In December 2015, the Tax Laws Amendment (Combating Multinational Tax Avoidance) Act 2015 (the Tax Laws Amendment Act) was passed by both Houses of the Commonwealth Parliament and received Royal Assent. The purpose of the Tax Laws Amendment Act is to amend the Income Tax Assessment Act 1936 (the 1936 Tax Act) and the Income Tax Assessment Act 1997 (the 1997 Tax Act) to give effect to measures aimed at combatting multinational tax avoidance as outlined in the Commonwealth Government’s 2015-16 Budget, including:
- implementing the Organisation for Economic Co-operation and Development’s (OECD) country-by-country reporting regime;
- introducing a multinational anti-avoidance law to strengthen Australia’s existing tax avoidance laws; and
- increasing the penalties for large companies found to be engaging in tax avoidance and profit shifting.
In addition to these changes, the Tax Laws Amendment Act also amends the 1997 Tax Act to require certain entities (‘significant global entities’) to lodge general purpose financial statements with the Australian Taxation Office (ATO).
Significant Global Entities
Generally speaking, an entity is a ‘significant global entity’ (SGE) for a period if it is:
- a global parent entity with an annual global income of $AU1 billion or more for the period; or
- any member of such a global parent entity’s group for the period.
In addition, the ATO can make a determination that an entity is an SGE if, in the period where the entity has not prepared global financial statements, the ATO considers its annual global income to be $1 billion or more. If the Commissioner makes a determination that an entity is an SGE, the Commissioner must then give a notice of the determination to the global parent entity or the entity that becomes an SGE as a consequence of the Commissioner’s determination. Like other determinations of the ATO Commissioner, the determination that an entity is an SGE is reviewable under Part IVC of the Taxation Administration Act 1953.
Because the criteria for SGE status is specified in Australian dollars, in some circumstances it may be necessary to translate income of an entity or group into Australian dollars. To this end, the entity or group would translate their Income figures on the basis of the average exchange rate for the relevant period. Average exchange rates may be obtained from one or more sources, provided those sources are not associates of the SGE. Alternatively, exchange rates for an annual period may be obtained from sources specified by the Commissioner of Taxation in a notice to the entity.
Lodgement of General Purpose Financial Statements
Pursuant to the Tax Laws Amendment Act, unless it already lodges general purpose financial statements (GPFS) with the Australian Securities and Investments Commission (ASIC), a corporate tax entity that is also an SGE will be required to lodge GPFS with the ATO Commissioner for the annual period or periods in which it meets the SGE criteria. These requirements will take effect for annual periods commencing on or after 1 July 2016.
An entity that would have been classified as an SGE except that it already lodges GPFS with ASIC need not also lodge GPFS with the ATO. If an entity, however, meets all of the criteria to be classified as an SGE and, as a consequence, is required to lodge GPFS with the ATO, the Commissioner of the ATO is required to provide a copy of those statements to ASIC.
Application of the New SGE Reporting Requirements
To date, relatively little guidance has been released regarding the practical application of the new financial reporting and lodgement requirements contained in the 1997 Tax Act, including:
- whether any relief would be provided to entities that meet the criteria for an SGE for one year only because it (or the group to which it belongs) recognises one or more significant one-off gains in that period?
- whether the ATO would accept an SGE lodging financial statements prepared in accordance with Australian Accounting Standards – Reduced Disclosure Requirements (Tier 2) rather than financial statements prepared in accordance with all applicable Australian Accounting Standards (Tier 1)?
- whether general purpose financial statements lodged with the ATO are required to be audited?
- whether an SGE with a foreign parent would be permitted to lodge the group’s consolidated GPFS if they were prepared in accordance with an accounting framework other than Australian Accounting Standards (for instance, US GAAP)?
- what implications, if any, are there for SGEs that are currently exempted from preparing and lodging financial statements, such as under ASIC Class Orders 98/98 and 98/1418, or are ‘grandfathered’ large proprietary companies? and
- what implications, if any, are there for SGEs lodging GPFS with the ATO (and therefore indirectly with ASIC) on the date by which the entity is required to lodge its income tax return for the income year with the ATO, which could be later than the lodgement date that would otherwise apply to the entity under the Corporations Act 2001?
Implications of Tax Laws Amendment Act
Financial statements that are lodged with ASIC are normally publicly available from ASIC’s Register. Accordingly, for annual periods commencing on or after 1 July 2016 the GPFS of SGEs will be publicly available from ASIC’s Registers. For those SGEs that currently lodge GPFS with ASIC, the changes introduced by the Tax Laws Amendment Act are likely to have relatively little impact. For those SGEs that, however, do not currently lodge their financial statements with ASIC and/or do not prepare GPFS, the changes introduced by the Tax Laws Amendment Act are likely to have a significant impact. Furthermore, the extent of the impact is unlikely to be reasonably understood until such time as the uncertainties identified above are clarified.
Prepared by Dean Arden and Darryn Rundle from our Technical Standards team.