International Tax
X

We'd love to help you build a successful business and grow your personal wealth. Get in touch to book a free consultation.

    Federal Opposition Australian Labor Party (ALP) tax policies

    Dividend imputation

    The Australian Labor Party (ALP) has announced an intention in government to change franking credits from a refundable to a non-refundable tax credit from 1 July 2019.

    A “Pensioner Guarantee” would be included in the franking credit change for individuals in receipt of an Australian Government pension or allowance. Also, self-managed superannuation funds with at least one pensioner or allowance recipient before 28 March 2018 will also be exempt from the changes (ALP website).

    Negative gearing

    Under an ALP government, negative gearing will only be allowed on newly constructed residential properties after 1 January 2020 (ALP website).

    All prior investments would be grandfathered, meaning that income losses on an asset class are able to be offset against other assessable income.

    It has been suggested that any negative income amounts would be allowed to be carried forward and offset against a future capital gain on the asset (Ref: MinterEllison, p 5).

    However, investors with many rental properties may be able to “stagger” the gearing levels across currently held assets in the same class. Specifics relating to how the new policy would work with regards to split loans, redraw or credit facilities are to be determined.

    CGT discount

    From 1 January 2020, the ALP has proposed to halve the capital gains tax discount from 50% to 25%. This change in the discount rate will apply for all assets purchased after 1 January 2020 that are held for longer than 12 months (ALP website).

    The media release goes on to say that all purchases made prior to 1 January 2020 will be fully grandfathered. There has been no announcement regarding any consequences this development may have on employee share scheme acquisitions.

    Limit on deductions for managing tax affairs

    The proposal in its current form is a $3,000 limit per taxpayer per year for managing tax affairs. This may include preparing and lodging tax returns and activity statements, and obtaining tax advice from a recognised tax adviser.

    Other areas which have been seen as controversial in the media relate to tax agent charges in large “one-off” events, such as divorce, inheritance or retirement (Ref: CPA In the Black). Also, there has been no further guidance on whether the deductibility of general interest charge on a tax debt will also be limited to $3,000 per year.

    Discretionary trust distributions tax

    A prior announcement made by the ALP in opposition intends to introduce a 30% standard minimum rate of tax to adult beneficiaries for discretionary trusts. There intends to be no change to the trust taxing rules for non-discretionary trusts, such as testamentary trusts or fixed unit trusts (ALP website).

    Extension of budget repair levy

    Following the 2019 Federal Budget, the ALP confirmed that, in government, they will bring back the temporary budget repair levy of 2%. ALP shadow treasurer stated the levy would remain in place until the budget surplus was 1% of gross domestic product, anticipated to be 2023 (AFR story, 3 April).

    The 2% levy would apply to individuals who are above $180,000 in taxable income.

    Australian Investment Guarantee

    The ALP leader confirmed in the 2019 budget reply speech a commitment to the Australian Investment Guarantee (AIG). The AIG will be an immediate write-off of 20% for any new eligible asset costing more than $20,000.

    Further information on eligible assets would be made available later, but are intended to include machinery, plant and equipment, including upgrades. It is announced that investments in buildings (capital works) would be excluded, as well as motor vehicles.

    Superannuation contributions

    The federal opposition has committed to changing certain rules relating to superannuation contributions (ALP website). These include:

    • providing superannuation guarantee payments of 9.5% for paid parental leave, and
    • phasing out the $450 per month minimum income threshold for superannuation guarantee.

    Catch-up concessional contributions

    Labor has announced their intention to repeal the catch-up concessional contributions, introduced in the 2016/17 income year (2018 ALP National Platform, p 15).

    Under the enacted legislation, individuals with a total superannuation balance of less than $500,000 are able to make additional concessional contributions. Eligibility to make additional contributions apply where an individual has not reached their concessional contributions cap in previous years, with effect from 1 July 2018. Unused amounts will be carried forward on a rolling basis for a period of five consecutive years from 1 July 2018.

    Other announcements

    • Maintaining the company tax rate of 25% for businesses with aggregated turnover under $50m, scheduled to commence in the 2021/22 income year.
    • Managed investment trust tax rate to be reduced from 30% to 15% in a “Build to rent” scheme, commencing 1 January 2020.
    • Removal of thin capitalisation calculations for debt deductions, leaving international entities with only the worldwide gearing ratio test to apply.
    • Reducing non-concessional contributions cap from $100,000 to $75,000.
    • Reducing threshold for Div 293 tax from $250,000 to $200,000.
    • Banning new limited recourse borrowing arrangements in self-managed superannuation funds.
    • Reintroducing recently repealed legislation surrounding deductibility for salary and wage earners to make additional deductible superannuation contributions. In the past, only self-employed individuals could make personal deductible superannuation contributions.

    If you have any questions or concerns about how the Australian Labor Party tax policies may impact on you, please do not hesitate to contact us. Read more Financial Industry articles.

    Norman Ruan
    Accountant
    T: 02 9984 7774
    E: normanr@northadvisory.com.au

    The ATO has updated its guidance on simplified transfer pricing record keeping options to include the minimum interest rate of 3.79% for small related party outbound loans for the 2018 year. Paragraph 75 of Practical Compliance Guideline PCG 2017/2 has been updated to reflect the new rate. Eligible lenders (among other things, entities with a combined cross-border loan balance of $50m or less for the Australian economic group) charging this interest rate may keep reduced transfer pricing documentation for eligible loans.

    For further information, please contact our office on 02 9984 7774 or email us at info@northadvisory.com.au.

    Read more about business tax.

    The ATO has released guidance on the implementation of Country-by-Country (CbC) reporting in Australia.

    The ATO guidance outlines its administrative practice, including advice on CbC reporting, to assist taxpayers in understanding and meeting reporting obligations for significant global entities).

    It supplements and should be read with Law Companion Guideline LCG 2015/3 (issued 17 December 2015).

    According to the ATO, the three types of statements required under the CbC reporting regime correspond to the master file, local file and CbC report in Annexes I, II and III to Chapter V of the final report.

    The ATO has approved forms for each of these statements. Read more Financial Industry articles.

    Most tax advisers will agree that one of the many ‘knock-on’ effects associated with the fast pace of globalisation is that businesses of all types and sizes are increasingly able to operate cross-border. It follows that a working knowledge of international tax principles can be very useful in day-to-day practice.

    1. The following considerations regarding Permanent Establishments are:
      • The permanent establishment rules under domestic tax law
      • The permanent establishment rules under the relevant Double Tax Agreement (DTA), which generally override domestic legislation
      • It is best to consider domestic rules first to determine whether a tax liability exists, then consider the application of the DTA to determine whether this alters the position
      • Can be done through a branch (the foreign entity having a direct presence in Australia), or through a subsidiary entity owned directly or indirectly by the foreign entity with ownership structure / inter-entity appropriation considerations.
    2. When deciding on a structure, tax consequences include:
      • Calculation of worldwide effective tax rate associated with streaming profits from Australia, and overall tax cost of distributing an amount of taxed profit back to the holding company
      • Consider direct taxes, withholding taxes, operation of DTAs and domestic tax rules of countries through which profits are streamed
      • Includes any number of entities/countries in a chain and can compare with other options for repatriating profits
      • Proof of any differences in overall tax cost to include commercial decision on which option to use
    3. Commercial considerations other than tax outcomes include:
      • Whether a shopfront or fixed place of business is required
      • A locally registered statutory entity may be more effective to obtain finance or tenders
      • Whether the presence will be for a short-term one-off project or for permanent operations
      • Whether costs of set-up and ongoing maintenance of the structure are acceptable
      • It can have the appropriate flexibility e.g. an exit strategy in the future
    4. Funding operations can be done through debt, equity or a combination of both. The considerations are:
      • Funding arrangements considered as a debt interest will be allowed deductions for interest payments, subject to thin capitalisation rules
      • Funding arrangements considered as an equity interest will allow franking of distributions
      • The commercial decisions include the level of risk associated with the financing
      • Thinly capitalised entities use a high level of debt and a small amount of equity, which will result in much higher interest deductions than if equity was used
      • Thin capitalisation rules don’t apply if:
        • You are an Australian resident entity that is not an inward investing entity nor an outward investing entity, or
        • You are a foreign entity that has no investments or permanent establishment in Australia, or
        • Your debt deductions (and associates) are $2 million or less
        • You are an outward investing entity that is not also foreign controlled and you meet the assets threshold test
        • You are a special purpose entity established to manage certain risks
    5. Appropriation of Profits back overseas includes:
      • Whether there is a withholding tax that applies to the distribution e.g. interest (10%), dividends (30% if unfranked, 0% if franked), or royalties (30%).
      • A payment may be deemed as paid even if not actually paid e.g. re-invested, accumulated, capitalised or dealt with on behalf of them
      • Management Fees are not subject to withholding taxes but must comply with transfer pricing rules / arm’s length considerations & documentation of actual services given
      • If income is classified as Conduit Foreign Income (CFI), then it may be exempt from withholding taxes and non-assessable non-exempt income for the non-resident as that income is actually from foreign sources even if earned through Australia
      • Three conditions for CFI are:
        • Must be ordinary or statutory income received by the company
        • Would not be assessable income of the company were treated as a foreign resident (income with non-Australian source)
        • The income is included in an income statement or similar statement (AASB)
    6. When selling inbound investments, there may be exemptions from CGT:
      • Foreign residents subject to CGT on capital gains arise only in relation to direct or indirect interest in Taxable Australian Property (TAP)
      • If an investment is through shares in an Australian company, it may be exempt if the shares are not TAP
      • TAP includes:
        • Real property located in Australia
        • Indirect interest in real property
        • Asset used to carry on a business through a PE in Australia
        • An option or right to acquire any of the above
        • An asset in resect of which a choice was made to disregard a gain or loss on ceasing to be an Australian resident
    7. Some inbound investments need to be approved by the Foreign Investment Review Board (FIRB). Notifiable actions include:
      • An acquisition of a direct interest in an agribusiness over relevant monetary threshold
      • An acquisition of a substantial interest in an Australian entity over relevant monetary threshold
      • An acquisition of an interest in Australian land over a relevant monetary threshold
      • Action prescribed by the Regulations, including a foreign government investor:
        • Acquiring a direct interest in an Australian entity or business
        • Starting an Australian business
        • Acquiring a legal or equitable interest in a mining, production or exploration tenement or an interest of at least 10% in securities in a mining, production or exploration entity
      • Notification requirements apply to all Australian land, including agricultural land, commercial land, residential land or a mining or production tenement unless an exemption applies.
    8. Regarding foreign investment into Australia, the ATO is responsible for:
      • Approving foreign investment in residential real estate and for register of foreign investment in agricultural land
      • Compliance activity to ensure foreign investors in residential property meet obligations under Foreign Acquisition & Takeover Act 1975 (FATA)
      • Agricultural Land Register from 01 July 2015 and for collection of fees for all foreign investment applications from 01 December 2015
      • Administration of all aspects of FATA for residential real estate and will maintain register related to foreign ownership from 01 July 2016.
    9. International Transfer Pricing Rules:
      • Refers to the process of setting prices charged between related parties for supply & acquisition of goods/services between those parties
      • Applies where an entity would otherwise get tax advantage in Australia from cross-border conditions and are inconsistent with the internationally accepted arm’s length principle
      • Australia has domestic tax legislation that allows the ATO to adjust prices charged between related enterprises
      • Basis for setting prices between related enterprises operating in more than one country is the arm’s length principle which requires prices charged to reflect prices that would have been charged if the enterprises had been independent and were dealing with each other at arm’s length
      • Documentation is required which records transactions in real time, and includes the transactional documents and further documentation that records why a pricing methodology has been adopted
    10. International Transfer Pricing – Simplified Documentation:
      • Eligibility criteria include materiality (international related party dealings are less than 2.5% of total turnover), small business taxpayers, distributors, intra-group services, management and administration services, technical services and low level inbound loans
      • These businesses can opt out to minimise record-keeping and compliance costs, in which case the ATO will not review records, but check whether the criteria have been met
      • The ATO and OECD position is that taxpayers should not be expected to prepare or obtain documentation beyond the minimum needed and enable reasonable assessment to be made on dealings with international related parties

    If you have questions on any of the above issues raised, please do not hesitate to contact us.

    Kim Edwards
    Accountant
    T: 02 9984 7774
    E: kime@northadvisory.com.au

    Read more about business tax.

    Globalisation has had a profound impact on the modern business operating environment, whereby significant technological transformations especially over the last decade have given arise to increased international mobilisation of both staff and senior level management. We begin with the first of our three part series overview of ‘International Taxation Issues to Consider’ with a summary of taxation considerations with respect to individuals and companies.

    1. For individuals coming to Australia, the following should be considered:
      • Determining if they are an Australian resident. If they are a resident, there are CGT consequences and taxation of foreign sourced income to consider
      • Whether the temporary resident rules apply, if full residency does not apply
      • Any applicable double taxation agreements (DTA) if they are a resident of another country at the same time
      • Foreign Superannuation they might have
      • Withholding Taxes that may apply to foreign income
      • Residents are taxed on all income at resident rates + Medicare Levy, non-residents are taxed on Australian income at non-resident rates with no Medicare Levy
      • Visa Status
      • International tax avoidance and attribution of income to Australia under CFC rules
      • Relief from double taxation from exemptions or foreign tax credits (FITO)
    2. For individuals leaving Australia:
      • Residency status where a person leaves Australia. If they cease their residency, there are CGT consequences and foreign sourced income is no longer assessable
      • DTA issues if they have residency in more than 1 country
      • Taxation of income earned by non-residents
      • International tax avoidance
      • Impact on SMSFs
      • Possible exemption for foreign employment income
      • CGT issues on departing Australia. It is possible to defer CGT on becoming a non-resident to the actual disposal date
      • Relief from double taxation from exemptions for foreign tax credits (FITO)
    3. Residence of individuals determined by 4 legal tests (s6 ITAA 1936):
      • Person is “residing” in Australia, according to ordinary concepts – main test
      • Domicile and Permanent Place of Abode of the person
      • 183-day test, unless it is established the usual place of abode is outside Australia
      • Eligible Employee for the purposes of the Superannuation Act 1976
    4. An individual is a temporary resident if they:
      • Hold a temporary visa granted under the Migration Act 1958
      • Not an Australian resident under the Social Security Act 1991
      • Spouse is not an Australian resident under the Social Security Act 1991.
    5. Removal of 50% CGT Discount for non-residents/temporary residents:
      • The 50% CGT Discount is removed for assets acquired by non-residents/temporary residents after 08/05/2012
      • If an asset is acquired before 08/05/2012 and a valuation is obtained at 08/05/2012, may apply discount to portion of gain accrued up to 08/05/2012.
    6. A company is considered an Australian resident if it is:
      • Incorporated in Australia, or
      • Carries on a business in Australia and has Central Management & Control in Australia, or
      • Carries on a business in Australia and its voting power is controlled by shareholders who are Australian residents

    If you have questions on any of the above issues raised, please do not hesitate to contact us.

    Kim Edwards
    Accountant
    T: 02 9984 7774
    E: kime@northadvisory.com.au

    Read more about business tax.

    Country by country (CbC) reporting applies to income years commencing on, or after, 1 January 2016.

    Significant Global Entities (SGEs) need to electronically lodge three statements (the local file, master file and CbC report) with the Australian Taxation Office (ATO). The first report is due on 31 December 2017, which may be too soon for some entities to comply with.

    The good news is that the ATO may consider granting transitional exemptions for the CbC report and master file for the first year on the basis that:

    • The global parent entity is not subject to CbC reporting for the income year ended 31 December 2016
    • The CbC report and master file are not required to be prepared or lodged in any other tax jurisdictions outside of Australia by the time the CbC report and master file are due for lodgment (31 December 2017)
    • You commit to filing the CbC report and master file for the periods after the first year
    The exemption to the local file is unlikely if there are international related party dealings (IRPDs) in existence.

    However if you have only low risk IRPDs (as included on the ATO exclusion list), then you should consider including the local file in the application for exemption.

    Due to the short time-frame to the first reporting deadline 31 December 2017, it is recommended that you make an exemption request as early as possible to allow the ATO to make and notify you of their decision before the statutory due date.

    Please contact us for more information, if you have any queries in regards to applying for reporting exemptions. Read more Financial Industry articles.

    Martin van der Saag
    Director
    T: 02 9984 7774
    E: martinv@northadvisory.com.au

    Judy She
    Senior Accountant
    T: 02 9984 7774
    E: judys@northadvisory.com.au

    Companies, trusts and partnerships can simplify their transfer pricing record-keeping requirements if any of following options applies:

    • Small taxpayers with turnover under $25m for the year for their “Australian economic group” (see below)
    • Materiality. Total international related-party dealings represent not more than 2.5% of the total turnover for the Australian economic group
    • Distributors with a turnover under $50m for the Australian economic group
    • Intra-group services. The combined value of intra-group services rendered or provided was:

    o $1m or less, or
    o more than $1m, but the total amount

     charged for the services they received was not more than 15% of the total expenses of the Australian economic group, and
     derived for the services they provided was not more than 15% of the total revenue of the Australian economic group

    • Management and administrative services. Income and expenditure on these services was not more than 50% of the total international party dealings of the Australian economic group
    • Technical services. Income and expenditure on these services was not more than 50% of the total international related-party dealings of the Australian economic group
    • Low-level inbound loans of $50m or less for the Australian economic group, and
    • Low-level outbound loans of $50m or less for the Australian economic group.

    An Australian economic group consists of an entity together with all the entities it is required to include in its consolidated financial statement by Australian Accounting Standard AASB10.
    An entity can be a company, partnership, superannuation fund or trust.

    The ATO Guideline specifies further eligibility criteria for the options. Taxpayers must self-assess to determine whether they meet these criteria.

    The options reflect the types of transactions or activities the ATO believes are low risk in the context of international related party dealings. If taxpayers apply any of these options, then the ATO will check to confirm their eligibility, but will not further review the relevant transactions or arrangements for transfer pricing purposes.

    Taxpayers must keep contemporaneous documentation to substantiate their eligibility.

    They must also inform the ATO of their election. This can be done by including code 7 at the percentage of documentation label field in the International Dealings Schedule (IDS) for relevant categories of transactions on the IDS.

    It must be noted that this code was not available for the 2014 income year – taxpayers who are contacted for the 2014 income year must inform the ATO that one or more options have been applied.

    Note that taxpayers are still required to comply with the general record-keeping requirements.

    Date of effect
    Simplification option Available from For taxpayers with substituted accounting periods
    Small taxpayers 1 July 2013 1 January 2013
    Distributors 1 July 2013 1 January 2013
    Intra-group services 1 July 2013 1 January 2013
    Low-level inbound loans 1 July 2013 1 January 2013
    Materiality 1 July 2015 1 July 2015
    Management and administration services 1 July 2015 1 July 2015
    Technical services 1 July 2015 1 July 2015
    Low-level outbound loans 1 July 2015 1 July 2015

     

    If you have any questions, please do not hesitate to contact us. Read more business accounting articles.

    Martin van der Saag
    Director
    T: 02 9984 7774
    E: martinv@northadvisory.com.au

    Judy She
    Senior Accountant
    T: 02 9984 7774
    E: judys@northadvisory.com.au

    In this blog post we provide an overview of the following:

    1. Transfer Pricing Rules
    2. Simplified Transfer Pricing Documentation Requirements
    3. 2016 International Dealings Schedule

    Transfer Pricing Rules

    The scope and complexity of Australia’s transfer pricing regime has increased considerably following the recent enactment of more stringent and robust domestic transfer pricing rules.

    The new self-assessment regime effectively requires every taxpayer with international related party transactions to:

    • Self-assess its compliance, regardless of the size of the transaction.
    • Consider whether related party dealings are conducted in a manner consistent with current transfer pricing legislation (i.e. no tax benefit derived)
    • Prepare and maintain transfer pricing documentation to demonstrate that the taxpayer’s cross-border transactions are at arm’s length in accordance with the transfer pricing legislation
    • Complete this before lodging the income tax return for the year in which those transactions occur.

    This is the duty of the public officer signing the tax return.

    Such documentation must provide details of:

    • the actual and arm’s-length conditions of each cross-border transaction
    • the arm’s length methodology selected to determine those arm’s length conditions;
    • the comparability factors used in identifying the arm’s-length conditions, and
    • the application of the selected arm’s length methodology to the particular cross-border transaction.

    Where such contemporaneous documentation is not prepared the entity will not be able to demonstrate that it has a reasonably arguable position (RAP) in contesting any penalties later imposed on any tax shortfall (i.e. underpayment of tax), should a transfer pricing adjustment later be made by the ATO in relation to that tax year.

    Taxation Ruling TR2014/8 further clarifies the records that must be kept in order for a taxpayer to develop a reasonably arguable position whilst the application of the penalty provisions is discussed in Practice Statement PSLA 2014/3.

    Simplified Transfer Pricing Documentation Requirements

    Practice Statement PS LA 2014/3 allows certain smaller taxpayers the option of meeting simplified transfer pricing documentation requirements.

    This allows taxpayers to lessen the costs associated with preparation and retention of contemporaneous transfer pricing documentation for either some or all of their IRPDs, provided certain eligibility criteria are satisfied

    In place of full documentation, taxpayers can instead prepare a document detailing their eligibility for the simplified rules. The ATO will not allocate resources to audit these companies, however will only check each entity’s eligibility for these rules. The taxpayer is required to self-assess for these rules.

    Where these simplified options are applied, eligible taxpayers will not be liable for a 25% penalty if they do not have a reasonably arguable position because they do not have full transfer pricing documentation. However, such taxpayers are not relieved of their broader obligation to ensure that all their cross-border transactions are compliant with the transfer pricing rules.

    The Practice Statement refers to an on-line guidance product ‘Simplifying transfer pricing record-keeping’ which sets out the range of smaller taxpayers who can apply this safe harbour documentation option for the year ended 30 June 2016.

    A copy of the guidance can be downloaded from the ATO website.

    Summary of the categories of smaller taxpayers entitled to apply the simplified record-keeping option:
    Category Applies to
     Materiality IRP Transactions < 2.5% of total turnover for Australian group  + other conditions
     Small Taxpayers Total Turnover < $25 M for Australian group + other conditions
    Cannot apply to Distributors.
     Distributors Total Turnover < $50 M for Australian group + other conditions
     Intra-Group Services Related Party Services of $1M or less  + other conditions
     Technical Services 50% or less of total related party dealings + other conditions
     Management & Administrative Services Mark ups of:
    -5% or more for relevant services provided to IRP
    -5% or less for relevant service received from IRP
    + other conditions
     Low-Level Loans (inbound) Combined cross-border loan balance <$50 at all times through the financial year
    Interest rate used is < the RBA Indicator lending rate for ‘small business variable residential-secured term’;
    Loans and associated costs are transacted in AUD & this is reflected in the loan agreements.
     Low-Level Loans (outbound) Combined cross-border loan balance <$50 at all times through the financial year
    Where interest rate applied for income year is no less than:
    -4.91% in 2015
    -4.37% in 2016
    -4.34% in 2017
    + other conditions

    Some of the options may be subject to additional eligibility conditions which must be met.

    In particular, the options for small business taxpayers, distributors, low level in-bound loans and intra-group services will not be available if the taxpayer has sustained tax losses for three consecutive years (including the current year) or has undergone a restructure in the current income year.

    The above simplified record keeping option does not apply to:

    • international related-party financial transactions in a low-tax jurisdiction
    • international related-party dealings of a capital nature.

    Importantly, the IDS requires disclosures on:

    • % of dealings covered by documentation
    • Transfer pricing method used to price the transaction
    • Quantum and countries involved
    • Whether a restructure has occurred during the year
    • Any dealings with specified countries
    • Any related party transactions which were capital in nature

    The ATO uses the IDS heavily as the first port of call.
    It is relied upon by the ATO for risk analysis, case selection and risk profiling for Multinational Anti-Avoidance Law cases.
    The current ATO focus is on:

    The current ATO focus is on:

    • Thin capitalisation
    • Marketing / procurement hubs
    • Management fees/services
    • Offshore digital tax structures
    • IP migration
    • Related party financing

    If you are eligible to apply a simplified record-keeping option because you are an eligible small taxpayer, then at the relevant labels on the IDS you would include code 7 at the percentage of documentation label code. This confirms that you have assessed your situation as complying with the transfer pricing rules and advised the ATO that a simplification option has been applied to your record keeping.

    In closing, we reiterate the transfer pricing rules now operate on a self-assessment basis, and that public officers must turn their minds to the veracity of the pricing of their cross-border transactions before signing and lodging returns.

    If you have further queries on this matter, please do not hesitate to contact Judy She or Martin van der Saag on 02 9984 7774. Read more Financial Industry articles.

    Martin van der Saag
    Director
    T: 02 9984 7774
    E: martinv@northadvisory.com.au

    Judy She
    Senior Accountant
    T: 02 9984 7774
    E: judys@northadvisory.com.au

    Documentation requirements
    Timing

    Businesses are now required to have the transfer-pricing documentation prepared before the time the entity lodges its income tax return for the income year relevant to the matter (or matters).

    Information

    In addition, businesses must ensure the transfer-pricing documentation contains an arguable position of why the self-assessment position for transfer pricing outcomes contained in the tax return have been adopted.

    It is now required to set out:

    • How trade is conducted within the industry of the taxpayer?
    • Must come to a conclusion as to whether or not the actual arrangements between related parties are different to what arms-length parties do in the industry; and if so
    • Is a transfer pricing benefit capable of being calculated

    As you can see, the focus is not just on how price and/or profits compare, but also how business is conducted and how benchmarking analysis is undertaken to ensure like is compared with like.

    The 5 Key Questions to answer:

    Taxation Ruling TR 2014/8 sets out the five key questions for all enterprises to consider when documenting its transfer pricing treatment:

    • What are the actual conditions that are relevant to the matter?
    • What are the comparable circumstances relevant to identify the arms-length conditions?
    • What are the particulars of the methods used to identify the arm’s length conditions?
    • What are the arm’s length conditions and is/was the transfer pricing treatment appropriate?
    • Have any material changes and updates been identified and updated?

    The ruling states:

    “The ATO recommends that an entity considers all five questions (not necessarily sequentially) in light of its own facts and circumstances, including the relative complexity and materiality of its relevant dealings and its self-assessment risk”.

    The transfer pricing documentation must:

    • Be prepared before income tax return lodged
    • Prepared in English or readily convertible to English
    • Explains the particular way in which Subdivisions 815B Income Tax Assessment Act 1997 (ITAA97) applies or does not apply to the matter
    • Explains why the application of 815B to the matter in that way achieves consistency with the OECD Guidelines and other material specified by regulations
    • Allow the arm’s length conditions applicable to the matter to be readily ascertained
    • Allow the particulars of the method used and comparable circumstances relevant to identifying those arm’s length conditions, to be readily ascertained
    • Allow (unless for the non-application of 815-B) the application of 815-B in a particular way as compared to the application of 815-B has for the operation of the penalty provisions in TAA53, to be readily ascertained
    • Allow the actual conditions of the entity to be readily ascertained

    If you should have any queries in regards to transfer pricing documentation, please contact Judy She and Martin van der Saag to discuss in detail. Read more business accounting articles.

    Judy She
    Senior Accountant
    T: 02 9984 7774
    E: judys@northadvisory.com.au

    Martin van der Saag
    Director
    T: 02 9984 7774
    E: martinv@northadvisory.com.au