Australia: Compliance implications, “significant global entity” and “country-by-country reporting entity”
Australia: Compliance implications
Guidance from the Australian Taxation Office (ATO) concerns legislative amendments that expand the coverage of entities considered to be “significant global entities” (SGEs) and that introduce a new concept of a country-by-country (CbC) reporting entity.
For both public and private large business groups, these legislative amendments have substantial annual tax and financial reporting compliance implications that require careful consideration.
Read the ATO guidance.
Expanded definition of “significant global entity”
The SGE concept was introduced in the “Tax Laws Amendment (Combating Multinational Tax Avoidance) Act 2015.”
The term SGE was initially used to define the population of entities subject to the “multinational anti-avoidance law” (MAAL), CbC reporting and General Purpose Financial Statements (GPFS) reporting obligations.
The SGE concept was then used to define entities subject to the diverted profits tax (DPT) and increased administrative and other penalties.
More recently, in the “Treasury Laws Amendment (2020 Measures No.1) Act 2020,” the SGE concept was expanded for income years beginning on or after 1 July 2019 (albeit any increased penalties did not apply until 1 July 2020).
The new SGE concept applies to groups of entities headed by an entity other than a listed company with annual global income of AU$1 billion or more. This mirrors how the old SGE concept applied to groups headed by a listed company. Moreover, it is now the case that any exceptions to accounting consolidation or rules on materiality, that may permit an entity not to be consolidated with other entities, are to be disregarded for the purposes of the new SGE concept.
As a consequence, the expanded SGE concept can now apply to entities such as wealthy individuals, partnerships, trusts, non-material entities as well as certain investment entities, in circumstances when consolidated financial statements have not even been prepared.
However, these SGE amendments also necessitated the accompanying introduction of a new concept, namely the CbC reporting entity.
ATO guidance on new SGE definition
For income years beginning on or after 1 July 2019, an entity is an SGE for a period if it is any of the following:
- A global parent entity (GPE) with annual global income (AGI) of AU$1 billion or more
- A member of a group of entities consolidated for accounting purposes and one of the other group members is a GPE with actual consolidated AGI of AU$1 billion or more
- A member of a notional listed company group (NLCG) and one of the other group members is a GPE with notional consolidated AGI of AU$1 billion or more
- A member of an actual or notional accounting consolidated group when the Commissioner has made a determination that there is actual or notional consolidated GPE with AGI of AU$1 billion or more
A GPE is defined as an entity that is not controlled by another entity according to accounting principles. A GPE is usually a member of a group of entities; however, a GPE can be a single entity. An individual may meet the GPE definition.
Under Australian Accounting Principles, AASB 10 Consolidated Financial Statements sets out the requirements for determining whether an entity (the parent) controls one or more other entities (subsidiaries) and needs to prepare consolidated financial statements. AASB 10 defines the principle of control and establishes control as the basis for consolidation, subject to an investment entity consolidation exception.
AASB 10 stipulates that an investment entity is not to consolidate its subsidiaries (other than a non-investment entity subsidiary whose main purpose is providing services related to investment entity’s investment activities). Instead, an investment entity is to measure an investment in a subsidiary at fair value through profit or loss in accordance with AASB 9 Financial Instruments.
Broadly, an investment entity is an entity that obtains funds from one or more investors for the purpose of providing those investor(s) with investment management services; its business purpose is to invest funds solely for returns from capital appreciation and/or investment income; and it measures the performance of substantially all of its investments on a fair value basis.
However, under the broader NLCG definition, in determining whether an entity is an SGE, any exceptions to accounting consolidation (e.g., the investment entity accounting consolidation exception) or exclusions of immaterial subsidiaries from consolidated accounts must be disregarded in calculating AGI.
It is apparent from the above that the outcome of modified accounting principles for determining control and which entities are consolidated, govern the membership of an SGE group of consolidated entities or, the membership of an SGE NLCG, for SGE purposes. In this regard, modified Australian Accounting Principles (AAP) are applied to those GPEs that are subject to such principles; otherwise, modified Commercially Accepted Accounting Principles (CAAP) are applicable for SGE purposes.
It therefore follows that knowledge of various accounting consolidation principles and what is included in consolidated accounting income becomes very important in applying the SGE definition. The ATO guidance provides a summary for determining control using accounting principles as well as commentary on the components of AGI.
In the case of a GPE with consolidated global financial statements (GFSs), covering the most recent period ending within 24 months before the income year-end, its AGI will be the total annual income in the profit and loss (converted into Australian dollars) disclosed in those GFSs. This is on the proviso that the GFSs have been prepared and audited in accordance with the requisite (modified) accounting and auditing standards.
In the absence of having legislatively compliant consolidated GFSs, entities will need to self-assess their SGE status in conformity with the NLCG rules. In such instances, AGI of the GPE is the amount that would have been the total annual income amount in consolidated GFSs for the NLCG. Thus, it is necessary to hypothetically assume consolidated GFSs had been prepared, using the requisite (modified) accounting and auditing standards. While there is no requirement for a GPE of an NLCG to actually prepare GFSs, the ATO noted that adequate documentation must support whether members of an NLCG are SGEs or not.
Thus, large business groups will most likely need to create additional tax compliance work papers leveraging information from their accounting systems to demonstrate their SGE status. Once again, this highlights the importance of accounting expertise being applied to hypothetical fact patterns determined by the legislative requirements of the SGE definition.
The practical implications of these legislative amendments are that many more companies, trusts and partnerships (or even individuals) can end up being SGEs.
Four examples are included in the ATO guidance to highlight scenarios covering consolidated GFSs, a large partnership with no GFSs, the disregarding of the investment entity consolidation exception, and the exclusion of immaterial subsidiaries.
Each example analyses the SGE test but also highlights consideration of potential CbC or GPFS reporting obligations. Additional SGE examples are provided in the ATO guidance on the CbC reporting entity definition. The SGE implications for entities joining or leaving an accounting consolidated group or a NLCG are also briefly highlighted.
CbC reporting entity
The introduction of a new concept, the CbC reporting entity also required guidance from the ATO for affected groups.
Under the changes, only a sub-set of the newly expanded SGE population has CbC and general purpose financial statements (GPFS) reporting obligations.
For example, individuals are carved out of the CbC reporting entity definition, and certain accounting consolidation exceptions for investment entities are now respected for the purposes of the CbC reporting entity definition.
- For income years beginning from 1 July 2019, if an entity has tax return filing requirements, is a corporate tax entity and a CbC reporting entity for that year, it has GPFS reporting obligations for that current year.
- For income years beginning from 1 July 2019, if an entity is a CbC reporting entity (but determined on whether it satisfied the CbC reporting entity definition in the immediate prior year) and has a specified connection to Australia (e.g., Australian resident entity or foreign entity with an Australian permanent establishment) it has CbC reporting obligations in the current year.
- For income years beginning before 1 July 2019, GPFS obligations and CbC reporting rely on the entity’s SGE status under the old SGE definition.
Thus, there are additional integrity tax rules and higher potential penalties applicable to taxpayers that now become SGEs under these legislative amendments and, if they are also CbC reporting entities, they can be subject to additional regulatory compliance costs in the form of CbC and GPFS reporting obligations.
Hence it is important for large business groups to carefully consider, on an annual basis, their SGE and CbC reporting entity status as this will affect their Australian regulatory compliance burden.
ATO guidance on new “CbC reporting entity” definition
An entity is a CbC reporting entity for a period if it is a CbC reporting parent or is a member of a CbC reporting group and another member of the group is a CbC reporting parent.
A CbC reporting group is a group of entities (none of which are individuals) that:
- Is a group consolidated for accounting purposes; or
- The group is an NLCG (but now any consolidation exception such as the investment entity exception is respected, although any immaterial subsidiary exclusion is still disregarded).
A CbC reporting parent is an entity (which is not an individual) if:
- It is a member of a CbC reporting group
- It is not controlled by another entity in that group according to the requisite AAPs or CAAPs; and
- Its AGI (or the CbC reporting group’s AGI) is AU$1 billion or more.
The concept of a CbC reporting entity, therefore, is a subset of the SGE population. As well as groups controlled by individuals, different CbC reporting entities versus SGE outcomes might arise for groups that have within them entities having an investment entity profile such as private equity, superannuation funds, and sovereign wealth funds.
The CbC reporting entity definition is then used for purposes of working out whether such entities have CbC or GPFS reporting obligations (subject to satisfying other specific requirements under each of these obligations).
Eleven examples are included in the ATO guidance to highlight how the CbC reporting entity definition is to be applied in various scenarios (including the fact that the CbC reporting entity definition needs to be satisfied in the prior income year in order to have a CbC reporting obligation in the current year).
The practical implication for these legislative amendments is that there are likely to be significant tax compliance costs if a taxpayer now has CbC reporting obligations, as well as additional financial reporting compliance costs, if the corporate tax entity also now has new GPFS reporting obligations.
Again, additional work papers would need to be created by large business groups to demonstrate the CbC reporting entity status of entities in the group.
GPFS tax reporting obligations and Australia’s revised financial reporting framework
As noted earlier, if an entity has tax return filing requirements, is a corporate tax entity, and is a CbC reporting entity (for income years commencing 1 July 2019), it has GPFS reporting obligations to the ATO.
However, if such corporate tax entities file GPFSs with ASIC, typically they will be exempt from having to provide GPFSs to the ATO. In this regard, it is expected more for-profit private sector entities will now be preparing GPFSs under Australia’s revised financial reporting framework.
The revised framework mandatorily applies from 1 July 2021 (with early adoption permitted).
Entities that have a reporting requirement under the Corporations Act or under other legislation and are required to comply with Australian Accounting Standards (AASs) or Accounting Standards will no longer be able to prepare special purpose financial statements (SPFSs). In addition, entities that are required by their constituent documents (either created or amended on or after 1 July 2021) to comply with AAS, will not be able to prepare SPFSs. Rather, they will need to prepare at least GPFS’s Tier 2 financial statements, complying with the full recognition and measurement requirements of AAS, but with simplified presentation and disclosure obligations.
Accordingly, when CbC reporting entities are within scope of the revised framework for a financial year most closely corresponding to their income year, it appears they would not be required to provide GPFSs to the ATO.
For more information, contact a KPMG tax professional in Australia:
Stephen Gottlieb | +61 2 9335 7122 | firstname.lastname@example.org
Matt Hayes | +61 2 9295 3861 | email@example.com
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