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Australian Reportable Tax Position Schedule for Uncertain Tax Positions

Author: Bart de Gouw

The Australian Tax Office (ATO) has recently moved to follow the global trend in tax authorities requiring taxpayers to report uncertain tax positions.

Uncertain tax positions are those wherein a taxpayer is not certain of the treatment to be applied by the tax authority. For example, an uncertain tax position may be that in which a taxpayer has taken a deduction in its tax return for a market support payment to a foreign affiliate, but is uncertain to what extent the tax authority will allow the full deduction.

The ATO will shortly join the Internal Revenue Service (IRS) and the Her Majesty’s Revenue Collection (HMRC) in having legislative requirements for taxpayers to report uncertain tax positions. In contrast, the Inland Revenue’s Large Enterprises Division seeks to understand New Zealand taxpayers’ uncertain tax positions through its compliance program which fundamentally differs in approach as there is no regulatory requirement for New Zealand taxpayers to disclose uncertain tax positions.

The ATO’s draft Reportable Tax Position (RTP) schedule is intended to assist the ATO to better understand tax risk for large businesses and to move the ATO away from reactive compliance activities and towards a role that is “proactive and advisory”.

The RTP schedule will be required to be completed for income years commencing on or after 1 July 2011 and will apply to all taxpayers which have been rated by the ATO as quadrant 1 (higher risk) or quadrant 2 (key taxpayers) and which have not entered into an Annual Compliance Arrangement (ACA) with the ATO. However, it is considered likely that the RTP schedule will have to be completed by a broader range of taxpayers in future years.

The RTP schedule has been released on the ATO’s website for comment and will force affected taxpayers to review and potentially enhance their tax governance and risk management processes, including review of transfer pricing risks.

The definition of what is reportable is currently broad enough to require disclosure of: 

  1. Material positions that are not more likely to be correct than incorrect (which would include 50/50 positions.
  2. Uncertain tax positions reflected in the taxpayer’s or a related party’s financial statements; and
  3. Significant reportable transactions (as defined).

In relation to paragraph c), a reportable transaction is a transaction in respect of which the taxpayer:

  • Recognises more than AUD 200 million of income in the financial statements for the current income year and recognises less than 50% of such income as assessable income in the current income year; and
  • The transaction involved a change or changes to the effective ownership or control of an entity (or entities) or asset(s).

The ATO will notify taxpayers by letter if they are required to complete the RTP schedule.

As presently drafted, reporting will apply to Australian tax positions only and not global tax positions. The vast majority of New Zealand companies with Australian subsidiaries will not have to complete a RTP schedule due to the size and risk criteria applied by the ATO. However, it is important that the New Zealand subsidiaries of Australian companies are considered when Australian taxpayers subject to the RTP regulations are reviewing their tax positions, most notably in relation to transfer pricing and Trans-Tasman funding structures.

Many of the countries with which New Zealand has close economic ties now have regulations in respect of reporting to tax authorities on uncertain tax positions. In addition, the International Accounting Standards Board has undertaken some work to address the measurement and disclosure of uncertain tax positions in IFRS financial statements – although the work is currently on hold at the moment pending other priorities. The US Accounting Standards Codification (ASC) 740 (formerly known as FIN 48) already requires US issuers to report the impact of uncertain tax positions on a global basis. These developments may signal a shift in the relationship between tax authorities and taxpayers to an increasingly open relationship where tax authorities have more information and seek to have a more contemporaneous involvement with taxpayers.

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