ATO issues guidance on general purpose financial statements for significant global entities

On 28 September 2017 the Australian Tax Office (ATO) released guidance about the provision of a general purpose financial statement (GPFS) by a corporate tax entity that is a significant global entity (SGE) (i.e. a ‘global parent entity’ whose ‘annual global income’ is A$1 billion or more) with an Australian presence. The ATO guidance covers who must lodge a GPFS, how to prepare a GPFS, lodging a GPFS with the ATO, and worked examples. The ATO invites any comments on the guidance by 27 October 2017.

Requirement to provide general purpose financial statements

For income tax years beginning on or after 1 July 2016, section 3CA of the Taxation Administration Act 1953 (the Act) requires multinational corporations with an Australian presence, whose annual global income is A$1 billion or more¹ (SGE), to provide the ATO Commissioner with a GPFS with their annual tax return.

1 As shown in the latest global financial statements for the entity for a period that includes the whole or a part of the income year preceding that income year

GPFS to be made publicly available on ASIC’s database

These GPFSs will in turn be given by the ATO Commissioner to the Australian Securities and Investments Commission (ASIC) and will be published, and therefore will be made publicly available, on ASIC’s register. Entities lodging the global overseas parent financial statements could have privacy concerns where the global financial statements are not publicly available in the overseas jurisdiction.

Guidance

The guidance also outlines the requirements for lodgement and considers the application of the Act to entities that form part of tax consolidated groups in addition to other circumstances.

Other issues to note include:

• Subsidiaries are not SGEs if they are excluded from the consolidated global financial statements on the grounds of materiality, or because of an exemption from consolidation for investment entities. Those subsidiaries are therefore not required to submit a GPFS with the ATO.
• The global A$1 billion threshold is based on accounting revenues and not taxable income. This means that fair value movements on financial assets and investment properties, as well as infrequent gains on disposal of assets, are included for the purpose of determining whether an entity is a SGE in a particular income year if they are treated as part of accounting revenues.
• A GPFS is considered to be a tax document in the context of tax transparency measures, and serious administrative penalties (in extreme cases, the failure to lodge penalty of up to AUD $525,000 per document) apply if SGEs are found to be non-compliant.

Several questions were raised regarding these requirements which we outlined in our December 2015 and August 2016 Accounting News articles, including:

• Whether these GPFS are required to be audited before submission to the ATO.
• Whether reduced disclosures (RDR) would be permitted (also referred to as ‘Tier 2 financial statements’), and
• Whether consolidated financial statements of the overseas parent could be lodged instead of the relevant Australian entity.

An ATO Consultation Paper from August 2016 sought feedback to address these three issues. The ATO has answered these and other question in its latest guidance.

Are the GPFS required to be audited?

The Act does not strictly require the GPFS to be audited, however the ATO recommends in its guidance that evidence be kept to demonstrate that the GPFS have been prepared in accordance with Australian Accounting Standards/IFRS, and that the best way to demonstrate this is through an audit.

We believe that having an audit is the best way to demonstrate compliance with the Australian Accounting Standards/IFRS and that there may be an increased risk of ATO investigation if there is a suspicion that there is insufficient evidence showing compliance with Accounting Standards.

Can the GPFS apply reduced disclosures (RDR)?

The guidance states that the application of the reduced disclosure requirements is a judgemental matter. ‘Publicly accountable’ entities must prepare Tier 1 GPFS, including all relevant disclosures. However, entities that are not ‘publicly accountable’, i.e. Tier 2 entities under AASB 1053 Application of Tiers of Australian Accounting Standards, may submit GPFS with reduced disclosures (RDR).

Can the consolidated financial statements of the overseas parent be lodged instead of the relevant Australian entity?

The ATO guidance leaves it up to the judgement of each Australian SGE to decide the level at which GPFS will be submitted. The ‘best practice’ section of the guidance says that an entity may determine that the requirements are satisfied by submitting the GPFS of the global parent and that the entity should consider the best option to contribute to the transparency of Australian tax affairs in doing so. Choosing to lodge the overseas parent's consolidated financial statements rather than its own standalone financiel statements.

Must Australian Accounting Standards be applied or are other overseas generally accepted accounting principles (GAAP) permitted?

Although the guidance does leave it open for some Australian SGEs to submit the overseas global parent entity consolidated GPFS with the ATO (s3CA(5)(b) of the Act), it should be noted that it requires a GPFS to be prepared in accordance with:

• Australian Accounting Standards if they apply in relation to the entity (e.g. if required to prepare, have audited and lodge financial statements under Part 2M.3 of the Corporations Act 2001), or
• CAAP (commercially accepted accounting principles) if Australian Accounting Standards do not apply.

This means that companies can only submit GPFS using CAAP if they do not fall within one of the categories of companies listed below:

• Required to lodge a GPFS with ASIC
• Lodge special purpose financial statements (SPFS) with ASIC
• Required to prepare, but not lodge financial reports with ASIC (for example, grandfathered large proprietary companies), or
• Are otherwise relieved by ASIC from preparing financial reports because their parent entity lodges consolidated financial statements prepared in accordance with Australian Accounting Standards incorporating their financial position and performance with ASIC (for example, where the wholly-owned entity Legislative Instrument has been applied).

CAAP refers to International Financial Reporting Standards (IFRS) or accounting standards that are IFRS compliant, such as Australian Accounting Standards and US GAAP. This means that entities not ordinarily required to prepare financial statements using Australian Accounting Standards must, for the purpose of submitting GPFS to the ATO, either apply:

• Australian Accounting Standards
• IFRS, or
• IFRS compliant standards, such as US GAAP.

Where other accounting principles are used, whether they are CAAP is a question of fact. This can only be determined on a case-by-case basis. One consideration is whether such principles ensure that financial statements provide a true and fair view.

Transitional arrangements for the income tax year ended 30 June 2017

For companies that are not allowed to submit GPFS in accordance with CAAP (i.e. those required to apply Australian Accounting Standards choosing to lodge the overseas parent’s consolidated financial statements rather than its own standalone financial statements), the ATO is allowing a one-year transition exemption for the first year whereby it will not be checking whether the financial statements are compliant with Australian Accounting Standards, provided they are prepared in accordance with another jurisdiction’s commercially accepted accounting principles. Further, the first year lodgement concession means companies will have until 31 March 2018 to lodge GPFS. The ATO is also seeking further comments on how the foreign parent financial statements can be Australian compliant in future. 

Do ‘grandfathered’ large proprietary companies effectively lose their ‘grandfathered’ status?

‘Grandfathered’ entities will not lose their ‘grandfathered’ status in that they will still be exempt from lodging their audited financial statements with ASIC under Part 2M.3 of the Corporations Act 2001. However, pursuant to s3CA of the Act, the requirement to submit GPFS to the ATO if such entities are part of a SGE (either headquartered in Australia or overseas) is effectively a means of removing ‘grandfathering’ via the back door, (i.e. because these ‘grandfathered’ financial statements will now appear on the public record once lodged with the ATO).

Which types of entities will be most impacted?

Entities currently lodging GPFS with ASIC within the stipulated time frames have no further obligations under s3CA of the Act.

However, the following types of entities will now have additional reporting responsibilities:

Other issues to consider for SGEs

• For income years beginning after 1 January 2016, SGEs will be subject to additional transparency measures in Australia under the Country-by-Country (CbC)reporting regime adopted by the ATO. These requirements include the following documentation to be submitted 12 months after the year end:
  • Master file
  • Local file, specifically developed Australian format
  • CbC Report
• Implementation of the Diverted Profits Tax, a new penalty regime for SGEs who engage in cross border transactions with ‘low tax’ jurisdictions. Punitive penalties of 40% of profits found to be diverted can be imposed in a ‘pay now, argue later’ approach. This measure applies from 1 July 2017.
• Multinational anti-avoidance law (MAAL) which targets significant global entities who enter schemes that artificially limit a taxable presence or permanent establishment in Australia. This measure applies to income years beginning on or after 1 January 2016.

BDO Comment

Companies should consider how they will satisfy the GPFS requirements and what resources will be required to collect the information required. The fines for non-compliance are sizeable (in some cases up to A$525,000 per document) and the requirement should not be ignored. 

The ATO guidance encourages ‘best practice’ beyond the legal requirements, and its interpretation of the rules is expected to generate significant compliance costs. In recognition of this, a one-year amnesty is available for most affected companies as well as a lodgement extension until 31 March 2018 (30 June 2017 year ends).

The ATO have requested comments on the guidance they have provided, with submissions due before 27 October 2017. Please send your comments to Aletta Boshoff or Transfer Pricing if you will be impacted by the Act, or seek further clarification on any of the guidance provided.