The terms used in item 2 have their ordinary meanings within the context of Australian tax law and accounting practices. The particular terms related-party international dealings and international related parties used in these instructions are defined in appendix 2.
Include only dealings between international related parties, and not dealings between you and Australian resident entities. For example, if you received management fees from a foreign subsidiary but incurred costs in Australia to earn those fees, show only the gross management fees received from the foreign subsidiary.
Show only the gross amounts in columns A and B at this item, in whole dollars. Where, for example, a related-party international dealing involved payments by an Australian taxpayer to an international related party and also receipts from an international related party, show the payments at column A and the receipts at column B. Do not record the net amount of the transactions. An exception to this general approach applies in the case of certain derivative instruments. See Item 2d Other for more information.
For revenue transactions, unless otherwise specified, include those amounts that constitute assessable income or allowable deductions.
For capital transactions, include amounts that constitute acquisition and sale prices including any deemed acquisitions or disposals.
If you have a permanent establishment, record any transactions such as purchases or expenditure and sales or revenue at items 2a to 2d, as appropriate, on the notional basis that the permanent establishment is a separate entity.
These transactions include both revenue and capital - including deemed acquisitions and disposals.
Unless you are an authorised deposit-taking institution (ADI) within the meaning of section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997), or fall within the situation described in the next paragraph, do not include at items 2e or 2f any internal transfer of funds which are akin to the borrowing or lending of money (for example, from your head office or other business site to a permanent establishment, or vice versa) as such internal transfers of funds are not recognised under Australia's income tax laws.
Where, however, the internal transfer of funds reflects the internal allocation of funds you have borrowed from related or unrelated parties and the funds so borrowed are attributable to the permanent establishment, include at item 2d the interest and incidental costs of borrowing that are allocated to the permanent establishment by the head office and at item 2e include the amount borrowed from related or unrelated parties (see paragraphs 3.41 to 3.44 of Taxation Ruling TR 2001/11 - Income tax: international transfer pricing - operation of Australia's permanent establishment attribution rules).
Item 2a Tangible property
Show your gross purchases or expenditure for trading stock and raw materials from international related-party dealings at A Stock in trade and raw materials.
At B show the gross sales or revenue from trading stock and raw materials transactions with international related parties.
These amounts will typically be included in trading account items, and will include partially finished goods.
Show the gross purchases or expenditure at C All other tangible property and gross sales or revenue at D in respect of all tangible property other than:
- trading stock and raw materials - include at item 2a
- services - include at item 2c
- other - list separately at item 2d.
Include acquisitions or disposals of ordinary shares or preference shares between international related parties at All other tangible property. Show the gross acquisition costs or receipts on disposal at C and D respectively.
Item 2b Royalties, rent and intangible property
Royalties are defined in subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936). Show gross purchases or expenditure on royalties paid or payable to international related parties at E, and gross sales or revenue from royalties derived from international related parties at F.
Rent other than royalties includes gross expenditure and revenue for the use of, or the right to use, property, both tangible and intangible, not included as royalties. Show gross rent between international related parties at G and H.
Include gross purchases or expenditure and gross sales or revenue for all other intangible property - not in the nature of royalties or rent - at I and J respectively.
Item 2c Services
This part of item 2 is directed at the provision of services between international related parties. An inclusive definition of 'services' is provided at section 136AA(1) of the ITAA 1936.
Item 2c is divided into the various forms that the provision of services may take between international related parties.
Identify the nature of any services and group them if appropriate, recording purchases or expenditure on the types of services at K, M and O, and recording sales or revenue at L, N and P.
If you are unable to categorise the service as any of the specified types at item 2c, include the expenditure or revenue at Q and R.
This part of item 2 is directed at financial and similar dealings between international related parties, and all other dealings or transactions not specifically included at other labels.
The terms, as mentioned earlier, have their ordinary tax or accounting meanings. At A include any gross expenditure relating to interest or discounts, and at B include any gross revenue from interest and discounts. At C include any gross expenditure relating to insurance, such as premiums, and at D include any gross revenue from insurance dealings, including settlements, from international related-party dealings.
At E and F include any transactions between international related parties involving derivative instruments and any financial transactions other than loans. Definitions of these terms and how they should be recorded are provided below.
A derivative instrument is a contractual right that derives its value from the value of something else, such as a debt security, equity, commodity or a specific index. The most common derivative instruments are forwards, futures, options and notional principal contracts such as swaps, caps, floors, collars and credit derivatives. Unlike traditional debt and equity securities, these instruments do not involve a return on an initial investment.
For many derivative instruments such as notional principal contracts (for example, interest rate swaps), the parties to the contract will often only exchange net cash flows at certain specified times during the term of the contract. In completing Schedule 25A in respect of such derivative instruments, only net cash flows should be recorded at E if it is an outgoing and at F if it is a receipt. Do not record any gross cash flows or any notional principal amounts associated with such transactions.
In some cases, only one party to the derivative instrument transaction may make a payment (for example, settlement amounts in respect of forward rate agreements, or option premiums). In such cases, the gross amount of the derivative instrument transaction should be recorded at E if it is an outgoing and at F if it is a receipt.
Mark-to-market accounting may be used for recording amounts in respect of derivative instruments at this label where this is used by a taxpayer for financial accounting purposes.
A financial transaction other than a loan is any other form of financial transaction that is not a derivative instrument or an amount to be recorded elsewhere in item 2d (that is, interest, discounts or insurance) or at items 2e or 2f (that is, interest-bearing loans and interest-free loans) and that is of a revenue (that is, non-capital) nature. For example, payments or receipts in respect of guarantee arrangements, lease agreements, repurchase agreements, securities lending arrangements and so on should be recorded at this item.
Item 2e Loans - Interest bearing
This part of item 2 is concerned with identifying the gross amounts of loans and advances between international related parties for which an interest component is being charged.
The loans and advances to be shown here include all amounts borrowed between a taxpayer and the related parties.
The terms loans and advances are intended to be applied broadly in accordance with commercial and accounting practices (a rigorous application of the debt-equity test is not necessary).
Where you have borrowed amounts or received advances from an international related party or parties, add all the opening balances of these loans or advances and write the sum at G. Add all the closing balances for these loans and enter this amount at H.
Where you have loaned or advanced amounts to international related parties, add the opening balances of these loans and enter that total at I. Add the closing balances of the loans or advances and enter the total at J.
An Australian company has several affiliates, which are related parties, in foreign countries. At the start of the income year, the company's balance sheet showed $182,678 owing to the affiliates by the company and $53,250 owing by the affiliates to the company.
At the end of the income year, $86,782 was owed to the affiliates by the company, and $245,354 was owed by the affiliates to the company. Item 2e would be completed as follows:
End of example
Item 2f Loans - Interest free
This part of item 2 is concerned with identifying the gross amounts of loans and advances between international related parties for which no interest component is being charged.
The loans and advances to be shown here include all amounts borrowed between a taxpayer and the related parties. The terms loans and advances are intended to be applied broadly, and to include quasi-equity loans in which no amount of interest was paid or accrued during the year.
The terms are not intended to include trade debtors and creditors who fall within ordinary commercial dealings. However, where trade debtors or creditors that are international related parties are allowed or give terms significantly more generous than those allowed to, or given by, comparable arm's length parties, those terms may constitute interest-free loans or advances. In completing this item, have regard to the terms of trade that are arm's length in your own particular circumstances.
Where you have borrowed amounts or received advances from an international related party or parties, add all the opening balances of these loans or advances and write the sum at K. Add all the closing balances for these loans and enter the total at L.
Where you have loaned or advanced amounts to international related parties, similarly add the opening balances of these loans and enter that total at M. Add the closing balances of the loans or advances and enter this at N.