Reporting entities lodging by 15 February 2018 are able to adopt a 'best efforts' approach in preparing the short form local file having regard to the Local file/master file 2017 outline. The best efforts approach can also be applied by entities whose local file would have been due on 15 February 2018 had they not been granted an extension beyond that date.
If you satisfy the relevant eligibility criteria, you are only required to lodge a short form local file. Eligibility is determined when the reporting entity lodges their local file.
General principles
The short form local file requires high level disclosures, as set out below, about five aspects of your local Australian entities and operations:
- organisational reporting structure including overseas reporting lines for local functions
- business and strategy
- business restructures including significant changes in ownership structure, related party funding arrangements, assets or operations
- transfer of intangibles including associated related party licensing or service arrangements
- key competitors.
You are required to provide a sufficient level of information and detail to ensure we are informed about:
- formal and effective overseas reporting lines for your functions and staff, including any dual or multiple reporting lines
- significant changes in your ownership or related party funding structure, including any resulting cross border tax hybrid arrangements (see note below on whether a change is significant)
- significant disposals or acquisitions, or commencement or cessation of operations (see note below on whether a change is significant)
- transactions or dealings connected with relevant changes or transfers.
Note: Whether a change is significant includes consideration of the expected impact on your Australian tax liabilities for the reporting period or following income years compared to the circumstances before the change.
Where there has not been any significant changes in your ownership or related party funding structures, disposals or acquisitions, or commencement or cessation of operations, you should positively state this in your short form local file.
The short form local file consists of a single file. If you would like to attach further documentation, you should provide this as an appendix in that file.
You may provide a chart or diagram, or series of charts or diagrams, to illustrate any of the five disclosures. However, the relevance of the information provided in the chart or diagram should be sufficiently explained in writing.
Specific guidance
Organisational structure
Provide a description and copy of your organisational structure, including a description of the individuals to whom local management reports and the countries in which such individuals maintain their principal offices.
This is expected to include:
- the job title and responsibilities of the most senior Australian based individuals to whom the local staff reported for each separately reporting local business line or function at the end of the reporting year
- in the case of foreign owned entities and operations, and any other scenario in which there is formal or effective overseas reporting
- the job title and responsibilities of the overseas based individuals to which the identified most senior Australian based individuals effectively report at the end of the reporting year
- the countries in which such overseas individuals maintain their principal offices
- the name of the entity which employs the identified overseas based individuals
- information about multiple reporting lines where the identified most senior Australian based individuals formally or effectively report to more than one overseas based individuals.
If there was any change during the reporting year in the most senior Australian based individuals to whom the local staff reported for each separately reporting local business line or function, or in the individuals or countries to which the most senior Australian based individuals reported, provide:
- the date on which the change occurred
- the information requested above for the reporting arrangements just prior to the change.
Business and strategy
Provide a description of your business and strategy.
You should:
- identify all of your main business lines and functions
- describe the strategies deployed in each business line or function
- describe the extent each business line or function overlaps or complements each other.
When describing your business and the strategies deployed for each business line or function, you should consider consistency with the other disclosures such as those made in the directors report section of your annual report (if applicable) or those made in other management or reporting documents.
Business restructures
Provide a description of any business restructures affecting your business in the current or previous income year and an explanation of its significance.
You should describe any significant business restructures that have occurred during the reporting period or previous income year including:
- significant changes in your ownership, equity or related party debt funding
- significant disposal or acquisition of your assets, including interests in foreign entities
- commencement or cessation of significant operations including operations of your controlled foreign companies or entities (CFCs) and operations you carry on at or through an overseas permanent establishment
- any resulting cross border tax hybrid arrangements.
This covers any significant changes of, and disposals or acquisitions by, any member of your Australian consolidated group or MEC group, and any of your CFCs.
In determining whether a change, disposal or acquisition is significant, you would take into account the expected impact on your Australian tax liabilities for the reporting period or following income years.
The description should include:
- the commercial context and explanation for the changes, or disposals or acquisitions
- a description of transactions or dealings connected with the changes, disposals or acquisitions.
Example 1
Head Co is an Australian resident company and the head company of an MEC group for Australian tax purposes. Head Co has an income year and reporting period ending 31 December.
Head Co's parent company is US Inc (US Parent Co), a US resident company.
Head Co's MEC group includes an Australian registered company which is treated as a resident for Australian tax purposes (Aus Sub 1). Aus Sub 1 is an eligible Tier 1 company in Head Co's MEC group and is also a wholly owned subsidiary of US Parent Co. Under the US 'check-the-box' tax rules, US Parent Co elects to treat Aus Sub 1 as ‘disregarded’ for US tax purposes. As a result, interest paid by the Aus Sub 1 to US Parent Co is ignored (for example disregarded) for US tax purposes, resulting in a 'deduction/no-inclusion' hybrid mismatch.
Aus Sub 1 has borrowed 1 billion USD from US Parent Co for a stated term of 9 years and 11 months on 30 June 2014 (US$1 billion borrowing). Interest on the borrowing is deducted by the MEC Group.
On 20 June 2016, in anticipation of Australian hybrids tax legislation, the Head Co MEC Group undertakes a refinancing of its related party debt involving the following steps:
- Head Co forms a new Australian resident company and subsidiary (Aus Sub 2) which on incorporation becomes a subsidiary member of the MEC group.
- Aus Sub 2 issues a promissory note for 1 billion US dollars (US$1 billion notes) for a stated term of 9 years and 11 months to a wholly owned subsidiary of US Parent Co which is resident in Barbados for Australian tax purposes (Barbados Sub Co).
- Barbados Sub Co funds the acquisition of the US$1 billion notes by an issue of ordinary share equity to US Parent Co. US Parent Co provides a guarantee to Barbados Sub Co of Aus Sub Co's obligations under the US$1 billion notes for an annual guarantee fee of 100bps.
- The proceeds from Aus Sub 2's US$1 billion borrowing is used by the MEC Group to repay the loan owing to US Parent Co by Aus Sub 1, which US Parent Co and Aus Sub 1 agree to terminate early.
A description of the restructure in related party funding and an explanation of its significance would be expected to include provision of:
- the above level of detail
- a description of agreements connected with the restructure, including the date of the agreements, the parties to the agreements and the nature of the agreements
- a diagram where appropriate
- a statement that the restructure occurred in anticipation of introduction of the Australian hybrids tax legislation.
Example 2
Aus Co is the head company of a consolidated group for Australian tax purposes. Aus Co has an income year and reporting period ending 30 June.
In connection with a number of agreements with related parties, on 1 October 2016:
- Aus Co's wholly owned subsidiary member (Aus Sub Co) commenced to carry on marketing and distribution activities and manufacturing activities through its newly established fixed place of business in Singapore
- Aus Sub Co ceased to carry on certain marketing and distribution activities and manufacturing activities through its Australian premises.
The agreements with related parties include:
- agreements transferring the employment of employees conducting activities in Australia to a related company resident in Singapore for Australian tax purposes (Sing Co)
- service agreements between Aus Co, Aus Sub Co and Sing Co.
This restructure is treated by Aus Co as affecting the application of the multinational anti-avoidance legislation (MAAL) in section 177DA of the Income Tax Assessment Act 1936 to Aus Co.
A description of the restructure and an explanation of its significance would be expected to include provision of:
- the above level of detail
- a description of agreements connected with the restructure, including the date of the agreements, the parties to the agreements and the nature of the agreements
- a diagram where appropriate
- a statement that Aus Co considers the restructure results in the Australian MAAL provisions not applying to income from relevant activities carried on by Aus Sub Co through its Singapore fixed place of business.
Transfer of intangibles
Provide a description of any transfers of intangibles in the current or previous income year and an explanation of its significance.
You should describe any transfer of intangibles including any connected arrangements, such as related party licensing or service agreements, that occurred in the reporting period or previous income year.
The term intangible includes property, assets or rights that are not physical or financial assets, which are capable of being owned or controlled for use in commercial activities. Examples of intangibles include intellectual property, goodwill, rights under service or distribution agreements, know-how and the right to access secret information or processes.
The description should include:
- the commercial context and explanation for the transfer of intangibles
- a description of transactions or dealings connected with the transfer of intangibles.
This covers any transfer of intangibles by any member of your Australian consolidated group or MEC group, or by any of your CFCs.
Example 3
Aus Co is the head company of a consolidated group for Australian tax purposes. Aus Co has an income year and reporting period ending 30 June.
Aus Co's ultimate parent company is Swiss AG (Swiss Parent Co), a company resident in Switzerland for Australian tax purposes.
In connection with a number of agreements with related parties, on 26 May 2017:
- Aus Co's wholly owned subsidiary member (Aus Sub Co) entered into an equitable assignment of certain trademarks and patents used in its Australian medical device retail operations to a subsidiary of Swiss Parent Co resident in The Netherlands for A$100 million (Dutch Sub Co).
- Dutch Sub Co entered into an equitable assignment of the same trademarks and patents to a subsidiary resident in Bermuda (Bermuda Sub Co) for US$95 million.
- Aus Sub Co claimed CGT rollover under subdivision 126-B of the Income Tax Assessment Act 1997 in respect of the assignment of the trademarks and patents to Dutch Sub Co.
- Dutch Sub Co licensed the right to use the trademarks and patents to Aus Sub Co for a term of 10 years for an annual fee.
The agreements connected with the above transfer of intangibles include service agreements between Aus Sub Co and Dutch Sub Co under which Aus Sub Co agrees to provide administrative and R&D services to Dutch Sub Co for an annual fee.
A description of the transfer of intangibles and an explanation of its significance would be expected to include provision of:
- the above level of detail
- a description of agreements connected with the transfer of intangibles, including the date of the agreements, the parties to the agreements and the nature of the agreements
- a diagram where appropriate
- a statement of the commercial reason and explanation for the transfer of intangibles and associated agreements.
Key competitors
Provide a list of key competitors of the reporting entity.
The list of key competitors should be provided for all of your main business lines and functions identified in your disclosures relating to your business and strategy (above).