In the 2020-21 Federal Budget, the Government announced an increase to the small business entity turnover threshold from $10m to $50m, allowing greater access to certain concessions including the shorter 2-year period of income tax assessment review. Broadly, this limits the Commissioner’s period to amend a return unless fraud or evasion occurred.

The Income Tax Assessment (1936 Act) Amendment (Period of Review) Regulations 2022 (the “Amending Regulations”) will amend the Income Tax Assessment (1936 Act) Regulation 2015 to exclude certain entities with “particularly complex tax affairs or significant international tax dealings” from the shortened 2-year period to a 4 year period.

The regulations were issued in draft form in August 2022 and the final version is largely unchanged, other than “providing more certainty to when the period of review would apply to entities that engaged in certain activities”.

SMEs excluded from shorter review period

Exceptions for certain taxpayers already existed that excluded entities from the 2 year review period, allowing the Commissioner to amend for 4-years after the notice of assessment is issued.

Arm’s length dealings

This exception has now been expanded to remove the requirement that one of the parties was already subject to the 4-year review period. It has also been expanded to apply – not just where the parties are not dealing at arm’s length – but also where:

• the transaction results in an amount of $200,000 or more being included in or allowable as a deduction of any of the parties, or
• the transaction involves CGT events where the sum of the proceeds from the CGT events is $200,00 or more.

Additional SMEs excluded from the 2-year review period

The list of SME exceptions to the 2-year period of review has been expanded to entities:

• where the sum of their foreign sourced assessable income, and that of their affiliates and associated entities is at least $200,000
• that are Australian foreign controlled or non-resident entities
• subject to the Diverted Profits Tax or Multinational Anti-Avoidance Law in the assessment year
• with at least 10 connected or affiliated entities
• that have claimed a Research and Development (R&D) tax offset for an income year or may be entitled to certain related deductions, recoupments, and adjustments
• that have claimed CGT relief under the following roll-over provisions:
  • Division 615 business restructure
  • Division 125 demerger
  • Subdivision 126-B companies in the same wholly owned group
• that have disregarded a capital gain/loss due to the operation of Division 855-10 (relating to foreign residents).

General tax assessment review rules

Subject to certain exceptions, the Commissioner may amend a tax assessment within 2 years of a notice of assessment for:

• an individual
• a company that is a small or medium business entity
• a person (in the capacity of a trustee of a trust estate) for a year of income if the trust is a small or medium business entity.

For other entities, the Commissioner may amend an assessment:

• within 4 years after the day on which notice of the assessment is provided to the taxpayer
• at any time if there has been fraud or evasion
• at any time to give effect to a decision on a review or appeal, or
• as a result of an objection made by the taxpayer or pending a review or appeal.

Date of effect

The amendments are now in operation, which means they apply to assessments for an income year if the assessment is made after 9 December 2022 and relates to income years starting on or after 1 July 2021.

How SW can help?

Reach out to your SW contact or the team here if you would like more information about how your tax assessment review period could be impacted.

Contributors

Tanya Bester

The post SMEs excluded from shorter Income Tax Assessment review appeared first on SW Accountants & Advisors.

Case background

The dispute between Glencore and the Commissioner surfaced as the latter suspected a breach in transfer pricing rules in relation to the purchase of copper concentrate by Swiss-based Glencore International AG (GIAG) from its Australian subsidiary, Cobar Management Pty Ltd (CMPL) over the 2007-2009 period. CMPL owned and operated the Cobar mine in NSW and since 1999 had sold all its production to GIAG. GIAG had the capability to perform downstream activities by way of reselling copper concentrate to third party smelters across the Asia Pacific region.

The transfer price of the copper concentrate was based on the London Metal Exchange (LME) price for refined copper, less certain discounts for Treatment Costs and Refining Costs (TCRC). As a result of contractual changes in 2007, the TCRC deduction was made at a flat rate of 23% (previously based on a published TCRC benchmark and reset annually), an approach known in the industry as ‘Price Sharing’. Since 2004, GIAG was also allowed to select flexible quotational periods for the LME benchmarking purposes.

The Commissioner’s position was that independent parties acting at arm’s length would not have entered into the 2007 amended arrangements.

Key decisions

Limitations to the power to reconstruct the terms of the transaction

The Commissioner focused on whether independent parties would have agreed to similar arrangements under comparable situations and whether CMPL (as the seller) would have agreed to the change of terms that might adversely impact profitability.

Nevertheless, the Court decided that the taxpayer had sufficiently proved that the amended pricing mechanism was arm’s length (apart from the basis of calculation of freight charges in 2009). Notably, the Court confirmed that there is no power or authority to substitute different terms of a contract where those terms do not define the price. This effectively implies that the ‘reconstruction’ provision under Australia’s transfer pricing laws should only be considered in very narrow circumstances.

Arm’s length price can be more than one

The Commissioner’s and the taxpayer’s experts disagreed over the pricing with which independent parties would be more likely to agree and the Court accepted aspects of both sides. The use of price sharing terms in contracts was supported by other contracts in the market. Effectively, the taxpayer does not have to prove its pricing is more likely than that put by the Commissioner. The taxpayer just has to present sufficient evidence that its pricing position falls within a range of ‘commercially acceptable arm’s length outcomes’.

The Court acknowledged that care must be taken “not to make the task of compliance with Australia’s transfer pricing laws an impossible burden when a revenue authority may, years after the controlled transaction was struck, find someone, somewhere, to disagree with a taxpayer’s attempt to pay or receive arm’s length consideration.” In order to establish the arm’s length price, a degree of flexibility and pragmatism is required.

Losses do not mean the transfer price is not arm’s length

The Commissioner challenged the amended contract on the basis that the taxpayer was “highly likely to be worse off” as opposed to staying under the prior contract. However, the Court held that prior contracts are not determinative of whether the arrangement in dispute was arm’s length. A “taxpayer is under no obligation to choose a pricing methodology which pursues profitability in Australia at the expense of prudence. There is no obligation to “maximise” profitability at the expense of all else”. The Court found it reasonable to factor risk handling into the price determination.  Given the extremely volatile copper concentrate market at that time, the trade-off between certainty and profitability was viewed as reflective of commercial prudence.

Key takeaways

The Glencore case is useful in lending guidance to interpreting complex transfer pricing rules. While the judgments under the case are untested in the new Subdivision 815-B environment, we believe the case has several key features that may help taxpayers defend their transfer pricing positions:

• Finding evidence that the same or similar pricing mechanism is adopted by independent parties in the market
• Ensuring the pricing is commercially prudent and consistent with the economic and market circumstances at the time of the arrangement
• Maintaining transfer pricing documentation on a contemporaneous basis. This not only evidences good corporate governance, but also mitigates the risk of hindsight challenge from the tax authorities. This is particularly important when a change in pricing methodology takes place.

¹Commissioner of Taxation v Glencore Investment Pty Ltd [2020] FCAFC 187

² Based on the applicable transfer pricing laws – Division 13 of Part III of the Income Tax Assessment Act 1936, and Subdivision 815-A of the Income Tax Assessment Act 1997.

Get in touch

Reach out to ShineWing Australia’s global transfer pricing and international tax experts to discuss how these changes may present an opportunity for your business. To learn more about the case or transfer pricing in further detail contact one of our experts below.

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