Focus areas relevant to the mid and emerging market
The ATO in line with their top 100 and top 1000 program will focus on the below across the mid and emerging market:
- Specific tax issues: the ATO topic areas are comprehensive, covering a range of different issues, with specific tax technical issues affecting businesses across all markets.
- Significant new transactions which may include significant business changes, and changes to tax treatments/positions of transactions undertaken
- Potential application of tax risks flagged to market: for example, given many Fintechs are financial services organisations, ‘Taxation Of Financial Arrangements’ (TOFA) is an area of interest for the ATO. The ATO speakers noted that when reviewing a taxpayer they are particularly keen to understand the extent of how these transactions are documented. Be mindful and keep track of updates on ATO messaging in the form of taxpayer alerts, ATO guidance, and publicly available guidance and messaging in forums that the ATO presents.
- Tax governance framework: The ATO understands the difference in resources in the tax functions of early stage and emerging companies and will always take a reasonable approach. The emphasis therefore, is to focus on the significant risks in your business and ensure that you have an appropriate tax governance framework, including processes and procedures to address and manage these risks that are critical to your business.
- Alignment between accounting and tax – areas of particular interest are:
- Statement of taxable income and financial statements
- Movement in tax payable balance including movement in provision for uncertain tax positions
- Significant year to year changes
Targeted focus areas for the mid and emerging markets
In addition to the reviews in the mid and emerging markets, there has also been campaigns targeting very specific types of reviews, focusing specifically around share buybacks, marketing hubs, stapled structures and inbound supply chains.
In particular, the most common risks identified were around:
- Cross border related party financing, share buyback issues, demerger issues, thin capitalisation issues, utilisation of losses, application of Continuity of Ownership testing and Similar Business tests.
- Another area of interest in the sector is the loss carry back rules linked to stimulus packages, Intellectual Property migration and arm’s length debt testing and treaty shopping.
- International tax issues will be relevant to the extent that you have cross-border operations, including transfer pricing, branch retribution, withholding tax and compliance with Controlled Foreign Company rules (CFC). The ATO is interested in understanding how these issues are treated with respect to the transactions undertaken.
- Withholding tax – the ATO has reviewed a number of approaches in relation to the section 128F interest withholding exemption that don’t meet the requirements of the public offer test. Many arrangements align too closely to related-party financing, and therefore don’t warrant that exemption. The ATO will be issuing questions in the form of letters to mid and emerging taxpayers where that exemption has been claimed.
There is a large expectation from the ATO that businesses will turn their minds to a governance framework commensurate with the level of risk that is exhibited in your business. A robust governance framework will give the ATO confidence that a taxpayer is aware of their tax obligations and managing tax risk appropriately.
It’s important to follow the governance framework as published by the ATO for both income tax and GST for all markets, for example:
- Have a specific tax policy that caters/aligns with broader governance polices
- Take a self-assessment exercise that takes into consideration the broader governance framework, which could be done internally if there is a level of expertise, if not you should obtain an external advisor
- Seek independent assurance and expertise
This is particularly relevant for those currently sitting in the mid to emerging market, who may very quickly move into the top 1000.
GST classification of supplies
Ensuring that the correct GST classifications have been applied to all supplies has been a key consideration for the ATO in risk reviews. One particular area of focus has been the classification of interest-free loans which should be classified as financial supplies.
Related party transactions
The ATO has seen a number of errors where GST has not been appropriately remitted on related party transactions between entities that are not members of the same GST group. In certain circumstances, there is also need to ensure that the consideration paid for transactions between associates has been valued at arm’s length.
Input tax credit recovery
The ATO expects that taxpayers actively monitor whether entities exceed the Financial Acquisitions Threshold (‘FAT’). Where an entity exceeds the FAT, GST recovery should be determined using a ‘fair and reasonable’ GST apportionment methodology.
During a GST review, the ATO will seek to understand whether a taxpayer’s GST apportionment methodology appropriately reflects the objective use of costs in a financial services business. For example, a revenue-based apportionment method may not be appropriate in the context of a buy now pay later provider that does not receive any interest revenue on supplies of credit to customers. Taxpayers are encouraged to ensure that apportionment methodologies are up-to-date, regularly reviewed, and well-supported by documentation.
In addition, the ATO will seek to ensure that reduced input tax credit claims are substantiated with evidence and relevant documentation.
Reverse charge GST
The ATO has also identified errors commonly arising from under-reported reverse charge GST liabilities on cross-border acquisitions. Taxpayers should ensure that they implement a robust GST governance framework to identify all reverse charge obligations on acquisitions from offshore suppliers.
Significant and unusual transactions
Taxpayers are encouraged to consider the GST treatment of costs that relate to significant transactions such as IPO’s. As significant transactions have been identified as a highly relevant focus area in the Fintech industry, the ATO is undertaking a targeted correspondence campaign to ensure that entities have identified credit entitlements on transaction costs correctly.
GST Governance, Data Testing, and Transaction Testing
For all Top 100 and Top 1000 GST reviews, the ATO will apply all principles outlined in the GST Governance, Data Testing and Transaction Testing Guide – the ATO does not intend to amend the principles and tests in the guide for Fintechs. As Fintechs experience rapid growth to the point where they enter the Top 1000 population, they are encouraged to act early and pre-emptively in setting up a GST governance framework that accords with the principles outlined in the guide.
The focus of the ATO on Fintech R&D claims continues and is expected to remain so in 2022. Namely their focus on the application of relevant Taxpayer Alerts (TAs) continues and should be an area where taxpayers review prior to lodging their R&D claims annually. In particular, the ATO has highlighted issues in TA2017/3 – ordinary business activities and TA2017/5 – software development activities.
Expenditure – activities and record keeping
Expenditure issues including where the expenditure is not incurred in relation to eligible activities, record keeping and records that don’t demonstrate the connection between activities and the registered R&D activity, have been highlighted as risk areas by the regulator. Your records should be very specific and evidence the activity. Often the taxpayer may produce high-level and project-based records, which means that there may be insufficient evidence of the connection to the activities being claimed in the R&D application. Overheads are also being reviewed and errors identified due to the overhead expenditure not being incurred in relation to the R&D claims, the allocation is not appropriate for the type of expense being apportioned, or is being used across multiple cost centres.
Contingent liabilities used for payments associates & R&D Governance
Commercially this is common in the Fintech sector and again the taxpayer needs to ensure that they have been paid as well as incurred if they wish to include them in an R&D claim. This is where the overall level of governance for R&D plays a role and implementing an R&D specific governance approach.
Turnaround time for refund claims
The standard turnaround for refunds being released for refundable R&D claims is 12 business days (electronically lodged). However this turnaround limit is subject to no issues being identified. Larger refunds can take longer as will paper lodgements.
Further Guidance Being Planned for 2022
The regulators are continually refreshing R&D guidance and we can expect web-based guidance to come out over the next 12 months. We recommend you monitor the Grant Thornton updates or reach out to your Grant Thornton specialist to stay across any new releases that may come out next year.
An important topic raised by the ATO in the webinar related to transfer pricing documentation. The ATO expects taxpayers to maintain contemporaneous transfer pricing documentation which clearly explains the business, the relative contributions by all the participants in the value chain and approach to supporting the arm’s length nature of the related party dealings.
Based on the quality of transfer pricing documentation, the ATO may choose to do their own functional analysis, and testing of intercompany transactions, specifically loans or derivatives. Therefore, to limit the risk of transfer pricing adjustments by the ATO, it is critical for taxpayers to prepare a good quality transfer pricing documentation.
The ATO also emphasised its focus on transaction specific practical compliance guidelines issued by them on topics such as intercompany financing, marketing hubs and inbound distributor arrangements. The ATO expects taxpayers to self-assess their risk rating accurately wherever such guidelines apply. If a taxpayers’ risk rating falls in the higher risk categories, the ATO expects that clear support is available from an arm’s length perspective.