After a nearly three-year wait, the ATO finalised the risk guideline targeting cross-border related party arrangements (collectively referred to as ‘Intangibles migration arrangements’) involving:
The Guideline addresses concerns with arrangements:
The Guideline applies from 17 January 2024, and will apply to existing and new arrangements.
The Guideline does not reflect the ATO’s interpretation of tax laws, however serves as a cautionary notice that ATO will focus on scrutinising risky arrangements.
The ATO’s approach to risk assessment is determined by two point-based Risk Assessment Frameworks (RAFs).
The below risk factors may trigger risk points for a completed intangible migration during the current year:
RAF Table 2 becomes relevant where there was no intangible migration completed during the current year. It comprises the below risk factors:
The risk zones / ratings and corresponding compliance approaches are summarised in the table below.
Similar to previous drafts, the Guideline continues to place a high bar for evidence and documentation.
The expected evidence focuses on the following aspects:
The complexity of taxpayers’ business, the extent to which their Intangibles migration arrangements contribute to that business, and the risk rating of the arrangement will influence the type and level of evidence the ATO expects from them to substantiate the arrangement. However, the Guideline does not serve as substitute for the transfer pricing documentation requirements under Australian tax law.
Appendix 1 of the Guideline includes 15 examples of Intangibles migration arrangements to illustrate how the RAFs should be applied by taxpayers. Our transfer pricing experts break down and explain these examples here.
Compared with PCG 2023/D2, there appears to be some “taxpayer friendly” changes which show that the ATO adopted public feedback during the consultation process. Some positive changes include:
On the other hand, the Guideline remains to place significant challenges and administrative burden on taxpayers:
The Guideline’s finalisation highlights the ATO’s focus on tax risks connected to intangible arrangements with offshore related parties. It is relevant to a wide range of Australian taxpayers, regardless where the relevant intangibles are held. The asessment of the relevance and associated risk is not a straightforward process. It is important for taxpayers to self-assess early and complete these self-assessments before tax returns for the relevant income year are lodged.
For larger taxpayers that are required to complete Reportable Tax Position (RTP) Schedules in the tax return, a new question on Intangibles migration arrangements will need to be completed. Getting in touch with relevant IRPs early to obtain necessary evidential support is critical for the RTP disclosure.
Regardless of materiality, taxpayers need to ensure sufficient coverage on the arm’s length nature of relevant intangible arrangements is included in its contemporaneous transfer pricing documentation. All the examples detailed in the Guideline have mentioned transfer pricing as a focus area under the ATO’s compliance approach across all risk categories.
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 With initial PCG 2021/D4 released in May 2021, followed by PCG 2023/D2 released in May 2023.
 Including the potential application of the general anti-avoidance, transfer pricing, capital gains tax rules etc.
The over-arching view remains that payments made for vast majority of software arrangements may be royalties when made by an Australian entity to an offshore entity. This includes cloud-based distribution, distributors of tangible hardware with a software component licensing, software-as-a-service.
The current draft is in essence a comprehensive rewrite, notably removing the concept of a ‘simple use of software’ but further considers the interactions and applications of the royalty definitions in domestic tax laws and Double Tax Agreements (DTAs). It replaces draft ruling TR 2021/D4 (issued in June 2021), which replaced TR 1993/12 (withdrawn effective 1 July 2021).
Under the current draft:
an agreement, arrangement or scheme under which a distributor makes payment(s) directly or indirectly to the owner or licensee…of the copyright (or other intellectual property (IP)) for the right to be in a position to earn income relating to the use of, or right to use, software.
The table below sets out the ATO’s distinction when consideration constitutes a royalty payment.
|Not a Royalty
|– Grant of a right to use IP (e.g. to reproduce a computer program), (regardless of whether the right is exercised).
– Use of an IP (under the standard tax treaty definition).
– Supply of know-how in relation to an IP right.
– Supply of assistance required to enable the application or enjoyment of the supply.
– Sale by a distributor of hardware with embedded software, where the distributor is granted or uses rights in the IP of the embedded software.
|– Solely for grant of right to distribute software without being provided the use, or right to copyright or another IP right.
– Consideration for transfer of all rights with respect to software copyright.
– Payment from distributor solely for acquisition of hardware with embedded software, provided the distributor does not use or is granted the right to use, any other copyright / IP in the embedded software.
– Outright sale of all rights associated with the software and IP. Supplier must not retain any rights.
– Consideration for the provision of services that are unrelated to any IP right referred to under the standard tax treaty definition.
To illustrate its view the ATO has replaced the eight high-level examples with two detailed scenarios.
In one scenario, the Australian entity (AusCo) is granted a non-exclusive right to resell its foreign parent’s (ForCo) software products in Australia. Whilst the agreement does not set out all the necessary rights and obligations to give effect to the software arrangement, certain key terms are provided, including:
The ATO considers payments made by the AusCo to ForCo is royalty because the rights and entitlements to use the software cannot be provided with the authorisation or communication by the ForCo (the copyright owner). Furthermore, AusCo has obtained other rights (e.g. use of ForCo’s trademarks, brands, enter into commercial rental arrangement (recurring licensing fee), etc.) under the agreement.
Reasonable apportionment may be applicable if sufficient evidence is provided to support the notion that the distribution right had substantial value independent of any right to use copyright or IP rights.
The ATO is currently seeking comments on the draft ruling, with the consultation period closing on 1 March 2024. Once finalised, the ruling will apply to both prospective and retrospective arrangements.
Where a payment is royalty, it is subject to royalty withholding tax in Australia – either at the treaty rate (where there is a DTA) or the default rate of 30 percent. If the Australian resident makes overseas payments but failed to withhold and/or remit, deduction of these payments will be denied for income tax purposes until such time the withholding tax is remitted.
Whilst the draft ruling concerns payments relating to ‘software arrangements’, the ATO may also potentially extend its application to distribution / licensing arrangements to other industries (e.g. pharmaceutical), where the rights to distribute, copyright, technical know-how and/or provision of ancillary services may also typically be ’bundled up’ under a single agreement.
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The NFP self-review return will be available from the Online Services section of the ATO website from 1 July 2024. It will be due for lodgement between 1 July and 31 October 2024 for 30 June financial year balancers. For details of the previous update click here.
The ATO has released high level information regarding the questions that NFPs will be required to answer on the online NFP self-review return, which includes:
Assuming answers indicate that an organisation is a tax exempt NFP, the ATO system will then generate a statement:
“Based on the information provided, the organisation has self-assessed as income tax exempt for this income year.”
A declaration is then required to be signed on behalf of the organisation. There is also the option to print a copy of the questions and answers to share with the board, committee or tax agent.
We can assist in your preparation for the new online return. To discuss your broader eligibility for income tax exempt status, please contact our Tourism, Hospitality and Gaming (THG) industry experts and not for profit experts.
To improve the disclosure and accountability of climate-related matters the Australian government’s final Policy statement proposes to mandate certain entities follow the new sustainability reporting standards issued by the AASB. This is consistent with the international sustainability standards.
The first group entities would need to prepare their sustainability report for annual reporting periods commencing on 1 July 2024, subject to submission feedback on a 6 month deferral, with smaller entities phased in over the next few years.
There is a new sustainability reporting requirement for reporting information on climate-related matters. If applicable, the sustainability report will need to be prepared together with the annual report.
The report will follow the new sustainability reporting standard issued by the Australian Accounting Standards Board, which is closely aligned with the international sustainability standard. This will provide much-needed comparability across the companies.
The requirement will be subject to the passing of the bill.
The government proposed a phased approach based on the size of the entities. The table below sets out the details of the threshold and date for the implementation.
The above table is extracted from Treasury Policy Statement
The smaller Group 3 (current Large Pty threshold) are only required to make climate disclosure if the entity has material risks or opportunities.
The disclosure will need to follow the new stainability standards issued by AASB. The key areas of disclosure include:
In addition to a qualitative description of the risks and opportunities, the company is also required to disclose a quantitative scenario analysis. There are several reliefs proposed by the government in relation to more complex disclosure on Scope 3 emission and quantitative analysis.
The above disclosure will need to be included in a new annual sustainability report. The structure and content of the sustainability report consists of:
The annual sustainability report will be presented together with the financial report.
The company’s financial auditor will also audit the sustainability report. The content subject to assurance will gradually move from Scope 1 and 2 emission data initially to the full report. The AuASB is currently consulting with stakeholders to develop the level of assurance required for climate related disclosures and will determine how assurance requirements will be phased in.
Our team of audit and assurance experts are fully informed of the requirements of the sustainability accounting standards and can assist with providing guidance for your business, as well as keeping you abreast of developments from an Australian reporting context.
Reach out to your SW contacts or the key contacts here for a conversation.
First announced in the 2021 Federal Budget, NFP’s including sporting clubs, societies and associations, with an active Australian business number (ABN) need to lodge an annual NFP self-review return to continue accessing income tax exemption. Find out more about the original announcement here.
The annual return reporting is part of the ATO’s revised guidance on the games and sports income tax exemption for NFP clubs under Tax Ruling 2022/2, aiming to enhance the transparency of income tax exemptions.
Their first NFP period is between 1 July and 31 October 2024. The lodgement period will differ for clubs who don’t adopt a 30 June financial year end however, specifics are yet to be determined by the ATO.
The lodgement of the self-review return marks a major change in the reporting obligations for Not-For-Profit clubs as to maintaining their income tax exempt status. It is imperative that clubs take all necessary steps prior to the lodgement deadline to ensure they have appropriate documentation and procedures in place to support their income tax exemption classification and to be prepared to lodge the self-review return with appropriate disclosures.
In order for NFPs to prepare for the new online self-review return the ATO has outlined what organisations need to do:
We can assist in your preparation for the new online return and completing the Early Self Review. To discuss your broader eligibility for income tax exempt status, please contact our Tourism, Hospitality and Gaming (THG) industry experts and not for profit experts.
On Sunday 10 December, the government announced property tax changes to penalise overseas investors buying homes which are left vacant as well as cutting tax for Build-to-Rent investors. The reform is a bid to increase housing supply, however the effectiveness of these measures to address the broader housing crisis remains open to debate.
From 2024, foreign investors purchasing established Australian homes will face tripled application fees.
Currently, the application fee charged to foreign investors for buying established homes in Australia is calculated on the property’s value. For instance, properties priced between $1m and $2 m incur an application fee of $28,200. This rises to a maximum of $1,119,100 for residential acquisitions of more than $40 million.
Additionally, if these properties are left vacant, the investors will incur an equivalent amount as a vacancy fee.
The tripling of application fee effectively is a six-fold increase in total fees (application plus vacancy fees) for properties bought since 9 May 2017. A vacant property costing between $1m to $2m will have an application fee of $84,600 and an annual vacancy fee of $84,600.
The new measures specifically target established dwellings, encouraging foreign investors to focus on new housing developments. This shift is intended to stimulate the construction sector, creating jobs and contributing to economic growth.
To promote investment in new housing stock, the government is reducing application fees for Build-to-Rent projects. From 14 December 2023, the application fees for Build-to-Rent projects will be set at the lowest commercial rate – irrespective of the nature of the land involved. This initiative aims to make Australia’s foreign investment framework more consistent and attractive for long-term rental housing developments.
However, it’s important to note that this is in contrast with the proposed Federal thin capitalisation changes. Thin capitalisation involves tax reforms to ensure multinational companies pay their fair share, focusing on entities funded by high levels of debt over equity. For the latest update on the proposed changes, we have recapped the Thin Capitalisation rules.
To strengthen the enforcement of its new property investment rules, the government is significantly increasing funding for the ATO. This aims to ensure strict adherence to the new regulations by foreign investors. A key regulation is the requirement for foreign nationals to sell their Australian properties upon leaving the country unless they have secured permanent residency.
This commitment to enhanced enforcement goes beyond merely introducing new rules; it reflects a concerted effort to effectively monitor and enforce compliance. Foreign nationals are typically barred from purchasing existing properties. This approach underscores the government’s dedication to addressing the complexities of the housing market and ensuring the integrity of its foreign investment framework.
The new foreign investment rules primarily impacts foreign investors, with increased fees and stricter compliance requirements. The construction industry may see growth from incentivised new housing projects. Australian residents, particularly those seeking affordable housing, could benefit from these changes. Real estate developers involved in Build-to-Rent projects are likely to gain from lower fees, encouraging investment in this sector. The repercussions of these changes are thus widespread, affecting various stakeholders in the property market.
Get in touch with our property experts to learn more about how these new regulations affect you.
In light of these proposed changes, we encourage all stakeholders in the Australian property market to stay informed and actively engage with the evolving landscape. For further updates, insights, and guidance on navigating these new regulations, be sure to follow us on LinkedIn.
Christmas celebrations are a wonderful way to end the calendar year, reflect and celebrate with your team. Find out if your Christmas events and gifts may be subject to FBT. While your staff enjoy the party, make sure your festive activities make sure you aware of tax implications.
Food and drinks provided at Christmas events could fall into the entertainment benefit category which may attract FBT based on several factors. These include:
If your Christmas party is held on the business premises during a normal working day, no FBT is payable for food and drinks. This constitutes an exempt property benefit, rendering the entire cost of the party FBT exempt.
However, this concession applies exclusively to food and drink provided to employees. If food and drinks are provided to an employee’s associate (like family members), this portion will not be exempt and may attract FBT.
This exemption can only apply to property consumed on premises and other types of benefits may be subject to FBT (e.g. it will not apply to the cost of performers).
For parties held off-site (such as in a restaurant) or outside regular business hours, the minor benefit exemption might apply.
To be eligible for this exemption, broadly the cost per person (inclusive of GST) must be less than $300, and the benefit should be provided on an irregular and infrequent basis.
Entities like government departments, universities, and some schools, which are exempt from Income Tax, face more stringent FBT rules for entertainment as the exemptions described above (i.e. exempt property benefit and minor benefits exemptions) are not available. For these organisations, the entire cost of food and drinks will attract FBT unless a particular exclusion applies such as:
In addition, income tax exempt entities may utilise other concessions such as the 50/50 method to reduce the overall FBT cost.
Restrictions on concessions for tax exempt body entertainment benefits apply only to meal entertainment. Therefore, it becomes more important to determine which benefits should be considered entertainment, and/or what proportions may be subject to reportable fringe benefit rules (i.e. reportable on employee Income Statements).
For non-entertainment benefits like gifts or hampers, the ATO has confirmed that these are generally treated as separate non-associated benefits under the minor benefits exemption rule. For example, an employer can provide the following benefits and still remain within the bounds of the minor benefits exemption:
This seems to be a special case for Christmas gifts and events, where the minor benefits exemption and its $300 threshold can be applied separately to the gift without also considering the value of associated Christmas events.
This special treatment does not apply to the Christmas parties which could be made up of several distinct benefits in its own right (e.g. dinner and a social event or performance), These distinct benefits could be considered similar or associate benefits, and their combined costs must be considered collectively. If the combined costs are considered significant, then the minor benefits exemption is not likely to apply, Take, for instance, the expenses of a Christmas party. If the cost for food and drinks per person is $300, and the additional entertainment also amounts to $300 per head, the aggregate expense of $600 per person should be evaluated. Given this combined figure, it’s not likely that the minor benefits exemption would apply, as the total cost for these associated benefits is significant.
The minor benefits exemption is a practical way for employers to provide certain benefits without incurring FBT. To maximise this exemption, make sure you carefully plan and document the costs and frequency of these benefits to avoid doubling the cost of an event.
For personalised advice on the FBT implications for Christmas parties and gifts please contact your SW advisor.
The government has introduced more amendments to the thin capitalisation and debt deduction creation rules Bill. While the changes to the Bill are positive, across our client base there are genuine third-party arrangements that will not satisfy the third-party debt test due to inadvertent technical breaches.
SW continues to work with industry bodies to highlight the impact to Treasury. We hope that further amendments will be made to the Bill to ensure it is a targeted and measured response to the issue of base erosion.
Taxpayers will face a further period of uncertainty regarding how the law applies as the Bill has again been referred to a Senate Economics Committee due to report to parliament on 5 February 2024.
The focus has largely been on the amendments to the thin capitalisation rules due to its effective date. Our recap of the changes proposed in the Exposure draft can be found here.
However, taxpayers should start identifying the types of arrangements that could be impacted by the debt deduction creation rules as their material impact is arguably greater. The debt deduction creation rules commence on 1 July 2024 for all arrangements and include historical arrangements arising prior to the introduction of the rules.
The original Bill and amendments are contained across separate documents. This means taxpayers will need to read each document collectively, which is no easy task.
To help you we have prepared a more detailed analysis of the Bill in our Technical Briefing. Our Technical Briefing summarises the application of the proposed law as well as the amendments to the original Bill. Due to the complexity of thin capitalisation, we encourage you to talk to our SW team.
Below are the key changes between the original legislation, released on 22 June 2023 and the Senate amendments made on 29 November 2023:
Third party debt test
Debt deduction creation rules
Our experts can assist with:
Reach out to your SW advisor for support from our specialist tax team. Download the Technical Briefing for a deeper dive into the technical details.
The Office of Management and Budget (OMB) have issued pre-released proposed changes to Uniform Grants Guidance on the 21 September 2023 for public comment. The guidelines are issued to all Federal agencies for use across all United States (US) Federal Grants and other types of financial assistance.
The proposed changes to OMB’s Uniform Grants Guidance include the following:
The proposed changes aim to streamline compliance process to enable recipients to have more time and resources available to deliver outcomes.
SW continues to review the anticipated changes to Uniform Guidance. Get in touch for further details and how these changes may impact you. We will continue to monitor the progress of any changes that impact US Federal Grants and financial assistance.
We have worked with 35 of the 40 major Australian Universities and have extensive experience in assisting education providers with an appropriate audit of US Government sourced funds as required by the OMB Uniform Guidance.
Our approach to Uniform Guidance audits offers best practice expertise in a practical and commercial manner that is delivered using senior personnel with significant educational sector experience.
The key findings found in the Next 5,000 population were that most had informally documented tax governance-like processes and controls in place. The ATO is now increasingly focusing on the next ‘gen’ and tax issues arising from succession planning within a private group.
The ATO will select cases by using data analysis and risk profiling, to identify emerging risks affecting private groups and tax issues relating to the Next 5,000 key priority areas. Taxpayers who were previously reviewed and provided with feedback for improvement or had issues may be subject to a new round of ATO review.
The Next 5,000 program was introduced to instil the community’s confidence that Australia’s largest and most complex private groups are compliant with their tax obligations.
This tax performance program considers Australian resident individuals who, along with their associates, control net wealth exceeding $50 million. Approximately 7,300 private groups fall under this population.
Whilst most taxpayers within this population will continue to be engaged through a streamlined assurance review (SAR), the ATO has recently advised that comprehensive risk reviews (CRR) will be undertaken for taxpayers identified:
A SAR typically involves request for information relating to the last two income years where tax returns were lodged, and for entities within the group with significant activities, events, and transactions. Where the ATO is satisfied that the four pillars of Justified Trust are achieved, future reviews will examine significant changes to the private group, and/or issues that were not considered/assured in the SAR.
In contrast, a CRR would encompass all entities within the private group and a substantially broader scope.
Click here for our previous coverage of Justified Trust and effective tax governance.
The ATO has identified taxpayers in the Next 5,000 population with the following behaviours and transactions as their focus for the 23/24 income year:
Common tax issues that the ATO identified from the completed reviews, of which some were escalated to an audit, included:
The main observations made by the ATO regarding the Next 5,000 population reviewed to date are that although majority had tax governance-like processes and controls in place, most are not formally documented. The lack of or insufficient governance frameworks has a strong correlation with disclosure errors on ITRs/BASs and taxpayers not recognising tax risks or adopting correct tax treatments.
Noting the program commenced on and around the in the 2020 income year and, taxpayers who were previously reviewed and provided with feedback for improvement, / had issues or unassured /transactions could not assured may be subject to a new round of ATO review. With the aging of the controlling individual/head, it also appears that the ATO is now increasingly focusing on the next ‘gen’ and tax issues arising from succession planning within a private group.
Reach out to us to discuss your tax governance issues, ATO reviews or other related matters.