tax update - aventri · resources ie finance/tax evidence globally that many large organisations...

Tax UpdatePatrick Lavery – Partner EYIAG Conference – Gold Coast

Copyright © 2018 Ernst & Young Australia. All Rights Reserved. Liability limited by a scheme approved under Professional Standards Legislation

What will be covered …

1. Holistic View► Proposition:

‘We are beginning a period that will see the most significant changeto tax management and administration in our lifetimes’

► Evidence to test this proposition:► The current and future state of tax management/administration:

► Tax Authorities► Internal tax functions

2. Granular View► Some recent legislative changes

► Taxable Payments Annual Reporting (TPAR)► GST withholding/notification on property transfers► GST intangible supplies from offshore


Tax Authorities – current focus and where theyare heading


Tax Authorities – current focus and where arethey heading

► Increased holistic assessment of tax compliance throughelectronic data collection, analysis and matching

► UK HMRC – ‘Making Tax Digital’► Proposed changes for VAT compliance from April 19 for certain taxpayers► Records required to be kept in functionally compatible software► Need to establish digital links (‘bridging software’) between taxpayer

records and HMRC to allow for transfer of data► HMRC will assess data and have access to all VAT data

► Current self assessment regime – ‘on life support’► US Client – ATO search of dealings with Australian customers

through AUSTRAC


Tax Authorities

► ATO’s increased gathering of raw data for analysis(examples):

► Single Touch Payroll (STP)► Taxable Payments Annual Reporting (TPAR)► Black economy focus – ABN/GST registration testing► GST withholding


Increased Data Reporting ObligationsTPAR – STP - GST

AP data fileGovernment

Data Inputs

TPARSpecv2.0.0

► Risks and opportunitiesidentified

► Payments to Contractorsfor services

► Grants► Super for STP

ATO Tax Agent portal

Tableaudashboards

ATO

Data

Obligations► STP► GST► TPAR ► Payroll

► Contractors► Grants► Procurement


Tax Authorities

► ATO focus on digital economy (examples):► Taxation of supplies through intermediation services eg ‘electronic

distribution platforms’ - GST► Treasury Discussion Paper on ‘Digital Services Tax’► Any interim DST likely to adopt similar taxing mechanisms to that applied

for GST ie ‘electronic distribution platforms’► While Government departments/agencies clearly not the target of any DST,

I note the Treasury Discussion Paper states:‘In view of Australia’s WTO and FTA obligations, an interim measurewould have to apply to both domestic and foreign businesses …’


Example – DST on intangible supplies fromoffshore

► Adrian subscribes to join a dating service, provides information via website andpays monthly fee (Adrian is an Australian resident)

► If US Inc has no presence in Aust then it would likely only pay GST not other tax► DST could apply to licence fee, also if Adrian did not pay any fee but US Inc

earned revenue through Australian businesses advertising to Adrian through thewebsite, DST could apply to marketing revenue

AUS

USA US Inc

$$ Access to information

Licence fee


Tax Authorities

► While also not currently focussed on government taxpayers –‘Justified Trust’ program provides an insight into what the ATOwill be looking for from departments/agencies – ATO alsogathering a lot of data in doing this!

► ‘Four pillars’:► understanding tax governance framework► identifying tax risks flagged to the public► understanding significant and new transactions► understanding why tax and accounting varies

► ‘Fourth Pillar’ causing a deal of grief on GST compliance ie fortaxpayers to be able to do a full rec from financial statementsto BAS – not as easy as it sounds


Lodged BAS

FinancialStatements

Manual Adjustments

Source Dataeg, AP & ARTransactions

RFUMSVOO Report

Trial Balance

AccountingAdjustments

BAS Rec Process


BAS Rec Process

► Issues Include► entities included in GST group

may be different to entities inaccounting figures, egconsolidated accounts

► costs may end up ascapitalised in the balancesheet, eg capitalised labour

► Label G1 ‘total sales’ mayinclude disclosure for taxableimportations which would notbe in the accounts as ‘revenue’

► foreign exchange rates -potential difference betweenbook and tax

► Comments► Consider if entities be excluded

through reconciliation analysis► need analysis and rec of all

capitalised costs and accountsthat may have different GSTimplications eg contractorsincluded in ‘wages’

► G1 rec is usually the easierside to rec but can still containscomplexities

► forex transactions need closeanalysis to pick up anybook/tax differences


Internal Tax Functions – current focus andwhere are they heading


Internal Tax Functions – current focus andwhere are they heading

► Increased focus on what ‘value’ the Tax Functions provide – merelymeeting compliance deadlines no longer seen to be sufficient

► Most tax functions feel they spend too much time on complianceobligations anyway and not enough on the ‘value add’

► Cost/FTE constraints are common: FTEs for taxcompliance/management are generally limited - frequently not dedicatedresources ie finance/tax

► Evidence globally that many large organisations are completelyoutsourcing their tax functions ie leveraging skills only when needed

► Tax technical answers are increasingly freely available – the challenge isunderstanding what the answer means in a particular context


Internal Tax Functions

► 96% of government clients surveyed see increasingreputational risk from tax, due to being required todivulge sensitive information about employees,contractors and other payments to the ATO

Increased Transparency + Increased Data Flows= Potential Increased Reputation Risk

► How to best manage this: know upfront what is being sent toATO rather than have queries raised after the event (iereputation management)



► We live in an increasingly data centric world – question is howdo we leverage the greatest knowledge from this data toassist in reducing risk and managing taxcompliance/administration?



► Tax Functions increasingly looking to RPA and analytics toassist with gaining deeper understanding of data and toreduce risks/manage tax

► Seeing many tools developed (off the shelf and bespoke) toassist such as (most incorporating some level of RPA):

► ABN/GST registration look up► TPAR dashboard analysis► Regular GST analytics and dash boarding► AI - fixed asset recording and reporting► ‘SAP Tax Compliance’ (only SAP Hana)


ATO is looking for same data insights – so tax functions need tobe on top of data flows

Client paid $1.9M to Vendors withcancelled ABNs in FY18

Client paid $12M in FY18 to 200 Vendorswho were Individuals or Sole Traders

► Poor procurement processes► Fraud risk► Tax consequences

► Super risks► PAYG risks► Payroll Tax risks


ABN Look Up/GST Registration Validation Tool

How does it work?A typical process is show in the flow chart below:

- Vendor Master file- Transaction file

Clie

ntTo

ol

Tool sorts andcleanses data

ClientABNdata

ABR

ABNexceptionreport

1. Upload data

Secure data platform: EY KeySpace

Toolperformsanalysis ofABN dataagainst theABR

Data

2. Performs analysis against ABR database

3. Receive reports and dashboards

Reports from Tool areprovided back to the clientalong with dashboard

4. Discuss resultsand actions

Following the review ofthe output from theTool anyrecommended actionsor processimprovements thathave been identifiedcan be implemented.


ABN Look Up/GST Registration Validation ToolScreenshots from the tool in action are provided below:

Secure data platform: EY KeySpace

Through customiseddashboards, allowsinsights into theaccounts payableinteractions forvendors inside andoutside of Australia.

Allows for the drill-down into risk areas(eg, missing ABNs) toallow for quickidentification ofsource informationsuch as contracts andtax invoices.

Reports generatedquickly provide userswith a sense of thescale of any risk oropportunities (eg, non-registered ABNs).


FTC – GPS used to identify ‘on road’ vsoff road’ data


Using digital capability – Asset profiles can be better leveraged

Insi

ght

oppo

rtun

itie

s ► Asset profiles► Maintenance Cost► Maintenance schedule► Tax/Accounting profiles

Data


Example - Using Artificial Intelligence to Manage Assets


Proposition Valid?

► ‘We are beginning a period that will see the most significantchange to tax management and administration in our lifetimes’

► I think so!


Some Recent Legislative Changes


TPAR - Overview

► Applicable (for GREs) from 1 July 2017 – first full year to 30 June 2018► Types of issues encountered:

► Who is in/ who is out (ie who is a GRE)► Separating out GST; picking up invoices with only materials etc► Isolation of ‘excluded’ payment types (what is meant to be included and what is not)► Payments made ‘as agent’ for other departments/agencies (‘which are my payments?’)

► Assessment:Reporting for 2017/18 seems to have gone relatively smoothly – but generalexpectation is that GREs will need to refine data sets going forward to moreaccurately capture and report required data fields – this has been reflected inconstruction industry TPAR developments

► Question:What are the broader implications of inaccurate reporting – when ATO startsquestioning recipients about payments that have been disclosed, who willthey complain to? … part of the ‘reputational risk’ referred to earlier


TPAR – what is it …

► Certain ‘government related entities’ (GREs) required to report payments made forthe supply of services

► Need to report for payee: ABN; name; address; total amounts (for the financialyear) of gross amount paid (including GST paid); total GST; any ABN withholding

► Also covers grants provided by GREs (excluding local government) to recipientswith an ABN (including non-profits)

► A number of specific entity type exemptions, such as providers of educationcourses and providers of medical services

► No TPAR reporting required for: payments for materials only; services that aremerely incidental to a supply of goods/materials; unpaid invoices at 30 June; PAYGwithholding amounts; payments to other Government entities; telephone andinternet services (amongst others) …

► Separate reporting even if number of entities are part of a single GST group


GST - withholding & notification

► Applicable from 1 July 2018► Primarily directed at ‘Phoenixing’ arrangements but no exemptions or carve outs

so very broadTake Away: if you have any dealing with land/real property

consider whether these rules could have application(obligations exists for both purchasers and vendors)

► Certain recipient to withhold GST and remit to the ATOTake Away: Supplier is still liable for the full GST liability

► Also suppliers must notify recipients of certain information, including whether awithholding is required

Take Away: there are two obligations1) for withholding by recipients/purchasers and

2) notification by suppliers



► If above not complied with then penalties can be apply► Failure to withhold 20 penalty units (@$210 = $4,200)► Failure to notify 200 penalty units (@ $210 = $21,000)

► Withholding applies to supply/‘long term lease’ (50 years) of‘new residential premises’ and ‘potential residential land’

► For withholding purposes ‘new residential premises’ does notinclude those created through substantial renovations norcommercial residential premises (so a bit different to thestandard GST definition – see GSTR 2003/3 and also GSTR2012/6 for guidance on these terms)



► ‘Potential residential land’ is land permissible to use for residentialpurpose but where it does not contain buildings that are ‘residentialpremises’

► Potential residential land must be included in a ‘property subdivisionplan’ and not with a commercial building on it

► ‘property subdivision plan’ is a plan for subdivision of the real propertythat is registered under an Australian law – primarily directed at ‘homeand land’ packages but picks up vacant land that has been subject to aregistered subdivision plan (no time limit on this)

Take Away: if you are selling any vacant land check the zoning andsubdivision history to establish if these rules may apply to you



► Withheld amount is a proportion of the contract price► ‘Contract price’ ignores any potential settlement adjustments (rates,

taxes, water) but includes contractual adjustments for the price,variations or discounts.

► Fully taxable amount withheld = 1/11► Using margin scheme = 7%► Withholding needs to be done as part of settlement process and remitted

before settlement► Withholding does not apply for ‘potential residential land’ where recipient

is GST registered and acquired for a creditable purposeTake Away: If you are GST registered and acquire new residential

premises then you may still need to withhold – ie even though youare GST registered



► Notification requirement is broader – applies to ‘residential premises’ and‘potential residential land’ so can apply even if withholding does not apply

Take Away: You may have a notification obligationeven if no withholding will occur

► What you need to take account of:► Need to be very clear on the classification of the property being transferred► Need to understand the GST status of the parties involved► Need to establish if there is withholding and if not are there still notification

obligations► If property is covered by withholding – need to establish what is the amount► If you are the supplier – need to be clear on who is named as the supplier but

also the representative member of any GST group the supplier is in► Allocation of GST credit may take some time (ATO getting better but matching

is not as quick as desired) – cash flow needs to be considered


GST - intangible supplies from outside Australia

► Series of GST law changes October 2016 and 1 July 2017► Now all supplies of things other than goods or real property (eg. services)

to Australian consumers deemed connected with Australia► GST now potentially applies to all digital and other intangibles supplied to

Australian consumers by non-residents (subject to GST registrationthreshold)

► “Australian consumer”:► Australian resident; and► Not registered for GST, or registered for GST but acquisition not

made in course of an enterpriseTake Away: Intangibles acquired from overseas by registered GST

business should not create GST liability for supplier butreverse charge rules could apply


GST - intangible supplies from outsideAustralia: reverse charge – B2B► Where an offshore digital or intangible supply is acquired by an ‘Australia-based

business recipient’ then need to consider GST ‘reverse charge’Take Away: Due to law changes many more non-residents are not GST registered

meaning that the ‘reverse charge’ rules have more frequent application

► GST liability is effectively shifted to the business recipient of the supply► Business recipient of the offshore supply is required to account for GST on the

supply where it is acquired for a purpose that is not fully creditable (eg input taxedfinancial supply or residential rent)

► Logic - same economic result as if acquired from domestic supplier

Take Away: If you acquire an intangible from offshore (eg a service or a licence) thenyou need to determine how you apply that acquisition. If it would not be fullycreditable had it included GST in the price then likely to be a reverse charge

obligation, ie the full GST and then claim whatever GST credit you are entitled to


Example - Reverse charge B2B

► UK Software provider supplies licence of software to Govt Dept► UK supplier has no presence in Australia► Govt Dept is registered for GST► If Govt Dept uses the software in part to make input taxed supplies then needs

to reverse charge full GST liability and recover what it can as an input tax credit

UK SoftwareLicence

Govt Dept

AUS

UK

$$ Licence


Thank You!


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