AUSTRALIAN TAXATION OFFICE

Notes to and forming part of the financial statements

for the period ended 30 June 2014

Note 1 – Summary of Significant Accounting Policies

1.1Objective of the Australian Taxation Office

The Australian Taxation Office (ATO) isan Australian Government controlled entity. It is a not-for-profit entity. The role of the ATO is to ensure the community has confidence in the administration of Australia’s taxation and superannuation systems.The ATO is the Government’s principal revenue management agency.

The ATO is structured to meet a single outcome:

Confidence in the administration of aspects of Australia’s taxation and superannuation systems through helping people understand their rights and obligations, improving ease of compliance and access to benefits, and managing non-compliance with the law.

The ATO also provides support to the Tax Practitioner’s Board (TPB), the Australian Business Register (ABR), the Australian Charities and Not-for-profits Commission(ACNC) and the Australian Valuation Office (AVO).

An overview of the ATO’s Outcome and Program structure is described in Part 1 of the Annual Report.

ATO activities contributing towards this outcome are classified as either departmental or administered. Departmental activities involve the use of assets, liabilities, income and expenses controlled or incurred by the ATO in its own right. Administered activities involve the management or oversight by the ATO, on behalf of the Government, of items controlled or incurred by the Government.

Elements of these notes which relate specifically to administered activities are shaded.

The continued existence of the ATO in its present form and with its present programs is dependent on Government policy and on continuing funding by Parliament for the ATO’s administration and programs.

The Government continues to have regard to developments in case law, including the High Court’s most recent decision on Commonwealth expenditure in Williams v Commonwealth [2014] HCA 23, as they contribute to the larger body of law relevant to the development of Commonwealth programs. In accordance with its general practice, the Government will continue to monitor and assess risk and decide on any appropriate actions to respond to risks of expenditure not being consistent with constitutional or other legal requirements.

1.2Basis of Preparation of the Financial Statements

The financial statements are general purpose financial statements and arerequired by section 49 of the Financial Management and Accountability (FMA) Act 1997. The financial statements have been prepared in accordance with:

  • Finance Minister’s Orders (FMOs)for reporting periods ending on or after 1July2011; and
  • Australian Accounting Standards and Interpretations issued by the Australian Accounting Standards Board (AASB) that apply for the reporting period.

The ATO’sfinancial statements have been prepared on an accrual basis and in accordance with the historical cost convention, except for certain assets and liabilities at fair value. Except where stated, no allowance is made for the effect of changing prices on the results or the financial position.

The financial statements are presented in Australian dollars and values arerounded as stated below unless disclosure of the full amount is specifically required.

The ATO departmental amounts have been rounded to the nearest thousandunless otherwise specified.

The ATO administered amounts have been rounded to the nearest million unless otherwise specified.

Unless an alternative treatment is specifically required by an accounting standard or the FMOs, assets and liabilities are recognised in the Statement of Financial Position when and only when it is probable that future economic benefits will flow to the ATO or a future sacrifice of economic benefits will be required and the amounts of the assets or liabilities can be reliably measured. However, assets and liabilities arising under executory contracts are not recognised unless required by an accounting standard. Assets and liabilitiesthat are unrecognised are reported in the Schedule of Commitments or the Schedule of Contingencies.

Unless alternative treatment is specifically required by an accounting standard, incomeand expenses are recognised in the Statement of ComprehensiveIncome when, and only when,the flow, consumption or loss of economic benefits has occurred and can be reliably measured.

1.3New Australian Accounting Standards

Adoption of New Australian Accounting Standard Requirements

No accounting standard has been adopted earlier than the application date as stated in the standard.

The following standardswere issued prior to the signing of the statement by the Commissioner of Taxation and Chief FinanceOfficer, were applicable to the current reporting period and had a material effect on the entity’s financial statements:

Standard/ Interpretation / Nature of change in accounting policy, transitional provisions, and adjustment to financial statements
AASB 13 Fair Value Measurement / Provides a single standard for the measurement and disclosure of fair value, with some of the new disclosure requirements being quite detailed. This includes extending the fair value hierarchy to all measures of fair value which will require the ATO to classify fair value measurements into three levels based upon the lowest level of inputs used. There have also been a number of consequential amendments to other standards that require or permit assets and liabilities to be valued at their fair value.
AASB 119 Employee Benefits / Amends the definition of short-term and long-term employee benefits, which will change the ATO’s disclosure of the expected settlement period for employee provisions. The practical impact of this is that annual leave is to be disclosed as a long term employee benefit in the Senior Executive Remuneration note.

All other standards, revised standards, interpretationsand amending standards issued by the Australian Accounting Standards Board prior to the signing of the statements by the Chief Executiveand the Chief Finance Officer and applicable to the current reporting period, did not have a material financial impact on the ATO’s2013-14 financial statements and are not expected to have a material future financial impact.

Future Australian Accounting Standard Requirements

There are three new standards that may have a material impact on the ATO’sfinancial statements in future reporting periods from the total number issued orrevised by the Australian Accounting Standards Board, as follows:

Standard/ Interpretation / Application Date for the entity1 / Nature of change in accounting policy, transitional provisions, and adjustment to financial statements
AASB 1055 Budgetary Reporting / From 1 July 2014 / A new disclosure requirement for the ATO to include the ATO’s original budget presented to Parliament, including administered budget information, variances between actuals and budget and explanations for major variances. It only requires disclosure and variance explanations for primary financial statements presented in the PBS. This change will take effect form 2014-15.
AASB 9 Financial Instruments / From 1 July 2017 / Simplifies the measurement method on financial assets from four into two. This will be taken into effect in 2017-18. It will change our financial asset classification and the way we recognise gains and losses.Under AASB 9, financial assets are classified as measured at amortised cost if it has assets being held within a business model that aims to collect contractual cash flows; and the contractual terms of the financial assets give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. If the above conditions are not satisfied, a financial asset is classified as measured at fair value through profit and loss.
AASB 1031 Materiality / Likely take effect from 1 July 2014. / The Australian Accounting Standards Board has planned to withdraw AASB 1031 Materiality. As a result of the change, guidance on quantitative assessment of materiality will likely be removed. Judgement calls will be required to be made on a case-by-case basis and the quantitative rule will no longer be available.

1. The entity’s expected initial application date is when the accounting standard becomes operative at the beginning of the entity’s reporting period.

All other standards, revised standards, interpretations and amending standards issued prior to the sign off date and are applicable to the future reporting period(s) are not expected to have a future material financial impact on the ATO’s financial statements.

1.4Significant Accounting Judgements and Estimates for Departmental Items

In the process of applying the accounting policies listed in this note, the ATO has made the following judgements that have the most significant impact on the amounts recorded in this year’s financial statements:

  • the fair value of leasehold improvements is determined by estimating the depreciated replacement cost taking the useful life and remaining useful life of the asset into consideration.
  • the fair value of plant and equipment is determined based on the market value for items of similar type and age or, where there is no active or comparable market, by estimating depreciation replacement cost.

No accounting assumptions or estimates have been identified that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next reporting period.

1.5Changes in Accounting Estimates

There has been no material changes in accounting estimates applied todepartmental and administereditems in the 2013-14financial statements.

1.6The ATO Reporting Entity

Included in the financial statements of the ATO are the operations of the Australian Valuation Office through the Valuation Services Special Account, the operations of the Australian Charities and Not-for-profits Commission through the Australian Charities and Not-for-profits Commission Special Account, and the operations of the Australian Business Register and Tax Practitioner’s Board.

On 24th January 2014, the Government announced that the Australian Valuation Office (AVO) will cease to provide services by 30 June 2014.

1.7Departmental Revenue

Revenue from Government

Amounts appropriated for departmental outputs for the year (adjusted for any formal additions and reductions) are recognised as Revenuefrom Government when the ATO gains control of the appropriation, except for certain amounts that relate to activities that are reciprocal in nature, in which case revenue is recognised only when it has been earned.

Appropriation receivables are recognised at their nominal amounts.

Other Revenue

Revenue from rendering of services is recognised by reference to the stage of completion of contracts or other agreements at the reporting date. The revenue is recognised when:

  • the amount of revenue, stage of completion and transaction costs incurred can be reliably measured; and
  • the probable economic benefits associated with the transaction will flow to the ATO.

The stage of completion of contractsat the reporting date is determined according to the proportion of costs incurred to date against the estimated total costs of the transaction.

Receivables for services, which have 30 day terms are recognised at the nominal amounts due less any impairment allowance account. Collectability of debts is reviewed at the end of the reporting period. Allowances are made when collectability of the debt is no longer probable.

No interest was earned by the ATO, excluding the AVO, on its cash balances in accordance with current Government policy. Interest revenue is recognised by the AVO under competitive neutrality guidelines and is calculated daily using the 90 day Government bond rate.

Refer to note 1.29 for administered revenue.

1.8Gains

Sale of Assets

Gains from the disposal of non-financial assets are recognised on a net basis when control of the asset has passed to the buyer.

Resources Received Free of Charge

Resources received free of charge are recognised as gains when, and only when, a fair value can be reliably determined and the services would have been purchased if they had not been donated. Use of those resources is recognised as an expense.

Resources received free of charge are recorded as either revenue or gains depending on their nature.

Contributions of assets at no cost of acquisition or for nominal consideration are recognised as gains at their fair value when the asset qualifies for recognition, unless received from another Government entityas a consequence of a restructuring of administrative arrangements (refer to Note 1.9).

Gains from Restoration Obligations

Gains from restoration obligations are recognised when the ATO exits a lease and the ATO’sobligations are absolved, when the costs incurred are less than the provision, or when the restoration obligationsare decreased due to changes in the lease agreement.

1.9Transactions with the Government as Owner

Equity Injections

Amounts appropriated which are designated as ‘equity injections’ for a year (less any formal reductions) and Departmental Capital Budgets (DCBs)are recognised directly in contributed equity in that year.

Restructuring of Administrative Arrangements

Net assets received from or relinquished to another Governmententity under a restructuring of administrative arrangements are recognised at their book value directly against contributed equity.

Other Distributions to Owners

The FMOs require that distributions to owners be debited to contributed equity unless it is in the nature of a dividend.

1.10Employee Benefits

Liabilities for ‘short -term employee benefits’ (as defined in AASB 119Employee Benefits)and termination benefits which are expected to be settled within twelvemonths of the end of the reporting period are measured at their nominal amounts.

The nominal amount is calculated with regard to the rates expected to be paid on settlement of the liability.

All other employeebenefit liabilities are measured at the present value of the estimated future cash outflows to be made in respect of services provided by employees up to the reporting date.

Leave

The liability for employee benefits includes provision for annual leave and long service leave. No provision has been made for sick leave as all sick leaveentitlement is non-vesting and the average sick leave to be taken in future years by employees of the ATO is estimated to be less than the annual entitlement for sick leave.

The leave liabilities are calculated on the basis of employees’ remuneration at the estimated salary rates that will apply at the time the leave is taken, including an allowance for the ATO’s employer superannuation contribution rates,annual leave and long service leave accrued when the leave is taken, to the extent that the leave is likely to be taken during service rather than paid out on termination.

The liability for long service leave has been determined by reference to the work undertaken by the Australian Government Actuary in 2011-12. The estimate of the present value of the liability takes into account attrition rates and pay increases through promotion and inflation.

Separation and Redundancy

Provision is made for separation and redundancy benefit payments. The ATO recognises a provision for termination when it has developed a detailed formal plan for the terminations and has informed those employees affected that it will carry out the terminations.

Superannuation

Employees of the ATO are members of the Commonwealth Superannuation Scheme (CSS) or the Public Sector Superannuation Scheme (PSS), which are defined benefit schemes for the Government, or a defined contribution scheme. The defined contribution scheme can be the PSS accumulation plan (PSSap), a fund of the employee’s choice or Australian Super (as the default fund for employees who are covered under the Superannuation (Productivity Benefits) Act 1988).

The liability for defined benefits is recognised in the financial statements of the Government and is settled by the Government in due course. This liability is reported in the Department of Finance’s administered schedules and notes.

The ATO makes employer contributions to the employees' superannuation schemesat rates determined by an actuary to be sufficient to meet the current cost to the Government. The ATO accounts for the contributions as if they were contributions to defined contribution plans.

The liability for superannuation recognised at 30 Junerepresents employer contribution accruals for the period from the last pay to 30 June.

1.11Leases

Leased Assets

A distinction is made between finance leases and operating leases. Finance leases effectively transfer from the lessor to the lessee substantially all the risks and rewards incidental to ownership of the leased asset. An operating lease is a lease that is not a finance lease. In operating leases, the lessor effectively retains substantially all such risks and benefits.

Where an asset is acquired by means of a finance lease, the asset is capitalised at the present value of minimum lease payments at the inception of the contract and a liability is recognised at the same time andfor the same amount.

The discount rate used is the interest rate implicit in the lease. Leased assets are amortised over the period of the lease. Lease payments are allocated between the principal component and the interest expense.

Operating lease payments are expensed on a straight-line basis which is representative of the pattern ofbenefits derived from the leased assets.

The ATO leases property for office accommodationunder operating lease agreements. Some IT equipment is leased under embedded finance leases.

Lease Incentives

The threshold for the recognition of new lease incentives received is $250,000 per lease (excluding GST).

Where an incentive has been received in the form of free fit out, rent-free period, reimbursement of lessee expenses or cash, the value of the lease incentive received is recognised as a liability. The liability is reduced by allocating lease payments between rental expense and the reduction of the liability over the period of the lease.

Surplus Space

The threshold for the recognition of surplus space associated with a non-cancellable lease is $250,000 per lease (excluding GST).

Where surplus space associated with non-cancellable operating leases exists and it is unlikely that there will be a future opportunity to enter into a sub-leasing arrangement for that space, the net present value of future rental costs associated with that space over the remaining period of the lease is expensed in the period and recognised as a liability. The liability is reduced by allocating lease payments between interest expense and the reduction of the liability over the period in which the lease has surplus lease space.