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  • Appendix 5 worked example

    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

    The following example shows how the appropriate answers are determined for Schedule 25A 2011 for a hypothetical situation involving an Australian resident company.

    Example 9

    An Australian company, XYZ Pty Ltd, has several wholly owned overseas subsidiaries.

    Non-resident subsidiaries qualify as international related parties - see the definition in appendix 2.

    During the year ending 30 June 2011, XYZ Pty Ltd had dealings with subsidiaries. Some of these dealings were transacted at arm's length prices, ensured by implementing and following various arm's length pricing methods, while other dealings were not.

    The following dealings, shown in Australian dollars, occurred during the year and are grouped under the headings in item 2 of the schedule.

    Stock in trade and raw materials

    • Stock in trade was sold to subsidiaries for $146,450. All sales were priced at bona fide arm's length prices, of which 50% were based on CUP and 50% based on the cost-plus method.
      • For the CUP dealings, the method for pricing was selected, applied and documented as discussed in the introduction to item 4
      • For the cost-plus dealings, the pricing method was selected and documented for all the dealings, but written documentation on the application of the method was kept for only one-quarter of all these dealings.
       
    • Raw materials were purchased from subsidiaries for $178,750. Of this total dollar amount, 60% was priced on comparative uncontrolled prices, and the remaining 40% was invoiced at a price XYZ Pty Ltd considered reasonable.
    • For all CUP dealings, the method was selected, applied and documented as discussed in the introduction to item 4.

    Other tangible property

    • Shares in a listed company were sold to a subsidiary for $23,345, being the quoted share price at the time. This method was selected, applied and documented as discussed in the introduction to item 4.
    • Machinery was purchased by a subsidiary and transferred to XYZ Pty Ltd for $18,850.

    This was the actual price paid by the subsidiary, including handling charges. This method was also selected, applied and documented as discussed in the introduction to item 4.

    Royalties

    The subsidiaries used trademarks owned by XYZ Pty Ltd but did not pay royalties.

    Other intangible property

    XYZ Pty Ltd sold a trademark to a subsidiary. This was a 'once-only' occurrence and was invoiced at cost plus a nominal mark-up. The amount invoiced was $17,800.

    Management and marketing fees

    XYZ Pty Ltd performed management services for its subsidiaries, and charged them cost plus 5%.

    The amount invoiced was $16,000.

    For taxation purposes XYZ Pty Ltd selected, applied and documented a bona fide CUP of $21,700.

    This arm's length price was reflected in the taxable income by an adjustment at item 7 Reconciliation to taxable income or loss on XYZ Pty Ltd's tax return.

    • Training was provided for the sales staff of one subsidiary. No amount was invoiced for this service but, in exchange, the subsidiary completed a specific research project for XYZ Pty Ltd.

    Technical and construction

    XYZ Pty Ltd provided ongoing technical services regarding manufacturing processes to a subsidiary, and invoiced those services at rates equivalent to prices for similar services performed for arm's length customers. The process was not analysed in detail, neither was it documented.

    • The amount invoiced was $12,650.

    Research and development

    XYZ Pty Ltd maintained a research and development (R&D) division and incurred R&D expenditure on behalf of all subsidiaries and its own activities. Subsidiaries paid their own share of the total annual cost, and no mark-up was included in the invoiced price. The total amount was $24,600.

    Loans

    On 29 June 2011, XYZ Pty Ltd approved the interest-bearing loan of $450,000 to a subsidiary.

    Answer to item 2

    Summary of the dealings

    Working calculations for item 2

    Suggested answer to item 2

    Answer to item 3a

    Y for yes should be written at item 3a. This is because XYZ Pty Ltd has provided management services to an international related party and consideration was settled by means of a swap or barter (in this case, staff training in return for the research project).

    Answer to item 3b

    Y for yes should be written at item 3b. The subsidiaries used trademarks owned by XYZ Pty Ltd but did not pay royalties which is a dealing for which there was no consideration.

    Answer to item 4a

    The percentage of the related-party dealings for which written documentation is held to support the selection of arm's length pricing methods is calculated as follows.

    The total dollar value of related-party dealings, for which an amount was included at items 2a to 2d is $444,145.

    The total dollar value of the dealings for which you hold documentation supporting selection and characterisation in accordance with steps 1 and 2 of chapter 5 of TR 98/11 is determined as follows:

    Answer to item 4a

    The percentage is calculated as 71.5% ($317,595 divided by $444,145).

    At F item 4a, Code 4 is written.

    Answer to item 4b

    The percentage of the related-party dealings, for which you hold documentation to support the application of arm's length pricing methods in accordance with step 3 of chapter 5 of TR 98/11, is calculated as follows:

    • The total dollar value of related-party dealings is $444,145, based on the amounts shown at items 2a to 2d.
    • The total dollar value of the dealings for which the relevant supporting documentation is held is determined as follows:

     

    Answer to item 4b

    The percentage is calculated as 59.1% being $262,676 divided by $444,145.

    At G item 4b, code 4 is written.

    Answer to item 5

    The amounts for dealings of a revenue nature are all the amounts in the Answer to item 2 above after excluding the amounts for capital dealings (being the sale of shares to a subsidiary, the purchase of machinery by a subsidiary, and the sale of the trademark to a subsidiary).

    The total amount for dealings of a revenue nature was $384,150 ($444,145 - ($23,345 + $18,850 + $17,800)).

    The total amount for dealings of a capital nature was $59,995 ($23,345 + $18,850 + $17,800).

    The two arm's length pricing methods used for amounts included at items 2a to 2d were the CUP method, code 1, and the cost-plus method, code 3.

    The method codes are in the table at item 5 column A.

    The codes for the percentages are in the table at item 5 column B.

    The percentage of the total amount for dealings of a revenue nature ($384,150) representing use of each kind of method are calculated as follows:

    CUP

    $202,175

    52.6%

    ($73,225 + $107,250 + $21,700)

     

    Cost plus

    $73,225

    19.1%

    The labels in item 5 are therefore completed as follows (with labels L, M, N and O left blank):

    H

    0

    1

     

    I

    4

    J

    0

    3

     

    K

    2


    Answer to item 6

    The amounts in the Answer to item 2 above which are for dealings of a capital nature are:

    • sale of shares
     

    $23,345

    • purchase of machinery
     

    $18,850

    • sale of a trademark
     

    $17,800

    Total

    $59,995

    Answer to item 6a

    The purchase of machinery, the sale of shares and the sale of the trademark will all be CGT events within the meaning of Division 104 of the ITAA 1997.

    At P item 6a write Y for yes.

    Answer to item 6b

    At this item, write the codes for the four principal methods used for pricing these capital dealings. In this example only three methods were used:

    • the quoted market price method for the share dealing - code 7
    • the cost price method for the machinery - code 2, and
    • other methods for the trademark - code 8.

    These codes are from the table at item 6b

    The labels in item 6b are therefore completed as follows:

    Q

    7

    2

    8

     

    Answer to item 6c

    In this item, write the codes for the percentage of the total of the amounts in the Answer to item 2 above representing dealings of a capital nature .

    This percentage is calculated as follows:

     

    $59,995
    $444,145

    =

    13.5%

    The relevant codes are from the table at item 6c

    Label R in item 6c is therefore completed as follows:

    R

    2


    Last modified: 28 Sep 2012QC 24214