COVID-19 - frequently asked questions
Relying on this Guide
We are committed to providing you with accurate, consistent and clear information to help you understand your rights and entitlements and your obligations.
If you follow our information and it turns out to be incorrect, or it is misleading and you make a mistake as a result, we will take that into account when determining what action, if any, we should take.
Some of the information in this Guide applies to a specific financial year. This is clearly marked. Make sure you have the information for the right year before making decisions based on that information.
Answers to questions on:
- Transfer pricing documentation
- Thin capitalisation and safe harbour
- Central management and control (CM & C)
- Permanent establishment
- Significant global entity (SGE) penalty
- PAYG withholding
Transfer pricing documentation
Question: I am a multinational taxpayer that plans on lodging my income tax return before my lodgment due date. Due to COVID-19, I will not be able to have our transfer pricing documentation prepared in time. Will I be precluded from having a reasonably arguable position under Subdivision 284-E of Schedule 1 to the Taxation Administration Act 1953 (Subdivision 284-E) if I do not lodge my transfer pricing documentation at this time?
Answer: The Australian transfer pricing rules require you to prepare compliant transfer pricing documentation by the time your income tax return is lodged. Failure to prepare documentation in time means you will not have a reasonably arguable position which may result in the imposition of penalties.
We understand and will work with taxpayers that are affected by COVID-19 and are not able to get their transfer pricing documentation in order before the lodgment of their current income tax return despite your best efforts. To help you, we will take an administrative approach for penalties whereby we may remit the portion of your penalties resulting from the lack of a reasonably arguable position (should they arise) if the following criteria are met:
- your lodgment due date for your income tax return was between 1 March and 15 July
- transfer pricing documentation compliant with Subdivision 284-E was in place for your previous income year
- there has been no material change to your related party arrangements since last income year
- you complete your transfer pricing documentation on or before your lodgment due date
- your transfer pricing position is otherwise reasonably arguable.
You will need to contact us before 15 July 2020 to confirm the penalty remission. Please contact International@ato.gov.au . Alternatively, if you have a dedicated relationship manager you may approach them directly for help with your case. We will continue to monitor the evolving effects on businesses and will issue further guidance if there are developments as a result of COVID-19.
This question was last updated on 8 May 2020.
Thin capitalisation and safe harbour
Question: I run a business that has previously relied on the safe harbour election to satisfy my thin capitalisation obligations. Because of COVID-19, my balance sheet has been affected and I am concerned I will not be able to rely on the safe-harbour election for my current tax year. Are there any options available to me?
Answer: The recent disruption brought about by COVID-19 may affect not only taxpayers' compliance with their reporting obligations, but also the underlying economic fundamentals that inform the choice of method for calculating maximum allowable debt for thin capitalisation purposes.
In line with our recent announcements about support for businesses affected by COVID-19, we understand this is a time of significant uncertainty and we will need to be flexible in how we administer our approach to compliance.
For the tax years encompassing the February/March 2020 period (the relevant year), if you are a non-ADI taxpayer you may no longer be able to rely on the safe harbour or worldwide gearing tests to determine your maximum allowable debt as a result of balance sheet effects brought by COVID-19. These balance sheet effects may be as a result of impairment of asset values or short term draw downs on debt facilities as a direct result of COVID-19. If so, you may wish to consider the following for the affected income year.
For the purpose of calculating average values for thin capitalisation amounts, the selection of alternative valuation measurement periods may allow a degree of smoothing of values in situations where wide variations have occurred throughout the income year. The table below demonstrates an example of the effect different measurement periods may have. In this example, monthly average has been selected.
An example of the effect different measurement periods may have:
Other options are available as well.
While the facts and circumstances will vary for each taxpayer, we encourage you to explore the use of all the alternative measurement periods in testing the suitability of the safe harbour or worldwide gearing tests.
If you will otherwise need to rely on the arm's length debt test (ALDT) for the relevant year, as a direct consequence of COVID-19, you can expect we will not dedicate compliance resources to reviewing the application of ALDT if the requirements listed below are met, other than to verify that the use of the test was directly related to a COVID-19 reflex.
The requirements for the simplified ALDT approach include:
- You would have satisfied the safe-harbour test but for the COVID-19 related balance sheet effects.
- It is still expected that you will use best endeavours to apply all criteria of the ALDT.
- For entities that are classified as inward investing entities (and not also outward investing entities) our compliance approach (as outlined above) applies only to the extent that no additional related party funding is received, other than short-term (less than 12 months) debt facilities. In these instances, we would expect any new capital to be equity.
- We would not expect inward investing entities to require the use of ALDT because dividends were paid, thereby weakening the Australian balance sheet.
If your economic circumstances are expected to persist over the longer term and, as a result, you are likely to rely on the ALDT beyond the immediate income tax year, take the opportunity to discuss your circumstances with us.
You can also expect that we will take a balanced approach to matters such as record keeping and timing of the creation of records for the purposes of the test. You should attempt to prepare documents supporting the application of the ALDT, but we will not apply compliance resources to determine if the documents satisfy the standards set out in draft Practical Compliance Guideline PCG 2019/D3 ATO compliance approach to the arm's length debt test.
We are committed to working with you and your advisors to provide certainty in these challenging times. We have a dedicated team responsible for the oversight and management of thin capitalisation risks. If you wish to discuss your application of the ALDT with us, you may contact Shahzeb Panhwar, Assistant Commissioner, International Tax Structuring at International@ato.gov.au . Alternatively, if you have a dedicated relationship manager you may approach them directly for assistance with your case.
This question was last updated on 9 April 2020.
Central management and control (CM & C)
Question: I run a foreign incorporated company that is not an Australian tax resident. I've needed to make alternative arrangements for board meetings because of travel restrictions. Does this mean the central management and control is in Australia?
Answer: If the only reason for holding board meetings in Australia or directors attending board meetings from Australia is because of the effects of COVID-19, then we will not apply compliance resources to determine if your central management and control is in Australia.
The spread of COVID-19 has resulted in overseas travel bans and restrictions and a high degree of uncertainty generally around international travel. You may be concerned about these effects on your corporate residency status because of a need to change locations of board meetings or where directors attend them from.
Some boards of foreign-incorporated companies that are not Australian tax residents may temporarily suspend their normal pattern of board meetings because either:
- there are overseas travel bans or restrictions
- the board has made the decision to halt international travel because of the present uncertainties around international travel due to COVID-19.
If these companies instead hold board meetings in Australia or directors attend board meetings from Australia, this will not by itself in the absence of other changes in the company's circumstances alter the company's residency status for Australian tax purposes.
We will continue to monitor the evolving effects on businesses in these circumstances and update our guidance if there are further developments as a result of COVID-19.
This question was last updated on 17 March 2020.
Question: I run a foreign incorporated company that is not an Australian tax resident. Does the unplanned presence of my employees in Australia now lead to the existence of a permanent establishment in Australia?
Answer: COVID-19 has resulted in overseas travel restrictions and a high degree of uncertainty generally around international travel. Foreign companies may be concerned about potential effects on their business and tax affairs because of the result of a presence of employees in Australia.
The effect of COVID-19 will not, in itself, result in the company having an Australian permanent establishment if it meets all the following:
- The foreign incorporated company did not have a permanent establishment in Australia before the effects of COVID-19.
- There are no other changes in the company's circumstances.
- The unplanned presence of employees in Australia is the short-term result of them being temporarily relocated or restricted in their travel as a consequence of COVID-19.
If you didn't otherwise have a permanent establishment in Australia before the effects of COVID-19 and the presence of employees in Australia is because they are temporarily relocated or restricted in their travel as a consequence of COVID-19, then we will not apply compliance resources to determine if you have a permanent establishment in Australia.
We will continue to monitor the evolving effects on business and issue further guidance if there are developments as a result of COVID-19.
This question was last updated on 17 March 2020.
Significant global entity (SGE) penalty
Question: If I don't lodge an approved form including the general purpose financial statement (GPFS) on time, will the ATO remit the failure to lodge on time SGE penalty?
Answer: We encourage you to lodge on time. However, we will remit the failure to lodge on time SGE penalty for a period of 30 days from the lodgment date of the approved form if all of the following apply:
- You are an SGE that is required to lodge an approved form (including the GPFS) with us by or before 30 June 2020.
- You are unable to lodge that approved form (including the GPFS) due to circumstances beyond your control that arise as a direct result of COVID-19.
- The failure to lodge on time SGE penalty is incurred after 23 January 2020 and on or before 30 June 2020.
If your lodgment is more than 30 days late, you will need to contact us to discuss your specific circumstances.
Despite the penalty remission, you will still need to make your payments on time. If you are having problems making your payments, you may be able to defer some payments.
You can contact the large services team to discuss lodgment and payments.
We will continue to monitor the effects of COVID-19 and will update our guidance as further developments occur.
This question was last updated on 22 May 2020.
Question: I'm a foreign employer and my employee is not a resident of Australia. They are working in Australia temporarily as a result of COVID-19. Do I have to register for PAYG withholding?
Answer: We do not expect you to register for PAYG withholding if the only reason your employee is now working in Australia is because of the effects of COVID-19 on travel and it is anticipated that they will leave before 30 June 2020.
We understand that it is unknown how long the effects of COVID-19 regarding travel will last. We will continue to monitor the evolving effects of travel restrictions and update our guidance if there are further developments as a result of COVID-19.
This question was last updated on 20 March 2020.
© AUSTRALIAN TAXATION OFFICE FOR THE COMMONWEALTH OF AUSTRALIA
You are free to copy, adapt, modify, transmit and distribute this material as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).
NO COVID-19 FAQ