Overview

Draft Practical Compliance Guideline PCG 2025/D3 outlines the ATO’s transitional compliance approach for lodgement obligations and penalties during the transition period (fiscal years starting on or before 31 Dec 2026 and ending on or before 30 June 2028).

Australia has introduced a 15% Global and Domestic Minimum Tax (Pillar Two Rules) aligned with the OECD’s Global Anti-Base Erosion (GloBE) Rules under Pillar Two. This targets large multinational enterprise (MNE) groups with consolidated revenues ≥ EUR750 million (AU$1.2 billion or US$820 million) in at least two of the four fiscal years preceding the tested year. The Pillar Two rules apply in Australia from 1 January 2024.

It is noteworthy that effective from 1 January 2025, the Undertaxed Profits Rule may subject an Australian MNE group member to top-up tax related to another group member. This is regardless of whether the former has any ownership interests in the latter. Consequently, auditors might require a Pillar Two analysis for the global group for the 2025 fiscal year.

What are the key lodgement obligations in Australia?

Applicable MNE Groups must lodge the following:

1. GloBE Information Return (GIR) – OECD- standardised form for calculating tax liability.
2. Foreign Notification Form (FNF) – Notifies the ATO of foreign GIR lodgement.
3. Australian IIR/UTPR Tax Return (AIUTR) – Assesses top-up tax under Income Inclusion Rule and Undertaxed Profits Rule.
4. Australian Domestic Minimum Tax Return (DMTR) – Assesses top-up tax on low-taxed Australian profits.

The AIUTR, DMTR, and FNF are consolidated into the Combined Global and Domestic Minimum Tax Return (CGDMTR). The GIR remains a standalone obligation. The returns are due 18 months after the fiscal year end for the first year and 15 months thereafter. For an MNE group with a fiscal year ending on 31 December 2024, the returns are due on 30 June 2026.

Importantly, the Australian members of an MNE Group must fulfil lodgement obligations in Australia, even if the Parent of the Group is in a country without Pillar Two rules implemented. The Australian entities may nominate one Australian Group Entity, known as the Designated Local Entity (DLE), to lodge the returns on behalf of the Australian entities.

As of the date of this document, Australia has not signed the Multilateral Competent Authority Agreement (MCAA) on the Exchange of GloBE Information (GIR MCAA) under Pillar Two. Until that happens, the GIR must be lodged in Australia with the ATO even if one has been lodged overseas.

Is there a “soft landing” in terms of penalties for taxpayers?

During the transition period, the ATO will adopt a “soft-landing” approach (i.e. penalties remitted) if the MNE group has demonstrated that reasonable measures were taken to comply.

Examples of reasonable measures include:

• documented implementation plans and internal policies
• system upgrades and gap analyses
• proactive engagement with the ATO and external advisors and
• timely correction of errors

Furthermore, no penalties should be imposed for isolated or good-faith errors during the transition period. However, gross indifference or failure to take reasonable care may be subject to penalties. Current administration penalties imposed upon Significant Global Entities apply in these circumstances.

How can SW assist?

We can assist with your Pillar Two project implementation by:

• implementing SW’s CTS Pillar Two Software for planning, Pillar Two calculations, and lodging GIR and domestic returns
• advising how Pillar Two will affect your group
• designing a Pillar Two implementation plan tailored to your group’s requirements
• identifying and classifying the entities within the group
• advising on the application of charging mechanisms
• assisting with Transitional CbCR safe harbour calculations

Contributors

Antony Cheung

The post Pillar Two obligations in Australia during the transition period appeared first on SW Accountants & Advisors.

The PSI rules were enacted to ensure that income derived by a PSE would be taxed to the individual earning the PSI. The PSI rules also limit the types of deductions an entity can claim in respect to income being derived from the personal services of an individual. 

If certain conditions are met, the PSE may be treated as conducting PSB. In these cases, the PSI provisions are exempted and the income would not be taxed to the individual.

The PCG confirms the ATO’s position, as stated in Taxation Ruling TR 2022/3, that the general anti-avoidance provisions in Part IVA applies when a PSE conducts a PSB. Therefore, any tax benefit obtained from an arrangement would be ‘unwound’ despite meeting the PSI rules. This could impact any person operating a business through a company or trust structure in industries including:

• Sole practitioner consulting/ professional services (legal, accounting, engineering, IT etc)
• Constructions and building trades
• Medical (doctor, dentist etc) and
• Other business where income is mainly derived from personal efforts/exertion.

Two main types of arrangements

Specifically, the PCG addresses concerns around two main types of alienation arrangements:

Retention of profits arrangements

The PSE retains income rather than distributing it to the individual who performed the services. By retaining profits within the PSE, tax on that income is often deferred, allowing the income to be taxed at a lower corporate rate or retained for future use.

In some cases, this results in the profits being distributed at a more advantageous time, or for the income to be used for non-commercial purposes, raising the risk of Part IVA being applied if the dominant purpose is to obtain a tax benefit through deferral.

Income splitting arrangements

This occurs when the income earned by the individual providing the personal services is diverted to associates (such as family members or related entities) rather than being fully allocated to the individual. It aims to reduce the overall tax by distributing income to entities at relatively lower tax rates, achieving a reduced overall tax rate or gaining other benefits such as spreading income across multiple taxpayers.

The ATO views these arrangements as higher risk under Part IVA, particularly if the income split is disproportionate to the value of the services provided by the associates.

Key takeaways

• The PCG introduces a two-part risk assessment framework categorising arrangements into ‘low-risk’ and ‘higher-risk’ using specific indicators.
• It provides 13 examples illustrating these indicators and guiding how different scenarios might be assessed. The ATO indicates that it will dedicate compliance resources towards higher-risk arrangements, particularly those involving significant income diversion or retention.
• The PCG is drafted to complement existing guidance materials and judicial decisions (such as Law Administration Practice Statement PS LA 2005/24) and does not provide extensive legal guidance on the application of Part IVA. It provides no substantive guidance on the ‘dominant purpose’ test for such alienation arrangements.
• The ATO suggested that a narrower scheme for Part IVA may be taken where a PSE is interposed for clearly commercial reasons (such as where the use of a PSE is a tender requirement).  
• The PCG emphasises the importance of maintaining thorough and contemporaneous records. Notwithstanding the informal nature of family arrangements, proper documentation will be critical for demonstrating compliance and mitigating risks.

Low-risk arrangements

The following are features of low-risk arrangements:

• full attribution – when the entire PSI received by a PSE is affirmed as assessable income of the individual performing the services
• non–tax purpose – if a portion of income is retained or used by the PSE for non-tax reasons, such as providing a superannuation benefit or acquiring assets, and this is not done primarily to obtain a tax benefit

Higher risk arrangements

The following are features of a higher-risk arrangement:

• income splitting – arrangements where income is split with another entity, reducing or deferring tax that would otherwise be payable
• value mismatch – significant discrepancies between distributed income and value of the services provided
• retention in lower–taxed entities – substantial amounts of income retained in entities subject to lower tax rates

Key actions required

The PSI rules apply to various professionals including doctors, dentists, plumbers, electricians, carpenters, accountants and lawyers.

Taxpayers using PSEs to derive PSI must review their current arrangements to determine whether any income-splitting or profit retention practices positions them in the higher-risk category for Part IVA scrutiny.

1. Review income-splitting or profit retention arrangements used within the PSE: If the arrangements primarily aim to gain a tax benefit, there is a higher risk of triggering Part IVA.
2. Maintain comprehensive documentation of all transactions, decisions, contracts, and agreements involving the PSE: Detailed record-keeping is essential for justifying the rationale behind income-splitting or profit-retention decisions if reviewed by the ATO.
3. Seek professional advice: Taxpayers unsure about their arrangement’s risk level or whether Part IVA applies should consult a tax professional to assess compliance and make necessary adjustments

How SW can help

Stakeholders have until 11 October 2024 to submit comments on the PCG before it is finalised.

Please reach out to an SW advisor to discuss the potential impact of the PCG on your business to mitigate any risks of current and future arrangements

Contributors

Ned Galloway

Eric Lay

The post ATO draft Practical Compliance Guideline PCG 2024/D2: Impact on personal services income appeared first on SW Accountants & Advisors.

On 31 July, the ATO released draft guidance in relation to Section 99B of the Income Tax Assessment Act 1936, including:

• Draft Taxation Determination TD 2024/D2 (Draft TD) – outlining the Commissioner’s views on certain factors relevant in determining when section 99B will apply.
• Draft Practical Compliance Guideline PCG 2024/D1 (draft PCG) – outlining the Commissioner’s proposed compliance approach to section 99B.

Comments on both releases are due on 28 August 2024.

What is section 99B?

Section 99B is a provision that was originally introduced to treat the provision of certain distributions and benefits provided by a non-resident trust to a resident beneficiary as taxable, where such amounts would not otherwise be taxable.

The provision is a ‘catch-all’ or residual provision, meaning unless a particular exception applies, amounts paid to the beneficiary’s benefit are subject to tax.

The main exceptions are:

• amounts representing the corpus of the trust estate, provided that if a ‘hypothetical’ resident taxpayer derived the funds represented by that corpus, the amount would not have been assessable.
• amounts that, had they been derived by a hypothetical resident taxpayer, would not be included in the hypothetical taxpayer’s assessable income for the year, and
• amounts that are assessable to the beneficiary through the application of another provision.

Whilst section 99B has been law since 1979, there has been minimal judicial or administrative guidance on its breadth and application. The wording of the provision is broad and ambiguous, and some commentators have expressed concern that it may apply to arrangements involving resident trusts as well as and non-resident trusts.

Draft Taxation Determination TD 2024/D2

The draft TD has a relatively narrow focus, as it only deals with the exceptions to section 99B relating to the ‘hypothetical resident’ taxpayer concept. The draft TD does not specifically state that section 99B only applies to non-resident trusts, however, the only scenarios discussed and examples used in the draft TD relate to non-resident trusts.  There is some comfort in that the draft TD gives no indication that the Commissioner will depart from the previous position that section 99B applies to distributions from non-resident trusts.

The draft TD states:

• the hypothetical taxpayer must be an Australian resident. Concessions only available to specific classes of taxpayers, such as the CGT discount, do not apply to amounts assessed under section 99B.Thus, the amount assessed under section 99B cannot be reduced by the CGT discount.
• the circumstances that resulted in the trust estate receiving the amount distributed to an Australian resident beneficiary are relevant to consider. The draft TD notes that where proceeds from the disposal of a CGT asset are distributed, the date of acquisition of the asset and its cost base are relevant considerations – for example:
  • if the amount distributed to a beneficiary represents proceeds from the disposal of a pre-CGT asset, the proceeds would (absent unusual circumstances) not be assessable under section 99B, and
  • for post-CGT assets, the asset’s cost base and relevant provisions are considered. For example, the CGT rules relating to death and deceased estates modifying the cost base of the CGT asset and the date of acquisition are assessed, where the distribution or benefit is provided by a non-resident deceased estate.

Draft Practical Compliance Guideline PCG 2024/D1

The draft PCG provides guidance on practical issues for the application of section 99B, clarifying:

• common scenarios where section 99B may need to be considered
• the practical aspects or record-keeping needed to prove that an exception applies
• the ATO’s compliance approach to distributions and benefits that are seen as low risk by the ATO.

Similar to the draft determination, the draft PCG onlydiscusses issues on non-resident trusts despite not asserting that section 99B only applies to non-resident.

Common scenarios where 99B may apply

Several potential Section 99B scenarios are in the draft PCG, illustrating distributions from a non-resident trust estate and other situations where Section 99B might apply. This includes where:

• a resident beneficiary receives a loan from a non-resident trust
• the trustee of a non-resident trust allows a resident to use trust property and
• a resident beneficiary receives an amount from a non-resident deceased estate.

When a taxpayer relies on one of the exclusions in section 99B, the onus will be on the resident beneficiary taxpayer to provide the ATO with documentation evidencing the exception.

Record keeping for reliance on the exceptions

The draft PCG details the required documentation to prove an exception, providing examples of records that must be provided to the ATO and emphasises that the resident beneficiary must secure sufficient records. One example highlights that a trust resolution stating an amount is out of corpus is not sufficient.

Low risk arrangements

The draft PCG illustrates low risk arrangements, indicating the ATO will not further review these arrangements. Examples include:

• arrangements on commercial terms with supporting evidence. The Commissioner’s comments are welcomed, with one of the many challenges of section 99B is that it can apply to loan arrangements and there is no express exception provided for loans on commercial terms, and
• where property is received from a non-resident deceased estate within 24 months of the date of death, with a value of less than $2m and evidentiary requirements are met. This is a sensible and positive administrative concession simplifying Australian issues for beneficiaries of a deceased estate of a non-resident.

How SW can help

Please reach out to your SW contact to discuss the application of section 99B and any aspect of the ATO draft releases.

SW will continue to monitor and provide commentaries to inform clients of any developments as they occur.

Contributors

Ian Kearney

Ned Galloway

Maxwell Pratt

The post Section 99B and trust distributions | New ATO draft guidance appeared first on SW Accountants & Advisors.

Intangibles Arrangements is the long-awaited and last tranche of ATO’s focus areas following the revision of OECD Transfer Pricing Guidelines in 2017.

The Draft PCG discusses ATO’s risk assessment framework on Intangibles Arrangements based on the risk factors described as High, Medium, or Low.

The following examples have been adapted from the PCG, and illustrate the application of these risk factors.

High-risk example 1: Centralisation of intangible assets

Facts:

• AusCo owns, manages and controls DEMPE activities of the group’s intangible assets
• AusCo and the global group decide to transfer these intangible assets from AusCo to be centralised in a new foreign entity, NewCo
• NewCo will receive worldwide royalty income from the rights to exploit the Existing Intangibles and any New Intangibles developed, while AusCo receives a declining royalty from NewCo associated with the exploiting the Existing Intangibles
• AusCo continues to undertake majority of DEMPE activities while receiving a cost-based remuneration under the R&D service agreement. NewCo hires additional staff and acquires additional assets, but these are not sufficient to allow NewCo to wholly manage, perform and control the DEMPE activities for the intangibles.

The above arrangement is regarded as a High-Risk Intangibles Arrangement because:

• There is a risk that this arrangement is not commercially rational for AusCo and may not be consistent with AusCo’s best economic interests having regard to the commercial options realistically available, disregarding potential tax impacts. The risk is emphasised when no documentation is available to substantiate the decision making or potential tax impacts that were taken into account
• AusCo has not been properly remunerated for the DEMPE activities it performs
• In the absence of this arrangement, AusCo would continue to own and derive income from the intangibles. AusCo would not need to pay royalties to NewCo.

High-risk example 2: Non-recognition of Australian intangible assets and DEMPE activities

Facts:

• AusCo owns trademarks connected to products and services exclusively distributed in Australia. AusCo manages, performs and controls DEMPE activities and assumes associated risk of the intangibles
• AusCo’s DEMPE activities increase in intensity, resulting in new intangible assets. AusCo does not account for these in its financial statements or register them for legal protection. Likewise, AusCo’s global group does not maintain a comprehensive contemporaneous R&D or intellectual property policy or other relevant guidelines
• AusCo’s international related parties (IRPCos) are granted access to the new intangible assets to improve their products and services. No documentation is available for this arrangement
• The profitability of IRPCos increases as a result of accessing and exploiting the new intangibles and the DEMPE activities performed by AusCo
• AusCo does not receive any compensation for the intangibles.

The above arrangement is regarded as a High-Risk Intangibles Arrangement because:

• The absence of legal agreements may impede AusCo’s ability to protect its interests of the intangibles
• The lack of compensation for the use of the intangibles may be inconsistent with arrangements expected between independent parties.

High-risk example 3: Migration of pre-commercialised intangible assets

Facts:

• AusCo undertakes years of R&D in Australia to develop a new product range, which results in the development of pre-commercialised intangible assets. The intangibles are owned by AusCo and are strategically important to the business
• Prior to the commercialisation of the intangibles, AusCo and the global group decide to incorporate a new offshore entity, NewCo, to own the rights to the intangibles. NewCo does not have sufficient assets to undertake DEMPE activities while AusCo has the capability and capacity to develop, manufacture and commercialise products associated with the intangibles. No documentation is available to substantiate the commercial rationales underpinning this decision or consideration of potential tax impacts
• AusCo and NewCo enter into a license agreement, which transfer the effective control of the intangibles from AusCo to NewCo. All the worldwide income that will be received from the global commercial sales of the related products will be derived by NewCo. NewCo pays ongoing royalties to AusCo in relation to worldwide sales of related products. No documentation is available to substantiate the arm’s length nature of the pricing or terms of this arrangement
• NewCo enters into a service agreement with AusCo where AusCo agrees to provide services for the development, manufacture, and distribution of the new products for a cost-based remuneration. No documentation is available to substantiate the arm’s length nature of the pricing or terms of this arrangement
• After the transfer, AusCo continues to employ specialised staff and uses its expertise and assets to manage, perform and control DEMPE activities associated with the intangibles. In the meantime, NewCo has limited relevantly qualified staff and manages and performs limited activities, owns limited assets, and assumes limited risks in connection with the intangibles
• AusCo employs specialised staff and uses its expertise and assets to manufacture and sell related products to the global market under the service agreements while it only receives cost-based remuneration. NewCo continues to have limited qualified staff, manages, and performs limited activities, and assumes limited risks in connection with the manufacture, distribution and marketing of related products while it derives worldwide income from the sale of related products

The above arrangement is regarded as a High-Risk Intangibles Arrangement because:

• There is a risk that AusCo’s entry in the license agreement and service agreement is inconsistent with comparable arrangements expected between independent parties. The risk is emphasised when no documentation is available to substantiate its decision making or potential tax impacts that were taken into account
• AusCo does not require NewCo as a partner to develop or commercialise the intangibles as it had the capability, expertise and capacity to do so
• The transfer results in AusCo not being able to derive worldwide income from the sale of related products
• NewCo did not have the capability or capacity to manage and be responsible for the rights and obligations it had under the Licence Agreement in connection with the Product Intangibles and the New Products which were instead, in substance, controlled and managed by AusCo.

Key takeaways

While the Draft PCG provides a detailed framework intended to facilitate taxpayers’ self-assessment of risks associated with related party intangible arrangements, the framework lacks quantitative risk indicators (as opposed to other PCGs). The framework reflects a move away from the traditional focus on legal ownership of intangibles to where the DEMPE activities are performed and the entity able to bear the risks associated with those activities.

In documenting where the DEMPE functions are performed, multinationals should have regard to commercial evidence (i.e. internal reviews / board presentations / briefing materials) associated with intangible arrangements, which may not be reflected in conventional transfer pricing documentation.

It is noteworthy that self-assessment of Intangible Arrangements are required for taxpayers who complete a Reportable Tax Position (RTP) schedule (i.e. Part of Category C disclosures).
The level of uncertainty resulting from transfer pricing disputes involving Intangibles Arrangements could be significant. Taxpayers should take prompt actions to thoroughly assess their material Intangibles Arrangements.

How SW can assist

Contact one of our experts below to discuss how the Draft PCG affects your Intangible Arrangements.

Get in touch

Helen Wicker

E hwicker@sw-au.com

Daren Yeoh

E dyeoh@sw-au.com

Yang Shi

E yshi@sw-au.com

The post ATO draft guidance on Intangibles Arrangements between related parties appeared first on SW Accountants & Advisors.