructure from a Part IVA perspective to obtain appropriate assurance. If you are looking to assure a proposed restructure in this context, we recommend that this can be best achieved through early engagement (refer to paragraphs 68 to 70 of this Guideline for further details). | Qualifying as low risk: 18. Each of the scenarios includes a description of the original hybrid arrangement before the restructure and the replacement arrangement following the restructure. The scenarios contain minimal facts as it is not the intention of this Guideline to prescribe all the possible combinations or sequences of steps that may or may not be acceptable under each scenario. We would expect the following factors to be present for a restructure to qualify as low risk. 19. The presence of features that are inconsistent with the factors outlined in paragraph 18 of this Guideline would be expected to indicate a higher compliance risk, which the Commissioner may investigate using the current framework of compliance engagement. It is not, however, the intention of this Guideline to prescribe technical advice on the full range of factors that could more heavily point towards the application of Part IVA. This would need to be determined on the facts and circumstances of each case. 20. Necessarily for the purposes of this Guideline, it must be assumed that the replacement arrangement is otherwise tax effective. That is, disregarding the potential application of Part IVA to the restructure, the replacement arrangement has the effect of preserving a tax benefit enjoyed under the original arrangement (be it an allowable deduction or the non-inclusion of an amount in a taxpayers assessable income). In the scenarios described in this Guideline, a taxpayer would need to consider as a separate exercise the availability of the tax benefit under the relevant operative provision (for example, sections 8-1 or 25-90 of the ITAA 1997) and the potential impact of any other integrity measures (including Subdivision 832-J of the ITAA 1997). Such analysis falls outside the scope of this Guideline. | Low risk scenarios: 21. In each of the following scenarios, it is assumed that the foreign jurisdictions have not implemented their own versions of the hybrid mismatch rules. In addition, the scenarios do not consider or discuss the impact of other provisions of the tax laws which may also have application (for example, the thin capitalisation or withholding tax rules). 22. Further, it is important to note that the scenarios outlined in this Guideline are not an exhaustive list. Whilst the majority of examples are financing arrangements, this Guideline also has application to the restructure of non-financing arrangements which would also potentially be impacted by the hybrid mismatch rules. For restructures falling outside these scenarios, the five factors outlined in paragraph 18 of this Guideline should be considered for the purposes of performing a risk assessment. | Scenario 1 - inbound mandatorily redeemable preference shares: 23. B Co is a company and a tax resident of Country B. Aus Co is a wholly-owned subsidiary of B Co and a tax resident of Australia. Hybrid arrangement 24. Under an existing arrangement, Aus Co has issued mandatorily redeemable preference shares (MRPS) to B Co. The funds raised through the MRPS are used to expand Aus Co's business operations in Australia. 25. Based on the terms of the MRPS, it would be a hybrid financial instrument [13] which gives rise to the following hybrid (D/NI) outcome: 26. In the absence of Australia's hybrid mismatch rules, this outcome would have been expected to continue for the remaining term of the MRPS. Replacement arrangement 27. Aus Co and B Co decide to refinance the MRPS to neutralise the hybrid (D/NI) outcome and take the necessary steps to replace the MRPS with an ordinary interest bearing shareholder's loan. 28. Under the replacement arrangement: 29. Notwithstanding Aus Co's entitlement to deductions for the servicing costs of the funds received from B Co has been preserved in Australia under the replacement arrangement, the D/NI outcome has been neutralised by the inclusion of the interest income in Country B's tax base. | Scenario 2 - outbound profit participating loan: 30. Aus Co is a tax resident of Australia and wholly owns B Co, a tax resident of Country B. Hybrid arrangement 31. Under an existing arrangement, Aus Co provides funding to B Co in the form of a profit participating loan (PPL). 32. Based on its terms, the PPL would be a hybrid financial instrument [14] giving rise to the following hybrid (D/NI) outcome: 33. In the absence of Australia's hybrid mismatch rules, this outcome would have been expected to continue for the remaining term of the PPL. Replacement arrangement 34. Aus Co and B Co decide to refinance the PPL to neutralise the hybrid (D/NI) outcome and take the necessary steps to replace the PPL with ordinary equity. 35. Under the replacement arrangement: 36. Notwithstanding Aus Co's entitlement to treat amounts received from B Co as non-assessable non-exempt income has been preserved in Australia under the replacement arrangement, the D/NI outcome has been neutralised by the elimination of an interest deduction from Country B's tax base. | Scenario 3 - inbound Australian limited partnership: 37. Australian Limited Partnership (Aus LP), Head Co and Aus Sub are all members of an Australian Multiple Entry Consolidated Group (Aus MEC Group) and tax resident in Australia. The Aus LP is an eligible Tier-1 company and Head Co is the provisional head company of the Aus MEC Group. 38. The partners of the Aus LP are tax residents of Country B and Aus LP has an existing loan with a third party bank. Hybrid arrangement 39. For Australian tax purposes, Aus LP is viewed as a company, but is also treated as part of Head Co (the head company of the Aus MEC Group) by virtue of the single entity rule. [15] 40. Under the tax law of Country B, Aus LP is treated as a transparent entity. 41. Aus LP would be a hybrid entity [16] and interest on its bank loan gives rise to the following hybrid (DD) outcome: 42. In the absence of Australia's hybrid mismatch rules, it is reasonable to expect that this outcome would have continued for the remaining term of the bank loan. Replacement arrangement 43. In order to neutralise the hybrid (DD) outcome, a decision is made to undertake an internal reorganisation of the group. Steps are taken to replace the Aus LP's existing partners in Country B (for instance through equity contribution of the Aus LP interests) with Australian resident partners, being the existing members of the Aus MEC Group (Head Co and Aus Sub). 44. Under the replacement structure: 45. Notwithstanding Head Co's entitlement to interest deductions in Australia on the bank loan continues under the replacement structure, the DD outcome has been neutralised by the elimination of the deduction in Country B. | Scenario 4 - outbound general partnership: 46. Aus Sub 1 and Aus Sub 2 hold a partnership interest in a general partnership (GP), which is formed under the laws of Country B. Head Co, Aus Sub 1, Aus Sub 2 and GP are members of the same Australian tax consolidated group (Aus TCG). 47. GP has an existing loan with a third party bank. Hybrid arrangement 48. GP is viewed as a transparent (flow through) entity for Australian tax purposes, but as an opaque (taxable) entity under Country B's tax law. 49. GP would be a hybrid entity [17] and interest payments made by GP on the bank loan give rise to a DD outcome as both GP and Head Co are entitled to deductions for the interest on the bank loan in Country B and Australia, respectively. Replacement arrangement 50. In order to neutralise the hybrid (DD) outcome, it is decided that GP will repay the existing bank loan in full using equity funding from Aus Sub 2 which, in turn, will enter into a new replacement loan with the bank. 51. Under the replacement arrangement, Head Co will continue to be entitled to a deduction in Australia for interest on the bank loan, but no such entitlement would arise under the replacement structure in Country B. Accordingly the hybrid (DD) outcome will have been neutralised. | Scenario 5 - removal of hybrid entity by election: 52. B Co is a company and a tax resident of the United States of America ('US'). Aus Co is a wholly-owned subsidiary of B Co and a tax resident of Australia. A 'check-the-box' election has been filed to treat Aus Co as a disregarded entity (that is, Aus Co is not treated as a separate entity but rather as part of B Co for the purposes of US Federal income tax law). [18] 53. Under an existing arrangement, B Co holds intellectual property and grants Aus Co a right to use that intellectual property in consideration for royalty payments from Aus Co. Aus Co utilises these rights in earning its assessable income. Hybrid arrangement 54. Aus Co is viewed as a stand-alone tax-paying entity for Australian tax purposes, but as a transparent (disregarded) entity for US tax purposes. 55. B Co is a regarded stand-alone liable entity for US tax purposes. 56. Aus Co would be a hybrid entity [19] and the royalty payments made by Aus Co to B Co give rise to the following hybrid (D/NI) outcome: 57. In the absence of Australia's hybrid mismatch rules, it is reasonable to expect that this outcome would have continued for the foreseeable future. Replacement arrangement 58. In order to neutralise the hybrid (D/NI) outcome, Aus Co's entity classification under the check-the-box rules is changed to being a separate regarded (taxable) entity under US Federal income tax law and consequently Aus Co's entity characterisation under both US and Australian income tax law matches. This results in the following outcomes under the replacement arrangement: 59. Notwithstanding Aus Co continues to be entitled to deductions in Australia for the royalty payments, the D/NI outcome has been neutralised by the change in income tax treatment of Aus Co in the US resulting in the inclusion of the royalty payments in B Co's income tax base. | Scenario 6 - removal of hybrid entity involvement: 60. B Co is a company and a tax resident of Country B. Aus Co is a wholly-owned subsidiary of B Co and a tax resident of Australia. C Co is another wholly-owned entity of B Co and is established under the laws of Country C. 61. Aus Co has an existing loan arrangement with C Co under which it makes interest payments to C Co. Aus Co uses these funds in earning its assessable income and continues to require this funding. Hybrid arrangement 62. C Co is viewed as a transparent (flow through) entity for Country C's tax law, but as a stand-alone tax-paying entity for Country B's tax purposes. 63. C Co is a reverse hybrid entity [20] and the interest payments made by Aus Co to C Co give rise to the following hybrid (D/NI) outcome: 64. In the absence of Australia's hybrid mismatch rules, it is reasonable to expect that this outcome would have continued for the remaining term of the loan. Replacement arrangement 65. The decision is taken to neutralise the hybrid (D/NI) outcome by Aus Co issuing an ordinary interest bearing loan to B Co and using the facility to repay the original loan arrangement to C Co, whereby: 66. Notwithstanding Aus Co has preserved its entitlement to deductions in Australia for interest payments, the D/NI outcome has been neutralised by the replacement of C Co with B Co and the inclusion of the interest payments in B Co's tax base in Country B. 67. This conclusion would equally apply to that same Replacement arrangement in respect of the following variation of the Scenario 6 pre-restructure hybrid arrangement: | Early engagement and reporting your risk assessment: 68. If you are considering restructuring in a way that falls outside the low risk scenarios or that does not satisfy the five factors in paragraph 18 of this Guideline, and you would like to mitigate your compliance risk or obtain a greater level of certainty, we encourage you to engage with us about your proposed restructure. 69. You can also send any general enquiries to us at: hybridmismatches@ato.gov.au . 70. You may be required to disclose information about your arrangements or any restructures in the International Dealings Schedule or Local file - short form (as part of Country by Country reporting) or Reportable Tax Position (RTP) schedule.",,,,,False,False,https://www.ato.gov.au/law/view/document?docid=COG/PCG20187/NAT/ATO/00001
PCG 2018/5,Final PCG,Diverted profits tax,,,1 July 2017,,,LCR 2015/2 | LCR 2018/6 | PS LA 2007/8 | PS LA 2015/4 | PS LA 2017/2,,1. This Guideline sets out our risk assessment and client engagement frameworks for the diverted profits tax (DPT). It also outlines our compliance approach when the DPT is identified as an area of concern. 2. You can use this Guideline to: Structure of this Guideline 3. This Guideline is structured as follows:,,"4. The DPT is designed to ensure that significant global entities (SGEs) pay tax in Australia that properly reflects the economic substance of their activities in Australia and that they do not reduce the amount of tax they pay by diverting profits offshore through contrived arrangements with related parties. The measure is also intended to encourage taxpayers to provide information to the Commissioner to allow for the more timely resolution of tax disputes. 5. The DPT applies to DPT tax benefits obtained in income years commencing on or after 1 July 2017, even if the scheme was entered into or commenced before that time. Where the DPT applies, the Commissioner may make a DPT assessment imposing tax at a rate of 40% on the diverted profit. 6. For the DPT to apply, the following criteria must be satisfied: 7. An outline of our views on the law is set out in Law Companion Ruling LCR 2018/6 Diverted profits tax. This Guideline should be read in conjunction with LCR 2018/6. 8. Due to the seriousness of making a DPT assessment, Law Administration Practice Statement PS LA 2017/2 Diverted profits tax assessments provides direction to our staff on the steps that must be followed in order to make a DPT assessment, and after a DPT assessment is made. The process outlined in PS LA 2017/2 is rigorous and includes several layers of endorsement and oversight.","General compliance activity: 10. We expect that a DPT risk will usually be identified in the course of our ordinary compliance activity. 11. Once a DPT risk is identified, our compliance approach may include ongoing monitoring of the risk or active consideration. Our decision-making process in relation to compliance activity is guided by the circumstances of the particular case. We will generally prioritise our resources to address arrangements that we consider pose the highest risk. 12. We will generally tell you if we intend to commence an examination of a DPT risk. As part of our examination, we will consider information available to us and may request further information from you as outlined in the documentation section of this Guideline. 13. We will seek to communicate our findings to you once we have concluded our examination and will outline our proposed compliance approach going forward. This may include further compliance activity or no further action. If we consider your arrangement to be low risk, we may continue to monitor your arrangement having regard to any additional information that becomes available. 14. In some cases we may identify other treatment strategies where there is an identified DPT risk. This may include a recommendation to seek greater certainty through an advance pricing arrangement (APA) or a private ruling. 15. It is important to note that in the course of our compliance activity we may consider the application of the DPT concurrently with other provisions of the income tax law, including the transfer pricing rules in Division 815 of the Income Tax Assessment Act 1997 (ITAA 1997). In order for the DPT to apply, the criteria set out in paragraph 6 of this Guideline must be satisfied. These criteria include the principal purpose test in paragraph 177J(1)(b) which is the central provision around which the DPT operates. [2] Consequently, while the DPT provisions are not provisions of last resort, consistent with the operation of Part IVA generally, it is expected that the DPT will be applied in limited circumstances. | APAs: 16. The extent to which an APA provides assurance in relation to the potential application of the DPT will depend upon the date that the APA application or renewal is or was entered into, and whether the APA contains a DPT clause. The DPT clause is explained at paragraphs 53 to 55 of this Guideline. APA applications and renewals entered into prior to 4 April 2017 [3] 17. In these circumstances, assurance relating to the DPT will generally not be provided to a taxpayer. APA applications and renewals entered into on or after 4 April 2017 18. In these circumstances, the covered transactions will generally be considered low risk for the purposes of the DPT for the period of the APA. The relevance of a low risk rating is explained at paragraph 19 of this Guideline. Monitoring compliance stage 19. In reviewing a lodged Annual Compliance Report, where the covered transactions are considered to be low risk for the purposes of the DPT, we will generally not apply compliance resources to review the potential application of the DPT. This however, does not afford the same protection as an APA that includes a DPT clause. 20. If the APA includes a DPT clause, we will only consider the application of the DPT in relation to the covered transactions where the taxpayer has not complied with the terms of the APA or where there has been a breach of an APA critical assumption. 21. Where there has been a breach of an APA critical assumption, we will consider our treatment of the breach in accordance with Law Administration Practice Statement PS LA 2015/4 Advance Pricing Arrangements. For instance, if there is a material change in the facts about the taxpayer or its affiliates that constitutes a breach, we may consider whether the change in circumstances results in a potential risk of the DPT applying to the covered transactions. | Settlements: 22. If there is a risk that the DPT may apply to an arrangement covered by a proposed settlement, we will generally seek to resolve the matter before proceeding with the settlement. 23. Taxpayers may request the insertion of a DPT clause in their settlement deeds. We will consider the insertion of such a clause on a case by case basis. Taxpayers engaged in settlement negotiations with us who would like such a clause are encouraged to make a request during the early stages of the settlement negotiations. | Our risk assessment framework: 24. This section is designed to assist you in assessing the risk of your arrangement. This section contains: 25. You should consider this section in conjunction with the DPT risk assessment process at Appendix 1 of this Guideline. | Our framing questions for assessing risk: 26. You can assess the risk of your arrangement having regard to the framing questions outlined in paragraphs 27 to 31 of this Guideline. The framing questions are indicative of the matters we are likely to consider when assessing the risk that the DPT applies to an arrangement. The framing questions are separated into a number of categories although there may in a particular case be significant overlap in relation to these categories. Preliminary framing questions 27. In conducting a preliminary assessment of risk we will generally consider the following questions: 28. If any of these questions are answered in the negative then we are unlikely to consider the potential application of the DPT further (other than to test or confirm the conclusion reached and monitor any future arrangements). Transaction-specific framing questions 29. In assessing the risk of a particular arrangement we may consider a number of transaction-specific framing questions if the taxpayer is otherwise within the scope of the DPT. These questions are likely to focus on whether the arrangement involves: Framing questions relevant to the principal purpose test 30. The following questions may be relevant to the application of the principal purpose test. The questions outlined in paragraph 31 of this Guideline may also be relevant when considering this test: Framing questions relevant to the SES test 31. In assessing whether an arrangement satisfies the SES test, we are likely to consider the following kinds of questions. Affirmative answers to the following questions indicate a greater likelihood of satisfying the SES test: | Matters relevant to the application of the SES test: 32. The SES test is an exception to the application of the DPT. The SES test will apply (that is, the exception will be satisfied) where it is reasonable to conclude that the profit made as a result of a scheme by each relevant entity reasonably reflects the economic substance of the entity's activities in connection with the scheme. 33. The scenarios at Appendix 2 of this Guideline are provided to illustrate some of the matters we will consider in assessing risk in relation to the SES test. 34. The scenarios at Appendix 2 include both high and low risk scenarios. The high risk scenarios highlight the circumstances in which we consider it unlikely that the SES test will apply. The low risk scenarios highlight the circumstances in which we consider it likely that the SES test will apply. 35. Under the SES test, to the extent relevant, regard is to be had to the 2010 OECD Transfer Pricing Guidelines (the OECD Guidelines) and other documents covered by section 815-135 of the ITAA 1997 [4] in determining whether the profit made by an entity reasonably reflects the economic substance of the entity's activities in connection with the scheme. 36. When we are determining whether the profit made by an entity reasonably reflects the economic substance of the entity's activities in connection with the scheme, to the extent relevant, we will have regard to the OECD Guidelines [5] in relation to the use of transfer pricing methods including both the traditional transaction methods and the transactional profit methods. The appropriate method will depend on the circumstances of the particular case. 37. Generally, we will accept, based on an assessment of sufficient information and documentation, a profit that falls within a range of acceptable results, provided that the profit made by each entity reasonably reflects the relative significance of the functions performed by the entity and the entity's relative contribution within the context of the overall value chain. 38. In addition, in considering the 'profit' made by each entity as a result of the scheme, we will generally determine 'profit' in a general commercial sense, having regard to accounting measures as a guide. | Other relevant guidance products: 39. We consider the following guidance products relevant to determining the level of engagement we expect from you: 40. If your arrangement is in the green zone under PCG 2017/1 or PCG 2017/4 [6] , there is no expectation that you will separately engage with us in relation to the DPT. Practically, this means we will generally only dedicate compliance resources to review your arrangement in accordance with the relevant Guideline. 41. Similarly, if your arrangement is in the white zone under PCG 2017/1 or PCG 2017/4, we will generally only undertake compliance activity to the extent stipulated in the relevant Guideline. 42. If you are eligible to apply any of the following simplified transfer pricing record keeping options under PCG 2017/2, there is no expectation that you will separately engage with us in relation to the DPT for covered transactions: 43. Practically, this means we will generally only undertake compliance activity to the extent stipulated in the Guideline. 44. Our approach to assessing risk in such cases is limited to the types of arrangements outlined in the specified Guidelines. Guidance products - insurance arrangements 45. When considering the application of the DPT in the context of insurance arrangements, we will have regard, among other relevant matters, to existing ATO advice and guidance on these arrangements. Specifically, we will have regard to the guidance contained in Taxation Ruling TR 96/2 Income tax: taxation implications of arrangements known as financial insurance and financial reinsurance and Law Administration Practice Statement PS LA 2007/8 Treatment of non-resident captive insurance arrangements. 46. Refer to SES Scenario 12 in Appendix 2 of this Guideline for an example of an insurance arrangement that would be considered low risk for the SES test. | Our client engagement framework: 47. We expect you to engage with us if, having considered the risk of your arrangement taking into account our risk assessment framework, you conclude that there is a potential DPT risk associated with your arrangement. 48. If your arrangement requires further engagement with the ATO to obtain greater certainty, the main avenues of engagement are: 49. As early as possible during the APA or private ruling process, we will advise you if an alternative product is better suited to your circumstances. | APA program: 50. The APA program can provide certainty with respect to the application of the DPT to covered transactions for an agreed period. For certain DPT tax benefits [7] , the APA program is our preferred product when we need to consider the substance of a group's overall value chain. 51. In most cases, we do not expect the DPT to be a risk that will potentially affect the outcome of an APA. However, where it does represent such a risk, where practicable, we will seek to deal with the DPT as a collateral issue in parallel with the development of the APA. 52. Where it is not practicable to resolve a DPT risk during the APA process, it is unlikely that we will proceed with the APA and the matter may be referred internally for further consideration. DPT clause 53. If you wish to obtain further assurance in relation to the DPT, you can request that a DPT clause be inserted into an APA. The standard DPT clause provides written assurance to you that, in relation to the covered transactions under an APA, we will not seek to issue a DPT assessment for the income years covered by the APA. However, this is subject to: 54. At your request, we will consider extending the standard DPT clause to include a DPT tax benefit that arises from a tax benefit referred to in paragraphs 177C(1)(bb), (bbaa), (bba) and/or (bc). Taxpayers may be required to provide further information to enable us to make a decision in relation to any such request. 55. If you would like a DPT clause included in an APA, we ask that you make note of it in your APA submission or as early as possible in the APA process. | Private rulings: 56. You may lodge a request for a private ruling on the application of the DPT in relation to a particular arrangement. A private ruling may be appropriate where you require a greater level of certainty in relation to the application of the law. 57. However, it should be noted that you will only obtain a greater level of certainty if the arrangement ruled upon reflects the arrangement actually carried out, and all relevant matters are disclosed. | Contacting the DPT specialist team: 58. The ATO has a dedicated team responsible for the DPT. If you have a general enquiry regarding our engagement strategy, you may contact us at divertedprofitstax@ato.gov.au . | Relevant documentation: 59. There are no specific record-keeping requirements for the DPT. Taxpayers will need to keep appropriate records of their arrangements and transactions in the normal way. 60. We have, however, sought to outline in paragraphs 62 to 72 of this Guideline the kinds of documentation we may consider relevant should your arrangement require engagement (for example, during the APA process). The documentation may also be relevant when we are assessing risk during compliance activity. 61. The documentation outlined in this Guideline is intended as a general guide and should not be treated as an exhaustive or mandatory list of the kinds of documentation we may take into account. The relevance of particular documentation will turn on the circumstances of the arrangement in question. General 62. In considering the application of the DPT, we will have regard to information in our possession, including but not limited to: 63. To further assist us in considering the application of the DPT, you may provide the following information: 64. Where you have chosen to use a simplified transfer pricing record keeping option, we will have regard to the record-keeping obligations outlined in PCG 2017/2. Principal purpose test 65. In considering the application of the principal purpose test, we may have regard to the following kinds of source documents, where they are relevant to the matters listed in subsection 177J(2): Sufficient foreign tax test 66. In considering the application of the sufficient foreign tax test, we may have regard to the following kinds of documents: SES test 67. In considering the application of the SES test, we may have regard to the following kinds of documents: 68. The documents that will be relevant in a particular case will depend on the circumstances of the case including the nature of the arrangement and the relevant industry sector. We provide some further guidance in relation to specific kinds of arrangements in paragraphs 69 to 72 of this Guideline. Related party financing arrangements 69. In the context of related party financing arrangements and related transactions, paragraph 65 of PCG 2017/4 provides examples of the kind of documentation that may be relevant in relation to the relevant risk indicators. Procurement, marketing, sales and distribution hubs 70. The framing questions listed at paragraphs 111 to 113 of PCG 2017/1 may assist taxpayers in identifying and preparing relevant documents in relation to procurement, marketing, sales and distribution hubs. Intellectual property arrangements 71. For intellectual property (IP) arrangements, we will pay close attention to intercompany agreements and company policies relating to the development, enhancement, maintenance, protection and exploitation of the relevant intangible assets. Source documents evidencing that the relevant entities are operating in accordance with intercompany agreements, company policies, transfer pricing documentation and other information supplied for the relevant period are likely to assist us in considering the application of the SES test. 72. We may also have regard to the following kinds of documents:",,"Appendix 1: DPT risk assessment process | Appendix 2: Low and high risk scenarios for the SES test SES Scenario 1: lease in lease out arrangement - high risk Background 73. Australia Co is a wholly owned subsidiary of a global parent entity engaged in the operation of oil drilling rigs. Asset Co and Sub-lessor Co are also members of the global group. 74. Asset Co is the legal owner of a drilling rig and provides the requisite finance and insurance for the asset. Asset Co is a resident of a country that does not have a tax treaty with Australia. Sub-lessor Co is resident of a country that has a tax treaty with Australia. 75. Asset Co leases the rig to Sub-lessor Co under the Master Lease for $300 million per annum. 76. Sub-lessor Co sub-leases the rig to Australia Co on substantially the same terms for the same period for $350 million per annum under a sub-lease arrangement. 77. Australia Co utilises the rig in the conduct of its business. As part of the conduct of its business, Australia Co is responsible for identifying and liaising with third party customers, the marketing and scheduling of the rig, managing its outsourced contractors, and managing operational, environmental and utilisation risks associated with the rig. 78. The sub-lease contract between Sub-lessor Co and Australia Co mirrors the terms of the Master Lease agreement and there are no inherent risks borne by Sub-lessor Co. Accordingly, risks are shared between Asset Co and Australia Co. 79. After taking into account the costs associated with the running of its business, Australia Co makes a return commensurate with its functional profile. 80. Service Co is a foreign related party of Australia Co and undertakes various technical, crewing and other services related to the operation of the rig on behalf of Australia Co. Service Co employs staff with the requisite skills to perform the obligations under the contracts. 81. The interposition of Sub-lessor Co results in a reduction or exclusion from Asset Co's liability to pay royalty withholding tax on the lease payment. This is a consequence of the Double Tax Agreement in force between Australia and the foreign country in which Sub-lessor Co is a tax resident. 82. There is a substantial equipment permanent establishment (PE) of Sub-lessor Co in Australia. However, Sub-lessor Co does not perform any additional functions that would result in Sub-lessor Co being considered to be carrying on a business through a PE in Australia (pursuant to subsection 6(1)) and the relevant treaty does not deem the PE to be carrying on a business. As such, no Australian royalty withholding tax could apply between the lease payments made by Sub-lessor Co to Asset Co. SES analysis 83. Based on the information available to us, the profit made as a result of the scheme by Australia Co and Service Co appears to reasonably reflect the economic substance of the entity's activities in connection with the scheme. 84. Notwithstanding Sub-lessor Co being party to the sub-lease agreement with Australia Co, it does not undertake any active functions in respect of the sub-lease. No independent consideration or negotiation is undertaken by Sub-lessor Co to determine the relevant terms and conditions of the sub-lease nor does Sub-lessor Co actively engage in managing any inherent risks from the underlying agreement (for example, defaulting payments). 85. Based on the information available to us, the profit made as a result of the scheme by Sub-lessor Co ($50 million) does not appear to reasonably reflect the economic substance of Sub-lessor Co's activities in connection with the scheme. 86. Asset Co, as the Master Lease holder, is responsible for the acquisition and financing of the rig, and the ongoing insurance of the rig with external providers. A functional analysis determines that Asset Co should have received $350 million for its economic activities in connection with the scheme. 87. Based on the information available to us, the profit made by Asset Co as a result of the scheme does not appear to reasonably reflect the economic substance of Asset Co's activities in connection with the scheme. We would consider this to be high risk in the context of the SES test. SES Scenario 2: lease in lease out arrangement - low risk 88. Assume the following modifications to the facts of Scenario 1 in paragraphs 73 to 87 of this Guideline. 89. Sub-lessor Co is the central leasing entity for the global group and is responsible for the sub-lease of rigs to related party operating entities in various regions of the world (including the Mediterranean, Africa and South America). Sub-lessor Co is responsible for global marketing and scheduling of the rigs, managing outsourced contractors, and adhering to local government reporting and compliance obligations in the country of Sub-lessor Co. Sub-lessor Co also bears utilisation risk in relation to the vessel and its financial performance is a function of its ability to optimise utilisation of the asset during the period of the head lease. 90. Sub-lessor Co enters into a Master Lease agreement with Asset Co under arm's length terms. Sub-lessor Co then sub-leases the rig to Australia Co after negotiating the terms and conditions of the lease for $350 million per annum under a sub-lease arrangement. Australia Co utilises the asset in the conduct of its oil drilling business. 91. In this modified scenario, Sub-lessor Co is able to demonstrate that it carries out significant functions and bears actual risk in its role as sub-lessor. After taking into account the costs associated with the running of its business, Australia Co makes a return commensurate with its functional profile and Asset Co is remunerated in accordance with the financial and economic risks borne by it in respect of the rig. 92. Based on the information available to us, the profits made by Australia Co, Asset Co and Sub-lessor Co as a result of the scheme appear to reasonably reflect the economic substance of their activities in connection with the scheme. We would consider this to be low risk in the context of the SES test. SES Scenario 3: intangibles migration (pharmaceutical) - high risk Background 93. Australia Co is part of a global pharmaceutical group. The group's core business is the development and commercialisation of pharmaceutical products. The group derives the bulk of its income from the sale of medicinal drugs. The development and manufacture of the drugs requires the group to exploit a range of IP assets. 94. On 1 July 2017, the group restructured. Prior to the restructure, Australia Co was the legal and beneficial owner of the IP associated with medicinal drug #16 (MD16) including registered trademarks, patents, know-how and processes. Australia Co performed all functions associated with developing, enhancing, maintaining, protecting and exploiting MD16. This involved funding and managing the development of the drug over a 10 year period, including: 95. On 1 July 2017, at the final stage of clinical trials and prior to commercialisation, Australia Co and Foreign Co entered into an agreement which legally transferred the ownership of all the existing registered IP relating to MD16 to Foreign Co. This included exclusive rights to utilise the registered IP for the manufacturing, distribution, marketing and commercialisation process. The trademarks for the product were also permanently assigned to Foreign Co. Foreign Co is the legal owner of the IP for MD16 post 1 July 2017. 96. At the time the registered IP was transferred, Foreign Co employed a small number of staff with limited experience in the development and commercialisation of pharmaceutical products. 97. Following the disposal, a manufacturing contract was entered into between Foreign Co and a third party manufacturer to produce MD16 for the purpose of global sales. Evidence available to us indicates that Australia Co undertakes functions related to the manufacture and commercialisation of MD16 for the global market, including: 98. Australia Co also continues to perform functions associated with developing, enhancing, maintaining, protecting and exploiting MD16, including: 99. Australia Co is remunerated on a cost plus basis for the services provided to Foreign Co. Foreign Co is responsible for payment to the third party manufacturer for the production of the drug and receives all income from global sales of the drug. 100. The effect of the arrangement is to move ownership of the IP offshore and the subsequent profits arising from the global sales of the drug. SES analysis 101. We take the view that an independent entity in circumstances comparable to Australia Co would not have entered into the arrangement as it involves Australia Co disposing of valuable IP while continuing to undertake the main functions in connection with the commercialisation of the IP. If the transfer of the IP had not taken place, Australia Co would have derived the income from global sales of the drug. 102. At the time of the disposal of the IP, the drug was fully developed and ready for commercialisation. Following its disposal, Foreign Co enjoys legal and beneficial ownership of the IP and derives a majority of the profits from its exploitation. 103. The form of the transaction allocates all risks that come with owning the IP to Foreign Co, as the purchaser. However, as set out above, Australia Co continues to bear economically significant risks associated with the exploitation of the IP. The functions required to exploit the drug, including the legal protection of the IP, management of the third party manufacturing contract and distribution of the drug, continue to be performed by Australia Co. 104. Based on the information available to us, the profits made by Foreign Co and Australia Co as a result of the scheme do not appear to reasonably reflect the economic substance of their activities in connection with the scheme. We would consider this to be high risk in the context of the SES test. SES Scenario 4: intangibles migration (pharmaceutical) - low risk 105. Assume the following modifications to the facts of Scenario 3 in paragraphs 93 to 104 of this Guideline. 106. Australia Co determines that it does not have the requisite skills and resources to successfully commercialise MD16. In addition to the transfer of the registered IP rights in respect of MD16 to Foreign Co, the following are also transferred to Foreign Co from Australia Co: 107. Further, a number of key employees of Australia Co involved in the decision making and management of the MD16 project were also relocated to Foreign Co. Foreign Co also employed additional personnel locally who are qualified and skilled in the development and commercialisation of pharmaceutical products. 108. Foreign Co provided market value [9] compensation to Australia Co in relation to the transfer of the registered IP, as well as associated business assets and other intangibles. 109. Australia Co made a gain on the disposal on the registered IP which it included in its assessable income. The R&D integrity rules applied to the relevant parts of this gain. 110. After the transfer of the MD16 business, Australia Co continued to perform various functions to develop, enhance and protect the MD16 IP under an agreement with Foreign Co to provide contract R&D and other support services. These functions were only performed for a short transitional period following the transfer of the business to Foreign Co and were performed under the direction of Foreign Co staff. Australia Co was remunerated by Foreign Co for these services in accordance with arm's length principles. 111. After the transition period, Australia Co provided limited contract R&D services in relation to the MD16 at the direction of Foreign Co and was remunerated accordingly. 112. Foreign Co employees are responsible for the planning and design of the manufacturing process for MD16. Foreign Co also bears the relevant risks associated with the exploitation of the IP, including risks associated with the manufacture and distribution of the MD16 product. Furthermore, Foreign Co has the financial capacity to bear the costs of managing and mitigating these risks as well as assuming any potential losses. 113. Foreign Co is entitled to the profits from the global sales of the MD16 products as a result of the functions and risks assumed by Foreign Co. 114. Based on the information available to us, the profits made by Foreign Co and Australia Co as a result of the scheme appear to reasonably reflect the economic substance of their activities in connection with the scheme. We would consider this to be low risk in the context of the SES test. SES Scenario 5: distributor - high risk Background 115. Parent Co, Australia Co, Singapore Co and China Co are members of a global group which designs, manufactures and markets electrical appliances. 116. China Co owns the group's manufacturing facilities and is responsible for: 117. Singapore Co is the initial purchaser of the finished goods and distributes the goods in the Asia-Pacific region. Singapore Co buys the goods from China Co at a percentage mark up on cost. Singapore Co further subcontracts to Australia Co for distribution to Australian customers. Singapore Co does not take physical possession of or make any changes to the products. 118. There are 2,000 employees in Singapore Co who perform centralised ordering and invoicing, human resources, logistics and sales and distribution functions for various countries in the Asia-Pacific region. Information available to us suggests that Singapore Co performs ordering functions for Australian sales based on instructions from Australia Co. We do not have any evidence that Singapore Co employees undertake any relevant functions in relation to the generation of Australian sales. 119. The terms of the contractual agreement between Australia Co and Singapore Co provide that Australia Co is a limited risk distributor and that Australia Co's purchase price is set in order to achieve a particular targeted adjusted operating margin of 2%. As set out in the distribution agreement between Australia Co and Singapore Co, Australia Co's main responsibilities as a distributor are the provision of routine sales and marketing support functions, and the delivery of administrative services. Pursuant to this agreement, Australia Co is the contracting party in all agreements entered into with Australian customers and these customers only have recourse to Australia Co. 120. Available evidence suggests that Australia Co assumes the relevant risks including inventory risk, market risk, customer credit risk, and warranty and product liability risk. 121. Australia Co employs over 500 personnel who perform a variety of functions, including: 122. In examining the arrangement between Singapore Co and Australia Co, we review information provided by the taxpayer as well as publicly available information, Country-by-Country reports and information obtained under exchange of information processes. 123. To further understand the arrangement, we seek to conduct functional analyses of Australia Co and Singapore Co and issue a number of requests for information to obtain additional information about their roles and functions. Australia Co is not forthcoming in engaging with us, consistently requests lengthy extensions of time to respond and provides incomplete responses to our requests for information. 124. As a result, we rely on available information to complete our review. This information suggests that over the years, Australia Co has undertaken market development activities which enhanced the value of the global group's brand name, with the strategy of building the group's market share in Australia. SES analysis 125. Based on the information available to us, we take the view that the profits made by Australia Co and Singapore Co do not appear to reasonably reflect the economic substance of their activities in connection with the scheme. Australia Co is the contracting party in all agreements entered into in the Australian market and it has an obligation to provide the products to customers. Australia Co's staff perform, significant functions including developing and implementing local marketing and promotional strategies, which are a crucial driver for the group's success in the Australian market. Australia Co's activities capture market share and generate value creation in Australia, and contribute to the strengthening of the global brand. 126. Furthermore, Australia Co bears market, inventory, warranty and customer credit risk. Australia Co undertakes functions and assumes risks that are consistent with the functional characterisation of a fully-fledged distributor. Australia Co's characterisation as a limited risk distributor does not align with its actual roles and responsibilities. On this basis, the profit made by Australia Co as a result of the scheme does not appear to reasonably reflect the economic substance of its activities in connection with the scheme. 127. Although there are a large number of employees in Singapore Co who are performing sales, marketing and distribution functions, these activities relate to sales made in the Asia-Pacific region excluding Australia. It is the activities performed by Singapore Co that relate directly to Australian sales that are relevant when considering the appropriate level of profit derived by Singapore Co for the purposes of the SES test. Available evidence demonstrates that Singapore Co has a limited, non-value adding role in relation to the sales made to Australian customers. 128. Singapore Co purchases products from China Co but does not take physical possession of the products. The purchases and delivery are based on Australia Co's instructions. Singapore Co relies heavily on Australia Co to perform key functions and Singapore Co's functions add value only to sales made in regions other than Australia. 129. Based on the information available to us, the profit made by Singapore Co as a result of the scheme does not appear to reasonably reflect the economic substance of its activities in connection with the scheme. We would consider this to be high risk in the context of the SES test. SES Scenario 6: distributor - low risk Background 130. Assume the following modifications to the facts of Scenario 5 in paragraphs 115 to 129of this Guideline. 131. Singapore Co takes physical possession of the products from China Co in order to perform quality checks on the products to ensure they adhere to the relevant industry safety standards and regulations. As the group's distributor for the Asia-Pacific region, Singapore Co is also responsible for all significant decision-making activities referable to the sales of the product to Australian customers. 132. Australia Co has a separate agreement with Singapore Co which provides that Singapore Co is responsible for and assumes the economically significant risks that relate to the sale of goods to Australian customers. These risks include inventory risk, customer credit risk, and warranty and product liability risk. Singapore Co has exercised control over these risks through the performance of functions such as quality control and inventory management. Singapore Co also has the financial capacity to assume these risks. In the past it has been required to pay for warranty and product liability claims and to bear the cost of customer bad debts. 133. Of the 2,000 plus employees in Singapore Co, over 500 employees undertake significant functions in relation to the generation of Australian sales, including: 134. The taxpayer is able to demonstrate that the distribution agreement between Australia Co and Singapore Co is an accurate representation of Australia Co's main responsibilities, that is, the provision of routine sales and limited marketing support functions, as well as the delivery of routine administrative services. Australia Co employs 50 personnel in carrying out these functions. Australia Co's purchase price is set in order to achieve a targeted adjusted operating margin that appropriately reflects its significant economic contribution to the transaction. Based on the functional and comparability analysis the margin is higher than the return in Scenario 5. 135. Further to the functional analyses of Australia Co and Singapore Co, evidence available to us confirms that Singapore Co's role in directing and managing sales and market development activities in Australia has enhanced the value of the global group's brand name and increased the group's market share. SES analysis 136. While Australia Co maintains its role in providing routine sales, limited marketing support functions and routine administrative services, Singapore Co's staff perform significant functions in generating Australian sales. This includes developing and implementing local marketing and promotional strategies which are a crucial driver for the global group's success in all relevant markets. Singapore Co's activities capture market share, generate value creation in Australia and contribute to the building of the global brand. Singapore Co also assumes the relevant risks associated with the distribution of the products in Australia. 137. Importantly, in considering the activities performed by Singapore Co in relation to the generation of Australian sales, it is clear that Singapore Co possesses actual decision-making responsibilities in directing sales and marketing strategies as well as managing and controlling the implementation of market development activities. With its product development and client management functions also reflected by the capability of its staff, it is evident that Singapore Co performs key functions in adding value specifically to the generation of sales in Australia. Based on the information available to us, the profit made by Singapore Co as a result of the scheme appears to reasonably reflect the economic substance of its activities in connection with the scheme. 138. China Co owns the group's manufacturing facilities and is appropriately rewarded for the goods supplied to Singapore with a mark-up on cost. 139. Based on the information available to us, it also appears that the profits made by Australia Co and China Co as a result of the scheme reasonably reflect the economic substance of their activities in connection with the scheme. We would consider this to be low risk in the context of the SES test. SES Scenario 7: intangibles migration - high risk Background 140. Foreign Co is the parent company of a global group. Australia Co is a wholly owned subsidiary of Foreign Co and the holding company for the group's Australian operations. The group derives income from the sale of goods and associated services. The distribution of goods and the provision of associated services require the group to exploit IP assets including copyrights, patents and trademarks. 141. On 1 July 2017, the group restructures. Prior to the restructure, Australia Co was the legal and beneficial owner of group IP (the old IP) and performed all functions associated with developing, enhancing, maintaining, protecting and exploiting the old IP. Australia Co received income from global customer sales on behalf of the group. From 1 July 2017, Australia Co licences the old IP to Foreign Co to allow Foreign Co to produce future versions of goods using the old IP. After entering into this agreement, Australia Co becomes a sales agent of Foreign Co in relation to the sale of the goods to Australian customers. Under the licensing agreement, Foreign Co also becomes the legal owner of group IP developed post 1 July 2017 (the new IP). 142. The evidence available to us suggests that the development of the new IP is wholly reliant on the enhancement and exploitation of the old IP so that the old IP forms the platform upon which the new IP is developed. Australia Co has a central role in the development of the new IP during the period following entry into the licensing arrangement, but is only engaged by Foreign Co on a contract R&D basis in respect of this work. Foreign Co pays licence fees to Australia Co on arm's length terms for the use of the old IP and remunerates Australia Co on a cost plus basis for providing contract R&D services associated with new IP. The amount of licence fees paid by Foreign Co to Australia Co declines over a short timeframe as the new IP is developed. Licence fees are no longer payable after the goods associated with the new IP are released to market. 143. Following this, key personnel are relocated offshore and Australia Co starts to provide limited R&D support to Foreign Co. Australia Co distributes goods to Australian customers only and is remunerated by Foreign Co on a cost plus basis. Foreign Co employs the key personnel and starts to perform the majority of functions associated with developing, enhancing, maintaining, protecting and exploiting the new IP. For example: 144. These functions are a key aspect of the group's business model and vital to the success of the business globally. Foreign Co also sells and distributes the goods to offshore customers and receives income from global group sales. Foreign Co enters into new global agreements with third parties as the existing agreements with Australia Co expire. 145. The effect of these arrangements is to move ownership and development of group IP offshore. SES analysis 146. On the available evidence, we take the view that the profits made by Foreign Co and Australia Co do not appear to reasonably reflect the economic substance of their activities in connection with the scheme. 147. Foreign Co enjoys legal and beneficial ownership of the new IP and derives a majority of group profits from the exploitation of the new IP, either through royalties from the use of the new IP by other group companies or directly through the manufacture and sale of products incorporating the new IP. This is mainly achieved via the modification and exploitation of the old IP, despite the absence of a legal form disposal of the old IP by Australia Co to Foreign Co. 148. Based on the evidence available, it is also considered that in the period following entry into the licensing agreement, Foreign Co did not have the capacity to undertake these further R&D activities as it did not have the expertise, know-how or qualified staff to do so and only paid Australia Co for the provision of 'limited R&D' services. While key personnel are eventually transferred to Foreign Co, it is considered that the activities undertaken by these employees after the transfer did not significantly contribute to the development of the new IP. 149. Additionally, the level of profit made by Australia Co is indicative of a sales agent with no responsibility for long term product or market development and this does not reflect Australia Co's contribution towards the development, enhancement, maintenance and protection of the new IP during the period following entry into the licensing arrangement. As the key R&D specialists and know-how in relation to the old IP remained in Australia during this period, Australia Co's role was not merely of a contract R&D provider but rather Australia Co played a key role in the development of the new IP, including the making of key decisions during the R&D process. 150. Based on the information available to us, the profits made by Foreign Co and Australia Co as a result of the scheme do not appear to reasonably reflect the economic substance of their activities in connection with the scheme. We would consider this to be high risk in the context of the SES test. SES Scenario 8: intangible migration - low risk 151. Assume the following modifications to the facts of Scenario 7 in paragraphs 140 to 150 of this Guideline. 152. Foreign Co is the primary R&D entity of the global group and accordingly has staff with the necessary skills, experience and capability to provide the relevant R&D services to further develop and enhance group IP. 153. The strategic decision was made for Australia Co to sell the IP to Foreign Co. 154. Under this alternative arrangement, Australia Co received market value [10] consideration for the disposal of the IP from Foreign Co in accordance with arm's length principles. Australia Co made a gain on the disposal of the registered IP which is included in its assessable income. The R&D integrity rules applied to the relevant parts of this gain. 155. Going forward, Foreign Co is entitled to the profits from the global sales of goods associated with the old and new IP as a result of the functions and risks assumed by Foreign Co. 156. Based on the information available to us, the profits made by Foreign Co and Australia Co as a result of the scheme appear to reasonably reflect the economic substance of their activities in connection with the scheme. We would consider this to be low risk in the context of the SES test. SES Scenario 9: marketing hub - high risk Background 157. Australia Co, Hub Co, Argentina Co and Canada Co are all members of a global group. The global group generates income primarily through selling commodities both in the Asia Pacific and Atlantic markets. 158. Australia Co, Argentina Co and Canada Co carry out mining, processing, inland transport and port activities for commodities in their respective jurisdictions. Australia Co, Argentina Co and Canada Co also undertake exploration activity to provide long term reliable supply and to maintain the product brand. 159. Australia Co provides commodities for the Asia-Pacific market whereas the Atlantic market commodities are sourced from Canada Co and Argentina Co. 160. Under the group's arrangements, Australia Co, Argentina Co and Canada Co exclusively sell all their production (on Free on Board terms) to Hub Co, which then on-sells the commodities immediately to third party customers (on Free on Board terms) in the two regional markets. 161. Due to Hub Co's participation in the sales market, it collects 'sales-side' market intelligence for the two distinct markets to assist in the identification of, and marketing to, potential customers (technical specification to price sensitivity, volume to price sensitivity, the customer's stockpile levels, demand cycles, sales by competitors, etc). 162. Under the arrangement, Australia Co, Argentina Co and Canada Co use the 'sales-side' market intelligence to assist them in their production planning. In addition, in order to secure sales, Hub Co is also dependent on the technical and production information gathered by Australia Co, Argentina Co and Canada Co in relation to their commodities as customers utilise this information to inform their purchase decisions. Accordingly, Hub Co is highly dependent on Australia Co, Argentina Co and Canada Co to provide technical marketing assistance to allow it to secure the sale of the commodities to third parties. 163. Australia Co, Argentina Co and Canada Co provide Hub Co with ongoing 'production-side' market intelligence (forecast production schedules, port loading delays, changes in product quality, production/quality of competitors, etc) and a feedback channel to their operating assets to allow Hub Co to most effectively sell its commodities. 164. Hub Co also receives information from group personnel located in the jurisdictions of the customers, who provide real time information of market conditions and customer contact in those regions. 165. Physically, Australia Co, Argentina Co and Canada Co hold the commodities in port stockpiles until sold. Hub Co does not alter the commodities, or take physical possession. 166. Australia Co, Canada Co and Argentina Co sell commodities to Hub Co at a discount relative to their respective regional index price which allows Hub Co to generate profits on the sale of the commodities to third party customers. 167. Australia Co employs staff who perform the following activities: 168. Canada Co and Argentina Co undertake similar functions in relation to their local markets. 169. The taxpayer has provided documentation that stipulates that Hub Co assumes the following risks: 170. Hub Co employs staff who undertake the following activities: SES analysis 171. On the available evidence, we take the view that the profits made by Australia Co and Hub Co do not appear to reasonably reflect the economic substance of their activities in connection with the scheme. 172. While Hub Co performs marketing activities and other administrative functions, we do not consider that these activities reasonably reflect the level of profits that it is receiving given that Australia Co, Canada Co and Argentina Co (as well as the personnel located in the local jurisdictions of the customers) provide key functions to Hub Co to allow it to secure its third party contracts. 173. Based on the functional analyses undertaken by us, Australia Co staff are responsible for ensuring planning, production and technical marketing of the commodities as well as collating local market intelligence. Australia Co undertakes significant activities in relation to the production, scheduling and specifications of the commodities which are important to the group's third party customers. Key value chain decisions and management functions are undertaken by Australia Co in relation to the Asia-Pacific sales and Hub Co does not undertake the activities required to obtain its third party contracts or to satisfy its contractual obligations, and relies on the functions and decision-making activities of its related parties in order to fulfil its obligations. 174. Further, as inventory is mined and transported to stockpiles at port and held until requested by customers, most of the market risk is still held by Australia Co. Hub Co bears limited market risk as the commodities are not sold to Hub Co unless the commodities are needed to fulfil a sales agreement with a customer. Hub Co does not have full control over the sales in relation to the supply, delivery or scheduling of the commodities as these are all dependent on Australia Co's functions. As such, Hub Co does not have a real exposure to losses based on the price or volume of the transaction. 175. Although Hub Co legally assumes accounts receivable late payment risk, based on the information available to us, Hub Co does not have the ability to manage and control any of its exposure to this risk and does not have the financial capacity to bear the risks apart from the ability to call on the financial resources of its parent. 176. Based on the information available to us, the profits made by Australia Co and Hub Co as a result of the scheme do not appear to reasonably reflect the economic substance of their activities in connection with the scheme. We would consider this to be high risk in the context of the SES test. SES Scenario 10: marketing hub - low risk Background 177. Australia Co, Hub Co and a number of foreign companies (Foreign Cos) are all members of a global group. The global group generates income primarily through the sale of oil and gas in various regional markets around the globe. 178. The global group acquires a percentage interest in the rights to develop a prospective natural gas field in Australia. This field holds proven reserves of natural gas that are able to be commercialised into liquefied natural gas (LNG). Australia Co is incorporated to carry out the front end engineering design, the subsequent extraction of the natural gas and its conversion to LNG. The Foreign Cos undertake similar activities in their local jurisdictions. 179. Hub Co is a global hub for the group and carries out marketing, storage (as required), shipping and other related services in the LNG markets. The role of Hub Co as a global hub pre-dates the LNG sales agreement with Australia Co. 180. Australia Co and the Foreign Cos enter into long-term sales agreements with Hub Co to sell 100% of their production to Hub Co, including any excess production volumes. Hub Co also purchases a diverse portfolio of LNG from third party producers, using a mixture of medium to long term supply contracts and spot purchases. Hub Co also owns and leases seaborne freight capacity. 181. Hub Co has a number of long term third party sales contracts that are fulfilled using both related party and third party supplies. 182. Hub Co identified the small number of foundation buyers (that were the basis for the group's Final Investment Decision (FID) in the Australian LNG project). LNG produced by Australia Co is on-sold by Hub Co to the foundation buyers, as well as other third party customers. 183. Hub Co is responsible for ensuring that the orders are most optimally scheduled and fulfilled. For example, this could address situations where there are urgent customer orders to be met or where there is port congestion requiring diversion of the affected ship to another port. 184. Hub Co takes legal title of the LNG from Australia Co and the Foreign Cos upon loading of the LNG onto the vessel. While Australia Co and the Foreign Cos are responsible for ensuring liquefaction of the natural gas and piping of the LNG at the load ports, Hub Co is responsible for the shipping of the LNG to the customers from the load port until delivered. 185. Hub Co develops business strategies for the sale of LNG to third party customers. Australia Co and the Foreign Cos provide Hub Co with on-going production information (forecast production schedules, transportation delays, changes in LNG specifications, etc); Hub Co is not solely reliant on this information to inform its marketing and trading strategies. Hub Co has third party providers and in-house employees responsible for obtaining third party market information to assist in its decision-making and price negotiations. 186. Australia Co, as the operator of the Australian LNG project for the global group, employs staff or contractors to perform the following activities: 187. The Foreign Cos undertake similar functions in their local markets. 188. Hub Co employs staff who are located in the same jurisdiction as Hub Co to undertake the following activities: 189. There are no staff in Australia that have the ability or capacity to undertake the activities performed by Hub Co. 190. The taxpayer has provided documentation which demonstrates that Australia Co and Hub Co assume various entrepreneurial risks. Australia Co takes on entrepreneurial risks related to the construction, financing and operation of the LNG project and management of the joint venture parties. Australia Co assumes production volume and production cost risk and, to an extent, also bears price risk in relation to the sales to Hub Co. 191. Hub Co assumes further entrepreneurial risks related to the marketing, sourcing, sales and delivery of the LNG, such as: SES analysis 192. Based on functional analyses and the evidence provided, Australia Co's staff are responsible for exploration, construction, operations, project financing, extraction of the natural gas, and loading of the LNG. Further, as a result of the long term sales and purchase agreement with Hub Co, Australia Co receives the market index price (with market based adjustments for specification, etc) and has a relatively certain income stream for its production volumes to allow it to focus its resources on production rather than marketing and portfolio management. 193. Hub Co undertakes key sales, marketing decisions and management functions. In this regard, Hub Co is responsible for securing sales, arranging shipping and delivery to third party customers. It is also responsible for portfolio optimisation and, in some instances, a degree of storage. Hub Co therefore also takes on entrepreneurial risks, including some degree of market price risk, being the difference between the price it pays to Australia Co and receives from third party customers. 194. In addition, the documents provided by the taxpayer support a conclusion that Hub Co has assumed customer non-performance risk, which primarily arises from spot contracts with new customers negotiated by Hub Co. The evidence supports the conclusion that Hub Co possesses the ability to manage and control its exposure to these risks (such as having the authority within the group to blacklist these customers) and possesses the financial capacity to bear the risks. 195. Based on the information available to us, the profits made by Australia Co, Hub Co and Foreign Co as a result of the scheme appear to reasonably reflect the economic substance of their activities in connection with the scheme. We would consider this to be low risk in the context of the SES test. SES Scenario 11: financing arrangement - high risk Background 196. Australia Co is a wholly owned subsidiary of Foreign Parent Co. Australia Co is engaged in the production, marketing and distribution of packaged food and beverages. Australia Co has an Australian dollar functional currency for Australian accounting and tax purposes. 197. Fin Co 1 is the treasury company for the global group. It is responsible for entering into financial transactions with external parties for the purposes of group debt funding, hedging and other cash management activities. Fin Co 1 has 40 full time employees and performs various treasury functions, including: 198. Fin Co 1 is funded by equity from Foreign Parent Co and sources debt funding for the global group from third party borrowings. The traceable debt cost of US dollar funds for Foreign Parent Co is 3%. 199. On 1 July 2017, Australia Co refinances its Australian Dollar (AUD) $500m loan from Fin Co 1 into an equivalent US dollar (USD) loan. The repayment terms are interest only. The refinancing of the loan from AUD to USD results in an actual reduction in interest rate. The interest rate on the AUD loan was fixed at 5% and the interest rate on the USD loan is fixed at 3%. Fin Co 1 is subject to Australian interest withholding tax on the payment of interest. 200. The multinational group's decision to refinance the related party loan creates an exposure for Australia Co to exchange rate movements (that is, USD to AUD). This is said to result in commercially significant volatility in Australia Co's standalone cash flow, financial accounts and tax performance which results in the group deciding to have a member of the Australian tax consolidated group enter into a foreign currency derivative with another overseas member of the group to reverse the foreign currency exposure created under the related party borrowing. This newly created risk (that is now having to be managed), results in Fin Co 1 incorporating a subsidiary in the Cayman Islands, Fin Co 2. 201. Fin Co 2 enters into a cross currency interest rate swap with Australia Co. At this time the AUD and USD currencies are at parity. Under the terms of the swap agreement Australia Co notionally exchanges USD$500m for AUD$500m (there is no physical exchange of principal). At maturity, Australia Co will notionally pay AUD$500m and notionally receive USD$500m. In addition, Australia Co incurs annual periodic payments being the net of a payment of AUD interest (at 5% calculated by reference to the AUD$500m) and a receipt of USD interest (at 3% calculated by reference to the USD$500m). The periodic payments under the swap are net settled in USD (this does not eliminate the cash flow risk for Australia Co on the USD borrowings). Fin Co 2 does not enter into an arrangement to hedge the exposure it has assumed. The group does not enter into an arrangement with a third party to hedge the exposure at a group level. SES analysis 202. The effect of the swap arrangement is that the cost of the loan to Australia Co is the same as before the refinancing however, after the refinancing, the interest cost is less and the balance is for the periodic swap payments. For Australian tax purposes, the periodic swap payments are deductible under the Taxation of Financial Arrangements provisions and are not subject to Australian interest withholding tax. 203. Fin Co 2 has one part time employee, is capitalised with nominal equity, and does not undertake any other treasury functions. The sole purpose of incorporating Fin Co 2 was for it to act as a counterparty under the swap arrangement. All but one of the directors of Fin Co 2 are on the board of Fin Co 1 and the directors usually reside in the United States. The role of the Fin Co 2 directors was essentially limited to entering into the swap arrangement. Fin Co 2 pays an annual dividend to Fin Co 1. This payment corresponds to its net periodic receipts from Australia Co. 204. The terms of the swap agreement, and the economic environment prevailing at the time the swap was entered into, meant that Fin Co 2 was a net receiver of periodic payments over the life of the swap arrangement. At maturity, Fin Co 2 made a net loss in relation to its notional right to receive AUD$500m and its notional obligation to pay USD $500m. It received a contribution of equity from Fin Co 1 to finance this net loss. Australia Co uses the proceeds of the net gain at maturity to, in part, meet its obligation to repay the USD loan to Fin Co 1. As the terms of the swap arrangement do not provide for an exchange of physical cash flows with respect to the notional principal and periodic interest payments, the swap does not manage the cash flow risk for Australia Co (that is, Australia Co does not receive USD to meet its periodic loan and principal repayments). 205. The information provided indicates that Fin Co 1's employees are actively engaged in performing the relevant functions and managing the relevant risks in respect of the refinanced loan. The Commissioner considers the profit made by Fin Co 1 appears to reasonably reflect the economic substance of its activities in connection with the scheme. 206. The information provided indicates that Fin Co 2 does not actively manage the foreign currency exposure arising from the swap arrangement. In addition, Fin Co 2 is not capable of meeting its obligations under the arrangement without contributions of equity from its parent, Fin Co 1. As a result the Commissioner considers that Fin Co 2's profit does not appear to reasonably reflect the economic substance of its activities in connection with the scheme. We would consider this to be high risk in the context of the SES test. SES Scenario 12: insurance arrangement - low risk [11] 207. Insurance Co is the reinsurer of a global group and is a resident in Bermuda. Insurance Co is authorised and registered to conduct an insurance business in Bermuda. 208. Insurance Co enters into reinsurance arrangements with Australia Co who provides insurance services to third parties in Australia. There is a genuine transfer of significant insurance risk to Insurance Co from Australia Co, with Insurance Co assuming the insurance risks under the reinsurance cover provided. Insurance Co is an associate of Australia Co. 209. Insurance Co employs staff located in Bermuda, who carry out underwriting, manage and control Insurance Co's arrangements with Australia Co, and manage Insurance Co's assets and investments. These employees have the requisite skills to undertake these activities. 210. Australia Co undertakes any reinsurance of its insurance risk exposure on arm's length terms and in a way which reflects its commercial risk appetite. 211. An insurance premium (net of commission) that is struck on arm's length terms is paid by Australia Co to Insurance Co. 212. Insurance Co has the capacity to pay and indeed does pay out any insurance claims made by Australia Co. 213. Costs incurred by Insurance Co are priced on arm's length terms, and there is no evidence of biased allocation of costs between the relevant insured risks and its other business. 214. Insurance Co undertakes any retrocession [12] of the reinsured risk to other reinsurers on arm's length terms and in a way which reflects its commercial risk appetite. 215. Insurance Co holds a level of capital in its investment portfolio which corresponds to the liability that it manages. Capital reserve levels and measurement of accounting liabilities in Insurance Co reflect the commercial nature of the relevant risks. [13] 216. Based on the information available to us, the profits made by Australia Co and Insurance Co as a result of the scheme appear to reasonably reflect the economic substance of their activities in connection with the scheme. We would consider this to be low risk in the context of the SES test.",,/law/view/document?LocID=%22COG%2FPCG20185EC%2FNAT%2FATO%2F00001%22&PiT=99991231235958,False,False,https://www.ato.gov.au/law/view/document?docid=COG/PCG20185/NAT/ATO/00001
PCG 2019/3,Final PCG,Wine equalisation tax: attribution and retention of title clauses,,,17 April 2019,,,PS LA 2013/1,,1. This Guideline explains when the Commissioner will allow you to attribute wine equalisation tax (WET) where you sell wine under a contract that includes an effective retention of title clause. It replaces Law Administration Practice Statement PS LA 2013/1 (GA) Attribution of wine equalisation tax (WET) where contracts include a retention of title clause and the purchaser sells or otherwise uses the wine before title passes which has been withdrawn from the date of publication of this Guideline. 2. This Guideline should be read with Wine Equalisation Tax Ruling WETR 2009/1 Wine equalisation tax: the operation of the wine equalisation tax system . 3. All legislative references in this Guideline are to the A New Tax System (Wine Equalisation Tax) Act 1999 (WET Act) unless otherwise indicated.,,,,,,,,False,False,https://www.ato.gov.au/law/view/document?docid=COG/PCG20193/NAT/ATO/00001
PCG 2025/D4,Draft PCG,Draft Practical Compliance Guideline,Draft,,7,,,,"Case References: PepsiCo, Inc v Commissioner of Taxation [2024] FCAFC 86 303 FCR 1 2024 ATC 20-918",,"Scope: 20. This Schedule relates to payments made in relation to software and should be read together with TR 2024/D1, which sets out our interpretative position on when an amount paid under a software arrangement is subject to royalty withholding tax. If we review your arrangement to consider whether an amount should have been withheld from a payment, our position will be in accordance with our views set out in TR 2024/D1. 21. In practice, characterisation of a payment will need to have regard to the context of the arrangement. Payments may be royalties not only because they are for the use or right to use software copyright, but also other IP (or intangible assets) such as patents, trademarks, designs, technical or commercial information, or services which are ancillary to the use or enjoyment of the IP. 22. This Schedule applies to payments you make under an arrangement that involves the purchase or acquisition of software (including rights to software) from a non-resident or its associate (offshore supplier) who holds the IP rights (such as copyright) relating to that software. 23. Table 2 of this Guideline summarises the risk zones for payments made to an offshore supplier. 24. Diagram 1 of this Guideline provides an overview of the risk assessment framework. Diagram 1: Roadmap to the risk assessment framework. White zone 25. Your arrangement is in the white zone if any of the following apply to you for an income year: 26. This is provided there has not been a material change in the available facts and evidence in relation to the arrangement since the time of the settlement agreement, APA, court decision, review or audit. Where information previously provided to us or a court was materially different or incomplete, this condition will not be satisfied. Green zone 27. Your undissected payment is in the green zone if it is paid only in relation to the acquisition of:","3. Draft Taxation Ruling TR 2024/D1 Income tax: royalties – character of payments in respect of software and intellectual property rights sets out our interpretative position on when an amount paid under a software arrangement is a royalty and subject to royalty withholding tax. This Guideline should be read together with TR 2024/D1. 4. At a later stage, we may consider expanding this Guideline to publish our broader compliance approach (that is, beyond the low risk zone). We will consult with you if we decide to do so. Current litigation 5. Finalisation of TR 2024/D1 has been deferred pending the decision of the High Court of the appeal from PepsiCo, Inc. v Commissioner of Taxation [2024] FCAFC 86 (PepsiCo). Neither TR 2024/D1 nor this Guideline will impact the view of an Australian court. We must apply the law in accordance with Federal or High Court authorities. 6. Following the High Court's decision of the PepsiCo appeal, we will review and, as necessary, update TR 2024/D1. If the decision results in material changes to our view, we will undertake further consultation about those changes.","Intro: This Practical Compliance Guideline is a draft for consultation purposes only. When the final Guideline issues, it will have the following preamble: This Practical Compliance Guideline sets out a practical administration approach to assist taxpayers in complying with relevant tax laws. Provided you follow this Guideline in good faith, the Commissioner will administer the law in accordance with this approach. | What this draft Guideline is about: 1. This draft Guideline [1] provides certainty about when the ATO will not review software arrangements to determine whether any part of a cross-border payment made to a non-resident is a royalty and subject to withholding tax (royalty risk). 2. This Guideline provides clarity on arrangements that will not attract our attention, thereby providing confidence to, and avoiding unnecessary compliance costs for, in-scope businesses.","Example 1: – internet security software solely acquired for private or domestic use 28. Sarah wants to enhance her online security and, after researching various internet security software options, decides that she wants a subscription for internet security software from AntiVirus Co. 29. AntiVirus Co is a provider based in a foreign country and specialises in developing internet security software to detect and neutralise computer viruses. 30. Sarah selects a one-year subscription plan on AntiVirus Co's website, enters her payment details, downloads a copy of the software and follows the easy setup instructions to install the internet security software onto her personal computer. 31. For the purposes of this Guideline, the payment by Sarah to AntiVirus Co is categorised in the green zone as the software acquired is solely for her private or domestic use. | Example 2: – general administrative software ancillary to a business in Australia 32. EducationCo Australia provides education services to Australian customers. 33. EducationCo Australia has an agreement with EducationForCo to obtain access to a comprehensive suite of cloud-based productivity applications which are licensed by EducationForCo from an unrelated offshore global software provider which develops software that is made generally available to the public. 34. These applications include: 35. EducationCo Australia cannot modify the source code in the software but is permitted by the global software vendor to configure and customise certain features of the cloud applications to fit its unique business needs, within certain constraints. For instance, EducationCo Australia customises the reporting and dashboards within the customer relationship management to display key performance indicators. EducationCo Australia also configures the security roles and access permissions across staff to vary levels of access based on an employee's role. 36. EducationCo Australia may work closely with the Software as a Service (SaaS) provider or approved third-party vendors to ensure these configurations align with both their operational needs and the cloud provider's software limitations. 37. EducationCo Australia provides access to these cloud-based applications to all staff across its Australian subsidiaries. 38. The cloud services agreement places a number of restrictions on EducationCo Australia's use of the software applications. EducationCo Australia is not permitted to disclose its account credentials to third parties or allow the applications to be used by more than 300 devices. EducationCo Australia can pay an additional amount to add more devices to the user base. 39. For the purposes of this Guideline, the payment by EducationCo Australia to EducationForCo is categorised in the green zone as the software is used in the course of its own business (productivity applications for EducationCo Australia staff use), is generally available to the public from other sources and is not substantially customised, and is not further sold, licensed or otherwise exploited as a primary object of its business. 40. The categorisation of EducationCo Australia's undissected payments as low risk does not preclude further investigation of the unrelated global software provider's arrangements in Australia. | Example 3: – software copies stored on physical media acquired by a retailer 41. Electronics Retail Co is a large Australian retail company that sells consumer electronics and white goods at stores located throughout Australia. 42. Electronics Retail Co also sells software such as productivity programs on physical media. Electronics Retail Co has wholesale agreements with offshore software companies which enables Electronics Retail Co to purchase the software on physical media at reduced prices. 43. Under the wholesale agreements, Electronic Retail Co has no rights to copy, modify or sublicence, nor has any other rights to use the software copyright of the offshore companies. 44. For the purposes of this Guideline, the payment by Electronics Retail Co to the offshore software providers under the wholesale agreements are categorised in the green zone as the software copies on physical media are acquired in the course of Electronics Retail Co's business of reselling the software copies and Electronics Retail Co does not require or have the rights to use the IP of the offshore software companies. | Example 4: – washing machines with embedded software 45. White Goods Co manufactures washing machines with smart technology and sells the products to Australian customers through its subsidiary distributor AusCo. AusCo makes payments to White Goods Co for the washing machines under a distribution agreement. 46. The smart washing machines AusCo purchases from White Goods Co have pre-installed software that allows consumers to remotely control and monitor their washing machine through an application on a smart phone. The software embedded in the washing machine also supports the sensor functions that automatically dispense detergent, monitor energy consumption during wash cycles, and run diagnostic tests and troubleshoot problems. 47. AusCo does not have any rights to modify, or rights to sublicense the modification rights, the software installed onto the smart washing machines. 48. The payments by AusCo to White Goods Co are categorised in the green zone as they are for finished tangible goods of which software is an inherent and practically inseparable part, and the software is to enable the tangible goods to perform their intended function and the goods are acquired for resale to retail customers.",,,,False,True,https://www.ato.gov.au/law/view/document?docid=DPC/PCG2025D4/NAT/ATO/00001
PCG 2026/1EC,Compendium,Compendium,Quo,,,,,PS LA 2007/1,,"All legislative references in this compendium are to the Superannuation Guarantee (Administration) Act 1992 as amended by the Treasury Laws Amendment (Payday Superannuation) Act 2025 (PDS Act) (commencing 1 July 2026), unless otherwise indicated. Stakeholders requested greater clarity in the final Guideline in respect of: Other aspects have been incorporated into Examples 8 and 9 of the final Guideline. See Issue 2 of this Compendium. Other responses in this Compendium also deal with, for example, clarification on risk assessment triggers and third-party delays. To the extent that the clarification sought is in relation to the operation of the law and its practical application, this is beyond the scope of this Guideline. Stakeholders requested clarification on distinguishing the low-risk, medium-risk and high-risk zones, including further examples in relation to: Stakeholders also requested clarity on the kind of information that would be accepted as evidence for the purposes of demonstrating the employer has done everything in their control to comply with the requirements. In the first year of Payday Super, the employer's actions in relation to each QE day will determine what risk zone they fall under for that QE day. As noted in paragraph 22 of the final Guideline, the fact that an employer is in the low-risk zone for a number of QE days in the first year is not of itself a factor that would move the employer into the medium-risk or high-risk zones. Examples 8 and 9 in the final Guideline illustrate how an employer may move between risk zones. Stakeholders argued that employers in the low-risk zone are recognised for promptly correcting contributions that are assessed and paid on a QE day according to the Payday Super timeframes but failed to meet the deadline. This is a pragmatic approach that allows Payday Super processes to become embedded into practice. However stakeholders drew a comparison with the medium-risk and high-risk categories, which are directly tied to current standards – paying SG contributions on a quarterly basis – not on 'genuine efforts' to comply. While the medium-risk zone may be appropriate for employers waiting on delayed system updates, it does not truly demonstrate a proactive commitment to behavioural change. An overly flexible stance risks giving a free pass to deliberately poor practices or lax adoption of the policy, effectively pushing back the intended start date. It is important to recognise that the Guideline does not impact the application of the law. It is simply an indication of how the Commissioner will allocate and prioritise compliance resources. The risk zone framework is designed to balance the protection of employees' superannuation entitlements with employers' ability to transition to Payday Super in the first year. Medium-risk arrangements therefore reflect circumstances where timely and accurate contributions are not consistently achieved, even if the employer is still developing or updating processes to support compliance. We have reserved the higher risk classification for cases where contribution patterns indicate that the employer is not taking steps to comply with the Payday Super requirements and insufficient payments of SG contributions are being made. Stakeholders submitted that the medium-risk band states that 'resources may be applied to investigate'. This could easily be interpreted to imply that employers who follow the status quo and are compliant with the current quarterly regime are unlikely to be targeted for active intervention in the first year of the policy. The high-risk band is for employers who do not meet quarterly SG obligations on time, stating that 'resources will be applied to investigate'. Investigation alone is not enough and this framing raises concerns that the ATO will not have the technical and resourcing capacity to enforce compliance during the transition period. Stakeholders therefore believe the guidance should be explicit about the ATO's intent to phase up its compliance efforts over the 12-month period, as systems and capacity uplifts occur and indicate how such evolution will contribute to efforts after 30 June 2027. In this respect, stakeholders suggested that the ATO should allocate resources to scale up data-driven surveillance before the commencement of Payday Super. Once the laws take effect, the ATO should notify all employers who fail to pay on time in the first pay cycle of the financial year, signalling that real-time monitoring has begun and urging them to meet their super obligations promptly. The ATO should then track responses to these notifications and take swift follow-up action to address any ongoing non-compliance. Compliance will continue to be monitored through available data, with compliance resources prioritised in accordance with the Guideline. Risk assessments will not be made based solely on the first pay cycle of the financial year. As Table 2 at paragraph 20 of the Guideline outlines, for the first year of Payday Super, assessments are made against the employer's level of compliance relevant to a QE day. The ATO takes non-payment of superannuation guarantee contributions seriously and continues to invest in comprehensive data matching from employers and super funds to identify where employers may not be paying the correct amount of superannuation for their employees, for example, Expanding the use of Single Touch Payroll data . Payday Super will enable the ATO to provide early prompts to employers not paying superannuation for their employees on time to avoid the superannuation guarantee charge (SGC). Stakeholders noted that employers are not able to self-monitor or self-assess their compliance with Payday Super due to an absence of paid-enabled software or system-level visibility for at least the initial 2 years of implementation. Accordingly, submitters consider that an employer's 'risk zone' classification should be determined based on the employer's response to an ATO-raised concern, rather than on self-initiated monitoring. For example, where an employer appropriately responds or takes reasonable steps to resolve the concern within 28 days, the employer should be assessed as being in the low-risk zone. In the first year of Payday Super, we will continue to encourage employers to adopt timely and accurate contribution practices. This includes providing early guidance and support where appropriate and applying compliance resources where contribution behaviour does not improve over time. Stakeholders raised concerns about system readiness for the mandated 1 July 2026 commencement date, including overlap with other internal technology or payroll projects and limited lead-time to implement the required changes. Some stakeholders requested that the compliance approach be extended into later years (for example, 2 additional years for small withholders and 1 additional year for medium withholders). Once the Guideline periods end, the ATO should publish additional guidance or safe harbour provisions to support employers. Some stakeholders also suggested that an employer who does everything that is reasonable to be compliant should be categorised as low risk on a permanent basis, and all businesses with less than $10 million in aggregated turnover should be considered low risk in Year 1. The commencement date of 1 July 2026 is legislated by the PDS Act and cannot be delayed or staged administratively. The Guideline outlines how the Commissioner will prioritise compliance resources in the first year of Payday Super, recognising that some employers may not have sufficient time to ready their systems to comply with the law on commencement of the Payday Super legislation. It is noted employers are required to commence reporting qualifying earnings in Single Touch Payroll from 1 July 2026. However, as an employer may need some time to reconfigure their payroll software, our expectation is that they commence reporting year-to-date qualifying earnings sometime in the first quarter of the 2026-27 financial year. Along with the mandated Single Touch Payroll reporting requirements, we expect employers would have transitioned their other processes to align with Payday Super before July 2027. We will continue to monitor the Payday Super implementation system readiness and will update guidance where appropriate. Stakeholders sought clarification on how voluntary disclosures are treated under the Payday Super framework, including how our compliance approach in Year 1 applies when employers proactively disclose historical errors and whether examples could illustrate common voluntary disclosure statement (VDS) scenarios. Some stakeholders stated that the final Guideline should remove the obligation for employers to consider and lodge a VDS until all digital services are fully enabled to allow an employer to monitor when payments have been allocated by super funds. In line with information provided by the employer, stakeholders suggested the ATO should adopt a 'tell us once' principle so employers do not have to resubmit data already held by the ATO. We will be addressing the operation of the VDS framework in other planned advice. Some stakeholders suggested that the ATO should implement a tiered enforcement model proportionate to employer size and risk profile – for example, first-time error relief or administrative penalty waivers for small employers who act in good faith and remediate within a defined period (such as 14 business days). Stakeholders sought clarification on how our compliance approach applies in exceptional circumstances outside an employer's control, including significant and long period of disruptions (such as system outages, clearing house delays, banking failures, fund or employee errors or natural disasters) that prevent contributions from being received by a fund within the expected timeframe. Some stakeholders also submitted that businesses who can provide written documentation that the delay was due to third-party error should be exempted from compliance action. Some stakeholders argued that the Superannuation Guarantee (Administration) Regulations 2018 should allow for the ATO to declare any delays in clearing house processing as an exceptional circumstance. The Guideline applies to employers that are covered by an exceptional circumstances determination in the same way. An employer covered by an exceptional circumstances determination will be in the low-risk zone if they fall within the criteria outlined in Table 2 in paragraph 20 of the Guideline. On-time contributions for these employers are set out in paragraph 9 of the Guideline and includes the extended period for employers covered by an exceptional circumstance determination (see footnote 10 of the final Guideline). Subsection 18C(4) provides an avenue for an extended period to make on-time contributions where an exceptional circumstances determination is in place for a class of employers. The Commissioner may only make such a determination for exceptional circumstances prescribed by the Superannuation Guarantee (Administration) Regulations 2018. Paragraphs 1.64 to 1.67 of the Explanatory Memorandum to the Treasury Laws Amendment (Payday Superannuation) Bill 2025 (Explanatory Memorandum) note that examples of exceptional circumstances that may be prescribed for this purpose include natural disasters or widespread technology outages that affect multiple employers on a large scale. For further information, see Payment deadlines for Payday Super and the Explanatory Memorandum at paragraphs 1.48 to 1.53. Stakeholders submitted that the compliance approach should focus on education rather than punishment for the first 2 years. Tax agents will need to train small employers who do not have administrative staff to submit super. Employers who genuinely attempt to comply with the Payday Super rules, where errors are detected by their tax agent at a quarterly review, should be in the low-risk zone. Consistent with the risk zone requirements in paragraph 20 of the Guideline, employers who attempted to make on-time contributions to the fund and ensure that late contributions are received and able to be allocated by the fund as soon as practicable will fall into the low-risk zone. Stakeholders sought clarification on how the PDS Act applies to different payroll patterns and non-standard work arrangements and whether alternative, transitional compliance frameworks can apply to these circumstances, including: For further information on how Payday Super applies to non-standard work arrangements, reference should be made to Payment deadlines for Payday Super . Other web guidance is also being updated in readiness for the commencement of Payday Super. For guidance relating to worker classification issues, see Work out if you have to pay super and Difference between employees and independent contractors . Stakeholders requested clearer and more practical ATO guidance to support implementation of Payday Super, including additional examples, worked scenarios and explanatory materials applicable across different industries to be made available ahead of the commencement of the PDS Act. Further, it was requested that existing guidance in relation to the SGC, ordinary time earnings and remitting administrative penalties be updated to incorporate the Payday Super laws. Some stakeholders requested a dedicated support channel for rural employers. We have published guidance at Payment deadlines for Payday Super . Further guidance will be available in readiness for the commencement of Payday Super. We have identified existing ATO advice which requires updating, replacement or withdrawal. We will also publish new formal advice documents on key priorities as identified by industry. At the time that the Guideline was first issued for consultation, Payday Super had not passed Parliament. Stakeholders submitted that there was uncertainty that prevented them from making productive comments on the Guideline. Stakeholders also sought clearer and earlier communication to support employer preparedness for Payday Super, including consultation opportunities and system nudging (such as reminders or prompts from payroll software or intermediaries) to help employers understand upcoming expectations. The issues raised in the submissions have been considered through the ATO's broader stakeholder engagement program of work, including technical working groups regarding systems channels such as Single Touch Payroll, Member Account Transaction Service and SuperStream. Further engagement will be undertaken to support business preparedness and promote awareness of employer obligations. Stakeholders raised concerns that the increased payment frequency and the 7-business day 'received by fund' requirement create administrative and cash flow pressures for small, regional, seasonal and cross-jurisdiction businesses. Various suggestions to amend Payday Super laws included: Stakeholders sought clarification on how the Payday Super timing rules apply to new employees and short-term or non-resident workers when super fund details or onboarding information are not available at commencement, including how the extended usual period for first time superannuation contributors operates when superannuation details are provided after the first pay cycle. Employers can refer to existing guidance for more information, such as Payment deadlines for Payday Super and Hiring a new worker , including the provision of fund details after commencement. Further ATO advice is planned on how the Payday Super laws apply to new employees. Explanatory material on the operation of the extended period for new employees is also available in the Explanatory Memorandum, at paragraphs 1.57 to 1.61. Stakeholders sought clarification on how the Payday Super rules apply to out-of-cycle or ad-hoc payments that fall outside normal payroll runs, including situations where such payments do not generate SG calculations or require manual correction. Employers can refer to Payment deadlines for Payday Super and paragraphs 1.62 and 1.63 of the Explanatory Memorandum. Further ATO advice is planned on how the Payday Super laws apply to non-standard payroll events. Stakeholders sought clarification on how the maximum contributions base operates when employees join or change funds mid-year, including potential excess contributions where payroll systems cannot view year-to-date superannuation across multiple funds, and how existing SG opt out arrangements apply for employees who have multiple or subsequent employers. For detailed guidance on these concepts , see Maximum contribution base and Super guarantee opt out for high-income earners with multiple employers . Further explanatory material on the maximum contributions base is available in Example 1.1 of the Explanatory Memorandum. Stakeholders sought clarification on how the Payday Super ordering and offset rules apply when employers make late, corrective or irregular contributions, including how payments should be allocated across QE days and how overpayments or underpayments interact with the offset framework. For detailed guidance on these issues, see the subheading 'How your contributions are allocated' in Making super payments . Further ATO guidance to assist business readiness will become available closer to the commencement of the PDS Act. Explanatory material on the ordering rule is also available in Examples 1.5 (overpayment) and 1.6 (underpayment) of the Explanatory Memorandum. Stakeholders raised concerns about the transition away from the Small Business Superannuation Clearing House (SBSCH), noting that many micro and small employers rely on the service and will need adequate notice, support and system readiness to manage contributions once SBSCH access ceases. Submitters highlighted potential issues with cost, accessibility, processing times and accountability (as employers are solely responsible for ensuring contributions are made on time). Several requested certification or assurance frameworks, minimum processing standards, and transitional support to assist small business users of the SBSCH. Employers can refer to existing guidance, including: The ATO has been working with clearing houses to ensure they are aware of the updated payment timeframes. Commercial clearing houses will be enabled to use the New Payments Platform to ensure fast payments of contributions though the superannuation system. We recommend that employers using a clearing house contact them to understand processing timeframes in a Payday Super environment. Stakeholders requested guidance on offset ordering, treatment of rejected contributions, interest cessation and the variability of self-managed super fund (SMSF) processing times. Submissions raised concerns that SMSF transit delays may elevate compliance risk where employers pay on time, but member data is not processed promptly. Submitters sought clearer examples illustrating correct sequencing and correction processes. Stakeholders requested more guidance on the difference between ordinary time earnings and qualifying earnings. The ATO will be providing advice on the application of the Payday Super law in respect of key priorities as identified by industry. This topic is expected to be covered. Existing ATO guidance is available at What payments are qualifying earnings . Further ATO guidance will be available ahead of the commencement of Payday Super. Stakeholders sought clarification on how interest cessation and notional earnings apply when employers correct, reallocate or adjust contributions, including how the cessation framework interacts with late or revised payments under the Payday Super rules. Further ATO guidance will be available ahead of the commencement of Payday Super. Stakeholders sought clarification on how the components of the SGC (including administrative uplift, penalty settings, deductibility rules and nominal interest) interact with late, corrective or reallocated contributions, and how correction timing affects SGC remission, interest cessation and notional earnings. Further ATO guidance will be available ahead of the commencement of Payday Super. Stakeholders argued that employers should only incur penalties for failures directly within their control, such as not initiating payment on the required day. Stakeholders also suggested that where a super fund rejected a contribution, there should be a renewed payment deadline of 7 business days from the date of notification of rejection. Other stakeholders also requested that remediation pathways be available for scenarios involving ex-employees, closed or inactive accounts, successor fund transfers and fund-initiated refunds. Under the SuperStream Data and payment standards – contributions message implementation guide [1] , super funds must return contributions they cannot allocate, and employers are expected to work with the fund to correct and resubmit the contribution as soon as reasonably practicable. Consistent with the Guideline, employers who take reasonable steps to remediate fund-returned contributions as soon as reasonably practicable will be treated as low risk during Year 1 (see Example 1 of the Guideline). The usual period of 7 business days for contributions is a legislated requirement under the Payday Super amendments. The law also allows for some longer periods in certain circumstances, such as first-time contribution payments to a fund for the employee. The Commissioner has no discretion in relation to these due dates. Where an employee leaves unexpectedly after payday but before the end of the month (monthly payroll cycle payable in advance), there is the possibility of super being overpaid. Stakeholders requested guidance on the processes to retrieve the overpayment from super funds. Stakeholders sought clarification on how the Payday Super timing rules apply during the transition to 1 July 2026, including the: Further ATO guidance about transitional issues will be available ahead of the commencement of Payday Super. Stakeholders advocated for the impact of Payday Super on small business to be taken into account before the Treasury Laws Amendment (Payday Superannuation) Act 2025 was passed by Parliament. © AUSTRALIAN TAXATION OFFICE FOR THE COMMONWEALTH OF AUSTRALIA You are free to copy, adapt, modify, transmit and distribute this material as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).",,,,,,,/law/view/pdf?DocId=COG%2FPCG20261EC%2FNAT%2FATO%2F00001&filename=law%2Fview%2Fpdf%2Fcog%2Fpcg2026-cp001.pdf&PiT=99991231235958,False,False,https://www.ato.gov.au/law/view/document?docid=COG/PCG20261EC/NAT/ATO/00001
PCG 2025/1EC,Compendium,Compendium,Draft,,,,,,,"All legislative references in this Compendium are to the Income Tax Assessment Act 1997 , unless otherwise indicated. Clarification is sought that the ATO will not apply compliance resources to specifically identify the deductibility of adviser fee payments under table item 5 of subsection 295-490(1) for the 2019–20 to 2024–25 income years. A 6-month transition period is proposed after the finalisation of the draft Guideline to ensure the necessary systems and program adjustments can be effectively implemented. The date of effect for Part 1 of the Guideline is 1 July 2019, which is when the new deduction, enacted by the legislative amendments, commenced. This means funds have the flexibility to choose whether to use the account-based method and, if desired, the method can be applied retrospectively from as early as 1 July 2019 (depending on a fund's amendment period) or prospectively. For these reasons, a transitional compliance approach for Part 1 of the Guideline is not necessary. As noted in paragraph 5 of the Guideline, the Guideline does not apply to the other requirements, in paragraphs (a), (b) or (c) of table item 5 of subsection 295-490(1), which must also be satisfied for a payment of a financial advice fee to be deductible under that item. It is our expectation that funds would have a documented governance framework and assurance practices in place that are adequate in meeting their income tax obligations for the deduction of financial advice fees, for the purposes of satisfying those paragraphs (and paragraph (d), if another method is applied other than that outlined in the Guideline). This may be considered along with other relevant documentation when we engage with funds as part of our compliance programs. Footnote 2 of the draft Guideline should be amended to provide further clarification of the nature of financial advice payments. The draft Guideline is dealing with matters relating to the deduction claimable by the superannuation fund for 'an amount paid by' the superannuation fund that satisfies the conditions in subsection 295-490(1). That may be an amount paid directly by the superannuation fund 'to a financial adviser' or it may be an amount paid by the fund 'to' the member or 'to' another entity as reimbursement for a qualifying amount paid by the member or other entity to the financial adviser. As the purpose of this footnote seems to be just to confirm the nature of the qualifying 'financial advice fees', to avoid any confusion regarding the payment that is deductible for income tax purposes, it is suggested that the words 'by a superannuation fund' be removed from the footnote. Further, footnote 2 of the draft Guideline outlines that 'Funds may also charge a fee for general advice, as defined in that section, against members' accounts'. We do not believe that this is technically correct. While it is possible to collectively charge members for the cost of personal financial advice as part of the member fee (that is, section 99F of the Superannuation Industry (Supervision) Act 1993 ) and for the cost of the provision of general advice to be incorporated within a member fee, it is not possible to directly charge members for general advice. It might be appropriate to add the words 'indirectly as part of a membership fee' prior to 'charge'. The final Guideline should include a footnote after 'amount paid by the fund' in the second line of paragraph 12 of the draft Guideline to clarify the distinction between internal transactions of the superannuation funds and payments to external parties. The following footnote has been suggested to ensure that the fund trustees and their service providers are clear on this distinction: The ATO should consider exercising the Commissioner's remedial power to provide certainty that financial advice fees paid prior to the 2019–20 income year are not treated as superannuation benefits. There remains an ongoing concern that the ATO's interpretation suggests trustees may have breached pay as you go withholding obligations for financial advice fees paid prior to 1 July 2019. Applying the Commissioner's remedial power would ensure that financial advice fees paid prior to the 2020 income year are not treated as superannuation benefits, reducing complexity and avoiding unintended compliance concerns. To the extent that there are broader concerns that the legislative amendments still leave uncertainty in relation to whether fees paid prior to 1 July 2019 would be regarded as 'superannuation benefits', we consider that any income tax related concerns should already be addressed by the Guideline or a fund or member's generally limited amendment period of up to 4 years. The ATO should consider providing additional guidance on the treatment of financial advice fees for members who transition from accumulation to retirement phase within an income year, ensuring that funds can confidently apply the compliance approach without unintended risk. It is noted that members of superannuation funds who have met a condition of release and have commenced a retirement phase product, may continue to work and as a result also maintain an accumulation phase product. While fees charged to their retirement phase product would not be deductible, fees charged to their accumulation phase product should be deductible. 'How' the fund will demonstrate that the fee has been paid from or charged to an accumulation phase account (versus a retirement phase account) is a question of how the superannuation fund can substantiate that this methodology has been adopted. Substantiation of the requirements of table item 5 of subsection 295-490(1) falls outside the scope of this Guideline. The ATO should consider providing further guidance in the final Guideline on how superannuation funds might also satisfy the requirements contained in paragraphs (a), (b) and (c) of table item 5 of subsection 295-490(1). The requirements in paragraphs (a), (b) and (c) of table item 5 of subsection 295-490(1), and how a fund can satisfy those requirements, are matters involving broader substantiation of the deduction. Substantiation falls outside the scope of this Guideline. However, as noted in paragraph 5 of the Guideline, it is expected that funds would have a documented governance framework and assurance practices in place that are adequate in meeting their income tax obligations for the deduction of financial advice fees, for the purposes of satisfying those paragraphs. We welcome and support the proposed 'account-based' approach outlined in the draft Guideline. We also welcome the ATO's expectation that large funds should have adequate governance frameworks and assurance activities in place to determine their income tax obligations in this regard, in place of specific requirements under paragraphs (a), (b) and (c) of table item 5 of subsection 295-490(1). We support the choice to apply this approach in any year, the ability to change that choice in later years and the fact that this choice must apply to all advice fees paid in that year. That is a practical position to have taken. © AUSTRALIAN TAXATION OFFICE FOR THE COMMONWEALTH OF AUSTRALIA You are free to copy, adapt, modify, transmit and distribute this material as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).",,,,,,,/law/view/pdf?DocId=COG%2FPCG20251EC%2FNAT%2FATO%2F00001&filename=law%2Fview%2Fpdf%2Fcog%2Fpcg2025-cp001.pdf&PiT=99991231235958,False,False,https://www.ato.gov.au/law/view/document?docid=COG/PCG20251EC/NAT/ATO/00001
PCG 2025/2EC,Compendium,Compendium,Draft,,,,,,,"All legislative references in this Compendium are to the Income Tax Assessment Act 1997 , unless otherwise indicated. Reordering the examples was considered and, on balance, not preferred. The low-risk zones include general characteristics that need to be present in all low-risk restructures (such as that Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) would not otherwise apply). The examples are then used to demonstrate circumstances the Commissioner would apply resources to investigate, distilled from stakeholder engagements. This approach is designed for taxpayers to self-assess using the examples provided in the Guideline. The examples are based on stakeholder submissions of realistic and expected restructures. However, the Guideline is not intended to provide interpretive guidance and this interaction may be considered for further guidance in the future. Further guidance on joint ventures is beyond the scope of the Guideline. The Guideline is not intended to provide interpretive guidance and this request may be considered for further guidance in the future. We have also included Example 9 in Schedule 1 (replacement of third party debt with related party debt) to demonstrate the inverse scenario would attract our attention. While a 'de minimis' threshold is included in the white zone (aligned to the legislative threshold in section 820-35), we have not sought to provide any additional 'de minimis' threshold in the context of this record-keeping guidance. The guidance is intended to assist taxpayers considering what records they may have to rely on and, in their circumstances, whether it is appropriate to disallow debt deductions in proportion to identifiable transactions to which the DDCR applies. In addition, where taxpayers consider their records indicate that it would be more appropriate to restructure their arrangements, the Guideline provides guidance on the Commissioner's compliance approach to that restructuring. This request may be considered for further guidance in the future. New Examples 15, 16 and 17, regarding record keeping, tracing and apportionment also include refinancing and illustrate the need to identify the original use of refinanced funds. We have not provided any mandatory methodologies in the final Guideline. Whether a particular methodology is appropriate will depend on what is fair and reasonable based on the facts and circumstances of the taxpayer. The Guideline is intended to assist taxpayers to comply with the DDCR in its context as new law. It is anticipated that taxpayers may restructure their arrangements rather than incur disallowed debt deductions. We will monitor these arrangements to consider whether we are able to publish guidance on low-risk scenarios in the future. The final Guideline retains statements from the draft Guideline that characterisation as low risk or high risk does not presuppose the application of any particular tax provision (including anti-avoidance provisions) to the restructure. It is intended as a guide as to the allocation of resources by the Commissioner, including the intensity of those resources (in the context of high-risk restructures). © AUSTRALIAN TAXATION OFFICE FOR THE COMMONWEALTH OF AUSTRALIA You are free to copy, adapt, modify, transmit and distribute this material as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).",,,,,,,/law/view/pdf?DocId=COG%2FPCG20252EC%2FNAT%2FATO%2F00001&filename=law%2Fview%2Fpdf%2Fcog%2Fpcg2025-cp002.pdf&PiT=99991231235958,False,False,https://www.ato.gov.au/law/view/document?docid=COG/PCG20252EC/NAT/ATO/00001
PCG 2025/3EC,Compendium,Compendium,Draft,,,,,PS LA 2008/12 | TR 2005/5 | TR 2007/10,,"All legislative references in this Compendium are to the Income Tax Assessment Act 1997, unless otherwise indicated. The final Guideline should include additional examples and comments to increase taxpayers' ability to self-assess common commercial arrangements, such that they more clearly fall within the 'green zone' and the 'red zone', as there is a large gap between green zone and the red zone categories against which taxpayers must self-assess under the draft Guideline. Many taxpayers will fall outside of the fairly narrow green zone but will not exhibit each of the factors relevant to being in the red zone based on the draft Guideline. Further, the provision is self-executing and does not require the Commissioner to exercise discretion to apply and deny the frankability of a distribution. It is crucial that the final Guideline provides guidance which allows as many taxpayers as possible to self-assess their risk. Other common merger and acquisition transactions The final Guideline should include a variation on Example 8 where a new significant investor is introduced, a pre-transaction dividend is paid to existing owners and the existing owners remain shareholders. The final Guideline should include an example covering an initial public offering (IPO) that involves a pre-IPO dividend funded by IPO proceeds. That is conceptually not dissimilar to scenario 5 in that existing owners are paid a dividend funded by new owners. The existing owners may or may not sell shares at the time of the IPO. In the final Guideline, the examples should clarify that the same conclusion in scenario 5 results, irrespective of whether the purchaser provides consideration by way of cash or scrip. Arrangements motivated by asset protection Closely held groups often seek to reduce the net assets of trading entities that are at high risk of being sued and commonly seek to distribute profits out of the company at the earliest opportunity. This may simply involve paying franked dividends up to a holding company. Where the trading company requires the continual use of the funds, they may seek to obtain the funds by way of loan, which the holding company may look to secure. Where this is an at-call loan, it can be classified as an equity interest for tax purposes. Alternatively, there may be arrangements involving more than 2 entities such as where the shareholder uses the dividend to subscribe for ordinary shares in a different company which lends the money back to the original trading company. This loan-in may be either a debt interest or an equity interest, but the issuance of shares by this other company creates the potential for the application of section 207-159 (for example, similar to the issuance of equity and loan in by ABC to Hawks Harvest in Example 8 of the draft Guideline). Our approach is focused on setting out key principles that can be broadly applied for self-assessment, rather than addressing a wide range of permutations. For this reason, including additional examples would be of limited value as each arrangement will be dependent on its own facts. For instance, Example 11 of the final Guideline refers to the type of documentation relevant to the purpose of a capital raising for a public company. This provides a practical example of what records will assist an entity to demonstrate that the integrity measure does not apply, with the principles being relevant to other merger and acquisition (M&A) scenarios that do not fall within the green zone. We consider the green zone scenarios and examples provided in the final Guideline align with the priority areas raised during our external consultation prior to publication of the draft Guideline. We have provided practical certainty on a range of common commercial arrangements that will be relevant for taxpayers, noting that there will be a variety of other factual scenarios that will fall outside the green zone. To alleviate concerns, the Guideline also provides guidance on documentation relevant to the principal effect and purpose tests, and examples of how entities have satisfied themselves that they are not in the red zone. As paragraphs 13 to 15 of the final Guideline emphasise, if an arrangement doesn't fall within the risk zones, this does not mean that there is a high risk of the integrity measure applying. All 4 criteria must be satisfied for section 207-109 to apply. Taxpayers are also able to obtain advice on their specific circumstances, such as by obtaining a private or class ruling. See our response to Issue 2 of this Compendium concerning comments on expanding scenario 5 of the green zone. Scenario 5 and Example 8 of the final Guideline should extend to public M&A scenarios. Extending the context to include public M&A transactions does not undermine the purpose of the provision, particularly given pre-sale dividends, in the context of public M&A transactions, are ordinarily subject to the Commissioner's review in the class ruling process in any event. There is no legislative basis nor policy rationale for making a distinction between public and private M&A. Irrespective of whether a pre-sale dividend is paid in a private or public M&A transaction, an equity raising that partially or wholly funds the distribution would not have a principal effect, nor non-incidental purpose of funding the dividend. Rather, the purpose and effect of the capital raising is to facilitate the sale by the target company's existing shareholders (that is, the same commercial purpose as Example 8). The fact that taxpayers will fall in 'no man's land' is acknowledged by Example 11 of the draft Guideline which states that the taxpayer is neither in the green zone or red zone, but as the taxpayer is able to demonstrate the commercial purpose of the equity issuance and the use of funds by reference to documentation the provision should not apply. The brief reference in the Supplementary Explanatory Memorandum to the Treasury Laws Amendment (2023 Measures No. 1) Bill 2023 (Supplementary EM), at paragraph 4.7 that 'family or commercial dealings of private companies to facilitate the departure of one or more shareholders are not intended to be affected by the [provision]' provides no justification or positive intent that public companies should be treated differently to private companies. Rather, paragraph 5.45B of the Explanatory Memorandum to Treasury Laws Amendment (2023 Measures No. 1) Bill 2023 [1] (EM) states that the provision targets 'contrived arrangements undertaken by closely held companies', while commercial dealings would not be targeted. This reflects Treasury's anticipation of greater integrity risk in the private company context, while legitimate M&A dealings, whether public or not, would not reflect any contrivance. The final Guideline should confirm if Example 8 of the draft Guideline is limited to private group wholly owned structures or whether a similar fact pattern in a public structure would apply as some of their members in the agriculture space often work in trust structures to manage joint arrangements and co-operatives with other businesses but aren't necessarily a private group. The final Guideline should acknowledge that there are comments in the Supplementary EM that refer to 'family or commercial dealings of private companies', however, we suggest that the reasoning and conclusion in Example 8 should not be limited to cases where the target company is a private company. There is nothing in the legislation that makes this a relevant distinction. It is submitted that the same conclusions should follow if Hawks Harvest was a public company. Example 11 of the Guideline provides an example of a public company M&A transaction to provide further guidance on how taxpayers can reasonably self-assess their circumstances using relevant documentation to determine whether they are within the red zone. The final Guideline should include a 12-month (or greater) delay between an equity raising, and a distribution as one of the green zone scenarios to demonstrate that generally where there is such a delay there will be 'insufficient linkage' between the equity raising and the distribution. An additional example or scenario should be included to demonstrate the application of these factors. This change would be consistent with Example 5.3 in the EM (includes a 12-month timeframe between the equity raising and the franked distribution) and would provide symmetry between the red zone (that is, factor 1 in Table 3 of the draft Guideline) and the green zone, thereby reducing the number of situations in which taxpayers fall in the gulf between the zones. This would also enhance taxpayers' ability to self-assess their risk and therefore assist in achieving the objectives of the Guideline. We also note that Example 5.3 in the EM considers an arrangement to have insufficient linkages between the capital raising and special dividend as the principal effect and purpose test is not satisfied, not because of the timing between the equity raising and distribution being more than 12 months. Rather, it was that the company's circumstances were for a genuine commercial purpose, where the capital raising was required for an acquisition and when the acquisition was unsuccessful, the surplus of cash was returned to shareholders as a special distribution. We welcome the administrative clarity provided by the Commissioner in relation to whether a distribution is in accordance with a company's 'established practice'. The draft Guideline helpfully provides that taxpayers are required to consider the preceding 3 years of distributions paid in relation to the relevant class of shares (for example, factor 2 of Table 3 of the draft Guideline). However, the Commissioner should provide additional guidance for taxpayers considering their established practice where external economic conditions have had a significant impact on their distribution policy and their needs to raise additional capital. We recommend the final Guideline includes some flexibility to take into account future economic crises outside the control of taxpayers. This could be achieved by including in scenario 1 of Table 2 of the Guideline a statement that established practice can be present even where there is a temporary suspension or decrease in dividends due to economic conditions, by having reference to distributions in earlier periods (if relevant). For example, if a taxpayer has suspended or reduced dividends in certain periods because of volatility in economic conditions, that those periods may be disregarded (or at least, considered as a 'pause' in established practice) and that taxpayers can look back to earlier periods (if relevant) when applying the Guideline to their affairs, for example, the suspension of dividends by many Australian-listed companies during the COVID-19 pandemic. Scenario 1 of the green zone should acknowledge that the factors identified are examples of the relevant factors and that other factors in addition to the 3 listed (timing, quantum and franking percentage) can be relevant to an established practice, and that it is not necessary that all the listed factors be consistent. Scenario 1, as drafted, indicates that distribution consistency is required of all the 3 factors (timing, quantum and franking percentage) to be consistent with an established practice. Although expressed as a cumulative 'and' test, it can be presumed that a practice can be regarded as an established practice in cases where some, but not all 3 factors (timing, quantum and franking percentage) are met. For example, if a practice existed of a 6-monthly dividend in the amount of X% of retained profits, but some of those dividends were franked and some were not (depending upon the tax profile of the company), we presume that this would amount to an established practice where 2 of the 3 factors are consistent. It is submitted that factors other than the 3 identified in scenario 1 of the green zone may be relevant in identifying an established practice. For example, a dividend policy may be based upon the company achieving certain debt to equity ratios or having paid down a certain amount of debt. In a private or family company scenario, it may be that the dividend practice is determined by matters outside of the company such as cash needs of shareholders. Scenario 1 of the green zone is intended to provide practical guidance for taxpayers on circumstances when we are satisfied that an established practice exists. Taxpayers may be able to demonstrate the existence of an established practice in other circumstances, supported by documentation with the relevant statutory factors. We accept that the amount, franking percentage and timing does not need to be precisely or exactly consistent across the 3-year testing period. Therefore, in the final Guideline, we have added that all 3 factors only need to be 'fundamentally' consistent. The 5% threshold in the draft Guideline does not reflect a 'substantial part' and is more aligned to a de minimus threshold than a substantial part threshold. Paragraph 25 of the draft Guideline and scenario 3 of the green zone do not accord with the ordinary usage of the term 'substantial'. Dictionary definitions of 'substantial' include 'of large size or amount' and 'large in size, value or importance'. Large is defined as 'of considerable or relatively great size or extent' and 'big in size or amount'. 'Substantial' should be considered to mean the 'main' part consistent with the similar approach in Taxation Ruling TR 2005/5 Income tax: ascertaining the right to tax United States (US) and United Kingdom (UK) resident financial institutions under the US and the UK Taxation Conventions in respect of interest income arising in Australia which practically, for this purpose, should mean more than 50%. In TR 2005/5, the Commissioner states in relation to the meaning of the term 'substantially deriving its profits' that 'the relevant term substantially when used in conjunction with deriving profits' requires that the main source of the enterprise's profits be derived from its business of undertaking 'spread activities'. If this change is not made, an increased number of taxpayers will obtain only limited guidance from the Guideline (limited to the consideration of factors in paragraph 13 of the draft Guideline) with resulting likelihood that taxpayers may need to apply for rulings on their arrangement to obtain comfort that the ATO will not apply the rules compared to if a more appropriate higher percentage measure was adopted. We recommend that a percentage higher than 5% should be used to determine when an arrangement is in the green zone for the compliance approach. We suggest that the issue of equity interest which funded the distribution should be less than 40% of the entire franked dividend to be considered to not be a 'substantial part' for the third criterion. That is, at a level of funding the dividend by the issue of equity interests equal to 40% or more of that dividend, the green zone scenario will not be met. This threshold should be increased from 5% to at least 20% of a distribution. This would concur with paragraph 3.10 of the Supplementary EM which states (emphasis added): While the EM does not conclude on a specific percentage (or range) that would be 'substantial' or 'more than small or minor', it points to a benchmark (being the majority of a distribution). A threshold of only 5% is drastically lower than that benchmark and would impose a heavy administrative burden on taxpayers (effectively requiring tracing of at least 95% of the distribution) and potentially leading to a much higher number of arrangements falling outside of the green zone, even where none of the red zone factors are present. Any threshold adopted in the final Guideline must concur with other relevant guidance and case law, including Allied Mills Industries Pty. Ltd v Commissioner of Taxation [1989] FCA 135 in which the court considered the meaning of 'substantial part' and referred to Wiseburgh v Domville (1956) 36 TC 527, where an agency agreement that was cancelled amounted to about 90% of the plaintiff's This case law has been cited in ATO Interpretative Decision ATO ID 2003/105 Income Tax: Income or capital – payment on termination of an agreement to provide services . Taxation Ruling TR 2007/10 Income tax: the treatment of shipping and aircraft leasing profits of United States and United Kingdom enterprises under the deemed substantial equipment permanent establishment provision of the respective Taxation Conventions also provides the Commissioner's view of whether equipment is 'substantial' is a question of fact and degree to be determined on balance, in a relative sense, and in an absolute sense. This indicates that 'substantial part' is intended to be more than a minor or de minimus part and supports increasing the 5% threshold to at least 20%. The 'third criterion' to be considered is that it is reasonable to conclude having regard to all relevant circumstances that the principal effect of the issue of any of the equity interest was the direct or indirect funding of the substantial part of the relevant distribution or relevant part and the entity that issues or facilitated the issue of the equity interest did so for the non-incidental purpose of funding a substantial part of the relevant distribution or relevant part. Technical positions should be supported by a binding taxation determination We recommend a taxation determination is issued and it does not need to state the 'safe harbour' threshold (that is, of 5%). Without a technical basis, the draft Guideline alone is insufficient to provide taxpayers certainty on this issue. A binding view should be provided by the Commissioner to explain that the 'relevant part' concept (paragraph 3.12 of the Supplementary EM) should be read consistent with achieving the ultimate purpose of the provisions, as opposed to the original purpose before the amendments were made. For example, $90 million capital raised may be said to fund a substantial portion of a $100 million distribution. Section 207-159 applies so that only $90 million of the $100 million distribution could be made unfrankable under section 207-159. If instead, $2 million of capital raised funded a portion of a $100 million distribution, it can be concluded (depending on the circumstances) that no amount of the distribution is unfrankable. We have considered the feedback and decided to increase the threshold of scenario 3 of the green zone. We have determined that a less than 20% threshold is appropriate for providing practical certainty on when we will generally not have cause to apply compliance resources, in the context that this is an anti-avoidance provision. As part of our maintenance of the Guideline, in accordance with Law Administration Practice Statement PS LA 2008/12 Public advice and guidance products: selection, development, publication and review processes, we will continue to monitor the relevance of the Guideline's application. This will include considering whether the 20% threshold remains appropriate, and where necessary, we may make updates to reflect evolving commercial practices. At paragraph 23 of the final Guideline, we have provided additional guidance on the 'proportionality' aspect of the integrity provision to improve clarity. For example, if a company raises $9.5 million in equity which directly or indirectly funds a $50 million distribution, this would be considered low risk. If the proportion is 20% or greater, this does not mean the arrangement is automatically high risk. In response to feedback about issuing a binding taxation determination, we have prioritised providing guidance regarding the practical implications of the integrity provision and how we will assess compliance risk. As such, we will not be issuing a binding product in relation to the provision. A submitter expressed support for the draft Guideline as issued and raised no concerns, indicating that it satisfactorily: Examples 5, 6 and 7 of the draft Guideline helpfully address the exception in the provision for the issue of equity interests in direct response to a requirement, direction or recommendation from APRA or the Australian Securities and Investments Commission. We recommend including an additional example in the draft Guideline in relation to APRA's announcement in December 2024 to phase out the use of additional Tier 1 (AT1) capital instruments by Australian banks (effective from 1 January 2027 via amendments to APRA's prudential standards). Should the changes go ahead, we expect a number of Australian banks may undertake equity capital raisings (for example, by issuing additional ordinary shares) in the near future to raise the relevant CET1 capital, but will still distribute franking credits via ordinary and special dividends. These banks' ability to distribute franking credits will be more limited with the phasing out of AT1 capital instruments, and to provide comfort to allow these taxpayers to continue to distribute franking credits where such distribution is not part of an artificial or contrived arrangement and is done in accordance with existing franking integrity measures. This example should bear similarity to existing Example 6 of the draft Guideline but would adopt slightly different facts. In addition, while Examples 5, 6 and 7 of the draft Guideline address green zone arrangements which invoke the APRA exception, we suggest that it would be helpful to include an additional example covering a red zone example, to provide additional clarity on the nexus required for an equity raising to be a direct response to APRA and Australian Securities and Investments Commission requirements where the equity raising also serves other goals. As noted in our response to Issue 6 of this Compendium, we will continue to monitor the relevance of the Guideline's application and update the Guideline in the future as appropriate. Once APRA has implemented its proposed changes, we can reassess the banking examples if stakeholders submit that they are no longer fit for purpose. We also note that another submitter provided positive feedback that the guidance addresses industry concerns. We recommend the final Guideline make clear that distributions made under a DRP (underwritten or not), undertaken for normal commercial purposes and which are not an artificial or contrived arrangement are in the green zone, no matter what the percentage of that distribution is to the entire franked dividends paid. Paragraph 31 of the draft Guideline states that arrangements will be in the green zone 'where any of the following apply' and we recommend this should be made clear in the examples. Example 2 of the draft Guideline stating that 'for the avoidance of doubt' where distributions are less than 5% of the entire franked distribution that scenario 3 will also apply and that scenario 1 may also apply tends to create confusion. We suggest that Example 2 be modified as scenario 2 of the green zone operates independently of other scenarios. Examples 2 and 3 of the draft Guideline are DRP cases which are taken to be for normal commercial purposes. There is no elaboration in the facts in Example 2 to demonstrate why it is an appropriate conclusion. Our intent of including 'any' at paragraph 31 of the Guideline is to ensure clarity that only one of the scenarios needs to apply for the arrangement to be in the green zone. In the final Guideline, we have clarified Example 2 to reflect that taxpayers can rely on a single scenario to be in the green zone. Example 2 of the Guideline emphasises the DRP has been in place for an extended period of time, is an ongoing arrangement for ordinary dividends and is designed to support retail investors to increase their shareholdings. We consider these facts to be relevant in determining the DRP was undertaken for normal commercial purposes. Example 3 of the draft Guideline states that the company wants to 'raise capital to invest in its upcoming property development projects'. Leaving aside a company undertaking a return on capital, any company will always require funds to conduct its ongoing business activities. Therefore it is not clear as to the difference between Examples 3 and 4 of the draft Guideline with respect to 'normal commercial purposes'. Example 4 of the Guideline has a range of objective facts that give rise to the arrangement being artificial and contrived. In particular, it highlights the concerns with the arrangement which include the following concerns: In the draft Guideline, scenario 2 of the green zone effectively repeats the comments in the Supplementary EM. There is no further EM commentary regarding 'normal commercial purposes' or 'artificial or contrived'. No clarity is brought to these matters via Example 4 of the draft Guideline. Example 4 of the draft Guideline is listed in the 'Green zone arrangements examples – scenario 2'. However, the example concludes that this is a red zone arrangement (as well as not meeting the requirements to be a green zone arrangement). We recommend that a cross-reference to this example should be added to the red zone arrangements section. It is not clear what is intended to be conveyed by the term 'special dividend' in Example 4 of the draft Guideline. This term is used in multiple places in the draft Guideline. If this is meaning that the 'dividend is not consistent with established practice as per paragraph 207-159(1)(a)', it would be clearer to describe the dividend in that way rather than introducing a new and uncertain term. We suggest that in the final Guideline, Example 4 should elaborate on why the example amounts to an artificial or contrived arrangement so as to delineate between Example 4 and a fully underwritten DRP that is not an artificial or contrived arrangement. Paragraph 51 of the draft Guideline – 'special dividend does not align with an increase in Pink Maple's earnings' Given that scenario 2 of the green zone is focused on the effect and purpose tests in paragraph 207-159(1)(c), we assume that the factor in paragraph 51 of the draft Guideline is relevant to the effect and purpose tests (noting that it may also be relevant to the condition in paragraph 207-159(1)(a). It is not clear as to what is meant by 'earnings'. Is it referring to gross income, EBITDA [2] , net income, retained earnings (undistributed profits) or other? Once the meaning of earnings is clarified, the final Guideline should clarify what inference if any is to be drawn from this fact. For the company to declare the dividend, it must be the case that the company has sufficient retained earnings (undistributed profits). These profits may relate to current profits or prior year profits (or both) in that sense, a dividend should always align with retained earnings. Paragraph 54 of the draft Guideline It is unclear why the company concludes that the DRP is not undertaken for normal commercial purposes and is artificial or contrived. Paragraph 55 of the draft Guideline It is submitted that at least the first and third factors listed in paragraph 55 of the draft Guideline will be present in any underwritten DRP. Yet, as a general proposition, an underwritten DRP is prima facie in scope of scenario 2 of the green zone. It is stated as a conclusion, without any further elaboration, that there is 'an absence of clear and genuine commercial purpose for the features of the arrangement'. We suggest that to better understand the relevant borderline here, that in the final Guideline, there also be a variation of the facts for Example 4 to provide indications of when an underwritten DRP will not fall foul of this absence of commercial purpose. While Example 4 of the Guideline relates to a DRP that falls within the red zone, the reason for including it with the other green zone DRP examples is to highlight the differences between a green zone and red zone arrangement. In the final Guideline, we have included a cross-reference to Example 4 at paragraph 85 and updated the example's title to provide clarity. Further, 'special dividend' is a commonly used term to describe dividends in the market. It is defined by Cambridge dictionary as 'part of the profit of a company that is paid to shareholders in addition to one of the normal payments'. [3] In the final Guideline, we have clarified in Example 4 that Pink Maple's profits have not increased, but a substantial special dividend is being distributed to shareholders, which is essentially funded by the capital raising. Refer to our response in Issue 10 of this Compendium for reasons why we consider Example 4 of the Guideline is in the red zone. The matters against which a dividend is to be tested as to whether it is 'unusually large' should be expanded. Scenario 1 of the green zone accepts that an indicator of established practice is consistency of the amount of a dividend, expressed either as: However, a dividend that is unusually large as compared to dividends in the last 3 years without there being a corresponding increase in profit is in scope of factor 2 of the red zone. We presume such a dividend should not be in scope of factor 2 of the red zone if a dividend is: However, as we read factor 2 of the red zone, such a dividend is in scope of factor 2 of the red zone. If a dividend is unusually large in quantum or in terms of pay-out ratio or percentage of free cash flow, factor 2 of the red zone will apply if the dividend is not proportionate to an increase in profits. As outlined in paragraph 84 of the final Guideline, all red zone factors need to apply in order for the arrangement to be considered in the red zone. The fact that a company does not have an established practice of making distributions or makes an unusually large distribution that is not consistent with the ordinary distribution practice of the entity, does not by itself mean that section 207-159 will apply to an arrangement. It is not clear in scenario 5 of the green zone or Example 8 of the draft Guideline as to what is the relevant definition of 'private company'. Is it the tax law definition, listed, other? By contrast, other parts of the draft Guideline refer to ASX-listed companies. The submitter recommends the final Guideline also state that if the amount of the dividend is one that is paid in order to comply with Division 7A (that is, the minimum yearly repayment formula in section 109E of the ITAA 1936) this should also be considered to be consistent and able to support the conclusion that the dividend is one consistent with an established practice. The submitter notes that Division 7A loans are commonly dealt with by way of dividend and set-off and driven by the statutory formula. These are genuine established practices adopted by private companies who commonly pay dividends for these reasons as opposed the reasons that large listed companies pay dividends (that is, a closely-held company is not motivated by a need to keep investors happy and create demand for their stock). The final Guideline should acknowledge and recognise that closely held companies establish dividend practices for vastly different reasons to widely held public companies and would not be expected to adopt similar metrics in order to establish a practice of paying dividends of a particular kind. To the extent that a private company has a history of paying dividends for Division 7A compliance (even if such dividends are ad-hoc) this would be considered an established practice. Practice established by other group entities The submitter suggests that the practice established by other entities in the same group should be taken into account as a relevant consideration. If too strict an interpretation was taken, this would disadvantage newly established entities (in non-consolidated groups) that may merely act as another vehicle that otherwise carries out the group's overall objectives. An example may be where a holding company is interposed (for example, pursuant to a Division 615 roll-over). If that holding company immediately adopts a practice consistent with the original company, it should be considered to have that practice from inception, rather than having to wait over 3 years before it can be covered by scenario 1 of the green zone. Likewise, a group may establish a new company for each project or separate location it expands to. Such entities should also be able to benefit from the group's existing dividend practice rather than having to wait 3 years. For example, the new company may immediately start paying dividends using the exact same frequency and exact same metric (for example, percentage of free cash flow) as all other companies in the group that conduct the same kind of activity. Additionally, we acknowledge the dividend practices in the private groups sector are influenced by a range of factors. While this may make it difficult to assess the conditions in paragraph 207-159(1)(a), as outlined in paragraph 14 of the final Guideline, this is only one of the criteria that is taken into account in determining whether the integrity measure applies. Having regard to the dividend practice of other entities will not be considered as relevant, as the condition provided in subparagraph 207-159(1)(a)(i) explicitly refers to the dividend practice of the entity. However, we would consider all relevant facts and circumstances in applying the legislation, including in considering the principal effect and purpose test. The final Guideline should state that tax outcomes will be considered as a relevant consideration for the Commissioner in allocating compliance resources. There should be an additional green zone scenario stating that distributions taxed at the top marginal rate are at low risk of the Commissioner having cause to allocate compliance resources, for example, in a closely held companies context, most shareholders would have marginal tax rate greater than or equal to the corporate tax rate. Such structures generally often prefer to reinvest profits at the corporate tax rate rather than accelerate the early release of franking credits.",,,,,,,/law/view/pdf?DocId=COG%2FPCG20253EC%2FNAT%2FATO%2F00001&filename=law%2Fview%2Fpdf%2Fcog%2Fpcg2025-cp003.pdf&PiT=99991231235958,False,False,https://www.ato.gov.au/law/view/document?docid=COG/PCG20253EC/NAT/ATO/00001
PCG 2025/4EC,Compendium,Compendium,,,,,,,,"The Transition Period appears to be based on the lodgment due date occurring on or before the Organisation for Economic Co-operation and Development's (OECD) stated end date of 30 June 2028, rather than the relevant Fiscal Year when the rules apply. We will continue to implement the law as enacted, which requires first lodgments from 30 June 2026. Australia's policy position is a matter for Treasury and the Australian Government. We will engage with the market and issue further communications should changes to our implementation be necessary. Taxpayers should continue to prepare their returns in anticipation of first lodgments. Differing standards of 'reasonableness' can exist across jurisdictions. Ongoing ATO commitment is sought to balance local standards with broader international consensus, to avoid inherent conflicts for global groups. Where taxpayers require specific guidance, we encourage them to contact us. We may include additional examples of reasonable measures in the future, based on ongoing feedback, if warranted. The draft Guideline omits the relevance of time in determining the appropriate penalty, per section 286-80 of Schedule 1 to the Taxation Administration Act 1953. The final Guideline should clarify that the base penalty amount is determined as one penalty unit for each 28-day period. The final Guideline should clarify instances when the ATO would consider further extension requests. Where taxpayers require specific guidance, we encourage them to contact us. © AUSTRALIAN TAXATION OFFICE FOR THE COMMONWEALTH OF AUSTRALIA You are free to copy, adapt, modify, transmit and distribute this material as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).",,,,,,,/law/view/pdf?DocId=COG%2FPCG20254EC%2FNAT%2FATO%2F00001&filename=law%2Fview%2Fpdf%2Fcog%2Fpcg2025-cp004.pdf&PiT=99991231235958,False,False,https://www.ato.gov.au/law/view/document?docid=COG/PCG20254EC/NAT/ATO/00001
COG/PCG20252EC1/NAT/ATO/00001,Unknown,Compendium,Draft,,,,,TR 2025/2,,"All legislative references in this Compendium are to the Income Tax Assessment Act 1997, unless otherwise indicated. Reordering the examples was considered and, on balance, not preferred. The low-risk zones include general characteristics that need to be present in all low-risk restructures (such as that Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) would not otherwise apply). The examples are then used to demonstrate circumstances the Commissioner would apply resources to investigate, distilled from stakeholder engagements. This approach is designed for taxpayers to self-assess using the examples provided in the Guideline. The examples are based on stakeholder submissions of realistic and expected restructures. However, the Guideline is not intended to provide interpretive guidance and this interaction may be considered for further guidance in the future. Further guidance on joint ventures is beyond the scope of the Guideline. The Guideline is not intended to provide interpretive guidance and this request may be considered for further guidance in the future. We have also included Example 9 in Schedule 1 (replacement of third party debt with related party debt) to demonstrate the inverse scenario would attract our attention. While a 'de minimis' threshold is included in the white zone (aligned to the legislative threshold in section 820-35), we have not sought to provide any additional 'de minimis' threshold in the context of this record-keeping guidance. The guidance is intended to assist taxpayers considering what records they may have to rely on and, in their circumstances, whether it is appropriate to disallow debt deductions in proportion to identifiable transactions to which the DDCR applies. In addition, where taxpayers consider their records indicate that it would be more appropriate to restructure their arrangements, the Guideline provides guidance on the Commissioner's compliance approach to that restructuring. This request may be considered for further guidance in the future. New Examples 15, 16 and 17, regarding record keeping, tracing and apportionment also include refinancing and illustrate the need to identify the original use of refinanced funds. We have not provided any mandatory methodologies in the final Guideline. Whether a particular methodology is appropriate will depend on what is fair and reasonable based on the facts and circumstances of the taxpayer. The Guideline is intended to assist taxpayers to comply with the DDCR in its context as new law. It is anticipated that taxpayers may restructure their arrangements rather than incur disallowed debt deductions. We will monitor these arrangements to consider whether we are able to publish guidance on low-risk scenarios in the future. The final Guideline retains statements from the draft Guideline that characterisation as low risk or high risk does not presuppose the application of any particular tax provision (including anti-avoidance provisions) to the restructure. It is intended as a guide as to the allocation of resources by the Commissioner, including the intensity of those resources (in the context of high-risk restructures). Taxation Ruling TR 2025/2 Income tax: aspects of the third-party debt test in Subdivision 820-EAB of the Income Tax Assessment Act 1997 provides guidance on when an asset may be characterised as an Australian asset. In the final Guideline, Example 37 has been revised to reflect stakeholder feedback and now provides further clarity as to the circumstances in which we will not apply compliance resources to the arrangement, including what actions by the taxpayer we will seek to verify. At the end of the compliance period, we will consider if this approach needs to be extended. In the final Guideline, a targeted compliance approach has been included at Example 34 to accommodate circumstances where trust distributions have been funded by third party debt, however, repayments towards the debt facility are made prior to or during the compliance period that equal or exceed those trust distributions. At the end of the compliance period, we will consider if this approach needs to be extended. © AUSTRALIAN TAXATION OFFICE FOR THE COMMONWEALTH OF AUSTRALIA You are free to copy, adapt, modify, transmit and distribute this material as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).",,,,,,,/law/view/pdf?DocId=COG%2FPCG20252EC1%2FNAT%2FATO%2F00001&filename=law%2Fview%2Fpdf%2Fcog%2Fpcg2025-cp002c1.pdf&PiT=99991231235958,False,False,https://www.ato.gov.au/law/view/document?docid=COG/PCG20252EC1/NAT/ATO/00001
PCG 2024/1EC,Compendium,Compendium,Draft,,,,,TA 2018/2 | TA 2020/1,,"Further updates have been made to paragraphs 1 to 6 of the final Guideline to clarify the scope. The Guideline focuses on structuring issues and tax risks associated with Intangibles Migration Arrangements, as defined in the final Guideline. Paragraph 4 of the final Guideline clarifies that the Guideline does not address our compliance approach to other tax issues that may arise in connection with 'Intangibles Migration Arrangements'. [1] For example, mischaracterisation of payments (including whether payments should be characterised as royalties), and other tax issues. Paragraph 2 of the final Guideline states that the pricing or valuation outcomes under the 'basic rule' in section 815-130 of the Income Tax Assessment Act 1997 (ITAA 1997) are outside the scope of the Guideline. That is, a risk rating under the Guideline is not an assessment of the risks associated with the transfer pricing or valuation outcomes of properly characterised Intangibles Migration Arrangements. Paragraphs 36 to 38 of the final Guideline have been included to provide further guidance on grouping intangible assets (or Intangibles Migration Arrangements) together in applying the Guideline where it is reasonable to do so. To make it easier to apply the Guideline, arrangements satisfying the criteria for 'low value service arrangements' have been excluded from the Guideline (paragraph 44 to 49 of the final Guideline). More generally, the definition of 'Intangibles Migration Arrangements' has been updated to clarify that the Guideline covers Migration or arrangements involving Australian development, enhancement, maintenance, protection and exploitation (DEMPE) activities in connection with intangible assets held offshore. This includes where the Australian activities are for the benefit of another entity that holds, or has legal or economic ownership of, the Intangible assets. We do not consider disclosure alone to be a reliable assessment of the level of tax risk (as covered by this Guideline) that may be associated with an Intangibles Migration Arrangement. Related issues raised include: In response to feedback, 'Excluded Outbound Distribution Arrangement' (paragraph 42 of the final Guideline) has been excluded from the application of the risk assessment framework. Further, in relation to RAF Table 1: Clarification has also been made to the final Guideline in other sections more generally, including the identification and grouping of Intangibles Migration Arrangements, that should assist taxpayers in applying the Guideline. The means of accessing the intangible assets under an arrangement is not expected to affect how the grouping rules or risk assessment would apply. This is consistent with the revised draft PCG 2023/D2. The documentation and evidence expectations outlined in the Guideline sets out, as guidance, what we are likely to have regard to when examining Intangibles Arrangements and would typically expect taxpayers to be able to produce to substantiate their arrangements. We note that these are consistent with our existing compliance approach. However, the risk rating of an arrangement will influence the likelihood of us seeking evidence beyond the risk assessment in any review. Paragraph 16 of the final Guideline clarifies that evidence relevant to the tax and profits outcomes of Intangibles Arrangements will be considered as part of any review. Paragraph 21 of the final Guideline has been updated to explain that while it will influence our resource allocation and compliance approach, we do not presume that there is necessarily non-compliance with Australian tax law if an arrangement is in the red zone. In addition, evidence verifying the commercial or non-tax rationale, will be considered when we review an Intangibles Migration Arrangement. Clarification was also recommended on various aspects of the risk assessment framework questions, including the meaning and intended scope of certain questions. Broadly, these include: Other changes have been made to clarify and enhance the robustness of the Risk Assessment Framework Tables, such as changes to the definition of Relevant Entity and expansion of what 'Relevant Intangible Assets 'covers in Questions 3 and 4 of RAF Table 1, and the wording of certain questions in the RAF Tables. Question 6 of RAF Table 1 has been updated to clarify that upfront gains, including upfront payments under a licence, should be excluded to ensure that there is no asymmetry between a Migration that involves a disposal and one that does not. Paragraph 16 of the final Guideline clarifies that evidence relevant to the tax and profits outcomes of Intangibles Arrangements will be considered as part of any review. Taxpayers are encouraged to refer to our evidence expectations and substantiate their Intangibles Migration Arrangements. The words 'substantially offset or shelter' were included in the revised draft PCG 2023/D2 and in the final Guideline to ensure that a more balanced outcome is achieved under the question. Also refer to Issue 11 of this Compendium for the ATO's response in the overall recalibration of the risk assessment framework and outcomes. In any further engagement with us, evidence relevant to the Intangibles Migration Arrangements such as evidence relevant to the commercial reasons or decision-making, and evidence relevant to the tax and profits outcome, will be considered along with the facts and circumstances of each case. In response to some of the feedback received, changes have been made to Question 3 in RAF Tables 1 and 2 regarding the Circumstances of the Relevant Entity. Certain arrangements (Excluded Intangibles Arrangements) have been excluded from the final Guideline (paragraphs 39 to 49 of the final Guideline). Part 3 of the final Guideline explains and clarifies the evidence expectation for taxpayers, including the acknowledgment that the type and level of documentation we expect can be influenced by a number of factors, such as complexity of their business, the extent to which their Intangibles Migration Arrangements contribute to that business, an appropriate materiality threshold based on their natural business system and their governance processes. (Refer also to our response to Issue 25 of this Compendium.) These comments equally apply to evidence substantiating a taxpayer's risk assessment. In relation to Question 4 in RAF Table 1, that question is included to provide a means to reduce points where the situation applies and if it is more reasonable to do so, taxpayers can choose not to determine and substantiate whether the question applies. The focus of this Guideline on Australian activities in relation to intangible assets held offshore (as opposed to offshore activities in relation to intangible assets held by an Australian entity where this is no Migration) is clarified through changes made to the definition of 'Intangibles Migration Arrangements' from the original definition of 'Intangibles Arrangements' in revised draft PCG 2023/D2 and previous draft PCG 2021/D4. This Guideline and PCG 2019/1 relate to different tax risks. Paragraph 6 of PCG 2019/1 states that PCG 2019/1 is limited to the transfer pricing risks associated with inbound distribution arrangements. When reviewing Intangibles Migration Arrangements, we will consider evidence substantiating a taxpayer's Intangibles Migration Arrangements, including evidence relevant to commercial reasons and decision-making. This includes any review of higher-risk (red zone) arrangements. Relevant evidence substantiating a taxpayer's Intangibles Migration Arrangement will be considered in our review. Some guidance should be included to give taxpayers certainty in respect of the ATO's expectations in respect of past Migration Intangibles Arrangements. We have updated paragraphs 26 to 28 of the final Guideline to clarify that while it is best practice for a taxpayer to assess their Intangibles Migration Arrangements, we will not require reporting of their self-assessment of past Migration in the reportable tax position (RTP) schedule beyond a period specified in the relevant instructions. Two examples from TA 2020/1 have been included as Examples 7 and 8 in Appendix 1 to the final Guideline. The ATO places a strong emphasis on documentation, despite the fact that such materials do not directly reduce the risk assessment framework scores and risk assessment outcomes. Such emphasis creates a risk that taxpayers will be required to prepare documents not required for any other commercial purpose or by any other tax jurisdiction, purely to meet the evidence expectations set out in the Guideline. The evidence expectations in Part 3 and Appendix 2 to the final Guideline are included as guidance to set out what we are likely to have regard to when examining Intangibles Migration Arrangements and would typically expect taxpayers to be able to produce to substantiate their arrangements. We note that these are consistent with our existing compliance approach. While the risk assessment framework influences our resource allocation and compliance approach, if we review a taxpayer's Intangibles Migration Arrangements, we will consider the relevant facts and circumstances in reaching a view on the level of risks associated with their Intangibles Migration Arrangements. This will include a consideration of the evidence substantiating their Intangibles Migration Arrangements. Paragraph 63 of the final Guideline has been included to explain that it is not the intention of the Guideline to unnecessarily impose burdensome requirements on a taxpayer in respect of the evidence required to substantiate their Intangibles Migration Arrangements. Rather, setting out the kinds of information and documents we are likely to request may assist taxpayers to mitigate the level of compliance risk posed by their Intangibles Arrangements and ensure that any engagement with us is as efficient as possible. Part 3 of the Guideline explains and clarifies the evidence expectation for taxpayers, including the acknowledgment that the type and level of documentation we expect can be influenced by a number of factors such as the complexity of their business, the extent to which the taxpayer's Intangibles Migration Arrangements contribute to that business, an appropriate materiality threshold based on the taxpayer's natural business system, and governance processes. Due to the complexity involved in pricing intangible arrangements, it is recommended that a 'best effort' criterion is introduced as part of the final Guideline. Refer to paragraphs 26 to 28 of the final Guideline for our approach regarding reporting requirements in the RTP schedule. A limit of the number of disclosures required should be considered (similar to the question in respect of PCG 2017/4 ATO compliance approach to taxation issues associated with cross-border related party financing arrangements and related transactions. Taxpayers should be provided with reasonable notice of when the Guideline will be finalised and enough time to undertake self-assessments. Refer to paragraphs 26 to 28 of the final Guideline in relation to RTP disclosure requirements in connection with past Migration arrangements. Certain arrangements have been excluded from the scope of the final Guideline. Withdrawal of RTP Schedule questions related to TA 2018/2 and TA 2020/1 should be considered. As issues related to TA 2018/2 are explicitly out of scope of the Guideline, it is not appropriate to withdraw the RTP Schedule question related to TA 2018/2. Withdrawal of the question related to TA 2020/1 will be considered when we develop guidance for the RTP schedule in due course. We will consider whether it is appropriate to refer to the final Guideline as part of our engagement in the FIRB process on a case-by-case basis.",,,,,,,/law/view/pdf?DocId=COG%2FPCG20241EC%2FNAT%2FATO%2F00001&filename=law%2Fview%2Fpdf%2Fcog%2Fpcg2024-cp001.pdf&PiT=99991231235958,False,False,https://www.ato.gov.au/law/view/document?docid=COG/PCG20241EC/NAT/ATO/00001
PCG 2024/3EC,Compendium,Compendium,Draft,,,,,TA 2021/2 | TD 2024/9,,"All legislative references in this Compendium are to the Income Tax Assessment Act 1936, unless otherwise indicated. With increasing globalisation and migration flows into and out of Australia, we have observed an increase in resident taxpayers who receive an amount of trust property (being a payment or a benefit) from non-resident trusts and therefore an increased need for ATO guidance. This Guideline is intended to provide guidance and certainty as to the scope of our current focus when considering the application of section 99B.That is, per paragraphs 6 and 7 of the Guideline, we are focused in this guidance on trust property accumulated by a trust during any period that it was a non-resident of Australia for tax purposes. By releasing this Guideline, we do not intend to alter our historical or existing approach. As part of our general compliance activities, if a section 99B risk is identified, taxpayers can expect: In the final Guideline, Example 3 now clarifies that the recipient's expectation was that they had been in receipt of a gift but the amount was actually a distribution from a trust. In the final Guideline, Example 7 has been replaced with another common example provided during consultation. See our response to Issue 14 of this Compendium. While this scenario has been raised during consultation, the most common scenario that arises involves Australian beneficiaries receiving cash or use of property (rather than the transfer of trust assets). We are of the view that pursuant to paragraph 99C(2)(c), a beneficiary who lends or otherwise has use of the property of a non-resident trust should consider the application of section 99B. However, providing guidance on how to quantify or value a benefit is outside the scope of this Guideline, which is to provide guidance on: The onus is on the beneficiary to objectively evidence the source of an amount or benefit received, consistent with Campbell and Commissioner of Taxation [2019] AATA 2043. Without objective evidence, the beneficiary would be unable to establish that subsection 99B(2) applies to reduce the amount assessable under subsection 99B(1). In the final Guideline, the Commissioner should clearly state at paragraph 43 that the core documents include financial accounts of a trust which 'clearly identify the source of the payment' to the resident beneficiary. Example 4 in TD 2024/9 makes clear that merely debiting an account is not sufficient to establish that a distribution is of corpus or is attributable to amounts which would not be assessable income of a hypothetical resident taxpayer. For further clarity, in the final Guideline we have refined the wording of Example 12. We consider that Howard makes it sufficiently clear that section 99B can apply in a situation where there is a chain of trusts and it was not necessary to duplicate that example in the Guideline. As that decision and paragraphs 35 to 36 of TD 2024/9 demonstrate, where a resident beneficiary receives a distribution from a non-resident trust who in turn received the property paid or applied in its capacity as a beneficiary of another trust, paragraphs 99B(2)(a) or (b) should be considered at each level of distribution in order to ultimately determine whether the resident beneficiary can reduce the amount included in their assessable income under subsection 99B(1). TD 2024/9 sets out the principles relevant in considering the application of the hypothetical resident taxpayer tests in paragraphs 99B(2)(a) and (b). The Guideline is unable to include a definitive answer on this and, instead, both the final Guideline and TD 2024/9 clarify our expectations around record keeping and burden of proof. Paragraphs 32 to 61 of the final Guideline includes guidance on the record keeping requirements to evidence that a reduction applies. See also the responses to Issues 11 to 13 of the Compendium for TD 2024/9 for further guidance. Safe harbours allow us to direct our compliance resources to higher-risk arrangements and provide additional certainty and compliance savings for taxpayers involved in low-risk arrangements, as they may otherwise have a heavy compliance cost in determining whether section 99B applies. In this scenario, section 99B will not automatically apply simply if the arrangement fails to meet the criteria outlined in the compliance approach. However, we may have cause to dedicate compliance resources to better understand the arrangement and determine if section 99B applies. This will include considering whether any of the reductions in subsection 99B(2) apply or whether another tax provision applies to the arrangement. The examples in the compliance approach section of the Guideline are included to provide further clarity and guidance to assist taxpayers in determining whether their arrangement is considered low risk. The scope of the Guideline does not extend to determining the application of section 99B. We agree that a beneficiary who does not meet the low-risk criteria may still be able to apply either paragraph 99B(2)(a) or (b). However, the purpose of the Guideline is to outline how the compliance approach operates for those taxpayers who do qualify. Paragraph 63 of the final Guideline provides that where an arrangement does not meet the low-risk criteria, we may engage with taxpayers to better understand the arrangement, including whether a reduction to section 99B applies. Paragraph 64 of the final Guideline provides that where our compliance approach does apply, it means taxpayers can have certainty that we will not have cause to dedicate compliance resources to determining if section 99B applies. See also our response to Issue 39 of this Compendium. The compliance approach for deceased estates is appropriate where it is based on a low-risk scenario. In developing our approach as to what is 'low risk', we consider 2 aspects: These aspects are linked. From an ATO administration perspective, we can extend the time, however then the likelihood of the asset value changing increases and therefore the quantum of value that we can consider low risk subsequently reduces. Given the feedback on this issue, we undertook further targeted consultation to consider options that would provide the greatest certainty for the greatest number of resident beneficiaries. The feedback confirmed that the 24-month timeframe, with the cap of A$2 million should be retained. See our response to Issue 48 of this Compendium. On this basis, extension requests would not be appropriate. For the compliance approach to be appropriate, it must be a low-risk scenario. We consider there to be a greater risk relevant to the materiality or quantum of potential tax revenue where beneficiaries are receiving amounts in excess of A$2 million. As outlined in paragraph 63 of the final Guideline, a resident beneficiary should consider the application of section 99B to their arrangement. Where our compliance approach applies, it does not mean that section 99B does not apply to the arrangement. Rather, it provides taxpayers with certainty that we will not have cause to dedicate resources to determining if an amount is included in assessable income under subsection 99B(1) or whether a reduction in subsection 99B(2) applies. See also our response to Issue 39 of this Compendium. The final Guideline provides a safe harbour option to further reduce compliance costs in objectively evidencing that an agreement is on commercial terms. Under the safe harbour option, for the interest rate and loan term, the resident beneficiary and trustee of the non-resident trust can rely upon: As provided by paragraph 106 in the final Guideline, the use of the terms under the safe harbour option does not of itself result in the application of Division 7A to the arrangement. Per paragraph 103 of the Guideline, to be considered low risk for the purposes of the compliance approach, a physical payment should be made to the trustee for the interest, hire or use of the trust property. A comparable rate in a foreign jurisdiction would only be accepted under the compliance approach if it is commercial or consistent with market rates in the same or similar circumstances, and that can be appropriately evidenced. We understand that the underlying issue is regarding evidencing contributions to the fund or earnings, for the purposes of the reductions in subsection 99B(2). As provided at paragraph 43 of the final Guideline, the onus is on the resident beneficiary to provide information and documentation to us to evidence that a reduction is satisfied. Where the onus is not discharged, a reduction to the amount included in assessable income pursuant to subsection 99B(1) will not apply. This applies in general and is not specific to foreign super funds and pension plans. While the Guideline deals with the most common scenarios that may attract the operation of section 99B, there is existing website guidance with respect to section 99C. See Receiving payments or assets from foreign trusts . © AUSTRALIAN TAXATION OFFICE FOR THE COMMONWEALTH OF AUSTRALIA You are free to copy, adapt, modify, transmit and distribute this material as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).",,,,,,,/law/view/pdf?DocId=COG%2FPCG20243EC%2FNAT%2FATO%2F00001&filename=law%2Fview%2Fpdf%2Fcog%2Fpcg2024-cp003.pdf&PiT=99991231235958,False,False,https://www.ato.gov.au/law/view/document?docid=COG/PCG20243EC/NAT/ATO/00001
PCG 2023/1EC,Compendium,Compendium,Draft,,,,,PS LA 2001/6 | TR 2011/5,,"Our communications from 1 July 2022 about working from home expenses have advised taxpayers that the shortcut method would no longer be available and to keep records of the actual hours they worked from home. If this method does not apply from 1 July 2022, those taxpayers will be required to claim the actual expenses they incurred because the current fixed-rate method requires taxpayers to have a dedicated home office space. The new paragraph should: ATO auditors should also be provided with clear guidance on how to work with taxpayers to resolve disagreements or concerns in a pragmatic manner. This includes ensuring that a taxpayer's whole working from home claim is not denied and that concessions are otherwise provided where a taxpayer has made a genuine attempt to comply with the Guideline. Paragraph 6 of the final Guideline also states that if taxpayers lodge an objection for any reason, they will not be able to rely on the Guideline or use the revised fixed-rate method to determine whether they are entitled to a deduction for their working from home expenses. These paragraphs already state that taxpayers will not be able to use the revised fixed-rate method to calculate their working from home claim if they are found not to have met the eligibility requirements. This includes lodging an objection on this basis. We will always look to practically resolve disputes, whether before or after an objection has been lodged. As public advice and guidance on objections and how to lodge an objection already exists, no further content about how to lodge an objection has been included in the final Guideline. However, a reference to TR 2011/5 has been included in footnote 6 of the final Guideline. Guidance for our staff will be developed. This creates difficulties for taxpayers who have relied on the revised fixed rate but have been found not to meet the requirements because they may not be able to fully substantiate their working from home expenses. Given the permanent shift in working arrangements and the increasing scrutiny by the ATO of working from home deductions, there is a need to legislate the revised fixed-rate method to preserve taxpayers' access to this method at objection to claim their expenses. The 67c per hour is a proxy rate used as an exercise of the Commissioner's general power or administration as to how we will apply compliance resources. When a taxpayer disputes whether a working from home expense is deductible, either at objection or before the Administrative Appeals Tribunal or Courts, they will need to establish that the particular expense was incurred and is deductible under the law. This is a different process to us not applying compliance resources to verify if a particular expense is deductible. The comment concerning the need for a legislative response is a policy issue that falls outside the scope of this Guideline. The revised fixed-rate method applies to individuals, including those carrying on a business from their home. As per paragraph 2 of the final Guideline, from 1 July 2022 taxpayers can continue to claim their actual expenses or, alternatively, they can use the revised fixed-rate method outlined in paragraphs 23 to 26 of the final Guideline. The final Guideline should explicitly state and provide examples to clarify how the revised fixed-rate method would apply to partnerships, trusts, companies and attributed personal services income. More information about deductions for home-based businesses (including partnerships, company and trusts is available at Types of business structures . This guidance will be updated after the final Guideline is published. There is ambiguity and a lack of detail. For example: As per Example 3 in the final Guideline, a taxpayer who simply checks their roster at home each week is not considered to be working from home. In the same way, a taxpayer who occasionally takes a quick phone call at home will not be considered to be working from home. This can be contrasted with a taxpayer who checks their work emails at home each day or who is required to attend a meeting by phone after hours. Requiring taxpayers to incur additional running expenses is outside the purview of section 8-1 and subjects taxpayers to stricter requirements for incurring outgoings if they rely on the revised fixed-rate method for their working from home claim. 'Additional expenses' should be removed from the final Guideline and replaced with 'losses and outgoings'. This replacement will ensure that the meaning in section 8-1 is accurately reflected in the final Guideline. This is the reason the final Guideline refers to additional running expenses. Taxpayers are not expected to undertake a comparative exercise to demonstrate that they have incurred additional running expenses as a result of working from home. This can be demonstrated by the number of hours they have worked from home. To make this clear, footnote 11 (paragraph 18(b)) and footnote 23 (paragraph 51) have been added to the final Guideline. This paragraph also refers the reader to paragraphs 49 to 55 of the Guideline for more information on what is required to meet this criterion and does not state you need to incur every kind of expense, just the kind of expenses outlined in paragraph 14 of the Guideline. Further, there is a reference to paragraph 49 of the final Guideline which, as noted, states that taxpayers do not have to incur every running expense listed at paragraph 23 of the Guideline. Taxpayers who have high mobile phone expenses will need to claim their actual expenses if they want to claim what they are entitled to and they will require assistance from tax agents to do this. As a mobile phone is a depreciating asset, a deduction for the decline in value of the phone can be claimed in addition to the revised fixed rate per hour. Monthly plans which include a payment for the phone generally separate the cost for the phone and the cost of the monthly plan or state what the overall cost of the phone is. Taxpayers who use their mobile phone mainly for income-producing purposes can either: We will continue to ensure there is public advice and guidance available to assist taxpayers in claiming working from home expenses should they wish to claim the actual costs they have incurred. Internet expenses have been included in the fixed rate per hour for the same reasons mobile phone expenses have been included. Taxpayers who have high stationery costs may not find this method suitable for their circumstances and can instead claim their actual working from home expenses. Assistance to taxpayers in calculating their deduction for the decline in value of depreciating assets is available via the Depreciation and capital allowances tool . Information on how to treat depreciating assets that were purchased while a taxpayer was using the shortcut and current fixed-rate methods can be found at Decline in value of depreciating assets . Footnote 16 of the final Guideline has been amended to include a link to the Depreciation and capital allowances tool. The rate of 67c per hour for the purpose of claiming working from home expenses under the revised fixed-rate method was based on the Australian Bureau of Statistics' household expenditure survey with consideration of annual Consumer Price Index weightings for the 4 categories of expenses comprising the rate; that is, electricity, gas, communications (including phone and internet charges), stationery and computer consumables such as printer ink and paper. We will continue to review whether the rate is reflective of current running expenses incurred by taxpayers who are working from home. If a taxpayer considers that the revised fixed rate of 67c per hour is less than what they are incurring on working from home expenses, they are able to claim the actual expenses they incur as a result of working from home. For transparency, footnote 13 has been added to paragraph 23 of the final Guideline to explain what the fixed rate per hour is based on. Tinkering with a functioning all-inclusive rate creates unnecessary complexity for all concerned. As a matter of good public accountability, the ATO as an institution should be held to a comparable (if not, a higher) standard than taxpayers. In the same manner that taxpayers must apportion expenses on a fair and reasonable basis where applicable (paragraph 12 of the draft Guideline), the ATO should publish calculations to demonstrate, factoring in the above elements, why Australian taxpayers should accept more complexity only to see a 13c per hour reduction in the working from home shortcut rate. How is the revised working from home shortcut rate espoused in the draft Guideline 'fair and reasonable'? Cleaning expenses are deductible where a taxpayer has a separate dedicated home office space. As it is not a requirement of the revised fixed-rate method to have a separate dedicated home office space, it is not appropriate to include an amount in the fixed rate per hour for cleaning expenses. See our response to Issue 13 of this Compendium in relation to the fixed rate per hour not covering decline in value. The revised fixed rate per hour covers all working from home expenses that are commonly incurred by taxpayers and that are difficult to apportion. As stated in our response to Issue 13 of this Compendium, assistance to taxpayers to calculate their deduction for the decline in value of depreciating assets used while working from home is available via the Depreciation and capital allowances tool . An explanation should be added to the final Guideline around why the rate is being reduced from 80c to 67c and how the rate was calculated. The revised fixed-rate method actually increases the rate per hour of the current fixed-rate method by 15c (52c increased to 67c). It also removes the need for taxpayers to have a dedicated home office space, which many taxpayers do not have and allows them to claim a separate decline in value deduction for more costly items and equipment. As noted in response to Issue 14 of this Compendium, the rate of 67c per hour was based on the Australian Bureau of Statistics' household expenditure survey with consideration of annual Consumer Price Index weightings for the 4 expenses comprising the rate; that is, electricity, gas, communications (including phone and internet charges), stationery and computer consumables such as printer ink and paper. We will continue to review whether the rate is reflective of current running expenses incurred by taxpayers who are working from home. If a taxpayer considers that the revised fixed rate of 67c per hour is less than what they are incurring on working from home expenses, they are able to claim the actual expenses they incur as a result of working from home. For transparency, footnote 13 has been added to paragraph 23 of the final Guideline to explain what the fixed rate per hour was based on. The same rate applies regardless of whether a business was entitled to full or partial input tax credits on home running costs. While alluded to in paragraphs 18 to 22 of the draft Guideline, such an overt acknowledgment of these common situations has been omitted. Paragraph 61 of the final Guideline provides examples of what a taxpayer will need to provide to show that they incurred part of the expense. We recommend that where a taxpayer uses the revised fixed-rate method and their working from home claim is, for example, $600 or less, the taxpayer is not required to retain more documentation than the invoice or bills of the costs and the working from home hours. The examples in paragraph 61 of the final Guideline are not intended to be an exhaustive list of what can be provided as evidence. There are other ways that taxpayers, including adult children, can show that they directly contributed to the cost of a bill. The suggestion that a less than $600 per year 'safe harbour amount' be deductible without any evidence is, in effect, an alternative to what has been proposed and therefore outside the scope of this Guideline. Footnote 17 (now footnote 18 in the final Guideline) refers to paragraph 24 and 25 of the final Guideline because together these paragraphs explain when you cannot claim a separate deduction for expenses covered by the fixed rate per hour. This information is relevant to a taxpayer considering if they can rely on the Guideline. The reference to timesheets, rosters, a diary or similar document kept contemporaneously in paragraph 58 of the final Guideline is not an exhaustive list. It states that a record of hours can be in the form of those. The reference to 'similar documents kept contemporaneously' covers records of time spent logged onto an employer's system or business system, time recorded in an app or any other similar record. However, to make this clear, paragraph 58 of the final Guideline has been revised. Many people who work from home also have additional household responsibilities and the long methods require a significant effort in paperwork and tracking on a daily basis, which adds to this burden, and which many people simply do not have the time in their day to do. It may also create a burden for employers to provide a way for employees to record the hours they work from home. The requirement to keep a record of the hours worked from home should not create a burden for employers. Individual taxpayers are required to keep the records necessary and if their employer does not provide them with a system to record their hours, they will need to keep records themselves. This can be done in a number of different ways provided the records are kept contemporaneously. The record-keeping obligations proposed here would not accept an estimate of the days spent working from home as it does not constitute 'a record of the hours worked from home during the income year' as per Example 4 at paragraph 48 of the draft Guideline. This is onerous and does not reflect this reality of hybrid working where arrangements are regular rather than exceptional. It is also inequitable; there does not appear to be an equivalent level of reporting required for businesses with hybrid working employees, for example, for their business deductions. Under section 262A of the Income Tax Assessment Act 1936, businesses are required to keep all documents that are relevant to the ascertainment of their income and expenditure. While the requirements for employees and business are slightly different, both are required to keep records of expenditure. To ease the record-keeping burdens of those working from home and of small businesses, a better approach would be to keep the 80c per hour shortcut method. In paragraph 59 of the draft Guideline, for the 2022-23 income year only, a different method is proposed for 6 months. We suggest this will be confusing and difficult for taxpayers to comply, as in the 2022-23 income year there are 2 substantiation methods. We propose that a representative record is kept for the full 2022-23 income year, which provides consistency. The proposed timeframe does not allow enough time for tax agents to develop assistive tools for, and communicate with, their clients so they can organise their affairs and to minimise any confusion and provide more clarity. The final Guideline should provide details on what the ATO would accept as a representative record so taxpayers can substantiate their claims accordingly. Taxpayers who were using the current fixed-rate method also had to keep a record of the hours they worked from home which could be in the form of a diary or similar document kept for a representative 4-week period. While it is acknowledged that taxpayers previously using this method may not have kept these records as yet, the requirement for the first 8 months of the year is just to keep some records that are representative of their hours for the first part of the year so this should be possible for them. There is no change for taxpayers claiming their actual working from home expenses. Our communications from 1 July 2022 about working from home expenses have advised taxpayers to keep records of the actual hours they worked from home. However, we acknowledge the difficulty of introducing this part way through the year, which is why we have included a transitional record-keeping requirement for the 2022-23 income year. Our web content will be updated to include information on what a representative record may be. Bills, invoices and receipts are often received by email which means they can be stored electronically and accessed that way. Taxpayers who receive bills, invoices and receipts by mail still often keep them and, if they do not, they generally keep a credit card statement or can access one via banking apps or websites. A credit card statement will be accepted as evidence, provided it has enough information about the expense that was incurred and that the taxpayer incurred it. For expenses such as energy, mobile phone and internet expenses, a credit card statement will generally show the information required. If a taxpayer does not wish to keep a hard copy or an email with a copy of a bill, invoice or receipt attached, they can simply take a photo of it and upload it to the 'My Deductions' tool in the ATO app. Taxpayers, practitioners and ATO officers should not have to digest and administer this 16-page manifest with its numerous criterions on how and when to apply the revised working from home shortcut rate. In its current form, it is anticipated that the draft Guideline, when finalised, will create a substitution effect that will result in taxpayers passing on the supposedly 'simpler alternative' shortcut method in favour of the precursor, the 52c fixed-rate method. If the ATO concurs with the World Health Organisation's assertion that the end of the COVID-19 pandemic is in sight, the ATO should keep it simple and timetable the sunset of the shortcut method. Taxpayers can simply revert to the 52c fixed-rate method or, if they prefer, adopt the actual expenses method. Conversely, if the ATO follows local health advice and is of a view that COVID variants will continue to emanate with warnings of new waves to come which will result in Australians continuing to work from home for an indefinite period, the ATO should not reinvent the wheel when there is already a functioning all-inclusive working from home shortcut rate. The shortcut method outlined in PCG 2020/3 was a temporary method introduced to assist individuals forced to work from home during COVID-19 lockdowns. The rate was all inclusive, which meant that no separate deduction (such as for the decline in value of work-related assets and equipment) could be claimed in addition to the hourly rate. PCG 2020/3 applied from 1 March 2020 and ceased to apply on 30 June 2022 (see paragraph 6 of the Guideline). As such, the shortcut method had an end date which our communications on this issue have explained. The 52c rate method outlined in PS LA 2001/6 was available from 1 July 1998 to 30 June 2022. This method is not available for the 2022-23 income year and later income years. The 52c fixed-rate method required taxpayers to have a separate dedicated home office space. The rate per hour was based on the costs associated with working at home in a separate room. The revised 67c fixed rate that is available from 1 July 2022 does not require taxpayers to have a dedicated home office space and also allows those who are unable to set up a separate room in their house to access the revised 67c fixed rate (subject to the relevant requirements being satisfied). Paragraph 17 of the final Guideline states that taxpayers will no longer be able to rely on the information included in PS LA 2001/6 under the heading '5. Special rules for home office running expenses' to calculate their deduction for expenses incurred as a result of working from home. The paragraphs under this heading allow taxpayers to use the fixed rate of 52c per hour for their lighting, heating, cooling, cleaning costs and the decline in value of home office furniture and furnishings in the dedicated home office space used for work. While we are considering whether the remaining content covered in PS LA 2001/6 would be better as web content, there is no consideration being given to changing the principles covered by that content. As such, taxpayers will be able to prove their deductible (work) use proportion of their actual expenses by providing a reasonable estimate in limited cases. In particular, this will only be the case where the claim for a particular running expense is small and the taxpayer can demonstrate that their estimate was reasonably likely under their given circumstances. For example, if mobile phone expenses are less than $50, an estimate is acceptable. Example 2 in the final Guideline has been included to explain the concept outlined in paragraph 6 of the draft Guideline. Footnote 7 in paragraph 6 of the final Guideline, explains objections regarding working from home expenses calculated using the shortcut method and the fixed-rate method are, and have been, dealt by us in the same way. In terms of the changes to the record-keeping requirements in PS LA 2001/6 as opposed to the final Guideline, the requirement to keep records of hours worked from home for the entire income year (as opposed to records for a 4-week representative period or an estimate as per Example 2 in the final Guideline) is to ensure that taxpayers keep contemporaneous records of the hours worked. This was also the record-keeping requirement for the shortcut method (see paragraph 28 and Example 5 in PCG 2020 /3). The final Guideline provides taxpayers with a simple method for calculating the deductible portion of additional running expenses on a fair and reasonable basis. There is also no longer a requirement to have a separate home office space and deductions for the decline in value of any depreciating assets used while working from home (for example, a laptop) can be claimed separately. The final Guideline also allows us to address the compliance risk associated with apportioning working from home expenses. Our compliance data indicates that taxpayers often incorrectly apportion expenses, such as the expenses covered by the fixed rate per hour or fail to apportion such expenses at all. The revised fixed rate is optional. Taxpayers with high working from home expenses can claim the actual additional running expenses they incur as a result of working from home if that allows them to claim a larger deduction. It is expected that going forward, many taxpayers will use the actual method to calculate their working from home expenses. It has been amended to clarify.",,,,,,,/law/view/pdf?DocId=COG%2FPCG20231EC%2FNAT%2FATO%2F00001&filename=law%2Fview%2Fpdf%2Fcog%2Fpcg2023-cp001.pdf&PiT=99991231235958,False,False,https://www.ato.gov.au/law/view/document?docid=COG/PCG20231EC/NAT/ATO/00001
PCG 2022/1EC,Compendium,Compendium,Draft,,,,,,,"Because of this, it is considered better to deal with these cases as individual discretion requests so that specific facts and circumstances can be considered. Further, adding the special circumstance of drought to paragraph 16(c) of the final Guideline would not necessarily resolve the matter raised in Issue 1 of this Compendium, as the other conditions in that paragraph also need to be met to apply the safe harbour. Example 6 of the final Guideline has also been added to explain this approach. Will the period of review apply to amending past years' returns? Footnote 11 has been added to paragraph 13 of the final Guideline to ensure this is known. The footnote includes a link to the time limits web guidance, which also provides information on how to lodge an objection. Business operators can still apply for a private ruling asking the Commissioner to exercise discretion based on their circumstances.",,,,,,,/law/view/pdf?DocId=COG%2FPCG20221EC%2FNAT%2FATO%2F00001&filename=law%2Fview%2Fpdf%2Fcog%2Fpcg2022-cp001.pdf&PiT=99991231235958,False,False,https://www.ato.gov.au/law/view/document?docid=COG/PCG20221EC/NAT/ATO/00001
PCG 2022/2EC,Compendium,Compendium,Draft,,,,,TA 2013/1 | TA 2016/12 | TA 2022/1 | TR 2022/4,,"The Fact sheet clearly stated that we considered it was possible for section 100A to apply to dealings between family members. Also, that whether an arrangement will be considered as part of an ordinary family or commercial dealing will depend upon the facts and the circumstance of the particular arrangement and that merely dealing between members of a family group is not sufficient. Following the release of the Fact sheet, we presented at numerous seminars, describing the types of arrangements that were being examined in our compliance activities. The Fact sheet was used as the reference point of our compliance approach. It attracted significant attention in the tax profession and reiterated that we were carefully examining section 100A in our compliance activities. Whether an arrangement is the same or not can only be determined by the facts. An arrangement continues before and after 1 July 2014 where, under an agreement, a beneficiary became presently entitled to trust income before 1 July 2014 and under the same agreement becomes presently entitled to trust income on or after 1 July 2014. Example 2 has been added to the final Guideline to explain this. This Guideline sets out that we will follow the Fact sheet where it is more favourable than the Guideline in respect of entitlements that arose before 1 July 2022. The Fact sheet provides a broad description of section 100A (including the ordinary family or commercial dealing exclusion and interaction with Division 7A) and identifies other relevant integrity provisions. There are 5 examples included to illustrate these. The final Guideline sets out that we will not dedicate compliance resources to consider section 100A in respect of entitlements that arose before 1 July 2022, where taxpayers demonstrate to us that they have taken reasonable care in following the Fact sheet in determining that section 100A does not apply. There are other scenarios not contemplated in the Fact sheet that the final Guideline addresses. It is not our intention to limit the final Guideline to what was already covered in the Fact sheet. The view in the advice products (TR 2022/4 and this Guideline) does not represent a change in policy or interpretation and is consistent with how section 100A has been applied in compliance activities, private advice requests, objections and articulated in seminar presentations since 2014. A dependant includes a beneficiary's child or stepchild under the age of 18 years or a person who is financially dependent on the beneficiary. The circumstances surrounding why a beneficiary chose to gift or loan an amount to another party is fact dependant. It is not appropriate for the Guideline to set a bright line test of this nature. Examples 8 and 10 of TR 2022/4 outline arrangements which concern gifts and non-commercial loans between family members in the context of section 100A. Green zone: scenario 4 of the final Guideline includes arrangements relevantly identical to Examples 6 to 10 in TR 2022/4 [1] which conclude that the arrangement would likely be entered into in the course of ordinary family or commercial dealing. Our experience with different scenarios concerning grandparents paying school fees for their grandchildren is that the level of risk where section 100A could apply depends on the facts and circumstances. While some arrangements are low risk and do not raise concerns, some appear to be contrived and considered by us to be high risk. To make it easier to comply, we have split Green zone: scenario 3 into scenario 3A and scenario 3B of the final Guideline to separately list the principles that apply to individuals and companies or trusts. Implementation and management of arrangements in Green zone: scenario 3 where it relates to: Refer to our response at Issue 10 of this Compendium. Green zone: scenarios 2 and 3B of the final Guideline would include arrangements where a trustee beneficiary has losses. New Green zone: scenario 3A of the final Guideline does not state that a distribution to a family member will result in the green zone being failed. Where an individual does not control a trust, is not the spouse of the controller or is not employed in the management of the business, we may require further information to ascertain the level of risk in respect of a beneficiary's unpaid entitlement. Loans made that meet the requirements set out in Division 7A are accepted as being on 'commercial terms' (whether or not Division 7A actually applies to those loans). We limited the 'use of funds' criteria in Green zone: scenario 3 so as to broaden that criteria to allow private use of funds which would involve additional criteria to delineate what is low risk, which would increase the complexity of the scenario. Green zone: scenario 3 of the final Guideline sets out criteria where we do not require further information in accepting that an arrangement is low risk. Further information may be required to ascertain risk in respect of an arrangement that includes an interest-free loan made by the trustee. New Green zone: scenario 3A of the final Guideline sets out criteria where we do not require further information in accepting that an arrangement is low risk. We limited the range of beneficiaries in Green zone: scenario 3A as a broader range of beneficiaries would involve additional criteria to delineate what is low risk, which would increase the complexity of the scenario. Green zone: scenario 3 of the final Guideline sets out criteria where we do not require further information in accepting that an arrangement is low risk. Where an individual does not control a trust, is not the spouse of the controller or is not employed in the management of the business, we may require further information to ascertain the level of risk in respect of a beneficiary's unpaid entitlement. This Guideline does not prevent trustees distributing to other beneficiaries and borrowing funds from those beneficiaries. The narrowness of the green zone reflects that we would need to make further enquiries to assess the risk. For consistency, the corporate beneficiary should also be able to be one that is controlled by the spouse of the controller of the trust. We have removed some terms from the final Guideline and for others have defined those terms within the Guideline where they are not generally understood and aid in applying the Guideline. In addition, the term 'associate' has been replaced in the final Guideline with the concept of a 'family group' as used in Schedule 2F. We considered this appropriate since many trustees and tax practitioners should be familiar with the provisions in Schedule 2F in managing their tax compliance obligations. Scenario 3A, concerns trustees retaining funds in respect of the trust entitlements of particular individuals, covers both trusts carrying on a business and trusts that undertake investment activities. This is explained in paragraph 25(c) of the final Guideline. Where an individual beneficiary is not in the scope of scenario 3A, further information may be required in considering any section 100A risk. Under the 'trustee working capital condition' in scenario 3 of the final Guideline, and subject to the other requirements in scenarios 3A and 3B of the final Guideline being satisfied, the green zone may apply to a trustee that uses funds to repay debt in the course of carrying on a business or repay debt used to acquire, maintain or improve investment assets. To provide a better user experience, the final Guideline no longer includes the blue zone. Instead, the green zone has been expanded to cover a greater range of scenarios and the red zone is more clearly defined. The exclusion from the green zone reflects that we may need further information to ascertain whether there is a risk that section 100A applies. Taxpayer Alerts TA 2013/1 Arrangements to exploit mismatches between trust and taxable income and TA 2016/12 Trust income reduction arrangements contain examples of where trustee powers have been exercised to create differences. The Federal Court in BBlood found that section 100A applied to a reimbursement agreement that involved a difference between trust law income and taxable net income - the difference was facilitated by an amendment made in the trust deed. At paragraph 10(c) of the final Guideline, we have included an overt statement that there is no reimbursement agreement where there was no agreement, arrangement or understanding to provide the benefit at the time the beneficiary became presently entitled. We accept the legal basis for excluding benefits that are not provided under a reimbursement agreement. We have made this clear in TR 2022/4. We have concerns about how, other than as a restatement of law, this can be converted into a risk filter suitable and easy to apply in the Guideline. The Guideline does not create a blanket exclusion from the green zone for transactions involving the set-off of obligations between parties (including between a trustee and beneficiary). Green zone: scenario 2 of the final Guideline states that a beneficiary will have received and used their entitlement where a beneficiary's trust entitlement is used to repay a liability of the beneficiary. While the scenario does not specifically mention set-offs, where a beneficiary borrows money from the trustee and the beneficiary uses its subsequent trust entitlement to repay that liability by way of set-off, this would be within the scope of the beneficiary benefiting from its trust entitlement in scenario 2. This is in contrast to an exception to the green zone concerning beneficiaries making payments to trustees that are set-off against the beneficiaries' entitlements. Examples given include corporate beneficiaries paying dividends against the beneficiaries' trust entitlements or receipt of minimum yearly repayments. We recognise that arrangements such as this are not uncommon and pose a level of risk that will require a deeper understanding (before we can be satisfied there is a low risk of section 100A applying) than would be required for examples within the green zone. The green zone is concerned with behaviours where we do not require further information in ascertaining that there is a low risk of section 100A applying. Market value alone is not determinative of whether or not an arrangement is entered in the course of an ordinary family or commercial dealing. Satisfying a trust entitlement through a set-off against paying a subscription for units in that trust will satisfy some of the basic elements of the definition of a reimbursement agreement and may mean we require further information to ascertain the risk concerning section 100A. Furthermore, market valuations can be imprecise and may require closer examination by us. We have updated paragraph 32 of the final Guideline with 3 more specific exclusions from the green-zone scenarios so that taxpayers and their representatives can understand the circumstances that will exclude an arrangement from the green zone. These dot points, which expressed common traits of the red-zone scenarios, have been omitted in the final Guideline. Paragraph 14 of the final Guideline includes a list of principles to guide you as to whether an arrangement may be lower or higher risk when it is not covered by the white, green or red-zone scenarios. Paragraph 27 of TR 2022/4 has a list of matters that may be relevant to whether the ordinary dealing exception in subsection 100A(13) applies. These matters are included in the red-zone scenarios in the final Guideline. We will update the Guideline as further arrangements come to light. In relation to beneficiaries more generally gifting their entitlements, paragraph 32 of the final Guideline excludes this from the green zone which reflects the need to make further enquiries to assess the risk. The circumstances surrounding why a beneficiary chose to gift or loan an amount to another party depends on the facts of the case. It is not appropriate for the Guideline to set a bright line test of this nature. We acknowledge that there are circumstances in which an arrangement undertaken for asset protection can be an ordinary dealing. We have concerns about how, other than as a restatement of law, this can be converted into a risk filter suitable and easy to apply in the Guideline. Whether a beneficiary chose to volunteer financial assistance or was coerced into doing so depends on the facts and surrounding circumstances of the case. It is not appropriate for the Guideline to set a bright line test of this nature. We have concerns about how, other than as a restatement of law, this can be converted into a risk filter suitable and easy to apply in the Guideline. Refer to TA 2022/1 which outlines our concerns with arrangements where inappropriate tax outcomes are obtained by accessing the tax-free thresholds and lower marginal tax rates of family members. The Guideline does not require or imply that there be commerciality by members of a family group. Whether the family members have genuine asset protection, wealth creation or succession purposes depends on the facts of the case. It is not appropriate for the Guideline to provide an example that specifically describes every arrangement or variation thereof. The circumstances surrounding why the beneficiary chose to repay another beneficiary's credit entitlement depends on the facts of the case. Therefore, we would need to make further enquiries to assess the risk. Subsection 100A(10) explicitly includes a 'loan' within the definition of a 'payment of money' per subsection 100A(7). Example 15 of the final Guideline concerns non-resident parents being made presently entitled to franked dividends where the resident son retains the use of the funds and the entitlements remain unpaid or are converted into loans. We see arrangements where the entitlements appear to be motivated by the non-resident beneficiary's tax preferred status while providing the use of those funds to a resident. Many of these arrangements involve situations where the funds are used to acquire assets that are not liquid, which will likely impede the non-resident's ability to receive the funds. The final Guideline has been updated to make it clearer that the third point under Red zone: scenario 1 does not apply where Green zone: scenario 3A of the final Guideline is satisfied. In reflecting on the suggestion, we are mindful that Green zone: scenario 3A of the final Guideline may lead to some behavioural change whereby children are made controllers of a trust merely to satisfy the scenario. We will consider it high risk (and therefore not within the green zone) where giving children control of a trust is simply to cause Green zone: scenario 3A to be satisfied. Our concerns with appointing trust income to non-resident beneficiaries are reflected in Taxation Rulings IT 2344 Income Tax: trust schemes with non-resident beneficiaries: assessing guidelines : determination of objections : settlement guidelines and IT 2466 Income tax : trust distributions of group interest to non-resident beneficiaries : determination of objections. We have updated Red zone: scenario 1 of the final Guideline to state that the non-resident beneficiary is a relative of the controller of the trust. This will significantly reduce any overlap between Green zone: scenario 3A and Red zone: scenario 1. While Green zone: scenario 3A of the final Guideline will generally take priority over Red zone: scenario 1 in respect of loans, we are monitoring behavioural change around increasing the number of individual controllers of a trust so that the arrangement may satisfy Green zone: scenario 3A. In this type of scenario, subject to any additional facts or the application of any other scenarios in the Guideline, we may seek to ascertain: We encourage taxpayers to maintain records that would readily enable these questions to be answered and that support the timely resolution of any compliance activities. We would encourage taxpayers to maintain records such as these to support their position and resolve compliance activity we undertake in a timely manner. The arrangement involves an operating company that pays franked dividends each year to a discretionary trust, that discretionary trust appoints the franked dividend from the operating company to a corporate beneficiary wholly owned by the trust, a loan agreement is entered into between the trust and corporate beneficiary, the minimum yearly repayments are funded by franked dividends paid by the corporate beneficiary back to the trust, with the franked dividends paid by the corporate beneficiary then appointed to individuals. The arrangement cannot satisfy the green-zone scenario in respect of the corporate beneficiary's entitlement to trust income. With the minimum yearly repayments from the trustee to the corporate beneficiary set off against the franked dividend paid by the corporate beneficiary, the green-zone exclusion at paragraph 32(e) of the final Guideline applies. Where we see a company made presently entitled to income in consecutive years and that company's trust entitlement or minimum yearly repayments being satisfied by way of set-off against dividends paid by the company, it poses the question as to why the company is made presently entitled since the subsequent dividend may suggest that the company has no need for the funds from the trust to which it was made entitled. The red-zone scenario will not be satisfied where a different beneficiary is entitled to the income attributed to the franked dividend paid by the corporate beneficiary to the trustee. The ATO should consider how Red zone: scenario 3 of the draft Guideline would apply to Collective Corporate Investment Vehicles (CCIVs) and consider treating this as low risk given CCIVs are highly regulated and would generally only be used in commercial dealings. We do not accept that arrangements involving a deliberate mismatch between the income of the trust estate and the trust net income pose a level of risk below the red zone. We have released 2 Taxpayer Alerts concerning differences between trust law income and taxable net income of trusts, being TA 2013/1 and TA 2016/12. TA 2013/1 was concerned with differences explained by capital gains, while TA 2016/12 concerned trustees undertaking steps to create differences. The red-zone scenario considers that section 100A risks can arise in respect of differences attributed to ordinary concepts as well as re-characterising income into capital. The facts in BBlood involve a difference between trust law income and taxable net income attributed to share buy-back proceeds that are treated as a franked dividend for tax law purposes. The share buy-back proceeds are likely to be a capital receipt under ordinary concepts for most trusts. We have updated Red zone: scenario 5 of the final Guideline to make it clearer that this scenario does not apply to beneficiaries who are members of the same family group as the distributing trust. Furthermore, updated Red zone: scenario 5 does not apply where a green-zone scenario applies to a loss beneficiary's entitlement. The examples in the final Guideline illustrate scenarios which explain our risk framework for which we determine whether to dedicate compliance resources. Given the risk focus, the examples in the Guideline intentionally do not deal with whether or not section 100A applies in the scenarios. The purpose of this Guideline is to explain how we differentiate risk and how we manage that risk through our compliance approach to section 100A. The relevance of a counterfactual is addressed in TR 2022/4. We have updated the final Guideline to outline the facts within each separate example. We note that BBlood concerned an arrangement that had a tax rate of about 30% (where franked dividends were included in the assessable income of a corporate beneficiary in the year ended 30 June 2014). Taxpayers should consider whether their business structure will support them to best meet their needs and personal circumstances. In the event that the trustee has insufficient funds to satisfy the UPE and instead used a dividend payment from the corporate beneficiary to service the UPE, this will take an arrangement outside of the green-zone scenario. Further information may be required to ascertain the risk of section 100A applying. The Example should clarify that the source of the funding to pay the university or tuition fees of an adult beneficiary should not change the outcome and such arrangements should continue to be treated as low risk; for example, the beneficiary sources the funds to meet the cost of those fees either from a third-party deposit-taking institution or from their parents, then later directs the trust to repay the bank or their parents out of their trust entitlement. In either case, the source of the funds to meet the cost of the fees does not change the tax outcome. While we recognise that the scope of arrangements involving trust distributions are very broad, we consider that it is not practical to provide examples that specifically describes every arrangement or variation thereof. We consider that the examples in the final Guideline to be sufficient to assist taxpayers in understanding the application of the risk framework. Subsection 100A(10) explicitly includes a 'loan' within the definition of a 'payment of money' per subsection (7). We would consider why Sylvia and Sylvester were made presently entitled when funds representing those entitlements flow in a different direction. Also refer to Issue 39 of this Compendium. Example 15 of the final Guideline has been updated to clarify that the beneficiary is a resident of Australia. The Example should be clearer as to what tax benefit is being achieved and why section 100A should apply given the apparent mischief involved. Thawley J in the decision in BBlood explains that '... section 100A does not operate by a mechanism which makes the identification of a specific amount of tax avoided a necessary component of identifying a 'tax avoidance' purpose.' For example, if an arrangement is intended to provide a benefit to a particular person and that person sought to disguise the benefit by transferring an asset to the presently entitled beneficiary for market value consideration, there is still the possibility the arrangement does not satisfy the ordinary dealing exception. Noting the criteria for Red zone: scenario 3, a bilateral agreement for issuing units at market value would not satisfy that scenario. It is considered realistic that a trustee may not make a family trust election where there is a potential negative tax consequence attributed to making an election. Paragraph 14 of the final Guideline sets out matters that attracts our attention in dedicating compliance resources. The first matter mentioned is that someone else benefits. Example 6 of TR 2022/4 also includes a testamentary trust example with the Guideline stating in Green zone: scenario 4 that any arrangement that is relevantly identical to an example in that Ruling, which concludes that the arrangement would likely be entered into in the course of ordinary family or commercial dealing. The final Guideline includes, in Green zone: scenario 4, those arrangements that are relevantly identical to Examples 6 to 10 in TR 2022/4 [2] , which conclude that the arrangement would likely be entered into in the course of ordinary family or commercial dealing. That Ruling does include examples concerning gifts and non-commercial loans. It is to be noted that it is not possible to provide examples covering all situations as there is a need to balance coverage with likelihood. Taxpayers with unique circumstances should engage with us if they require certainty regarding their arrangements. This is in contrast to an exception to the green zone concerning beneficiaries making payments to trustees that are set-off against the beneficiaries' entitlements. Examples given include corporate beneficiaries paying dividends or subscribing for units in a trust which are set-off against the beneficiaries' trust entitlements. The underlying concern is that such set-off arrangements may not see the beneficiary being genuinely better off to the extent that the entitlement has been set-off against the payment. This underlying concern reflects why we may need further information in considering any section 100A risk. Examples 11 and 12 of the final Guideline outline arrangements where a trust distribution to a private company is not immediately paid and then loaned back to the trust. Further, the green-zone scenarios in the final Guideline illustrate arrangements that are low risk where there is a lesser likelihood of us applying compliance resources because they may be considered to be entered into in the course of ordinary family or commercial dealings. The Ruling outlines our interpretation of trust arrangements that meet the scope of an 'ordinary family or commercial dealing' and the final Guideline discusses our risk-based approach to those arrangements. We have historically maintained, in the Fact sheet and public forums, that the question of whether an arrangement was entered into in the course of ordinary family or commercial dealing will be assessed or determined on a case-by-case basis taking an objective view of all of the relevant facts and circumstances, and that merely because all parties to a dealing are family members will not suffice for the dealing to be considered part of an ordinarily family dealing. We have described the types of records that will support taxpayers to help resolve compliance activities in a timely manner. The purpose of the Guideline is to explain our risk framework for which we determine whether to dedicate compliance resources. Within this context, the Guideline supports taxpayers to better understand the types of records that will support them to demonstrate that an arrangement is within the green zone. For further information on record keeping, refer to the final Guideline and web guidance. The Guideline sets out how the ATO differentiates compliance risk for a range of trust arrangements to which section 100A may apply by providing a risk assessment framework with examples of the arrangements that will attract our attention, identify those arrangements that are in a safe zone and when we will not seek to apply compliance resources. As section 100A is based on the individual facts and circumstances of a case, it does not lend itself to a bright line test resulting in a set safe harbour. We will also continue the practice of presenting new case typologies to the General Anti-Avoidance Rules (GAAR) panel before section 100A is applied to those typologies. We will consider what further governance processes are appropriate to ensure that section 100A is not applied inappropriately where a taxpayer's affairs are otherwise being considered outside the period of review or where a taxpayer claims that they have taken reasonable care in applying the Fact sheet to determine section 100A did not apply to their to entitlement arising before 1 July 2022. The Guideline should contain guidance as to when the ATO will use the unlimited amendment period. A suggested approach is within 4 years of lodgment except in most serious cases with fraud, evasion or blatant anti-avoidance. Also refer to our response to Issue 83 of this Compendium. To provide certainty, the reference to an arrangement reflected in an administrative position of the Fact sheet should be clearer. Where a trustee demonstrates to us that they have taken reasonable care in relying on the Fact sheet concerning why section 100A does not apply in respect of an entitlement arising before 1 July 2022, we will not dedicate compliance resources to consider section 100A. Also refer to our response to Issue 83 of this Compendium. There are some differences in the wording in TR 2022/4 and this Guideline in relation to the date of effect as that Ruling is our view of how the tax laws apply, whereas the final Guideline sets out the risk assessment framework and our compliance approach to a range of trust arrangements to which section 100A may apply. Throughout the extended consultation period, we have sought and considered a wide range of feedback and we have taken it all into account in the final Guideline to promote certainty and provide transparency of our views to the community. The imposition of penalties and interest will be considered on a case-by-case basis in line with our standard practices and procedures. We encourage taxpayers to inform us of mistakes by making a voluntary disclosure. If you make a voluntary disclosure, you can generally expect a reduction in the administrative penalties and interest charges that would normally apply. For more information, see Voluntary disclosures in the approved form . However, we note that with respect to Division 7A, we have stated in paragraph 38 of TR 2022/4 that in the case of a corporate beneficiary, where the entitlement is taken by section 100A not to have arisen, there will be no entitlement which could be the subject of a loan to the trustee under section 109D. Division 7A in those circumstances would not operate in respect of the entitlement. Section 100A is a specific integrity rule that applies to certain reimbursement arrangements and Part IVA is a GAAR that is applied as a provision of last resort. The application and operation of section 100A is not on 'all fours' with Part IVA so it cannot be said definitively that the GAAR will apply to most, if not all, arrangements to which section 100A would apply. However, in this instance our view does not represent a change in policy or interpretation and is consistent with how section 100A has been applied in compliance cases, private rulings and objection decisions since at least 2014. Our view has also been publicised in seminar presentations since at least 2014. The advice products exist within a larger framework of administrative measures that have been used to promote certainty and confidence in the administration of the law. These include a Taxpayer Alert (TA 2022/1), web guidance, training and education. We partnered with the professional associations to run numerous information sessions on the draft Guideline when it was released in February 2022. A variety of virtual and face-to-face sessions were held, largely in a webinar, panel or Q&A style format. We also spoke at numerous professional body events about the advice products. On finalisation of the advice products, we will renew our focus on supporting the professional associations to educate practitioners to ensure they have a clear understanding of the final Guideline. Paragraph 53 of TR 2022/4 acknowledges that the decision in Guardian is a current source of law that has been taken into account. TR 2022/4 includes a summary of the case and identifies where we maintain views being contested in the appeal of this decision as appropriate. Where we form the view that a present entitlement to trust income arose from a reimbursement agreement, the case team supported by a relevant technical branch, will follow the due decision-making process before an assessment (or amended assessment) can be issued. Since 2017, we have had a practice that where a new section 100A case fact pattern is identified, it is presented at a special sitting of the GAAR panel for their consideration and guidance. Since then, section 100A has not been applied unless the case satisfied a typology that had been presented to the GAAR panel. We will continue this practice of seeking GAAR panel oversight on a fact pattern basis. We have adequate internal processes and review mechanisms to effectively understand when cases might not be covered by existing GAAR advice. We will work on giving sufficient visibility to the market on new and emerging trends that we identify as a concern. We appreciate that the application of section 100A, an anti-avoidance provision with an unlimited period of review, must not be applied without sufficient oversight. We will consider what further governance processes are appropriate to ensure that section 100A is not applied inappropriately where a taxpayer's affairs are otherwise being considered outside the period of review or where a taxpayer claims that they have taken reasonable care in applying the Fact sheet to determine section 100A did not apply to their entitlement arising before 1 July 2022. This Guideline should be read in conjunction with TR 2022/4, which sets out our interpretative position on the application of section 100A. An agreement may be inferred from the surrounding circumstances or the conduct of the parties. Where a present entitlement arises from an agreement or a payment or application of trust income resulting from an agreement, naturally, the relevant agreement must be in existence at the time when the present entitlement arises, payment is made or funds applied. However, that existence can also be established by evidence of the conduct of the parties before and after that time.",,,,,,,/law/view/pdf?DocId=COG%2FPCG20222EC%2FNAT%2FATO%2F00001&filename=law%2Fview%2Fpdf%2Fcog%2Fpcg2022-cp002.pdf&PiT=99991231235958,False,False,https://www.ato.gov.au/law/view/document?docid=COG/PCG20222EC/NAT/ATO/00001
PCG 2022/3EC,Compendium,Compendium,Without,,,,,GSTR 2006/4 | GSTR 2012/2,,"This issue came up in the draft Guideline working group and was identified in the working group compendium as issue 10, which suggested among other things that the old valuation be indexed by the Australian Bureau of Statistics (ABS) Rents Index for the relevant capital city. The ATO agreed to this suggestion. The compendium noted that paragraph 20 in the draft Guideline had been updated to reflect that CPI is adjusted by the ABS Rents Index for the relevant capital city. Paragraph 20 of the draft Guideline does not appear to have been updated to reflect the agreement by the ATO to use the ABS Rents Index for the relevant capital city. In fact, paragraph 20 merely states that the ABS CPI be used for the indexation. There is a footnote 5 reference in paragraph 20 of the draft Guideline that does not appear to provide an indexation method based upon the ABS Rents Index for the relevant capital city - it only provides a link to QC 32370 (GST and supplies by charities - benchmark market values) on the ATO website, which in turn does not refer specifically (on that page) to an indexation method. Could you update the final Guideline to reflect the outcome of the working group compendium issue 10? A defining characteristic of residential colleges in Australia is that they are either university-owned or have a statutory or other formal affiliation with their host university. Arguably, entities that do not meet this test are not residential colleges. Not all residential colleges include 'residential college' or 'college' in their name. Not all entities that include 'residential college' or 'college' in their name are residential colleges. Paragraph 5 of the draft Guideline provides a general description of what a 'residential college' is. Notwithstanding the provisions of paragraphs 4 and 5 of the draft Guideline, the ATO permits and has permitted various entities that arguably or actually are not residential colleges to (subject to prior written application to and approval from the ATO) elect to adopt the recommendations of the GST Tool for purposes of complying with their ongoing GST obligations. To allow the draft Guideline to go forward to final Guideline status without making provision for these entities that arguably or actually are not residential colleges (but who nevertheless are approved to use the GST Tool), would mean these entities face uncertainty as to whether or not they are entitled to use the final Guideline and on whether or not they will be exposed to the practical GST compliance difficulties described at paragraphs 8, 12 and 13 of the draft Guideline. The draft Guideline is silent on whether or under what circumstances mandatory charges are net of scholarships and bursaries. This raises the question of whether a scholarship or bursary forms part of the 'consideration' provided to the college for the supply made to the student, for purposes of the market value tests at paragraph 38-250(1)(b) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act). If this issue is not addressed adequately by the final Guideline: Informal student stays may differ from the normal contract the student enters into with the residential college in some or all of the following respects (aside from the number of contracted weeks): If this issue is not addressed adequately by the final Guideline, for informal student stays it is likely to result in: The methodology requires the residential college to know its 'total turnover'. Neither 'turnover' or 'total turnover' is defined in the draft Guideline. For the avoidance of doubt on what is meant by 'total turnover', would it be possible to have a footnote added noting (words to the effect) that: This definition, if added, would be consistent with QC 50241 (Definitions) on the ATO website and would remove any doubt that residential colleges may have on what to count as 'total turnover'. In the draft Guideline, there is no hyperlink to Waverley Council and Commissioner of Taxation [2009] AATA 442, notwithstanding this case is provided on the ATO's Legal database. We note that the hyperlink to the Decision impact statement for this case under the end heading 'Other References' works. Footnote 7 of the draft Guideline should refer to both the long-term accommodation benchmark value and the short-term meals benchmark value, given residential colleges often serve meals when they provide informal student stays. Paragraph 25 and footnote 10 of the final Guideline have been updated. Example 1 at paragraph 23 of the draft Guideline refers to the fictional case of St Agatha's residential college where the college obtained an independent market valuation for its student accommodation in January 2025 but not for its student meals. The example goes on to state that St Agatha's cannot apply the ATO charity benchmark market values to its student accommodation in the 2025 calendar year and must use that independent market valuation. This raises the issue of how St Agatha's would deal with the situation where material numbers of commencing and returning students entered into contracts for residence in the 2025 academic year, over the months of November and December 2024 - being months prior to the residential college's receipt of the January 2025 valuation. What takes priority in this situation - paragraph 21 or paragraph 23 of the draft Guideline? A final point to note about paragraphs 20 to 24 of the draft Guideline is that a number of residential colleges comprise a mixture of National Rental Affordability Scheme (NRAS) dwellings (subject to NRAS incentives) and student rooms that are not NRAS dwellings. The NRAS dwellings in these cases are generally of far higher standard and market value than the non-NRAS rooms within the same residential college, given NRAS dwellings are each required to have their own en suite bathroom and self-contained kitchen. There is an unwelcome level of ambiguity in the draft Guideline as to whether or not a residential college with both NRAS rooms and non-NRAS rooms may access the ATO charity benchmark market values for the non-NRAS rooms. After all, paragraph 20 of the draft Guideline uses the words 'if the property is used'. Does the word 'property' at paragraph 20 of the draft Guideline refer solely to a particular building or designated part of the residential college campus that is used only for NRAS rooms or does it in fact refer to the property being the whole of the residential college campus which includes the non-NRAS rooms as well? The draft Guideline sensibly attributes a fixed percentage of 2% of the total mandatory charges to TRCCs for each student contract, provided the minimum requirements at paragraphs 29 to 32 of the draft Guideline (to do with minimum numbers of tutorials and attendances) are satisfied. Paragraph 40 of the draft Guideline contemplates circumstances where the residential college might attribute more than 2% of the total mandatory charges for each student contract as relating to TRCCs and notes the college in these circumstances may be required by the Commissioner to provide evidence to support the percentage attributed. The draft Guideline is silent on the issues of: The final Guideline has not prescribed the type of evidence that may be required as the extent and range of evidential material is expected to vary from institution to institution. However, we would consider all reasonable information (such as accounting, budget and administrative records) that a college may wish to use. The final Guideline is not intended to cover all possible outcomes and factual arrangements for TRCCs, therefore the suggestions regarding inter-college tutorials, non-resident students and longer tutorials (which the feedback notes occur infrequently) have not been addressed in the final Guideline. Colleges can self-assess how they approach such matters and support any position taken with evidence. When the draft Guideline refers to 'NRAS market value', it is not clear whether this refers to the NRAS market value inclusive of utilities and other items or whether it refers to the 'market value rent'. The uncertainty caused by the draft Guideline in this area is best illustrated by a real-world case. The de-identified real-world case provided below and the redacted attachment is from a residential college (referred to as College X) currently in receipt of NRAS incentives. College X supplies partially catered NRAS studios on a 44-week contract to students in residence for $450 per week inclusive of all mandatory charges. The services provided to the student under the contract include 7 meals per week, formal tutorials, pastoral care, room furnishings, sporting services, internet, common rooms, utilities and mentor programs. College X retained a professional valuer to do the NRAS valuation. The NRAS valuation of College X's supply to the students in the NRAS studios came to $550 per week broken down as: The use of the short-term meals rates in the benchmark makes life easy for residential colleges to be less than 50% of the market but has unintended consequences elsewhere. The apportionment method between accommodation and meals will always be the same percentage for both accommodation and meals. This effectively means that we need to be below 50% of the market for accommodation if we want to also be below 50% for the food component. Our budget papers document our room rates and catering rates (which are consistently over the various semi catered and fully catered options). If we use those rates from our budget papers then we can be, for example, 72% for accommodation and 44% for meals. Any changes to the ATO benchmark market values are outside the scope of the final Guideline. We note that the use of the final Guideline is voluntary and, if used, that residential colleges are also able to choose which supplies to apply it to. There are some issues to do with the way in which religious services are handled by the draft Guideline that have the potential to cause a degree of uncertainty as to outcome, inclusive of: Is the NRAS valuation that is between one and 4 years old to be indexed using the NRAS valuation indexation methodology in the NRAS legislation or is it to be indexed using the same methodology that would apply under the Guideline to a non-NRAS valuation? Depending upon the answer to this question, the draft Guideline can give materially different GST outcomes. The NRAS valuation indexation methodology is prescribed in section 5 and paragraph 36(1)(b) of the National Rental Affordability Scheme Regulations 2020. This methodology uses the ABS Rents Index for the relevant capital city but it applies this index on a lagged basis. The final Guideline is not intended to recreate the GST Tool. It is beyond the scope and purpose of this Guideline to cover every eventuality or potential scenario, especially given the variation of services included or excluded from student contracts between institutions. If you do not wish to use the benchmark market value appropriate to your location, you may wish to seek an independent valuation which remains open to you after the final Guideline is published. In previous years, the prior iteration of the Residential Colleges GST Tool was used, which this new tool will supersede. However, it cannot be assumed that this state of affairs will automatically carry over to the new Guidance and associated GST Tools. Would it be appropriate to use and rely upon the new Guidance and GST Tools for tax compliance purposes? The Residential Colleges GST Tool is being retired from 31 December 2022, except for residential colleges who used it to apportion student contract fees and determine the GST status of the supplies they make to students in the 2023 academic year only. We understand the ATO intention to decommission the Toolkits for student accommodation market value testing and introducing the draft Guideline was to simplify the administrative burden on universities and residential colleges of the GST-free market value analysis. However, it is noted that based on initial review, it appears that the GST-free versus input-taxed outcomes are likely to significantly differ under this benchmark approach to the Toolkit testing. Can you clarify if it is the intention to derive similar GST outcomes on market value testing under this approach and, if so, can the final Guideline be updated to explain how suppliers of student accommodation can account for these differences in their market value testing? Any changes to the ATO benchmark market values are outside the scope of the final Guideline. We note that the use of the final Guideline is voluntary and, if used, that residential colleges are also able to choose which supplies to apply it to. The long-term accommodation rates only include rent for accommodation. Many of the other services mentioned need to be assessed on a case-by-case basis by the college as some may be outsourced to third parties (for example, gym, car parking). The final Guideline is not intended to recreate the GST Tool. It is beyond the scope and purpose of this Guideline to cover every eventuality or potential scenario, especially given the variation of services included or excluded from student contracts between institutions. By constitution or by formal contractual arrangement with their host university, URCs are bound to only offer accommodation and related services to students and other members of the university community. This is a significant restriction on their ability to operate commercially and a constraint that is not applied to other providers of student accommodation or charities in the local accommodation marketplace. URC trading operations are intrinsically bound to the educational mission of their host university. This association with the host university also has an inherent compliance cost. The reputation of the host university may be adversely affected by misbehaviour by or misadventure to URC student residents. Either by constitution or by formal agreement with the host university, URCs are required to employ essential supervisory staff who remain on call for 24 hours a day, 7 days a week. This is a significant staffing cost that is not imposed on other providers of student accommodation or charities in the local accommodation marketplace. These concerns have dogged communications between UCA and the ATO since GST was introduced in 2001 (refer to clause 4.17 of Professor Hugh Collins' (the then-Head of the Association of Heads of Australian University Colleges and Hall Inc's (now UCA)) response to the ATO in August 2004). It does not appear that this fundamental issue has ever been addressed. In summary, the key immediate concerns are: While noting that supervisory staff are required to monitor student behaviour in college-provided accommodation and to protect university reputations, this cannot be addressed in the final Guideline, which is about allowing access to the ATO charity benchmark valuations rather than benchmarks based on local accommodation commercial providers. Again, we note that use of the final Guideline is not mandatory. The challenges of obtaining an accurate and reasonable valuation are acknowledged. In response to specific questions: The understanding of your response is that the interim arrangements will remain in place for 2023 with any changes to be incorporated within the 2023 college budget cycle for the 2024 academic year. Another issue pertaining to timing is that the ATO has not committed to a response timeline to URCs' concerns during this consultation period. This is a source of even greater anxiety, given your stated wish that this be active by 1 January 2023. The increase range is between $50,000 and $600,000 per annum (excluding clawbacks of GST). Only one has reported no increase in GST. We may seek to verify the figures submitted to assist in any post-implementation review of the final Guideline. This will vary on a case-by-case basis depending on how residential colleges impacted have previously treated supplies of accommodation historically in the relevant adjustment periods under Division 129 of the GST Act. Generally, there may be a resulting beneficial adjustment if accommodation previously treated as input taxed is now GST-free under the final Guideline. There is concern that where clarity on compliance with the GST Tool had been obtained from the ATO or legal and financial advisers, the advent of the final Guideline would again require complete fresh assessment and renewed communication by URCs with these third parties. The present definition is: It is proposed that this should be updated to:",,,,,,,/law/view/pdf?DocId=COG%2FPCG20223EC%2FNAT%2FATO%2F00001&filename=law%2Fview%2Fpdf%2Fcog%2Fpcg2022-cp003.pdf&PiT=99991231235958,False,False,https://www.ato.gov.au/law/view/document?docid=COG/PCG20223EC/NAT/ATO/00001
PCG 2021/3EC,Compendium,Compendium,Draft,,,,,TD 2020/5 | TR 2021/1 | TR 2021/4,,"While the return of the '21-days rule' provides structure and certainty for employers in order to establish travel policies and record keeping, it is somewhat unclear if the 21-days rule is limited to the same work location. Considering the 89-day requirement specifies the threshold being applicable to the 'same work location', the lack of clarity may lead to confusion among taxpayers. On this basis, we request the ATO update the criteria to clearly establish that the 21-days rule is or is not limited to the one work location. That dot point now requires that an employee is away at the same work location for no more than 21 calendar days at a time continuously. In particular, the draft Guideline does not account for travel among upper-level management (for example, executive leadership) whose roles may necessitate frequent overnight travel to national sites (often on a weekly basis). Assuming this happens throughout the course of a fringe benefits tax (FBT) year, they may be travelling for, for example, 104 days (based on single-night overnight travel) a year, and therefore breach the 90-days criteria. We question, therefore, whether marginally extending the 90-days aggregate could allow for capturing such scenarios, while preserving the integrity of the 'travelling on work' concept. Given the ongoing changes in the working environment, particularly over the last year, this recommendation could provide greater practical application as Australia continues to open up, particularly with respect to interstate travel, as roles are less confined to one jurisdiction. Considering the example raised in Issue 2 of this Compendium regarding weekly multi-site travel, we request the ATO increase the PCG factor in paragraph 4 of the draft Guideline to account for an aggregate period of fewer than 110 days (that is, the most being 109 work days, which would cover two days (one night) per week), in the same work location in an FBT year. We are of the view that 'no more than 90 calendar days in total' is a reasonable safe harbour for travel by employees to the same location in an FBT year, noting that it is just one factor to consider when determining whether an employer can rely on the final Guideline. The other factors at paragraph 12 of the final Guideline must also be considered. The principles in the final Guideline apply to all employers. If an employer does not meet the criteria in paragraph 12 of the final Guideline and is therefore not eligible to rely on the final Guideline, they can still apply the relevant FBT provisions to determine if an FBT liability arises for the benefit provided. Example 4 of the final Guideline has been amended to explain that where the employer has more information about the facts and circumstances of the employee's travel (by analysing the factors in paragraph 43 of Taxation Ruling TR 2021/4 Income tax and fringe benefits tax: employees: accommodation and food and drink expenses, travel allowances, and living-away-from-home allowances, the employee may be considered to be travelling on work even though the overall period they are away at the one location is more than 90 calendar days in total in the FBT year. Historically, as noted in the Australian Society of Certified Practising Accountants submission at the 1997 FBT Sub-Committee meeting of the National Tax Liaison Group, the general guideline used by taxpayers was two and four years for domestic and international arrangements, respectively. In this regard, we note that Example 8 in Draft Taxation Ruling TR 2021/D1 Income tax and fringe benefits tax: employees: accommodation and food and drink expenses, travel allowances, and living-away-from-home allowances was concluded to be a 'relocation' for a two-year interstate transfer and this is noted as being an 'extended length of time'. Given this conclusion and single example, we recommend that the draft Guideline is expanded to also include the 'relocation' assessment, including providing concrete 'length of time' outlines for domestic and international arrangements, noting in particular the importance being that different FBT concessions may apply to accommodation and food and drink costs. Given the focus of the draft Guideline, we will not be expanding the scope of the final Guideline to include a discussion of relocation versus living at a location. The final Guideline should be read in conjunction with TR 2021/4 which provides guidance on when an employee can deduct accommodation and food and drink expenses under section 8-1 of the Income Tax Assessment Act 1997. The draft Guideline contemplates that the employee: In the context of the table, it seems likely that the 'period away' is intended to refer to the period the employee is away from their normal residence for work purposes. In other words, the draft Guideline appears to require that the employee would return to their normal residence immediately once the period of work travel ends. Depending on where the work travel has taken them, and subject to their own personal circumstances, an employee might not always return to their normal residence immediately once the period of work travel ends. Some employees might take the opportunity to have a short holiday at the end of a temporary assignment in a particular location and travel directly to the holiday location without first returning to their normal residence. Provided they return to their normal residence after the short holiday, there should be no adverse impact on the employees' status of travelling on work. The table in paragraph 10 of the draft Guideline should be modified to allow for a degree of flexibility as to when an employee is expected to return to their normal residence. Footnote 20 has also been inserted into the final Guideline to explain that an employee may take a small amount of additional time to undertake mandatory quarantine due to the COVID-19 pandemic; or to travel or take recreational leave after the end of their period away, and still return to their normal residence as soon as practicable. Is this assuming 21 continuous calendar days, that is, meaning that returning home on weekends would break the continuity? Paragraph 11 of the draft Guideline allows for 'numerous short stints of travel...' which seems to contemplate this, as long as the aggregate period is less than 90 days. Would the 28 days be regarded as LAFHA, and the remaining as travelling on work and deductible? Or would the entire overall aggregate period of 88 days become LAFHA? For example, Ann lives and works in Brisbane and is required to relieve in Toowoomba for three months. She stays continuously for the first 28 days in Toowoomba and thereafter travels back to Brisbane to visit her family every weekend. In this situation we would treat the 28 days as LAFHA and the remainder as travelling on work. Is this correct? Where an employer does not meet the criteria in the table in paragraph 12 of the final Guideline, they will need to apply the relevant interpretive principles in TR 2021/4 to establish if the employee is travelling on work or living at a location, to determine if a FBT liability arises for the benefit provided. For the subsequent periods that are each for less than 21 calendar days at a time continuously, each of the criteria in the table in paragraph 12 of the final Guideline have been met and the employer can rely on the final Guideline. Amendments have also been made to paragraph 13 of the final Guideline to explain that the number of days away includes the day of departure from the employee's normal residence and the day of departure from the work location that the employee has travelled to. As a result of these amendments, 90 calendar days means the total period of time an employee spends at a work location, including weekends and public holidays, rather than a count of working days. As such, the number of days that an employee is away from their normal residence for work purposes at the same work location resets each FBT year. In Example 1 of the draft Guideline, if Kate doesn't return home between stints away and goes directly from one location away to another (for example, for 14 days each), does that change the nature of the travel from travelling on work to LAFHA as the time away from the normal residence is more than 21 days continuously? We would treat each location as separate, and in that example both locations would be travelling on work. For logistical and cost reasons, these individuals' separate visits to Australia for work purposes may generally be longer than 21 days. This will particularly be the case if periods of quarantine continue to be required. These employees' activities are more likely to retain the character of 'travelling on work' during these longer periods. We therefore recommend that the ATO should consider modifying the safe harbour in respect of employees who usual place of residence in outside Australia. In our view the concept could be modified to allow an aggregate of no more than 89 days at the work location in a year of tax, without the additional requirement for individual periods of presence to be of maximum 21 days. We are of the view that this criteria is a reasonable safe harbour for travel by employees, noting that it is just one factor to consider when determining whether an employer can rely on the final Guideline. The other factors in the table in paragraph 12 of the final Guideline must also be considered. The principles in the final Guideline apply to all employers. If an employer does not meet the criteria in the table in paragraph 12 and is therefore not eligible to rely on the final Guideline, they can still apply the relevant interpretive principles in TR 2021/4 to establish if the employee is travelling on work or living at a location, to determine if a FBT liability arises for the benefit provided. The test of residency is a wholly different statutory test and answers a very different interpretive question compared to determining whether or not an individual is 'travelling on work'. In our view, this is a significant limitation on the practical application of the draft Guideline for most employers, and not representative of business travel in the modern world. Further, the 21-days sub-limit is not in line with published ATO guidance in private binding rulings (PBRs) and even the examples contained in the recently-released Taxation Ruling TR 2021/1 Income tax: when are deductions allowed for employees' transport expenses? and recently-released draft Ruling TR 2021/D1. The ATO commentary in these does not have any concept of a sub-limit whatsoever. Practically, the reality of this type of business travel for employers is that there are business needs and considerations which necessitate the travel and the inclusion of this sub-limit would be difficult for employers to manage if an employee were required to never be away more than 21 continuous days. We would suggest the ATO consider adjusting that sub-limit or removing it altogether given the 90 days aggregate amount already included in the draft Guideline. We are of the view that this criteria is a reasonable safe harbour for travel by employees, noting that it is just one factor to consider when determining whether an employer can rely on the final Guideline. The other factors at paragraph 12 of the final Guideline must also be considered. The principles in paragraph 12 of the final Guideline apply to all employers. If an employer does not meet the criteria as outlined in paragraph 12 and is therefore not eligible to rely on the Guideline, they can still apply the relevant interpretive principles in TR 2021/4 to establish if the employee is travelling on work or living at a location, to determine if a FBT liability arises for the benefit provided. PBRs can only be relied on by the taxpayer who applied for the ruling as the decision is based on their individual circumstances. In our view, it would be helpful if the ATO provided some prescriptive comments on this aspect, while ensuring it is practical and easy for employers to manage. Footnote 17 has been inserted into the fourth dot point of column one of the table in paragraph 12 of the final Guideline to provide some examples of an employer's normal business records that would be able to substantiate that the criteria in the first column of the table in paragraph 12 of the final Guideline are met. While we appreciate the difficulty of these scenarios, we believe it would be beneficial to extend the draft Guideline to include these arrangements, or at least consider including additional guidance on the ATOs view of these arrangements. Amendments have been made to paragraph 8 and footnote 14 has been inserted into the final Guideline to explain that fly-in fly-out and drive-in drive-out employees have their own concessional arrangements under the FBTAA. Sections 31A and 31E of the FBTAA outline the requirements of a fly-in fly-out or drive-in drive-out employee, which are also summarised in Chapter 11 of Fringe benefits tax - a guide for employers. Paragraph 9 has been inserted into the final Guideline to explain when an employee works on a fly-in fly-out or drive-in drive-out basis. Some members with remote and mobile regional workforces noted there may be practical difficulties in tracking where employees are working and for the length of time in which they are in a particular location. This is particularly the case where an employee may be required to move around the country for short-term projects and where employees may be called back to the same work location repeatedly throughout the FBT year due to the uncertain and changing demands of the project. It is quite possible that the aggregate period the employee ends up in the same work location will exceed 90 days, albeit individual 'stays' at the location may be short (that is, say ten days per trip for ten separate trips which on aggregate add up to more than 89 days). In such cases, employers are likely to choose not to rely on the Guideline (per paragraph 8 of the draft Guideline) and will be required to provide further information to support the position that the employee is travelling on work. To assist taxpayers in applying the 'additional information' requirement in the draft Guideline, we suggest the following amendment to paragraph 24: For example, if an employee is required to be away from home overnight, for a period of time, for work purposes but they do not receive an allowance from their employer (that is, the employee pays for accommodation costs and is not reimbursed), could the employee use the 21-days/90-days combined tests in the draft Guideline to characterise the employee as 'travelling on work' or living at the location to which they travel? Or, in this case, would the employee need to refer to the factors in draft TR 2021/D1 and make an assessment on that basis? In the past, the ATO applied the '21-days test' in (withdrawn) Miscellaneous Taxation Ruling MT 2030 Fringe benefits tax: living-away-from-home allowance benefits more broadly than in the context of employer-provided allowances (which was the purpose of MT 2030). For example, this application was evident in a small number of PBRs. An employer may choose to rely on the final Guideline when they meet the criteria in paragraph 12 of the final Guideline. Given the focus of the final Guideline, we will not be expanding the scope of the final Guideline to allow an employee to choose to rely on the final Guideline in order to determine whether the employee is travelling on work or living at a location. PBRs are based on individual circumstances of the applicant and, for that reason, can only be relied on by that taxpayer. Is the employer able to use the 21-days/90-days combined tests in the draft Guideline to characterise the employee as 'travelling on work' or living at the location to which they travel? Our concern here is that the arrangement is an ongoing one that could potentially be in place year after year. There does not appear to be anything in paragraph 10 of the draft Guideline that would prevent reliance on the Guideline to support that the employee is travelling on work (assuming the combined tests are satisfied). As such, the number of days that an employee is away from their normal residence for work purposes at the same work location resets each FBT year. If, in a particular week, the employee works in Sydney on Thursday and Friday and stays over for two nights, returning on Saturday, when applying the combined tests in draft Guideline for this period, is the employee away for two days or three days? If, in a particular week, the employee works in Sydney on Thursday and Friday and stays over for one night, returning on Friday night, when applying the combined tests in draft Guideline for this period, is the employee away for one day or two days?",,,,,,,/law/view/pdf?DocId=COG%2FPCG20213EC%2FNAT%2FATO%2F00001&filename=law%2Fview%2Fpdf%2Fcog%2Fpcg2021-cp003.pdf&PiT=99991231235958,False,False,https://www.ato.gov.au/law/view/document?docid=COG/PCG20213EC/NAT/ATO/00001
PCG 2021/4EC,Compendium,Compendium,Draft,,,,,,,"The shift away from the safe harbours is unexplained and unwelcome. The draft Guideline provides little practical protection to individual professional practitioners (IPPs). It uses vague language and the ATO retains plenty of options to go on the offensive where it sees behaviour it does not like. The draft Guideline does not provide safe harbours, de minimis rules or any assurance to many IPPs given the current settings of the scoring model. The final Guideline was specifically designed to address these high-risk IPP arrangements. The application of Part IVA is based on the individual facts and circumstances of a case and does not lend itself to a bright line test resulting in a set safe harbour. The bright line test under the suspended guidelines demonstrated IPPs' ability to reorganise or construct their arrangements to meet the singular benchmarks regardless of whether they were commercially driven. As a result, the final Guideline is designed to provide a matrix where IPPs can self-assess their risk and discuss their arrangement with the ATO if they do not consider the assessment aligns to their level of risk. Given the risk rating may not equate to the existence of any Part IVA factors, the draft Guideline can lead to unnecessary compliance activity and costs. The abstract, generalised tests (the Gateways) and the specific risk assessment factors create uncertainty for taxpayers and impose an unnecessary administrative burden and compliance cost, without having a proper basis in law. The two Gateways determine whether an IPP undertaking a self-assessment should apply the risk assessment framework. This approach, combined with the application of three risk assessment factors (though it is only necessary to apply the first two factors), was necessary to overcome the shortfalls of the suspended guidelines. The three risk factors were co-designed during initial consultation on the suspended guidelines and have not changed in order to maintain certainty. The difference is the need to apply the first two risk factors (or all three risk assessment factors where appropriate), rather than just one. This is paramount to ensure we focus our compliance activities on arrangements that demonstrate a spectrum of risk and was the main reason for suspending the original guidelines. Where an IPP self-assesses against the risk assessment framework and considers their risk rating is not commensurate with their arrangement, they are encouraged to contact the ATO to discuss. Support for ATO's effort to address artificial and contrived arrangements that seek to inappropriately alter taxpayers' tax liabilities. Reinstate the suspended guidelines. The high-risk features in Gateway 2 should be dealt with under existing tax laws rather than through the imposition of arbitrary guidelines in the draft Guideline. Concern around the lack of both legislation and recent precedential decisions to support the ATO's line of reasoning in the draft Guideline. If the ATO or Treasury are not happy with the outcomes this provides, consider a legislative fix rather than traffic light system with grey areas. Consider eventually running test cases. The approach in the final Guideline dates back to the original Everett [3] assignments which may be distinguishable from certain contemporary professional practices. In summary, the Everett matter concerned a goodwill practice and Mr Everett paid market value to buy his equity share. Although there are still some goodwill practices operating today, most are no-goodwill. More importantly, Mr Everett was entitled to his proportionate share of the partnership profits, however much or little energy he devoted to the practice, so long as the partnership remained on foot. We consider that a partner or equity holder's right to participate in the profit of a contemporary professional firm will be determined by the constituent documents or any other relevant agreements between the equity holder and the firm. Commonly, such terms include that the IPP: While it seems unlikely an interposed entity could fulfill such obligations, the existence and prevalence of personal obligations on the individual indicates the derivation of a substantial part of the profit entitlement is generated by the individual and, therefore, should be declared and assessed in their own personal income tax return. It is relevant to note that when the suspended guidelines were issued, the ATO published that test case funding would be available for a suitable case in order to obtain judicial guidance on these issues. The ATO remains committed to finding a suitable test case. This is because the application of Part IVA requires consideration of certain matters (refer to subsection 177D(2)). The issues considered under the Gateways would form part of any Part IVA analysis, as would the risk assessment factors, but Part IVA analysis is not limited to these matters alone. Paragraph 28 of the final Guideline confirms that it does not apply if the income of the professional firm is subject to the personal services income rules. The ATO should provide evidence of widespread tax avoidance or the quantum of revenue at risk. The draft Guideline should not be applied to a subset of the population as this results in inconsistent administration of the law. Why does it apply to IPPs given other business have the same business investment and risk? No proper justification for singling out the services provided by 'professional firms'. Is it appropriate or fair that professionals are targeted separately and differently by the ATO in relation to income splitting compared to other forms of income derivation from personal exertion? It is not unusual to develop guidance for a specific group of the taxpayer population where behaviours of concern have been identified or where perceived uncertainty continues to exist. Since the suspension of the original guidelines, the ATO has received repeated submissions stressing the need for guidance. The ATO makes a binary distinction between equity and non-equity holders. In practice, the distinction is not that clear. Practitioners within a professional services business will often progress through stages of equity, with their involvement and rights changing in each stage. To suggest that they are non-equity holders until some arbitrary set of criteria is met is simply not reflective of the commercial reality. When this issue became known in the market previously, we began to receive a number of requests about 'classes' of partners who were 'hybrid' or somewhere between non-equity and full equity with full rights. The ATO does not want to attempt to define the factual issue of equity versus non-equity. There were also part equity/hybrid partners identified prior to the suspended guidelines. The risk is these arrangements are a reaction to the suspended guidelines with a view to those who previously could not alienate any income being able to access the suspended guidelines resulting in 'low-risk' or 'permissible' alienation. If an IPP or firm has bespoke arrangements of this nature, they should seek assurance on a case-by-case basis. An IPP also may not have information to assess whether the gateway criteria are satisfied. The Commissioner considers the allocation of professional firms profits to a non-equity holder are derived through the IPP's personal exertion and therefore should be returned in the IPP's individual income tax return. The final Guideline should cover more examples of current IPP arrangements, including professional firms running through a common corporate structure or a unit trust. Clarify whether franking credits and related offsets are to be considered for the purposes of the risk assessment factors. The ATO will take a practical administrative approach and encourages IPPs to engage with us if they think their self-assessed risk rating is not appropriate. The final Guideline applies to all professional firms irrespective of the structure used. Feedback suggests there is a misunderstanding that corporate structures and trusts are not covered by the final Guideline, and that the ATO is under the impression that most professional firms are still conducted via partnerships. The draft Guideline contained 18 examples, which included trusts and companies; however, the examples were reduced as it was considered excessive. The final Guideline now provides additional case studies to address these issues. Where considering the commercial imperatives and tax consequences, due regard should be paid to the application of Part IVA. Remove Gateways 1 and 2 because: The application of Part IVA requires consideration of certain matters (refer to subsection 177D(2)). The issues considered under the Gateways would be part of any Part IVA analysis, as would the risk assessment factors. For this reason, the final Guideline is used to understand the risk of Part IVA applying to the individual facts and circumstances of a case. The final Guideline includes a risk assessment framework used to allocate compliance resources; however, a full consideration of Part IVA would go beyond consideration of the Gateways and the risk assessment factors. Paragraph 60 of the final Guideline further clarifies that where an IPP has any of the risk features outlined within Gateway 2, we would expect the IPP to engage with the ATO. Gateway 1 requires a self-assessment of whether the arrangement is commercially driven. There may be circumstances, when looking at the individual facts and circumstances of a case, where the IPP and ATO disagree the arrangement is commercial. Gateway 2 is based on observed structures and is not an exhaustive list of high-risk features. There may be existing and/or 'next generation' arrangements that the final Guideline does not currently contemplate. One difficulty in relying solely on Gateways is that it would provide insufficient certainty to IPPs of the ATO's level of concern in relation to an arrangement. For example, it would be possible for an IPP to self-assess as satisfying both Gateways 1 and 2, yet still be considered high risk by the ATO. From the ATO's perspective, a difficulty in relying solely on the Gateways is that it would require a case-specific exploration of commercial considerations prior to determining whether a case needs further investigation. For both the ATO and IPPs, there is additional importance in having a quantitative risk assessment framework underpinning case selection, in that it supports consistency across the ATO of determining cases for further investigation. The draft Guideline is unclear regarding the requirement to document the commercial rationale for an IPP's arrangement and how it operates and appears to mandate such documentation. Potentially serious retrospective taxation issue for taxpayers that held classed shares and genuinely considered they met the requirements of the suspended guidelines by meeting at least one safe harbour test, but now may have a heightened audit risk for the years 2018 to 2021. Non-equity partners whose interests have these features can engage directly with the ATO to ascertain their level of risk. The suspended guidelines did not provide safe harbours to non-equity IPPs who sought to alienate income derived through their personal exertion. The final Guideline should include guidance on: Many IPPs will not know their incomes or profits by 30 June each year. How are they required to pay dividends and wages and make effective trust distribution resolutions by this time, which take into account the risk factors? The Commissioner recognises there may be a number of other relevant factors pertaining to individual arrangements which will affect an IPP's self-assessed risk rating. These may include timing differences, retention of income within a firm in a particular year for commercial purposes, access to tax concessions and provisions including accelerated depreciation and instant asset write off, and other extraordinary business factors. However, the final Guideline allows for a return of income generated by the business structure to be returned and assessed in income tax returns other than the IPP's personal return. This recognises that a portion of the profit entitlement is generated by elements other than the personal exertion of the IPP, being income generated from and by a business structure which includes employees and other business assets, including goodwill (which is attached to the individual in the case of professional practitioners). The final Guideline should more appropriately address income derived through service trusts. This facilitates a certain proportion of alienation of the overall firm's income, which is accepted to be a part of the overall profit entitlement which is generated by a business structure. This income, along with the other income generated by a business structure from the professional partnership, company or trust, is the overall proportion of a partner's entitlement. The Commissioner considers this amount to be generated by the entities which form part of the broader business structure. Therefore, the Commissioner considers this appropriately forms part of the profit entitlement of an IPP which is to be assessed against the scoring matrix. Where an IPP adopts low-risk commercially-driven arrangements and the draft Guideline deems these arrangements to be moderate or high risk, a change in the IPP's arrangement to result in low risk pursuant to the draft Guideline will result in an increased tax liability. The risk assessment framework does not reflect the correct ratings for commercial, low risk arrangements and therefore should be recalibrated. The risk ratings form a matrix of risk which seeks to overcome the consequence of the bright line test adopted in the suspended guidelines. As noted in our response to Issue 1 of this Compendium, the ATO was (as a matter of administrative practice) precluded from applying Part IVA to some professional firm arrangements that were considered high risk but technically qualified as low risk under the suspended guidelines. Suggest a different score for firms with a turnover of less than $50 million which are subject to 25% corporate rate. The effective tax rate thresholds do not factor in the legislated reductions in corporate and individual tax rates. Was the ATO cognisant of the declining base rate entity company tax rate when framing the risk assessment factors OR does the favourable score afforded to IPPs with an effective tax rate around the 30% mark reflect instead the resident individual marginal rate scale? As corporate tax rates are being constantly reduced, it will be more difficult to meet the guidelines to qualify as 'low risk'. A simple measure such as tying arrangements to the current corporate tax rate does not address the range and complexity of arrangements. Further, when assessing income returned in the hands of the IPP, it would be the IPP's marginal tax rates that would be applicable not the corporate tax rate. The final Guideline has been updated to clarify it is only necessary to consider the first two risk assessment factors but, in some cases, it may be appropriate to consider all three. The approach recognises that it may be impractical to determine an appropriate commercial remuneration against which to benchmark. The ATO accepts the final Guideline cannot provide a 'one size fits all' model; however, it is designed to cover the maximum number of IPPs in the most consistent manner. Most importantly, the final Guideline is a risk framework which acts as an indication of risk only. Where the scoring matrix results in anomalies, additional ATO profiling work will rule out compliance action. Alternatively, IPPs can contact the ATO directly if they consider their risk assessment rating is not reflective of their arrangement. Further, it removes references to being directly audited and instead states at paragraph 37 of the final Guideline: The relevance of failing a Gateway, or being in the red zone (or the amber zone), is that the Commissioner is likely to give closer attention to the individual facts and circumstances of the arrangement, including a deeper consideration of whether anti-avoidance provisions apply. It is considered this is better aligned with the intent of the final Guideline as a risk assessment tool based on the individual facts and circumstances of an arrangement. The ATO considers IPPs keeping relevant records to support their self-assessment represents best practice. We acknowledge that the ATO has redefined the risk parameters based on their concerns (about arrangements involving taxpayers redirecting their income to associated entities where it has the effect of altering their tax liability); however, we are concerned that the difference in risk rating of an IPP can vary from low to high based on a minuscule difference in the commercial and taxation outcomes. Alternatively, IPPs can contact the ATO directly if their risk assessment is not aligned to their arrangement. The transitional arrangements are well-intentioned but unclear. Further clarification is needed to provide certainty to compliant IPPs who entered professional firms: 'Grandfathering' should be provided to existing IPPs who are rated as low risk. The ATO should provide further guidance and clarity on whether the transitional grace period will apply on a firm-wide basis or on an IPP basis. For example, how does the draft Guideline apply if a firm put in place a structure before 14 December 2017 that complied with the suspended guidelines and admitted new IPPs into the firm after that date? The draft Guideline is unclear whether IPPs whose arrangements are flexible and can adopt low-risk arrangements immediately by varying their distributions must do so immediately or whether they are required to do so for the year ended 30 June 2024. Paragraph 118 of the final Guideline also clarifies that all IPPs who qualify for the transitional treatment may continue to rely on the suspended guidelines until 30 June 2025. Proposed flow chart provided. There are many professional firms with IPPs whose roles do not involve the provision of professional advice directly to clients. For example, IPPs whose roles involve management of the firm's business functions. We accept that some IPPs who have management and other firm responsibilities may not have client-facing and/or external fee-charging roles. However, the number of these IPPs is small as a proportion of the total number of IPPs in any firm. Many have dual roles (that is, firm responsibilities while still performing client-facing roles) and many rotate through these roles for a limited/set period, after which they revert to their client-facing role. IPPs without client-facing roles are contemplated in the definition of an IPP at paragraph 20 of the final Guideline, which includes individuals who provide services to the firm, as well as to clients of the firm.",,,,,,,/law/view/pdf?DocId=COG%2FPCG20214EC%2FNAT%2FATO%2F00001&filename=law%2Fview%2Fpdf%2Fcog%2Fpcg2021-cp004.pdf&PiT=99991231235958,True,False,https://www.ato.gov.au/law/view/document?docid=COG/PCG20214EC/NAT/ATO/00001
PCG 2021/5EC,Compendium,Compendium,Draft,,,,,MT 2008/1 | MT 2008/2,,"Disclosure requirements in the RTP schedule are prospective only and will not require taxpayers to amend prior lodgements of the RTP schedule to include their rating under this Guideline. Taxpayers are encouraged to undertake self-assessment on prior years for their own compliance purposes, and this may be provided during engagement and assurance activities. The intention of this Guideline is to provide taxpayers and their advisors the information that may be required to demonstrate compliance and the type of information the Commissioner would likely seek to obtain to assist taxpayers in meeting their obligations. In some circumstances it may be easier to use a combination of the top-down and bottom-up approaches rather than one or the other. The ATO should also provide additional clarification that the information requirements set out in the Appendix is not a prescriptive list. The Appendix to the final Guideline sets out the information the Commissioner considers would be relevant in demonstrating compliance with the imported hybrid mismatch rule. It is intended as a general guide for enquiries and is not an exhaustive list. To ensure this is clearer, we have inserted paragraph 33 of the final Guideline, which is consistent with paragraph 70 of the final Guideline. The information listed in the Appendix to the Guideline may be requested when we are assessing risk during engagement or assurance activity. It is not the intention of this Guideline to limit the operation of the law and it does not create new documentation requirements. While some of the lower risk zones contain materiality thresholds, they should be expanded. Providing examples of circumstances where the Commissioner would consider to be reasonably arguable is not within the scope of this Guideline and there is existing ATO guidance on this concept. Taxpayers should refer to Miscellaneous Taxation Ruling MT 2008/2 Shortfall penalties: administrative penalty for taking a position that is not reasonably arguable for the meaning of 'reasonably arguable position'. Where taxpayers are not covered by paragraph 26, as stated at paragraph 27, of the final Guideline, assessments of reasonable care will be made on a case by case basis. Taxpayers should refer to Miscellaneous Taxation Ruling MT 2008/1 Penalty relating to statements: meaning of reasonable care, recklessness and intentional disregard for the meaning of 'reasonable care'. We have added Example 3 at paragraph 45 of the final Guideline to set out that we consider that determining whether there is an offshore hybrid mismatch under Australian law cannot be solely determined by a qualified foreign tax advisor.",,,,,,,/law/view/pdf?DocId=COG%2FPCG20215EC%2FNAT%2FATO%2F00001&filename=law%2Fview%2Fpdf%2Fcog%2Fpcg2021-cp005.pdf&PiT=99991231235958,False,False,https://www.ato.gov.au/law/view/document?docid=COG/PCG20215EC/NAT/ATO/00001
PCG 2020/2EC,Compendium,Compendium,Draft,,,,,,,"If Parliament is to enact this provision, we believe, as a matter of public policy, that some of the matters contained within the draft Guideline should be legislated. This is particularly the case for the matters contained in the draft Guideline regarding 'When will the Commissioner make an estimate of a net amount?' and 'What will the Commissioner take into account in making a `reasonable' estimate?' A legislative approach is far preferable because as matters stand, as was observed in CLK Kitchens & Joinery Pty Ltd v Commissioner of Taxation [2019] FCA 1086 at [113], ...'the power of the Commissioner to make an estimate is granted in unconfined terms'. Given the far-reaching effect of an estimate, the appropriate place for these provisions is in legislation that has been subject to a robust parliamentary process, and allows for appropriate restraint on executive power. This will enable the ATO and others to undertake an education campaign so that companies, directors, managers, accountants and other relevant persons are made aware of these new, significant potential liabilities. This is the most critical paragraph of the draft Guideline as it triggers the application of the estimate provisions so particular care must be taken in its drafting. The matters set out in that dot point are subjective and broader than what might normally be interpreted as phoenix behaviour. We believe it is more appropriate that this dot point is located within paragraph 14 of the draft Guideline as a potential indicator of phoenix behaviour, in this case, as a precursor of phoenix behaviour. It could then be considered alongside the other possible indicators of phoenix behaviour. Of course, a number of these factors may not indicate phoenix behaviour at all. As paragraph 1.2 of the Explanatory Memorandum to the Treasury Laws Amendment (Combating Illegal Phoenixing) Bill 2019 notes 'phoenix activity is not defined in legislation and can encompass both legitimate business rescue activities and the use of serial deliberate insolvency as a business model to avoid paying company debts.' We recommend that paragraph 14 of the draft Guideline be qualified, stating that some of these factors, either alone or in combination, may not point to phoenix behaviour, and that it is only when the factors, either alone or in combination, evidence the stripping or transfer of assets from a company to another entity with the intention of defeating the interests of the first company's creditors in that company's assets, should making an estimate GST be considered. Paragraph 15 has been added to the final Guideline to qualify the list of indicators of phoenix behaviour, stating that some of these factors, either alone or in combination, may not point to phoenix behaviour, and that it is the totality of the circumstances that must be considered in deciding whether the issue of an estimate is justified. Contact should also specifically refer to directors who may become liable for the debt. As a matter of procedural fairness, the ATO should not proceed with making an estimate unless they have attempted to contact directors as well as employees or other representatives of an entity. We suggest the matter could be addressed by the insertion of a new paragraph 18 of the final Guideline as follows: An estimate of unpaid net amount will generally not be made where a person is taking a course of action reasonably likely to lead to a better outcome for a company that may become or be insolvent in accordance with the safe harbour provisions of section 588GA of the Corporations Act 2001 . If the ATO accepts this suggestion, we also believe it would be useful to have an example of a director utilising safe harbour provisions and the Commissioner determining not to make an estimate included in the final Guideline. This paragraph does not mean that the Commissioner will be under any obligation to take active steps to determine whether a director is eligible for a 'safe harbour' under section 588GA of the Corporations Act, before issuing an estimate. We have decided not to add a further example. Example 5 - company winding up imminent, no estimate made Li and Wei are directors of ABC Pty Ltd a carpentry business. Monthly BAS statements have been regularly lodged by ABC Pty Ltd for the previous few years. Several months have gone by and no BAS statements have been lodged. Initial calls to Li go unanswered. A call is made to Wei who answers. Wei explains that Li was injured at work and that has caused the business financial difficulties. They don't think they can pay their suppliers and they think they won't be able to pay their tax liabilities. They intend to place the company into voluntary administration. The ATO will be a creditor. Neither Li or Wei have ever been associated with a company that has gone into liquidation before and they hold no other directorships. Records indicated that ABC Pty Ltd has three employees who are only showing employment income from that company. Third party data does not indicate any drawdown of bank accounts other than for normal business expenses. In this circumstance, there is no evidence of phoenix behaviour and the Commissioner will not make an estimate. It may also be noted that there are very few constraints or limitations upon the power given to the Commissioner. Although phoenixing activity may have been the stated reason for the introduction of the new law, the power is 'at large' and is by no means limited to phoenixing activity. In this context, the draft Guideline is both welcome and important. That said, it should be understood that there is no legal remedy if an ATO officer fails to follow the Guideline, or misunderstands or misinterprets the Guideline in any way. Accordingly, both the terms of the Guideline, and the ATO's internal processes and controls will be of paramount importance. However, the Commissioner goes on to say, at paragraph 20 of the draft Guideline, that 'if the Commissioner has reason to believe that the entity has operated in the cash economy and has not kept accurate records or obtained a tax invoice as required, the Commissioner may not allow input tax credits in making an estimate, because the taxpayer would in most cases not be entitled to attribute the input tax credits without a tax invoice.' We respectfully disagree with this analysis. It does not appropriately reflect the way in which the GST works, nor as a matter of law accord with the making of a reasonable estimate. There may be many reasons for the absence of a tax invoice and the Commissioner has power in any event to treat a document that is not a tax invoice as a tax invoice. What is more important is to arrive at a reasonable estimate of a net amount, whatever the circumstances, and not to introduce a de facto penalty into the estimating process. Schedule 3 of the Treasury Laws Amendment (Combating Illegal Phoenixing) Bill 2019 (Amending Bill) permits the Commissioner to make estimates of an entity's net amount and any estimate of GST taxes should properly include the input tax credits for creditable acquisitions, not just the GST collected on taxable supplies. The inclusion of a power to not allow input tax credits in making an estimate based on a belief that the entity has operated in the cash economy is contrary to the intention of the legislation. It would be reasonable to expect the ATO to provide service standards aligned with their expectations of taxpayers. A regular complaint from small business is that the ATO calls from a 'private number' and if a voicemail is left, the call back number is a general ATO line with long wait times. Taxpayer contact with the ATO needs to be made easy to encourage engagement and support good outcomes. However, to remove any impression that this process of evaluation is simply a matter for the Commissioner's discretion, we have added the remaining words from Transtar Linehaul at [86] ... 'although in the case of dispute it would ultimately be for a court to decide whether the statutory declaration was to the effect required by the statute' . In footnote 12 of the final Guideline, we have also added a quote from CLK Kitchens & Joinery Pty Ltd v Commissioner of Taxation [2019] FCA 1086 at [173] '...The effect of a declaration is not conditioned on whether the Commissioner accepts that it has the required effect, but whether it is of the required effect.'",,,,,,,/law/view/pdf?DocId=COG%2FPCG20202EC%2FNAT%2FATO%2F00001&filename=law%2Fview%2Fpdf%2Fcog%2Fpcg2020-cp002.pdf&PiT=99991231235958,False,False,https://www.ato.gov.au/law/view/document?docid=COG/PCG20202EC/NAT/ATO/00001
PCG 2020/5EC,Compendium,Compendium,Draft,,,,,,,We are also considering a further practical compliance guideline for later income years as part of the finalisation of draft Law Companion Ruling LCR 2019/D3 Non-arm's length income - expenditure incurred under a non-arm's length arrangement. We are also considering a further practical compliance guideline for later income years as part of the finalisation of LCR 2019/D3. Paragraph 11 of the final Guideline confirms that the transitional compliance approach will not apply where the fund incurred non-arm's length expenditure that directly related to the fund deriving particular ordinary or statutory income.,,,,,,,/law/view/pdf?DocId=COG%2FPCG20205EC%2FNAT%2FATO%2F00001&filename=law%2Fview%2Fpdf%2Fcog%2Fpcg2020-cp005.pdf&PiT=99991231235958,False,False,https://www.ato.gov.au/law/view/document?docid=COG/PCG20205EC/NAT/ATO/00001
PCG 2020/6EC,Compendium,Compendium,Draft,,,,,,,"We support the proposed compliance approach (including retrospective application). It is a sensible approach to provide deductibility for super contributions when transferred to the Small Business Superannuation Clearing House (SBSCH). The compliance approach should apply to all clearing houses (not just the SBSCH) and apply retrospectively. If the same compliance approach on tax deductibility applied to payments made before 30 June to all clearing houses, then businesses are in a simpler administrative regime. We note that the business would then gain tax deductibility and also meet their super guarantee compliance (which is not due until 28 July). To provide certainty to employers using the SBSCH prior to the end of the 2019-20 financial year, the decision has been made to finalise this Guideline with the existing scope. Note: Section 23B of the Superannuation Guarantee (Administration) Act 1992 provides that, for super guarantee purposes, employer payments made to an approved clearing house are taken to be contributions made on the day they are accepted by the approved clearing house. The SBSCH is the only approved clearing house. I understood this compliance approach to have already been in place in accordance with what I read on the ATO website prior to 30 June 2019 and could be relied upon. We understand and accept the conditions of 'all relevant information', 'dishonoured by the super fund', 'returned to you by the SBSCH' by endorsing the approach. We note however that it is often outside the control of the employer as to whether a payment is ultimately accepted by the super fund as it is dependent on the information provided by the employee. The penalty of loss of tax deductibility remains unreasonable when the employer has performed all reasonable steps to make payment and receive the tax deduction through no fault of their own. We would like the same compliance approach to also apply to each quarterly payment - that is, if payment (and all required information provided) is made to a clearing house on or before 28 July then the employer can be deemed to have met both their super guarantee and tax deductibility requirements. For completeness, paragraph 5 or footnote 6 of the draft Guideline, when finalised, should clearly state that the SBSCH is the only approved clearing house (see section 24 of the Superannuation Guarantee (Administration) Regulations 2018). We note access to the SBSCH is restricted to small businesses with 19 or fewer employees. This limit prevents businesses that otherwise are small businesses from benefiting from the SBSCH. We encourage access to the SBSCH to be expanded to align with the definition of a small business - that is, any business with an annual aggregated turnover of less than $10 million. We would recommend an important adjustment at the first dot point in paragraph 8 of the draft Guideline to explain what is meant by 'you…made payments to the SBSCH'. For example, does it mean that the ATO has received cleared funds from an employer? Or does it mean that the funds have left the employer's bank account but have not yet been deposited with the ATO? An employer can claim a deduction for the payment of super contributions made through the SBSCH in the year they are made. This would be at the time of making the payment to the SBSCH (that is, if the amount leaves the employer's bank account on or before 30 June) where the SBSCH accepts the payment. For example, funds leave an employer's bank account on 29 June 2020 and are not returned by the SBSCH. Provided all the requirements of paragraph 8 of the final Guideline are met, the ATO would not take compliance action to consider if the funds were received by the trustee of the super fund or retirement savings account in the 2019-20 financial year, for the purposes of the employer's entitlement to claim an income tax deduction. If the payment is not accepted by the SBSCH, and the payment is made in the subsequent financial year, the employer cannot claim the deduction in the earlier financial year.",,,,,,,/law/view/pdf?DocId=COG%2FPCG20206EC%2FNAT%2FATO%2F00001&filename=law%2Fview%2Fpdf%2Fcog%2Fpcg2020-cp006.pdf&PiT=99991231235958,False,False,https://www.ato.gov.au/law/view/document?docid=COG/PCG20206EC/NAT/ATO/00001
PCG 2019/1EC,Compendium,Compendium,Draft,,,,,PS LA 2015/4,,"Additional statements have been included in the final Guideline to clearly delineate the risk assessment framework in the Guideline from the identification of the arm's length conditions as required under the law (refer to paragraph 9 of the final Guideline). Paragraph 32 of the final Guideline provides that the ATO will take into account additional information, which may include the taxpayer's global supply chain and global profitability, when determining the level of follow-up compliance activity. Publishing the underlying independent company data will increase the risk that the Guideline is wrongly perceived as a safe harbour/pre-determination of the arm's length conditions - without an appropriate benchmarking and comparability analysis as required under the law. It is proposed that updated profit markers will be published where analysis or further benchmarking indicates that there is a material movement in the information used to develop the profit markers. Paragraph 23 of the final Guideline notes that there is no bright-line test to define an inbound distribution arrangement. However, as with most transfer pricing questions, an element of judgement is ultimately required. Entities contacted by us, based on the risk assessment framework outlined in the Guideline, can notify us of their view on characterisation and the appropriate selection and application of an arm's length method as required under the law. The Guideline's use of categories reflects our experience in differentiating risk. It is our view that certain activities affect risk for inbound distribution arrangements, in that they incrementally generate value. The industry schedules set out the activities that will prompt an inbound distribution arrangement to fall into the higher categories. The extent and economic significance of the activities will be considered and determined as part of a review of the arm's length conditions based on a comparability analysis. However, in relation to the example in the question, the ICT schedule is stated to apply to all types of hardware and software 'that enable interaction through technology'. It is unlikely that the ICT schedule will apply to printers and cameras. Rather, it is more likely that arrangements distributing these types of products will be covered by the General Distributors schedule. Publishing the final Guideline provides additional information to clients that may assist in forming a view as to whether to, or how best to, approach us in relation to a matter involving an APA or MAP. Entities in an overall loss position for three or more years will ordinarily be prioritised for review. We encourage such entities to prepare appropriate transfer pricing analysis and consider whether any adjustment of prior year positions for tax is necessary. This analysis will be taken into account as part of an ATO review. Specifically, the Guideline sets out profit markers that may indicate a risk that inappropriate levels of profit are being recognised in Australia. The benchmarking and industry case experience has assisted in setting the profit markers specific to inbound distribution arrangements. It therefore follows that our view of risk associated with inbound distribution arrangements is necessarily different to our view of risk associated with outbound arrangements, including marketing and procurement hubs.",,,,,,,/law/view/pdf?DocId=COG%2FPCG20191EC%2FNAT%2FATO%2F00001&filename=law%2Fview%2Fpdf%2Fcog%2Fpcg2019-cp001.pdf&PiT=99991231235958,False,False,https://www.ato.gov.au/law/view/document?docid=COG/PCG20191EC/NAT/ATO/00001
PCG 2019/5EC,Compendium,Compendium,,,,,,TD 1999/74,,"1 All further references in this Compendium are to the ITAA 1997. The factors listed in paragraphs 12 and 13 of the final Guideline are relevant to the safe harbour and to the exercise of the Commissioner's discretion (when asked), but the Commissioner may take additional factors into account. Additional factors include (but are not limited to) those described in paragraph 17 of the final Guideline. To provide more clarity, the phrase has been altered to state: ' during the first two years after the deceased's death ... ' in paragraph 11(a) of the final Guideline. This alteration is in line with the wording used in Item 1 of the table contained in section 118-195. For the avoidance of doubt, the safe harbour would not be available in a situation where a dwelling took more than two years after the deceased's death to pass to a beneficiary, who subsequently spent more than 18 months addressing the relevant favourable factors. The total maximum time period that the safe harbour can be used is a period of 42 months from the deceased's death (noting the Commissioner's discretion may be exercised for longer periods). Areas of clarification include: Possible factors include: It is recognised that the safe harbour will not cover all situations where it would be appropriate for the Commissioner to extend the two year period. The aim is to give certainty to those people with straightforward circumstances that are resolved in a timely manner, whilst ensuring that the Commissioner continues to have visibility of arrangements that involve more complex factual scenarios or which extend over longer periods of time. The broad range of factual circumstances that might be covered by these factors makes them inappropriate for inclusion in the safe harbour. Areas for clarification include: Where a genuine challenge to the ownership of the dwelling, or to the will, has occurred, which has caused a significant delay in time, this will be a favourable factor to the exercise of the Commissioner discretion. Where a genuine challenge arises, taxpayers should keep records relating to the challenge to support their eligibility for the safe harbour. It is recognised that the safe harbour will not cover all situations where it may be appropriate for the Commissioner to extend the two year period. The aim is to give certainty to those people with straightforward circumstances that are resolved in a timely manner, whilst ensuring that the Commissioner continues to have visibility of arrangements that involve more complex factual scenarios or which extend over longer periods of time. Where a relevant life tenancy extends beyond 42 months and the test in column 3 of item 2 of the table in subsection 118-195(1) is not satisfied, the taxpayer should request the Commissioner exercise the discretion. The purpose of Example 1 of the final Guideline is to demonstrate a set of circumstances where the safe harbour could operate. Extending the time period between the death of Mr Bishop and Mrs Bishop would mean that the situation would no longer satisfy the final condition in paragraph 11 of the final Guideline and would cease to demonstrate a situation which would qualify for the safe harbour. Note: The timeframes have been extended in this example in line with the changes described in Issue 1 of this Compendium, but are still within the timeframes required to apply the safe harbour. However, due to the wide range of factual scenarios that may present on this point, it would not be appropriate to extend the safe harbour to try and cover a subset of them.",,,,,,,/law/view/pdf?DocId=COG%2FPCG20195EC%2FNAT%2FATO%2F00001&filename=law%2Fview%2Fpdf%2Fcog%2Fpcg2019-cp005.pdf&PiT=99991231235958,False,False,https://www.ato.gov.au/law/view/document?docid=COG/PCG20195EC/NAT/ATO/00001
PCG 2019/6EC,Compendium,Compendium,,,,,,PS LA 2012/5 | TD 2001/3,,"This is of particular concern in relation to the imported mismatch rules, as this broad interpretation effectively means that the intended deferral of these rules to 1 January 2020 will not apply. The ATO's proposed interpretation would defeat Parliament's objective of legislating the 12 month deferral if this objective is made redundant by the ATO's interpretative view. For example, where an Australian taxpayer is not aware of the hybrid mismatch when the scheme was entered into, but subsequently becomes aware, would the hybrid mismatch be a design feature of the scheme? The 'design feature' test is not a purpose test and a finding of a design feature must be supported with contemporaneous demonstrable evidence. The ATO is considering if further guidance is necessary to assist taxpayers in this market. The application or remission of penalties will be done in accordance with the legislation and taking due account of ATO policy. Further, the application of penalties in any particular case is dependent on the unique facts and circumstances of each case. For example, whether or not a position is reasonably arguable or whether false and misleading statements are relevant to a particular case. Any guidance on this would need to be consistent with the Commissioner's current views on the administration of the penalties regime as set out in practice statements such as Law Administration Practice Statement PS LA 2012/5 Administration of the false or misleading statement penalty - where there is a shortfall amount . The ATO is considering if further guidance to assist taxpayers in understanding what information required may be expected to satisfy the identification of a deduction/non-inclusion mismatch in this context. A discussion of how the Commissioner will apply paragraph 832-210(3)(c) of the ITAA 1997 in the Guideline or Ruling would provide valuable guidance for taxpayers. The Commissioner is of the view that a scheme would include both the deduction and non-inclusion of income.",,,,,,,/law/view/pdf?DocId=COG%2FPCG20196EC%2FNAT%2FATO%2F00001&filename=law%2Fview%2Fpdf%2Fcog%2Fpcg2019-cp006.pdf&PiT=99991231235958,False,False,https://www.ato.gov.au/law/view/document?docid=COG/PCG20196EC/NAT/ATO/00001
PCG 2019/8EC,Compendium,Compendium,Draft,,,,,GSTD 2017/1 | GSTR 2006/3 | GSTR 2008/1 | GSTR 2019/2,,"The first dot point in the red zone should be dropped. This point creates a red flag if a taxpayer does not apportion to GST-free supplies of credit. As claiming such a percentage would only advantage a taxpayer, if there are taxpayers that take the view that the time, effort and/or documentation for such an apportionment is not justified then it would seem odd that such a conservative position would put them in the red zone (if they are also over 35% weighted extent of creditable purpose (ECP)). Certainly it would seem inappropriate to consider such a taxpayer 'high risk' if that were the only red flag that existed. Perhaps such a taxpayer is a good example of someone that would be in the yellow zone. The final Guideline has been clarified so that this red zone feature is only relevant where in fact a taxpayer's apportionment method does recognise the extent to which the supply of the credit card facility is GST-free, but does not utilise the method in the blue zone. The second dot point in the red zone, as drafted, will be hard to apply (the other dot points are a lot more specific as to what is the element of an apportionment model that is causing the red flag). Is this second dot point aimed at the concern that a single ECP rate is determined without considering any weighting - or more specifically, that there has been no consideration/analysis of whether certain acquisitions in the credit card issuing business relate solely to credit. If so, perhaps it can be redrafted along those lines. We have made changes to make the application of this red zone feature more certain. The final Guideline has been clarified to provide that a method will be in the red zone where it does not have regard to the acquisitions that only relate to the financial supply of the credit card facility, in accordance with GSTR 2019/2 Goods and services tax: determining the creditable purpose of acquisitions in a credit card issuing business . The submitter recommends the ATO agree to delay finalisation of the draft Guideline and commit to alternative approaches to resolve the outstanding technical issues underpinning the draft Guideline (noting that the submitter does not agree with the view in Draft Goods and Services Tax Determination GSTD 2018/D1 Goods and services tax: determining the creditable purpose of acquisitions in a credit card issuing business ). The ATO's perception that a Guideline is an appropriate mechanism for providing compliance certainty and confidence to the inherently complex, dynamic and fluctuating nature of Australia's financial services industry is misplaced. We have consulted extensively on our views in GSTR 2019/2 and on the risk assessment framework set out in this Guideline, and have taken the submitters' views into account. Schedule 1 of the final Guideline is intended to work together with GSTR 2019/2 to provide a clear expression of our technical views and our expectations for how they are applied in practice. It provides certainty on the compliance approach we will take given the risk associated with particular apportionment methods. We encourage taxpayers to contact us to discuss their circumstances if they would like additional certainty in relation to their arrangements. The submitter considers the 35% rate in the green zone is significantly below what is a fair and reasonable rate. It is not clear how this rate was derived by the ATO and the data that was used to calculate the rate. In calculating the green zone rate, we had regard to the application of the method in the blue zone to available information on the typical acquisitions and supplies in a credit card issuing business. We recognise that some taxpayers may have different business arrangements such that it may be more appropriate in their circumstances to instead apply the approach outlined in the blue zone. As stated in paragraph 24 of the final Guideline, the green zone rate will be reviewed regularly in line with industry developments. The draft Guideline in relation to open loop systems shows the Commissioner is showing disregard to the potential distorted GST outcomes as between the open and closed loop payment systems. Given the small number of entities operating a closed loop system, we do not consider that this Guideline is the appropriate product for these entities. One-on-one engagement with these entities is more appropriate. The submitter queries why reliance on one or more relevant ATO public rulings is not a risk mitigating factor or even a qualifying condition for white zone status. This undermines the Commissioner's stated intention to improve certainty and instil confidence for self -assessment. The final Guideline provides a specific framework for how we assess risk associated with apportionment methods for these acquisitions. The framework does incorporate references to those ATO public rulings that are specific to credit card issuing businesses (GSTR 2019/2 and Goods and Service Tax Determination GSTD 2017/1 Goods and services tax: when is the supply of a credit card facility GST-free under paragraph (a) of Item 4 in subsection 38-190(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)? ). Goods and Services Tax Ruling GSTR 2006/3 Goods and services tax: determining the extent of creditable purpose for providers of financial supplies provides general guidance on apportionment for financial supply providers. It does not provide specific guidance on the design of an apportionment method for acquisitions in a credit card issuing business. In relation to paragraph 26 of the draft Guideline, the following should be clarified: The final Guideline sets out our compliance approach for GST apportionment. The final Guideline and the green zone in particular is our assessment of the likelihood that a taxpayer has correctly applied the law and therefore our compliance approach. It does not absolve taxpayers from applying the relevant GST provisions in determining their ECP rate, nor does it create a safe harbour rate for credit card issuers. Therefore, if a taxpayer determines that their ECP rate is below 35%, this Guideline does not allow them to increase the rate to the 35% green zone rate. Specifically, the first bullet point in paragraph 26 of the final Guideline recognises that taxpayers may have specific circumstances that result in an ECP rate for acquisitions in their credit card issuing business being below the green zone rate, which are reflected in their current position. In this situation, we may seek to understand whether a material uplift to the rate claimed is appropriate in their circumstances. The second bullet point in paragraph 26 of the final Guideline makes it clear that the fact that a taxpayer's ECP rate places them in the green zone is not an assessment of any particular method used to determine that rate. For instance, if you use an apportionment method that results in an ECP rate of 35% in one period as a weighted average across the relevant acquisitions, but updating the inputs in the method results in an ECP rate of 40% in a later period, the use of the higher rate would mean that you would no longer be in the green zone for that later period. You will need to reassess your risk rating. In relation to the transitional arrangements at paragraphs 31 to 34, a number of issues arise: Where a taxpayer meets the requirements in paragraphs 31 to 34 of the final Guideline in respect of the transitional period, they will be in the white zone for that period. We have clarified in paragraph 27 of the final Guideline that this is in addition to the other situations where a taxpayer will be in the white zone. You will be actively engaging with us if you are cooperating with us throughout the transitional period to transition your arrangements to the green zone. We will confirm with you whether you meet these requirements. Your engagement with us may occur through justified trust or another assurance product, through your client relationship manager, or by contacting FSIConsult@ato.gov.au to discuss your arrangements. In relation to Schedule 1 of the final Guideline, as discussed over the course of the consultation process that commenced in July 2019, you must have started to engage with us by 1 January 2020 to be eligible for these transitional arrangements. This has been clarified in paragraph 32 of the final Guideline. We take it that the penalties and general interest charge (GIC) remission referred to in paragraph 34 of the draft Guideline relate to the voluntary disclosure required under paragraph 32 of the draft Guideline, but point out that the implication of such a limited remission is that any taxpayer not falling within paragraph 32 will be subject to such penalties and GIC. This, in our view, provides an inappropriate impression to both taxpayers and ATO officers as to the approach to be taken to taxpayers falling outside the green zone during this period. There could be a number of reasons why a taxpayer does not (or cannot) comply with paragraph 32, and in which ATO officers would not otherwise issue assessments (and/or impose penalties and GIC). The transitional arrangements in paragraphs 31 to 34 of the final Guideline enable an option for taxpayers who wish to engage with us to transition their arrangements, allowing them to be in the white zone for this period (that is self-assessment of their risk zone is not required). In other situations, the imposition of penalties and interest will be considered on a case-by-case basis in line with our standard practices and procedure. The statement about penalties should not be construed as implying that taxpayers have failed to take reasonable care in apportioning input tax credits for financial supplies in a credit card business. The assumption that a taxpayer transitioning from a position other than the green zone should have to make a voluntary disclosure at the end of that transitional period, with all the implications of incorrect treatment and assumption of liability that this entails, is fundamentally unacceptable. Many taxpayers have current private rulings authorising technical positions diametrically different to those set out in GSTD 2018/D1 and the draft Guideline. Taxpayers should not be required to treat those long-held positions as invalid during any transitional period. A six-month transitional period is, in any case, entirely inadequate. In our view, transitional arrangements should be negotiated individually with different taxpayers, to take account of their unique product mix, systems, and technical positions. The Guideline has prospective effect for tax periods starting 1 January 2020 (which aligns with the date of effect of GSTR 2019/2). The transitional period is intended to assist taxpayers to transition to the green zone in circumstances where there are difficulties with meeting the green zone requirements immediately from 1 January 2020. For example, where additional time is required for system changes to be made and come into effect. We acknowledge the submitter's comments but respectfully consider that the transitional period provided is appropriate. The transitional period is a voluntary option, and is to assist taxpayers in implementing the green zone. If taxpayers want to discuss how the transitional period will apply to their specific circumstances, we encourage them to engage with us. Your engagement with us may occur through justified trust or another assurance product, through your client relationship manager, or by contacting FSIConsult@ato.gov.au to discuss your arrangements. We have sought to minimise the compliance impact for taxpayers through extensive consultation and the practical compliance approach provided in this Guideline. We consider adopting a consistent transitional period is the best approach to ensure a level playing field across the industry. We will continue to review private rulings to ensure there is consistency across the industry. Affected taxpayers will be notified by the ATO. The submitter fundamentally disagrees with the ATO's insistence on dismissing the transactor/revolver methodology (which is included in the red zone) and considers that the reasons for doing so have not been articulated. The final Guideline sets out our assessment of risk and the compliance approach that we are expected to adopt based on that risk. An apportionment method that uses a transactor/revolver method will be high risk, with the result that it will be a high priority for review. A transactor/revolver method has three steps: Our assessment is that the use of a transactor/revolver method is high risk, including because: The submitter fundamentally disagrees with the ATO's insistence on dismissing a methodology that treats acquisitions in the credit card issuing business as relating to taxable supplies of merchant services in the credit card acquiring business. The submitter considers that the reasons for doing so have not been articulated. Another submitter observed that the 'on-us' carve out in the blue zone methodology, and the corresponding 'red flag' in the red zone, would appear to conflict, conceptually, with other parts of the methodology that expect a taxpayer to 'look through' business units to relate acquisitions to supplies. That is, whilst acquisitions in other business units must be taken into account to the extent they relate to supplies in the credit card issuing business, there is no acknowledgment that an apportionment to 'on-us' supplies of inter-business interchange is really an apportionment to the taxable supplies made in the acquiring business unit (and so should be creditable to that extent, rather than taken to rely only to the supply of credit). We agree that the mere fact that an acquisition and a supply are made in different business units is not of itself a sufficient basis for concluding that apportionment is not appropriate. However an acquisition that has a relevant connection with the supply of interchange services in an off-us transaction will not necessarily have an equivalent connection to the supply of merchant services in the on-us context. Interchange services and merchant services are not the same and the supplies made by the entity are factually and functionally different. An objective analysis of the facts is required to determine whether the relevant connection can be established between an acquisition made in the issuing business and the supply of merchant services through the acquiring business. A similar analysis would be required to determine whether any of the acquisitions in the acquiring business have the relevant connection to the supply of the credit card facility by the entity, resulting in a requirement to apportion credits in the acquiring business. This analysis is required by paragraph 11-15(2)(a) of the A New Tax System (Goods and Services Tax) Act 1999 and is consistent with the principles set out in Goods and Services Tax Ruling GSTR 2008/1 Goods and services tax: when do you acquire anything or import goods solely or partly for a creditable purpose? , GSTR 2006/3 and GSTR 2019/2. Given the different factual matrix and relationships in the on-us context, we consider that most of the acquisitions in the issuing business identified in GSTR 2019/2 as having a relevant connection to interchange services do not have a relevant connection to the supply of merchant services in an on-us transaction. Any connection to the supply of merchant services in an on-us transaction is too remote. However, one area where the relevant connection might potentially be found to exist is for certain processing costs such as those necessary for authorising credit card transactions. In such a case, the corresponding processing acquisitions in the acquiring business would be expected to have a corresponding relevant connection with the supply of the credit card facility. Whether the relevant connection is established will depend on the particular facts and circumstances applicable to on-us transactions. The requirement to consider each acquisition from the perspective of both the acquiring and issuing businesses requires a higher level of assurance and is therefore not considered appropriate for a blue-zone methodology. A number of the factors and/or requirements outlined in the blue and red zones directly conflict with the Commissioner's own public rulings. For example, in Example 10 in GSTR 2006/3 the Commissioner accepts that a range of apportionment ratios may be available to be used as to apportion the intended use of acquisitions. However, in the draft Guideline, if a taxpayer was to similarly adopt this approach and a higher than 50%proportion of intended use to taxable supplies resulted, this is considered to be high risk. This illustrates the inherent inconsistency as between the Commissioner's existing binding principles-based rulings and the arbitrary (for example, 50/50 basis) ratios which form such an integral part of the Commissioner's assessment of risk in the draft Guideline. The inclusion in the red zone of any methodology which results in 'some acquisitions having a closer relationship to the supply of interchange services than to the supply of the credit card facility' means that (in the ATO's view) it is never possible to demonstrate a fair and reasonable apportionment involving a recovery rate of greater than50% for any class of acquisitions. This is, with respect, clearly wrong, and should be removed. The final Guideline sets out our assessment of risk and the compliance approach that we are likely to adopt based on that risk. As stated in the final Guideline, the apportionment methods included are for risk assessment purposes only, and should not be taken as a prescribing a specific method. Furthermore, the final Guideline is not to be taken as a statement that a method that is different to a method outlined in the blue zone will never be fair and reasonable. However, it reflects the compliance approach we will consider necessary to gain assurance as to whether an apportionment method that is not in the blue zone is in fact fair and reasonable in the circumstances. An apportionment method that treats some acquisitions as having a closer relationship to the supply of interchange services than to the supply of the credit card facility will be a high priority for review, and is therefore in the red zone. This position is based on our analysis of common acquisitions in a credit card issuing business, which is outlined in GSTR 2019/2. For the acquisitions that are identified as relating to both supplies, we have not seen anything to suggest that there is an objective basis for considering that these acquisitions are more closely related to the supply of interchange services than to the supply of the credit card facility. Note that the final Guideline does not limit the operation of the law or replace, alter or affect our interpretation of the law in any way. We also note that it is not possible for this Guideline to address every potential variation in individual circumstances, including every potential acquisition. The aim of the final Guideline is to be transparent as to our compliance approach according to our assessment of risk in this area. It is open for a taxpayer to demonstrate that an apportionment method is fair and reasonable in their circumstances and therefore reflects the correct application of the law (even if it has features within the red zone). We do not see any inconsistency with Example 10 of GSTR 2006/3. This provides an illustrative example of the process a financial supplier may go through in comparing and then selecting a fair and reasonable method in a different factual context involving a different acquisition and different supplies.",,,,,,,/law/view/pdf?DocId=COG%2FPCG20198EC%2FNAT%2FATO%2F00001&filename=law%2Fview%2Fpdf%2Fcog%2Fpcg2019-cp008.pdf&PiT=99991231235958,False,False,https://www.ato.gov.au/law/view/document?docid=COG/PCG20198EC/NAT/ATO/00001
COG/PCG20191EC1/NAT/ATO/00001,Unknown,Practical Compliance Guideline compendium,Draft,,,,,TR 2001/11,,"We continuously review the use and application of this Guideline and will review the outcomes of the changes in this update. Any future revisions will be made as necessary. In the final update, paragraph 7 has been adjusted for clarity. Taxation Ruling TR 2001/11 Income tax: international transfer pricing - operation of Australia's permanent establishment attribution rules provides relevant guidance on the attribution of income and expenditure to Australian permanent establishments. It is also noted that despite the updates made to some industry sector profit markers within the draft update, these profit markers still remain relatively high compared to benchmarking ranges we are currently experiencing in the market. This demonstrates the need for further clarity on the ATO's benchmarking approaches and what should be considered standard practice for Australian taxpayers. Therefore, we suggest that the ATO addresses some of the above comparability issues in the final update, to assist taxpayers with performing benchmarking studies aligned with ATO expectations. The Guideline does not replace an appropriate comparability analysis and proper application of the transfer pricing obligations under the law. A comparability analysis aims to find the most reliable comparables based on the facts and circumstances of each case. Given the importance of considering the specific facts and circumstances of each case, it is not the intent of the Guideline to provide generic guidance on the issues raised. Further, such generic guidance may be wrongly perceived as a pre-determination of the suitability of a particular approach without an appropriate comparability analysis based on the circumstances as required under the law. © AUSTRALIAN TAXATION OFFICE FOR THE COMMONWEALTH OF AUSTRALIA You are free to copy, adapt, modify, transmit and distribute this material as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).",,,,,,,/law/view/pdf?DocId=COG%2FPCG20191EC1%2FNAT%2FATO%2F00001&filename=law%2Fview%2Fpdf%2Fcog%2Fpcg2019-cp001c1.pdf&PiT=99991231235958,False,False,https://www.ato.gov.au/law/view/document?docid=COG/PCG20191EC1/NAT/ATO/00001
COG/PCG20198EC1/NAT/ATO/00001,Unknown,Compendium,,,,,,GSTR 2020/1,,"The green zone can only be used if more than 50% of the total number of transaction accounts provided do not involve the taxpayer making any taxable supplies of interchange services. It is recommended that the green zone should be available if interchange services could be provided to 50% of accounts regardless of whether the account holder uses that functionality. It would seem impractical to require the individual institution to have to periodically assess whether interchange has been used. The extent of creditable purpose (ECP) rate stipulated in the green zone (20% as a weighted average across all acquisitions to the extent they are for use in making supplies in transaction accounts business) is significantly below a fair and reasonable rate. It remains unclear as to how this rate was derived by the ATO and the data that was used to calculate the rate. The requirement that a taxpayer is not eligible to use the green zone if they do not meet the 50% threshold materially narrows the scope for a taxpayer to benefit from the green zone approach. The ATO should consider a broader range of circumstances in which taxpayers can satisfy the requirements of the green zone. Draft Schedule 2 to PCG 2019/8 does not provide any clarity on the ECP rate that taxpayers should apply in the event they have not met the 50% transaction accounts requirement for the green zone. The 50% threshold reflects that the ECP rate stipulated in the green zone is unlikely to appropriately reflect the circumstances of ADIs who mainly provide accounts that do not involve interchange supplies (for example, online savings or term deposit accounts, accounts primarily to settle trades). The ECP of the costs to provide such accounts is limited to the GST-free percentage (if any). Where a taxpayer does not meet this requirement, the remainder of the risk assessment framework in the final Guideline will remain relevant. We also encourage taxpayers to contact us to discuss their circumstances if they would like additional certainty in relation to their arrangements. The green zone is not a 'safe harbour' and the ATO should expand upon the circumstances (not included in the red zone triggers already) which would put a taxpayer's use of the green zone into doubt. If a taxpayer is in the green zone, we will generally only apply compliance resources to confirm they meet the requirements for this risk rating. This means we will not apply compliance resources to consider whether the apportionment method used is fair and reasonable, unless there are exceptional circumstances. Where a taxpayer is not in the green zone, they may be in the blue, yellow or red zone depending on the facts of their specific arrangements. Note that taxpayers are only in the red zone if they exceed the ECP rate stipulated to be in the green zone and have features in the red zone. In addition to this, paragraph 7 of the final Guideline explains that certain acquisitions are outside the scope of this Guideline, and that we may apply compliance resources to test risks that are beyond what is covered. Examples of risks we may test include whether taxpayers have correctly identified whether an acquisition is a reduced credit acquisition, and whether taxpayers have correctly identified an obligation to apply the reverse charge provisions. We have made it clear that it is not possible for this Guideline to address every potential variation in individual circumstances and we encourage taxpayers to engage with us if further guidance or additional certainty is required. In relation to on-us supplies, the ATO refers to issue 12 of the Compendium of comments on PCG 2019/D7 ATO compliance approach to GST apportionment of acquisitions that relate to certain financial supplies as the rationale for the ongoing treatment of on-us transactions as having no connection with taxable supplies. This rationale (as currently articulated) is not technically sufficient to sustain the ATO's position. If further interpretive guidance is required, taxpayers may engage with us (noting that the application of paragraph 11-15(2)(a) of the A New Tax System (Goods and Services Tax) Act 1999 will require a factual analysis of acquisitions from the perspective of both the issuing and acquiring business, as explained in Issue 12 of that Compendium). The requirements for a taxpayer to fall within the blue zone are extremely complex, onerous and necessitate that taxpayers comply with ATO views on contentious technical issues. Further, the level of protection that is afforded to a taxpayer in the blue zone is limited to the taxpayer being regarded as 'Low to moderate priority for review'. As such, the requirements are disproportionate to the benefits obtained. The final Guideline provides a comprehensive risk assessment framework for apportionment methods for transaction account acquisitions. With regards to the level of protection provided in the blue zone, it is noted that a taxpayer will only be in the blue zone if the ECP rate exceeds the rate stated in the green zone. In relation to the transaction count method (the methodology used for the formula at Step 4E of paragraph 65 of the draft Guideline to determine the ECP for other costs not identified in Steps 4A to 4D) reflects the ongoing misunderstanding that an interchange (taxable) supply is not a valid separate transaction to the related account supply. These are different supplies (with different GST classifications governed by different provisions in the Act and Regulations). The red zone includes any methodology which results in 'some acquisitions as having a closer relationship to the supply of interchange services than to the supply of the transaction account'. This suggests that in the ATO view, it is never possible to demonstrate a fair and reasonable apportionment methodology resulting in a recovery rate of >50% for any class of acquisitions. The ATO is yet to clearly outline the technical basis for this position. As such, an apportionment method that treats some acquisitions as having a closer relationship to the supply of interchange services than to the supply of the transaction account will be a high priority for review and is therefore in the red zone. The aim of the final Guideline is to be transparent as to our compliance approach according to our assessment of risk in this area. It is open for a taxpayer to demonstrate that an apportionment method is fair and reasonable in their circumstances and therefore reflects the correct application of the law (even if it has features within the red zone). However, the final Guideline reflects the compliance approach we will consider necessary to gain assurance as to whether an apportionment method that is not in the blue zone is in fact fair and reasonable in the circumstances. This position is based on our analysis of transaction accounts, outlined in GSTR 2020/1 Goods and services tax: determining the creditable purpose of acquisitions in relation to transaction accounts. Note that the final Guideline does not limit the operation of the law or replace, alter or affect our interpretation of the law in any way. We also note that it is not possible for this final Guideline to address every potential variation in individual circumstances, including every potential acquisition. This is consistent with the approach to similar issues raised in relation to Schedule 1 (see Issue 13 of the Compendium of comments on PCG 2019/D7 ). The Guideline uses pejorative labelling, such as labelling the red zone as 'high risk'. The Guideline also indicates that the ATO's compliance approach will consider methodologies that have features in the red zone as high priority for review. In addition, it is considered that the red zone, as identified in draft Schedule 2 to PCG 2019/8, is too broad as: The apportionment methods included are for risk assessment purposes only and should not be taken as prescribing a specific method. Furthermore, the final Guideline is not to be taken as a statement that a method that is not within the green or blue zone will never be fair and reasonable. However, it reflects the compliance approach we consider necessary to gain assurance as to whether an apportionment method that is not in the green or blue zone is fair and reasonable. Draft Schedule 2 to PCG 2019/8 targets highly factually specific scenarios and it is not possible for 'broad brush' guidance products to have sufficient regard to the individual circumstances of the target audience or to provide certainty.",,,,,,,/law/view/pdf?DocId=COG%2FPCG20198EC1%2FNAT%2FATO%2F00001&filename=law%2Fview%2Fpdf%2Fcog%2Fpcg2019-cp008c1.pdf&PiT=99991231235958,False,False,https://www.ato.gov.au/law/view/document?docid=COG/PCG20198EC1/NAT/ATO/00001
PCG 2018/3EC,Compendium,Compendium,Draft,,,,,CR 2015/80 | TR 2007/12,,"The term 'exempt vehicle' is highly misleading. A more accurate term would be concessionally taxed vehicles. It is difficult to identify what the compliance costs savings outlined by the Commissioner at paragraph 2 [2] would be or the practical utility of the Guideline. The Guideline requires the obtainment of detailed records/examination of an employee's private use of an eligible vehicle. As most employers will not be able to obtain such records without considerable effort, the great majority of employers will find that the Guideline offers no assistance. It would be extremely rare for an employee's private use to be limited to the private kilometres travelled as outlined in paragraph 5(g). As such the utility of the Guideline is limited and it is overly restrictive. It will make compliance for those who try to do the right thing even more troublesome. Those that abuse the car-related exemptions will continue to do so. The use of practical compliance guidelines are a good idea. However, the application and practical nature of guidelines considerably reduces their benefit. In the context of the car-related exemptions there are a number of legislatively prescriptive tests to be satisfied. The Guideline then seeks to add an additional three more requirements that an employer must apply to determine if the private use is exempt to access the car-related exemptions. These requirements are more onerous than what is currently required under the legislation. For this reason, we would not seek to rely on it as it creates additional compliance in order for us to ensure that we satisfy the requirements. It is for this same reason we also do not rely on Practical Compliance Guideline PCG 2016/10 [3] , as it equally also creates more compliance if we wished to apply the simplified approach to our business use percentage. An employer could only rely on the Guideline where they have fulfilled the requirements of the Guideline (including monitoring private use) and the employee's private use of the vehicle was slightly more than minor. If the use was minor, the vehicle would already meet the car-related exemptions. Accordingly the Guideline is limited in its practical utility. The Guideline is likely to result in misuse of the car-related exemptions or result in employers not accurately reporting their FBT liability. Consideration should be given to practical scenarios for example where eligible vehicles are used for private journeys for safety reasons. The Guideline appears to be predicated on the basis that all kilometres travelled are business unless they have been recorded as private use. If employees are required to maintain records of their private use in order to rely on the Guideline than the Guideline does not reduce compliance costs as this is not currently required in order to access the car-related exemptions. The Guideline has not identified a means for employers to track and assess these parameters which is not administratively burdensome and counter to the stated intentions of the Guideline. A clearly stated employer policy on the appropriate use of the eligible vehicles together with the collection of employee declarations confirming the appropriate use is a reasonable approach which meets the stated intentions of the Guideline. The Guideline does not outline the Australian Taxation Office (ATO) view on the operation of the car-related exemptions and operates within the existing FBT law. It does not represent a change in ATO view. The requirements that an employer is to satisfy to rely on the Guideline have been clarified, in order to reduce compliance costs and increase the utility of the Guideline. The Guideline should be restricted to applying to privately owned companies as this is where the risk would lie. Listed companies have measures in place to ensure private travel is limited. The ATO has identified instances where employers (both small and large business employers) incorrectly apply the car-related exemptions. For more information on the behaviours and characteristics that may attract our attention in relation to FBT, refer to What attracts our attention . The Guideline should make a distinction between those using eligible vehicles for itinerant work and those that work mainly at a single location. A deemed private use percentage could apply to itinerant workers based on a comparative sample of log books for similar occupations. The significant difference between eligible vehicles and other non-commercial vehicles is that work-related travel in an eligible vehicle is exempt. In outlining a private use percentage that will not result in a FBT liability for an employer it could significantly change the 'business use' percentage that would otherwise be achievable for a non-commercial vehicle. This would enable employers to consider adopting the operating cost method and pay some FBT where the vehicle is being used more than an acceptable amount for private use. Where the employer chooses to rely on the Guideline and satisfies the requirements in the Guideline, the employer can access the car-related exemptions. The vehicles that the Guideline applies to are work vehicles, often used to carry equipment to job sites, and are commonly used by tradespeople. This Guideline does not appear to consider the work related travel these vehicles undertake during the day in addition to the home to work/office travel, which then limits the practical application. The examples that have been included in the Guideline are overly simplistic. In the examples, noting example 1 for ease, the 30,000 kilometres can be determined relatively easily by calculating the distance from the employee's home to work/office. This will not be possible where the employee travels to different work sites each day, which is consistent with many tradespeople who drive these vehicles and where the business travel is not a consistent amount each day. The equation being used where you take 30,250 less the 30,000 'home to work' allowance does not allow for travel at work, which would make this example worthless. In reality there will be much more than the 30,000 business kilometres travelled. That is, 30,000 between the employee's home and work/office plus, for example, another 20,000 to undertake the work which requires the use of the vehicle during the day. This travel may be between home and the job site, or between the work/office and a job site. The vehicle would then have travelled 50,250kms and the exercise will be to determine how much of the 20,250 kilometres is private. This Guideline will only provide assistance in very limited circumstances, that is where the vehicle is only driven between the home and business premises. The Guideline is based on the proposition that an employee's work related travel could be easily determined based on the distance between their home and work. The Commissioner of Taxation acknowledges that in some instances it may be difficult to determine the number of private kilometres travelled based on the odometer reading for the purposes of the Guideline. By removing the requirement that employers conduct checks of odometer readings to compare business kilometres and home to work kilometres travelled by the employee against the total kilometres travelled; it will reduce the record keeping requirements and compliance costs for employers. The examples have been amended to illustrate where an employer is able to rely on the Guideline. The compliance approach outlined in the Guideline provides an alternative way an employer can determine if they satisfy the car-related exemptions. Adherence to the approach is optional. Employers will need to determine if it is suitable for their individual circumstances. Where it is difficult to adhere to the requirements of the Guideline, the employer will need to rely on the relevant provisions of the FBT law to determine if it can access the car-related exemptions. The Guideline should define what is non-work related travel to make the distinction between work-related travel and limited private use clearer. That is, it should outline that non-work related travel is other private use of the vehicle by the employee or an associate of the employee which is minor, infrequent and irregular. It then should outline that for non-work related travel, the use by the employee or associate must satisfy all three terms: minor, infrequent and irregular. The Guideline currently outlines what is considered to be minor travel at subparagraphs 5(g)(ii) and (iii) and does not clarify what travel is considered to be irregular and infrequent. It would be helpful for the Guideline to outline what is infrequent and irregular travel (for example, infrequent of less than three other private journeys and irregular if other private journeys were to different destinations or one-off by reference to a log book and employee declarations). This will ensure adherence to the legislative requirements that non-work related is minor, infrequent and irregular. In order to satisfy paragraph 5(a) a panel van or single cab ute must be designed to carry a load of one tonne. The payload capacity for accessing the car-related exemptions should be increased to 2,000 kilograms in order to reflect a proper commercial vehicle and that the plethora of 4x2 and 4x4 vehicles with 1,000 kilograms payload capacity are no longer available. By limiting the compliance approach to eligible vehicles it will result in employers and employees purchasing these vehicles solely to take advantage of the exemption. The Guideline needs to make it clear whether it relates to the car-related exemptions under both subsections 8(2) and 47(6) and those vehicles with a load capacity under one tonne and in excess of one tonne. While both these subsections are mentioned at paragraph 1 all the examples refer to vehicles with less than one tonne carrying capacity. Clarity is needed as to whether an e-bike is an eligible vehicle and to what extent the Guideline applies to e-bikes. The Commissioner has considered that an E-stralian electric bicycle is an eligible vehicle in Class Ruling CR 2015/80. [7] However, that class ruling only applies to the defined class of entities who take part in the scheme as described in that Ruling. Refer also to ATO Interpretative Decisions ATO ID 2001/313 [8] , ATO ID 2009/140 [9] and ATO ID 2010/163. [10] In order to be an eligible vehicle the vehicle must not be designed for the principal purpose of carrying passengers. Miscellaneous Taxation Ruling MT 2024 [11] outlines the formula for determining carrying capacity at paragraph 15 by reference to 68 kilograms. This figure should be reviewed as it is outdated according to the Australian Bureau of Statistics and may be understated by 20 kilograms. Providing a defined guideline for an issue that has broad application across a range of industries and employers should not be applied retrospectively. This Guideline should be finalised and issued for employers to adopt in the next FBT year (that is from 1 April 2018). This will allow appropriate processes and systems to be put into place to capture the information required for testing compliance with the Guideline. It will also allow for employees to be informed about the changes and amendments to be made to manuals and other documentation. PCG 2017/D14 sets out the Commissioner's compliance approach for car and residual benefits provided in the 2018 FBT year where employers, who satisfy the requirements in paragraph 5 of the earlier draft PCG, have chosen to rely on the earlier guideline. In order to ensure the Guideline has practical utility, rather than prescribing the three requirements at paragraph 5(g), it should outline one single requirement that must be satisfied. The requirement should outline that any private travel that does not exceed a certain kilometre threshold (for example 1,000 or 750 kilometres) in total per annum is minor or prescribe a maximum overall percentage of private use that is allowed (for example that travel undertaken for a wholly private purpose not exceed 1 to 10% of the total work-related kilometres travelled in the eligible vehicle for the FBT year). This would be a practical and workable solution. Most employers already apply such an approach when eliminating private travel especially where they have a large fleet of eligible vehicles. The current three requirements are onerous and result in additional compliance for employers. Furthermore, in prescribing a percentage single requirement, it would overcome the current discrimination between employees located in regional compared with city areas. It would allow a number of private kilometres relative to use rather than an arbitrary number and reflect pattern of use. Prescribing a maximum overall percentage of private use that is allowed may require a log book to be kept for a 12 week period, but that would be far more practical than trying to track the three requirements at paragraph 5(g). If the maximum percentage approach is adopted in the Guideline, the Guideline could outline that where the log book demonstrates less than allowed percentage is used, no further action needs to be taken by the employer. However, it could then outline that if the percentage of use is greater than allowed in the Guideline, the employer can then choose to adopt the operating cost method and apply FBT on the amount over the allowable percentage. The use of a maximum overall percentage may create distortions and inequities amongst employers and lead to additional monitoring requirements. In particular, applying a maximum overall percentage is necessarily retrospective as employers will not know until the end of the FBT year (when the total kilometres travelled are known) if they can rely on the Guideline. See also the ATO Response to Issue 5. By using the kilometre requirements in paragraph 5(g), the Guideline is inconsistent with Taxation Ruling TR 2007/12. [13] Taxation Ruling TR 2007/12 provides an example of the application of the minor, infrequent and irregular tests in section 58P to a car benefit at paragraphs 73 to 75. In applying the test, TR 2007/12 does not focus on the distance travelled for each of the journeys. Instead, it looks at the value of each of the benefits (to determine if the notional taxable value using the cents per kilometre method was less than $300), how often the benefits were provided and whether the benefits were provided on a regular basis. The same approach should be adopted when considering the minor, infrequent and irregular test in subsections 8(2) and 47(6) and for the purposes of this Guideline. The requirements in paragraph 5 are arduous. It is understandable that the Commissioner would want to limit the application of the compliance approach but rather than create arbitrary guidelines, the existing rules should be refined (for example, no business accessories and limiting the engine size). Furthermore, the requirements at paragraph 5 relate to the determination of whether a benefit has been provided, rather those that relate to the classification of a benefit as an exempt benefit or fringe benefit. The Guideline should outline that to qualify for this exemption, the vehicle must be used in the prescribed way for the entire FBT year or for the period the vehicle was held. So, for example, the exemption won't be available at all where an employer provides an employee with a vehicle for the entire year but they only use it in the prescribed manner for half the year. The Guideline should clarify what evidence an employer is required to maintain in order to demonstrate that the vehicle is provided to the employee to perform their work duties and, to this extent, satisfies paragraph 5(b). The requirement in paragraph 5(b) should be expanded to make it clear that it includes eligible vehicles used by service providers in performing their work duties (for example where the employee provides a service like a plumber and the vehicle is a tool of trade necessary to deliver the service). The requirement that the vehicle be provided to an employee in performance of their work is strict given that no similar requirement is needed in the legislation. The requirement is vague and difficult to enforce. In particular as industrial relations issues may prevent the installation of GPS tracking devices to monitor private use and employers cannot force employees to declare their level of private use. Rather than imposing additional record keeping requirements reference should be made to the record keeping requirements in the FBT legislation (in particular section 7), the Fringe benefits - a guide for employers or Miscellaneous Taxation Ruing MT 2034. [14] The requirement to monitor private use is strict given that there is no requirement to substantiate private use is limited in the FBT legislation. Accordingly, if private use is minor, infrequent and irregular employers would not need to rely on this Guideline; limiting the practical utility of this Guideline. Employers are already required to monitor private use as outlined in paragraph 5(c) in order to rely on the car-related exemptions. This Guideline then requires employers to calculate what the reasonably expected work-related travel is in order to calculate the difference. This may not be particularly practical, given that employees are not always diligent at providing odometer records and where the business travelled each day is not consistent. A comparison of the annual odometer reading and the employee's estimated annual travel distance between work and home would not produce a reliable estimate of the employee's wholly private travel during the period. The term 'reasonable steps' should be defined or removed as it is open to interpretation and will lead to requests for private rulings. Guidance should be provided on how an employer is to 'take all reasonable steps to limit private use of the vehicle' and how the employer should monitor that the kilometres travelled do not exceed the requirements of the Guideline. At the moment the only guidance is provided at footnote 5 and paragraph 12. As such greater certainty around the expectations of an employer to monitor its processes for limiting private use should be provided. For example the Guideline could note that paragraph 5(g) would be satisfied if their employer conducts a sample audit of 5% of eligible vehicles and checks odometer readings employee role, work locations and GPS records. Alternatively it could outline logbooks illustrating less than 175 kilometres of private travel over 12 weeks is sufficient for substantiation and an employer is able to rely on the Guideline for a period of three years based on the log book provided there is no substantial change to circumstances. It is implied that employers must monitor the use of the vehicles and check they meet the requirements of the Guideline annually by comparing total kilometres travelled to home to work travel and wholly work trips. However, there should be evidential checks and monitoring carried out throughout the year in the form of a diary or logbook. The Guideline should also specify that an employer policy stating only limited private use is allowed would not be considered sufficient to be eligible for the exemption. Evidence would need to be obtained to show that the vehicle is not used whilst they are on annual leave and the employee has another vehicle available for them to use within their family unit. Additional evidence that would illustrate work-related use should also be obtained (for example, nature of work undertaken by the employee and whether tools and equipment are required to be carried). The suggestion at example 1 of an employer demonstrating that a policy is monitored is likely to require an employer to undertake the collection of data from various sources and analysis of the data to determine if the requirements of paragraph 5(c) have been met is burdensome. Few employers would be able to obtain such records without considerable effort and as such most employers will not likely rely on the Guideline. Rather than requiring monitoring, the Guideline should note that records are not required to be maintained if the employer has policies in place to limit private use and employees confirm adherence to the policies through obtaining declarations. Alternatively it should allow for a sampling exercise to be undertaken to determine, the level of private use. This is a reasonable and less administratively burdensome approach to monitoring the permissible use of the vehicle. There is an inherent point of confusion between the reliance expressed in paragraph 6(a) and the record keeping requirements under paragraph 5(c). These requirements are mutually exclusive. The examples have also been amended to illustrate where an employer is able to rely on the Guideline. By removing the requirement that employers conduct checks of odometer readings to compare business kilometres and home to work kilometres travelled by the employee against the total kilometres travelled; it will reduce the record keeping requirements and compliance costs for employers. Employers are required to maintain oversight of an employee's use of the vehicle in order to rely on the Guideline and to communicate with their employees in relation to their use of the eligible vehicle to ensure they satisfy the requirements at paragraph 6. The use of the term non-business accessories in subparagraph 5(d) is confusing. It is unclear whether a new term is intended to be introduced to refer to a safety accessory or whether it is a reference to the term as defined in the legislation. Footnote 6 introduces a distinction between non-business accessories and non-business safety accessories. Many non-business accessories improve the quality and sustainability of the vehicle as a workplace and in turn improve the work place health and safety of the employee. In particular where the distances travelled are significant and non-business accessories are a necessary part of the safe operations of the vehicle. For example, a sophisticated stereo system for work-related long distance driving which would greatly benefit the mental health of the employee. Such a non-business accessory is added by an employee to personalise their work environment and allows them to better perform their duties where they spend a lot of time travelling for work. The non-business accessories requirement should be removed. It is unnecessary to exclude vehicles with non-business accessories for no sensible reason. The majority of vehicles are now sold with accessories that may be non-business accessories (and may not be a safety accessory) such as GPS systems. This will result in the majority of vehicles not satisfying the requirements in paragraph 5. The motivation behind this particular requirement is an assumption that non-business accessories tend to point against the position that the purpose of the provision of the vehicle is primarily for work purposes. However, there is no express requirement in the legislation for such a requirement. It is unclear why regard is needed to be had to non-business accessories where the luxury car tax threshold requirement at paragraph 5(e) would ensure that vehicles fitted with expensive accessories do not fall within the Guideline. Similarly, the requirements in paragraphs 5(b) and 5(f) also ensure that there is no misuse of the Guideline. Whether or not a non-business accessory is fitted to the car does not reflect the vehicles use. That is a vehicle may be fitted with a tow-bar and trailer to enable the employee to transport its yacht on the weekend. The tow-bar or trailer does not reflect the actual use of the vehicle which is the relevant consideration for the purposes of accessing the car-related FBT exemptions. Additional guidance should be provided as to what constitutes a non-business accessory. Clarity should also be provided around whether floor mats, protective coatings or paint protection (which are used for business purposes to protect the vehicle from wear and tear and increasing the vehicle's effective life) are non-business accessories for the purposes of the Guideline. Whether a particular accessory is a 'business accessory' depends on the specific circumstances of the employer's business operations and may be fitted for commercial reasons. Reference should be made to 'non-business accessories not directly related to the employee's work' where the intention is for vehicles fitted with accessories that are inherently private in nature being excluded from the Guideline. The ATO view of the definition of 'non-business accessory' should be reviewed. It is unclear whether window tinting (where this is required under the relevant occupational health and safety guidelines for an employer) would result in the vehicle being excluded from the Guideline. This is particularly so given that under the current ATO guidance, window tinting is considered to be a non-business accessory (ATO Interpretative Decision ATO ID 2011/47 [15] and chapter 7.4 of Fringe benefits tax - a guide for employers). Accordingly, the footnote should note that window tinting or nudge bars (in particular where they are fitted to vehicles used in regional areas to cover animal strikes and off-road site access) are safety non-business accessories. Alternatively the requirement should be that the employer has a safety policy that requires the vehicle to be fitted with safety accessories. Vehicles with non-business accessories such as paint protection, fabric protection and window tinting may satisfy the car-related exemptions and be exempt from FBT. Excluding such vehicles from the Guideline is confusing and not helpful in assisting employers to comply with their obligations because it indicates to the employer that fitting non-business accessories means the car-related exemptions do not apply. Some accessories may be added for marketing and signage purposes and the addition of such accessories should not result in the vehicle being excluded for the purposes of the Guideline. It is beyond the scope of the Guideline to outline the ATO view on what is a business accessory. The ATO will engage in further consultation to identify if further guidance is required, or if our current ATO view requires clarification, in respect of non-business accessories. The Guideline should clarify whether the fitting of a child seat to an e-bike will result in the car-related exemptions not being available to e-bikes based on the Guideline. It is not clear why the vehicle, in order to satisfy the requirements of the Guideline, must have a GST-inclusive value less than the luxury car tax threshold. This requirement creates inequity between employers in different industries and limits the utility of the Guideline. This requirement should be removed as: The inclusion of this requirement means that most employers cannot rely on it. The requirements in paragraphs 5(b), 5(d) and/or 5(f), together with paragraph 5(g), are sufficient to ensure that there is no misuse of the exemption without the need to have regard to the value of the vehicle. Consideration should be given to referring to the car depreciation limit as the legislation in relation to luxury car tax considers cars that may not be eligible vehicles and in determining the cost of a car for FBT purposes reference is made to the car depreciation limit rather than the luxury car tax threshold. Further context is required to understand the purpose of this requirement. In particular, how it applies in practice, the background and rationale given that this does not reflect how a vehicle is selected and used which is the relevant criterion. The requirement should be removed. The motivation behind this particular requirement is an assumption that salary packaging tends to point against the position that the purpose of the provision of the vehicle is primarily for work purposes. However, there is no express requirement in the FBT legislation. Any attempt to prevent the provision of an exempt vehicle by way of salary packaging should have a legislative fix. In addition, it is unclear how the Guideline applies in the context of novated leases or if it is intended to apply to novated leases. If it applies to novated leases it may result in the type of vehicles provided under a lease being exempt vehicles only. It may be reasonable to assume there would be a greater level of private use if someone is prepared to enter into a salary packaging arrangement for a vehicle. An employee may choose to salary sacrifice part of the purchase price to upgrade from the standard vehicle offered by their employer and in this instance the employer should be able to rely on the Guideline. A better approach may be to compare the kilometres travelled to the fuel costs. This is as a fuel card is often provided for work related travel by employers but employers are unlikely to provide fuel for private travel. Alternatively all of the requirements should be defined in percentage terms rather than in fixed kilometres in order to reflect relative usage of a vehicle for employment as opposed to minor private use. The numeric requirements imposed are extremely prescriptive and requires precise monitoring that does not reflect the pattern of use of the vehicle. In particular in situations of high employment related mileage and/or where employees are living long distances from their workplace. Accordingly the parameters should be more realistic. The three kilometre requirements, and in particular their interaction, are not well expressed. They appear to read as if all three need to be satisfied for a FBT year. However the examples do not support this interpretation. The subparagraph should be redrafted to make its intention clearer. Miscellaneous Taxation Ruling MT 2034 and TR 2007/12 should also be considered in this context. Miscellaneous Taxation Ruling MT 2034 allows for the c/km method as an appropriate means of valuing the usage of a residual vehicle and TR 2007/12 allows for the application of the $300 threshold to be applied per journey. When you calculate a taxable value in accordance with these rulings, you could reduce the taxable value to $nil whereas under the Guideline, the usage would not be considered acceptable. On this basis the requirements in subparagraph 5(g) should be expanded to be more generous in line with the way Australians live and work and to align more closely with the outcomes in MT 2034 and TR 2007/12. There is no one size fit all approach and the requirements in paragraph 5(g) should allow for different locations. That is the concessions should be more concessional. The application of extremely limited travel distances, such as the two kilometre diversion, the 750 kilometre annual allowance and the 200 kilometre single trip (as outlined at paragraph 5(g)) does not provide any differentiation between city based use versus regional use. The distances travelled in regional areas are often far greater than those in the city, so it is unfair to apply the same kilometre requirements. Different requirements should be applied depending on whether the vehicle is required by the employer to be utilised in regional areas as opposed to city travel. Accordingly, the kilometre distances should be increased to account for the distance travelled in regional areas and the additional cost of conducting business in regional areas. This would, in turn, will assist in attracting and retaining employees in regional areas. It otherwise creates an unjust advantage where an employer is denying an employee to use an eligible vehicle in a regional area for private use because of the distances involved when similar travel by an employee located in the city would be considered limited private use and exempt. For example, an employer may be denying an employee in a regional area travel in a medical emergency (which is often more than a 250 kilometre return trip with no public transport available) because such travel would result in a FBT liability. In practice, upon preparing a FBT return, such an employer may not accurately record their FBT liability for the vehicle as it would not recall the event as it would have been one-off, infrequent and an unusual event. In particular when, compared with the distances travelled for work-related purposes by employees in regional travel the 250 kilometres would be minimal. A city based employee would, comparatively, need to travel only a quarter of the distance to seek medical assistance in an emergency. The private kilometres for employees located in regional areas should be increased to allow for a five to 10 kilometre diversion (at subparagraph 5(g)(i)), a total of 1,000 to 1,500 kilometres for each FBT year (at subparagraph 5(g)(ii)) and a single return trip of 400 kilometres (at subparagraph 5(g)(iii)). Alternatively, the requirements at paragraph 5(g) should be based on the percentage of personal use. Paragraph 5(g) should be revised to outline that where the kilometres travelled for wholly private use does not exceed 1% of the total kilometres travelled in the eligible vehicle such travel would be considered minor, infrequent and irregular (with no threshold for a single journey as currently required in subparagraph 5(g)(iii)). Based on the current 750 kilometre requirement in subparagraph 5(g)(ii) this would allow private travel undertaken by a city based employee whose odometer reading was 75,000 kilometres for the year to be exempt if it did not exceed 750 kilometres and for a regional based employee whose odometer reading was 150,000 for the year for private travel that did not exceed 1,500 kilometres to be exempt under the Guideline. This would allow for a regional based employee to travel to their nearest city several times a year and ensure remote and regional employers are not restricted in applying the Guideline. See also the ATO Response to Issue 13. The diversion should be increased (for example to 10 kilometres) and guidance should be provided on how the distance between home and work is calculated. The current two kilometre diversion is unduly restrictive in particular for drivers of eligible vehicles in rural areas, those that live a significant distance away from work and situations of high employment related mileage. The parameters should be more realistic and consider situations of travel congestion or other legitimate reasons for variances (for example, road work detours). It is onerous and impractical for an employer to track every kilometre travelled. In order to meet the requirements, the employer would need to undertake a detailed analysis of diversions and maintain records far more stringent than those currently required by the FBT legislation; increasing compliance costs. Rather than applying a fixed kilometre limit, the Guideline should adopt a compliance saving method for how an employer is required to determine any diversions of more than two kilometres or a percentage method. The term diversion should be defined. It is inconsistent with the long held ATO view and FBT legislation that work-related travel must be exclusively for business purposes or travel solely between work and home. It will be difficult to monitor travel to ensure it amounts to a diversion of no more than two kilometres in order to apply the Guideline. If this subparagraph is always meant to apply, then the condition seems to say that the only permissible travel is home to work with minor diversions. It seems the intention of the conditions is to say if the employee uses the vehicle to travel between home and work that any diversion should not add more than two kilometres. The only explanation as to what is a diversion is provided by the examples where: Putting aside the obvious comment about an employee who drives these types of vehicles being more likely to stop for coffee and/or breakfast/lunch, rather than a newspaper, the question has to be asked as to what factors distinguish the 2 situations. Both involve the employee travelling to a place that is not a work place and not home to do a private activity. Further, if driving to the shop to purchase 1 item (a newspaper) is a diversion, does the classification change if the employee purchases several items (eg. the employee does his or her weekly grocery shopping? If so, at what point does stopping at a shop cease to be a diversion?). However, in reality this is all theoretical as from a practical perspective, it is questionable as to whether anyone (other than the employee) will know an employee has stopped to purchase a newspaper, coffee or breakfast on their way to work. Further, home to work journeys are not recorded in the log book and even if they were, the rounding differences that occur when recording odometer readings will always create a difference between the calculated total distance between home and work and the actual distance recorded on the odometer. For example, assume: The calculated distance travelled for the year = 480 x 20 kilometres = 9,600 kilometres Distance travelled (according to the odometer) = 41,282 - 30,250 = 10,032 (a difference of 432 kilometres as compared to the calculated distance). In the context of the 4.3% difference created by rounding and the record keeping provisions (which do not require continuous logbooks to be kept), the diversion concept is a meaningless concept and subparagraph 5(g) is impractical to administer. The Guideline should clarify that 'place of work' does not need to be the employee's main place of work and includes place of work in which the employee performs the majority of their duties for the day and have regard to the modern working scenarios where there is a change in work locations. This requirement should be amended to reflect a 'no more than 5% wholly private purpose test' rather than a specific reference to a distance travelled. This would ensure that there is no discrimination between regional and city employers or where employees live a significant distance away from work. It is unclear why this requirement is necessary. This requirement by itself does not make sense. However 200 kilometres seems to be a reasonable amount. In order to prove to the Commissioner that the requirements in the Guideline are met, detailed records would need to be maintained and, rather than reducing record keeping requirements it increases them. The Guideline should provide less onerous record keeping requirements than those already in the existing legislation. The Guideline currently requires employers to maintain records that are potentially more than they would need if they did not rely on the Guideline. Rather than introducing new concepts, the Guideline should rely on the same record keeping required for car benefits, that is, log books and employee declarations relying on an estimated private use (see paragraph 15 of MT 2034 and paragraphs 26 and 27 of MT 2034). It is unclear what records are required to be maintained in order to demonstrate to the Commissioner that an employer satisfies the requirements and does not need to keep records or determine if the car-related exemptions apply. Furthermore, it should be made clear that the only records that are required to be maintained where the requirements in the Guideline are met, are the records that demonstrate that the employer complies with the Guideline. Most employers would still require a declaration for substantiation purposes from their employees for exempt benefits. This requirement should be removed to protect integrity of the car-related exemptions and ensure compliance. The Guideline should instead outline that no records are required to be maintained if a declaration is obtained from an employee that the private travel in the vehicle was limited to that outlined in paragraph 5(g). By not requiring records to be kept; it may result in fabricated log books in particular where the vehicle is provided as part of a novated lease. This paragraph is inconsistent with paragraph 7 and the requirements of each should be clarified. An employer can choose not to rely on the Guideline and instead rely on the relevant provisions of the FBT law to determine if they can access the car-related exemptions. The Guideline outlines the Commissioner's compliance approach to determining private use of eligible vehicles. It is intended to outline a sensible and efficient approach to the Commissioner's administration of the car-related exemptions. The view expressed in the Guideline that the 'Commissioner will not devote compliance resources' where the vehicle satisfies the requirements of the Guideline is unhelpful for most employers. The Commissioner should outline that vehicles that satisfy the requirements of the Guideline will be treated by the Commissioner as being exempt from FBT. It is unclear what the ambit of this measure is. This requirement should be removed to protect integrity of the car-related exemptions and ensure compliance. The requirement in this paragraph is somewhat contradictory to the comments contained in paragraph 6(a). It is not clear how employers would demonstrate that they had checked that they continued to meet the requirements in paragraph 5, if they don't need to keep records as indicated by paragraph 6(a). Additionally, it appears to impose an additional compliance burden. As a result the Guideline does not take any significant steps to reduce the administration employers are currently doing in practice, and/or it imposes a greater compliance burden on employers. Typically, employers will have a clearly articulated policy outlining what is reasonable private use of a vehicle, and will collect declarations from employees at year end, confirming that they have adhered to the policy. An employer can choose not to rely on the Guideline and instead rely on the relevant provisions of the FBT law to determine if they can access the car-related exemptions. The Guideline outlines the Commissioner's compliance approach to determining private use of eligible vehicles. It is intended to outline a sensible and efficient approach to the Commissioner's administration of the car-related exemptions. Example 1 should be changed to an in-eligible vehicle such as a dual cab as this is the most common eligible vehicle provided by employers. As such a vehicle is able to seat five passengers an employer providing such a vehicle would not be able to rely on the Guideline as the vehicle would be considered to be designed principally of the carriage of passengers in accordance with MT 2024. Example 1 outlines that the employer 'conducts checks to monitor the kilometres travelled' and notes the kilometres travelled. However, at paragraph 6 the employer is not required to keep records about the employee's use. It is unclear how the employer is required to demonstrate to the Commissioner that it has conducted checks where it has not kept records as outlined in the Guideline. The comment is vague and needs greater clarity to outline what checking or monitoring is required and what other supporting evidence is required to be maintained to demonstrate that monitoring occurred by way of examples. Employers may feel a log book is the best way to demonstrate their travel is monitored and private kilometres are limited. The Guideline should outline how an employer would determine and substantiate that on 10 occasions the employee transported their niece to school on 10 occasions during the FBT year. A third point should be added at paragraph 13 to note that there was no single trip greater than 200 kilometres. The example should make it clear that carrying a passenger results in the travel being included within the 750 kilometre limit whether or not the diversion adds more than two kilometres to the overall home to work trip (that is that it results in the travel not being work-related travel). The number of times it is accepted that private use is 'minor, infrequent and irregular' in transporting their niece to school should be revised from 10 occasions to one occasion. Refer to Marks, B 1991, Understanding fringe benefits tax in Australia, 3rd edition, CCH Australia, NSW, p. 324 as well as ATO ID 2012/98 pursuant to which it would not be considered that the transportation of the niece to school on 10 occasions is minor, infrequent and irregular such that the car-related exemptions would apply to exempt the travel from FBT. It is unclear how if the eligible vehicle is provided to perform work duties the 30,000 kilometres travelled relates to home to work travel and the total travel is 30,250 kilometres. The requirement that the employer take an odometer reading and compare it to the expected kilometres travelled between home and work is not practical or realistic. It places additional compliance burdens on an employer to determine what the home to work kilometres should have been. Further, in practice it would be difficult to determine the kilometres of work-related travel where an employee travels in the course of their day for work. Consideration should be given to adding an odometer check requirement as described in this paragraph to paragraph 5 as an odometer check is not currently a requirement. The only way an employer could conclude that the business kilometres was 30,000 out of 30,250 kilometres would be to maintain a log book for the full FBT year. This is more onerous than the current legislation requirements. In addition comparing business kilometres to home to work kilometres with total kilometres travelled will not show: In this regard, example 1 is very confusing as it states: An employer can choose not to rely on the Guideline and instead rely on the relevant provisions of the FBT law to determine if they can access the car-related exemptions. The example should outline that if based on the legislation the benefit is not exempt, the vehicle will result in a car fringe benefit being provided. In such a circumstance, the example should make it clear that all the private use of the vehicle will be taken into account in the calculation of the taxable value of the benefit. If no logbook record is maintained (for example, because the employer incorrectly relied on the Guideline), the statutory formula method must be used to value the value of the car benefit. For information on how to calculate the taxable value where a car fringe benefit is provided, refer to Chapter 7.2 of the Fringe benefits tax - a guide for employers. While this example is useful as it extends the 'one trip to the tip' example further (and allows the employer to treat vehicles with more personal travel as exempt), the only way an employer could demonstrate that 750 kilometres of the total kilometres travelled is for personal use is to maintain a log book for the whole FBT year. This is more onerous than the current legislation and it is unlikely employers will have sufficient records to be able to substantiate the 750 kilometres. An employer can choose not to rely on the Guideline and instead rely on the relevant provisions of the FBT law to determine if they can access the car-related exemptions. The Guideline should make it clear whether or not the travel undertaken to move residences would be exempt under section 58F as a benefit in respect of relocation travel. For example, it should outline that the change in residence is not undertaken in order to perform the duties of their employment. In particular as the distance between the employee's home to their new residence is approximately 33 kilometres; it could mean that the employee was relocating to be closer to work. The example should make it clear that the car-related exemptions would not be available based on the private use of the vehicle by the employee and a car benefit has been provided. The Guideline illustrates the application of subparagraphs 5(g)(ii) and (iii) in examples 3 and 4 which can be summarised as follows: In applying subparagraph 5(g), the Guideline concludes that the travel in example 3 is exempt, but the travel in example 4 is not minor. The reason given for the different outcome is that the return trip in example 4 is more than 200 kilometres. In view of the guidelines provided for section 58P in TR 2007/12, this conclusion is very harsh as the total value in both examples is the same. Further, the value in example 4 is only $189 and it is a 'one-off' trip. While a 'one-off' trip can cause the private use to not be considered to be minor, (for example the 'one-off' loan of a four-wheel drive vehicle to enable an employee to travel cross-country during an extended holiday break referred to in the Explanatory Memorandum to the Taxation Laws Amendment (Fringe Benefits and Substantiation) Bill 1987 and in paragraph 134 of TR 2007/12) it is hard to understand why a return 300 kilometre trip does this. For consistency, the Guideline needs to align with TR 2007/12 for the application of the car-related exemptions. See also the ATO Response to Issue 14. The Guideline (or other guidance material) should contain an example to outline whether travel related to rental property will be continued to be otherwise deductible. Facts: A construction company employee is given a company ute to use, including to and from work. In April to June 2016 the employee completes a log book for three months. It shows: Background: Travel related to rental property (maintenance, inspections, etc.) has been treated as being 'otherwise deductible' with log books confirming no FBT. The log books relied on for this purpose are used for five years unless odometer readings suggested a changed pattern. As from 1 July 2017 the travel related to rental property is no longer deductible due to a legislative change introduced in the May 2017 budget it is unclear if the travel would be otherwise deductible and if new log books are required to be maintained. Many construction workers own rental properties and those that do their own maintenance would likely use the company utes they have been issued for obvious reasons and, if the travel is no longer deductible, the travel related to rental property is likely to push the private kilometres above the requirement in paragraph 5(g) of 750 kilometres per annum. Questions: It will be useful for the Guideline to clarify: More practical examples are required in the Guideline such as children drop-offs/pick-ups, filling up on petrol, acceptable record-keeping and residual vehicles taking into account the modern working scenarios. The examples do not appear to have considered all permissible categories of travel where the exemption may apply, nor the conditions listed in paragraph 5 to allow the Guideline to be applied. That is under the exemption, there are three possible categories of travel being: However, the examples in the Guideline use scenarios where there is home to work travel and other private use only. If this was the fact pattern, then how would the condition in paragraph 5(b) (that is, the vehicle is provided to the employee to perform their work duties) be satisfied? The examples seem to suggest that a record keeping concession is to work backwards from total kilometres travelled in a year (deducting a reasonable calculation for home to work travel) to identify other private use. This omits to take into account that the vehicle may have been used for deductible travel for work purposes. To take that one step further, if paragraph 5(b) is to be satisfied, it would seem necessary that the vehicle has been used for deductible travel for work purposes. The examples and this approach should be reconsidered. In the absence of detailed logbooks or trip records (which would be unreasonably burdensome and not in line with the stated objectives of the Guideline), it would seem difficult for employers to assess the usage of the vehicles. The examples have been updated to clarify that the eligible vehicles are provided for business use to enable the employee to perform their work duties. In addition, the examples have been updated to reflect that the employee may undertake travel in performing their work activities. See also the ATO Response to Issue 18. The ATO should consider issuing a practical compliance guideline on minor benefits. Failing to issue a guideline in relation to minor benefits is a significant lost opportunity and would have delivered a significant administrative and compliance benefit to employers.",,,,,,,/law/view/pdf?DocId=COG%2FPCG20183EC%2FNAT%2FATO%2F00001&filename=law%2Fview%2Fpdf%2Fcog%2Fpcg2018-cp003.pdf&PiT=99991231235958,False,False,https://www.ato.gov.au/law/view/document?docid=COG/PCG20183EC/NAT/ATO/00001
PCG 2018/4EC,Compendium,Compendium,,,,,,,,"This PCG is a great step towards providing certainty for LPRs. This is a welcome release from the ATO. This is progress. We have been asking for guidance so we got some. For more information about practical compliance guidelines refer to Practical Compliance Guideline PCG 2016/1 Practical Compliance Guidelines: purpose, nature and role in ATO's public advice and guidance . For example, one or two year period in relation to the deceased's outstanding returns for all other estates. Delay in distribution of funds. Once the Guideline is in operation, the issue of how section 260-145 of Schedule 1 of the Taxation Administration Act 1953 applies for an executor properly administering an estate without probate as Queensland law facilitates, may be able to be mitigated by fine tuning this PCG, or other administrative measures.",,,,,,,/law/view/pdf?DocId=COG%2FPCG20184EC%2FNAT%2FATO%2F00001&filename=law%2Fview%2Fpdf%2Fcog%2Fpcg2018-cp004.pdf&PiT=99991231235958,False,False,https://www.ato.gov.au/law/view/document?docid=COG/PCG20184EC/NAT/ATO/00001
PCG 2018/5EC,Compendium,Compendium,Draft,,,,,LCR 2015/2 | LCR 2018/6 | PS LA 2005/24 | PS LA 2015/4 | PSLA 2017/2,,,,,,,,,/law/view/pdf?DocId=COG%2FPCG20185EC%2FNAT%2FATO%2F00001&filename=law%2Fview%2Fpdf%2Fcog%2Fpcg2018-cp005.pdf&PiT=99991231235958,False,False,https://www.ato.gov.au/law/view/document?docid=COG/PCG20185EC/NAT/ATO/00001
PCG 2018/8EC,Compendium,Compendium,Draft,,,,,,,,,,,,,,/law/view/pdf?DocId=COG%2FPCG20188EC%2FNAT%2FATO%2F00001&filename=law%2Fview%2Fpdf%2Fcog%2Fpcg2018-cp008.pdf&PiT=99991231235958,False,False,https://www.ato.gov.au/law/view/document?docid=COG/PCG20188EC/NAT/ATO/00001
PCG 2018/9EC,Compendium,Compendium,,,,,,TR 2004/15 | TR 2018/5,,Where business has not changed in a particular year - these may be the only decisions made by the board and some case law indicates the decision whether to pay a dividend as an important indicia of central management and control (CM&C). The transitional compliance approach applies to all foreign incorporated entities who consider that under TR 2018/5 they may be residents of Australia and they may not have been under Taxation Ruling TR 2004/15 Income tax: residence of companies not incorporated in Australia - carrying on business in Australia and central management and control. As noted in the Compendium to TR 2018/5 consideration is being given to providing public advice and guidance on this issue.,,,,,,,/law/view/pdf?DocId=COG%2FPCG20189EC%2FNAT%2FATO%2F00001&filename=law%2Fview%2Fpdf%2Fcog%2Fpcg2018-cp009.pdf&PiT=99991231235958,False,False,https://www.ato.gov.au/law/view/document?docid=COG/PCG20189EC/NAT/ATO/00001
COG/PCG20184EC1/NAT/ATO/00001,Unknown,Compendium,,,,,,,,"We recommend the second dot point of paragraph 3 of the draft update be amended to read as follows (new text is underlined): Inserting the suggested underlined words would depart from the text in section 260-140 of Schedule 1 to the Taxation Administration Act 1953 (TAA) and footnote 4 of the Guideline which are the basis for paragraph 3 of the Guideline. Section 260-140 of Schedule 1 to the TAA permits the Commissioner to treat the LPR as standing in the shoes of the deceased person as at the date of their death, allowing any outstanding tax-related liabilities to be recovered from the LPR. At the date of the deceased person's death, the Commissioner will not have had an opportunity to assess all the outstanding tax-related liabilities owed by the deceased estate and will therefore not have notified the LPR of any such outstanding tax-related liabilities. Therefore, it would be incorrect to conclude that the LPR would only be liable to pay any outstanding tax-related liabilities which they had 'notice' of. It would similarly be incorrect to use 'net' market value as the LPR would not yet have been notified of the deceased person's liabilities to calculate the value of the deceased estate assets. It would therefore be more appropriate to use the market value. We recommend that paragraph 8 of the draft update would be clearer if it were amended to read as follows: None of the examples relate to letters of administration. For clarity we recommend that the word 'they' in the first dot point in paragraph 9 of the draft update be changed to read 'the deceased'. The current list of assets in the fourth sub dot point of the second dot point in paragraph 9 of the draft update is too narrow. We recommend that the list be expanded to provide more examples and include a 'catch-all' to pick up items used solely by the deceased person in their home or residence. For example, the following additions to the fourth sub dot point are proposed: It is common for a deceased person to have an interest in the estate of another deceased person. We suggest that an additional fifth sub dot point to the second dot point in paragraph 9 of the draft update be added to extend the current list of assets to include interests in the estate of another deceased estate, when that other estate consists of the same assets listed in the second dot point of paragraph 9 (including the addition proposed in issue number 5 of this Compendium). Determining whether the deceased person had an interest in the estate of another deceased person is a complex matter of law interpretation and is outside the scope of this Guideline. The meaning of the term 'cash' in the fourth sub dot point of the second dot point of paragraph 9 of the draft update is not sufficiently clear. It may be construed narrowly to mean 'currency', that is, notes and coins, or widely to include all money, such as the proceeds of a bank account or term deposit. We suggest that the word 'cash' be replaced with 'cash investments' with a footnote to make it clear that it includes all cash investments, including at-call accounts and term deposits, bonds and managed funds. We query whether the asset limit in the third dot point of paragraph 9 of the draft update should be expressed as a net amount. The inclusion of additional examples to provide greater certainty to LPRs of less complex deceased estates in distributing estate assets before the expiration of the relevant review period without concern, is welcome. Whilst the increase in the threshold for the market value of estate assets from $5 million to $10 million in the third dot point in paragraph 9 of the draft update is welcome, the other limitations in paragraph 9 mean that a monetary threshold is not necessary. The removal of the monetary threshold would mean that the Guideline would not need to be adjusted in future as the market value of estate assets increased and would remove arguments about valuation methodologies. We query whether a superannuation death benefit paid to an estate following the death of the deceased is intended to be included within the assets of the deceased's estate as at date of death. We suggest this be made clear. This is because superannuation death benefits (being an asset under the second sub dot point of the second dot point of paragraph 9 of the draft update) will not form part of the deceased person's estate 'at the date of the deceased person's death'. The deceased's superannuation death benefit may be paid to the estate by a superannuation fund trustee after death. The superannuation death benefit is to be included within the assets of the deceased person's estate even though it only forms part of their estate after death. The superannuation death benefit will have a market value at the date of the deceased person's death and this amount should be used for the purposes of paragraph 9 of the final Guideline. We query the meaning of the phrase 'intended to pass' in the fourth dot point of paragraph 9 of the draft update. A deceased person might leave assets equally between children, one of whom was not a foreign resident at the time the will was created, but who was a foreign resident at the date of death. In that circumstance, whether the assets will pass to a foreign resident will have nothing to do with the person's intention. We suggest that the fourth dot point in paragraph 9 be amended to read: CGT event K3 is triggered when a CGT asset of a deceased person's estate passes to a beneficiary who is a tax advantaged entity that is specified in subsection 104-215(1). The deceased person is made liable for any capital gain or capital loss for this asset in their final income tax return as if the deceased person had disposed of the asset immediately before their death. To reduce ambiguity, in the final Guideline, we have updated the fourth dot point in paragraph 9 and deleted the words 'intended to'. This brings the wording in line with section 104-215. CGT event K3 happens if the assets of the deceased estate pass to a foreign resident, a tax exempt entity or a complying superannuation entity. The requirement in the fourth dot point of paragraph 9 of the draft update was inserted to ensure that CGT event K3 capital gains did not escape tax simply because of the Guideline. However, there is no assessable capital gain if an asset passes to a tax exempt entity that is a deductible gift recipient (DGR) (see section 118-60 of the ITAA 1997) and there are many estates where assets are left to charities that are DGRs. Therefore, the fourth dot point of paragraph 9 of the draft update should be amended by adding 'that is not a DGR' after 'tax exempt entity'. The final Guideline should explain the significance and meaning of 'notice of claim' in paragraph 11. Further explanation of the phrase would introduce unnecessary repetition into the final Guideline. The references to the 'affairs of a deceased estate' and 'estate assets' in paragraph 15 of the draft update should be changed to the 'affairs of the deceased person' and 'assets of the deceased'. As per paragraph 7 of the draft update, the Guideline is not about the estate. For clarity, in the final Guideline, the reference to 'affairs of a deceased estate' has been changed to 'affairs of a deceased person's estate'. In the final Guideline, the reference to 'estate assets' has also been changed to 'assets of the deceased person's estate' to be consistent with the terminology in paragraph 9 used to define the less complex estates to which the Guideline applies. Paragraph 15 of the draft update should be rephrased to contain some restriction regarding liability of the LPR. For example, if the deceased had lodged all returns except for the date of death return and the LPR has lodged that and not identified any material irregularity, the ATO should be required to give notice within 6 months of the lodgment of the last return. Some examples would be useful. In the final Guideline, the reference to 'returns' in paragraph 15 should be amended to 'assessments'. The advice in paragraph 17 of the draft update will often be from an accountant. Therefore, the reference in paragraph 17 to 'written legal advice' should be to 'written advice from an advisor' or 'written advice from a solicitor, accountant or financial advisor'. The words 'bring it to the attention of the ATO in writing' in paragraph 18 of the draft update are not sufficient and do not specify how the disclosures it contemplates are to be made to the ATO. There should be a dedicated process by which notifications can be made in writing. For example, notifications could be sent to a particular post box or email address. A confirmation receipt by the ATO should be provided to the party making the notification. There is concern regarding the change in the draft update to paragraph 19 and the inclusion of paragraph 20. Six months is more than enough time for the ATO to either tell the LPR that they intend to review the matter or to issue an assessment. The existing test does not require both matters to be done in 6 months. There should not be an onus on the LPR to keep following up with the ATO about what it intends to do with the disclosure regarding a potential outstanding tax liability. If the ATO has had to seek further information, then that is covered by the existing wording of the paragraph, that is, the ATO has notified the LPR that it intends to review the matter. An example would be better than the change contemplated. In paragraph 21 of the draft update, where the ATO has 'not been able to process the amendment request within the 6-month period' as per the first bullet point in paragraph 21, it is necessary for the ATO to issue a written notification to the LPR. It is unreasonable for the LPR to not have in writing anything from the ATO confirming its intention after 6 months. Regarding the 6-month rule in paragraphs 19 to 21 of the draft update – the second bullet point in paragraph 19 appears to contradict the first bullet point in paragraph 21. It is recommended that the draft update be amended to be consistent with judicial authority, namely that actual knowledge of the LPR of a source of income is required for the LPR to be liable. The test is not that the LPR have constructive notice. Example 2 should explain whether and, if so when, an LPR is expected to go back through tax returns within the review period if the LPR is not on notice of anything potentially untoward about the deceased. Paragraphs 20 and 21 of the draft update should be reviewed for clarity and consistency with the law, and Examples 3 and 4 reconsidered in light of those amendments. Example 6 should either be amended to reflect the decision in Taylor v Deputy Commissioner of Taxation [1969] HCA 25, or rewritten to explain why, properly applying the principle of constructive knowledge, the LPR should be held liable. The reference to 'straightforward' in Example 1 of the draft update should be deleted or another word used. The use of this word creates issues in perception, as the number or value of assets does not necessarily correlate to whether a matter is more or less complex. Paragraph 27 of the draft update should perhaps follow paragraph 9. That is, this is an issue relevant to determining whether the estate is less complex (paragraph 9) than whether the LPR has acted reasonably in respect of the deceased's tax position. In paragraph 27 of the draft update, it is often the case that a relevant individual will have been the trustee of their family trust such that when they die enquiries cannot be made of the trustee directly. What should the LPR do in that instance? Example 5 of the draft update is not particularly helpful. Would it be material if John (the LPR) found that Susan's income was understated by $100, particularly given the cost of amendment for the LPR and the ATO? Example 5 of the draft update illustrates what is not a material irregularity due to an error in disclosure. It is recommended that the ATO also state in the example that where there is an error in the calculation of the income tax liability instead, the error is material irrespective of the quantum of the amount. This is because the Commissioner has no power to write off or waive a debt owing to the Commonwealth. Example 5 of the draft update refers to an error in disclosure of the period the rental property was rented out and not an error in the rental income reported in the tax return. On those facts, the tax assessment is correct and not as stated 'an error in the assessment for the 2015 income year'. Therefore, paragraph 46 could be rephrased as follows: Or alternatively, 'an error in the assessment' should be clarified to read 'an error in the information disclosed to the ATO'. Life insurance Paragraph 55 of the draft update refers to assets available to satisfy the debts of the deceased. The position of life insurance should also be considered. Life insurance is protected from creditors under section 205 of the Life Insurance Act 1995. Practitioners assume that this would include the ATO. If so, it is suggested that the LPR's liability to the ATO be limited to the net value of deceased's assets which are available for the payment of creditors. If life insurance is paid under a standalone policy and the deceased estate is the beneficiary, it must be captured as an asset of the estate. The examples would be more realistic if they were based on a reference date of 2023. It is not clear why 'tax liability' has been changed to 'tax-related liability'. © AUSTRALIAN TAXATION OFFICE FOR THE COMMONWEALTH OF AUSTRALIA You are free to copy, adapt, modify, transmit and distribute this material as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).",,,,,,,/law/view/pdf?DocId=COG%2FPCG20184EC1%2FNAT%2FATO%2F00001&filename=law%2Fview%2Fpdf%2Fcog%2Fpcg2018-cp004c1.pdf&PiT=99991231235958,False,False,https://www.ato.gov.au/law/view/document?docid=COG/PCG20184EC1/NAT/ATO/00001
COG/PCG20189EC5/NAT/ATO/00001,Unknown,Compendium,Draft,,,,,PS LA 2007/11 | TR 2004/15,,"It is suggested that the final update to the Guideline refers to the relevant provisions (section 23AH of the Income Tax Assessment Act 1936 (ITAA 1936), Subdivisions 768-A and 768-G of the Income Tax Assessment Act 1997 (ITAA 1997) and Part X of ITAA 1936) and provides a more detailed explanation and examples of how they give a similar treatment. This may allay some unfounded concerns about the tax effect of subsidiaries being deemed to be an Australian tax resident under the central management and control test of residency. As recognised in the Guideline, public groups that meet certain requirements can rely on the ongoing compliance approach for public groups for ongoing certainty. Additional guidance has been included in the ongoing compliance approach regarding circumstances considered to be low risk (from paragraphs 105 to 107G of the final update to the Guideline) to reduce compliance costs for public groups and provide greater certainty. This includes additional guidance for wholly offshore operating subsidiaries of public groups (subparagraph 107(b) of the final update to the Guideline) and guidance regarding how companies in public groups can evidence falling within the ongoing compliance approach (paragraphs 105 to 107G of the final update to the Guideline). The ongoing compliance approach does not extend to private groups as they have a lower level of public transparency and a greater level of diversity in the ways in which they are structured and operate. The white zone is also suggested to include foreign-incorporated companies that hold, directly or indirectly, shares in a foreign-incorporated company with an active business in a foreign jurisdiction for public groups. Foreign-incorporated companies that hold shares in other foreign-incorporated companies, directly or indirectly, may rely on subparagraphs 107(a) and (b) of the Guideline in relation to the ongoing compliance approach where the requirements are met. It is understood that some companies have been relying on the former Government's 2020–21 Budget announcement. Announced measures that are not yet law are subject to consideration by the Government. For more information refer to Law Administration Practice Statement PS LA 2007/11 Administrative treatment of taxpayers affected by announced but unenacted legislative measures which will apply retrospectively when enacted. Paragraph 115 of the draft Guideline provides, essentially, that a company falls within the 'low-risk' zone if 2 criteria are met: The circumstances currently listed in the 'low-risk' section of Table 2 of the draft Guideline go to the question of whether criterion 2 outlined above is satisfied; they are not independent positive criteria, as currently presented in Table 2. To fall in the low-risk zone of the risk assessment framework, one or more of the factors in the low-risk zone of Table 2 need to exist, in addition to the company not falling within the moderate or high-risk zones. Paragraphs 115 to 117 of the final update to the Guideline provide detail regarding how companies and groups evidence falling within the low-risk zone. This is now explicitly referenced in the low-risk zone of Table 2. For completeness, if an entity falls within the high-risk zone, they do not fall within the low or moderate-risk zones. For avoidance of doubt, a company is not excluded from this definition where it is a resident (or equivalent) under a foreign jurisdiction's law and subject to comprehensive liability to tax in that jurisdiction, and that jurisdiction has a territorial tax system. The reference to a 'resident of a tax haven' in Table 2 of the Guideline has been revised to include a reference to a 'resident of a specified country' with a new footnote (footnote 16) referring to the International dealings schedule instructions 2023 in the moderate and high-risk zones. In response to the 2 uncertainties raised: Paragraph 113 of the final update to the Guideline clarifies that all companies may not fit squarely within the risk assessment framework.",,,,,,,/law/view/pdf?DocId=COG%2FPCG20189EC5%2FNAT%2FATO%2F00001&filename=law%2Fview%2Fpdf%2Fcog%2Fpcg2018-cp009c5.pdf&PiT=99991231235958,False,False,https://www.ato.gov.au/law/view/document?docid=COG/PCG20189EC5/NAT/ATO/00001
PCG 2017/1EC,Compendium,Compendium,,,,,,TR 1999/1,,,,,,,,,/law/view/pdf?DocId=COG%2FPCG20171EC%2FNAT%2FATO%2F00001&filename=law%2Fview%2Fpdf%2Fcog%2Fpcg2017-cp001c2.pdf&PiT=99991231235958,False,False,https://www.ato.gov.au/law/view/document?docid=COG/PCG20171EC/NAT/ATO/00001
PCG 2017/4EC,Compendium,Compendium,,,,,,TR 2014/6,,"Schedule 3 operates to reduce the risk rating for an outbound interest-free loan in certain circumstances. It does not increase the risk rating otherwise provided by the Guideline. Accordingly, Schedule 3 can only operate favourably to taxpayers and it is not considered necessary to apply it prospectively only. We have made further amendments to Schedule 3 to clarify this position (see paragraph 222 of the final Guideline). Note: Additional examples were requested for controlled but not fully owned entities which hasn't been specifically covered in the point above. It is not possible to provide examples covering all situations. Taxpayers with unique circumstances should engage with us if they require certainty regarding their arrangements. If so, the ATO should provide advance notice and from which income year reporting period. There have been no specific changes made to Schedule 3 as the content of the final Guideline has been amended to address the potential changes. We recognise that this may result in high risk ratings, however given the associated risk profile of these transactions, this is considered to be an appropriate outcome. We have updated Schedule 3 to provide clearer guidance on the relevance of motivational risk indicators (see paragraph 205 of the final Guideline). It is observed that the application of this indicator could result in inappropriate risk scores being allocated to arrangements that fund activities/projects in high-rated countries but have a low prospect of raising interest-bearing third-party debt due to the nature and stage of the project or the circumstances of the borrower. Hence, the sovereign risk of the country is not a reliable indicator. The sovereign risk indicator will continue to apply for interest-bearing loans. Concern has been expressed the ATO may seek to review and challenge tax deductions for foreign exchange losses that arise from interest-free outbound funding to related parties that would not have previously been considered. For example, we expect the tax treatment of foreign exchange gain/losses on an interest-free loan that is characterised as equity to be the same as any other equity instrument. We do not consider it necessary to make any further changes to Schedule 3. We believe that the risk assessment required under Schedule 3 does not impose additional burden on taxpayers over and above the self-assessment requirements of Subdivision 815-B. It is possible that in some circumstances the minimum required factors are not met although arm's length conditions may support a zero-interest rate or an equity contribution. For example, it is possible in certain circumstances that the rights under an instrument are different from the rights of a shareholder and there is an intention of creating a debtor-creditor relationship. If this was to occur, even though the 'additional factor' would be evidenced, Schedule 3 would not apply to reduce the score, because the minimum required factor would not be evidenced. In short, ten points would apply, even though the arm's length conditions could otherwise be considered to exist between the parties that support a zero-interest rate/equity contribution. Taxpayers with unique circumstances should engage with us if they require certainty regarding their arrangements. However, it is important to note that any evidence supporting a Step 2 assessment is not determinative in isolation and has to be considered along with the factors and evidence for Step 1. Taxpayers with unique circumstances should engage with us if they require certainty regarding their arrangements. Taxation Ruling TR 2014/6 Income tax: transfer pricing - the application of section 815-130 of the Income Tax Assessment Act 1997 provides guidance on the application of section 815-130. This Schedule should be read in conjunction with TR 2014/6. Accordingly, any technical law interpretation is not considered necessary for the purpose of this Schedule. It is recommended the ATO include an introductory paragraph to Schedule 3 to state more explicitly that this guidance is not merely a risk assessment and provides a documentation framework that the ATO expects taxpayers to follow. As the scope and purpose of this Schedule is clearly defined, no additional explanation is considered necessary. Taxpayers with unique circumstances should engage with us if they require certainty regarding their arrangements. It is recommended that the ATO provide a clearer distinction between the two steps, and a clearer explanation of what Step 2 involves (as these factors appears less well defined than the Step 1 factors), as well as refine language for paragraph 214(b)(ii) in Schedule 3 which requires taxpayers to demonstrate 'the borrower is in a position where it has questionable prospects for repayment and is unable to borrow externally'.",,,,,,,/law/view/pdf?DocId=COG%2FPCG20174EC%2FNAT%2FATO%2F00001&filename=law%2Fview%2Fpdf%2Fcog%2Fpcg2017-cp004.pdf&PiT=99991231235958,False,False,https://www.ato.gov.au/law/view/document?docid=COG/PCG20174EC/NAT/ATO/00001
PCG 2017/9EC,Compendium,Compendium,Draft,,,,,TD 2017/26,,"Generally, arrangements of the type referred to in the PCG are unlikely to be implemented by employers. To satisfy the requirements of the PCG, the trustee must have an absolute discretion to determine when the dividend equivalents payments are made. This results in the PCG having limited practical application. An example of the circumstance in which this PCG will be satisfied, in particular one that satisfies the second condition in paragraph 9 of PCG 2017/D9 should be provided. The Commissioner should consider issuing a safe harbour guideline (or amending the requirements in paragraph 9 of PCG 2017/D9) within which a trustee of an employee share trust (EST) can make dividend equivalent payments which are not taxable as remuneration or otherwise to employees and without breaching the sole activities test in subsection 130-85(4) of the Income Tax Assessment Act 1997. Such a safe harbour would provide greater practical utility than that currently provided. The safe harbour guideline should allow trustees of ESTs to make dividend equivalent payments to employees that are not assessable as remuneration where: Refer to the compendium of responses to the issues raised by external parties to Draft Taxation Determination TD 2017/D2 [1] .",,,,,,,/law/view/pdf?DocId=COG%2FPCG20179EC%2FNAT%2FATO%2F00001&filename=law%2Fview%2Fpdf%2Fcog%2Fpcg2017-cp009.pdf&PiT=99991231235958,False,False,https://www.ato.gov.au/law/view/document?docid=COG/PCG20179EC/NAT/ATO/00001
PCG 2019/1,Final PCG,Transfer pricing issues related to inbound distribution arrangements,,,14,,,PS LA 2015/4,,"1. This Guideline outlines our compliance approach to the transfer pricing outcomes for inbound distributors within the meaning of paragraphs 16 to 26 of this Guideline. 2. Arrangements to conduct any of the activities covered in paragraphs 16 to 26 of this Guideline, together with any related activities involving the provision of ancillary services, are referred to in this Guideline as 'inbound distribution arrangements'. 3. This Guideline applies to inbound distribution arrangements of any scale. However, this Guideline will not apply where you are an inbound distributor and you: Instead, we will follow the compliance approach set out in PCG 2017/2. 4. We use the framework in this Guideline to assess the transfer pricing risk of inbound distribution arrangements and tailor our engagement with you. Where this Guideline applies, we rate the transfer pricing risk of your inbound distribution arrangements having regard to a combination of quantitative and qualitative factors. 5. If we rate your inbound distribution arrangements as having a low transfer pricing risk, you can expect that we will generally not apply compliance resources to review the transfer pricing outcomes of your arrangements. However, if your inbound distribution arrangements fall outside the low transfer pricing risk category, you can expect us to monitor, test or verify the transfer pricing outcomes of your arrangements. The higher the risk rating, the more likely we are to review your arrangements as a matter of priority. 6. This Guideline is limited to the transfer pricing risks posed by the profit outcomes associated with inbound distribution arrangements. It does not affect our compliance approach to other tax issues that might arise in connection with your inbound distribution arrangements (for example, the deductibility of an expense, the existence of withholding tax obligations or the application of the general anti-avoidance rule in Part IVA of the Income Tax Assessment Act 1936). If we consider that your inbound distribution arrangements pose a risk under other tax provisions, we will have cause to apply compliance resources to review your arrangements. 7. This Guideline does not affect the principles determining taxable income attributable to business operations carried on, at, or through an Australian permanent establishment of a foreign resident. Those principles must be applied by any permanent establishment to which this Guideline applies. 8. This Guideline does not limit the operation of the law. [1] The information provided in this Guideline does not replace, alter or affect our interpretation of the law in any way. It does not relieve you of your legal obligation to comply with all relevant tax laws, or create any safe harbour administrative concessions. 9. Having a low-risk rating under this Guideline does not necessarily mean that your transfer pricing outcomes are correct or that you have a reasonably arguable position. Equally, having a high-risk rating under this Guideline does not necessarily mean that your inbound distribution arrangements fail to comply with Australia's transfer pricing rules. Having regard to your particular circumstances, we may accept that your transfer pricing outcomes are reasonable. 10. You should not rely on the profit markers to determine arm's length conditions. This Guideline does not replace an appropriate comparability analysis and proper application of the transfer pricing obligations under the law, including an accurate delineation of the transaction and selection of the most appropriate transfer pricing method. 11. You can use the framework set out in this Guideline to: Structure of this Guideline 12. This Guideline is structured as follows: 13. This Guideline does not provide advice or guidance on the technical interpretation or application of Australia's transfer pricing rules or other tax provisions.",,,"Intro: 27. We concentrate our efforts on inbound distribution arrangements that pose the highest risk of not complying with Australia's transfer pricing rules. 28. This Guideline highlights inbound distribution arrangements where we see risk of non-compliance. 29. The transfer pricing methodology used in the risk framework in this Guideline is for risk assessment purposes only. 30. Consistent with the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations and other documents covered by section 815-135 of the Income Tax Assessment Act 1997, you should use the transfer pricing methodology (or combination of methodologies) that is most appropriate and reliable for your circumstances when pricing your inbound distribution arrangements. 31. Where the most appropriate transfer pricing methodology for your circumstances is a multi-sided method such as the profit split, this Guideline may not be relevant for your inbound distribution arrangement. 32. The quantitative and qualitative indicators set out in this Guideline are based on work we have undertaken in relation to Australian distribution activities. Accordingly, this Guideline sets out our compliance approach to the transfer pricing risk associated solely with inbound distribution arrangements. 33. Where this Guideline applies, you can expect the following compliance approach depending on your risk zone. [2] We will be open to entering into early engagement advance pricing arrangement (APA) discussions with you. We will be open to entering into early engagement APA discussions with you and may invite you to make a formal APA application. When selecting our compliance activity, we will take into account various factors in addition to the framework in this Guideline. These factors include consideration of your global supply chain, the tax profile of your related parties and the amount of tax at risk. We consider that entities with inbound distribution arrangements that consistently suffer losses pose a very high transfer pricing risk. We will ordinarily prioritise a review of you where you have been in an overall loss position for the aggregate of your current and previous 2 income years. You may seek to enter into early engagement APA discussions with us. | How we risk assess your inbound distribution arrangements: 34. We assess the transfer pricing risk of your inbound distribution arrangements by comparing the profit outcome of your arrangements against our profit markers for inbound distributors. The profit markers relevant to you are based on the industry sector in which you operate and the extent to which your distribution arrangements involve activities that we see as generally adding incremental value in Australia. [3] 35. We analyse the profit outcome of your inbound distribution arrangements using Earnings Before Interest and Tax (EBIT) relative to sales. The EBIT margin earned by an inbound distributor can be affected by a range of commercial factors. However, we consider the EBIT margin provides a reasonable basis for us to identify transfer pricing risks for inbound distribution arrangements. 36. Due to the circumstances of inbound distributors, in particular the predominance of spot or short-term sales and their typical asset profile, we would expect to find similarity between their EBIT and profit before tax. We do not generally expect inbound distributors to enter into substantial debt arrangements. 37. Our approach to assessing the transfer pricing risk of your inbound distribution arrangements has similarities with the OECD transactional net margin method. However, this does not necessarily mean that we view this method as being the most appropriate transfer pricing method to price your inbound distribution arrangements. | Profit markers: 38. We have undertaken a benchmarking exercise to understand the EBIT margins earned by distributors operating independently that we believe are relevant to the Australian economy. The exercise looked at distributors generally, and also focused on distributors in certain industry sectors. 39. These specific industry sectors were chosen due to the potential level of transfer pricing risk we see in those sectors based on the total value of the goods imported into Australia and previous case work we have undertaken. 40. From this benchmarking exercise, we have developed a set of profit markers that we use for assessing transfer pricing risk based on the industry sector in which the inbound distributor operates. The profit markers also take into account activities undertaken by the inbound distributor that we consider incrementally generate value in the industry sector, and which are therefore relevant to transfer pricing risk. [4] 41. We analyse the profit performance of your inbound distribution arrangements against these profit markers in order to assess your transfer pricing risk. As a measure of profit performance, we calculate a 5-year weighted average EBIT margin. 42. In calculating the 5-year weighted average EBIT margin, where possible, we use financial information which reliably isolates the revenues and costs of your inbound distribution arrangements from the revenues and costs of any other business activities you carry on. This information may include statutory or management accounts that we have obtained in the course of our general compliance activity. However, in instances where this information is not available, we will assess whether, based on the information we do have, there are revenues or costs in the EBIT margin which make it inappropriate to assess your transfer pricing risk in this way. This will generally be the case where the revenues or costs unrelated to your inbound distribution activities are material. Determining the significance of unrelated revenues and costs to the risk assessment process is a matter of judgment. 43. The profit markers are set out in the Schedules at paragraphs 62 to 85 of this Guideline. We will update the profit markers based on future benchmarking work as required. | Activities that incrementally generate value: 44. The characterisation of an entity as an inbound distributor largely reflects its economically significant activities in the context of its industry and its business strategies. 45. Where inbound distributors undertake more economically significant activities relative to the generation of overall value, we would generally expect them to earn a relatively higher profit. As a result, in determining the relevant profit marker to assess your transfer pricing risk, we have regard to the extent to which you undertake activities that incrementally generate value. In assessing risk, we expect entities that undertake more activities which incrementally generate value to earn higher profit margins overall. 46. In certain industry sectors, we have identified activities that we consider incrementally generate value from inbound distribution arrangements. We see these activities as making a significant contribution to an overall value chain, and hence they have the potential to create increased value in Australia relative to other distributors that do not undertake such activities. Where relevant, the value-generating activities that we consider for risk assessment are specified as different categories of inbound distributors within the Schedules of this Guideline. Where we have identified categories of inbound distributors in an industry sector, we have developed profit markers for each category for that industry sector. 47. In addition to industry factors, when assessing risk we have regard to factors such as: 48. As this information becomes available to us, it may influence our view of the arm's length outcome from the overall activities such that we perceive a higher level of transfer pricing risk than indicated by the profit markers. | Risk assessment framework: 49. Our risk assessment framework for inbound distributors is made up of 4 transfer pricing risk zones – a white zone and low, medium and high risk zones. 50. With the exception of the white zone, the Schedules of this Guideline set out the profit markers we use to determine your risk zone based on your industry sector and your category of activities that incrementally generate value. For each category, there are 2 profit markers, A and B. Your risk zone is determined by your profit outcome relative to the markers for your category. 51. You are deemed to be in the white zone where both of these conditions apply: 52. You may be required to disclose whether you have self-assessed the risk rating of your inbound distribution arrangement. If we request in writing, or if you meet the criteria to complete a Reportable tax position schedule, you will be asked to disclose your self-assessed risk zone rating for certain distribution arrangements. Where you are deemed to be in the white zone in accordance with paragraph 51 of this Guideline, your reporting disclosure for that inbound distribution arrangement is the white zone. 53. If you fall outside the white zone and low risk zone, we do not presume that your inbound distribution arrangements are uncommercial or that they fail to comply with Australia's transfer pricing rules. Falling outside the white zone and low risk zone means we consider your inbound distribution arrangements may give rise to an inappropriate transfer pricing outcome. Therefore, we will generally conduct some form of compliance activity in relation to your inbound distribution arrangements. 54. Schedule 1 of this Guideline sets out the profit markers that we use for determining the transfer pricing risk for inbound distributors generally (general distributors). Further schedules apply to inbound distributors operating in the life science sector, the ICT sector and the motor vehicles sector. We apply Schedule 1 unless a more specific Schedule applies. 55. If more than one Schedule applies to your inbound distribution arrangements, we will use the industry schedule that we consider best fits your circumstances. 56. The profit markers in the Schedules are provided to give you transparency in relation to our compliance and risk assessment approach. You should not use the profit markers as a safe harbour to adjust your arrangements so that you sit lower within a particular zone merely because it does not change your overall risk zone. We will monitor outcomes for inbound distribution arrangements over time to ensure there is no unexplained 'drift' within a risk zone. 57. We may ask you to tell us in writing whether you have reviewed the compliance risk of your inbound distribution arrangements and which risk zone you believe your arrangements fall within. You may be required to inform us which risk zone you believe you fall within via the Reportable tax position schedule. | Increasing certainty through the advance pricing arrangement program: 58. Our APA program provides you with the opportunity to engage with us in a constructive way to reach agreement on the transfer pricing of your inbound distribution arrangements for a fixed period of time. An APA may assist you with managing and mitigating your transfer pricing risk and provide you with greater certainty on a prospective basis. Our practice and procedures for entering an APA are set out in Law Administration Practice Statement PS LA 2015/4 Advance pricing arrangements. 59. No matter what risk zone your inbound distribution arrangements are in, you are able to seek to enter into discussions with us as part of the early engagement stage of the APA process. | Who to contact: 60. If you wish to discuss your inbound distribution arrangements with us, you may contact ISCStrategy@ato.gov.au. 61. Alternatively, if you have a dedicated relationship manager, you may approach them directly for assistance with your case.",,,,/law/view/document?LocID=%22COG%2FPCG20191EC1%2FNAT%2FATO%2F00001%22&PiT=99991231235958,False,False,https://www.ato.gov.au/law/view/document?docid=COG/PCG20191/NAT/ATO/00001
PCG 2026/2,Final PCG,Apportionment of rental property deductions - ATO compliance approach,,,7,,,TR 2000/2 | TR 2026/1,Case References: Commissioner of Taxation v Kowal 84 ATC 4001 79 FLR 75 15 ATR 125,"1. When you use a property to produce assessable income and hold it for another use (for example, part of a property is rented out and part of the property is your residence), losses and outgoings related to the property will need to be apportioned on a 'fair and reasonable' basis to work out the deduction that can be claimed under section 8-1 of the Income Tax Assessment Act 1997. 2. It may be difficult to determine what is fair and reasonable because it will depend on the facts and circumstances that relate to how you use your rental property. [1] This Guideline sets out methodologies that we will accept as fair and reasonable in common situations. If you are eligible to use this Guideline and work out your apportionment using the most appropriate methodologies detailed in this Guideline, the Commissioner would not have cause to apply compliance resources to investigate your claim. [2] You will need to keep records to support your view that the Guideline applies to you, and how you made your apportionment calculations. 3. The methodologies set out in this Guideline build on and are consistent with the approach taken in Taxation Ruling TR 2026/1 Income tax: rental property income and deductions for individuals who are not in business and previously in Taxation Ruling IT 2167 Income Tax: rental properties – non-economic rental, holiday home, share of residence, etc. cases, family trust cases (now withdrawn). They are not exhaustive of methods that may be appropriate to your circumstances. You can use a different method to work out your apportionment of expenses, but you will not be covered by this Guideline, and you will need to establish why the method that you have chosen is fair and reasonable in your circumstances. You will need to keep records to support how you made your apportionment calculation, and why the method that you have chosen is fair and reasonable. 4. All further legislative references in this Guideline are to the Income Tax Assessment Act 1997, unless otherwise indicated. What is not covered by this Guideline 5. This Guideline does not apply to: 6. This Guideline does not apply to deductions that relate to the ownership or use [4] of your property which is a holiday home. [5] There is an exception to deductions being denied in full where you use your holiday home (or hold it for use) mainly to produce income in the nature of rents, lease premiums, licence fees or similar charges. [6] When this exception applies, you can use this Guideline to apportion your deductions for any private use of your rental property.",,,"Intro: This Practical Compliance Guideline sets out a practical administration approach to assist taxpayers in complying with relevant tax laws. Provided you follow this Guideline in good faith, the Commissioner will administer the law in accordance with this approach.","Example 1: – agent fees 12. Fleur rents out her property through an agent who charges her an ongoing property management fee and a letting fee when they find new tenants for the property. In total, Fleur pays $3,180 in agent fees which will be fully deductible against her rental income. There is no need to apportion the expense. Where apportionment is required 13. For deductions which are not denied in full because your property is a holiday home [8] , expenses which relate to deriving income from your property and for another use (such as, private or domestic use) [9] will need to be apportioned on a fair and reasonable basis. What is fair and reasonable usually depends on the: You may need to use a combination of the time-based method and the area-based method if you rented out part of your property for part (or parts) of the year. Time-based method 14. Where deductions are not denied because your property is a holiday home [10] , you can work out the amount you can claim as deductions for your property using the following formula during periods when it is used (or held) for income-producing purposes at any point during the year: 15. In determining the days held to produce income, whether your property is available for rent on commercial terms (for the periods that your property is unoccupied) will depend on the facts and circumstances. Where you are renting out a room in your home, the number of days your property is unoccupied but available for rent on commercial terms will be zero. This is because when a room in your home is not being rented out, it is treated as being used privately as part of your home and is not considered available for rent on commercial terms. 16. Factors that indicate, on an objective analysis, that your property is available for rent on commercial terms include: 17. Factors that indicate, on an objective analysis, that your property is not available for rent on commercial terms include: | Example 2: – private use by owners during peak periods with little or no demand for property at other times 18. In summer, chefs Daniel and Kate relocate to and live in a cottage they own so they can work at a nearby restaurant. Because Daniel and Kate do not use the house for their holidays and recreation, it is not their holiday home. The house is located in an area that is popular with summer holidaymakers but has limited rental potential as a holiday destination during the colder seasons. 19. When they are not living in the house, Daniel and Kate occasionally rent the property to itinerant workers based on word of mouth only. Daniel and Kate only rent the house out for 14 days of the year. 20. On an objective assessment of the relevant factors, the property is not held to produce income during the periods the property is unoccupied. Daniel and Kate can claim a deduction for a proportion of their expenses based on the days the property was used to produce income, being 14 out of 365 days. | Example 3: – private use of property by owner where property is actively rented at other times 21. Gail and Craig jointly own a rental property. They advertise the property for rent through a real estate agent. Gail and Craig can show that the rental terms, including the amount of rent, for the property are similar to comparable properties in the area. Gail and Craig have instructed the real estate agent to actively monitor requests for rental so as to maximise occupancy for the property. 22. Gail and Craig do not use the property for their holidays or recreation, so it is not their holiday home. They do however use the property themselves for 30 days during the year. 23. During the year, Gail and Craig's expenses for the property are $36,629. This includes $1,828 for the agent's commission and the cost of advertising for tenants. It also includes interest on the funds borrowed to purchase the property, property insurance, maintenance costs, council rates, the decline in value of depreciating assets and capital works deductions. 24. Gail and Craig claim the full $1,828 as a deduction for the agent's commission and costs of advertising for tenants. They can also claim deductions for their other expenses ($34,801) based on the time-based method. Gail and Craig will need to apportion their deduction for the year (which is not a leap year) as follows: 25. This calculation removes the portion of total expenses attributable to private usage. Time-based method when there is a change in use of the property 26. Where there is a clear change in use of a property during the year, such as when the property is first used as a rental or stops being used as a rental, the time-based method can be used to apportion expenses between these periods. The change in use of the property should be definite and is determined on the particular facts and circumstances of the actual use of the property. The use of the property is not considered to change merely due to fluctuations in use due to seasonal patterns, such as with a ski lodge or beach house. | Example 4: – change in use of the property during the income year 27. Sachin owns a property in Tasmania which he has rented out for long-term rentals for 10 years. After he retires, he decides to move into the Tasmanian property. He moves into the Tasmanian property on 1 March as his main residence. From that day the property is being solely used for private purposes and he would need to apportion his deductions for that income year. 28. Because Sachin's property stopped being used for income-producing purposes during the year (which is not a leap year), he uses the time-based method. Sachin paid interest of $28,000 in the year, and he will need to apportion it as follows: Area-based method 29. If only part of your property is rented out to a tenant or used to produce income, you apportion expenses to reflect the area of the property that is used to produce income using the following formula: 30. Common areas are parts of the property that you share with your tenant, such as kitchens, bathrooms, living areas or outdoor spaces. | Example 5: – shared property usage 31. Kim owns a 2-storey townhouse and rents out the bottom floor to a long-term tenant. They each have exclusive possession of their floor. They share the use of the gardens around the house. The top floor has a large deck and is 55 square metres, the bottom floor is 45 square metres, and the gardens are 35 square metres. Kim works out her apportionment percentage as follows: 32. Kim can claim 46.3% of the expenses as a deduction related to the property. Combined area-based and time-based methods 33. In situations where part of a property is used for only part of a year, you will need to combine the time-based method and the area-based method to apportion the expenses by time and area. | Example 6: – combined area-based method and time-based method 34. Leanne has a 2-bedroom, 2-bathroom unit in a high-rise apartment. Leanne lives alone and mainly uses the master bedroom and the ensuite bathroom. The second bedroom and main bathroom is accessible from the common areas of the unit including the lounge, kitchen and balcony and are mainly used by visitors. 35. Part way through the year, Leanne decides to let out the second bedroom using a sharing economy platform to earn extra income. She actively monitors replies from the listing and does not refuse guests when the room is available. 36. The unit is 80 square metres in total. The second bedroom being let is 10 square metres. Leanne also gives paying guests access to common areas including the main bathroom, kitchen, lounge and balcony, which totals 50 square metres. She also offers her guests access to her wi-fi for free. 37. For the period guests are staying and have access to the common areas (along with Leanne), Leanne can claim 50% of the deductible portion of associated costs related to the common areas. Step 1 – apply the area-based method 38. Leanne works out the percentage of the house her guests have access to when they are there using the area-based method: 39. Applying this formula, the percentage of the house Leanne's guests have access to when they are there, using the area-based method, is 43.75%: Step 2 – apply the time-based method 40. Leanne lets out the spare bedroom of her property, being her home, for 100 days of the year (which is not a leap year). She will also need to apportion by time and uses the time-based method (as set out in paragraph 14 of this Guideline) using the following formula: 100 days used to produce income ÷ 365 days 41. Because the room is part of her home, when it is not being rented out it is treated as being used privately as part of Leanne's home. The number of days held to produce income will always be zero, even if the room is advertised for rental while it is unoccupied. 42. By multiplying the time-based method and area-based method together, Leanne will be able to work out what percentage of her yearly expenses are deductible: 43.75% × 100 ÷ 365 = 11.99% 43. This means Leanne can deduct 11.99% of her ownership expenses, such as interest on her mortgage, insurance and council rates. She can claim 100% of the expenses associated solely with renting out the second bedroom, such as the sharing economy platform's service fees or commission. Renting to family or friends at non-market rates 44. If you are renting your property to family or friends and not charging rent at a market rate, it is likely your property has a mixed use of producing assessable income and a private or domestic use of providing accommodation for your family or friends. In these situations, your deductions should be apportioned to exclude the private or domestic use of the property. [11] Where your expenses that would otherwise be deductible exceed the rent received, we will accept that it is fair and reasonable for you to limit those deductions to the amount of the rental income derived from the property [12] , resulting in no net rental taxable income or loss. | Example 7: – non-arm's length rental to mother 45. Jana rents a property to her mother for her to live in. While her mother signed a standard lease agreement, Jana has set the rent at a below market non-arm's length rate. Jana provides the discount for private or domestic reasons to assist her mother who cannot afford to pay rent at the market rate. Jana includes the amount she receives as rent from her mother as assessable income and claims deductions for her expenses related to the house, such as mortgage interest, capital works and council rates up to the amount of rent received from her mother. 46. Similarly, if you are renting out your property to others at non-market rates and the property is being held for multiple purposes including one that has a non-income-producing element, apportionment of expenses will be required. Renting to family or friends at market rates 47. If you are renting the property out to family or friends at a market rate, you do not need to apportion the outgoings when determining your deductions. 48. To establish that the property has been rented at a market rate, you will need to provide evidence of how that market rate was calculated at the time the rent amount was set (for example, a real estate rent valuation or contemporaneous house listings of similar properties in the area). | Example 8: – market rate rental to son 49. Bartolo owns a residential property that he rents to his son and his family who live in the property. The rent is charged at market rates (obtained from a real estate rental valuation) and the lease operates under a standard lease arrangement. No apportionment of expenses is required for Bartolo in claiming his deductions as he has charged rent at market rates and the only use of the property was to derive assessable income. Mortgage has multiple purposes 50. Where a mortgage is taken out against a rental property, (or the property is re-mortgaged) and the funds are not all used for an income-producing purpose, you cannot claim a deduction for all of the interest expenses. In these circumstances it is important to work out the proportion of the loan that is for income-producing purposes and the proportion that is not. [13] 51. Although beyond the scope of this Guideline, where a loan to purchase a rental property has a redraw facility, amounts withdrawn are not treated as relating to the original purpose of the loan (that is, the rental property), but instead to what was purchased with the withdrawn amounts. [14] A redraw facility is different to a loan offset arrangement used to reduce the interest payable on a loan account. [15] Independent pursuit of an objective other than income-producing purpose associated with your property 52. Where there is an independent pursuit of an objective other than an income-producing purpose associated with your property, as explained in Taxation Ruling TR 95/33 Income tax: subsection 51(1) – relevance of subjective purpose, motive or intention in determining the deductibility of losses and outgoings, we consider it fair and reasonable to claim deductions up to the amount of any income from your property. Applying the principles from TR 95/33 to a rental property:",,,/law/view/document?LocID=%22COG%2FPCG20262EC%2FNAT%2FATO%2F00001%22&PiT=99991231235958,False,False,https://www.ato.gov.au/law/view/document?docid=COG/PCG20262/NAT/ATO/00001
PCG 2026/3,Final PCG,Application of section 26-50 of the Income Tax Assessment Act 1997 to holiday homes that you also rent out - ATO compliance approach,,,11. This Guideline will apply both before and after its date of issue.,,,TR 2026/1,,"1. The purpose of this Guideline is to support taxpayers with managing their compliance risks with respect to section 26-50 of the Income Tax Assessment Act 1997, which is a tax law integrity provision. 2. All further legislative references in this Guideline are to Income Tax Assessment Act 1997, unless otherwise indicated. 3. Taxation Ruling TR 2026/1 Income tax: rental property income and deductions for individuals who are not in business expresses our view on section 26-50, which outlines that the intention of section 26-50 is to establish a firm rule to deny deductions for taxpayers obtaining a tax subsidy for what is in truth expenditure on their own recreation. 4. Section 26-50 denies deductions for losses or outgoings that relate to the ownership or use [1] of a holiday home unless an exception applies. Section 26-50 may be relevant to a broad range of properties that are a 'holiday home'. While the term holiday home [2] is broad, there is a significant exception if you mainly use a holiday home (or hold it for use) to produce assessable income in the nature of rents, lease premiums, licence fees or similar charges. [3] This Guideline is concerned with the application of this exception. 5. This Guideline sets out how we differentiate risk and how we manage that risk for a range of rental property arrangements to which section 26-50 may apply. We aim to give you more certainty by setting out how we will engage with you, including how we: 6. This Guideline uses 3 coloured zones to denote risk ratings in relation to how section 26-50 may apply to your arrangements. Refer to Table 2 of this Guideline to see a summary of these zones and the corresponding compliance approach. The coloured zones in this Guideline represent a spectrum of behaviours as illustrated in Table 1 of this Guideline. (low risk) (medium risk) (high risk) 7. This Guideline is designed to give you confidence that, if your circumstances align with the principles in the green zone set out in this Guideline, the Commissioner will not have cause to apply compliance resources to consider the application of section 26-50 to your arrangements, except to confirm that your arrangements meet the requirements of the green zone. In addition to the green zone, paragraph 18 of this Guideline describes our compliance approach where arrangements fall in the amber zone or red zone. 8. This Guideline may be updated from time to time to reflect changes in identified risks relating to the application of section 26-50. 9. Note: this Guideline does not replace, alter or affect the ATO's interpretation of the law in any way. It complements, and should be read together with, TR 2026/1, which sets out the ATO's interpretative position on the application of section 26-50. This means that if, under this Guideline, we allocate compliance resources to consider section 26-50, our consideration of section 26-50 will be in accordance with our interpretation set out in TR 2026/1. What is not covered by this Guideline 10. This Guideline does not apply to:","Scope: This Practical Compliance Guideline sets out a practical administration approach to assist taxpayers in complying with relevant tax laws. Provided you follow this Guideline in good faith, the Commissioner will administer the law in accordance with this approach.","15. Setting out our approach to the application of section 26-50 in this Guideline allows us to deal with the increasing risk of taxpayers inappropriately using the tax system to subsidise their private recreation through the utilisation of modern arrangements in the rental property market. Such arrangements include allowing property owners to easily and inexpensively list their holiday homes as available for rent through sharing platforms. 16. Our approach to the application of section 26-50 will not impact property owners who legitimately use their property (or hold it for use) mainly to produce assessable income in the nature of rents, lease premiums, licence fees or similar charges as explained in TR 2026/1. In these situations, you can choose to use the apportionment methods outlined in Practical Compliance Guideline PCG 2026/2 Apportionment of rental property deductions – ATO compliance approach to apportion your deductions for any private use of your rental property. 17. Rental investment by taxpayers in Australia is very common. This Guideline provides practical guidance to assist taxpayers who rent out their holiday homes in complying with their obligations. This Guideline provides support to individuals in determining whether the exception in subparagraph 26-50(3)(b)(ii) [7] , for using their holiday home (or holding it for use) mainly to produce assessable income in the nature of rents, lease premiums, licence fees or similar charges, may apply to their circumstances.","Intro: This Practical Compliance Guideline sets out a practical administration approach to assist taxpayers in complying with relevant tax laws. Provided you follow this Guideline in good faith, the Commissioner will administer the law in accordance with this approach.","Example 1: – limited personal use with high occupancy 26. Eric lives in Victoria and owns an apartment on the Gold Coast, Queensland. The property is near the beach and is managed by property managers as part of the apartment complex rental pool. All rental enquiries are managed and responded to by a dedicated property manager. The property is regularly rented on a short-stay basis and consistently has a high occupancy rate. Eric usually blocks out 4 weeks a year for personal use of the apartment for his annual holiday when rental demand for the property is low. 27. Eric lives interstate but will also occasionally stay at the apartment when visiting the area if the apartment happens not to be already booked out or rented. 28. Because Eric uses the apartment for his holidays and recreation, the apartment is a holiday home. Eric's claim for deductions relating to the Gold Coast apartment would not be denied because it is a holiday home that he uses (or holds for use) mainly to produce income from rent. Eric's use of the property shows clear prioritisation of income-producing activity over personal use. He will be required to apportion deductions under section 8-1 for his incidental personal use of the property. | Example 2: – limited personal use of seasonal property with high occupancy 29. Natalie and Scott own a house in the Barossa Valley. They advertise the property year-round on a sharing economy platform. The property has a high occupancy rate during the usual 4-month peak period, and a low occupancy rate at other times. 30. Each year, while on holiday, Natalie and Scott stay at the property for one week during peak period, otherwise they actively manage the property to maximise rental income. 31. Because Natalie and Scott use the house for their holidays and recreation, the house is a holiday home. Natalie and Scott's claim for deductions for their house would not be denied because it is a holiday home that they use (or hold for use) mainly to produce income from rent. Natalie and Scott's attitude towards the marketing of the property shows an intent to prioritise income derived from the property, and their personal use is incidental to this. If Natalie and Scott do stay at the property, they will be required to apportion deductions under section 8-1 for their personal use of the property. | Example 3: – limited personal use with high occupancy during peak periods 32. Ricky lives in Perth and owns a beach house in Busselton, Western Australia. The beach house is managed by a property manager and is advertised for rent year-round on sharing economy platforms. The beach house is highly desirable during the summer months and is rented at a higher rate during this time. The beach house has a high occupancy rate over the summer months and the school holidays. 33. Ricky usually blocks out one week a year for personal use of the house for his annual holiday when rental demand for the property is low. In addition, throughout the year, including during the summer months, Ricky occasionally uses the property for short stays of 2 or 3 days when it is not already booked or rented. His decision to use the property is generally made around 3 days in advance. If a booking is made within that 3-day period after he has decided to use the property, Ricky accepts the booking, even if it means changing his plans. 34. Because Ricky uses the beach house for his holidays and recreation, it is a holiday home. Ricky's claim for deductions relating to the beach house would not be denied because it is a holiday home that he uses (or holds for use) mainly to produce income from rent. Ricky's use of the property shows clear prioritisation of income-producing use over personal use. He will be required to apportion deductions under section 8-1 for his personal use of the property. | Example 4: – limited personal use with high occupancy during peak periods and short-term rental restrictions 35. Bindi and Ash live in Sydney and own a house in a regional town close to several bushwalking tracks. The local government where the property is located has rules for short-term rental properties which only allow Bindi and Ash to rent out their property for a maximum of 180 days per year. However, where a booking is for 21 or more consecutive days, those days do not count towards the applicable day limits. 36. Tourist demand is highest during the warmer summer months up to the end of the Easter school holidays, allowing the property to be rented at higher market rates. To maximise occupancy and rental income, Bindi and Ash advertise the property through a local real estate agent specialising in holiday accommodation and list it on several sharing economy platforms. The property has a high occupancy rate during this period. 37. During periods of high rental demand, Bindi and Ash do not block out the property for personal use. However, they stay at the property for one week when it is not already booked or rented. 38. Outside peak periods, when demand for the property is low, Bindi and Ash block out a total of 4 weeks for personal use. At all other times, they actively manage the property to maximise rental income. 39. Once the 180-day limit is reached, Bindi and Ash continue to advertise the property for rent but restrict bookings to stays of 21 or more consecutive days. They vary the rental rate to attract bookings while maximising the rental income received. 40. Because Bindi and Ash use the house for their holidays and recreation, it is a holiday home. Bindi and Ash's claim for deductions relating to the beach house would not be denied because it is a holiday home that they use (or hold for use) mainly to produce income from rent. Their use of the property shows clear prioritisation of income-producing use over personal use. They will be required to apportion deductions under section 8-1 for their personal use of the property. Amber zone factors and arrangements 41. Amber zone arrangements usually have factors that point to lower commercial exploitation of a property to produce rents, lease premiums, licence fees or similar charges and an increase in other uses, most commonly, personal use. 42. Factors that could point to an amber zone arrangement include, but are not limited to: 43. No single factor is decisive, and the weight given to each of these (or other) factors will vary depending on your individual circumstances. | Example 5: – personal use during peak period 44. Leonie owns an apartment in Hobart which she markets on a sharing economy platform. When the property is available to guests, it is occupied more often than not. 45. For a few months each year during peak periods, Leonie uses the apartment as a retreat while she is on holiday. Leonie does not respond to enquiries from potential tenants for the periods she wants to use it. Because Leonie uses the apartment for her holidays and recreation, the apartment is a holiday home. 46. Should Leonie want to shift to the green zone, she could reconsider her private usage and make attempts to maximise income from the use of the property by more actively managing the apartment year-round to ensure that it remains used (or held for use) mainly to produce income at all times in the year. | Example 6: – prioritising personal use during peak periods 47. Ryan and Tom live in Adelaide and own an apartment in the Melbourne central business district which they have available for short-term rentals on various sharing economy platforms. 48. Ryan and Tom are sports fans and use the apartment at specific times when there is a sporting event taking place in Melbourne, including the Australian Open tennis tournament, the Formula 1 Australian Grand Prix, and numerous major Australian football league games. 49. When not needed by Ryan and Tom, the apartment is mostly booked out for rental for full weeks during other periods when the property has high income-earning potential. There are other incidental bookings throughout the year. 50. Because Ryan and Tom use the apartment for their holidays and recreation, the apartment is a holiday home. If Ryan and Tom want to shift to the green zone, they could reconsider their current position of prioritising their personal usage of the property during peak periods and reduce their use of the apartment to attend sporting events when the property has high income-earning potential. | Example 7: – prioritising personal use of seasonal property 51. Ling owns a luxury ski chalet in Thredbo, New South Wales. The property is advertised online via sharing economy platforms. 52. During the ski season, which lasts around 4 months, Ling uses the property for a few days per fortnight, blocking it out for her personal use so she can enjoy skiing. When the property is not used by Ling during the ski season, it is consistently booked. In the off-season, the chalet attracts occasional weekend bookings. 53. Ling's approach to the chalet indicates an intention to produce some income from it. However, she extensively uses the chalet privately during the ski season which is a peak income-earning period. 54. Ling's chalet is a holiday home because she uses it for holidays or recreation. If Ling wants to shift to the green zone, she could reconsider her personal usage of the property during peak ski season when the property has the highest income-earning potential. Red zone factors and arrangements 55. Red zone arrangements for the purposes of section 26-50 are ones where there is little or no commercial exploitation of the property to produce income through rents, lease premiums, licence fees or similar charges and the non-income-producing use is usually prioritised. 56. Factors that could point to a red zone arrangement include, but are not limited to: 57. No single factor is decisive, and the weight given to each of these (or other) factors will vary depending on your individual circumstances. | Example 8: – major features inaccessible with limited attempt to rent 58. Kristoff purchases a luxury property in Sorrento, Victoria. Rental demand for the property is at its highest during the summer months. Typically, Kristoff rents the property for 3 or 4 weeks per year. 59. The house is listed on one sharing economy platform and is managed by Kristoff, who does not respond to queries in a timely manner, if at all. 60. Kristoff stays at the property for 1 or 2 weeks each year while he is on leave, around the New Year's Eve holiday period. The property is furnished with high-end furniture, and houses Kristoff's extensive wine and fine art collections as well as his boat and jet-ski, which are all inaccessible to guests. 61. Because Kristoff uses the house for holidays or recreation, it is a holiday home. Kristoff cannot rely on the exception to the application of subsection 26-50(1) in subparagraph 26-50(3)(b)(ii) because the property is a holiday home that is not mainly being used to produce assessable income. Kristoff's action of blocking off guests' access to his wine and fine art collections, boat and jet-ski, reduces the appeal of the property to guests and points to prioritising his use of the property for his holidays and recreation. Subsection 26-50(1) will therefore apply to deny deductions relating to property ownership. [12] | Example 9: – prioritising private use, times blocked out for personal use 62. Josh lives in Perth and owns a beach house in Busselton, Western Australia. The beach house is advertised for rent year-round through an agent and on sharing economy platforms. The beach house is highly desirable during the summer months and is rented at a higher rate during this time. The beach house is always blocked out for use by Josh and his family and friends at Christmas and Easter, and during summer school holiday periods. 63. Josh and his family do not always use the property for the blocked-out dates, but Josh has instructed his agent not to let the property during these times just in case they wish to use it at short notice. Josh is very selective about who can rent the property and rejects many of the booking enquiries he receives. On average, the beach house is rented out to unrelated guests about 10 weeks per year. 64. Because Josh uses the beach house for holidays and recreation, it is a holiday home. Josh is prioritising his personal use of the property over any income-earning use. The beach house is a holiday home that is not mainly being used to produce assessable income. The exception in subparagraph 26-50(3)(b)(ii) will not apply and subsection 26-50(1) will apply to deny deductions relating to property ownership. [13] | Example 10: – unreasonable restrictions, prioritising private use 65. Andy is an avid golfer. He purchases a property on a golf course in the Hunter Valley, New South Wales. The property is advertised online via sharing economy platforms. Andy stays at the property approximately 1 or 2 Sundays each month to play golf. 66. The property has a minimum stay requirement of 4 nights but has a recurring block-out period on Sundays to allow Andy to use the property when he wishes on those days. Andy also ensures that prospective tenants are made aware that the property has poor mobile phone reception and does not have any internet available for use by tenants. The property is let approximately 5 or 6 times per year for the minimum 4-night stay. 67. Because the property is used for Andy's holidays or recreation, it is a holiday home. Andy is prioritising his personal use of the property over any income-producing use. The property is a holiday home that is not mainly being used to produce assessable income, and subsection 26-50(1) will apply to deny deductions relating to property ownership. [14] | Example 11: – mainly used for holidays and recreation by owners 68. Shane and Carmen live in rural South Australia, and own a property in Glenelg Beach, South Australia. They have owned the property for many years, and it has always been let as an income-producing long-term rental property. 69. Shane and Carmen both retire from work and begin to travel more. They decide to evict their long-term tenants and shift their rental strategy for the property to short-term rentals so that they can visit the property on weekends and for holidays on a regular basis. 70. The property is only very occasionally rented out via several sharing economy platforms, with Shane and Carmen seldom responding to enquiries. They tend to make their holiday and travel plans at the last minute, so rarely block out specific dates, but will cancel a booking if it conflicts with their plans to utilise the property. 71. Because Shane and Carmen use the property for their holidays and recreation, it is a holiday home. Because of their prioritisation of their personal use of the property over any income-producing use, Shane and Carmen will not be able to rely on the exception in subparagraph 26-50(3)(b)(ii). Subsection 26-50(1) will apply to deny deductions relating to property ownership. 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