RTP Schedules: The Who, What, When and Why

28 July 2021

In brief

The Reportable Tax Positions (RTP) Schedule was introduced by the Australian Taxation Office (ATO) in 2011 with the intention of gathering information on uncertain tax positions from the largest public and multinational companies. Since then, the scope and content of the Schedule has been significantly expanded to now cover large public, foreign-owned and (most recently) privately-owned companies. 

In this Tax Alert, we summarise the requirements of the RTP Schedule including who is now required to complete it, and key changes applicable from the 2020-21 income year. 

In detail

What is the RTP Schedule?

The RTP Schedule is a schedule to the company income tax return and requires certain large companies to disclose their most contestable and material positions. This covers arrangements that result in tax uncertainty in financial statements and/or the income tax return as well as specifically determined arrangements for which the ATO requests disclosure (see discussion later). 

The ATO uses the schedule to:

• tailor their engagements and focus to high risk arrangements,
• identify areas to provide further clarification/certainty on the correct treatment of transactions,
• better understand tax risk for taxpayers, industries and the large market, and
• improve dialogue with large businesses about their risk profile and corporate governance.

Who needs to complete the RTP Schedule now and in the future?

It is only companies that are potentially required to complete and lodge the RTP Schedule with their income tax return. 

Broadly, for the 2021 income year the RTP Schedule must be completed by a public company or a foreign-owned company with:

• total business income is A$250 million or more in the current year, or
• total business income is A$25 million or more in the current year, where the company is part of a public or foreign owned economic group with total business income of A$250 million or more in the current year.

In addition, a company must complete an RTP Schedule if it is notified to do so by the ATO. In 2020, the ATO notified those large private groups that it required to complete the RTP Schedule with their 2021 tax return. 

However, effective from the 2021-22 income year, privately-owned companies must self-assess their requirement to lodge the RTP schedule for each income year in the same way - and using the same total business income thresholds - as public and foreign-owned companies (except for large private companies with an early balancing substituted accounting period, which will have to self-assess from the 2022-23 income year). The ATO is currently writing to private companies that it believes might meet the lodgment criteria for 2021-22 encouraging them to consider their RTP lodgment obligations well in advance of year end. 

Our experience to date suggests that some companies have difficulty determining if an RTP Schedule is required to be lodged with their tax return. Unfortunately, the triggers that require an RTP Schedule use different grouping and size concepts to other well known concepts such as “significant global entity” and “aggregated turnover”. Issues that frequently arise include:

• Determine which entities are part of an economic group. An economic group includes all entities (not just companies) that lodge an Australian tax return under a direct or indirect Australian or foreign ultimate holding company or other majority controlling interest. This includes all entities under a single ultimate holding company or under the ownership of a single individual, trust or partnership. With the expansion of the RTP Schedule to private groups, additional complexities may arise where a group potentially includes discretionary trusts and/or superannuation funds. Changes in the group during the year must also be considered, with membership of the group generally determined at the end of the current income year. 
• Determining total business income. The total business income of a company is the amount reported at the 'total income' label of the company income tax return. The total business income of an economic group is the sum of the amount reported at all income labels in the Australian tax return for each and every group member. Since there is no total income label on the trust and partnership tax returns, this needs to be calculated manually covering all income labels. All Australian income of group members is included in the calculation, with foreign income only included where the entity generating that income is an Australian resident entity. Where an individual holds the ownership interest that connects entities into one economic group, the income on their individual tax return is excluded from group total business income calculations, for the purposes of determining the RTP schedule lodgment obligation of the economic group.
• Double counting of business income across economic group members. The concept of total business income (as set out above) does not provide for “intra-group” transactions to be ignored. This means, for example, where dividends are paid up the ownership chain of controlled companies, the income will be counted more than once in determining if the economic group meets the A$250 million threshold. Similar double counting will apply where a partnership is in the same economic group as one or more of its partners, and where a trust is in the same economic group as its beneficiaries. 

What is a reportable tax position?

There are three types of RTPs:

1. Category A: Tax uncertainty in your income tax return: A Category A RTP is a position where it would be concluded, based on relevant authorities, that a material position taken in the tax return is about "as likely to be correct as incorrect", or is "less likely to be correct than incorrect". In addition to situations where the technical application of the law may be unclear, this may also include:

• positions based on anticipated legislation,
• positions contrary to a public ruling,
• positions relating to the exercise of a Commissioner’s discretion,
• positions covered by an industry or administrative practice, and
• positions where the law is clear but the facts are uncertain (for example, uncertainty relating to valuation).

Special rules apply when determining if a transfer pricing position is a Category A RTP. In particular, a company is required to disclose any position that is not covered by transfer pricing documentation to the standard required by the tax law. This is because, in the ATO’s view, a lack of compliant documentation means there is insufficient information to determine if the position is more likely to be correct than incorrect. 

A Category A RTP only needs to be disclosed on the schedule if the position is material. A position will be material where the potential adjustment, should the position not be sustained, is equal to or exceeds the company's materiality amount, which is broadly 5 per cent of its Australian current tax expense, except where:

• 5 per cent of its Australian current tax expense exceeds A$30 million – the materiality amount is then A$30 million,
• 5 per cent of its Australian current tax expense is less than A$3 million – the materiality amount is then A$3 million, or
• it has no Australian current tax expense – the materiality amount is then A$3 million.

2. Category B: Tax uncertainty in financial statements: A Category B RTP is a position in respect of which uncertainty about taxes payable or recoverable is recognised and/or disclosed in the company’s financial statements in accordance with AASB Interpretation 23 Uncertainty over income tax treatments. 

The ATO has acknowledged that private companies often prepare less comprehensive financial statements than public and foreign-pwned companies and may not consider or report tax uncertainty in their financial statements. To this end, the ATO has said that so long the financial statements meet the requirements for that company, there is no need to look beyond the company’s financial statements for Category B disclosures. However, an uncertain position that is not recorded in the financial statements likely meets the requirements of a Category A RTP. 

3. Category C: Reportable arrangements: A Category C RTP will arise if the company answers “yes” to any of the Category C questions set out by the ATO in the RTP Instructions for the applicable income year. Each question refers to specific arrangements described in an ATO Tax Ruling or Determination, Taxpayer Alert or a Practice Compliance Guideline (PCG), and other positions considered to be high risk by the ATO. For 2021, there are 35 Category C questions which can be found here. The ATO has instructed taxpayers to interpret these questions and the accompanying guidance broadly. 

Category C questions typically relate to tax avoidance, profit shifting and other practices that pose systemic risk to the corporate tax base. The 35 questions for 2021 represents a significant increase on the prior year with 12 new questions, and at least seven questions carried over from 2020 now requiring additional information to be provided. These new questions highlight the ATO’s continued use of PCGs to allow companies to self-assess their own risk levels, and focus on a range of issues including hybrid mismatch rules, restructures, intangible arrangements, and cross-border financing. 

The ATO has indicated it will no longer be updating the RTP Schedule during the year, and has instead included a new “catch-all” question which requires companies to make a disclosure if they have an arrangement covered by a final PCG that is published after the RTP Instructions were released (i.e. 24 March 2021 for the 2021 RTP Schedule), and the arrangement falls within the high risk zone of the PCG or the company has not applied the PCG. 

ATO findings from 2018-19 RTP Schedules

In January 2021, the ATO released its first RTP Schedule Findings Report outlining the aggregated disclosures made by companies for the 2018-19 income year under Category C of the Schedule. As noted above, Category C disclosures relate to specific questions from the RTP Schedule instructions, usually relating to high risk issues highlighted by the ATO in their guidance products. 

The ATO has indicated that approximately 1,240 companies lodged the RTP Schedule for the 2018-19 income year. The ATO believes that approximately 230 taxpayers who lodged their 2018-19 tax return and met the schedule lodgment criteria were yet to lodge their schedule at the time they published the findings report. The ATO’s overall conclusion is that:

The data shows that high-risk or arrangements of concern aren’t prevalent among large public and multinational businesses. This finding is consistent with our view that most large businesses do the right thing and are paying the right amount of tax. It is also reflected in our estimate of the large corporate groups income tax gap.

Of the 1,240 schedules received by the ATO, just over 40% contained no Category C disclosures, with approximately 30% having just one Category C disclosure and the remainder multiple Category C disclosures. 

Table 1: Category C disclosures by ATO guidance type, 2018-19 year

As outlined in the table above, the largest proportion of disclosures related to PCGs, which require companies to also disclose their self-assessed risk rating against the framework provided in the PCG. In relation to some PCG questions (for example, question 9 relating to cross-border related party financing arrangements), the ATO indicated it has already engaged with most taxpayers with arrangements in the higher risk “red” and “amber” zones, whilst in others (such as Question 14 relating to marketing hubs), the ATO has used the RTP Schedule disclosures to identify previously unknown arrangements and acknowledged that the disclosures have given them a more comprehensive understanding of the level of risk associated with these arrangements.

The ATO noted the low number of disclosures relating to Taxpayer Alerts as “unsurprising” and “a healthy sign most large company taxpayers are choosing to not enter into or have exited arrangements of the nature described in the alerts”. They also indicated that they have coverage over most of the disclosures relating to Taxpayer Alerts through prior or ongoing engagement with the relevant taxpayer.

The takeaway

Completing the RTP Schedule, particularly for the first time, can be a daunting task. The questions cover a wide range of issues, and while many of these involve cross-border arrangements, there are also questions relating to imputation benefits, trust splitting, roll-overs, Division 7A (private company deemed dividends), unamended mistakes or omissions, the research and development tax incentive, fragmentation of trading businesses and share buy-backs.

Some practical tips for completing the RTP Schedule include:

• The schedule forms part of the income tax return and must be lodged by the due date for the return. Prepare early and do not underestimate the amount of work that may be required to satisfactorily complete the schedule and answer the 35 Category C questions. As with all other income tax return schedules, a taxpayer must take reasonable care in completing the schedule, and penalties may apply for false or misleading statements or late lodgment. For a significant global entity, the penalty for late lodgment can range from A$111,000 to A$555,000. 
• Do not ignore new draft PCGs. There is an expectation that companies that are large enough to be caught by the RTP Schedule thresholds will self-assess their arrangements following the release of a draft PCG, and a company must disclose on the RTP Schedule if it has not done so by the time its tax return is due for lodgment if a final version of the PCG has been issued. Such a disclosure is likely to lead to enquiries from the ATO.