Monthly Tax Update: April 2021

Legislation Update

Tax laws 2020 No 4 Bill passes House

The Treasury Laws Amendment (2020 Measures No 4) Bill 2020 has passed the House of Representatives with government amendments to, among other things, the temporary mechanism to enable ministers to change meeting and documentary requirements, in response to COVID-19.

The Bill proposes to:

• make refunds of large-scale generation shortfall charges non-assessable non-exempt (NANE) income for income tax purposes. As a result, no income tax is payable on refunds of large-scale generation shortfall charges;

• facilitate the closure and any transitional provisions relating to the replacement of the Superannuation Complaints Tribunal with the Australian Financial Complaints Authority;

• increase the maximum amount of penalty units that can be included in regulations that prescribe an industry code from 300 penalty units to 600 penalty units; and

• extend the operation of Schedule 5 of the Coronavirus (Measures No. 2) Act, which provides a temporary mechanism for responsible Ministers to change arrangements for meeting information and documentary requirements under Commonwealth legislation, including requirements to give information and produce, witness and sign documents, in response to the challenges posed by the Coronavirus.

For more details, please refer here.

OECD Updates

Tax treaties: OECD publishes 30 country profiles applying Arbitration under the multilateral BEPS Convention

On 25 March 2021, the OECD, in its capacity as Depositary of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (the MLI), has published the Arbitration Profiles of 30 jurisdictions applying Part VI on Arbitration of the MLI and an opinion of the Conference of the Parties to the MLI.

• Arbitration Profiles

Part VI of the MLI allows jurisdictions choosing to apply it to adopt mandatory binding arbitration for the resolution of tax treaty disputes. The Arbitration Profiles have been developed to provide taxpayers with additional information on the application of Part VI of the MLI for each jurisdiction choosing to apply that Part. The Arbitration Profiles also allow those jurisdictions to make publicly available clarifications on their position on the MLI Arbitration. Each of the Arbitration Profiles includes:

• links to the competent authority agreements (CAAs) concluded by each jurisdiction choosing to apply Part VI of the MLI to settle the mode of application of that Part (which the OECD, as the Depositary of the MLI, needs to maintain and make publicly available);
• lists of certain reservations made by those jurisdictions, governing the scope of cases eligible for arbitration; and
• further clarifications that those jurisdictions wish to make publicly available on their position on the MLI arbitration.

Please refer here to access the Arbitration Profiles.

• Opinion of the Conference of the Parties to the MLI

On 15 March 2021, the Conference of the Parties to the MLI approved an opinion that clarifies the interpretation and application of Article 35 of the MLI on the entry into effect of its provisions. In particular, the opinion clarifies a question that had arisen with respect to the entry into effect of the MLI for taxes withheld at source where the latest of the dates of entry into force of the MLI for a pair of Contracting Jurisdictions is on 1 January of a given calendar year. An early version of this opinion, which was initially prepared by the Secretariat in 2018, was published on the OECD website on 14 November 2018.

For further details of the MLI, please refer here.

OECD releases new peer review results on the prevention of tax treaty shopping under the BEPS Action 6 minimum standard

In an effort to continue tackling international tax avoidance, the OECD has released the latest peer review report assessing jurisdictions' efforts to prevent tax treaty shopping and other forms of treaty abuse under Action 6 of the OECD/G20 BEPS Project. A revised peer review document forming the basis of the assessment of the Action 6 minimum standard was also released on 1 April 2021.

The third peer review report on the implementation of the Action 6 minimum standard on treaty shopping reveals that a large majority of members of the OECD/G20 Inclusive Framework on BEPS (Inclusive Framework) are translating their commitment on treaty shopping into actions and are modifying their treaty network. For more details, please refer here.

As one of the four minimum standards, BEPS Action 6 identified treaty abuse, and in particular treaty shopping, as one of the principal sources of BEPS concerns. Treaty shopping typically involves the attempt by a person to access indirectly the benefits of a tax agreement between two jurisdictions without being a resident of one of those jurisdictions. To address this issue, all members of the Inclusive Framework have committed to implementing the Action 6 minimum standard and participate in annual peer reviews to monitor its accurate implementation.

The latest report includes the aggregate results of the peer review and data on tax treaties concluded by each of the 137 jurisdictions that were members of the Inclusive Framework on 30 June 2020. The data compiled for this peer review demonstrates that the BEPS Multilateral Instrument (MLI) has been the tool used by the vast majority of jurisdictions that have begun implementing the Action 6 minimum standard, and that the MLI has started to impact tax treaties of jurisdictions that have ratified it.

The impact and coverage of the MLI is expected to rapidly increase as jurisdictions continue their ratifications and as other jurisdictions with large tax treaty networks consider joining it. To date, the MLI covers 95 jurisdictions and over 1700 bilateral tax treaties.

The revised peer review documents were also released on 1 April 2021, they form the basis on which the peer review process will be undertaken as of 2021. The consolidated document includes the Terms of Reference which set out the criteria for assessing the implementation of the Action 6 minimum standard, and the Methodology which sets out the procedural mechanism by which the review will be conducted. Please refer here for the copy of the revised peer review documents.

ATO Rulings and Activity

Final FBT ruling on car parking benefits again deferred

The ATO has again postponed the effective date for its upcoming final fringe benefits tax (FBT) ruling on car parking benefits to 1 April 2022.

In December 2020, the ATO conducted a consultation on Draft Taxation Ruling TR 2019/D5 and a draft update to Chapter 16 of Fringe benefits tax – a guide for employers published in November 2019. Concerns were raised in consultation that the draft ruling relied too heavily on subjective factors such as the profit-making intention of a car parking operator, which an employer would have difficulty in establishing, for a nearby car park.

To address the issue, the final FBT ruling will revise the test to determine what is a “commercial car parking facility” to focus on a car parking facility’s objective characteristics.

Acknowledging the ongoing uncertainty for employers, the ATO has decided that the changes will apply from 1 April 2022, not 1 April 2021, as indicated in the draft ruling. The final draft ruling is intended to publish by mid-June 2021.

For further information, please refer here.

ATO issued draft ruling on application of PSI rules

The ATO has issued draft taxation ruling (TR 2021-D1). The draft Ruling is about the personal services income (PSI) rules contained in Part 2-42 of the Income Tax Assessment Act 1997 and how they apply to an individual or entity.

PSI is income that is mainly a reward for an individual’s personal efforts or skills (or would mainly be such a reward if it was the income of the individual).

The PSI rules in Pt 2-42 of ITAA 1997 ensure that PSI received by an interposed company, partnership, or trust (a personal service entity (PSE)) is taxable to the individual who performed the personal services. The rules also limit the deductions available to a PSE and to individuals who provide personal services but do not work through a PSE.

The Ruling explains:

• the meaning of PSI (paragraphs 26 to 29)
• what is not PSI (paragraphs 30 to 43)
• determining whose PSI it is (paragraphs 44 to 49)
• who is not subject to the PSI rules (paragraphs 50 to 51)
• effect of the PSI rules (paragraphs 52 to 57)
• PSB (paragraphs 58 to 64)
• the PSB tests (paragraphs 65 to 139)
• PSBD (paragraphs 140 to 147), and
• application of Part IVA of the Income Tax Assessment Act 1936(ITAA 1936) (paragraphs 148 to 150).

ATO issued draft ruling on application of PSI rules (Cont.)

The Ruling provides examples to illustrate the application of some of these principles:

• what is (and is not) PSI (paragraphs 151 to 163)
• determining who is earning PSI (paragraphs 164 to 176)
• PSB - results test (paragraphs 177 to 191)
• PSB - unrelated clients' test (paragraphs 192 to 205)
• PSB - employment test (paragraphs 206 to 227), and
• PSB - business premises test (paragraphs 228 to 238).

The PSI rules do not apply if an individual provides their personal services to a service acquirer as an employee or if the PSE or sole trader conducts a PSB.

When finalised, the Ruling will apply to arrangements begun to be carried out from the day after TR 2001/7 and TR 2001/8 are withdrawn.

The closing date for comments on the draft ruling is 9 April 2021.

For more information, please refer to the copy of the draft Ruling here.

Class rulings issued:

• Class Ruling CR 2021/22 - Commonwealth Bank of Australia — CommBank PERLS XII Capital Notes. The ruling applies from 1 July 2019 to 30 June 2029.
• Class Ruling CR 2021/23 - EML Payment Solutions Ltd — use of a living expenses card facility to acquire a stored value prepaid card. The ruling applies from 1 April 2019 to 31 March 2024, and continues to apply after 31 March 2024 to all entities within the specified class who entered into the scheme during the term of the ruling.
• Class Ruling CR 2021/24 - Uber Australia Pty Ltd — promotions received by employees under the Uber Rewards loyalty program and Uber for Business platform. The ruling applies from 1 April 2020 to 31 March 2025.
• Class Ruling CR 2021/25 - Blossomvale Holdings Ltd — return of capital. The ruling applies from 1 July 2020 to 30 June 2021.
• Class Ruling CR 2021/26 - Qantas Airways Ltd — 2020/22 Qantas non-executive director fee sacrifice share acquisition plan. The ruling applies from 1 July 2019 to 30 June 2022.