AUSTRALIAN INTERNATIONAL FINANCIAL REPORTING STANDARDS (AIFRS)

GENERAL ALL BLUEPRINT MAY 2005 - v4.5

SEGMENT AUDIENCE FORMAT DATE & EDITION

Australian International Financial Reporting Standards - Blueprint 1

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

© COMMONWEALTH OF AUSTRALIA 2005This 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 use within your organisation. Apart from any use as permitted under the Copyright Act 1968, all other rights are reserved. Requests for further authorisation should be directed to the Commonwealth Copyright Administration, Intellectual Property Branch, Department of Communications, Information Technology and the Arts, GPO Box 2154, Canberra ACT 2601 or posted at www.dcita.gov.au/cca.

PUBLISHED BYNew Law Administration Design PracticeAustralian Taxation OfficeCanberraMay 2005


http://www.dcita.gov.au/cca

THE BLUEPRINT IN BRIEFThis blueprint contains :

information regarding the Tax Office’s response to the introduction of Australian International Financial Reporting Standards (AIFRS), including:

Government’s intent

role of the Tax Office

stakeholders

interactions with existing Tax Law

Accounting, tax technical, policy and law, and administration issues raised by the introduction of AIFRS.

A framework to measure success

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.

What the Tax Office needs to focus on:

The technical interpretation of standards

The requisite skilling of staff to meet the requirements of AIFRS

The current systems in place and their ability to use and deal with changed data (eg size of balance, data comparison etc)

The examination and mitigation of identified risks

Designing the appropriate skilling and compliance strategies to mitigate some of the risks identified

Designing an appropriate communication strategy to provide taxpayers with a consistent ATO view

Developing and designing the appropriate advice and interpretive products to provide taxpayers with certainty and clarity in respect of AIFRS as it applies to their tax affairs.

Consult with Small Business representatives both within the ATO and externally.


INTEGRATED ADMINISTRATIVE DESIGN (IAD)What is a blueprint?A blueprint is a conceptual design of a proposed change to the system-in-use. It is a picture of how the system will work in practice. It is like an architect’s plans and elevations of a building, designed to best achieve the owner’s goals.

A blueprint is a living document which will continue to develop as the project progresses.

What is the IAD Process?The Integrated Administrative Design (IAD) process consists of two foundation models:

The IAD Process Framework (the Stacker) which comprises:

The constitutional foundation for tax designThe context for tax design, being the current system in use, andThe infrastructure (in the areas of people, process and product.

The IAD Process Cycle (the Wheel)

The Wheel is the descriptive name given to IAD Process Cycle. The Wheel represents the 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.

1 Formulate

Intent

3Design

Products

2Create

Blueprint

4Build

Products

6Implement

Change

5Test UserPathway

System in use

QA/Gateway

Gate

way

QA/Gateway

QA/Gateway/PA Gateway

QA/Gateway

Evaluate

Blueprints contain the following key elements:

Policy Intent Community of Users User Pathway& Structures

How does it work? Connections Evaluation

A shared understanding and clearly articulated statement of intent integrates the effortsof legislative and administrative design.

It answers ‘why did we want to make a change?’and ‘what is the better state we wanted to achieve?’

Without this context our efforts will be unfocused and unproductive.

To design good experiences for userswe need to know for whom we are designing.

In this context, the community of users represents the different people who will experience the system first hand and use its products.

You cannot picture a ‘system’ – it is too vague. But what we can imagine (and design) is the sequence of experiences that users have, either in transitioning to the new system or their ongoing interaction with it. This insight provides the heart of our blueprint.

Products support the user’s experience of the system.

This is a descriptionof how the new measure works.

Other projects, areas of the Tax Office, government agencies and social systems may be impacted by the change or could impact the change.

Failure to identify such connections and cross impacts could result in duplication, gaps and a poor user experience.

Evaluation of the system as well as the outputs of the Core Design Team.

The design must include an evaluation of its costs and success from two perspectives:– organisational goals– user expectations.


CONTENTS

07Products and ServicesProduct Overview 24

08Priority Tasks 25

09Measures of Success 26

10AppendixLevel of Engagement to date 27Abbreviations 28

The blueprint in brief 3

IAD principles 4

01Introduction 6Background 6Level of Impact on Taxpayers 7Project Structure and Governance 8

02Intent 9

03Tax Payer/Tax Office Interactions 10Interaction with the Law 11

04Stakeholders 12

05ComplianceCore Processes 13Timeline for December 31 balancers 14Timeline for June 30 balancers 15AIFRS Timeline of Key Issues and Potential Impacts 16

06Issues 17-22AccountingTechnicalPolicy and LawSkilling 23Issues from other tax jurisdictions 23


01INTRODUCTIONBackground

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).


01LEVEL 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.

Taxpayers Likely to be Affected Level of ImpactHigh Medium Low

X

Tax Concept

Consolidation

Disqualifying Accounts

Trading Stock

Trusts

PAYG Instalments

Consolidated Groups, MECs

All Corporate Groups

All Taxpayers who have trading stock

All Trusts using Accounting Standards

All Taxpayers liable to pay PAYG instalments and who are required to use Accounting Standards.

X

X

X

X

X

X

X

Corporate GroupsThin Cap

Share Capital Tainting All Corporate Groups

TOFA All Taxpayers using Financial Instruments


01PROJECT STRUCTURE AND GOVERNANCE

REVENUE PRODUCT LINES

GST

INCOME TAX (PAYG (w), FBT & CGT)

Income tax needs to be broken down into sub-components

SUPERANNUATION

Preliminary analysisby product line teams

Project Manager

Core Design Team

Admin Support Team

COMMUNITY OF USERS(codesign)

Communications Team

Stakeholder Relations Team

CUSTODIAN

STEERING COMMITTEE Market Committees

Regulators Reference GroupExpert Accounting Reference Group

Product specificationsLawCompliance productsInformation productsTransaction productsBusiness (IT) systemsSkilling productsInterpretation productsInternal information management and reporting products

Integrated administrative design and project management products and process required by PS CM 2003/05 (DPM)

PRRT*

INTERMEDIARIESNTLG

WORKING GROUPS

*PRRT = Petroleum Resource Rent Tax


02INTENT

GOVERNMENT INTENT

The introduction of AIFRS:

will enhance comparability of financial information

should make the allocation of capital across borders more efficient

should reduce compliance costs for corporations

should improve consistency in audit quality

How it works now.

Generally, Australian income tax law has evolved relatively independently from Australian accounting standards, however, in recent years, there has been a convergence of accounting standards and income tax law particularly in consolidation. There are a number of provisions in Australian income tax law that either directly or indirectly rely on accounting standards and accounting principles for the purposes of determining a taxpayers’ income tax liability. As a result, any change in the established accounting framework and standards has the potential to impact on income tax, non-income tax and transfer liability at the individual entity level, and ultimately revenue collections/transfer at the aggregate level.

Revenue Impact

Generally, revenue neutral.

How it will work in the future

All Australian entities preparing financial reports under the Corporations Act 2001 must comply with the Australian equivalents to IFRS for financial years beginning on or after 1 January 2005 following gazettal of the standards.

While there is no systematic connection between Australian income tax law and Australian accounting standards and practice, as a practical matter most businesses determine their taxable income or loss for a year of income by reconciling from a profit and loss account. There are a number of provisions in Australian income tax law (eg Consolidation, TOFA, Thin Capitalisation) that either directly or indirectly rely on accounting standards and accounting principles for the purposes of determining taxpayers’income tax liability.

The new measures will apply on a prospective basis for information and products.

WHAT IS THE TAX OFFICE ROLE?

To understand the standards and their implications with current tax law

To measure and monitor revenue

To work together with stakeholders to ascertain the tax impact of AIFRS

To act upon the tax implications of AIFRS

What are the Tax Office Drivers?

As AIFRS has to be adopted by Australian taxpayers in reporting their financial accounts, where the tax system has a direct or indirect link to accounting standards, we need to acknowledge changes to avoid any unintended tax consequences.

This will result in:Greater certaintyMaintained compliance costsMaintained neutralityFewer opportunities for arbitrage and deferralA positive environment consistent with other OECD countries.A neutral tax environment which is not an obstacle to locating financial activities in Australia.

The administration is aligned with the Government’s intent of enabling more effective comparable corporate reporting and governance processes, reducing the cost of capital in Australia and improving access to foreign capital for Australian entities resulting in a stronger economy.

Why is AIFRS being implemented?

The arguments in favour of international convergence of accounting standards are compelling and include facilitation of cross border listings, financial statement comparability for investors, reducing the cost of capital in Australia and improving access to foreign capital for Australian entities.

Who will be affected?

All Australian entities preparing financial reports under the Corporations Act 2001 must comply with the Australian equivalents to IFRS for financial years beginning on or after 1 January 2005.

Commencement Date

The commencement date is the first day of the next reporting period after 31 December 2004.


03TAX PAYER / TAX OFFICE INTERACTIONS

AnalysisLenses

Profit & loss itemsBalance sheet itemsCharts of accounts

Revenue transactions

Capital transactions

Measureand

record

Compliance obligations

Business Pathway

Revenue laws

Changing standards:old standardstransitioningnew standards

Codes of law:GST

SuperannuationPRRTIncome Tax

Accounting standards

Products:LegislationInterpretationInformation TransactionAwarenessCompliance

Information systemsDebt managementCapital managementSecuritisationIntangible AssetsValuation modelsKey Performance

indicatorsDividend policy

GSTSuperannuationPRRT - transitional

CGTWithholding TaxesIncome Tax

Prudential compliancePrudential capital adequacyLending practicesInternal control proceduresCredit ratingsInvestor relationsShare based paymentContingent liabilities and assetsFinancial instruments-Recognition

and measurement

Pote

ntia

l are

as im

pact

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impa

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Pote

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pro

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03INTERACTIONS WITH THE LAW

04STAKEHOLDERS

ATO

Treasury

APRA

ASIC

ABS

CPA Australia

ICAA

Tax Institute

National Institute of Accountants

ABA

IFSA

CTA

IBSA

BCA

ASFA

Federation of Small Business

Small Business Council

APPEA

Government Departments Regulatory Authorities

Professional Associations Industry Associations

Companies

Trusts/Partnerships

Superannuation Funds

KPMG

PWC

Deloitte Touche Tohmatsu

Ernst and Young

2nd tier accounting firms

ASX

Software Developers

RBA

Foreign Revenue Authorities (eg New Zealand Inland Revenue Department, UK Inland Revenue)

AASB

Taxpayers Accounting Firms Others


05CORE COMPLIANCE PROCESSES

1. Registration Increases/decreases in corporate group structures, eg partnership structures/trusts

Changes in Consolidated group data pre 1/1/2005 and 1/7/2005

2. Debt and lodgmentCheck the policy on Tax Sharing Arrangements for AIFRS impacts

3. Payment Processing (in some cases contacting large payers before payments are due to understand payment trends)

Undertake Revenue Performance Strategy to explain movements in:*PAYG instalments*Wash Ups*Refunds

Anticipate impact of AIFRS for Government

Review actual cost of AIFRS across whole market

4. Intelligence

Monthly reports on trends in FIRB data focussing on changes in group financing and ownership structures

Review of Disclosures required under AASB 1047 –as early warning of potential revenue impacts

Quarterly reports on changes picked up from OSR reports (movements in brand names etc)

ASIC/APRA/ASX/AASB MOUs - meet with regulatory bodies to share intelligence

Gain intelligence from other revenue bodies i.e. NZIRD, JITSIC

5. Risk Assessment

Risk assess cases where there are new hybrid instrumentsReview transfer pricing cases involving profit methodologies using pre/post AIFRS dataTreaties – double tax – risk assess cases involving profits under ITA, including PEs

Review Pre AIFRS returns for changes in funding and structure and losses being incurred pre AIFRS

Review R and D amounts under AIFRS vs Tax

Post AIFRS Review of biggest cases across Large and SME markets with the biggest in changes in tax outcomes (eg increases in bad debts; interest expenses, Forex gains/losses. DTAs, DTLs; thin cap compliance; market valuation v Fair Value calculations to reset cost base of assets

6. Audit Audit highest risk risk assessment cases

7. Technical Products and Advice

Develop public messages and general guidance around Post AIFRS impacts on Transfer Pricing and ITAs

Review Existing TDs, TRs, LA PSs, that refer to existing accounting standards and not just for income tax

Urgent AIFRS skilling/awareness for staff undertaking PBRs

Develop and Deliver AIFRS Rulings Program

General Advice, Admin Products, Skilling Program, SME products. Specific Advice to Software Developers

Examine the need for general advice on Part IVA

Advice on Transfer Pricing

8. Law ReformEscalate Law Reform Issues from other core processes to Treasury as required

Review the need for law changes to allow closer working relationships between ATO and other regulatory bodies eg ASIC, APRA.


05TIMELINE EARLY DECEMBER 2005 BALANCER


05TIMELINE EARLY JUNE 2006 BALANCER


05TIMELINE OF KEY ISSUES & POTENTIAL IMPACTS

⌦ AIFRS compulsory from start of next reporting period……

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

⌦ AIFRS become compulsory from most affected taxpayers……

14 12a1312 18 1915 16 17111 7543

82 6

9

10


11 First GST payments under AIFRS -we may see some GST impacts in our risk rating engine (financial supplies, offshore acquisitions, GST groups)

10 There will be a change in the basis of recognition of contingent liabilities (a current GST disputes issue)

13Basis for calculating instalment income after 1/1/05 (a product already exists?)

1 Will AIFRS be a factor in ACA outcomes and structuring decisions of Consolidated groups?

7

Will AIFRS be a factor in taxpayer responses to RITA and other business tax reform measures?

8

Companies set dividend policies –there might be an impact on share buy-back policies as well

5

Listed companies begin making market disclosures – we may see new PBR topics and requests for pre-lodgment risk reviews

4

International accounting firms will set global policy and practice on applying AIFRS

2

Early balancing companies prepare their comparative statements (old vs. new standards)

3 Further AIFRS expected to be released

9

Largest number of taxpayers begin using AIFRS

14 Possible commencement of TOFA stage IV.

15 Completion of design of 2005-06 return forms and schedules.

16 Completion of 2005-06 return form instructions.

17 First reports to ASIC under AIFRS due.

18 First income tax returns under AIFRS due.

6 Policy and law window opens after federal election.

19 30 June balancing entities begin lodging income tax returns under AIFRS.

12 First PAYG instalments for early Dec balancers using AIFRS – we may need a new instalment variation code

Key

Applies to 30/06 balances

Applies to 31/12 balances

Applies to both dates

12a First PAYG instalments for June balancers using AIFRS code

06ISSUES – ACCOUNTING, TAX POLICY, LAW & ADMINISTRATION


Standard Accounting Tax Technical Policy and Law Administration

Assets and Liabilities Recognition and Measurement

AIFRS will have the effect of increasing liabilities and decreasing the quantum of assets reported on the balance sheet. For example, internally created assets, eg. brands and mastheads, will no longer be recognised as assets and will be deleted from the balance sheet. Large write downs may be required.

AIFRS will change the basis for recognition and measurement of liabilities and new liabilities may also be recognised.

Asset impairment testing under AIFRS –Under AIFRS, companies will have to run tougher tests and examine smaller business units when justifying the carrying values of their assets – eg in retailing, examine individual stores, not only store chains.

Goodwill – Under AIFRS goodwill will not be amortised but will be subject to strict impairment requirements.

Thin Capitalisation

For the purposes of Division 820 (Thin Cap), the accounting standards must be used in calculating the value of assets and liabilities. This change to AIFRS may cause taxpayers to inadvertently breach the safe harbour rule, resulting in some debt deductions being disallowed.

Thin Capitalisation

Treasurers’ Press Release No 002 of 24 January 2005, provides that a transitional regime is to be introduced to alleviate the effect of AIFRS on the Thin Cap regime.

Thin Capitalisation

Draft Practice Statement/Taxation Ruling to be written to explain the impact of legislative amendments. Amendments are to be made to the Thin Cap schedule and guide advising taxpayers of the legislative changes.

Consolidation – Exit of a subsidiary member

The introduction of AIFRS may result in the recognition of liabilities upon the exit of a subsidiary member of a consolidated group that were not recognised when that subsidiary member joined the group. Entities will be penalised on exit from a consolidated group where additional liabilities are recognised.

AASB 138

AASB 136

Consolidation – Exit of a subsidiary member

The effect of this change will result in a greater capital gain or lesser capital loss to the head company of a consolidated group when a subsidiary member exits.

Consolidation - Exit of a subsidiary member

The effect of s 711-45 is being analysed to scope the extent of the issue.

Consolidation/CGT implication

The head company of a consolidated group may make a capital gain under CGT event L7 where a liability that was taken into account in the ACA calculation is later discharged and the sum of the payment made, and the market value of any other 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.


From a policy perspective, CGT event L7 should not happen when a liability is discharged and the reconstructed ACA would be different because the liability was recognised for the first time, or changed in value, merely because of the introduction of AIFRS.


The ATO is considering the issue.





Move to Fair Value accounting under AIFRS is likely to result in the transfer of unrealised profits into retained earnings. Such a transfer will trigger a credit to the company’s notional disqualifying account.

Companies will be penalised because they will be unable to frank distributions made out of retained earnings accounts to the extent of such transfers (ie the unrealised profits are deemed to be paid out of the account first).

Share Capital Tainting

Under AIFRS, there can be transactions under which amounts that are not from the issue of shares are credited to the share capital account, eg expensing equity-based remuneration and recognition of deferred tax assets for equity-raising costs. There can also be transactions under which amounts can be transferred from the share capital account to retained earnings. The effect is that entities will be penalised on transactions not previously considered to be tainted.

Share Capital Tainting

Treasury is in the process of designing new law to respond to this issue as part of the Simplified Imputation System. In drafting any new law, the impact of ATO ID 2000/355 needs to be considered.

Equity-based remuneration

AIFRS will require reporting entities to expense equity-based remuneration. This will result in a debit to the P&L account and a credit to the shareholders’ equity account.

AIFRS will also require reporting entities to recognise a deferred tax asset for only tax assets such as equity raising costs.

AASB 119Share Capital Tainting

Unknown until draft legislation released.

AASB 116

AASB 139

AASB 141

AASB 136

Recognising unrealised profits in retained earnings

AIFRS standards are more effectively attuned to fair value accounting. As a result, reporting entities are likely to be required to carry more assets and liabilities at fair value with increments and decrements made to the P&L account. Given the focus of AIFRS on fair value accounting, this may result in companies booking additional profit and losses in respect of unrealised assets.


The ATO will provide guidance on this issue.


Preparation of suitable product outlining ATO’s position is to be considered.




Trading Stock Valuation

Whether or not the closing balance under AGAAP is the same as the opening balance the following year under AIFRS.

Accounting - Managed Funds

Under AIFRS, Managed Funds may no longer qualify as a fixed trust.

AASB 102 Inventories

This standard prescribes the accounting treatment for inventories. There are no material differences between this standard and its predecessor under AGAAP.


Interpretation of s 70-40 of the ITAA 1997.


Information product to be developed and published on Web.

Taxation of Managed Funds

Adverse consequences may apply to funds and members if compliance with the new AIFRS standards means that for certain matters the managed funds are no longer fixed trusts and relevant interests are no longer fixed interests for the purposes of the taxation legislation.


It has been suggested by industry that we should align the meaning of what is a fixed trust with the Class Order CO 04/1575 issued by ASIC. However, the issue involves the interpretation of s272-5 of ITAA of 1997 and the terms vested and indefeasible interest. Whether an interest is vested and indefeasible will depend upon the proper interpretation of the trust instrument.


1. Awaiting submissions on this issue

2. Possible solution is through the use of the Commissioner’s Discretion to treat non-fixed trusts as fixed under certain circumstances. Issue may be referred through the ATO’s Trust Working Group.

Accounting – Securitisation Trusts

Under AIFRS there is real possibility that some securitisation vehicles could record losses for accounting purposes in certain income years primarily as a consequence of the requirement to account for unrealised gains and losses on swap transactions which are frequently used as an integral part of securitisation transactions.

Taxation of Securitisation Trusts

The tax consequence is that the trustee may be liable for tax because they do have net income for the purposes of Division 6 of ITAA 1936, even though there is no net accounting profit according to AIFRS.


The interpretation of Division 6 of the ITAA 1936 on where there is no net accounting profit for a trust.


The Finance & Investment Centre of Expertise is examining this issue and guidance will be provided.

Accounting Standards

AIFRS is more conservative than AGAAP in terms of recognition of income and identifies liabilities at an earlier time in the accounting cycle.

Relevance of Accounting Standards to the calculation of taxable income

There is a possibility that some entities will be including income and deductions twice because the law or accounting standards are unclear.


Case law indicates that accounting standards have a reasonable influence but are not necessarily determinative in the calculation of taxable income.


The ATO is considering this issue.




Financial Instruments

There are specific rules around identification, measurement and classification of financial instrument balances and hedging activities.

General hedging is out – hedges must be tied to specific deals. Groups that run large unallocated hedge books must run changes through P&L statements.

Reset Preference shares – under AIFRS, these will not qualify as equity, and will be reclassified as debt resulting in treatment as interest and companies’ profits will reduce – flow on tax effects.

TOFA

How will expected TOFA law be impacted by AIFRS standards covering financial institutions and arrangements?

FOREX

Existing forex rules are not consistent with existing international accounting standards governing the treatment of foreign exchange gains and losses.

AASB 139 TOFA

TOFA draft law expected to be published in the next few months (? June 05). Interaction with AIFRS rules being considered by Treasury and ATO.

TOFA

Unknown until exposure draft published.

FOREX

Introduction of AIFRS standards changes accounting rules for dealing with Forex. For example, Gains and Losses on short term contracts.

FOREX

ATO/Treasury is aware of different treatment between tax and accounting. There will be no further action on this issue. Refer to the ForexWorking Party minutes dated 7 May 2004 and 14 September 2004.

AASB 121 Accounting – Foreign Currency

This standard allows entities to choose their functional and presentation currency. Functional currency is the currency in which they measure the 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.

Consolidation – Foreign Currency

Consolidation regime and tax law is generally predicated on the notion of Australian dollars being the relevant currency.

Consolidation – Foreign Currency

ATO is considering the issue

06ISSUES – ACCOUNTING, TAX POLICY, LAW & ADMINISTRATIONStandard Accounting Tax Technical Policy and Law Administration

All standardsConsolidation – TRs and TDs

TRs and TDs may need to be reissued as they reflect AGAAP rather AIFRS standards. Eg references to statement of financial position will revert to balance sheet.

Consolidation – TRs and TDs

Rulings and determinations will need to reflect the change to AIFRS.

Consolidation – TRs and TDs

The ATO is considering the issue.

All standardsAccounting – Preparation of ASIC returns for SMEs

Joint Committee on Corporations and Financial Services recommended that SMEs should be granted an additional month to prepare ASIC returns. Members of the NTLG IFRS Sub-Committee commented that accounting advice/expertise available to SMEs is also limited.

Extension of lodgment of returns for SMEs.

In view of the Joint Committee’s comments, some industry representatives felt that consideration should be given to the extension of lodgment of income tax returns by SMEs.

Extension of lodgment of returns for SMEs.

The ATO will consult with SME stakeholders to ascertain whether an extension of time should be granted.

AASB 112 Accounting – Income Tax

This standard is based on the general principle that the current and future tax consequences of all transactions and other events recognised in an entity’s balance sheet give rise to current and deferred tax liabilities and assets.

In implementing this principle in relation to deferred tax liabilities and assets, this standard adopts the notions of “tax base”and “temporary difference”.

Consolidation – Tax Base

Tax base is not always the same as tax cost or tax cost setting amount. The standard also brings in the concept of management expectation and this may cause a problem to the intended result for tax consolidation ACA process.


The ATO is currently scoping the issue and industry needs to supply examples on this issue.


Management expectations bring forward the joining entity’s recognition of events that will occur in the head company, therefore causing problems for the ACA calculation under Subsection 705-70 (1 (A)) of the ITAA 1997.


06ISSUES – ACCOUNTING, TAX POLICY, LAW & ADMINISTRATIONStandard Accounting Tax Technical Policy and Law Administration

Consolidations – transitional issue

TR 2004/14 sets outs what standards are to be used at joining time. Generally for purpose of joining time the standards applicable to joining entity should be applied at the joining time. However there are some potential residual issues eg 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.


There may be situations where a joining entity is still applying AGAAP after 1 January 2005, but the head entity is now using AIFRS or vice versa. The issue that arises is which set of standards should be used at joining time as this will effect the ACA process.


ATO will provide guidance either through the issue of a TD or placing an example in the consolidation reference manual.

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.


http://www.ato.gov.au/large

06ISSUES - OTHER

Issues from other countriesSkilling

1. What initial products are needed to raise awareness among ATO field staff of AIFRS and issues?

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

The following were identified as risks following the examination of the UK Inland Revenue’s experience of IFRS.


07PRODUCTS & SERVICES OVERVIEW

General overarching Product

These are the issues the ATO knows aboutThese are the currently unresolved issuesThese are the issues that the ATO will examine in terms of compliance

Skilling

Specific Issues Advice

General Advice Products

CommunicationProducts

Fact sheets

Rulings

TR/2004/14Trading Stock Thin Cap

Practice Statements LodgmentsPaymentsPenalties

Consultative PlanIssues Management

Compliance Messages

Admin Guidance

Tax Implicationsof AIFRS for SMEs

Tax Implications of AIFRS

for Tax Agents

Call Centre Scripts General/ Non Technical

Tech Awareness Story in ATO extra

Technical - for LBI staffCompliance StaffSpecific BSLs

Rulings/TDs – Preparation and Peer Review by TCN

General accounting awarenessAIFRS awareness

Development of skilling package

TCNCofEsTech leadership in BSLsOther staff in BSLs with specific queriesCall centre scripts

Resource Impacts

Identify AIFRS experts externally

Strategic researching staff within LBI to assess AIFRS data in tax returns

Development of “skilled up” AIFRS staff within ATO.

Internal

Tax Agent Newsletter

LBI Web site

Fact sheets on Web

Tax Agent Satellite seminarsExternal

Others to Come


08PRIORITY TASKS

1. Establish a Project Team and a Steering Committee.

2. Identify and bring together in internal team of accounting experts to provide technical expertise to the core design team.

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 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.

5. Establish a methodology for undertaking in-depth analysis (particularly needed for income tax).

6. Undertake preliminary analysis across each revenue type of immediate and significant tax impacts of the change to international standards.

7. Organise a joint internal/external workshop on issue identification and priority tasks for ATO to assist users.

8. Create a AIFRS Issues Register.

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).

10. Ensure that a process is in place to capture and escalate AIFRS intelligence in the ATO, ASIC and APRA to the project team.

11. Create and distribute an internal information package, ahead of delivery by OCTC Skilling of awareness training.

12. Create and manage internal and external relationships, including the development of a communications plan.

13. Establish contact with the UK and other major revenue authorities who are well advanced along the AIFRS implementation path.

14. Undertake an assessment of taxation revenue reporting to identify any budgetary implications for the Government.

15. Establish a TCN reference team.

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09MEASURES 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


10APPENDIX 1 – LEVEL OF ENGAGEMENT TO DATEIn 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.


10ABBREVIATIONSAASB Australian Accounting Standards BoardABA Australian Bankers’ AssociationABS Australian Bureau of StatisticsANAO Australian National Audit OfficeAPPEA Australian Petroleum Production and Exploration Association LtdAPRA Australian Prudential Regulation AuthorityASFA Association of Superannuation Funds of AustraliaASIC Australian Security and Investments CommissionASX Australian Stock ExchangeBCA Business Council of AustraliaCTA Corporate Tax AssociationDTA Deferred Tax AssetDTL Deferred Tax LiabilityFIRB Foreign Investment Review BoardGBE Government Business EnterpriseIBSA International Banks and Securities Association of AustraliaICAA Institute of Chartered Accountants in AustraliaIFRS International Financial Reporting StandardsIFSA Investment and Financial Services Association ITA International Tax AgreementJITSIC Joint International Tax Shelter Information Centre MOU Memorandum of UnderstandingNZIRD New Zealand Inland Revenue Department (Te Taari Taake)PE Permanent EstablishmentsRAB Revenue Analysis BranchTD Taxation DeterminationTIA Taxation Institute of AustraliaTR Taxation Ruling


Documents

AUSTRALIAN INTERNATIONAL FINANCIAL REPORTING STANDARDS (AIFRS)