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  • Question 11

    Attention

    Warning:

    This information may not apply to the current year. Check the content carefully to ensure it is applicable to your circumstances.

    End of attention

    This question collects information about your dealings of a financial nature (including loans) with international related parties.

    The dollar amounts or values asked for in this question are all based on your accounting records.

    Loans and interest

    A 'loan arrangement' should be given its ordinary meaning within the context of commercial and accounting practices. In general terms, a loan arrangement is defined as a contract whereby the lender pays a sum of money in consideration of a promise by the borrower to repay the money at some time in the future (and this promise may/may not include the promise to repay interest on the money borrowed). Any amounts that are not a loan but which would be considered to be a debt interest for the purposes of Division 974 of the ITAA 1997 should be included here. This will include redeemable preference shares or promissory notes which satisfy the conditions for a debt interest under subsection 974-20 of the ITAA 1997.

    Financial arrangements that are economically in substance a loan arrangement would be regarded as a loan for the purposes of this question, for example, securities arrangements where the collateral is cash, sale and buyback arrangements to be settled in cash, or repurchase agreements (repos) to be settled in cash.

    Whether a financial arrangement economically constitutes a loan arrangement is a matter to be decided based on the facts and circumstances of each arrangement.

    For arrangements that are economically in substance loans, for the purposes of completing the labels of this question, treat:

    • the cash collateral or cash settlement amount as the loan amount
    • any fees paid/received in respect of those arrangements as interest
    • any gain made / loss incurred in respect of those arrangements as interest.
    Further Information

    For more information about the concept of what constitutes a loan, refer to:

    • TR 92/11Income tax: application of the Division 13 transfer pricing provisions to loan arrangements and credit balances
    • TR 2002/16Income tax: the taxation consequences for taxpayers issuing certain stapled securities.
    End of further information

    We recommend that you obtain appropriate advice or guidance in light of the particular facts and circumstances of your case.

    We expect interest to be the principal expense incurred and revenue earned in respect of your financial arrangements in the nature of loans, and this would be included at item 11c. However, any other expenses/losses or revenue/gains associated with these arrangements, such as borrowing costs or foreign exchange gains/losses, should be included at item 11g.

    Do not show at this question principal and principal repayment amounts.

    To complete this part of the question you need to:

    • identify all your international related party dealings of a financial nature in the nature of loans
    • divide those loan arrangements into:
      • interest bearing loans
      • interest free loans
       
    • calculate the average balance of each of those loan arrangements by:
      • adding up the loan balance amount at the start of the year and the loan balance amounts at the end of each quarter
      • dividing the result by five
       
    • in respect of interest bearing loans, determine the amount of interest expenditure or interest revenue in respect of these loans.

    If you had any financial arrangements in the nature of loans with international related parties during the income year, answer 'Yes' at label A of question 11 and complete the required labels as follows.

    Further Information

    If an amount to be written at a label of this question is not relevant for any of your international related party financial arrangements in the nature of loans, leave the label blank.

    End of further information

    For the labels at item 11a:

    • At label I, write the average balance of interest bearing loans in relation to amounts borrowed from international related parties.
    • At label K, write the average balance of interest free loans in relation to amounts borrowed from international related parties.

    For the labels at item 11b:

    • At label I, write the average balance of interest bearing loans in relation to amounts loaned to international related parties.
    • At label K, write the average balance of interest free loans in relation to amounts loaned to international related parties.

    For the labels at item 11c:

    • At label C, write the total interest expenditure in respect of the interest bearing loans borrowed from international related parties.
    • At label D, write the total interest revenue in respect of the interest bearing loans to international related parties.

    Guarantees

    The expenditure and revenue for guarantees include fees associated with a contract or arrangement under which a party agrees to perform an obligation or discharge a liability of another entity should that entity fail to do so.

    Insurance and reinsurance

    This part of question 11 asks you to provide details of your expenses incurred and revenue earned in relation to your insurance and reinsurance contracts with international related parties during the income year.

    Insurance is a means by which an entity can protect itself with an insurance company against the risk of loss. Insurance is commonly categorised into general insurance, life insurance and health insurance.

    Reinsurance is a means by which an insurance company can protect itself with other insurance companies against the risk of losses. Therefore, the question relating to reinsurance is applicable only to insurance companies.

    The amounts reported for this question should include the expenditure and revenue that would qualify as expenditure or revenue in relation to insurance or reinsurance contracts under relevant Australian accounting standards or comparable foreign accounting standards (for example, premium revenue, claim recoveries, commissions received from reinsurers). At the time of this publication, the three key Australian accounting standards relevant to the recognition of expenditure and revenue in relation to insurance/reinsurance include AASB 4 Insurance Contracts, AASB 1023 General Insurance Contracts and AASB 1038 Life Insurance Contracts. As the dollar amounts in this question are based on your accounting records, you should include all of your reinsurance expenditure and revenue in terms of section 148(1) of the ITAA 1936.

    If you engaged an intermediary (for example, a broker) in arranging your insurance or reinsurance contracts, even if the intermediary was acting as an independent agent, the intermediary is considered to be acting on your behalf. Therefore, the transactions undertaken by the intermediary on your behalf should be included in your answer to this question.

    For each of your financial dealings with international related parties of a type covered by item 11d (Guarantees), item 11e (Insurance) or item 11f (Reinsurance), complete the labels for the item for that financial dealing type as follows:

    • At label C, write the total expenditure you incurred for the financial dealing type.
    • At label D, write the total revenue you derived for the financial dealing type.
    • At label E, write the Appendix 5 code for the main pricing methodology you used to set or review consideration in respect of the financial dealing type.
    • At label F, write the Appendix 9 code for the percentage of your international related party dealings involving the financial dealing type for which you have documentation.

    'Percentage of dealings with documentation' refers to the aggregate dollar amount of transactions reported at this question for which you have relevant documentation (as per TR 98/11) expressed as a percentage of total dollar value of transactions reported at this question.

    Other financial dealings

    Item 11g asks you to provide details of your expenses/losses incurred or revenue/gains earned in relation to your other kinds of financial dealings with international related parties during the income year.

    'Other financial dealings' refers to dealings in financial instruments that would qualify as financial assets or financial liabilities under relevant Australian accounting standards or comparable foreign accounting standards but excludes financial instruments that would be treated as a derivative for the purpose of completing question 9. At the time of this publication, the two key Australian accounting standards relevant to this question include AASB 132 Financial Instruments: Presentation and AASB 139 Financial Instruments: Recognition and Measurement. You do not need to take the debt/equity provisions in Division 974 of the ITAA 1997 into account.

    The amounts reported at this question may be reported in the financial statements as revenue/gains or expenses/losses, depending on the accounting treatment of your relevant financial assets and financial liabilities. This includes amounts relating to hedging items that are classified in the financial statements as financial assets or financial liabilities. Therefore for the purposes of this question, the terms 'expenditure' and 'losses' are interchangeable and the terms 'revenue' and 'gains' are interchangeable.

    For each of your financial dealings of any other kind with international related parties, complete the labels at item 11g as follows:

    • At label C, write the total expenditure you incurred for the other kinds of financial dealings.
    • At label D, write the total revenue you earned or derived for the other kinds of financial dealings.
    • At label E, write the Appendix 5 code for the main pricing methodology you used to set or review consideration in respect of the other kinds of financial dealings.
    • At label F, write the Appendix 9 code for the percentage of your international related party dealings involving the other kinds of financial dealings for which you have documentation. 'Percentage of dealings with documentation' refers to the aggregate dollar amount of transactions reported at this question for which you have relevant documentation (as per TR 98/11) expressed as a percentage of total dollar value of transactions reported at this question.
    • At label H, write a description of the other kinds of financial dealings. The description should be limited to 200 characters.
    Further Information

    For the list of:

    • main pricing methodology codes, see Appendix 5
    • percentage of dealings with documentation codes, see Appendix 9.
    End of further information

    Example

    During the income year, the Australian taxpayer (a 30 June balancer) borrowed and loaned amounts for its financial arrangements in the nature of loans with international related parties. The Australian taxpayer has divided these loan arrangements into interest bearing and non interest bearing loans and calculated the average balance of each of the loan arrangements (by adding up the loan balance amount at the start of the year and the loan balance amounts at the end of each quarter and dividing the result by five).

    For example, an amount is borrowed from a related United States entity (as shown in the first line of the table below). The loan arrangement is interest bearing and the loan balances are as follows:

    01/07/11
    30/09/11
    31/12/11
    31/03/12
    30/06/12

    $3,000,000
    $7,000,000
    $5,000,000
    $3,000,000
    $3,000,000
    $21,000,000 divided by 5 = $4,200,000

    The table below shows all the average loan balances for the taxpayer's borrowed and loaned amounts for its financial arrangements in the nature of loans with international related parties.

    Country

    Related entity

    Loan type

    Interest bearing loans

    Interest free loans

    Average loan balance

    Interest

    Average loan balance

    United States

    Entity

    Borrowed

    4,200,000

    31,500

     

    Singapore

    Entity

    Loaned

     

     

    1,800,000

    Singapore

    Entity

    Loaned

    2,200,000

    16,500

    1,800,000

    United States

    Entity

    Borrowed

    3,200,000

    24,000

    4,000,000

    Japan

    Entity

    Loaned

     

     

    2,900,000

    Hong Kong

    Entity

    Borrowed

    3,300,000

    24,750

     

    United States

    Entity

    Borrowed

    2,800,000

    21,000

    3,500,000

    Vietnam

    Entity

    Loaned

    1,650,000

    12,375

     

    Hong Kong

    Entity

    Borrowed

    2,800,000

    21,000

     

    Singapore

    Entity

    Borrowed

     

     

    1,900,000

    United States

    Entity

    Borrowed

    2,800,000

    21,000

     

    The Australian taxpayer extracts the relevant data from the information above.

    Related entity

    Loan type

    Interest bearing loans

    Interest free loans

    Total average loan balances

    Total interest

    Total average loan balances

    Entity

    Borrowed

    4,200,000

    31,500

     

    Entity

    Borrowed

    3,200,000

    24,000

    4,000,000

    Entity

    Borrowed

    6,100,000

    45,750

    3,500,000

    Entity

    Borrowed

    5,600,000

    42,000

    1,900,000

    Total (average balances)

    19,100,000

     

    9,400,000

    Total interest

     

    143,250

     

    Entity

    Loaned

     

     

    1,800,000

    Entity

    Loaned

    2,200,000

    16,500

    1,800,000

    Entity

    Loaned

     

     

    2,900,000

    Entity

    Loaned

    1,650,000

    12,375

     

    Total (average balances)

    3,850,000

     

    6,500,000

    Total interest

     

    28,875

     

    With this information the Australian taxpayer completes question 11 as follows:

    With this information the Australian taxpayer completes question 11

    Last modified: 08 Aug 2014QC 26054