Australia: Updated ATO guidance, cross-border related-party financing arrangements

Australia: Updated ATO guidance

The Australian Taxation Office (ATO) on 10 December 2020 released an updated practical compliance guideline regarding cross-border related-party financing arrangements and related transactions.

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Read the updated Practical Compliance Guideline (PCG) 2017/4: ATO compliance approach to taxation issues associated with cross-border related party financing arrangements and related transactions.

According to the ATO, the update to PCG 2017/4 includes the final Schedule 3 concerning interest-free loans between related parties. Schedule 3 outlines the factors under which the risk score assigned to outbound interest-free loans between related parties may be modified for the purposes of Schedule 1 of the guideline.

Risk determination of related-party financing arrangements

The updated PCG 2017/4 outlines the ATO’s compliance approach to the taxation outcomes associated with a “financing arrangement” or a related transaction or contract entered into with a cross-border related party—that is, a “related-party financing arrangement.” The ATO will use the guideline to assess risk and tailor the engagement with a taxpayer according to the features of the related-party financing arrangement, the profile of the parties to the related-party financing arrangement, and the choices and behaviours of the taxpayer group. The tax risk associated with the related-party financing arrangement is assessed having regard to a combination of quantitative and qualitative indicators.

If the related-party financing arrangement is rated as “low risk,” then a taxpayer can expect the ATO would not use its resources to review the taxation outcomes other than to fact check the appropriate risk rating. If, however, the related-party financing arrangement falls outside the low risk category, the taxpayer can expect the ATO would monitor, test, and verify the taxation outcomes. The higher the risk rating, the more likely that the taxpayer’s arrangements would be reviewed as a matter of priority.

Accordingly, taxpayers can use PCG 2017/4 to assess the tax risk of a related-party financing arrangement; to understand the ATO’s compliance approach in determining the risk profile of the related-party financing arrangement; to mitigate the transfer pricing risk in relation to the related-party financing arrangement and reduce the risk exposure; and understand the type of analysis and evidence required by the ATO when assessing the risk outcomes of related-party financing arrangements.

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