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ATO Part 6 - What attracts the ATO's attention

 
                       

Following on from December's newsletter, we look into the specific behaviours, characteristics and tax issue that attracts the ATO's attention.

In this issue we consider International Matters.

The ATO will focus on activities of Australian companies where they are transferred offshore and income earned is not reported as attributed foreign income but repatriated as an exempt dividend under s23AJ.

What attracts the ATO's attention:

o    Uplift in s23AJ income from previous year. Increase in s23AJ income but no attributable foreign income reported for the current and prior years.

   
           

o    Entities with large deductions under Income Tax Assessment Act 1997 s25-90 for outgoings incurred in deriving s23AJ income.

S23AH Non-assessable Non-exempt income

The ATO will focus on reporting where income of an Australian company's overseas branch/permanent establishment is not returned as attributed foreign income but repatriated as an exempt branch profit under s23AH.

What attracts the ATO's attention:

o    There is no permanent establishment, but s23AH income is declared.

o    A permanent establishment may not have passed the active income test and the income is both adjusted tainted income and eligible designated concession income (the latter applies to permanent establishments in listed countries only).

o    Anomalous change in numbers of controlled foreign companies that may imply tainting of assets.

 

 Profit shifting – related party dealings

The ATO will review activities where income and profits sourced in Australia are not being subjected to domestic tax; and where related party dealings provide opportunities to enter into non-economic/commercial arrangements to facilitate profit-shifting arrangements.

What attracts the ATO's attention:

o    Paying a non-arm's length amount for goods and services, or the transfer or use of property (tangible and intangible, such as intellectual property).

o    Paying non-arm's length prices to generate excessive losses or expenses domestically while shifting gains or revenue outside the jurisdiction.

o    Relying on financial instruments and accounting techniques to artificially create, assign or transfer rights and obligations in order to manipulate financial dealings between related parties.

o    Tax planning that structures business operations for shifting assets, risks and functions to low tax jurisdictions.

o    Non-disclosure of offshore asset disposals or restructures.

o    Businesses employing strategies that may lead to an erosion of the corporate tax base.

 

 Profit shifting – non-monetary or nil considerations

The ATO will focus on activities when there are international related party dealings occurring for non-monetary or nil considerations.

What attracts the ATO's attention:

o    An entity has provided services, transferred property (tangible or intangible), processes, rights or obligations to an international related party with nil or non-monetary non-arm's length considerations.

o    A capital gains tax event has occurred with respect to a related party overseas, but no consideration was paid or received.

 

 International dealings schedule – non-lodgment

The ATO will review income tax returns and other information indicating that lodgment of an international dealings schedule may be required but one has not been lodged.

What attracts the ATO's attention:

o    The value of any property/services transferred exceeds the threshold.

o    The balance of any loan exceeds the threshold.

 

 International – Non-resident withholding tax – interest/royalty (payment)

The ATO will focus on:

o    interest/royalty withholding tax not being withheld and/or remitted or incorrectly remitted

o    deductions for interest/royalty expenses overseas being incorrectly claimed and/or misclassified in income tax returns.

What attracts the ATO's attention:

o    Entities that disclose the payment of overseas interest/royalty expenses in their income tax returns but reflect a proportionally lower amount of tax withheld (activity statement and/or annual report).

 

International – Non-resident withholding tax – interest/royalty (reporting) 

The ATO will focus on situations where a taxpayer pays interests/royalty to a foreign resident and:

o    fails to lodge the PAYG withholding from interest, dividend and royalty payments paid to non-residents – annual report to reflect withholding events

o    amounts reported on the annual report do not reconcile with deductions claimed.

What attracts the ATO's attention:

o    Inconsistency between annual report data and interest or royalty payments to foreign resident payees or offshore permanent establishments of Australian payees.

o    Discrepancies between amounts claimed as deductions for such interest or royalty payments (income tax return) and the amounts reported as paid and withheld (annual report).

 

International – controlled foreign company (CFC) or Transferor Trusts (TT) – non/under-reporting attributable foreign income

The ATO will look at attributable foreign income not reported correctly by Australian companies.

What attracts the ATO's attention:

o    Country in which a CFC or TT is located is unlisted.

o    Type of income being generated through a CFC is tainted income.

o    Fund movements contrary to where the CFC or TT is located.

o    Sudden drop in attributable foreign income without changes in the numbers of CFCs or TTs.

 

International – thin capitalisation

The ATO will focus on Australian and foreign entities that have multinational investments and their debts exceed 75% of the net value of their Australian investments.

What attracts the ATO's attention:

o    Non-lodgment of international dealings schedule or lodgment of an international dealings schedule without completion of thin capitalisation section and a large amount of overseas interest expense on the tax return.

o    Failed safe harbour debt test or arm's-length debt test or worldwide gearing test (based on international dealings schedule data) and not declaring debt deduction disallowed.

 

International – dealings with secrecy and low-tax jurisdictions

The ATO will on Australian entities that have dealings or relationships with secrecy and low-tax jurisdictions and poor tax performance.

What attracts the ATO's attention:

o    Entities having related entities in secrecy and low-tax jurisdictions (based on international dealings schedule data).

o    Entities having dealings in secrecy and low tax jurisdictions (based on AUSTRAC data).

 
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