Edited version of private advice

Authorisation Number: 1051759749444

Date of advice: 24 September 2020

Ruling

Subject: Requirements for country-by-country reporting and lodgement of general purpose financial statements

Question 1

Is a six-month transitional period an income year as defined under section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

Question 2

Does Entity X cease being a significant global entity (SGE) under section 960-555 of the ITAA 1997 when it leaves a group that is consolidated for accounting purposes headed by Entity Y?

Answer

Yes

Question 3

Will Entity X be subject to country-by-country (CbC) reporting obligations under section 815-355 of the ITAA 1997 in respect of the transitional period?

Answer

No

Question 4

Will Entity X be required to provide general purpose financial statements (GPFS) to the Commissioner under section 3CA of the Tax Administration Act 1953 (TAA 1953) in respect of the transitional period?

Answer

No

Question 5

Will Entity X be subject to CbC reporting obligations under section 815-355 of the ITAA 1997 in respect of the income year ending 31 December 2020?

Answer

Yes

Question 6

Will Entity X be required to provide GPFS to the Commissioner under section 3CA of the TAA 1953 in respect of the income year ending 31 December 20XX?

Answer

No

Question 7

Will Entity X cease being subject to the increased penalty amount being imposed under subsection 286-80(4A) of Schedule 1 to the TAA 1953 when it ceases being an SGE?

Answer

Yes

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ended 31 December 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

Entity X is a wholly-owned subsidiary of Entity Y and has always been a member of the group consolidated for accounting purposes headed by Entity Y.

Entity X and Entity Y were members of the group that is consolidated for accounting purposes headed by Entity Z for the whole of the income year ended 30 June 20XX.

Entity Z's annual global turnover exceeded A$XXX for the income year ended 30 June 20XX.

During the income year ended 30 June 20XX, Entity Z sold all of its interest in Entity Y to Entity A. Consequently, Entity X ceased being a member of Entity Z's accounting consolidated group and became a member of an accounting consolidated group headed by Entity A in September 20XX.

Entity A adopts an accounting period ending on 31 December.

In the periods ended 31 December 20XX and 31 December 20XX, Entity A did not have an annual global income of A$XXX or more. Entity A is expected to have an annual global income of significantly less than A$XXX in the period ended 31 December 20XX.

Subsequent to the acquisition of Entity X by Entity A, Entity X was given leave of the Commissioner to adopt a substituted accounting period (SAP) being the 12 months ending on 31 December in order to align its reporting period with Entity A.

The SAP will first take effect from 1 January 20XX, which is preceded by a six-month transitional period (the Transitional Period).

Reasons for decision

Question 1

Is the Transitional Period an income year as defined under section 995-1 of the ITAA 1997?

Summary

The Transitional Period is not an income year as defined under section 995-1 of the ITAA 1997.

Detailed reasoning

Section 995-1 of the ITAA 1997 defines an 'income year' to have the basic meaning given by subsections 4-10(2) and 9-5(2) of the ITAA 1997 and for an entity that adopts an accounting period in place of the particular income year, its income year is the adopted accounting period.

Under subsection 4-10(2) of the ITAA 1997 an 'income year' generally means the same as the financial year. However, for a company, the income year is the previous financial year and for an entity that has an accounting period that is not the same as the financial year, each such accounting period or, for a company, each previous accounting period is an income year.

Section 995-1 of the ITAA 1997 defines a 'financial year' as a period of 12 months beginning on 1 July.

An accounting period is defined in section 18 of the ITAA 1936 as being the 12 months period ending on some date other than 30 June.

The Transitional Period is not a twelve-month period. Therefore, it does not meet the definition of an 'income year' under subsection 4-10(2) and section 995-1 of the ITAA 1997.

Question 2

Does Entity X cease being an SGE under section 960-555 of the ITAA 1997 when it leaves a group that is consolidated for accounting purposes headed by Entity Z?

Summary

Entity X ceases being an SGE under section 960-555 of the ITAA 1997 when it leaves a group that is consolidated for accounting purposes headed by Entity Z and joins a group that is consolidated for accounting purposes headed by Entity A.

Detailed reasoning

Under subsection 960-555(2) of the ITAA 1997, an entity that is not a global parent entity will be an SGE if it is a member of a group of entities consolidated for accounting purposes as a single group and one of the other members of the group is a global parent entity with annual global income of A$1 billion or more.

If an entity joins or leaves a group that is consolidated for accounting purposes as a single group, the entity is an SGE for a particular period (such as an income year) where one of the following applies at the end of the period:

·         the entity remains outside of a group and the entity's annual global income as shown in their global financial statements, relevant for the period, is A$1 billion or more

·         the entity is part of a group consolidated for accounting purposes as a single group and the annual global income shown in the global financial statements, relevant for the period and prepared by the global parent entity of the group the entity has joined, is A$1 billion or more.

The membership of a group the entity left during the period is not relevant in determining whether the entity is an SGE for the period. The relevant law simply requires an entity to be a current member of a group of entities consolidated for accounting purposes as a single group.

During the income year ended 30 June 20XX, Entity X left Entity Z's accounting consolidated group and joined Entity A's accounting consolidated group.

Therefore, after the income year ended 30 June 20XX, Entity X ceases being an SGE as it is part of a group consolidated for accounting purposes as a single group and the annual global income of the parent entity (Entity A) is less than A$XXX.

Question 3

Will Entity X be subject to CbC reporting obligations under section 815-355 of the ITAA 1997 in respect of the Transitional Period?

Summary

Entity X will not be subject to CbC reporting obligations under section 815-355 of the ITAA 1997 in respect of the Transitional Period as the Transitional Period is not an income year for the purposes of CbC reporting.

Detailed reasoning

Section 815-355 of the ITAA 1997 imposes an obligation to provide CbC reports to the Commissioner in certain circumstances.

An entity will have CbC reporting obligations for an income year if:

·         the entity (including a trust or partnership) was a significant global entity (SGE) for the whole or a part of the previous income year

·         during the income year, the entity was an Australian resident entity for a foreign entity with a permanent establishment (PE) in Australia, and

·         the entity is not exempt from providing all of the CbC reporting statements.

Briefly, an entity will be an SGE for an income year if the entity is either:

·         a global parent entity with 'annual global income' of A$1 billion or more

·         a member of a group of entities consolidated (for accounting purposes) where the global parent entity has an annual global income of A$1 billion or more.

An 'income year' for CbC reporting purposes must be a 12-month period. If an entity has a transitional period due to a change in their income tax accounting period, (for example, because the ATO has approved a change from a year ending 30 June to a year ending 31 December) the transitional period is not an income year as it is not a 12-month period as discussed in Question 1.

Therefore, Entity X does not have an obligation to provide CbC reports to the Commissioner for the Transitional Period.

Question 4

Will Entity X be required to provide GPFS to the Commissioner under section 3CA of the TAA 1953 in respect of the Transitional Period?

Summary

Entity X will not be required to provide GPFS to the Commissioner under section 3CA of the TAA 1953 in respect of the Transitional Period because the Transitional Period is not an income year.

Detailed reasoning

Section 3CA of the TAA 1953 specifies when a corporate tax entity (that is, a company, corporate limited partnership or public trading trust) must lodge GPFS with the ATO.

Under section 3CA of the TAA 1953, the GPFS reporting requirements only apply to income years.

As discussed in Question 1, the Transitional Period is not an income year. Therefore, Entity X is not required to lodge GPFS for the Transitional Period.

Question 5

Will Entity X be subject to CbC reporting obligations under section 815-355 of the ITAA 1997 in respect of the income year ending 31 December 20XX?

Summary

Entity X will be subject to CbC reporting obligations in respect of the income year ending 31 December 20XX as it satisfies all of the elements of subsection 815-355(1) of the ITAA 1997.

Detailed reasoning

Under subsection 815-355(1) of the ITAA 1997, an entity will have CbC reporting obligations for an income year if:

·         the entity (including a trust or partnership) was an SGE for the whole or a part of the previous income year

·         during the income year, the entity was an Australian resident entity or a foreign entity with a permanent establishment (PE) in Australia

·         the entity is not exempt from providing all of the CbC reporting statements.

As the Transitional Period is not an income year, the previous income year immediately before the income year ended 31 December 20XX is the income year ended 30 June 20XX.

Entity X was an SGE during the income year ended 30 June 20XX. Therefore, Entity X is required to provide the statements listed in subsection 815-355(3) of the ITAA 1997 for the income year ended 31 December 20XX.

Question 6

Will Entity X be required to provide GPFS to the Commissioner under section 3CA of the TAA 1953 in respect of the income year ending 31 December 20XX?

Summary

Entity X will not be required to provide GPFS to the Commissioner under section 3CA of the TAA 1953 in respect of the income year ending 31 December 20XX because Entity X is not an SGE in that income year.

Detailed reasoning

Under section 3CA of the TAA 1953, an entity is required to provide GPFS to the Commissioner for an income year if the entity is an SGE for the income year and the entity satisfies all the other elements of section 3CA.

As discussed in Question 2, Entity X is not an SGE in the income year ending 31 December 20XX because in that income year it is a member of a group consolidated for accounting purposes as a single group and the annual global income of the global parent entity of the group is less than A$XXX.

Question 7

Will Entity X cease being subject to the increased penalty amount being imposed under subsection 286-80(4A) of Schedule 1 to the TAA 1953 when it ceases being an SGE?

Summary

Entity X ceases being subject to the increased penalty amount being imposed under subsection 286-80(4A) of Schedule 1 to the TAA 1953 when it ceases being an SGE for an income year.

Detailed reasoning

Subsection 286-75(1) of Schedule 1 to the TAA 1953 imposes a failure to lodge (FTL) penalty for failing to lodge returns, notices, statements or other documents (referred to as 'taxation documents') in the approved form by a particular day.

FTL penalties for SGEs apply to an entity that fails to lodge a taxation document required to be given at a date that is on or after 1 July 2017.

An entity is an SGE, for the purposes of FTL penalties, according to the most recent income tax assessment (either following lodgment of the entity's tax return or, if the entity has not lodged a tax return, a default assessment). However, if at the time of calculating a penalty amount, the ATO is satisfied that an entity will not be an SGE for the current income year (for example because the entity is no longer a member of the global group), the ATO is able to remit the higher penalty amount to the amount that would otherwise have applied.

In most circumstances, the question of whether an entity is an SGE for the income year in which a penalty is imposed is determined after the year has ended. If a penalty is imposed at the rate applicable to SGEs and the entity was not in fact an SGE for that period according to the assessment for that relevant income year, the penalty amount will be reduced to the amount that would otherwise have applied (refer to subsection 286-80(4B)).

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