A taxing time for carriers

If you hold (or recently held) a communications carrier licence, 28 September 2009 is a key date.  That’s the last day for filing an Eligible Revenue Return (‘ERR’) with the Australian Communications and Media Authority (‘ACMA’).

The ERR has a key purpose:  To determine what proportion of the national communications subsidy the client will be required to fund.

It’s a very specialised return and carriers have to get it right … and get it in on time.  No extension is possible.

Telecommunications law expert Peter Moon explains this unique regime.

The national communications subsidy

Australia’s telecommunications law establishes a communications safety net for people in remote or disadvantaged locations.  That’s why a payphone gets installed and maintained in a remote Queensland town and folks in isolated Western Australian hamlets can get a landline.

The law appoints one or more Universal Service Providers (‘USP’) charged with ensuring that basic communications facilities are reasonably available throughout the country on an equitable basis.  In fact, Telstra is now the only USP.

Many services the USP provides are unprofitable.  So the scheme pays it an off-setting subsidy.  The subsidy is funded by all carrier licence holders, in proportion to their communications-based revenue. 

The service obligations imposed on the USP are called the Universal Service Obligation, or ‘USO’ and the subsidy is the USO subsidy.

Fixing the amount of the USO subsidy

Each year, the Communications Minister sets the amount of the USO subsidy, exercising power under the Telecommunications (Universal Service Levy) Act 1997 (‘USO Act’).  The 2008/9 USO subsidy was about $145 million.

Sharing the USO burden

The USO subsidy is funded by the communications industry.  Specifically, every holder of a carrier licence – there are nearly 200 of those at present – during any part of the ERR period is liable to contribute.

Once every carrier has lodged an Eligible Revenue Return, ACMA is in a position to determine the aggregate industry revenues and the proportion attributable to each carrier. 

That’s why there is no provision for an extension of time to lodge a return.  The entire rating process would be stymied while stragglers complied with their obligation.  Director penalties apply for failure to lodge strictly on time.

Eligible revenue

Broadly, the ERR must show the revenue derived from communications activities excluding certain items, such as revenue from:

• activities conducted outside Australia
• supplying, installing, insuring or maintaining customer equipment
• providing content for a content service
• constructing, installing, maintaining, or managing the construction or installation or maintenance, of the infrastructure of a communications network
• inter-carrier input payments such as interconnection payments.

Importantly, eligible revenue is not limited to revenue that depends on holding a carrier licence.  If you hold a  licence, a wider range of revenue is ‘eligible’ than simply the component (if any) they could not have earned if they had no carrier licence.

Corporate groups

A group in which one member holds (or has held, during the return period) a carrier licence may have to declare eligible telecommunications revenues earned by all its members. 

Grouping arises when entities satisfy the criteria of ‘Declared Related Parties’ in the Telecommunications Universal Service Obligation (Eligible Revenue) Determination.  In a broad sense this is a ‘standard’ grouping provision, but its detail is unique to the communications regime, and is flexible.  That is deliberate.  When there are only 200 or so potential ‘tax payers’ from whom $145 million is to be raised, a gap in the grouping provisions could create a huge distortion.

Here are some key elements of the grouping regime:

(1) An entity is a declared related party for the whole of an eligible revenue period if it:

(a) is not: (i) a participating person; or (ii) a consolidated related party in relation to a participating person; and

(b) is owned, at any time during an eligible revenue period, by a body that owns a participating person at any time during the same eligible revenue period; and

(c) has telecommunications sales revenue in Australia at any time during the same eligible revenue period.

(3) For subsection (1): (a) a body owns a declared related party or a participating person if the body has company interests in the declared related party or participating person that are greater than 49% of the declared related party or participating person; and (b) company interests may be traced in the same manner as company interests may be traced for Part 4 of Schedule 1 to the Broadcasting Services Act 1992.

It’s complex.  Call Peter Moon of Cooper Mills Lawyers if you need assistance on USO subsidy grouping.

Delayed reaction

Eligible revenue is assessed for the financial year before the USO claim period i.e. the year for which the USP is to be reimbursed. So contributions for  2009/10 are based on revenue for 2008/9.

The good news for smaller carriers

Normally, an ERR must be accompanied by an independent auditor’s report.  But in many cases, the cost of a specific USO audit report is out of proportion to revenue derived from communications activities. 

Be aware that ACMA can, and will, grant an audit report exemption in appropriate circumstances.  Last year, exemptions were allowed in roughly a third of cases.

ACMA says:

 The ACMA has previously given audit waivers where the carrier was in liquidation or external administration, or in circumstances where the carrier did little or no trading and it was clear that the likely USO levy contribution might not outweigh the costs of the audit and there was little or no risk of error in the Return.

The ACMA may refuse to grant audit waivers for a number of reasons, such as where larger amounts of revenue are involved or where it considers there is risk of an incorrect Return being submitted.

But note that where you are otherwise required to prepare audited financial statements under the Corporations Act 2001 or any other legislation, their ERR Return must be based on audited financial statements, even if you get an exemption from the requirement for a specific USO subsidy audit report.

You can apply for an exemption in writing when lodging their ERR but it’s best to make early contact with ACMA staff to clear the path.

Summing up

The requirement to lodge an Eligible Revenue Return affects only a couple of hundred Australian businesses.  Those it applies to need expert guidance.  Above all, allow plenty of time to come to grips with this unique regime if you haven’t had experience with it.