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    • GENERAL ALL BLUEPRINT MAY 2005 - v4.5 SEGMENT AUDIENCE FORMAT DATE & EDITION AUSTRALIAN INTERNATIONAL FINANCIAL REPORTING STANDARDS (AIFRS) BLUEPRINT FOR TAX IMPLICATIONS For more information: Visit International Financial Reporting Standards under `Tax topics explained’ at www.ato.gov.au/large Australian International Financial Reporting Standards - Blueprint 1
    • © COMMONWEALTH OF AUSTRALIA 2005 PUBLISHED BY This work is copyright. You may download, display, print and reproduce this material in unaltered form only (retaining this notice) for your personal non-commercial use or New Law Administration Design Practice use within your organisation. Apart from any use as permitted under the Copyright Act Australian Taxation Office 1968, all other rights are reserved. Requests for further authorisation should be Canberra directed to the Commonwealth Copyright Administration, Intellectual Property Branch, May 2005 Department of Communications, Information Technology and the Arts, GPO Box 2154, Canberra ACT 2601 or posted at www.dcita.gov.au/cca. Australian International Financial Reporting Standards - Blueprint 2
    • THE BLUEPRINT IN BRIEF This blueprint contains : What the Tax Office needs to focus on: information regarding the Tax Office’s response to the introduction The technical interpretation of standards of Australian International Financial Reporting Standards (AIFRS), The requisite skilling of staff to meet the requirements of AIFRS including: The current systems in place and their ability to use and deal with changed data (eg size of balance, Government’s intent data comparison etc) role of the Tax Office The examination and mitigation of identified risks stakeholders Designing the appropriate skilling and compliance strategies to mitigate some of the risks identified interactions with existing Tax Law Designing an appropriate communication strategy to provide taxpayers with a consistent ATO view Accounting, tax technical, policy and law, and administration Developing and designing the appropriate advice and interpretive products to provide taxpayers with issues raised by the introduction of AIFRS. certainty and clarity in respect of AIFRS as it applies to their tax affairs. A framework to measure success Consult with Small Business representatives both within the ATO and externally. There is also an overview of: the products and services the Tax Office needs to implement in order to meet the changes to the system-in-use brought about by the introduction of AIFRS the level of engagement in the design process from both within the Tax Office and from other professional bodies, industry representatives etc. Australian International Financial Reporting Standards - Blueprint 3
    • INTEGRATED ADMINISTRATIVE DESIGN (IAD) What is the IAD Process? What is a blueprint? The Integrated Administrative Design (IAD) A blueprint is a conceptual design of a process consists of two foundation models: proposed change to the system-in-use. It is a 1 picture of how the system will work in The IAD Process Framework (the Stacker) y practice. It is like an architect’s plans and wa Formulate te Ev Ga a which comprises: lua Intent 2 elevations of a building, designed to best te 6 The constitutional foundation for tax achieve the owner’s goals. Create design Implement Blueprint The context for tax design, being the A blueprint is a living document which will Change current system in use, and continue to develop as the project System QA/Gateway in use QA/Gateway The infrastructure (in the areas of progresses. 5 3 people, process and product. Test User Design Pathway Products The IAD Process Cycle (the Wheel) QA 4 /G ate QA wa Build /G y/P The Wheel is the descriptive name given to ate AG w ay Products ate IAD Process Cycle. The Wheel represents the ay w IAD process at the level of an individual project. It consists of six sequential but overlapping stages with clearly defined gateways and quality assurance processes throughout. Blueprints contain the following key elements: Policy Intent Community of Users User Pathway How does it work? Connections Evaluation & Structures A shared understanding To design good You cannot picture a This is a description Other projects, areas of Evaluation of the system and clearly articulated experiences for users ‘system’ – it is too vague. of how the new measure the Tax Office, as well as the outputs of statement of intent we need to know for But what we can imagine works. government agencies the Core Design Team. integrates the efforts whom we are designing. (and design) is the and social systems may The design must include of legislative and sequence of experiences be impacted by the In this context, the an evaluation of its costs administrative design. that users have, either in change or could impact community of users and success from two transitioning to the new the change. It answers ‘why did we represents the different perspectives: system or their ongoing want to make a change?’ people who will Failure to identify such – organisational goals interaction with it. This and ‘what is the better experience the system connections and cross – user expectations. insight provides the heart state we wanted to first hand and use its impacts could result in of our blueprint. achieve?’ products. duplication, gaps and a Products support the poor user experience. Without this context our user’s experience of the efforts will be unfocused system. and unproductive. Australian International Financial Reporting Standards - Blueprint 4
    • CONTENTS The blueprint in brief 3 07 IAD principles 4 Products and Services Product Overview 24 01 Introduction 6 08 Background 6 Priority Tasks 25 Level of Impact on Taxpayers 7 Project Structure and Governance 8 09 Measures of Success 26 02 Intent 9 10 Appendix 03 Level of Engagement to date 27 Tax Payer/Tax Office Interactions 10 Abbreviations 28 Interaction with the Law 11 04 Stakeholders 12 05 Compliance Core Processes 13 Timeline for December 31 balancers 14 Timeline for June 30 balancers 15 AIFRS Timeline of Key Issues and Potential Impacts 16 06 Issues 17-22 Accounting Technical Policy and Law Skilling 23 Issues from other tax jurisdictions 23 Australian International Financial Reporting Standards - Blueprint 5
    • 01 INTRODUCTION Background Globalisation has led more countries to open their doors to foreign investment. As business expands across borders, both the public and private sectors are increasingly recognising the need for globally accepted accounting and auditing standards. Most major capital markets are pursuing convergence towards a single set of globally accepted standards recognising that global capital markets require high quality, globally consistent and uniform regulatory and standards regimes. The Financial Reporting Council (FRC) announced on 3 July 2002 that Australia would formally adopt International Financial Reporting Standards (IFRS) for reporting periods commencing on or after 1 January 2005. At present, entities preparing financial reports under the Corporation Act 2001 must comply with the Australian Generally Accepted Accounting Principles (AGAAP). Australian International Financial Reporting Standards - Blueprint 6
    • 01 LEVEL OF IMPACT ON TAX PAYERS The Tax Office and other stakeholders have identified the introduction of AIFRS as impacting a range of taxation concepts. This table indicates the concept, the range of taxpayers likely to be affected, and the level of expected impact. This list is not exhaustive and further issues may be identified in the future. Tax Concept Taxpayers Likely to be Affected Level of Impact High Medium Low Thin Cap Corporate Groups X Consolidation Consolidated Groups, MECs X Share Capital Tainting All Corporate Groups X Disqualifying Accounts All Corporate Groups X TOFA All Taxpayers using Financial Instruments X Trading Stock All Taxpayers who have trading stock X Trusts All Trusts using Accounting Standards X All Taxpayers liable to pay PAYG instalments and who are required to PAYG Instalments use Accounting Standards. X Australian International Financial Reporting Standards - Blueprint 7
    • 01 PROJECT STRUCTURE AND GOVERNANCE STEERING COMMITTEE Market Committees CUSTODIAN Regulators Reference Group Expert Accounting Reference Group REVENUE PRODUCT LINES Project Manager SUPERANNUATION Law Core Design Team Compliance products Product specifications Information products GST Transaction products Communications Team Business (IT) systems Preliminary analysis Skilling products by product line teams Interpretation products Stakeholder Relations Team Internal information management and INCOME TAX (PAYG (w), FBT & CGT) Admin Support Team reporting products PRRT* Integrated administrative design and project management products and Income tax needs to be process required by broken down into sub- PS CM 2003/05 (DPM) components COMMUNITY OF USERS (codesign) INTERMEDIARIES *PRRT = Petroleum Resource Rent Tax NTLG WORKING GROUPS Australian International Financial Reporting Standards - Blueprint 8
    • 02 INTENT GOVERNMENT INTENT WHAT IS THE TAX OFFICE ROLE? The introduction of AIFRS: To understand the standards and their implications with current tax law will enhance comparability of financial information To measure and monitor revenue should make the allocation of capital across borders more efficient To work together with stakeholders to ascertain the tax impact of AIFRS should reduce compliance costs for corporations To act upon the tax implications of AIFRS should improve consistency in audit quality What are the Tax Office Drivers? Why is AIFRS being implemented? How it works now. How it will work in the future As AIFRS has to be adopted by Generally, Australian income tax law has All Australian entities preparing The arguments in favour of international Australian taxpayers in reporting their evolved relatively independently from financial reports under the convergence of accounting standards are financial accounts, where the tax system Australian accounting standards, however, Corporations Act 2001 must comply compelling and include facilitation of cross has a direct or indirect link to accounting in recent years, there has been a with the Australian equivalents to IFRS border listings, financial statement standards, we need to acknowledge convergence of accounting standards and for financial years beginning on or after comparability for investors, reducing the cost changes to avoid any unintended tax income tax law particularly in 1 January 2005 following gazettal of of capital in Australia and improving access consequences. consolidation. There are a number of the standards. to foreign capital for Australian entities. provisions in Australian income tax law This will result in: that either directly or indirectly rely on While there is no systematic Who will be affected? Greater certainty accounting standards and accounting connection between Australian income Maintained compliance costs principles for the purposes of determining tax law and Australian accounting All Australian entities preparing financial Maintained neutrality a taxpayers’ income tax liability. As a standards and practice, as a practical reports under the Corporations Act 2001 Fewer opportunities for arbitrage result, any change in the established matter most businesses determine must comply with the Australian equivalents and deferral accounting framework and standards has their taxable income or loss for a year to IFRS for financial years beginning on or A positive environment the potential to impact on income tax, non- of income by reconciling from a profit after 1 January 2005. consistent with other OECD income tax and transfer liability at the and loss account. There are a number countries. individual entity level, and ultimately of provisions in Australian income tax Commencement Date A neutral tax environment which revenue collections/transfer at the law (eg Consolidation, TOFA, Thin is not an obstacle to locating aggregate level. Capitalisation) that either directly or The commencement date is the first day of financial activities in Australia. indirectly rely on accounting standards the next reporting period after 31 December Revenue Impact and accounting principles for the 2004. The administration is aligned with the purposes of determining taxpayers’ Government’s intent of enabling more Generally, revenue neutral. income tax liability. effective comparable corporate reporting and governance processes, reducing the The new measures will apply on a cost of capital in Australia and improving prospective basis for information and access to foreign capital for Australian products. entities resulting in a stronger economy. Australian International Financial Reporting Standards - Blueprint 9
    • 03 TAX PAYER / TAX OFFICE INTERACTIONS Accounting standards Revenue laws Potential areas impacted Information systems GST Debt management Superannuation Capital management PRRT - transitional Securitisation CGT Intangible Assets Withholding Taxes Potential revenue products impacted Valuation models Income Tax Key Performance See Diagram on next page indicators Business Pathway Dividend policy Revenue transactions Measure Compliance obligations and Capital transactions record Prudential compliance Prudential capital adequacy Potential areas impacted Lending practices Internal control procedures Credit ratings Investor relations Share based payment Contingent liabilities and assets Financial instruments-Recognition and measurement Products: Codes of law: Legislation Changing standards: GST Interpretation Profit & loss items old standards Superannuation Information Analysis Balance sheet items transitioning PRRT Transaction Lenses Charts of accounts new standards Awareness Income Tax Compliance Australian International Financial Reporting Standards - Blueprint 10
    • 03 INTERACTIONS WITH THE LAW Australian International Financial Reporting Standards - Blueprint 11
    • 04 STAKEHOLDERS Government Departments Professional Associations Industry Associations Regulatory Authorities CPA Australia ABA ATO ICAA IFSA Treasury Tax Institute CTA APRA National Institute of Accountants IBSA ASIC BCA ABS ASFA Federation of Small Business Small Business Council APPEA Taxpayers Accounting Firms Others Companies KPMG ASX Trusts/Partnerships PWC Software Developers Superannuation Funds Deloitte Touche Tohmatsu RBA Ernst and Young Foreign Revenue Authorities (eg New Zealand Inland Revenue Department, UK 2nd tier accounting firms Inland Revenue) AASB Australian International Financial Reporting Standards - Blueprint 12
    • 05 CORE COMPLIANCE PROCESSES Increases/decreases in corporate group structures, eg partnership structures/trusts 1. Registration Changes in Consolidated group data pre 1/1/2005 and 1/7/2005 Check the policy on Tax Sharing Arrangements for AIFRS 2. Debt and lodgment impacts 3. Payment Processing (in some Undertake Revenue Performance Strategy to explain Anticipate impact of AIFRS for Government cases contacting large payers movements in: Review actual cost of AIFRS across whole market before payments are due to *PAYG instalments understand payment trends) *Wash Ups *Refunds Monthly reports on trends in FIRB data focussing on Quarterly reports on changes picked up from OSR reports (movements in changes in group financing and ownership brand names etc) 4. Intelligence structures ASIC/APRA/ASX/AASB MOUs - meet with regulatory bodies to share Review of Disclosures required under AASB 1047 – intelligence as early warning of potential revenue impacts Gain intelligence from other revenue bodies i.e. NZIRD, JITSIC Risk assess cases where there are new hybrid instruments Review transfer pricing cases involving profit Review R and D amounts under AIFRS vs Tax methodologies using pre/post AIFRS data 5. Risk Assessment Treaties – double tax – risk assess cases involving profits Post AIFRS Review of biggest cases across Large and SME markets with under ITA, including PEs the biggest in changes in tax outcomes (eg increases in bad debts; Review Pre AIFRS returns for changes in funding and interest expenses, Forex gains/losses. DTAs, DTLs; thin cap compliance; structure and losses being incurred pre AIFRS market valuation v Fair Value calculations to reset cost base of assets 6. Audit Audit highest risk risk assessment cases Develop and Deliver AIFRS Rulings Program Develop public messages and general guidance around 7. Technical Products and General Advice, Admin Products, Skilling Program, SME products. Specific Post AIFRS impacts on Transfer Pricing and ITAs Advice Advice to Software Developers Review Existing TDs, TRs, LA PSs, that refer to existing accounting standards and not just for income tax Examine the need for general advice on Part IVA Urgent AIFRS skilling/awareness for staff undertaking PBRs Advice on Transfer Pricing Escalate Law Reform Issues from other core processes to Treasury as required 8. Law Reform Review the need for law changes to allow closer working relationships between ATO and other regulatory bodies eg ASIC, APRA. Australian International Financial Reporting Standards - Blueprint 13
    • 05 TIMELINE EARLY DECEMBER 2005 BALANCER Australian International Financial Reporting Standards - Blueprint 14
    • 05 TIMELINE EARLY JUNE 2006 BALANCER Australian International Financial Reporting Standards - Blueprint 15
    • 05 TIMELINE OF KEY ISSUES & POTENTIAL IMPACTS ⌦ AIFRS compulsory from start of next reporting period…… ⌦ AIFRS become compulsory from most affected taxpayers…… Sept 04 Oct 04 Nov 04 Dec 04 Jan 05 Feb 05 Mar 05 Apr 05 May 05 Jun 05 Jul 05 Aug 05 Sep 05 Oct 05 Nov 05 Dec 05 Jan 06 Feb 06 Mar 06 Apr 06 Jun 06 Dec 06 Jan 07 1 3 4 5 7 11 12 13 14 12a 15 16 17 18 19 2 6 8 9 10 1 Basis for calculating instalment income 7 Will AIFRS be a factor in ACA 13 Largest number of taxpayers begin after 1/1/05 (a product already exists?) outcomes and structuring decisions of using AIFRS Consolidated groups? 2 International accounting firms will set 8 Will AIFRS be a factor in taxpayer 14 Possible commencement of TOFA stage IV. global policy and practice on applying Key responses to RITA and other business AIFRS tax reform measures? 3 Early balancing companies prepare Applies to 31/12 9 Further AIFRS expected to be 15 Completion of design of 2005-06 return forms their comparative statements (old vs. balances released and schedules. new standards) Applies to 30/06 10 There will be a change in the basis of 16 Completion of 2005-06 return form instructions. 4 Listed companies begin making balances recognition of contingent liabilities (a market disclosures – we may see new current GST disputes issue) PBR topics and requests for pre- lodgment risk reviews 11 First GST payments under AIFRS - 17 First reports to ASIC under AIFRS due. Applies to both dates we may see some GST impacts in 5 Companies set dividend policies – our risk rating engine (financial there might be an impact on share supplies, offshore acquisitions, GST 18 First income tax returns under AIFRS due. buy-back policies as well groups) 6 Policy and law window opens after 12 First PAYG instalments for early Dec 19 30 June balancing entities begin lodging income federal election. balancers using AIFRS – we may need tax returns under AIFRS. a new instalment variation code 12a First PAYG instalments for June balancers using AIFRS code Australian International Financial Reporting Standards - Blueprint 16
    • 06 ISSUES – ACCOUNTING, TAX POLICY, LAW & ADMINISTRATION Standard Accounting Tax Technical Policy and Law Administration AASB 138 Assets and Liabilities Recognition and Thin Capitalisation Thin Capitalisation Thin Capitalisation Measurement AASB 136 For the purposes of Division 820 Treasurers’ Press Release No 002 of Draft Practice Statement/Taxation AIFRS will have the effect of increasing (Thin Cap), the accounting 24 January 2005, provides that a Ruling to be written to explain the liabilities and decreasing the quantum of standards must be used in transitional regime is to be impact of legislative amendments. assets reported on the balance sheet. For calculating the value of assets and introduced to alleviate the effect of Amendments are to be made to the example, internally created assets, eg. liabilities. This change to AIFRS AIFRS on the Thin Cap regime. Thin Cap schedule and guide brands and mastheads, will no longer be may cause taxpayers to advising taxpayers of the legislative recognised as assets and will be deleted inadvertently breach the safe changes. from the balance sheet. Large write harbour rule, resulting in some debt downs may be required. deductions being disallowed. AIFRS will change the basis for Consolidation – Exit of a Consolidation – Exit of a Consolidation - Exit of a subsidiary recognition and measurement of liabilities subsidiary member subsidiary member member and new liabilities may also be recognised. The introduction of AIFRS may The effect of this change will result in The effect of s 711-45 is being result in the recognition of liabilities a greater capital gain or lesser analysed to scope the extent of the Asset impairment testing under AIFRS – upon the exit of a subsidiary capital loss to the head company of issue. Under AIFRS, companies will have to run member of a consolidated group a consolidated group when a tougher tests and examine smaller that were not recognised when that subsidiary member exits. business units when justifying the subsidiary member joined the carrying values of their assets – eg in group. Entities will be penalised on retailing, examine individual stores, not exit from a consolidated group only store chains. where additional liabilities are Goodwill – Under AIFRS goodwill will not recognised. be amortised but will be subject to strict Consolidation/CGT implication Consolidation/CGT implication Consolidation/CGT implication impairment requirements. The head company of a consolidated From a policy perspective, CGT The ATO is considering the issue. event L7 should not happen when a group may make a capital gain under liability is discharged and the CGT event L7 where a liability that was taken into account in the ACA reconstructed ACA would be different because the liability was calculation is later discharged and the sum of the payment made, and recognised for the first time, or changed in value, merely because of the market value of any other the introduction of AIFRS. consideration given, to discharge the liability differs from the amount of the liability taken into account in the ACA calculation. Technically this may result in a capital gain or loss under CGT event L7 when the ACA is reconstructed. Australian International Financial Reporting Standards - Blueprint 17
    • 06 ISSUES – ACCOUNTING, TAX POLICY, LAW & ADMINISTRATION Standard Accounting Tax Technical Policy and Law Administration Equity-based remuneration Share Capital Tainting Share Capital Tainting Share Capital Tainting AASB 119 AIFRS will require reporting entities Under AIFRS, there can be transactions Treasury is in the process of designing Unknown until draft legislation to expense equity-based under which amounts that are not from new law to respond to this issue as released. remuneration. This will result in a the issue of shares are credited to the part of the Simplified Imputation debit to the P&L account and a credit share capital account, eg expensing System. In drafting any new law, the to the shareholders’ equity account. equity-based remuneration and impact of ATO ID 2000/355 needs to recognition of deferred tax assets for be considered. AIFRS will also require reporting equity-raising costs. There can also be entities to recognise a deferred tax transactions under which amounts can be asset for only tax assets such as transferred from the share capital account equity raising costs. to retained earnings. The effect is that entities will be penalised on transactions not previously considered to be tainted. AASB 116 Recognising unrealised profits in Disqualifying Accounts Disqualifying Accounts Disqualifying Accounts retained earnings AASB 139 Move to Fair Value accounting under The ATO will provide guidance on this Preparation of suitable product AIFRS standards are more effectively AIFRS is likely to result in the transfer of issue. outlining ATO’s position is to be AASB 141 attuned to fair value accounting. As a unrealised profits into retained earnings. considered. AASB 136 result, reporting entities are likely to be Such a transfer will trigger a credit to the required to carry more assets and company’s notional disqualifying account. liabilities at fair value with increments Companies will be penalised because and decrements made to the P&L they will be unable to frank distributions account. Given the focus of AIFRS on made out of retained earnings accounts fair value accounting, this may result in to the extent of such transfers (ie the companies booking additional profit unrealised profits are deemed to be paid and losses in respect of unrealised out of the account first). assets. Australian International Financial Reporting Standards - Blueprint 18
    • 06 ISSUES – ACCOUNTING, TAX POLICY, LAW & ADMINISTRATION Standard Accounting Tax Technical Policy and Law Administration AASB 102 Inventories Trading Stock Valuation Trading Stock Valuation Trading Stock Valuation This standard prescribes the Whether or not the closing balance under Interpretation of s 70-40 of the ITAA Information product to be accounting treatment for inventories. AGAAP is the same as the opening 1997. developed and published on Web. There are no material differences balance the following year under AIFRS. between this standard and its predecessor under AGAAP. Accounting - Managed Funds Taxation of Managed Funds Taxation of Managed Funds Taxation of Managed Funds Under AIFRS, Managed Funds may Adverse consequences may apply to It has been suggested by industry that 1. Awaiting submissions on this issue no longer qualify as a fixed trust. funds and members if compliance with we should align the meaning of what is 2. Possible solution is through the the new AIFRS standards means that for a fixed trust with the Class Order CO use of the Commissioner’s certain matters the managed funds are no 04/1575 issued by ASIC. However, the Discretion to treat non-fixed trusts longer fixed trusts and relevant interests issue involves the interpretation of s272- as fixed under certain are no longer fixed interests for the 5 of ITAA of 1997 and the terms vested circumstances. Issue may be purposes of the taxation legislation. and indefeasible interest. Whether an referred through the ATO’s Trust interest is vested and indefeasible will Working Group. depend upon the proper interpretation of the trust instrument. Accounting – Securitisation Trusts Taxation of Securitisation Trusts Taxation of Securitisation Trusts Taxation of Securitisation Trusts Under AIFRS there is real possibility The tax consequence is that the trustee The interpretation of Division 6 of the The Finance & Investment Centre of that some securitisation vehicles may be liable for tax because they do ITAA 1936 on where there is no net Expertise is examining this issue and could record losses for accounting have net income for the purposes of accounting profit for a trust. guidance will be provided. purposes in certain income years Division 6 of ITAA 1936, even though primarily as a consequence of the there is no net accounting profit according requirement to account for to AIFRS. unrealised gains and losses on swap transactions which are frequently used as an integral part of securitisation transactions. Accounting Standards Relevance of Accounting Standards to Relevance of Accounting Standards Relevance of Accounting Standards the calculation of taxable income to the calculation of taxable income to the calculation of taxable income AIFRS is more conservative than AGAAP in terms of recognition of There is a possibility that some entities Case law indicates that accounting The ATO is considering this issue. income and identifies liabilities at will be including income and deductions standards have a reasonable influence an earlier time in the accounting twice because the law or accounting but are not necessarily determinative cycle. standards are unclear. in the calculation of taxable income. Australian International Financial Reporting Standards - Blueprint 19
    • 06 ISSUES – ACCOUNTING, TAX POLICY, LAW & ADMINISTRATION Standard Accounting Tax Technical Policy and Law Administration AASB 139 Financial Instruments TOFA TOFA TOFA There are specific rules around How will expected TOFA law be TOFA draft law expected to be Unknown until exposure draft published. identification, measurement and impacted by AIFRS standards published in the next few months (? classification of financial instrument covering financial institutions and June 05). Interaction with AIFRS balances and hedging activities. arrangements? rules being considered by Treasury and ATO. General hedging is out – hedges must be tied to specific deals. Groups that FOREX FOREX FOREX run large unallocated hedge books must run changes through P&L Existing forex rules are not Introduction of AIFRS standards ATO/Treasury is aware of different statements. consistent with existing international changes accounting rules for dealing treatment between tax and accounting standards governing the with Forex. For example, Gains and accounting. There will be no further Reset Preference shares – under treatment of foreign exchange gains Losses on short term contracts. action on this issue. Refer to the Forex AIFRS, these will not qualify as equity, and losses. Working Party minutes dated 7 May and will be reclassified as debt resulting in treatment as interest and 2004 and 14 September 2004. companies’ profits will reduce – flow on tax effects. Accounting – Foreign Currency Consolidation – Foreign Currency Consolidation – Foreign Currency AASB 121 This standard allows entities to choose Consolidation regime and tax law is ATO is considering the issue their functional and presentation generally predicated on the notion of currency. Functional currency is the Australian dollars being the relevant currency in which they measure the currency. items in the financial statements. Presentation currency is the currency in which the entity presents its financial statements. This may be some other currency than Australian dollars. Australian International Financial Reporting Standards - Blueprint 20
    • 06 ISSUES – ACCOUNTING, TAX POLICY, LAW & ADMINISTRATION Standard Accounting Tax Technical Policy and Law Administration Consolidation – TRs and TDs Consolidation – TRs and TDs Consolidation – TRs and TDs All standards TRs and TDs may need to be Rulings and determinations will need The ATO is considering the issue. reissued as they reflect AGAAP to reflect the change to AIFRS. rather AIFRS standards. Eg references to statement of financial position will revert to balance sheet. Accounting – Preparation of ASIC Extension of lodgment of returns Extension of lodgment of returns All standards returns for SMEs for SMEs. for SMEs. Joint Committee on Corporations and In view of the Joint Committee’s The ATO will consult with SME Financial Services recommended that comments, some industry stakeholders to ascertain whether an SMEs should be granted an additional representatives felt that extension of time should be granted. month to prepare ASIC returns. Members consideration should be given to the of the NTLG IFRS Sub-Committee extension of lodgment of income tax commented that accounting returns by SMEs. advice/expertise available to SMEs is also limited. AASB 112 Accounting – Income Tax Consolidation – Tax Base Consolidation – Tax Base Consolidation – Tax Base This standard is based on the general Tax base is not always the same Management expectations bring The ATO is currently scoping the issue principle that the current and future tax as tax cost or tax cost setting forward the joining entity’s and industry needs to supply consequences of all transactions and other amount. The standard also brings recognition of events that will occur examples on this issue. events recognised in an entity’s balance in the concept of management in the head company, therefore sheet give rise to current and deferred tax expectation and this may cause a causing problems for the ACA liabilities and assets. problem to the intended result for calculation under Subsection 705- tax consolidation ACA process. 70 (1 (A)) of the ITAA 1997. In implementing this principle in relation to deferred tax liabilities and assets, this standard adopts the notions of “tax base” and “temporary difference”. Australian International Financial Reporting Standards - Blueprint 21
    • 06 ISSUES – ACCOUNTING, TAX POLICY, LAW & ADMINISTRATION Standard Accounting Tax Technical Policy and Law Administration Consolidations – transitional Consolidations – transitional Consolidations – transitional issue issue issue ATO will provide guidance either There may be situations where a TR 2004/14 sets outs what through the issue of a TD or placing an joining entity is still applying standards are to be used at joining example in the consolidation reference AGAAP after 1 January 2005, but time. Generally for purpose of joining manual. the head entity is now using AIFRS time the standards applicable to or vice versa. The issue that arises joining entity should be applied at the is which set of standards should joining time. However there are be used at joining time as this will some potential residual issues eg effect the ACA process. application of ss 705-70(1A) where different standards apply between the joining and head entities. Also uncertainty around whether accounts prepared in accordance with AIFRS would be used at step 2 of entry ACA where the joining time is after 1/1/05. For more information, visit International Financial Reporting Standards under `Tax topics explained’ at www.ato.gov.au/large where you will find a link to the Issues register under the `IFRS Committee’ heading. Australian International Financial Reporting Standards - Blueprint 22
    • 06 ISSUES - OTHER Skilling Issues from other countries 1. What initial products are needed to The following were identified as risks raise awareness among ATO field following the examination of the UK staff of AIFRS and issues? Inland Revenue’s experience of IFRS. 2. Other issues to be raised at further meetings 1. Transitions Up to and after the introduction of IFRS. Are the standards causing taxpayers to change their funding arrangements? 2. Avoidance Scope for arbitrage with hedging: across accounting standards across tax jurisdictions 3. Unforseen issues/risks Unforseen issues that are not apparent until tax returns are received – eg unwinding of embedded derivatives Other unforseen tax consequences Australian International Financial Reporting Standards - Blueprint 23
    • 07 PRODUCTS & SERVICES OVERVIEW General overarching Product These are the issues the ATO knows about These are the currently unresolved issues These are the issues that the ATO will examine in terms of compliance Specific Issues Fact Advice sheets Trading Stock Thin Cap TR/2004/14 Others to Come Rulings Practice Statements Lodgments Consultative Plan Compliance Admin General Advice Payments Issues Messages Guidance Products Penalties Management Tax Implications Call Centre Scripts General/ Non Technical Communication Tax Implications of AIFRS Tech Awareness Story in ATO extra Products of AIFRS for SMEs for Tax Agents Technical - for LBI staff Tax Agent Newsletter Compliance Staff LBI Web site Specific BSLs Fact sheets on Web Rulings/TDs – Preparation and Peer Review by TCN Tax Agent Satellite seminars External Internal TCN General accounting Development of skilling CofEs Skilling awareness package Tech leadership in BSLs AIFRS awareness Other staff in BSLs with specific queries Call centre scripts Identify AIFRS experts externally Resource Impacts Strategic researching staff within LBI to assess AIFRS data in tax returns Development of “skilled up” AIFRS staff within ATO. Australian International Financial Reporting Standards - Blueprint 24
    • 08 PRIORITY TASKS Not In Started Progress Completed Sign-Off 1. Establish a Project Team and a Steering Committee. X 2. Identify and bring together in internal team of accounting experts to provide technical expertise to the core design team. X 3. Create an inter-agency relationship (Treasury/ASIC/APRA/AASB/State Revenue Authorities, etc) to bring a “whole of government’ approach to in determining the tax implications of X AIFRS on the tax system. 4. Establish a Sub-committee of the NTLG for AIFRS made up of accounting, legal and peak industry body representatives. X 5. Establish a methodology for undertaking in-depth analysis (particularly needed for income tax). X 6. Undertake preliminary analysis across each revenue type of immediate and significant tax impacts of the change to international standards. X 7. Organise a joint internal/external workshop on issue identification and priority tasks for ATO X to assist users. 8. Create a AIFRS Issues Register. X 9. Ask a selected group of taxpayers what they see as the tax issues and implications of the change to international standards (eg early balancing companies). X 10. Ensure that a process is in place to capture and escalate AIFRS intelligence in the ATO, ASIC and APRA to the project team. X 11. Create and distribute an internal information package, ahead of delivery by OCTC Skilling of awareness training. X 12. Create and manage internal and external relationships, including the development of a communications plan. X 13. Establish contact with the UK and other major revenue authorities who are well advanced along the AIFRS implementation path. X 14. Undertake an assessment of taxation revenue reporting to identify any budgetary implications for the Government. X 15. Establish a TCN reference team. X Australian International Financial Reporting Standards - Blueprint 25
    • 09 MEASURES OF SUCCESS 1. Cross-code impacts, interactions, connections and dependencies identified and addressed. 2. Assurance that the Tax Office and users codesign and work together from the start of the project. 3. Created a register of issues from existing analysis within the Tax Office. 4. Accurately gauged the impact of the new accounting standards on Tax Office receivables policy. 5. Identified the implications for the Tax Office’s reporting requirements as set by the Department of Finance and for compliance with the regulatory framework as per ANAO’s financial statements audits. 6. Additional measures of success to be developed further with stakeholders Australian International Financial Reporting Standards - Blueprint 26
    • 10 APPENDIX 1 – LEVEL OF ENGAGEMENT TO DATE In the Large Market Online Bulletin of November 2004, the Tax Office announced the establishment of an IFRS sub-committee of the National Tax Liaison Group (NTLG) and defined its role. The sub-committee is comprised of representatives from professional bodies plus representatives from the specific areas of banking and finance and mining. They considered issues arising from the introduction of IFRS for financial reporting on taxation, superannuation and other transfers administered by the Tax Office. The sub-committee also facilitated consultation on specific technical and implementation issues. Professional association representatives on the sub-committee also had the opportunity to raise priority issues and work with the Tax Office on reaching co-design solutions. The first sub-committee meeting was held on 2 December 2004, and subsequent meetings were held on 15 February 2005 and 20 April, 2005. Within the Tax Office, a high level IFRS Steering Committee meets monthly and is comprised of Deputy Commissioners from the LB&I, SB, OCTC, PMD and Operations business lines. There has also been substantial input from the Tax Counsel Network and AIFRS Project Team. Australian International Financial Reporting Standards - Blueprint 27
    • 10 ABBREVIATIONS AASB Australian Accounting Standards Board ABA Australian Bankers’ Association ABS Australian Bureau of Statistics ANAO Australian National Audit Office APPEA Australian Petroleum Production and Exploration Association Ltd APRA Australian Prudential Regulation Authority ASFA Association of Superannuation Funds of Australia ASIC Australian Security and Investments Commission ASX Australian Stock Exchange BCA Business Council of Australia CTA Corporate Tax Association DTA Deferred Tax Asset DTL Deferred Tax Liability FIRB Foreign Investment Review Board GBE Government Business Enterprise IBSA International Banks and Securities Association of Australia ICAA Institute of Chartered Accountants in Australia IFRS International Financial Reporting Standards IFSA Investment and Financial Services Association ITA International Tax Agreement JITSIC Joint International Tax Shelter Information Centre MOU Memorandum of Understanding NZIRD New Zealand Inland Revenue Department (Te Taari Taake) PE Permanent Establishments RAB Revenue Analysis Branch TD Taxation Determination TIA Taxation Institute of Australia TR Taxation Ruling Australian International Financial Reporting Standards - Blueprint 28