A payment or other benefit provided by a private company to a shareholder or their associate can be treated as a dividend for income tax purposes under Division 7A even if the participants treat it as some other form of transaction such as a loan, advance, gift or writing off a debt.

Division 7A can also apply when a private company provides a payment or benefit to a shareholder or associate through another entity, or if a trust has allocated income to a private company but has not actually paid it, and the trust has provided a payment or benefit to the company's shareholder or their associate.

Division 7A is part of the Income Tax Assessment Act 1936 and is intended to prevent profits or assets being provided to shareholders or their associates tax free.

A Division 7A deemed dividend is generally unfranked. Given this, the most effective way to provide a payment or other benefit to a shareholder or their associate is to pay it as a normal dividend (with a franking credit if available) and for the shareholder to include it in their assessable income.

Division 7A doesn't apply to amounts that are assessable to the shareholder or their associate under other parts of the income tax law, such as normal dividends or director's fees.

A payment or benefit that is potentially subject to Division 7A isn't treated as a dividend if it's repaid or converted into a Division 7A complying loan by the company's lodgment day for the income year in which the payment or benefit occurs.

See also

• Division 7A calculator and decision tool

Entities potentially affected by Division 7A include:

• Private companies
• Shareholders and their associates
• Trusts
• Interposed entities

Private companies

Division 7A applies to payments and other benefits by private companies including:

• non-resident private companies – the payment or other benefit doesn't have to be provided by a private company that is a resident or has any connection with Australia (other than by reason of providing the payment or other benefit to an Australian resident)
• closely held corporate limited partnerships (that is, with fewer than 50 members or where another entity has, directly or indirectly and for its own benefit, an entitlement to a 75% or more of the partnership's income or capital) – payments or benefits provided to partners or their associates (see Division 7A - closely held corporate limited partnerships).

Shareholders and their associates

Division 7A applies to payments or other benefits provided by a private company to shareholders or associates of the shareholders.

Payments or loans to shareholders or their associates that are companies are not treated as Division 7A dividends except where the company shareholder or associate is trustee of a trust.

Even after an entity ceases to be a shareholder or their associate, payments or other benefits subsequently provided to them may still be treated as a dividend if the benefit was provided because the entity had been a shareholder or their associate.

For the purpose of Division 7A, equity holders and non-share equity interests are treated in the same way as shareholders and shares.

Associate

The definition of an associate is very broad and depends on what type of entity the shareholder is.

For an individual shareholder, an associate includes:

• a relative of the individual
• a partner of the individual or a partnership in which the individual is a partner
• the spouse or child of an individual partner
• a trustee of a trust under which the individual or an associate benefits
• a company under the control of the individual or associate.

For a company shareholder, an associate includes:

• a partner of the company or a partnership in which the company is a partner
• a trustee of a trust under which the company or associate benefits
• another individual or associate who controls the company
• another company that is under the control of the company or the company's associate.

For a trustee shareholder, an associate includes an entity or associate of the entity that benefits or is capable of benefiting under the trust.

For a partnership shareholder, an associate includes each partner of the partnership or their associates.

Trusts

Division 7A applies to certain payments or other benefits provided by a trust to shareholders or their associates where the private company has an unpaid present entitlement (UPE) to the profits of the trust.

See also:

• Trust payments and other benefits

Interposed entities

An amount may be treated as a Division 7A dividend even if it's paid or lent by the private company to the shareholder or their associate through one or more other entities.

Payments or loans may be treated as Division 7A dividends where they are made on the understanding that the interposed entity, or a further interposed entity, will pay or lend an amount to the shareholder or their associate.

Next:

• Payments and other benefits affected

Division 7A may apply to any payments or other benefits provided by private companies directly or indirectly to their shareholders or their associates, including the following transactions and events:

• private use of company assets
• transfer of company assets
• gifts
• loans and other forms of credit
• writing off (forgiving) a debt
• guarantees
• payments or the loans by a trust where a company has unpaid present entitlements
• payments and loans through interposed entities.

Payments or other benefits deemed as dividends under Division 7A can be treated as assessable income of the shareholder or their associate in the form of unfranked dividends.

If the payment or other benefit is provided to a shareholder or their associate in their capacity as an employee or an associate or an employee of the private company, Fringe Benefits Tax (FBT) can apply to the payment or other benefit (see Related tax issues).

A payment or loan that's potentially subject to Division 7A isn't treated as a dividend where:

• it's fully repaid or converted to a Division 7A complying loan by the company's lodgment day for the income year in which the payment or loan occurs
• it's already treated as assessable income (or excluded from being assessable income) under another part of the income tax law.

You may be able to use the Division 7A calculator and decision tool to:

• determine whether a payment or other benefit provided by a private company to a shareholder or their associate will give rise to a dividend
• calculate the minimum yearly repayment required if there is a complying loan.

Find out about:

• Loans and other forms of credit
• Private use of assets
• Trust payments and other benefits
• Transactions through interposed entities
• Writing off (forgiving) a debt
• Tax treatment of Division 7A dividends
• Payments and other benefits not affected

Legislative framework

The treatment of a payment or other benefit under Division 7A depends on whether it's categorised by the legislation as either a:

• payment (see section 109C) – note that the legislation treats as a payment the transfer of a company asset to, or the private use of a company asset by, a shareholder or their associate (whether or not this involves a formal arrangement such as a lease or licence, or merely an informal right to use)
• loan ( see section 109D), or
• debt forgiveness (see section 109F).

See also:

• Division 7A - Payments by private companies
• Division 7A - loans by private companies
• Division 7A - debt forgiveness by private companies

A loan from a private company to a shareholder or their associate may be treated as a Division 7A dividend unless, by the lodgment day, the loan is:

• a complying loan for Division 7A purposes, or
• repaid.

A 'loan' for the purposes of Division 7A includes the provision of credit or any other form of financial accommodation and any transaction that is in substance a loan of money.

Complying loan under Division 7A

All of the following conditions must be satisfied for a loan to be a complying loan and therefore excluded from being a Division 7A dividend:

• A written loan agreement must be in place before the company's lodgment day for the income year in which the loan amount was paid to the shareholder or associate.
• The loan interest rate for each year of the loan must at least equal the Division 7A – benchmark interest rate.
• The term of the loan must not exceed  
  • 25 years if 100% of the loan is secured by a registered mortgage over real property and, when the loan is made, the market value of the property, less the amounts of any other liabilities secured over the property in priority to the loan, is at least 110% of the amount of the loan
  • 7 years for any other loan.
   

There is no prescribed format for a written loan agreement. However, as a minimum, the agreement should:

• identify the lender and borrower
• set out the essential conditions of the loan (the amount of the loan, the date on which it's drawn down, the requirement to make minimum yearly repayments, the interest rate payable, and the term of the loan), and
• be signed and dated by the lender.

Minimum yearly repayment

Where a loan agreement is made for the purposes of Division 7A, minimum yearly repayments must be made in the subsequent income years. If not fully made in any subsequent income year, the shortfall amount is treated as a Division 7A dividend in that income year.

To be effective, minimum yearly repayments of loans must be made by 30 June of the income year in which the repayment is due.

The minimum yearly repayment amount is calculated on the total loans made to a shareholder or associate in the income year for the same term or period, called an 'amalgamated loan'.

The interest on the loan must be included in the lender's assessable income for the year.

You may be able to use the Division 7A calculator and decision tool to calculate the minimum yearly repayment required.

Repayments not taken into account

Some payments you make to a private company in relation to a loan are not taken into account for the purpose of working out the minimum yearly repayment or how much of the loan has been repaid.

See also:

• Loan repayments

Employee loans

A loan to a shareholder or their associate in their capacity as an employee or an associate of an employee of the private company doesn't give rise to fringe benefits tax irrespective of whether the loan is a complying loan or is treated as a Division 7A dividend.

See also:

• Division 7A and fringe benefits tax

Next:

• Private use of assets

The use of a company asset by a shareholder or their associate, or the transfer of a company asset to a shareholder or their associate, may be treated as a Division 7A dividend.

Such arrangements are treated as payments for the purposes of Division 7A.

The first time the asset is provided by the company is considered the time the payment is made. However, if the right to use continues into another income year, the provision of the asset for use in the subsequent year is treated as being a separate payment made at the start of that year.

See also

• Can the use of assets (other than a transfer of property) be treated as a payment?

Next

• Trust payments and other benefits

Where a private company writes off (forgives) a debt owed by a shareholder or their associate (the debtor) the debt amount may be treated as a Division 7A dividend.

For the purposes of Division 7A, a debt is forgiven when:

• the debtor's obligation to pay is released, waived or otherwise extinguished, except when the debt is discharged by payment in cash or a transfer of property
• recovery of the debt becomes statute-barred as a result of its age
• the debtor is effectively released from their obligation to pay, notwithstanding the existence of an agreement or arrangement that implies the debt remains in force. For example, where the debtor's obligation to pay the debt doesn't cease immediately but at some time in the future, the debt is treated as forgiven immediately if the debtor and creditor are not acting at arm's length and they agree either that the debtor will not have to pay any consideration for the concessions granted by the creditor or will be required to pay merely a token amount. The agreement or arrangement need not be legally enforceable
• there is 'debt parking' – where the private company assigns its rights to receive payment of a debt to a new creditor, who is either an associate of the debtor or a party to an arrangement with the debtor in relation to the assignment, and a reasonable person would conclude that the new creditor will not exercise the assigned right
• a reasonable person would conclude that the private company will not insist or rely on the debt being paid.

Debt forgiveness is not treated as a dividend where:

• it's made in favour of another company, unless the other company owed the debt in its capacity as trustee
• the debt is forgiven because the debtor becomes bankrupt or because of Part X of the Bankruptcy Act 1966
• the debt or part of a debt results from a loan that has been treated as a Division 7A dividend in the current or previous income years
• the Commissioner exercises discretion not to treat the debt forgiveness as a dividend.

Debt forgiveness – employees

While payments to shareholders and their associates in their capacity as employees or associates of employees of the private company are generally not treated as Division 7A dividends, debts forgiven to such parties may be treated as Division 7A dividends.

FBT doesn't arise where debt forgiveness is treated as a Division 7A dividend.

See also:

• Division 7A - Debt forgiveness by private companies

Next:

• Payments and other benefits not affected

Payments or benefits treated as dividends under Division 7A can be assessable income of the shareholder or their associate in the form of unfranked dividends.

Division 7A dividends are generally not frankable even though they are taken to have been paid out of the company's profits. This means that the company can't attach a franking credit to the dividend, and the payment has no impact on the company's franking account.

However:

• a dividend that is taken to have been paid because of a family law obligation is frankable
• if the Division 7A dividend arises because of an honest mistake or inadvertent omission, you can apply to allow it to be franked (see ATO relief).

If the dividend is franked, a dividend statement indicating the value of the dividend and the amount of franking credit must be provided by the private company. A payment or benefit treated as a Division 7A dividend is taken to have been paid as a dividend at the end of the income year in which it was provided.

Calculating the value of a transfer or use of an asset

The amount of such a payment is the amount that would have been paid for the transfer or provision of the asset by parties dealing at arm's length, less any amount actually paid. For information on how to calculate an arm's length value see Market valuation for tax purposes.

Division 7A dividends limited to company's distributable surplus

The total of all dividends a private company is taken to pay under Division 7A during an income year is limited to its distributable surplus for that year.

Note that a company's profit or retained earnings and its distributable surplus will not necessarily be the same.

For information on how to work out the distributable surplus see Division 7A - distributable surplus.

Later dividends

A later dividend arises where a private company distributes a dividend to the shareholder that it doesn't actually pay but is applied to repay some or all of a loan that has been treated as a Division 7A dividend in a previous income year.

• If unfranked, the amount of the later dividend set-off is not included in the shareholder's assessable income.
• If franked or partly franked, the later dividend is included in the shareholder's assessable income to the extent that it is franked.

For example, a private company makes a loan of $100 to a shareholder in the 2006–07 income year that is taken under Division 7A to be a dividend paid on 30 June 2007. In the 2007–08 income year, the company distributes to the shareholder an unfranked dividend of $100 (the later dividend) that it sets off against the shareholder's $100 loan. The effect of the set off is that no amount of the later dividend is taken to be a dividend. Accordingly, the later dividend is not included in the shareholder's assessable income in the 2007–08 income year.

The following payments and other benefits are not treated as Division 7A dividends:

• loans and other payments repaid before company's lodgment day for the year in which the payment or loan occurred
• amounts that are treated as assessable income or excluded from being assessable income under another provision of the income tax law
• payments that discharge an obligation of the private company to pay money that are consistent with the two parties dealing at arm’s length
• complying loans for the purpose of Division 7A
• payments that are converted to complying loans for the purpose of Division 7A before the private company's lodgment day
• loans made by the private company in the ordinary course of its business on the usual terms it makes similar loans to parties at arm's length
• payments (but not loans or debts forgiven) to shareholders or their associates in their capacity as an employee – Fringe benefits tax (FBT) may apply instead of Division 7A (see Division 7A and fringe benefits tax)
• loans solely for the purpose of enabling the shareholder or their associate to acquire certain shares or rights in the company under an employee share scheme
• payments or loans to shareholders or their associates that are companies except where the company shareholder or associate is trustee of a trust
• certain retirement exemption payments
• a distribution by a liquidator in the course of winding-up a company
• minor use of a company asset – where the value of the use is under $300
• otherwise deductible usage – that is, had the shareholder or their associate paid for the use of the asset they could have claimed the cost as an income tax deduction
• the use of certain residences.

Next

• Tax treatment of Division 7A dividends

Division 7A may also apply where:

• a private company pays or loans an amount to an interposed entity on the understanding that the interposed entity or another interposed entity will pay or loan an amount to a shareholder or their associate
• a trust makes certain payments or loans to an interposed entity on the understanding that the interposed entity or another interposed entity will pay or loan an amount to a shareholder or their associate of a private company with an unpaid present entitlement (UPE) to the profit of the trust. Where another trust is interposed between the private company and the trust from which the payment or loan is made, the company can be taken have a UPE from the net income of the trust making the payment or loan if certain conditions are satisfied.

See also:

• Division 7A - payments and loans through interposed entities
• Division 7A - payments and loans through interposed entities involving guarantees
• Division 7A - trust amounts treated as dividends - payments and loans through interposed entities

Next:

• Writing off (forgiving) a debt

Division 7A applies to certain benefits provided to shareholders or their associates from trusts where a private company has an unpaid present entitlement (UPE) to the profits of the trust.

For example, private business structures can involve a business being operated by a trust associated with a private company and its shareholders. As a trust beneficiary, the company is presently entitled to the profits made by the trust. However, the profit is not actually paid to the company (thereby constituting a UPE), but used for the benefit of a shareholder or associate. In this situation, the benefit may be treated as a Division 7A dividend paid to the shareholder or associate.

For this purpose, the trust is treated as a notional company and the benefit as a Division 7A dividend paid to the shareholder or their associate.

See also:  

• Division 7A - unpaid present entitlement

Next:

• Transactions through interposed entities

Explains the tax and other implications if your transactions are subject to Division 7A.

Fringe benefits tax (FBT)

Division 7A does not apply to payments made to shareholders or their associates in their capacity as an employee or as an associate of an employee of a private company. However, such payments may be subject to FBT.

Division 7A does apply to loans and debt forgiveness provided to shareholders or their associates even where such benefits are provided in their capacity as an employee or as an associate of an employee. To avoid double taxation, such benefits are not subject to FBT.

See also:

• Fringe benefits tax
• Division 7A and fringe benefits tax

Dividend imputation and franking credits

Payments and other benefits taken to be Division 7A dividends are generally unfrankable distributions unless they are provided under a family law obligation.

The Commissioner has a general discretion to allow a Division 7A dividend to be frankable if it arises because of an honest mistake or inadvertent omission (see ATO relief).

See also:

• Division 7A - franking implications

Withholding tax

Payments and other benefits treated as Division 7A dividends are generally not subject to dividend withholding tax or PAYG withholding.

Family law settlements

Payments and other benefits provided by a private company to shareholders or their associates as a result of divorce or other relationship breakdowns may be treated as Division 7A dividends and are assessable income of the recipient. However, such payments or other benefits are treated as frankable dividends if provided under a family law obligation, such as a court order under the Family Law Act 1975, a maintenance agreement approved by a court under that Act or court orders relating to a de facto marriage breakdown.

See also:

• Division 7A - marriage or relationship breakdown - dividends and deemed dividends
• Taxation Ruling 2014/5 - Income tax: matrimonial property proceedings and payments of money or transfers of property by a private company to a shareholder (or their associate)

Our video series will help you better understand your clients’ Division 7A obligations and get things right when working with Division 7A.

Video – Managing common mistakes

Video – What is a payment?

Video – Ensure loans comply with Division 7A

Video – The commissioner's discretion

Distributing retained profits

The operation of Division 7A as an integrity measure means that the most effective way to distribute retained profits to shareholders may be to pay the amount in the form of a dividend (with a franking credit if available) and for the shareholder to report it as such (as assessable income with or without a franking credit).

Apart from anything else, a Division 7A dividend generally isn't frankable even though it's taken to be paid out of the company's profits. This means that the whole amount of the dividend is taxed in the hands of the shareholder, without any accompanying tax credit (as would apply with a franked dividend).

Avoiding issues in the first place

Division 7A dividends may inadvertently arise as a consequence of a failure to keep private expenses separate from company expenses.

To avoid this:

• don't pay private expenses from a company account
• keep proper records for your company that record and explain all transactions, including payments to and receipts from associated trusts and shareholders and their associates
• if you lend money to shareholders or their associates make sure it's on the basis of a written agreement with terms that ensure it's treated as a complying loan – so the loan amount isn't treated as a Division 7A dividend.

Repay or convert dividend amount by lodgment day

A payment or other benefit that's potentially subject to Division 7A isn't treated as a Division 7A dividend if it's repaid or converted to a complying loan by the company's lodgment day for the income year in which the payment occurs. A company's lodgment day is the actual day on which the company lodges its income tax return or the due date for lodgment, whichever is earlier.

This means that you can take corrective action after the income year is ended but before you need to finalise your tax affairs and lodge your return. Note, however, that the underlying transaction must occur by the lodgment day.

ATO relief

The law allows the Commissioner to disregard a deemed dividend outcome or allow the dividend to be franked in certain circumstances.

This means that if you've made a mistake or circumstances have changed beyond your control, you can apply to us for relief from the consequences of having Division 7A apply to a payment or loan.

See also:

• Division 7A - exercise of Commissioner's discretion under section 109RB

If you need help with Division 7A and how it affects you:

• speak to your tax adviser
• phone 13 28 66
• phone 13 72 86 (tax practitioners only)
• write to us at
  PO Box 3000 
  Penrith NSW 2740.

If you do not speak English well and want to talk to a tax officer, phone the Translating and Interpreting Service on 13 14 50 for help with your call.

If you have a hearing or speech impairment and have access to appropriate TTY or modem equipment, phone 13 36 77. If you do not have access to TTY or modem equipment, phone the Speech to Speech Relay Service on 1300 555 727.

When corporate tax entities distribute, to their members, profits on which income tax has already been paid – such as when a company pays a dividend to its shareholders – they have the option of passing on, or 'imputing', credits for the tax.

This is called ‘franking’ the distribution. The franking credits are attached to the distribution and can be used by the recipients as tax offsets.

The imputation system also applies to a non-share dividend paid to a non-share equity interest holder in the same way as it applies to a membership interest.

Although the recipients are taxed on the full amount of the profit represented by the distribution and the attached franking credits, they are allowed a credit for the tax already paid by the corporate tax entity.

This prevents double taxation – that is, the taxation of profits when earned by a corporate tax entity, and again when a recipient receives a distribution.

See also:

• Debt and equity tests
• Guide to the debt and equity tests (for information on non-share equity interests)

Franked distributions can be made by companies and other corporate tax entities that are Australian residents for tax purposes.

New Zealand companies can also choose to enter the Australian imputation system and pay dividends with Australian franking credits attached. Special rules apply to ensure the imputation rules operate appropriately (see Trans-Tasman imputation special rules).

The most common frankable distribution is a dividend paid to company shareholders.

The corporate tax entity uses a franking account to keep track of the amount of tax paid that it can pass on to its members as a franking credit attached to a distribution.

Find out about:

• Franking account
• Franking distributions
• Allocating franking credits
• Franking account tax return
• Issuing distribution statements

A franking account records the amount of tax paid that a franking entity can pass on to its members as a franking credit.

Each entity that is, or has ever been, a corporate tax entity has a franking account.

Special rules apply to consolidated group and multiple entry consolidated (MEC) group members (see Special rules for consolidated groups and MECs).

Franking entity

An entity is a 'franking entity' if it is a corporate tax entity.

A corporate tax entity includes a company, corporate limited partnership or public trading trust, but does not include a mutual life insurance company or a company acting in its capacity as trustee of a trust.

Franking credits and debits

A franking credit is most commonly recorded in the account if the entity receives a franked distribution, pays income tax or a PAYG instalment, or incurs a liability for franking deficit tax (FDT). The credit is equal to the amount of tax or PAYG instalment paid, the franking credit attached to the distribution received, or the FDT liability incurred.

Where an income tax liability is only partially paid, franking credits will not arise for the amount that remains outstanding. Partial payments made towards outstanding activity statement liabilities will be allocated in accordance with our policy. Franking credits will only arise to the extent that a partial payment is allocated towards a PAYG Instalment liability.

A franking debit is most commonly recorded in the account if the entity pays a franked distribution to its members or receives a refund of income tax. The debit is equal to the franking credit attached to the distribution or the amount of tax refunded.

The franking account is a rolling balance account, which means that the balance of the account rolls over from one income year to another. At any time the franking account can be either in surplus or deficit.

The account is in surplus at a particular time if the sum of franking credits in the account exceeds the sum of franking debits. The account is in deficit at a particular time if the sum of franking debits exceeds the sum of franking credits.

Next step:

• Franking deficit tax

See also:

• Special rules for consolidated groups and MECs
• When does a franking debit arise? ITAA 1997
• When does a franking credit arise? ITAA 1997

The imputation system has some flexibility to allow entities to anticipate franking credits. However, the basic principle remains that an entity must not give its members credit for more tax than has actually been paid.

This is given effect through the franking deficit tax (FDT) rules, which require an entity to reconcile its franking account at certain times. An entity will have to pay FDT when the account is in deficit.

An FDT liability will arise if an entity's franking account is either:

• in deficit at the end of the entity's income year (or at 30 June for certain late balancing corporate tax entities)
• in deficit when the entity ceases to be a franking entity.

If an entity is liable for FDT, it must lodge a franking account tax return and pay the FDT by the last day of the month immediately following the end of the entity’s income year.

Payment of FDT can generally be offset against future income tax liabilities.

Find out about

• Refunds received within three months of the end of the income year
• Franking deficit tax offset
• Franking deficit tax and COVID-19

See also

• Franking account tax return and instructions 2016

Refunds received within three months of the end of the income year

If a refund of income tax for an income year is received within three months of the end of that income year, the refund is treated as though it had been received just before the end of the income year for the purpose of calculating FDT.

This rule ensures an entity does not avoid FDT by deferring the time a franking debit would arise in its account by overpaying tax in anticipation of the refund.

In these circumstances, a franking account tax return or an amended franking account tax return must be lodged, and any FDT liability paid, within 14 days of the refund being received for that income year.

See also

• Franking deficit tax liability for late balancing corporate tax entities

Franking deficit tax offset

Payment of FDT may be offset against future income tax liabilities in certain circumstances.

A franking entity is entitled to a tax offset for an income year if it satisfies the residency requirements and at least one of the following applies:

• the entity has incurred a liability to pay FDT in that year
• the entity has carried forward an amount of excess FDT offset that was unable to be applied against an income tax liability in a previous income year
• the entity incurred a liability to pay FDT in a previous income year when it did not meet the residency requirement and was therefore not entitled to an FDT offset for that income year.

An entity satisfies the residency requirement if it is an Australian resident for more than half an income year. If the entity has existed for less than six months, it will pass the residency requirement if it was a resident at all times during the year in which it existed.

The full amount of FDT liability can be claimed as a tax offset except where the FDT offset reduction rule applies. The FDT offset is generally reduced by 30% where the FDT liability for certain debits arising in the franking account is greater than 10% of the total franking credits in that year. There are also exclusions to the FDT offset reduction rule.

The FDT offset is not refundable, but any excess is taken into account when calculating the amount of the tax offset in future income years.

There are special rules to calculate the amount of tax offset for late balancers who choose to have their FDT liability determined at 30 June.

There are also special rules for the treatment of excess franking deficit tax offsets when an entity becomes a member of a consolidated group (or MEC group).

Franking deficit tax and COVID-19

The FDT liability is generally due by 31 July 2020. If you were unable to pay by that date, you can request a payment deferral. We will consider a deferral of the payment up to 30 September 2020.

If the deficit in your franking account in the 2019–20 income year was due to unexpected downturn in your business directly related to COVID-19, and the deficit relates to franked dividends paid before 1 March 2020, we will allow you to manage your tax affairs as if the Commissioner's administrative discretion to not reduce the available tax offset has been granted. In these circumstances, the full tax offset will be available.

You can do this by:

• printing C in the code box in the franking account tax return, and
• providing an attachment with the following information
  • entity name and tax file number (TFN)
  • income year in which the FDT liability arose and the amount of the franking deficit
  • a statement that the deficit arose due to COVID-19 and the entity has taken advantage of the Commissioner’s administrative concession.
   

If your situation is different, contact us to discuss your circumstances.

See also

• Franking deficit tax offset calculations, reduction rule and exclusions
• Franking deficit tax liability for late balancing corporate tax entities
• Special rules for consolidated groups and MECs

About franking a distribution

To frank a distribution, the distribution must be frankable and the entity making the distribution must be a franking entity. A franking entity is a company or other eligible corporate entity that is an Australian resident, or a New Zealand company (NZ franking company) that chooses to enter the Australian imputation system (Trans-Tasman Imputation special rules).

Special rules apply to consolidated group and multiple entry consolidated (MEC) group members.

A corporate entity that is a co-operative may choose how it distributes income to its shareholders (see Co-operative company franked and unfranked distributions).

Frankable distributions

Generally, only distributions from profits can be franked. For imputation purposes, a distribution includes:

• a dividend, or something taken to be a dividend, made by a company
• a distribution made by a corporate limited partnership, other than a distribution from profits or gains arising during an income year in which the partnership was not a corporate limited partnership
• something taken to be a dividend, made by a corporate limited partnership
• a unit trust dividend made by a public trading trust.

A distribution is frankable unless the law specifies that it is unfrankable.

Unfrankable distributions

Unfrankable distributions include:

• distributions made in respect of shares treated as debt interest under the debt test (non-equity shares)
• distributions made in relation to an instrument characterised as an equity interest under the equity test (non-share equity) where the distribution exceeds available frankable profits – see Debt and equity tests
• distributions made by approved deposit institutions in respect of certain capital instruments issued overseas that are characterised as non-share equity under the equity test
• distributions that are treated as demerger dividends for taxation purposes
• distributions sourced from a company's share capital account
• excessive payments by private companies to shareholders, directors and associates that are deemed to be dividends
• payments or loans made by private companies to their members (or their associates) deemed as dividends under Division 7A (except in some circumstances – see Private company benefits – Division 7A dividends)
• distributions to controlled foreign companies that are deemed to be dividends under section 47A of the Income Tax Assessment Act 1936
• distributions relating to off-market buy-backs of shares where the amount paid for the buy-back exceeds the market value of the share (ignoring the buy-back)
• payments to CGT concession stakeholders of exempt amounts (where the small business 15-year exemption is available)
• payments to CGT concession stakeholders of exempt amounts (where the small business retirement exemption is available)
• deemed dividends relating to the streaming of bonus shares to some members and minimally franked (franked to less than 10%) dividends to other members
• deemed dividends relating to capital streaming and dividend substitution arrangements
• certain distributions funded by capital raisings under arrangements that don’t significantly change the financial position of the entity, but are implemented to release franking credits that would otherwise remain unused
• certain payments made by NZ franking companies
• distributions from profits sourced in Norfolk Island before 1 July 2016 from companies resident there.

Franking entity residency

A distribution can only be franked by a:

• company or corporate limited partnership that is an Australian resident at the time of making the distribution
• public trading trust that is a resident unit trust for the income year in which the distribution is made
• New Zealand resident company that chooses to enter the Australian imputation system (Trans-Tasman imputation special rules).

A corporate tax entity allocates franking credits to shareholders by attaching the credits to the distributions they make.

The maximum franking credit that can be allocated to a frankable distribution paid by a corporate tax entity is based on its applicable corporate tax rate for imputation purposes.

Find out about:

• Corporate tax rate for imputation purposes
• Calculating the maximum franking credit
• Distributions issued using an incorrect tax rate
• The franking percentage

Corporate tax rate for imputation purposes

From the 2017–18 income year, to work out your corporate tax rate for imputation purposes you need to assume your aggregated turnover, assessable income and base rate entity passive income will be the same as the previous income year.

If you are a base rate entity, your corporate tax rate for imputation purposes is 27.5% for the 2017–18 to the 2019–20 income years. It will be 26% for the 2020–21 income year and 25% for the 2021–22 income year.

You are a base rate entity for an income year if either of the following apply:

• your aggregated turnover for the previous year was less than $25 million for the 2017–18 income year or less than $50 million from the 2018–19 income year, and 80% or less of your assessable income was base rate entity passive income
• the entity didn't exist in the previous income year.

Otherwise, your corporate tax rate for imputation purposes is 30%.

See also:

• Law Companion Ruling LCR 2019/5 Base rate entities and base rate entity passive income

Calculating the maximum franking credit

From the 2016–17 income year onwards, the maximum franking credit is calculated using the following formula:

• Amount of the frankable distribution × (1 ÷ Applicable gross-up rate).

The 'applicable gross-up rate' is the entity's corporate tax gross-up rate for the income year in which the distribution is being made.

The 'applicable gross-up rate' is calculated using the following formula:

• (100% - your corporate tax rate for imputation purposes for the income year) ÷ your corporate tax rate for imputation purposes for the income year.

Previous years

For the 2016–17 income year, your corporate tax rate for imputation purposes is 27.5% if either of the following apply:

• your 2015–16 aggregated turnover was less than $10 million, and you are carrying on a business
• this is the first year you are in business.

Otherwise, your corporate tax rate for imputation purposes is 30%.

For the 2015–16 and previous income years, the maximum franking credit that can be allocated to a frankable distribution for all companies was 30%.

See also:

• Changes to company tax rates
• Law Companion Ruling LCR 2019/5 Base rate entities and base rate entity passive income
• Imputation
• Simplified imputation: Franking deficit tax offset

Distributions issued using an incorrect tax rate

You may have issued 2016–17 or 2017–18 distribution statements using an incorrect corporate tax rate for imputation purposes if:

• based on Taxation Ruling 2019/1 Income tax: when does a company carry on a business?, you now consider you are carrying on a business and are a small business entity eligible for the lower company tax rate (2016–17 distributions)
• more than 80% of your assessable income is base rate entity passive income, making you ineligible for the lower company tax rate (2017–18 distributions).

If you have issued your 2016–17 or 2017–18 distribution statements using an incorrect corporate tax rate for imputation purposes, you should notify your shareholders of the correct dividend and franking credit amounts. You can do this by sending a letter or email to your shareholders, or a revised distribution statement. You also need to ensure the correct amounts are reflected in your franking account.

Find out about:

• Calculating the maximum franking credit for prior years
• The franking percentage

See also:

• Practical Compliance Guideline PCG 2018/8 Enterprise Tax Plan: small business company tax rate change: compliance and administrative approaches for the 2015–16, 2016–17 and 2017–18 income years
• Changes to company tax rates
• Company tax rates

The franking percentage

The extent to which an entity has allocated franking credits to a frankable distribution is referred to as the franking percentage. This is calculated by dividing the franking credit allocated to the distribution by the maximum franking credit that may be allocated to the distribution. It is expressed as a percentage of the frankable distribution, rather than the whole of the distribution. This means that in circumstances where only part of the total distribution is frankable, the franking percentage could still be 100%.

You may choose the extent to which you want to allocate franking credits to a distribution. You will need to consider the existing and expected surplus in your franking account and the rate at which earlier distributions have been franked. However, you cannot frank a distribution at a percentage greater than 100%.

Generally, the only restriction on your ability to frank a distribution is the requirement to frank all frankable distributions within the franking period to the same extent – known as the benchmark rule.

If you issue a distribution statement showing an amount of franking credit that exceeds the maximum amount allowable, then:

• your franking account is debited by the amount of the maximum franking credit allocation rather than the amount shown on the distribution statement
• the recipient of the franked distribution will only include the franked distribution and the amount of franking credit up to the maximum that could have been allocated on the distribution in their assessable income
• the recipient is only entitled to a franking credit equal to the maximum amount.

See also:

• Benchmark rule
• Franking period

For the first distribution in a franking period, the franking entity can select the franking percentage. This sets the benchmark percentage for the franking period. Any subsequent frankable distributions in the same franking period must be franked at the same percentage.

This rule ensures that, over time, the benefit of franking credits is spread more or less evenly across members in proportion to their ownership interest. Other integrity rules prevent the streaming, or disproportionate allocation, of franking credits to certain members.

Note that:

• If an entity distributes frankable distributions and chooses not to frank them, the benchmark franking percentage for the period is zero.
• If no frankable distributions are made in the period, the entity doesn't have a benchmark franking percentage for the period.
• Franking entities must disclose to us if the benchmark franking percentage varies by more than 20% between successive franking periods in which frankable distributions are made.

The benchmark rule doesn't apply to listed public companies (or subsidiaries) that must include all members in distributions and frank those distributions at the same franking percentage for all members. This exception recognises that in these circumstances dividend streaming isn't possible or is unlikely.

See also

• The franking percentage

Find out about

• Breaches of the benchmark rule
• Disclosure of significant variations between benchmark franking percentages

Breaches of the benchmark rule

A breach of the benchmark rule will not invalidate the allocation made to the distribution, but it will result in the imposition of over-franking tax or the imposition of an under-franking debit for the franking entity.

The breach applies to the franking entity only. The member receiving the distribution – whether it's over-franked or under-franked – can still claim a tax offset for the amount of the franking credit shown on the distribution statement.

The over-franking tax and under-franking debit is calculated according to the difference between the franking credits allocated and the benchmark percentage:

• If the franking percentage for the distribution exceeds the benchmark franking percentage (over-franking), the entity is required to pay over-franking tax equivalent to the excess franking credits.
• If the franking percentage for the distribution is less than the benchmark franking percentage (under-franking), the entity incurs a franking debit in its franking account equivalent to the unused franking credits, meaning those credits are wasted.

See also

• Franking deficit tax calculations, reduction rule and exclusions
• How to calculate over-franking tax and under-franking debit
• Applying to depart from the benchmark rule

Disclosure of significant variations between benchmark franking percentages

As significant variations between benchmark franking percentages may indicate the presence of streaming, franking entities must disclose to us if the benchmark percentage varies by more than 20% between successive franking periods in which frankable distributions are made.

If there has been more than one franking period since a frankable distribution was made, the threshold increases in multiples of 20% for each franking period in which there has been no distribution. For example, if a franking entity makes a frankable distribution in period 1, followed by no frankable distribution in period 2, followed by a frankable distribution in period 3, the variation threshold for notifying us is 40%.

The entity must make the disclosure by lodging a franking account return by the last day of the month following the end of the income year.

See also

• Franking account tax return

A private company has a single franking period, which is the same as its income year for other tax purposes – typically, 1 July to 30 June.

For a corporate tax entity that is not a private company, the franking period depends on the length of its income year:

• Income year less than 6 months – the franking period is the same as its income year.
• Income year more than 6 months but less than 12 months – the first franking period is the first 6 months beginning at the start of the entity's income year and the second is the remainder of the income year.
• Income year of 12 months – the first franking period is the first 6 months beginning at the start of the entity's income year and the second franking period is the remainder of the income year.
• Income year more than 12 months – the first franking period is the first 6 months beginning at the start of the entity's income year, the second is the next 6 months beginning immediately after the first franking period, and the third franking period is the remainder of the income year.

The franking period is different for an early or late balancing corporate tax entity. An early or late balancing corporate tax entity is one that has obtained the Commissioner of Taxation's permission to use an approved substituted accounting period (SAP), which is in lieu of an income year ending on 30 June.

A franking account tax return must be lodged by a franking entity that is:

• liable to pay franking deficit tax (because it has a deficit balance in its franking account at the end of the income year)
• liable to pay over-franking tax (because the franking percentage for a distribution exceeded the permitted benchmark franking percentage)
• obliged to disclose a significant variation in its benchmark franking percentages to us
• given a written notice by the Commissioner of Taxation.

The franking account tax return must generally be lodged by the last day of the month following the end of the income year – typically 31 July. This is also the date by which franking deficit tax and over-franking tax is payable.

If the entity has a substituted accounting period, the franking account tax return is due on the last day of the month following the end of its substituted income year.

However, late balancing corporate tax entities that have chosen to have their franking deficit tax liability determined on 30 June must:

• lodge a franking account tax return and pay any franking deficit tax by 31 July
• lodge any further franking account tax return required, pay any over-franking tax and notify of any significant variation in its benchmark franking percentages by the last day of the month following the end of its substituted income year.

See also:

• Franking account tax return and instructions 2021

The franking entity must issue a distribution statement to each member who receives a distribution, showing the amount of franking credit attached to the distribution and the extent to which it's franked.

There are no formal documentation requirements in relation to a franking entity’s decision to allocate a franking credit to a distribution. Provision of the distribution statement is evidence of the allocation.

Find out about:

• Required information
• When to provide a distribution statement
• Amending a distribution statement – including if you issued 2016–17 distributions using an old rate

Required information

The distribution statement, which the recipient uses to complete their tax return, must contain the following information:

• name of the entity making the distribution
• date on which the distribution was made
• amount of the distribution
• amount of franking credit allocated to the distribution, rounded to the nearest cent
• franking percentage for the distribution, worked out to two decimal places, rounded up if the third decimal place is five or more
• amount of any withholding tax deducted from the distribution
• name of the shareholder
• if the distribution is unfranked – a statement to that effect
• if the distribution is franked – the franked and unfranked parts of the distribution, rounded to the nearest cent
• if any or all of the unfranked amount of the distribution has been declared to be conduit foreign income – the portion declared to be conduit foreign income.

This gives the recipient enough information to meet their tax obligations for the distribution.

The amount of the franking credit is that stated in the distribution statement, unless the amount stated exceeds the maximum franking credit. In that case, the amount of the franking credit is limited to the maximum franking credit for the distribution.

If a franking entity can't provide any part of the required information on the distribution statement it can apply to us for the requirements to be varied. This might occur for example, in circumstances where the entity can't state the franking percentage (for example, due to delays in the redesign of dividend stationery and related software applications).

See also:

• Allocating franking credits
• Conduit foreign income

Additional distribution statement requirements

Different requirements apply to New Zealand companies (NZ franking company) that choose to enter the Australian imputation system.

Eligible shareholders of a listed investment company (LIC) may be entitled to a deduction for an LIC capital gain. This is only if all or some part of the dividend paid by an LIC is reasonably attributable to an LIC capital gain made by an LIC.

An LIC is required to provide the following additional information on its distribution statements:

• the share of the attributable part of the dividend
• the members who are entitled to a deduction for the attributable part of the dividend
• the amount of deduction that these members may claim.

See also:

• Trans-Tasman imputation special rules
• Income Tax Assessment Act 1997: section 115-290 – Meaning of listed investment company
• TR 2005/23 Income tax: listed investment companies

When to provide a distribution statement

Entities that are not private companies must issue a distribution statement on or before the day on which the distribution is made.

Private companies must issue a distribution statement within four months of the end of the income year in which the distribution is made.

This extended period of time for private companies means that they can decide what franking credit to allocate after the distribution is paid. However, the extension doesn't apply if the franking credits allocated to the distribution would create or increase a company’s liability to franking deficit tax.

Amending a distribution statement

In certain circumstances an entity can apply to us to vary the franking credit allocated on a distribution by amending the distribution statement. We will generally only approve a variation if the amount of franking credit on the distribution statement was not intended.

We consider:

• the number of recipients that will receive an amended distribution statement
• whether the last day has passed for lodging the recipients’ tax return for the income year in which the distribution was made
• whether the recipients’ withholding tax liability would change as a result of changing the franking credit on the distribution
• whether amending the distribution statement would result in the entity breaching the benchmark or anti-streaming rules
• whether amending the distribution statement would set a new benchmark for the franking period in which the distribution was made
• any other relevant factors.

Distributions issued using incorrect tax rate

If you have issued 2016–17 or 2017–18 distributions using the incorrect corporate tax rate for imputation purposes, you need to notify your members of the correct dividend and franking credit amounts. You can do this by sending a letter or email to your members, or a revised distribution statement.

You also need to ensure the correct amounts are reflected in your franking account and in the information that you provide to us as part of the annual distribution reporting process.

See also:

• Work out if you're a small business for the income year
• Changes to company tax rates
• Allocating franking credits
• PCG 2018/D5 Enterprise Tax Plan: small business company tax rate change: compliance and administrative approaches for the 2015–16, 2016–17 and 2017–18 income years

Corporate entities can pay distributions to their members, who include:

• shareholders in a company
• unit holders in a public trading trust
• partners of a corporate limited partnership.

Members may be individuals or other entities.

The franking entity must issue a distribution statement to each member who receives a distribution, showing the amount of franking credit attached to the distribution and the extent to which it's franked.

Only Australian resident taxpayers can claim a tax offset for a franking credit attached to a distribution. For non-residents, a distribution is exempt from withholding tax to the extent that it's franked.

Grossing up a distribution

Where a member such as an individual or company receives a franked distribution directly, they include the grossed up distribution (that is, both the distribution and any franking credit) in their assessable income. They are then entitled to a tax offset equal to the franking credit. This is called the ‘gross-up and credit’ approach. It applies to most members who receive franked distributions directly, including:

• individuals
• corporate tax entities
• eligible superannuation funds, approved deposit funds and pooled superannuation trusts.

A franked distribution made to partnerships and trusts is generally treated as flowing indirectly to the partners or beneficiaries respectively. The taxable amount is the distribution grossed up by the amount of the franking credit, but only the ultimate recipients of the distribution, who are assessed on the share of the net income that flows indirectly to them, are entitled to the tax offset.

If the franked distribution is exempt income, the recipient is generally not entitled to a tax offset – in which case the distribution is not grossed-up. However a tax offset is allowed for:

• complying superannuation funds, approved deposit funds and pooled superannuation trusts (eligible superannuation entities), and life insurance companies, which are entitled to a tax offset for certain exempt income, such as income derived by a complying superannuation fund from segregated pension assets
• income tax exempt charities and deductible gift recipients.

See also:

• Receiving a distribution through a partnership or trust

Utilising franking credit tax offsets

A tax offset can be used to reduce the tax liability from all forms of income (not just dividends) and from any taxable capital gain. Excess franking credit tax offsets may be refundable for some members where their marginal tax rate is less than the corporate tax rate.

Excess franking credits are not refundable for a corporate tax entity, such as a company. The tax offset can reduce the corporate tax entity’s tax liability to nil, but is not refunded if it exceeds the tax liability. However, it can convert any excess franking tax offsets to a tax loss which can be carried forward to future years. A corporate tax entity must also be mindful of the limitations placed on the utilisation of its prior year losses where it has franking tax offsets (see Utilising franking credit tax offsets and effect on losses – corporate tax entities')

An individual’s marginal rate of tax varies according to their taxable income so the tax payable on a grossed-up distribution may exceed the franking credit attached to a distribution. In this case they will have an additional tax liability on the distribution which is sometimes referred to as 'top up' tax.

However, a corporate tax entity receiving a distribution doesn't pay additional tax because the corporate tax rate (30%) results in the same taxable amount as the credit attached to a fully franked distribution. The income has already been fully taxed at the level of the corporate tax entity making the distribution.

A corporate tax entity that receives a distribution also receives a credit to its franking account. This credit can be passed on (imputed) to its members through a distribution.

See also:

• Utilising franking tax offsets and the effect on losses – corporate entities
• Refunding excess franking credits

Special rules

Special rules may apply where a recipient is a member of a consolidated group or a multiple entry consolidated (MEC) group.

A resident company that is wholly owned by a non-resident company that receives an unfranked non-portfolio dividend from other resident companies may be entitled to a deduction. This is subject to certain conditions. The deduction is equal to the amount of any unfranked non-portfolio dividend that it pays on to its non-resident parent.

See also:

• Special rules for consolidated groups and MECs
• Deductions for non-portfolio dividends to a resident company

Conduit foreign income

If you're an Australian corporate tax entity who receives (directly or indirectly) foreign sourced income, you may declare some or all of a frankable (whether actually franked or not) distribution to be conduit foreign income. This is to the extent it is conduit foreign income in accordance with Subdivision 802-A of the Income Tax Assessment Act 1997.

If you make the distribution to:

• a non-resident member – the portion declared to be conduit foreign income is exempt from withholding tax
• another Australian corporate tax entity – that corporate tax entity may pass on that conduit foreign income to its members. The distribution statement must specify the portion of the unfranked part of the distribution that is declared to be conduit foreign income.

If an individual resident member receives a distribution declared to be conduit foreign income, that distribution is treated like any other unfranked distribution.

Note: if an amount is eligible to be both an unfranked non-portfolio dividend for which a deduction is allowed, and also to be treated as conduit foreign income, you must make a choice for one to apply. (See Deductions for non-portfolio dividends to a resident company).

See also:

• Subdivision 802-A of the Income Tax Assessment Act 1997
• Taxation of trust net income – non-resident beneficiaries

Generally, Australian-resident members of a corporate entity, such as Individuals and superannuation funds are eligible for a refund if the franking credits allocated to distributions they receive exceed their tax liability. Charities and deductible gift recipients that are exempt from income tax are also entitled to a refund of franking credits attached to their distributions.

Categories of Australian resident members that are eligible for refunds include:

• individuals who receive franked dividends, either directly or through a trust or partnership
• endorsed income tax-exempt charities and deductible gift recipients
• complying superannuation funds, approved deposit funds (ADFs) and pooled superannuation trusts (PSTs)
• life insurance companies and registered organisations (in respect of their superannuation business)
• trustees liable to be assessed, in limited circumstances, under section 99 of the Income Tax Assessment Act 1936.

For corporate entities such as companies, the franking credit is not refundable. A tax offset can reduce the entity’s tax liability to nil, but is not refunded if it exceeds the tax liability. However, the entity may convert any excess franking credit tax offsets to a tax loss which may be carried forward to future years.

See also  

• Utilising franking tax offsets and effect on losses – corporate tax entities

Claiming a refund

Individuals who have tax offset entitlement for franking credits that exceed their tax payable and who satisfy the anti-avoidance rules are eligible for a refund of the balance of the excess.

Individuals who are required to lodge a tax return will have their refund entitlement determined as part of the income tax return process. They do not have to lodge a separate claim form.

Individuals that are not required to lodge a tax return can lodge an application for a refund of franking credits online, over the phone, or by mail.

Note: Individuals are entitled to a franking tax offset only for those shares that satisfy the relevant anti-avoidance rules. If they cannot claim a refund, they do not include those franking credits in their assessable income (see eligibility details in refunding franking credits – individuals).

Charities and deductible gift recipients apply for the refund by lodging an Application for refund of franking credits – Endorsed income tax exempt entities and deductible gift recipients form.

Complying superannuation funds, ADFs and PSTs apply for the refund by lodging the Fund income tax and regulatory return. The trustee must retain the supporting documents.

Life insurance companies claim the refund as part of the income tax assessment process when completing the Other refundable credits section of the Company tax return.

If an Australian resident member has received a dividend that has Australian franking credits attached from a New Zealand franking company, they may be eligible to claim the Australian sourced franking credits.

See also  

• Refunding excess franking credits – individuals
• Franking credit refunds – not-for-profit entities
• Imputation tax offset and franking credit refunds – trustees
• Trans-Tasman imputation special rules
• Utilising franking tax offsets and effect on losses – corporate tax entities

Franked distributions to partnerships and trusts are generally treated as flowing indirectly to the partners and beneficiaries respectively.

The taxable amount is the distribution grossed up by the amount of the franking credit. Only the ultimate recipients of the distribution, who are assessed on the share of the net income that flows indirectly to them, are entitled to the tax offset.

The recipients include in their assessable income their share of the franking credit attached to the distribution. They are then entitled to a tax offset equal to that share of the franking credit. This is provided they are not themselves a partnership or trust through which the distribution flows indirectly.

Where the trustee, rather than a beneficiary, is taxed on a distribution or share of a distribution, the trustee is entitled to the tax offset.

Find out about:

• Partnerships
• Trusts

Partnerships

When calculating its net income or loss for tax purposes, a partnership that receives a franked distribution includes both the amount of the dividend and the franking credit in its assessable income.

This is subject to the partnership satisfying certain integrity rules (such as the qualified person test and other relevant rules).

Individual partners then include in their individual returns:

• their portion of the partnership income or loss
• their portion of the franking credit.

They are entitled to a tax offset equal to their portion of the franking credit if all other eligibility tests are met.

Partnership loss

If the partnership has a loss, and the grossed-up dividend is included in the loss calculation, a partner is still entitled to a tax offset representing their share of the franking credit.

Trusts

A trustee receiving a franked dividend includes both the amount of the dividend and the franking credit in the trust's assessable income when calculating the trust's taxable income or loss. This is subject to the trust satisfying the integrity rules. In particular the franking credit trading rules about the qualified persons test (holding period rule and related payments rule) and other relevant rules).

The beneficiaries who are presently entitled include in their tax returns:

• their portion of the trust income (as determined under section 95 of the Income Tax Assessment Act 1936)
• their portion of the franking credit.

They are entitled to a tax offset equal to their portion of the franking credit if all other eligibility tests are met. Special rules are also available that allow trustees to create specific entitlements to franked distributions.

Note: If a trust has no net income or makes a loss, the benefit of the franking credit is lost. That is, there is no tax offset.

See also:

• Trust income
• Streaming trust capital gains and franked distributions

Where there is no present entitlement or other trustee liability

A trustee is liable to be assessed on a share of the trust's net income in certain circumstances. For example, where there is no beneficiary presently entitled (section 99 or 99A of the ITAA 1936) or a beneficiary is under a legal disability (section 98 of the ITAA 1936).

The trustee is entitled to a tax offset for any franking credit included in the share of net income on which they are assessed. However, they are not entitled to a refund for any excess franking credits except in limited circumstances when the income is assessed under section 99 of the Income Tax Assessment Act 1936.

See also:

• Imputation tax offset and franking credit refunds – trustees

Integrity rules ensure that the imputation system is not used to benefit members who don't have a sufficient economic interest in the entity, or to prefer some members over others.

Where the imputation system has been manipulated a tax offset will be denied.

The assessable income of an entity that receives the distribution directly will not be grossed-up. An entity that receives the distribution indirectly will be allowed a deduction (or reduction) to ensure its assessable income does not include its share of the franking credit.

There is also a general disclosure rule that requires franking entities to notify us if the entity’s benchmark franking percentage varies significantly between franking periods. This helps us identify cases where anti-streaming rules might apply.

Individuals that are Australian resident members must meet the anti-avoidance rules to receive a refund. An individual who does not make a related payment may also have consideration to the small shareholder exemption which is subject to a $5,000 threshold (see eligibility details in Refunding excess franking credits – individuals).

The integrity rules are addressed by:

• Dividend streaming (anti-streaming rules)
• Franking credit trading
• Share capital account tainting
• Franked distributions funded by capital raisings

Any strategy that aims to avoid wastage of imputation benefits, by directing franked distributions to members who can most benefit from them to the exclusion of other members, may amount to dividend streaming.

This might happen where, for example, some members are non-residents or tax exempt bodies that can't fully use franking credits, and the franking entity seeks to divert franking credits from these members to others who can fully use the credits.

As well as the benchmark rule, there are also specific anti-streaming rules relating to:

• linked distributions, where a member of one entity can choose to receive a distribution from another entity that is franked to a greater or lesser extent than distributions to other members of the first entity
• substitution of tax-exempt bonus shares, where members of an entity can choose to receive tax-exempt bonus shares instead of a distribution from the entity
• distribution streaming, where a corporate tax entity streams distributions to give those members who benefit most from franking credits a greater imputation benefit than those who benefit less.

There is also an anti-avoidance rule (section 177EA of the Income Tax Assessment Act 1936) that applies in certain situations to prevent streaming.

See also:

• Benchmark rule
• Section 177EA of the Income Tax Assessment Act 1936
• Trust income

Franking credit trading occurs when franking credits are diverted from the true economic owners of the membership interests to others who can most benefit from the use for the credits.

Franking credit trading is addressed by:

• exempting entity rules
• qualified person test
• dividend washing rule
• anti-avoidance provisions in sections 177EA and 177EB of the Income Tax Assessment Act 1936 (ITAA).

Exempting entity rules

An exempting entity is a corporate tax entity that is 95% or more effectively owned by prescribed persons (which includes foreign residents and tax exempt entities that cannot fully use franking credits). When an entity ceases to be an exempting entity and it is not again an exempting entity, it becomes a former exempting entity.

To ensure that franking credits accumulated by an exempting entity are not the target of franking credit trading the rules in Division 208 of the ITAA 1997:

• limit the circumstances in which a distribution, franked with credits from an exempting company's franking account, can give rise to benefits under the imputation system
• quarantine credits of an exempting company that becomes a former exempting entity by moving them into a separate account called an exempting account, and requiring the entity to start a new franking account
  • deny a recipient of a distribution franked with an exempting credit from any benefit under the imputation system as a result of that distribution, unless the recipient was a member of the entity immediately before it became a former exempting entity.

See also:

• Imputation rules for exempting and former exempting entities

Qualified person test

To be entitled to a franking credit tax offset, a taxpayer is required to be a 'qualified person' in relation to a franked dividend. The qualified person test ensures only the true economic owners of shares benefit from franking credits attached to distributions made from the shares.

A shareholder generally meets the qualified person test if they satisfy either the:

• holding period rule
• where applicable, the related payments rule.

An individual shareholder can also be a qualified person if the small shareholder exemption applies – that is, if they have a total of less than $5,000 franking credits in an income year (whether their shares are a single parcel or a portfolio made up of several parcels). In this case they are entitled to franking credits for all shares that satisfy the related payments rule, without having to satisfy the holding period rule.

See also

• see eligibility details in Refunding franking credits – individuals
• tax return instructions in You and your shares 2019

Holding period rule

The holding period rule requires shares to be held ‘at risk’ for a continuous period of at least 45 days (90 days for preference shares) during the qualification period.

The 45-day and 90-day periods don't include the day of acquisition or, if the shares have been disposed of, the day of disposal. Also excluded are days where the financial risk of owning the shares is materially diminished. For example, the financial risk may be reduced through arrangements such as hedges, options and futures.

The primary qualification period begins the day after the shares are acquired, and ends 45 days after the ex-dividend date.

Because of the way the qualification period is defined, the holding period rule only needs to be satisfied once per parcel of shares – that is, if a shareholder is a qualified person for a distribution from shares under that rule, they will also qualify for subsequent distributions from those same shares, unless the related payments rule applies.

If a shareholder purchases substantially identical shares over a period, the holding period rule applies a ‘last in first out’ method to establish which shares satisfy the holding period rule.

Testamentary trust individual beneficiaries who have a vested interest in the dividend income of the trust, but do not have current beneficial ownership of the underlying shares (such as life tenants) will have franking credits and associated tax offsets denied by the holding period rule.

Alternative test for certain institutions

For certain institutional taxpayers (such as superannuation funds and listed widely held trusts) there is an alternative test. Instead of applying the holding period rule, eligible taxpayers can elect to have a franking rebate ceiling apply. Under this test, the maximum franking rebate a fund is entitled to in an income year cannot exceed the amount (increased by 20%) of franking credits to which the taxpayer would be entitled in respect of dividends paid on a benchmark portfolio of shares with the fund's net equity exposure.

See also

• For monthly franking credit and rebate yields on a share portfolio, refer to the list of yields in Company tax & imputation: average franking credit & rebate yields

Related payments rule

This rule applies to a distribution on shares when there is an obligation to pass on the benefit or value of the distribution to someone else.

The related payments rule requires shares to be held ‘at risk’ for at least 45 days (or 90 days for preference shares) during the relevant qualification period (that is, the secondary qualification period). Like the holding period rule, the day of acquisition and, if relevant, disposal, is excluded, as are any days of diminished risk.

The relevant qualification period begins 45 days before the ex-dividend date and ends 45 days after.

The rule applies to each distribution on those shares where a related payment is made.

Dividend washing rule

The dividend washing integrity rule prevents taxpayers from obtaining franking credits if they have engaged in dividend washing.

Dividend washing is a practice through which taxpayers seek to claim two sets of franking credits. They do this by selling shares held on the Australian Securities Exchange (ASX) on an ex-dividend basis (retaining the dividend entitlement) and then effectively repurchasing the same parcel of shares on a different ASX trading market (the special market) on a different basis (cum-dividend, meaning that you also acquire the entitlement to the dividend on this parcel of shares). The timing of when this transaction occurs can lead to an entitlement to two sets of dividends on what is economically the same parcel of shares.

The operation of the integrity rule means that if you receive a dividend as a result of dividend washing, you are:

• not entitled to a tax offset for the franking credits associated with the dividend received on the equivalent parcel of shares purchased on the special ASX trading market
• not required to include the amount of the franking credits on those shares in your assessable income.

The integrity rule applies to distributions received on or after 1 July 2013. However, for distributions made before this date, the Commissioner of Taxation may apply section 177EA of the Income Tax Assessment Act 1936 to deny franking credit benefits received through dividend washing arrangements.

See also

• Dividend washing in detail

The share capital account tainting rules are designed to prevent a company from transferring profits into a share capital account and then distributing these amounts to shareholders disguised as a non-assessable capital distribution.

If a company's share capital account is tainted:

• a franking debit arises in the company's franking account at the end of the franking period in which the transfer occurs
• any distribution from the account is taxed as an unfranked dividend in the hands of the shareholder
• the account is generally not taken to be a share capital account for the purposes of the Income Tax Assessment Act 1936 and Income Tax Assessment Act 1997.

A company's share capital account remains tainted until the company chooses to untaint the account. The choice to untaint a company's share capital account can be made at any time, but once the choice is made it cannot be revoked.

See also

• Share capital account tainting rules

Most of the largest organisations operating in Australia are publicly listed Australian or multinational groups. They play a crucial role in the revenue system by paying and withholding taxes – and contributing to and managing superannuation (super) on their employees' behalf.

Engaging with you

Australia's largest businesses receive customised service from us. We tailor our interactions with publicly listed and multinational groups based on company size, complexity and behaviour. Our focus is on prevention before correction, and providing early assurance to taxpayers.

We're committed to working together to improve the client experience and shape our future tax and super systems.

See also:

• Tax risk management and governance review guide
• What attracts our attention

About the program

We engage with taxpayers outside our justified trust programs where we identify higher risk or emerging issues that may be present to:

• support these taxpayers in meeting their tax obligations
• resolve our concerns or identify areas that may need closer examination.

The expansion of the Tax Avoidance Taskforce announced in the October 2022 Federal Budget has meant a broadening of our risk focus to ensure the larger business populations are also not engaging in tax avoidance.

We operate alongside our justified trust programs to build community confidence that all public and multinational businesses are paying the right amount of income tax.

We have learned from our work across the different industries and risks over the past few years. We're well-positioned and capable to respond to existing and emerging risks and issues with effective strategies and tailored activity.

Who is covered by this program

The program focuses on:

• taxpayers who are part of an economic group controlled by a public or multinational entity with a combined Australian turnover of less than $250 million.
• high priority or emerging tax risks identified in taxpayers who are part of an economic group controlled by a public or multinational entity with a combined turnover of more than $250 million and outside our justified trust programs.

Our focus areas

The program's engagements address income tax compliance risks in public and multinational businesses, including:

• inappropriate access to tax incentives and concessions including the research and development tax incentive and concessions
• related party transactions where we observe:
  • non-arm's length pricing in cross-border financing and inbound distribution arrangements
  • mischaracterisation of payments between Australian residents and related entities in other jurisdictions
• non-payment or incorrect payment of interest, dividend and royalty withholding tax
• structuring and business events resulting in profit shifting and avoiding the taxation of capital gains including
  • payments that give rise to hybrid mismatch outcomes
  • inappropriate access to tax treaty benefits.

Keep informed of the program's upcoming focus areas by subscribing to the ATO business bulletin.

You can find out more about focus areas for public and multinational businesses at key compliance risks for large corporate groups and the focus areas of the tax avoidance taskforce at compliance programs.

How we tailor our approach to you

We're using intelligence and analytical models to improve our understanding of your business and the environment you operate in.

With our increased understanding, we tailor our approach to engagement based on:

• size and complexity of the risks we identify in your affairs
• behavioural drivers
• impact at a whole of system level.

While considering the effect tax compliance has on your business, we'll support you to meet your tax obligations by:

• encouraging voluntary compliance by informing you of the issues that attract our attention and directing you to our guidance material
• contacting you when we identify possible errors to encourage you to resolve the issue
• engaging with you directly where we need more information to assess a potential risk that we have identified
• where appropriate, conducting risk reviews to assess and treat identified tax risks.

What to expect if we contact you

We use cooperative compliance approaches to assess risks as they arise. If you're selected for an engagement, we'll write to you explaining:

• why we're contacting you
• what the next steps are
• how to contact us.

We'll work with you to resolve our concerns or issues that arise from our risk modelling and analysis of data from:

• income tax returns, schedules, and country by country reporting
• third party data sources.

Help and education

We may proactively contact you to provide further information about law changes or new guidance to assist you to meet your tax obligations.

Letters to correct errors

When we identify possible errors in your tax disclosures, we'll write to you advising you of the possible error.

We'll request you to review your tax disclosures and encourage you to make an amendment to correct errors.

Targeted letters

When we identify possible risks from the information available to us, we'll engage with you directly seeking more information to either resolve our concerns or identify areas that need closer examination.

We'll assess the information you provide and will inform you of the next steps. The next steps may include:

• working with you to progress to an amendment to your tax return – this could be through a voluntary disclosure
• actively monitoring your future tax performance – this may include issuing a notice for you to lodge a reportable tax position schedule in future years.
• escalation to a risk review or audit where a closer examination is needed.

Reviews

We may decide to commence a specific risk review, a comprehensive risk review or an audit if we identify areas of concern that need an in-depth investigation.

You can find more information on our approach at Risk review and audit processes.

How to prepare

To reduce the risk of us selecting you for an engagement:

• follow our advice and guidance available through the legal database, including our taxpayer alerts, public rulings and practical compliance guides
• have your reporting, lodgment, and payment obligations accurate and up to date. This includes
  • lodgment of your tax return and all relevant schedules
  • lodgment of your annual report if you have a withholding tax obligation due to payments of investment income and royalties to foreign residents
  • complying with the lodgment obligations if you are a country-by-country reporting entity
• keep informed of the program's upcoming focus areas by subscribing to the ATO business bulletin and proactively review your tax affairs
• have good record keeping and tax control framework.

When we engage with you as part of the program, we don't consider or review your tax governance processes. However, taxpayers who have good tax governance generally have a more streamlined and efficient review than those who don't.

Public and international groups need to make business decisions quickly, so they appreciate strong, purposeful relationships, and early engagement to focus on getting it right.

We’re working collaboratively with other agencies on whole-of-government approaches so we can identify and inform businesses of risks and issues we’re seeing earlier. We’re also providing earlier certainty on complex and contestable issues by issuing more private binding rulings.

You can  

• engage with us for advice, such as rulings and administratively binding advice
• expect us to engage early with you through pre-lodgment compliance reviews and assurance workshops.

See also  

• Mutual arrangements for certainty

If you're considering a complex transaction or applying for a private ruling, you can contact us prior to lodging your formal ruling application for an early engagement discussion.

Early engagement helps us gain a clear understanding of the issues and signal to you any concerns we may have as early as possible.

To help us provide advice in timeframes that meet your business needs it is best to:

• Talk to us early: Talk to us about transactions as early as possible to help us meet your deadlines. Early notification helps us to plan ahead so we can have the right people available once you are ready to proceed. It also gives us the opportunity to understand the commercial context you are working in.
• Have information ready (pre-ruling): Be ready to explain the transaction and the technical issues that concern you at a pre-lodgment discussion. We will help you work out what should be included in your application, including information we will need and issues you should address.
• Work within timeframes: Send us your comprehensive application and the information we need by the agreed times. We understand that tax is not your only concern when a major transaction is being developed and that it is a busy time for you.

You can expect us to:

• progress matters within the agreed timeframes
• maintain open dialogue and keep you informed of the progress of rulings, including where complex cases may take more than 28 days
• make information requests clear and unambiguous
• contact you in order to understand the facts and discuss any concerns we might have
• provide you with a central point of contact and access to the relevant decision-makers.

A full and true disclosure of the material facts will allow us to form a view. If all relevant material facts are not disclosed the ruling cannot be relied upon.

We expect you to:

• contact us as early as possible so that we can give you the best opportunity to meet your timeframes
• understand that complex cases may take more than 28 days
• maintain open dialogue on the issues and facts
• supply information within agreed timeframes
• provide us with a central point of contact.

We will tell you about any concerns we have as early as possible. If we become aware that our interpretations of the law diverge, we will inform you while we are still working through the issues. Only the final ruling can be relied upon.

We encourage you to discuss the issue at hand with us, and we will include our decision-makers in these talks.

General anti-avoidance rule

You may consider requesting a private ruling on the application of one of the general anti-avoidance rules (GAARs) to a specified scheme and any particular tax benefit in connection with that scheme. GAARs that may apply include Part IVA of the Income Tax Assessment Act 1936 and section 165 of the A New Tax System (Goods and Services Tax) Act 1999.

Private rulings on the application of a GAAR will need a thorough examination of the facts and purpose of each step in the overall scheme, which may delay the issuing of the ruling or result in a qualified ruling.

To minimise delays, you can ask us to consider the application of a GAAR about specific issues or concerns (that is, specific tax, including indirect tax, benefits) rather than asking us to consider if a GAAR will apply to the scheme in general.

The GAAR Panel helps us to administer these rules. The panel is comprised of a range of business professionals and senior ATO officers.

Administratively binding advice

Administratively binding advice is written advice that we give you in limited circumstances – usually when the law does not allow us to give you a private ruling. It may, for example, be advice about:

• the tax consequences to a company planning a takeover bid of another company (without the consent of the target company)
• a scheme proposed by a company that is not yet incorporated
• a scheme where private or public infrastructure matters are raised and there are no entities yet in existence that can request a private ruling.

See also:

• PS LA 2008/3 Provision of advice and guidance by the Tax Office

Indicative advice

As part of our ongoing relationship, or in the course of preparing a private, class or product ruling, you may ask us to indicate our likely view of the law for a situation.

We provide indicative advice only if exceptional criteria are met and you acknowledge that the advice is not binding on us and should not be relied on as representing our view of the law on the matter.

See also:

• PS LA 2008/3 Provision of advice and guidance by the Tax Office

How we engage with you

Our engagement approach for the income tax affairs of top 100 taxpayers is primarily through an annual income tax pre-lodgment compliance review (PCR). We apply the justified trust methodology in these reviews. We also apply the justified trust methodology to the GST affairs of top 100 taxpayers through the Top 100 GST assurance program.

Our aim

The aim of applying the justified trust methodology in these reviews is to build and maintain community confidence that taxpayers are paying the right amount of tax. It also allows us to focus our resources in the right areas.

Achieving justified trust means:

• we have attained a sufficient level of assurance that a taxpayer is paying and reporting the right amount of tax
• going forward we can rely on that assurance resulting in more tailored, lower intensity reviews
• if we don't attain sufficient assurance, we can focus our resources on these areas.

These reviews help us build an understanding of your business, including your tax governance. This also allows us to:

• assure the right tax and GST outcomes
• identify and manage material tax risks through early, tailored and transparent engagement.

We encourage engagement

We foster a culture of transparency and willing participation through early engagement. We encourage taxpayers to disclose material, new transactions and business changes in real time. This supports our approach of raising and resolving potential compliance concerns as they arise – that is, prevention before correction.

To understand more about our expectations in relation to pre-lodgment disclosures and how we will action these, see Top 100 Pre-lodgment disclosure framework.

Income tax pre-lodgment compliance review

Each PCR runs for approximately 2 years. This timeframe may be shorter if a top 100 taxpayer has attained overall high assurance and is in the monitoring and maintenance phase.

Timeframes

A PCR typically covers:

• the financial year (12 months)
• the standard period allowed from the conclusion of the final year to the lodgment of the return (7 months)
• a period of time after the lodgment of the return (up to 6 months) to allow for analysis and discussion of outstanding issues where necessary.

What a PCR involves

A PCR typically involves the following.

Initial discussions

A PCR typically involves initial discussions with our case officer to establish the framework in which we will do the PCR.

The PCR framework is a living document that will:

• be updated during the review as required
• include the scope of the review including items that were outlined in the
  • Future Assurance Plan in the last Tax Assurance Report (TAR)
  • Monitoring and Maintenance Assurance Report (M&M assurance report) if one was issued.

At this discussion you'll have the opportunity to meet the relevant senior executive service officer.

Other discussions

A PCR typically involves:

• additional discussions through the income year where you may make disclosures or the ATO may raise identified issues for discussion, as well as discuss any requests for information
• a pre-lodgment discussion of details to be included in the tax return, and the tax return preparation process
• post-lodgment conversations to discuss issues identified in the tax return preparation process
• provision of information requested by the ATO across the 4 focus areas of justified trust.

For more information, see:

• Top 100 justified trust program
• Top 100 program - Tailored approach to obtaining, maintaining and refreshing assurance
• Top 100 Monitoring and maintenance approach for income tax
• Top 100 Income tax refresh review.

Assurance activities and reports

A PCR typically involves:

• ATO assurance activities across the 4 focus areas of justified trust
• the issue of a TAR or M&M assurance report at the completion of the PCR including a
  • summary of assurance attained, maintained or refreshed across the 4 focus areas of justified trust
  • future assurance plan which outlines the proposed focus of future PCRs and risk reviews or audits.

We have a pre-lodgment compliance review timeline.

GST assurance review

We complete an initial top 100 GST assurance review (initial review) for each top 100 taxpayer. We continue annual reviews until overall high or medium assurance is attained.

Timeframes

Once a taxpayer has attained an overall medium or high level of assurance in a top 100 GST assurance review, we:

• review them on a periodic basis at least once every 4 years
• take a monitoring stance during the intervening 3 year period
• may do targeted assurance activities during the intervening 3 year period.

An initial or refresh top 100 GST review runs for up to 12 months, and generally starts once the financial statements for the review period are available. The review will focus on a 12 month period.

Making disclosures

We encourage taxpayers to make disclosures about material new transactions and business changes prior these occurring. GST disclosures can also be made as part of any regular discussions and interaction in ongoing income tax PCRs. The ATO may also raise identified issues for discussion.

To understand more about our expectations relating to disclosures and how we will action these, see Top 100 Pre-lodgment disclosure framework.

What a review involves

A top 100 GST assurance initial or refresh review typically involves:

• initial discussions with our case officer to establish the framework in which we will do the review
  • The GST assurance review framework is a living document that will be updated during the review as required and will include the scope of the review including items that were outlined in the Future Assurance Plan in the last TAR from the initial review or any subsequent reviews.
  • At this discussion you'll have the opportunity to meet the relevant senior executive service officer.
• additional discussions through the review, including to discuss any requests for information
• provision of information requested by the ATO across the 4 focus areas of justified trust – see
  • Top 100 GST assurance program
  • Top 100 GST Program Future GST engagement after initial GST assurance review
  • Top 100 GST refresh review
• ATO assurance activities across the 4 focus areas of justified trust
• the issue of a GST TAR at the completion of the GST assurance review including a
  • summary of assurance obtained or refreshed across the 4 focus areas of justified trust
  • future assurance plan that outlines the proposed focus of future reviews, and any ATO or client next actions.

Top 100 taxpayers and other taxes

Depending on their circumstances, top 100 taxpayers may also have regular or periodic, tailored engagement in relation to other taxes. These include:

• petroleum resource rent tax (PRRT)
• fringe benefits tax (FBT)
• excise
• excise equivalent goods (imported)
• fuel tax credits
• luxury car tax
• wine equalisation tax, and
• product stewardship for oil program.

We encourage taxpayers to adopt the same transparency and willing participation through early engagement for these taxes. This includes:

• proactively engaging with regarding potential compliance concerns as they arise
• disclosing material business changes, changes in tax positions taken, and any new or significant transactions.

If possible, in these engagements we will use the information provided as part of the income tax PCR and GST assurance review.

Timeline purpose

This timeline indicates key points in the pre-lodgment compliance review (PCR) cycle. Potential meeting points and subjects are shown, as well as information sources the taxpayer should have available at that point. Information collected at these points assists risk identification and assessment for your lodgment.

This timeline also indicates other potential sources of information that could be obtained from the ATO and other regulators.

You can also download this information in a portable document format (PDF) – Pre-lodgment compliance review timeline (PDF, 259KB).

Meeting points by quarter

Typical meeting points for each quarter:

• Quarter 1
  • Tax year begins
  • Taxpayer businesses and financial updates
  • Taxpayer disclosures
  • PCR framework including PCR intent, communication protocols and information gathering
• Quarter 2
  • Taxpayer businesses and financial updates
  • Taxpayer disclosures
  • PCR framework updates
• Quarter 3
  • Taxpayer businesses and financial updates
  • Taxpayer disclosures
  • PCR framework updates
• Quarter 4
  • Tax year ends
  • Taxpayer businesses and financial updates
  • Taxpayer disclosures
  • PCR framework updates
• Quarter 5
  • Taxpayer businesses and financial updates
  • Taxpayer disclosures
  • PCR framework updates
• Quarter 6
  • Final payment
  • Taxpayer businesses and financial updates
  • Taxpayer disclosures
  • PCR framework updates
  • The return and schedules being prepared
• Quarter 7
  • Tax return lodgment
  • Final return and schedules and any issues
  • Potential amendments
  • PCR framework updates
• Quarter 8
  • Final return and schedules and any issues
  • Potential amendments.

Information sources by quarter

Information sources you need to assist risk identification and assessment for your lodgment.

Group reporting packs or equivalent

Group reporting packs or equivalent are submitted by a Australian subsidiary to a parent company for the purposes of accounting consolidation.

The pack usually includes:

• a balance sheet and profit and loss statement
• schedules that feed into the group financial statements
• notes to the financial statements.

Developments in law and administration of relevance to taxpayer

For example:

• public rulings program
• advance pricing arrangement program
• industry issues
• key ATO speeches
• consultative forum news.

About the public and multinational business advice and guidance program

The public and multinational business advice and guidance program (the Program) is a specialised service that:

• delivers high quality advice for complex transactions undertaken by public and multinational business taxpayers on a range of transactions, including mergers and acquisitions, restructures, financing arrangements, or cross-border dealings
• provides certainty about the tax outcomes for transactions where a ruling, advice, or other guidance is provided to help taxpayers comply with their tax obligations from the outset, and
• engages closely with internal and external partners to identify issues early through the early engagement process, facilitating timely and collaborative resolution of tax issues to assist in minimising future compliance costs.

Advice and Guidance products provided as a part of the Program are outlined in Practice Statement Law Administration PS LA 2008/3 Provision of advice and guidance by the ATO.

We strongly encourage taxpayers contemplating complex transactions to seek early engagement with us before lodging a formal ruling application or implementing the transaction. Early engagement on complex transactions that starts as early as possible in the scheme implementation process ensures there is a clear understanding of the proposed scheme and the tax implications before a formal ruling application is made.

The early engagement approach enables taxpayers to engage with us to:

• discuss an arrangement and its intended outcomes
• identify key issues and concerns and how they can be addressed
• discuss the most appropriate form of advice required and the information needed to support it, and
• expedite the ruling process by resolving issues upfront and reducing the need for further queries.

While taxpayers may decide through the early engagement process that a formal ruling isn't required, any advice they receive through the early engagement process isn't binding and doesn't provide the same level of protection as a private or class ruling. In those cases, early engagement still assists taxpayers to understand the Commissioner’s view of the transaction.

About this report

This report includes insights drawn from the work completed in the Program over the 2020-21 to 2023-24 financial years. This report outlines:

• insights on the requests for advice that we receive
• observations about the time it takes us to provide our service offerings and the key factors that impact our timeliness, and
• our key findings about the outcomes of our engagements.

The insights from this report are used by us as part of our commitment to continuous improvement of the Program. We also use the findings and observations to inform how we can better educate and assist taxpayers to obtain tax certainty through the most effective and efficient use of both the Program and the ATO’s public advice and guidance.

Key insights

As a demand driven program, the volume and nature of advice requests we receive reflects market activity as well as legislative changes. Key examples are the effects of macro-economic trends, such as interest rates being higher for longer than markets anticipated on merger and acquisition activity, and the cyclical nature of withholding tax exemption requests to the Program.

Most applications to the Program are made via advisers – this reflects the transactional nature of many of the arrangements on which advice is requested. The number of requests lodged directly by clients is trending down.

Engagement through the early engagement program on complex transactions has continued to trend down, coinciding with decreased requests on capital management transactions and from Top 100 ADF clients. However, our findings show the early engagement program is more likely to result in positive ruling outcomes for applicants.

Receiving a low assurance rating as a part of the ATO’s Justified Trust program doesn't affect the likelihood of receiving a favourable ruling as a part of the Program and doesn't prevent clients from obtaining certainty over their transactions. In addition to their Justified Trust reviews, clients interact with the Program as part of their good governance practices, especially for new transactions and where they are uncertain about the application of the law.

The complex and often precedential nature of our work, with broader system-wide impacts, has seen certain engagements run for extended periods. We continue to work on internal initiatives to reduce cycle times, however, our findings indicate that those requests with longer response times to our requests for further information have taken us the longest to complete.

We didn't receive any new eligible New Investment Engagement Service (NIES) engagements in 2023–24 and have withdrawn the NIES as a service offering.

Program observations

This report provides aggregated data on the 2020–21 to 2023–24 financial years for cases completed within the Program. It doesn't include requests received in this period that were not completed before 30 June 2024.

Requests for advice or engagements are not one-size-fits-all. While this report aggregates data to give an overall picture of the Program, the different complexity of each item produced means that it is inherently difficult for the data to capture the differences between the engagements. Some transactions may require more than one ruling to be issued, particularly when there are multiple parties to transactions each requiring individual certainty, or there are separate issues that need to be addressed independently. The findings in this report are primarily based upon the number of ruling and guidance products completed each year, rather than the number of underlying transactions or schemes to which those products relate.

Additionally, the report findings should be considered alongside broader macro-economic conditions and external influences across the different years included in the report, such as legislative changes and the impacts of COVID-19 in the earlier comparable periods. Changes in demand drivers for advice and guidance impact the type, nature and complexity of advice and guidance requested by our clients.

Receipts

Overall receipts

Not all early engagement, ruling or guidance requests received in a financial year will be completed in that financial year. As such, there is a fluctuating variance between receipts and completions year to year which will be evident in several of the tables in this report.

The number of engagements initiated in 2023–24 is relatively consistent with the preceding year. This stabilisation comes after declines from record high receipts in 2021–22, then driven primarily by increased requests relating to capital management issues during COVID and some remaining requests from sovereign entities and superannuation funds for foreign residents seeking confirmation of their eligibility for tax concessions following legislative changes in 2019.

Completions have also trended down from record highs, following lower receipts, and have again exceeded receipts in 2023–24 as the Program continues to reduce its year-end matters on hand.

Chart 2: Private ruling, class ruling, guidance and early engagement requests received and completed by product type 1 July 2020 to 30 June 2024

You can also view data for requests received and completed by product type in table format.

Private ruling requests received in 2023–24 increased noticeably from the prior year, while there is a noticeable downward trend in requests for early engagements and guidance matters. Drivers for these trends are considered further in the following sections.

The fall in requests for guidance was primarily driven by a decrease in competent authority determination requests being referred internally to the Program for assistance. This reflects a general reduction in these types of requests referred to the Program. Fluctuations in competent authority determination requests will continue to be monitored by the responsible team.

Receipts by topic

Chart 3: Top 10 topics requests received 2023–24

You can also view top 10 topic requests received in table format.

As predicted heading into 2023–24, the Program saw an increase in withholding tax exemption requests relating to sovereign immunity and superannuation funds for foreign residents. This is now the most frequently requested advice topic and was a key driver in the increase in private ruling requests received in the year.

The next most popular advice topics were:

• CGT
  • rulings relating to demergers
  • CGT rollovers
  • Division 855
  • CGT cost base
  • Division 149
  • Division 615
  • capital losses
  • earnouts and other similar issues
• capital management
  • rulings relating to returns of capital
  • off-market share buy-backs
  • capital raising transactions
  • payment of special dividends
  • issuance of capital notes and other similar issues
• employee share schemes.

Chart 4: Private ruling, class ruling, guidance and early engagement requests received by Top 5 Topics 1 July 2020 to 30 June 2024

You can also view data on the Top 5 topic requests received in table format.

The increase in withholding tax exemption matters in 2023–24 is clearly viewed in chart 4 which tracks the most popular Program topics across the past 4 years. Also identifiable from this chart is the continued decline in requests relating to capital management issues and international topics which coincide with the downward trend in early engagements.

In line with this decline, we have noted that clients and advisors appear more comfortable foregoing the early engagement process and submitting private ruling applications directly on some topics such as the issuance of capital notes and other capital raisings. Changes to legislation have also affected requests for certain topics.

In the case of off-market share buy-backs (OMSBBs), new legislation introducing an integrity measure to align the tax treatment of OMSBBs undertaken by listed public companies with the tax treatment of on-market share buy-backs has resulted in reduced OMSBBs for listed companies and far fewer requests for advice.

Receipts by taxpayer population

The Action Differentiation Framework (ADF) represents a strategic methodology for engaging with public entities and multinational corporations based upon clients being allocated to populations based upon their place in the framework.

Our ADF population categorisation has recently been updated. This report uses the existing classifications for the 2020–21 to 2023–24 income years:

• Top 100
• Top 1000
• Medium
• Emerging.

The Program also receives requests from clients outside of these ADF populations.

Chart 5: Private ruling, class ruling, guidance and early engagement requests received by taxpayer population 1 July 2020 to 30 June 2024

You can also view requests received by taxpayer population in table format.

When analysed by client placement in the ADF, it is noticeable that there has been a continued downward trend in receipts from the Top 100 population since the COVID peak. This has coincided with the previously discussed decline in receipts regarding capital management transactions, as well as the ongoing maturity of the ATO’s Justified Trust program, especially for Top 100 taxpayers.

Matters received from the Top 1000, Medium and Emerging markets have been relatively consistent from 2022–23 while the increase in matters coming from outside of the ADF framework reflect the previously discussed increase in withholding tax exemption requests from foreign clients.

Chart 6: Private ruling, class ruling, guidance and early engagement requests received by most recent income tax assurance review rating 1 July 2020 to 30 June 2024

You can also view requests received by most recent income tax assurance review rating in table format.

Chart 6 analyses engagement requests received by the Program based on a client's most recent assurance rating under our Justified Trust program, if any. Assurance ratings in the chart are based on the most recent assurance result achieved in a Justified Trust review, such as a Tax Assurance Review, Streamlined Assurance Review or Combined Assurance Review. A client's most recent Justified Trust review may not have taken place in the same year their request was received.

Many of the Program's clients fall outside the scope of the Justified Trust model, which highlights the important service offering the Program provides for taxpayers not engaged under our Justified Trust programs.

There has been a consistently downwards trend in requests from clients who have achieved a high or low assurance rating since 2021–22. This mirrors the overall decline in requests to the Program, particularly those related to capital management, which account for 35% of requests lodged by clients who have been through a Justified Trust review.

The small number of requests from clients with a low assurance rating reflects the small number of clients receiving this assurance outcome in their Justified Trust reviews and the declining number of clients receiving low assurance ratings over recent years. The decline in requests from those clients with high assurance ratings may also reflect an evaluation that they have sufficient certainty regarding their tax outcomes based upon the regular and ongoing Justified Trust review processes, particularly those that are also Top 100 clients.

Receipts by use of advisor

Chart 7: Private ruling, class ruling, guidance and early engagement requests received by advisor type 1 July 2020 to 30 June 2024

Advisors play a key role in the Program, with 81% of requests for advice received through an advisor.

Chart 8: Private ruling, class ruling, guidance and early engagement requests received by advisor type 1 July 2020 to 30 June 2024

You can also view requests received by advisor type in table format.

The number of receipts from Big 4 firms in 2023–24 was slightly higher than the prior year, while receipts from other firms and directly from clients were slightly lower.

New Investment Engagement Service

The NIES was introduced on 1 July 2021 as an investor-initiated service. It connects our specialists with businesses planning significant new investments in Australia. It’s available to:

• all foreign businesses that come through the Global Business and Talent Attraction Taskforce (this Austrade taskforce is no longer in operation)
• other Australian and foreign businesses making new investments into Australia in the vicinity of $250 million or more.

We didn't receive any new eligible NIES engagements in 2023–24.

Given the limited uptake on the NIES since its inception and the recent lack of NIES engagements from the market, it has been withdrawn as a service offering by the ATO.

Investors seeking advice on the tax implications of undertaking significant commercial transactions and investments in Australia can continue to use our early engagement and rulings services to obtain certainty about their circumstances.

Case timeframes

Performance against service commitments

The Program is governed by the ATO’s service commitments, which set out the level of service you can expect when dealing with us. As a part of these commitments, the Program agrees to meet the following targets in 80% of private and class ruling cases:

• Respond to enquires within timeframes – we will complete rulings within 28 days of receiving all required information.
• Keep clients informed of status or delays – if we find that a request raises particularly complex matters that will take more than 28 calendar days to resolve after receiving all the necessary information, we will aim to contact the applicant within 14 calendar days to negotiate a due date.

Note: No service commitments apply to early engagement or guidance requests.

Program completion timeframes

Reporting on our performance against our service commitments doesn't provide the full picture of the time taken to complete a request for advice or guidance in the Program. Our service commitments don't apply to guidance or early engagement products, and don't account for the impact of the complexity of matters. Complex matters often require multiple stakeholder discussions and additional requests for information (which extends the service standard timeframes) as further issues are identified in these engagements.

Chart 10 shows the median time taken to complete requests, both overall and by product type. In order to provide the most comprehensive analysis of the Program’s cycle times, chart 10 and chart 11 combines early engagement requests that weren't withdrawn with the timeframe of their subsequent ruling or guidance products. That is, if a class or private ruling was preceded by an early engagement, its timeframe has been captured from the date the first early engagement request is lodged to the day the final private ruling is issued or the class ruling is published.

Chart 10: Median total days to complete requests by product 1 July 2020 to 30 June 2024

Note: This chart doesn't include early engagement requests that don't progress to a ruling or guidance product. The time taken to complete early engagements that did progress to has been combined with the time taken to complete the subsequent ruling or guidance product to produce a total engagement time.

You can also view data on median total days to complete requests by product in table format.

While the total median time taken to complete a request in the Program fell slightly from 152 days in 2022–23 to 144 days in 2023–24, chart 11 evidences completion times vary by topic, with some request types taking longer to complete than others.

Class rulings consistently take longer to complete than other products as a result of the additional consent, internal review and publication processes that are required for these products. Additionally, we don't publish class rulings until the relevant schemes have been entered into, which means the completion of many class rulings that have been effectively resolved from a technical standpoint is often delayed due to factors outside of the control of the Program.

Chart 11: Private ruling, class ruling and guidance requests completed 2023–24 difference from median completion days by selected topic

Note: This chart only includes topics with 10 or more completions in 2023–24.

You can also view data on the difference from median completion days by topic in table format.

While some of these differences are easy to explain – discretions for example tend to be straight forward requests that can be completed relatively quickly – others are more complicated to tease out. Cycle times may increase for a number of reasons, including delays in coming to a position on complex or precedential issues within the ATO, as well as delays in obtaining all the information required for us to rule. For example, 2023–24 saw the completion of several highly complex withholding tax matters in the Program which involved significant uncertainty and difficulty obtaining information from foreign sources.

We have observed that it takes longer to resolve matters where Part IVA is considered in addition to the substantive provisions in question than engagements where Part IVA isn't identified as an issue.

In order to better understand the drivers of the time taken to complete requests, in 2023–24 the Program trialled tracking the number of requests for information (RFIs) issued and the time taken to receive a full response for each request.

Chart 12 compares the median time taken to obtain a response (in days) from RFIs issued by selected topics. This allows us to see how responses to RFI differ across topics and compare the impact of responsiveness to RFIs upon overall case times.

Chart 12: Private ruling, class ruling, guidance and early engagement requests completed 2023–24 – difference from median RFI response days by selected topic

Note: This chart only includes topics where we have completed more than 10 requests in 2023–24.

Note: Withholding tax requests involve treaty, royalty and entity-related questions.

You can also view data on the difference from the median RFI response days by topic in table format.

While the median number of days spent waiting on RFI responses across all completed requests where at least one RFI was issued in 2023–24 is 44 days, case teams spent a median of 176 days awaiting RFI responses for withholding tax requests, and 118 days awaiting RFI responses for deduction requests. This is a cumulative number; many engagements require more than one RFI to be issued.

This is a new metric that we are analysing in the Program and we acknowledge delayed RFI responses aren't the sole driver of the time taken to complete engagements. We will continue to improve analysis of timeliness and embed it in our internal reporting rhythms to have better visibility over barriers to the progression of our work which will help us identify internal and external opportunities to provide more timely advice and guidance.

We consult with our external stakeholders on issues and topics that are recurrent in our cases and contribute to the development of new and improved public advice and guidance products based upon insights drawn from the Program. For example, we recently consulted on Additional tier-1 capital note issuances, which are a recurrent one-to-one advice product.

Additionally, with the knowledge that fewer requests for information lead to lower cycle times, we have sought to improve the information available to applicants to support the submission of more comprehensive ruling requests. In 2023–24, we released improved bespoke application forms to support clients requesting rulings in relation to sovereign immunity and superannuation fund for foreign residents withholding tax concessions. We will continue to track the impact that these improved forms have on cycle times for these cases in the future.

Outcomes

Overall ruling outcomes

Chart 13: Outcome of private ruling and class ruling requests 1 July 2020 to 30 June 2024

Note: The x-axis for this chart has been truncated to allow smaller categories to be more easily visualised. This chart won't add up to 100% due to rounding.

You can also view data on the outcome of private ruling and class ruling requests in table format.

The percentage of class and private rulings which have favourable outcomes has remained around 80% for the past 4 years, with only 1% to 3% of rulings resulting in an unfavourable outcome in that period.

Most cases where we refuse to rule occur when the applicant doesn't provide the requested information or where a ruling would have limited immediate utility for self-assessment. We're unable to provide a ruling if we haven't been provided with sufficient information. This most commonly occurs in foreign superannuation fund withholding tax exemption cases or where the relevant transaction is too far in the future and not yet in serious contemplation.

Requests for rulings which result in no further action being required have remained stable as a percentage of total ruling requests over the past 4 years. Outcomes described as ‘no further action’ include instances where a ruling wasn't required because we provided written guidance or the request for a ruling was withdrawn.

A request for a ruling may be withdrawn for numerous reasons, but most were withdrawn because circumstances changed resulting in the proposed transaction not proceeding.

Where we provide an unfavourable decision or an application is withdrawn after we identify concerns with the applicant’s interpretation or application of the law, we may continue to monitor the relevant issue, for example as part of the applicant’s Justified Trust review.

Outcomes by taxpayer characteristics

Despite the relative consistency of outcomes over the past 4 years, outcomes are highly differentiated across taxpayer populations.

Chart 14: Class and private ruling outcomes by taxpayer population 1 July 2020 to 30 June 2024

Note: The x-axis for this chart has been truncated to allow smaller categories to be more easily visualised. This chart won't add up to 100% due to rounding.

You can also view outcomes by taxpayer population data in table format.

Class and private ruling requests lodged by medium and emerging clients are significantly less likely to result in a favourable outcome, and significantly more likely to result in either a withdrawn ruling request, an unfavourable ruling, or a situation where we must decline to rule. This differentiation may be explained by the relative difference in use of the early engagement system across taxpayer populations as viewed in chart 15.

Chart 15: Class and private rulings completed following early engagement by taxpayer population – 1 July 2020 to 30 June 2024

You can also view data on class and private rulings completed following early engagement by taxpayer population in table format.

The relationship between lower use of the early engagement system by medium, emerging and taxpayers outside the ADF, and higher levels of withdrawn and unfavourable ruling outcomes demonstrates the value of the early engagement system, discussed further in the following early engagement section.

However, this stratification in outcomes across ADF rating doesn't extend to Justified Trust assurance ratings.

Chart 16: Class and private ruling outcomes by most recent income tax assurance rating – 1 July 2020 to 30 June 2024

Note: Assurance ratings are based on the most recent assurance result from Income Tax Streamlined Assurance Reviews, Combined Assurance Reviews and Tax Assurance Reviews completed between 2018 and 2024.

You can also view data on class and private ruling outcomes by most recent tax assurance rating in table format.

There is no correlation between ruling outcomes for clients across the 3 assurance ratings – a client most recently receiving a high assurance rating through a Justified Trust review is just as likely to receive a favourable ruling as one who had received a medium assurance rating. Those clients that had most recently received a low assurance rating were more likely to receive a favourable outcome from an engagement with the Program.

A client’s most recent assurance rating is an overall assessment based on our assessment of a number of issues that don't necessarily include the tax issue that is the topic of the ruling request.

A low assurance rating is a starting point for further collaboration between clients and the ATO and doesn't prevent clients from taking advantage of the service offerings of the Program to obtain certainty over their transactions as a part of their good governance practices, particularly in relation to issues and topics that are new or occur outside the scope of their Justified Trust reviews.

Ruling outcomes following early engagement

Chart 17: Outcome of early engagement requests 1 July 2020 to 30 June 2024

Note: This chart won't add up to 100% due to rounding.

You can also view outcomes of early engagement requests data in table format.

The proportion of early engagements progressing to rulings has remained relatively steady over the past 4 years, although 2023–24 saw a slight increase in the proportion of early engagement requests that were closed without further action. While this is sometimes a result of the case teams providing an unfavourable indicative view, this most commonly occurs when circumstances changed and the transaction didn't proceed, or when the initial analysis advised that a ruling wasn't required.

We encourage taxpayers to engage with us early and seek advice for complex transactions as the early engagement system has a notable effect on the outcomes of class and private rulings.

Charts 18 and 19: Class and private ruling request outcomes with and without early engagement 2023–24

Chart 18: Request outcomes without early engagement

Chart 19: Request outcomes with early engagement

In 2023–24, class or private ruling requests that followed an early engagement were 19 percentage points more likely to result in a favourable ruling (where we agree with the applicant’s view of the law) than ruling requests that hadn't been preceded by early engagement.

The early engagement process doesn’t just increase the likelihood of receiving a favourable ruling, and decrease the likelihood of receiving an unfavourable ruling, it also significantly decreases the number of withdrawn rulings and circumstances where we decline to rule.

For class and private ruling requests completed in 2023–24, using the early engagement process reduced the number of unfavourable rulings from 4% to 1% and reduced the number of withdrawn rulings from 17% to 3%. We didn't decline to rule on any class or private ruling requests that came to us following an early engagement.

Table 1 details the data used in Chart 2: Private ruling, class ruling, guidance and early engagement requests received and completed by product type 1 July 2020 to 30 June 2024.

Table 2 details the data used in Chart 3: Top 10 topics - Private rulings, class rulings, guidance and early engagement received 2023–24.

Table 3 details the data used in Chart 4: Top 5 topics - Private rulings, class rulings, guidance and early engagement received 1 July 2020 – 30 June 2024.

Table 4 details the data used in Chart 5: Private rulings, class rulings, guidance and early engagement received by taxpayer population 1 July 2020 – 30 June 2024.

Table 5 details the data used in Chart 6: Private rulings, class rulings, early engagements and guidance requests received by most recent income tax assurance review rating 1 July 2020 – 30 June 2024.

Table 6 details the data used in Chart 8: Private rulings, class rulings, guidance and early engagement received by advisor type 1 July 2020 – 30 June 2024.

Table 7 details the data used in Chart 10: Median total days to complete request by product 1 July 2020 – 30 June 2024.

Table 8 details the data used in Chart 11: Private rulings, class ruling and guidance requests completed 2023–24 - difference from median total completed days by selected topic.

Table 9 details the data used in Chart 12: Private ruling, class ruling, guidance and early engagement requests completed 2023-24 – difference from median RFI response days by selected topic.

Table 10 details the data used in Chart 13: Outcome of class and private ruling requests 1 July 2020 – 30 June 2024.

Table 11 details the data used in Chart 14: Class and private ruling outcomes by taxpayer population 1 July 2020 – 30 June 2024.

Table 12 details the data used in Chart 15: Class and private ruling requests completed following early engagement by taxpayer population - 1 July 2020 – 30 June 2024.

Table 13 details the data used in Chart 16: Class and private ruling outcomes by most recent income tax assurance rating - 1 July 2020 – 30 June 2024.

Table 14 details the data used in Chart 17: Outcome of early engagement requests 1 July 2020 – 30 June 2024.

Find the service channels available to help large business taxpayers comply with tax and superannuation obligations.

Self-help channels

Online services for business

Most business reporting and transactions can be done through our Online services for business. They are the most secure and efficient way to manage business reporting and transactions.

Lodgment of tax returns

Our preferred options for lodging tax returns are:

• through SBR-enabled software, for secure online lodgment directly from financial, accounting or payroll software, often integrated with business software that's tailored to specific industries
• through your tax agent
• by mail.

Large business support phone service

You can contact our large business support phone service for access to officers experienced in large business income tax and GST account enquiries, including:

• debt and lodgment obligations, including deferral requests
• pay as you go (PAYG) withholding for large withholders.

To speak to an officer, call us on 1300 728 060 between 8:00 am and 5:00 pm (AEST or AEDT) Monday to Friday.

General business support services

You can contact us by phone on 13 28 66 between 8:00 am to 6:00 pm (AEST or AEDT) Monday to Friday for general business enquiries such as:

• account balances
• business registrations
• business tax return preparation
• business activity statements
• Single Touch Payroll
• excise and fuel schemes or grants.

International callers can phone us on +61 2 6216 1111 between 8:00 am and 5:00 pm (AEST or AEDT) Monday to Friday.

See Contact us for more information.

Services for top 100 taxpayers

In addition to the self-service channels, we also offer specialist relationship managers to top 100 taxpayers.

Senior relationship managers are offered as a contact point for top 100 taxpayers. These officers manage, facilitate and coordinate engagements (including escalations) for top 100 taxpayers across the ATO.

Top 100 taxpayers also have access to:

• a key client manager (KCM) for help with tax law related matters
• a key account manager (KAM) for help with account and transactional issues where online services are not available.

Services for large business taxpayers (other than top 100 taxpayers)

Top 1000 taxpayers can access our Large Service Team who are dedicated to assisting large businesses with turnover above $250 million.

When online services are not available, you can use this service to assist, escalate or resolve your administrative and transactional queries.

You can contact us by email LargeServiceTeam@ato.gov.au.

Tax agents

Tax agents have access to a range of dedicated service channels. Most business reporting and transactions by tax agents can be done online using:

• online services for agents
• practitioner lodgment service
• Standard Business ReportingExternal Link
• Australian Business RegisterExternal Link.

The Large Service Team will refer queries from tax agents to these dedicated service channels available for tax agents, including:

• Tax practitioner assistance program
• Tax agent lodgment program
• BAS agent lodgment program.

You can:

• request a pre-lodgment agreement for practical certainty about a commercial deal or restructure event prior to lodgment
• enter into an annual compliance arrangement to identify and resolve tax issues early
• request an advance pricing arrangement for your dealings with international related parties
• apply for a mutual agreement procedure for relief from double taxation on international transactions.

Commercial deals

We engage early with privately owned and wealthy groups to offer a pre-lodgment compliance agreement for commercial deals and restructure events.

We define a commercial deal as any significant business transaction that may affect the structure of your business.

See also:

• Commercial deals

Annual compliance arrangements

An annual compliance arrangement (ACA) is a voluntary administrative arrangement between us and you to govern our compliance relationship.

An ACA provides a level of practical certainty for you by mutually resolving tax risks as soon as possible, generally prior to lodgment. ACAs complement other products and services we offer, such as our rulings program.

These arrangements are most suited to Australia's largest businesses. ACAs can apply to income tax, goods and services tax, excise, fringe benefits tax, petroleum resource rent tax, or any combination of these taxes.

To be considered for an ACA you must have in place an effectively designed and operating tax control framework which:

• is aligned as appropriate with the best practices outlines in the Tax Risk Management and Governance Review Guide
• is supported by a robust approach to tax risk management that can be evidenced at both the strategic and operational levels, and
• a genuine commitment to continuous disclosure of all material risks.

See also:

• Annual compliance arrangements – what you need to know

Advance pricing arrangements

An advance pricing arrangement (APA) is an agreement with us on the future application of the arm's length principle to your dealings with international related parties.

APAs provide certainty by:

• ensuring the fair application of the arm's length principle to related party international dealings
• eliminating or reducing the risk of double taxation on related party international dealings (particularly in bilateral and multilateral APAs)
• eliminating the risk of a transfer pricing audit on the related party international dealings covered by the APA.

APAs may be:

• unilateral, which involves your business in Australia and us
• bilateral or multilateral, which involves an agreement between two or more tax administrations and their respective taxpayers.

APAs generally cover a period of three to five years and may be reviewed if the trading circumstances materially change. APAs have an annual reporting requirement.

See also:

• PS LA 2015/4 Advance Pricing Arrangements

Mutual agreement procedures

International transactions can expose your group to double taxation. For example, a transfer pricing adjustment arising from an audit in one country may result in the same income being taxable in two jurisdictions.

If you believe you have been or will be subject to double taxation, you can apply for relief to the tax administration of your jurisdiction. If your application is accepted we will discuss your case with the other tax administration and try to resolve it in accordance with the relevant double tax agreement. This process is known as a mutual agreement procedure.

A mutual agreement procedure is part of the dispute resolution process and is in addition to your objection and appeal rights.

See also:

• OECD Manual of effective mutual agreement proceduresExternal Link
• Mutual agreement procedure

If the law is clear

We have a duty to apply the law. If the law is clear but gives rise to unintended consequences, anomalies, or significant compliance costs inconsistent with the policy intent, we advise the government – usually through Treasury. We do this whether the existing law favours taxpayers or the revenue, giving the government the opportunity to consider legislative change.

If the law is open to interpretation

If the words in legislation are open to interpretation, our approach is to adopt the interpretation that is consistent with the policy intent. If more than one of the available interpretations achieves the policy intent, we will generally favour the interpretation that reduces your compliance costs.

New legislation

We are responsible for ensuring that new legislation is implemented efficiently and effectively through co-design with taxpayers, professional associations, representatives, industry bodies and Treasury.

See also:

• How we apply the law.

Public and international groups want contemporary, digital interactions that make compliance less costly and less time consuming. In dealing with us, they expect to have the right people from the ATO involved and for the process to be sensitive to the impacts of their business.

We’re using experts from across the ATO to ensure the right people are involved at the right time, allowing us to provide a tailored experience for businesses. We are also expanding and automating our access to third party and other jurisdictions’ data. Combining this with improved analytics allows us to better understand complex business structures and individual client circumstances to further tailor our interactions.

Find out about:

• Tax assurance
• Amendment periods
• Penalties and interest
• Resolving disputes

Income tax

Different amendment periods apply to some cases where transfer pricing, research and development and capital gains tax is involved.

Effective lines of communication and cooperation will help to keep compliance activities on schedule.

Generally, you will be given every reasonable opportunity to present your case before we issue an amended assessment. We are conscious of possible financial and reputation risks associated with a debt adjustment and we take due care to ensure that adjustments are based on reasonable grounds.

Indirect taxes – GST, wine equalisation tax, fuel tax credits and luxury car tax

If we make an adjustment to your activity statement as a result of compliance activity (whether to increase or decrease your liability), we will do it by making an assessment and issuing a notice of assessment. For tax periods commencing on or after 1 July 2012 this will usually be an amended assessment.

We take care to ensure any adjustments are based on reasonable grounds. Before we issue such an assessment, we will generally provide you with details and reasons for any adjustment and give you the opportunity to raise any concerns.

Excise (fuel, alcohol and tobacco)

If we identify an adjustment to your excise liability, we will work with you to amend the appropriate excise return.

If you disagree with an identified adjustment in excise liability, you will have the opportunity to present your case before we issue a demand for the amount of excise duty.

Product Stewardship for Oil program and cleaner fuels grants scheme

You can claim a Product Stewardship for Oil benefit or cleaner fuels grant up to three years after the start of the claim period in which your entitlement arose. You may request an amendment within two years of the end of the claim period (or such further period as we allow). We can make amendments to your grants or benefits at any time.

See also:

• Fuel schemes

We're focused on supporting you to voluntarily comply with your Australian tax obligations, manage tax risk and minimise compliance costs.

If we identify potential issues, our response includes a mix of service, help and active compliance approaches. In most cases we will contact you to resolve or better understand the matter. If we find significant risks requiring further examination, we'll generally conduct a review or possibly an audit. At all times we'll be transparent about the nature of our concerns.

If non-compliance is the result of uncertainty, we will seek to reduce the uncertainty by explaining our view of the law. If non-compliance arises from administrative issues, we will work with you to make compliance easier.

Follow these links for information about:

• Risk review and audit processes
• Conduct, feedback and independent review
• Gathering information

See also:

• Taxpayers' Charter
• Compliance model

Generally, when we identify a compliance risk we will review your tax affairs. We may decide to conduct an audit if we identify areas of concern that need closer examination.

We're guided by the facts and won't necessarily follow every step of the typical tax assurance process. For example, during a risk review you may make a voluntary disclosure that resolves the issue.

We review all large businesses at a high level using our risk filtering processes. We use a cooperative compliance approach to identify and assess risks as they arise.

In some instances, the nature of transactions and our knowledge of the compliance risks mean that we will proceed directly to an audit after we analyse the risks. This may happen if we consider your business or particular arrangement is higher risk, involves carrying forward a previous audit or is time sensitive, or we think there may be a risk that revenue may not be able to be collected.

Risk review

When we conduct a risk review we will determine if there are any compliance issues that need a more in-depth investigation and response. Risk reviews give us an opportunity to resolve our concerns about compliance issues and in most cases mean we do not need to conduct an audit.

We focus on understanding your business context and environment and the processes you have in place to manage and oversee tax risk. Generally we will ask for information from you first, but we may also seek information from third parties (such as your intermediaries) if we need to.

Comprehensive risk review

A comprehensive risk review has a broad scope and involves ongoing dialogue and information gathering to assess and treat identified tax risks.

This allows us to develop an in-depth understanding of your business operations and how effectively your tax governance processes identify and deal with tax risks in your industry and business operations.

Specific review

A specific review occurs when we examine one or more specific risks we have identified. We concentrate on the identified risks to minimise the impact on your business.

Outcomes

At the end of a risk review we will discuss the outcomes with you, advising if we are satisfied with your compliance or consider further action is needed.

If the risks are not deemed to be significant, we would usually not proceed further unless there were other concerns raised.

If an audit is necessary, we will keep you informed about our plans. Depending on the nature of the risks, the discussions may also cover possible mitigation strategies, which you might choose to apply to reduce the likelihood of an audit, or to mitigate any potentially adverse effects.

See also:

• Pre-lodgment compliance review

Audit

Audits are more comprehensive than risk reviews and involve intensive case examination where material underpayment of income tax, GST or excise is a risk. They provide a means for us to:

• check the appropriate tax has been paid in cases where we identified risk – including gathering evidence or proof as needed
• understand the causes of non-compliance and address them for the past and the future
• identify areas where the law may need clarification or where our processes can be improved.

An audit typically follows a risk review and will test the review's conclusions. Refining the scope of the audit may include (but is not limited to):

• eliminating issues
• adding new issues
• determining which income tax years will be the subject of the audit.

If we identify additional risks during the audit, we may broaden its scope. This requires approval from a panel of senior officers, and the decision will be communicated to the taxpayer.

In most cases, an audit involves agreeing on a plan to collect detailed information and undertake analysis. During the information collection phase, auditors will have more contact with you and may spend time at your premises examining documents and processes and discussing issues with your key personnel. After the audit, we will provide you with our view.

We endeavour to complete most income tax audits within 18 months. The timeframe and scope of each audit is determined following discussions with you at the beginning of the case. This depends on the number of specific issues, level of complexity and other circumstances we encounter.

Complex cases may extend beyond the 18 month timeframe, such as those requiring consideration of Part IVA, input from external Counsel and tax treaty partners on transfer pricing matters. In those cases we will keep you informed of the progress of the case and expected completion date.

Each case will have a case manager assigned to it to ensure it's completed within the agreed timeframe. We seek to gather information in an informal approach; however where we experience unreasonable delays in our information gathering process we will then use formal powers.

Next step:

• Conduct, feedback and independent review

We want to have ongoing, open and frank discussions during the course of a review or audit. At the outset, we'll assign a case officer who you can contact if you have any issues or concerns. In addition, you can request a review of the ATO's audit position.

• Expectations during compliance activities
• Escalating issues
• Independent review of position paper
• General Anti-Avoidance Rules Panel
• Feedback questionnaire

Expectations during compliance activities

Both parties should seek to:

• have ongoing, open and frank discussions and agree on a case plan upfront
• participate in meetings to identify any issues that could delay or disrupt the process, and agree on contingencies
• agree on realistic timeframes
• provide relevant information about processes, as well as facts and evidence, in a timely manner
• clarify issues as they arise so they can be resolved efficiently
• provide prompt and ongoing access to key personnel and escalation points
• undertake genuine efforts to resolve disagreements, including consideration of dispute resolution processes
• recognise that sometimes we may have to agree to disagree
• agree upfront on how to handle relevant documents covered by legal professional privilege, the accountants' concession, or the concession applying to corporate board advice on tax compliance risk.

See also

• PS LA 2004/14 Access to 'corporate board advice on tax compliance risk'

Escalating issues

You can provide open and honest feedback, or raise concerns, without it influencing our view or future interactions with us.

At the start of a review or audit we will notify you of the key ATO contact for your case. If you have any issues with how the case is being conducted or the tax risks involved, you should raise these issues with the case officer first.

If you are not satisfied with the case officer's response, you should contact their team leader.

If you remain unsatisfied with our response, you can escalate the issue to the team leader's immediate manager, who will consider the matter and contact you to discuss your concerns.

Higher consequence taxpayers can also raise concerns and issues through their relationship manager.

Talking to us early will help resolve issues, and if issues need to be escalated you will have access to our decision-makers.

Independent review of position paper

You may have the opportunity to request an independent review of the statement of audit position prior to us making our final decision.

The review will be conducted by a senior officer in our Law Design and Practice Group who has had no involvement in the audit process.

See also  

• Large market independent review - turnover over $250m

General Anti-Avoidance Rules Panel

The General Anti-Avoidance Rules (GAAR) Panel helps to administer Part IVA and other general anti-avoidance provisions. It ensures decisions about applying these provisions are objectively based and well-considered. The panel's role is advisory but our decision-maker must take the panel's advice into account.

Except in exceptional circumstances, matters are generally referred to the panel after we have issued a position paper and considered your response.

The panel may consider matters without your response where:

• you have chosen not to respond to the position paper
• there are time constraints
• a reasonable time has passed without a response.

To help the panel provide us with advice, you will usually be invited to address the panel meeting. Before attending a panel meeting you will also be asked to provide a written submission.

See also  

• PS LA 2005/24 Application of General Anti-Avoidance Rules

Feedback questionnaire

We give clients the option to complete a short survey as the final step of our interaction. This can be completed anonymously. We highly value client feedback as a part of our ongoing efforts to reinvent and continually improve the client experience.

Next  

• Gathering information

Though we can use both formal and informal powers to gather information, where there is a commitment by you to fully cooperate with our requests we prefer to work informally to minimise cost and disruption to both parties.

We will use formal powers where the circumstances require it, such as when you request it, when informal requests for information have not been satisfied, or if we have not been able to use an informal approach to gain access to senior personnel to obtain an exact picture of an arrangement.

Having the full facts quickly, along with the relevant supporting evidence, enables us to establish our position and inform you of it as soon as we can. In our experience, delays in receiving information are one of the major causes of the timespan for a review or audit being extended.

Information includes documents evidencing an intention, election, choice, estimate, determination or calculation. 'Documents' can include paper and electronic communications including emails.

Informal approaches

We prefer an informal approach to gathering information based on you demonstrating your proactive support and action to meet our information needs. This means that you will assure or advise us:

• that searches for information within the large business group (including, where relevant, within its overseas associates) have been undertaken to the greatest possible extent
• that you have provided full details of what information is available to meet our requests, and when such information will be available
• if a staged approach to providing information can be undertaken
• that information provided is in user-friendly formats that enable us to readily analyse information or data
• when you encounter difficulties in meeting our timeframes and the actions you will take to mitigate delays.

When issues arise our compliance team will make every reasonable effort to resolve them and if necessary, refer the matter to more senior officers for resolution.

Accountable conversations

An informal approach to information gathering still means you are accountable for the accuracy and completeness of information you provide.

An appropriate record of our conversations, including meetings and interviews, is an essential part of the informal approach. In normal circumstances we will provide you with a summary of the key issues discussed and the agreed action items resulting from the meeting. With prior consent, we may make a verbatim record of important meetings and interviews.

It is an offence to make a false or misleading statement to a tax officer even if the conversation or interview is undertaken on an informal basis (under Subdivision B of Division 2 of Part III of the Tax Administration Act 1953).

Expectations during informal approaches

Informal approaches presume full cooperation. You can expect that we will:

• engage you in constructive dialogue so that our information requests are clear and unambiguous
• plan our information gathering around the risk hypothesis and clearly stated evidentiary needs – the plan will include agreed milestones and timeframes
• have face-to-face discussions with you to develop the key information gathering questions if appropriate
• actively manage information requests with timely escalation, if needed, when delays or unforseen events arise
• adopt a transparent process.

We expect that you will:

• engage in constructive dialogue with us
• meet agreed timeframes
• provide complete and timely information
• provide access to key decision-makers and senior personnel
• work with us to ensure that the compliance activity proceeds in an efficient and timely way.

In some cases relationships can be tested. The change from a cooperative to a less cooperative relationship is often difficult to pinpoint because it generally results from several incidents or actions rather than a clearly identified single point. We acknowledge that differences will occur; however, persistence, openness and a willingness to understand the other view or position will help in resolving any issues.

If there are any issues that need to be escalated, you will have access to senior level decision-makers.

Formal approaches

Generally, when we decide that using formal powers is necessary, we will advise you that we intend to use them and the reasons for doing so.

We will use formal information gathering powers when the informal process is no longer productive or if your circumstances, history or behaviour indicate that a formal approach is warranted.

There are some situations where we may adopt a formal approach in the first instance, including where there:

• is a history of uncooperative behaviour
• are privacy, contractual, or confidentiality obligations – for example, involving former employees or third parties
• is a need to obtain an exact picture of an arrangement or transaction.

In other cases it may be necessary during the course of an audit or review to move from an informal to a formal approach. This can occur where:

• a reasonable level of cooperation is lacking
• there are ongoing or persistent delays in providing information.

For example, we would use formal powers where:

• the information provided informally only partially answers our requests
• a response has qualifying statements attached to it or is redacted without a valid claim for the corporate board tax risk advice concession
• access to senior personnel involved in the issues is restricted, for example, in cases where intention is an issue
• representatives request that all requests for information be put in writing and take a legalistic and literal approach to responding
• documents, people and other evidence are purposely placed outside our jurisdiction
• claims are made for legal professional privilege or that the accountants' concession or corporate board tax advice concession applies – without providing sufficient information to enable us to properly assess the veracity of the claims.

Expectations during formal approaches

You can expect that we will:

• treat you fairly and, as far as possible, in a non-intrusive way
• give you reasonable notice of our intention to use our formal powers in all but exceptional circumstances
• explain why we are requesting information
• clearly identify the objects of any examination
• keep information requests relevant and focused
• consider requests for an extension of time to comply with a notice
• keep records of your personal information safe and secure
• respect your rights and discuss with you the basis of any claims for legal professional privilege, the accountants' concession or that advice on tax risks to a corporate board is subject to an administrative concession in accordance with PSLA 2014/14. This will not adversely impact our view of your cooperation.

We expect that you will:

• provide a full response in a timely manner to all enquiries
• notify us if you have difficulty complying by the due date
• be prepared for any formal interview.

See also:

• Our approach to information gathering
• Taxpayers' charter – fair use of our access and information gathering powers
• PS LA 2004/14 ATO access to advice for a corporate board on tax compliance risk

Public and international groups want more guidance about the current ATO interpretation of law, and more information about the risk assessment process so they have more certainty.

We keep businesses informed by advising what we know about them, including our view of their tax risk. To improve this process, we’ve been reviewing our risk-differentiation framework to ensure it is focused on both risk and relationships. We’re also developing a self-review guide to help businesses evaluate their strategic and operational tax risk identification and governance framework.

You can:

• correct a mistake by requesting a self-amendment or making a voluntary disclosure
• lower your tax risk through good tax governance
• make the right choices by knowing what attracts our attention
• engage with us through consultation.

We focus on six key industries: superannuation, insurance, energy and resources, banking and finance, manufacturing, and sales and services. Across all industries we look at particular tax risks, such as losses and international profit shifting, and particular events in the business lifecycle, such as private equity investments.

Increasingly we seek to understand taxpayers' business models, tax performance and changes/variations over time or relative to peers. We want to identify compliance risks and opportunities for enhanced taxpayer service. By clustering common issues across taxpayers we can treat them in a more timely, consistent and effective manner – for example, we are reviewing the offshore service hubs used by several mining companies to address profit shifting risk through transfer pricing.

The following issues will attract our attention:

• capital gains tax
• losses – capital and revenue
• profit shifting
• concessions
• offshore evasion
• trusts
• consolidation
• financial arrangements
• integrity of business systems for GST and excise obligations
• GST and property transactions
• GST international and cross border issues
• GST financial supply transactions and the application of apportionment

The following structuring and business events will also attract our attention:

• mergers and acquisitions
• divestment of major assets and demergers  
• share buy backs
• capital raisings and returns of capital
• private equity entries and exits
• initial public offerings
• infrastructure investments
• cessation of business operations in Australia.

Next:

• Engaging with you to administer the system

Corporate restructures involving acquisitions and disposals are a priority focus for us. These transactions could result in a range of factors you need to consider for taxation purposes.

Engaging through consultation

We consult with you, your tax advisers, professional associations and industry stakeholders to improve our understanding of your business environment and current tax issues you face. Our key forums for consulting with public and international groups are the:

• Large Business Liaison Group
• National Tax Liaison Group

By working with you, we can identify the right areas to reduce red tape, minimise compliance costs, improve the administration of the tax and super systems, and increase willing participation.

You can get involved through our Consultation webpage.

External scrutineers

We are open and accountable in our administration of the tax system and are subject to review by external scrutineers, including:

• parliamentary committees
• the Tax Ombudsman
• the Board of Taxation
• the Commonwealth Ombudsman
• the Australian National Audit Office.

We work closely with Treasury in developing new tax policy and legislation. We may refer matters to Treasury if the tax law is not consistent with policy or if it produces unintended consequences or significant compliance costs.

We encourage you to contribute to enquiries by our external reviewers as you consider appropriate.

Corporate Collective Investment Vehicles
Find out about eligibility, registration, reporting and lodgment obligations for Corporate Collective Investment Vehicles (CCIVs).

Managed investment trusts
Check if your trust qualifies as a managed investment trust (MIT).

Becoming an attribution managed investment trust (AMIT)
Find out about AMITs, eligibility and how to apply.

What is a CCIV

A CCIV is a new type of Australian company registered and regulated by the Australian Securities & Investments Commission (ASIC) and is:

• a type of company limited by shares that is used for funds management
• an umbrella vehicle that is made up of one or more CCIV sub-funds
• operated by a single corporate director.

The regime began on 1 July 2022.

The CCIV framework was introduced by the Corporate Collective Investment Vehicle Framework and Other Measures Act 2022. This introduced:

• Chapter 8B into the Corporations Act 2001 (Corporations Act)
• Subdivision 195-C into the Income Tax Assessment Act 1997 (ITAA 1997).

A sub-fund of a CCIV is all or part of their business that is registered by ASICExternal Link.

CCIV tax framework

The CCIV tax framework objective is that the general tax treatment of CCIVs and their members is aligned with the existing tax treatment of attribution managed investment trusts (AMITs) and their members.

The law doesn't provide an exclusive set of rules for taxing CCIVs. A deeming principle operates with the intent of subjecting a CCIV to existing tax laws for trusts, in particular the AMIT regime.

For the purposes of all tax laws, unless expressly excluded, a trust is deemed to exist between:

• a CCIV
• the business, assets and liabilities referable to a sub-fund
• the relevant class of members.

This has the effect that, for tax purposes, generally the:

• assets, liabilities and business referable to a CCIV sub-fund are treated as a separate unit trust (known as a ‘CCIV sub-fund trust’)
• CCIV is treated as the trustee of the CCIV sub-fund trust
• holders of shares in the CCIV which are referable to a particular CCIV sub-fund are treated as holding units in that sub-fund trust.

Nothing in the tax law operates to establish a CCIV sub-fund trust as being outside the boundaries of the tax system.

Where a CCIV sub-fund trust:

• meets the AMIT eligibility criteria, it is intended to be taxed as an AMIT under the attribution flow-through tax regime
• doesn't meet the AMIT eligibility criteria, it is intended to be taxed in accordance with general trust provisions.

It is not necessarily the case that the CCIV regime will achieve the same outcomes as trusts under the AMIT or general trust provisions.

CCIV Law Companion Ruling

Law Companion Ruling LCR 2024/1 The corporate collective investment vehicle regime was published on 2 October 2024. The Ruling:

• outlines the operation of the CCIV regime
• explains the deeming principle and its effect on the tax treatment of a CCIV, a CCIV sub-fund trust and investors
• provides views on specific tax interpretative issues.

Attribution CCIV sub-fund trust eligibility requirements

The tax regime is focused on providing CCIVs with access to the same attribution-based flow-through tax regime that applies to AMITs.

To access the AMIT regime in an income year, CCIV sub-funds must meet the modified AMIT eligibility criteria outlined in the tax framework for that income year.

This means a CCIV sub-fund trust must satisfy all requirements for determining AMIT eligibility as specified in Divisions 275 and 276 of the ITAA 1997, subject to various modifications. Modifications include those where a CCIV and its sub-funds are not managed investment schemes under the Corporations Act.

Where a CCIV sub-fund trust meets the modified AMIT eligibility criteria, it will automatically be treated as an AMIT. In contrast, an eligible managed investment trust (MIT) has the option to either irrevocably choose to be an AMIT or remain outside the regime.

Failure to meet AMIT eligibility criteria

If a CCIV sub-fund trust doesn't meet the AMIT eligibility requirements in an income year, it is intended to be taxed as either a:

• Division 6 CCIV sub-fund trust under the general trust provisions in Division 6 of Part III of the Income Tax Assessment Act 1936 (ITAA 1936)
• Division 6C CCIV sub-fund trust (as a public trading trust) under Division 6C of Part III of the ITAA 1936 if at any time in the income year it carries on or controls (directly or indirectly) a trading business and satisfies the rules for being 'public'.

If a CCIV sub-fund trust doesn't meet the eligibility criteria to be taxed as an AMIT in an income year, the lodgment requirements that apply will depend on which criteria have not been met.

Registering to operate a CCIV

There is a 3-phase registration process for a CCIV and its sub-funds:

1. Obtain an Australian Financial Services License (AFSL) that authorises the corporate director to operate a CCIV.
2. Register CCIV and sub-funds with ASIC.
3. Apply for a tax file number (TFN) (and Australian business number (ABN) if applicable) for the CCIV and its sub-funds.

Applying for an AFSL to operate a CCIV

A CCIV must have a corporate director that:

• is a public company
• holds an AFSL authorising it to operate the business and conduct the affairs of a CCIV.

Work out how to apply for an AFSL with ASICExternal Link and the required conditions to operate a CCIV.

Registering with ASIC

A CCIV and its sub-funds must be registered by ASICExternal Link before registering with us.

Applying for an ABN and TFN

After a CCIV and its sub-funds have been registered by ASIC, the CCIV structure can:

• apply for ABNs and TFNs
• register for goods and services tax (GST) online at Australian Business Register (ABR)External Link.

A CCIV and each of its sub-funds will need to register with us as separate entities. Registration details can also be changed at ABRExternal Link.

To check if a CCIV sub-fund (or CCIV) holds an ABN, search on ABN LookupExternal Link.

CCIV

A CCIV should consider its circumstances to determine if TFN and ABN registration separate to the CCIV sub-fund trust registration is needed.

To apply for a TFN and an ABN, under the Which of the following are you? drop-down box:

1. Select Corporate Collective Investment Vehicle.
2. At the type of entity, select Company, Partnership, Trust or other organisation.
3. For organisation type, select Other incorporate entity.
4. Then answer the questions that follow.

CCIV sub-fund trust

To apply for a TFN and an ABN for a CCIV sub-fund trust, under the What type of organisation is the applicant? drop-down box:

1. Select Corporate Collective Investment Vehicle Sub Fund.
2. At the type of entity, select Company, Partnership, Trust or other organisation.
3. Then answer the questions that follow.

Corporate director

The corporate director of a CCIV is entitled to an ABN as a public company. Find out how to apply for an ABNExternal Link. From the Organisation type drop-down box:

1. Select Australian public company.
2. Answer the questions that follow.

The CCIV corporate director is not eligible for or required to have a director identification number.

GST registration

CCIV

A CCIV, as a Corporations Act company, is entitled to have an ABN. A CCIV will generally not need to register for GST because it will not be carrying on an enterprise in its own right.

CCIV sub-fund trust

To determine if a CCIV sub-fund trust is required to be registered for GST, it needs to consider:

• if it is carrying on an enterprise
• its GST turnover.

Where more than one CCIV sub-fund trust is required to be registered for GST, each CCIV sub-fund trust will need to register separately.

Corporate director

The corporate director will need to consider if it is required to register for GST in its own right.

Other tax registration requirements

Entities in a CCIV structure may have other taxation obligations. For example, a sub-fund and a corporate director may need to register for pay as you go withholding.

Lodgment and reporting obligations

Reporting and lodgment obligations for tax purposes generally arise at the CCIV sub-fund trust level. A CCIV sub-fund is required to lodge the following:

• income tax return, if applicable
• Annual investment income report (AIIR)
• activity statement

CCIV sub-funds must issue Attribution managed investment trust member annual (AMMA) statements if the sub-fund meets the AMIT requirements.

The CCIV is generally not required to:

• lodge an income tax return or AIIR
• issue AMMA statements or SDS to investors.

Income tax return

Attribution CCIV sub-fund lodgment requirements

Attribution CCIV sub-funds will lodge an Attribution CCIV sub-fund tax return (ACSITR). This is a bespoke income tax return that reflects the unique structure and circumstances of a CCIV sub-fund that meets the AMIT eligibility requirements.

The ACSITR shares common labels with the AMIT return and can also only be lodged electronically.

There will be differences to the lodgment requirements for the CCIV sub-fund for that year if:

• a CCIV sub-fund trust fails the AMIT eligibility criteria for an income year
• Division 6C applies.

Division 6 lodgment requirements

If a CCIV sub-fund trust fails the AMIT eligibility criteria for the income year, an ACSITR should not be lodged. The following will be required:

• trust return for the income year
• statement of distribution through the trust return

Division 6C lodgment requirements

If Division 6C applied to your circumstances at any point during the income year, an ACSITR should not be lodged.

You should lodge a Company tax return. To do this, you need to register a new TFN.

If you have changed lodgement requirements due to your circumstances and require more information, contact us.

Business activity statement (BAS)

Depending on the circumstances of the CCIV sub-fund trust or the corporate director, a BAS may be required.

The BAS will report and pay:

• GST
• PAYG instalments
• PAYG withholding tax
• other taxes.

Annual Investment Income Report (AIIR)

Generally, CCIV sub-funds must lodge an AIIR, outlining amounts attributed to investors for the income year.

From Tax Time 2022–23, all CCIV sub-funds, MITs and AMITs are required to report using either the specific or global option.

Specific AIIR option

The Specific AIIR option requires lodging an AIIR on behalf of each:

• CCIV sub-fund
• MIT
• AMIT.

Include details of the CCIV sub-fund at the investment body section and attribution details at investor level information.

Global AIIR option

Larger preparers can use the Global AIIR option to complete a single AIIR for multiple entities.

To provide details of each CCIV sub-fund or AMIT that attributed amounts to an investor, use Interposed Entity TFN/ABN and Interposed Entity Name fields.

More information on each approach and how to complete the AIIR is available in the AIIR companion guideExternal Link.

Attribution managed investment trust member annual (AMMA) statement

CCIVs as deemed trustees of attribution CCIV sub-funds must give an AMMA statement within 3 months of the end of the income year to each person who was a member of the sub-fund during the income year.

Trustees of non-AMIT CCIV sub-funds should use the Standard Distribution Statement (SDS) for their investors. See how to complete these statements.

Investor information

The CCIV tax regime uses the same attribution flow through tax regime that applies to AMITs. To access the AMIT regime, a CCIV sub-fund must meet the eligibility criteria. CCIV sub-funds can generally be considered an attribution investment vehicle for tax purposes.

Investment bodies, such as CCIV sub-funds and custodians, lodge reports with us on an annual basis, disclosing:

• investors
• amounts attributed to them
• withholding taxes collected.

Australian tax residents

Australian tax resident investors will receive AMMA statements from their CCIV sub-fund outlining their distributions for the income year. Statements include the information required for the investor's income tax return.

For individuals, myTax will pre-fill CCIV sub-fund investment income. You should always check the pre-fill amounts against your records.

Non-resident investors

Investor under an Australian tax treaty

To apply tax treaties, Australia treats the business, assets and liabilities of each sub-fund as the trust estate of separate unit trusts where the:

• CCIV is the trustee
• members of the sub-fund are the beneficiaries.

This is despite the legal form of the CCIV as a new type of company under Australian company law.

If the CCIV sub-fund trust meets the modified AMIT eligibility criteria, it is eligible for the same treatment under the treaty as if it were an AMIT.

The following example in the Explanatory Memorandum to the Corporate Collective Investment Vehicle Framework and Other Measures Bill 2021 (Example 13.1) demonstrates how treaty arrangements will apply from an Australian domestic perspective:

ADHP Investments CCIV has one sub-fund – sub-fund A, through which it derives $1 million of income in an income year. This income is comprised of $500,000 of interest, $300,000 of royalties and $200,000 of dividends.

ADHP Investments CCIV distributes $1,000, comprised of the same proportions, to a member who is a resident of a country with which Australia has double taxation agreement.

Applying the priority rule and deeming principle, for treaty purposes, the distribution is not recognised as a $1,000 dividend payment by ADHP Investments CCIV to the member. Instead, the income derived by ADHP Investments CCIV retains its character in the hands of the member, meaning that they receive $500 of interest, $300 of royalties and $200 of dividends. These amounts are subject to any applicable treaty arrangements, including the withholding rates for interest, royalties and dividends.

For more information see withholding rules.

GST liability under the CCIV tax framework

The deemed trust relationship that arises under the CCIV tax framework also applies for GST purposes.

Supplies

Supplies by corporate director

The corporate director needs to consider the capacity in which it makes supplies and acquisitions. For example:

• When the corporate director makes supplies in its own capacity (as a public company), it will be liable for GST on those supplies, subject to meeting the requirements of section 9-5 of the GST Act.
• When the corporate director makes acquisitions from third parties in its capacity as corporate director, the acquisition is made by the CCIV sub-fund trusts - in this case the corporate director won't be liable for GST.

Issue of shares in a CCIV

When a CCIV issues shares referable to a sub-fund (in legal form), it is treated for tax purposes as the supply of units issued by the CCIV sub-fund trust. The CCIV sub-fund trust is treated as making the supply rather than the CCIV.

If the CCIV sub-fund trust is registered or required to be registered for GST, this supply will be treated as a financial supply of a security by the CCIV sub-fund trust. This supply is therefore an input taxed financial supply.

The supply may be GST-free if made in certain circumstances to a non-resident:

• outside the indirect tax zone
• for use outside the indirect tax zone.

Other supplies by a CCIV sub-fund trust

A CCIV sub-fund trust may make other supplies such as selling assets (for instance, real property) of the sub-fund.

GST liability from these supplies will be determined under the general GST rules as if each CCIV sub-fund trust was a separate entity.

Acquisitions and input tax credits

In a GST context, a CCIV sub-fund trust may make acquisitions of goods and services from:

• the corporate director acting in its own capacity
• other entities, via the corporate director acting in its capacity as corporate director of the CCIV for each CCIV sub-fund trust.

In either case, the CCIV sub-fund trust may be entitled to an input tax credit or reduced input tax credit.

If the corporate director makes acquisitions of goods and services for a CCIV sub-fund trust, it will not be entitled to any input tax credits.

Tax invoices for CCIV sub-fund trusts

A tax invoice must contain enough information to ascertain the recipient's identity or ABN if the total price is at least $1,000. For CCIV sub-fund trusts this means where an acquisition is for:

• a single CCIV sub-fund trust, the information in the tax invoice must determine the identity or ABN of that CCIV sub-fund trust before attributing the input tax credit
• more than one CCIV sub-fund trust, the information in the tax invoice must determine the identity or ABN of each CCIV sub-fund trust.

The significant global entity (SGE) concept determines whether an entity is subject to a number of tax integrity and reporting measures.

The SGE concept was introduced by the Tax Laws Amendment (Combating Multinational Avoidance) Act 2015 to define the population subject to the multinational anti-avoidance law (MAAL), country-by-country reporting (CBC reporting) and the entities required to give the Commissioner a general purpose financial statement (GPFS). Subsequently, the SGE concept was used to define entities that may be subject to the diverted profits tax (DPT) and increased administrative and other penalties.

More recently, the SGE concept was expanded by the Treasury Laws Amendment (2020 Measures No. 1) Act 2020External Link so that, for income years or periods commencing on or after 1 July 2019, the concept applies to groups of entities headed by an entity other than a listed company – mirroring how it applies to groups headed by a listed company. In both cases, exceptions to consolidation and rules on materiality that may permit an entity not to consolidate with other entities are to be disregarded.

As a consequence, the SGE concept can apply to entities such as high wealth individuals; partnerships; trusts; those considered to be non-material to a group as well as certain investment entities (and those that they control), including in circumstances where consolidated financial statements have not been prepared.

The amendments also introduce the concept of country-by-country reporting entity (CBC reporting entity) to define those entities within the expanded SGE population that have CBC reporting obligations and that may be required to give the Commissioner a GPFS. This means that:

• for income years commencing from 1 July 2019, CBC reporting and GPFS lodgment obligations rely on an entity's CBC reporting entity status
• for income years commencing before 1 July 2019, CBC reporting and GPFS lodgment obligations rely on an entity's SGE status.

If an entity is an SGE, it needs to determine whether it may also be a CBC reporting entity. This may turn on whether certain exceptions under the relevant accounting rules are applied or disregarded, in the context of the accounting rules that define control and that determine the consolidation of entities. These standards are represented by AASB 10 and any relevant equivalent rules in other applicable accounting standards.

Consequences of being an SGE

Entities that are SGEs may be subject to the following:

• the multinational anti-avoidance law (MAAL)
• the diverted profits tax (DPT)
• increased administrative and other penalties.

Entities that are also CBC reporting entities may have:

• CBC reporting obligations
• a GPFS obligation if they are a corporate tax entity.

An entity is required to complete the relevant SGE label in their annual income tax return if it is an SGE. This applies to the company, trust, partnership and fund income tax returns.

Note: The examples provided in this content are illustrative only and should not be taken as representing a conclusive outcome with respect to a particular fact pattern as it is acknowledged that an entity's circumstances will be unique, including whether the taxpayer is part of a tax consolidate or MEC group.

Find out about:

• Significant global entity definition
• Global parent entity
• Member of a group of entities consolidated for accounting purposes
• Notional listed company groups and significant global entities
• Joining or leaving a group

See also:

• Significant global entities – prior to 1 July 2019
• Country-by-country reporting entities
• Tax Laws Amendment (Combating Multinational Tax Avoidance) Act 2015External Link

Significant global entity definition

An SGE is defined in Subdivision 960-U of the Income Tax Assessment Act 1997 (ITAA 1997). For income years commencing on or after 1 July 2019, an entity is an SGE for a period if it is any of the following:

• a global parent entity (GPE) with an annual global income of A$1 billion or more
• a member of a group of entities consolidated for accounting purposes as a single group and one of the other group members is a GPE with an annual global income of A$1 billion or more
• a member of a notional listed company group and one of the other group members is a GPE with an annual global income of A$1 billion or more.

A notional listed company group is a group of entities that would be required to be consolidated as a single group for accounting purposes if a member of that group were a listed company. However, exceptions in accounting principles that may permit an entity not to consolidate with other entities will need to be disregarded.

An entity is also an SGE for a period if it, or any other member of the actual or notional accounting consolidated group of which the entity is a member, has been given a notice by the Commissioner determining that its GPE has an annual global income of A$1 billion or more for the period.

Such a determination may be made if global financial statements have not been prepared, and based on available information, it is reasonable for the Commissioner to conclude that the annual global income of the GPE would have been A$1 billion or more. The GPE, or another entity that becomes an SGE as a result of a determination, must be notified in writing. Any such determination by the Commissioner is reviewable under Part IVC of the Taxation Administration Act 1953.

Due to the expansion of the SGE definition discussed above, the need for the Commissioner to issue a determination to deem an entity to be an SGE is expected to be limited. This is because entities for income years commencing from 1 July 2019, in the absence of having global financial statements, will need to self-assess their SGE status in conformance with the notional listed company group rules.

An SGE can be a public or private company, a trust, a partnership or an individual. Further, the SGE definition covers:

• Australian-headquartered entities (with or without foreign operations)
• foreign-headquartered multinationals (with or without local operations).

The SGE status of an entity may change for a subsequent period if the annual global income of the GPE of a group falls below A$1 billion, which may occur in some circumstances due to changes to a group's structure.

Global parent entity

A global parent entity (GPE) is an entity that is not controlled by another entity according to Australian accounting principles. If Australian accounting principles don't apply in relation to the entity, then whether an entity is controlled by another entity is determined according to commercially accepted principles related to accounting (also known as commercially accepted accounting principles or CAAP).

A GPE is usually a member of a group of entities. However, a GPE may be a single entity that does not control any other entities. For income years from 1 July 2019, an individual may meet the definition of a GPE.

If according to applicable accounting standards, an incorporated joint venture is not controlled by any single entity, it may be a GPE in its own right.

An entity such as a private company, an individual, a partnership or a trust can be a GPE of a group even if it's not required to apply Australian accounting principles or other CAAP.

Whether an entity controls other entities is a factual matter determined by the application of Australian accounting principles or other applicable CAAP, subject to any modifications required by the legislation. The outcome of this application of the rules determines the membership of a group consolidated for accounting purposes or a notional listed company group.

Determining control using accounting principles

If Australian accounting principles apply to an entity or need to be considered by a member of a notional listed company group, particular attention should be paid to Australian Accounting Standard AASB 10, Consolidated Financial Statements, as updated from time to time by the Australian Accounting Standards Board.

Paragraphs B2–B4 of AASB 10 were updated on 2 March 2020 and provide the framework for assessing control as follows:

B2 An investor controls an investee if and only if the investor has all the following characteristics:

(a) Power over the investee

(b) Exposure, or rights, to variable returns from its involvement with the investee

(c) the ability to use its power over the investee to affect the amount of the investors returns.

B3 Consideration of the following factors may assist in making that determination:

(a) the purpose and design of the investee (see paragraphs B5–B8)

(b) what the relevant activities are and how decisions about those activities are made (see paragraphs B11–B13)

(c) whether the rights of the investor give it the current ability to direct the relevant activities (see paragraphs B14–B54)

(d) whether the investor is exposed, or has rights, to variable returns from its involvement with the investee (see paragraphs B55–B57), and

(e) whether the investor has the ability to use its power over the investee to affect the amount of the investor’s returns (see paragraphs B58–B72).

B4 When assessing control of an investee, an investor shall consider the nature of its relationship with other parties (see paragraphs B73–B75).

In all cases, all the relevant facts and circumstances must be evaluated in accordance with the applicable edition of AASB 10 or the applicable standard in CAAP.

In most cases, assessing control should be straightforward, such as where control is clear by virtue of the ownership of the majority of the voting power in an investee. In other cases, assessing control can be more complex, such as when the control arises from one or more contractual arrangements. In such cases, the elements outlined in Appendix B of AASB 10 may be relevant to determining control.

The use of a suitably qualified practitioner may lower the risk of not correctly identifying a GPE, if the practitioner makes an adequately documented analysis and signs off on their assessment. Where relevant, the analysis would specifically include an assessment of the use of exceptions to consolidation under the relevant accounting standards.

An example of a suitably qualified practitioner would be a Chartered Accountant (CA) or Certified Practising Accountant (CPA) or a Company Auditor who is registered with the Australian Securities and Investments Commission. Any risk of a failing to correctly identify a GPE may be further mitigated where a qualified accountant provides an independent opinion on the issue. This could be done as part of an entity’s regular governance process.

See also:

• Australian Accounting Standards BoardExternal Link
• AASB 10 (PDF 844KB)This link will download a file updated on 2 March 2020

Global financial statements

The financial statements of a GPE for an income year are global financial statements if they are prepared and audited in accordance with either:

• Australian accounting standards and auditing principles, or
• if Australian accounting standards and auditing principles do not apply, with other commercially accepted principles relating to accounting and auditing.

Also, the financial statements must cover the most recent period (not necessarily the income year) ending within 24 months before the end of the income year.

The period for which such statements would have been prepared is the latest annual accounting period the GPE has adopted. The annual accounting period may not necessarily align with a GPE’s income year (if any). However, if the GPE does not keep and prepare accounts periodically then the relevant period to consider would be the GPE’s income year. In the event a GPE does not have an income year, the period should be the income year of the Australian parent entity.

What is CAAP (where Australian accounting standards don't apply)?

Commercially accepted principles relating to accounting would usually be the standards in use in the country where the entity is resident or carries on its principal business activities. These standards are typically developed and enforced by the relevant country.

In addition, these principles must ensure that the relevant financial statements provide a true and fair view of a GPE's financial position. Where the SGE rules need to be applied by entities that belong to non-audited groups that are resident in jurisdictions other than Australia, this means that either IFRS 10 or ASC 810 may be more applicable, depending on the circumstances.

We accept the following accounting standards as being 'commercially accepted principles relating to accounting':

• International Financial Reporting Standards (IFRS)
• accounting standards that are IFRS compliant as published on IFRS.Org (such as Australian accounting standards or IFRS as adopted by the European Union)
• US generally accepted accounting principles (GAAP)
• accounting standards that are accepted by ASX Limited from time to time for the purposes of its Listing Rules.

Where the accounting standards listed above do not apply in your circumstances, the guidance provided in paragraphs A8, and paragraphs 3 and 4 in Appendix 2 of the Auditing Standard ASA 210 (PDF 1.1MB)This link will download a file will assist you in determining whether the accounting standards applied to prepare your financial statements are CAAP.

Annual global income

If a GPE is a member of a group of entities that are consolidated for accounting purposes, the GPE’s ‘annual global income’ for a period is the total annual income of the consolidated group disclosed in one or more items in its latest ‘global financial statements’.

For a 'stand-alone' GPE that is not consolidated for accounting purposes with any other entities, and there are no other entities that would fall within a notional listed company group of the GPE, the annual global income for a period is the total income of the entity disclosed in one or more items of that entity's latest global financial statements (stand-alone financial statements).

If a stand-alone GPE has not prepared global financial statements, its annual global income is the amount that would have been shown in such statements had they been prepared.

When determining annual global income, amounts shown in global financial statements in currencies other than Australian dollars must be converted into Australian currency, at the average exchange rate for the period for which the statements are prepared. The exchange rates or average exchange rate the entity uses to convert amounts into Australian currency must come either from:

• sources specified by notice from the Commissioner, or
• sources independent of that GPE or any of its associates.

If a GPE is a member of a notional listed company group of entities, that GPE’s annual global income for a period is the total annual income of the notional listed company group disclosed in one or more items in its latest global financial statements (if any).

In practice, a GPE that is a member of a notional listed company group of entities may not normally have global financial statements or not have global financial statements covering itself and all the members of the notional listed company group. In such instances, the annual global income of the GPE is the amount that would have been shown in consolidated global financial statements for the notional listed company group, if such statements had been prepared.

There is no requirement for a GPE of a notional listed company group to actually prepare global financial statements. However, adequate documentation must support any assessment of whether the members of the notional listed company group are SGEs or not.

Where a member of a notional listed company group has GPFS obligations, the group may wish to prepare global financial statements to satisfy their GPFS obligations and at the same time to work out their SGE status.

Income is defined in the Conceptual Framework for Financial Reporting, published by the AASB, as '… increases in assets, or decreases in liabilities, that result in increases in equity, other than those relating to contributions from holders of equity claims' (para. 4.68).

Typically, this would include:

• revenue
• gains from investment activities
• other inflows that go to the determination of the profit or loss.

The annual global income is the total of income that goes to the determination of profit or loss in accordance with Accounting Standard AASB 101External Link, as shown on the global financial statements or would have been shown had such statements been prepared. While the definition of income also encompasses other comprehensive income, annual global income does not include other comprehensive income, as it does not go to the determination of profit or loss.

Similar principles should be applied in determining which items in the financial statements are considered in working out the annual global income where commercially accepted principles relating to accounting are used.

Some transactions may be recorded as part of income on a net basis in accordance with the accounting standards. Items might be labelled as ‘net banking product’, 'net gains', 'net losses', or ‘net revenues’ in the financial statements. For example, an income or gain from a financial transaction, such as an interest rate swap, may be reported on a net basis under the accounting rules.

The term ‘income’ for the purposes of annual global income includes the net amount, as long as that net amount is in accordance with the applicable accounting standards. For example, the net amount may be included in working out the 'Total net investment income/loss' or 'Other income'.

If financial statements are prepared for a period other than 12 months (for example, because it is the first accounting period after an entity’s formation), then the annual global income should be prorated if longer than 12 months, or extrapolated, if shorter, to an annual amount.

Member of a group of entities consolidated for accounting purposes

One way an entity will be an SGE is 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 GPE with annual global income of $1 billion or more.

This is the case in relation to income years that commenced from 1 January 2016.

Notional listed company groups and significant global entities

Another way in which an entity may be an SGE is if it is a member of a notional listed company group.

The Treasury Laws Amendment (2020 Measures No. 1) Act 2020 expanded the SGE definition so that, for income years commencing from 1 July 2019, it applies to a group of entities headed by an entity other than a listed company in the same way as it applies to a group headed by a listed company.

A notional listed company group is a group of entities that would be required to be consolidated as a single group for accounting purposes had an entity (the test entity) been a listed company. The test entity would generally be the GPE of the group of entities that are potentially in scope of the SGE definition.

For the purposes of the SGE definition, the test entity is treated as if any of its shares were listed for quotation in the official list of a stock exchange in Australia or elsewhere. The following principles should be used when determining the accounting standards that must be applied:

• If the test entity is currently subject to Part 2M.3 of the Corporations Act 2001, the notional consolidation must follow Australian accounting standards, including AASB 10.
• If the test entity is not subject to Part 2M.3 of the Corporations Act 2001, the notional consolidation must apply CAAP.

The test entity is assumed to be a company and is then treated as if it were listed in its jurisdiction of operation and had to apply the accounting standards that would apply to it under the relevant listing rules. The appropriate stock exchange is that on which the entity would be most likely to seek listing of its shares having regard to factors such as the entity's tax residence, place of formation, regulatory context and financial market access. These principles apply irrespective of whether there is a stock exchange in the jurisdiction in which a test entity is resident.

Where the listing of shares on the relevant stock exchange would require the use of a particular accounting standard (or standards) by the entity for financial reporting, this mandatory standard (or one of the mandatory standards) will be the CAAP to be applied in identifying the notional listed company group.

The test entity may be any kind of entity, including an individual, a partnership, a limited partnership, a trust or a private company. Irrespective of whether the test entity in its own capacity could be listed on a stock exchange under the relevant listing rules, the notional listed company group test is applied as if the test entity were a listed company.

For example, while an individual or a partnership cannot be listed on a stock exchange, for the purposes of the SGE definition it should be hypothesised that had such an entity been listed, it would be required to prepare financial statements in accordance with the relevant accounting standards which may include a requirement to prepare consolidated financial statements.

The notional listed company group identified with the test entity covers the group of entities that would have been required to be consolidated by the test entity as a single group for accounting purposes had the test entity been a listed company. When determining an entity's SGE status, if one entity (such as the test entity) within the notional listed company group is an SGE, then all other entities of the notional listed company group will be SGE's.

Modification to accounting standards

In determining whether an entity is an SGE by virtue of its membership of a notional listed company:

• exceptions to consolidation, such as those that may apply to investment entities in AASB10, must be disregarded
• entities that are considered immaterial under the relevant accounting rules must be included as members of the notional listed company group

Disregard exceptions to consolidation

When applying the notional listed company group rules, any exceptions in the relevant accounting principles that may permit an entity not to consolidate with other entities must be disregarded.

For example, AASB 10 and equivalent rules in other accounting standards, provide exceptions to consolidation that apply to investment entities. The definition of an investment entity is as provided for in the relevant accounting standard. Entities that may have the profile of an investment entity under the accounting standards include those that operate as private equity, superannuation and sovereign wealth funds.

Under the notional listed company group rules, this exception to consolidation is to be disregarded for the purposes of determining an entity's SGE status. This means that an investment entity that is a GPE must disregard this exception and consider what its consolidated annual global income would have been had it been a listed entity and likewise have applied the modified accounting rules. That is, an investment entity that controls other entities and is not required to consolidate those other entities under AASB 10 or an equivalent standard will be a member of a notional listed company group along with those entities.

Similarly, an entity whose GPE is an investment entity must consider what their GPE’s annual global income would have been, in accordance with the modified accounting rules.

Disregard exclusion of immaterial entities

The modification of the accounting rules under the notional listed company group rules requires exceptions to consolidation relating specifically to materiality to be disregarded when identifying the members of the notional listed company group.

This means that an entity that is not included in a group's consolidated financial statements, and whose non-inclusion in those statements is not material due to its size or another matter, is a member of the notional listed company group.

See also:

• Further examples (on the CBC reporting entities page)

Joining or leaving a group

If you join or leave a group that is consolidated for accounting purposes as a single group, or a notional listed company group, you are an SGE for a period (such as an income year) – where one of the following applies at the end of the period:

• you remain outside of a group and your annual global income as shown in your global financial statements, relevant for the period, is A$1 billion or more
• you are a member 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 GPE of the group you have joined, is A$1 billion or more
• you are a member of a notional listed company group whose GPE has annual global income of A$1 billion or more.

Generally, joining or leaving a group is brought about by changes in ownership or control as set out by the relevant applicable accounting standards regarding consolidation or otherwise in the rules that determine your membership of a notional listed company group.

Membership of a group you left during the period is not relevant in determining whether you are an SGE for the period. The law simply requires you to be a member of a group of entities consolidated for accounting purposes as a single group, or a member of a notional listed company group, as at the end of the period.

Related provisions

Country-by-country reporting entities

CBC reporting entities are a subset of the SGE population and have two distinct reporting obligations:

• CBC reporting (BEPS Action 13This link opens in a new window), which is part of a broader suite of international measures aimed at combating tax avoidance, in particular through more transparent exchanges of information between countries
• CBC reporting entities that are corporate tax entities may be required to give us a general purpose financial statement if they have not otherwise lodged a GPFS with the Australian Securities and Investments Commission (ASICExternal Link).

See also:

• CBC reporting entities

Multinational anti-avoidance law (MAAL)

The MAAL applies to SGEs that are involved in certain schemes on or after 1 January 2016, irrespective of when the scheme commenced. Under the MAAL, we can cancel any tax benefits an SGE and its related parties obtain from certain schemes.

See also:

• Combating multinational tax avoidance – a targeted anti-avoidance law

Diverted profits tax (DPT)

The DPT aims to ensure that the tax paid by SGEs correctly reflects the economic substance of their activities in Australia and prevents the diversion of profits offshore through contrived arrangements.

It also encourages SGEs to provide sufficient information to us to allow for more timely resolution of tax disputes.

See also:

• Diverted profits tax 

Increased administrative and other penalties for SGEs

Increased penalties apply to SGEs. Administrative statement penalties and scheme penalties are doubled, and the failure to lodge on time penalties are significantly higher.

For entities that are SGEs as a result of the expanded definition introduced by the Treasury Laws Amendment (2020 Measures No. 1) Act 2020, the increased administrative penalties do not apply until 1 July 2020.

See also:

• Significant global entities – penalties

Contact details

If you have any questions, email SGE@ato.gov.au.

Penalties for significant global entities

Administrative statement penalties, scheme penalties and failure to lodge (FTL) on time penalties are increased when they are applied to significant global entities (SGEs). Administrative statement penalties and scheme penalties are doubled, and the FTL penalties are significantly higher.

There are different ways we calculate these penalties.

Administrative statement penalties

• are doubled from 1 July 2017 (twice the amount that applies to all other taxpayers) for SGEs that make a false or misleading statement
• take a tax position that is not reasonably arguable
• fail to provide documents when required and we determine the liability without the document.

The doubled penalty applies from:

• 5 December 2019 for a SGE subsidiary member of a consolidated group or a multiple entry consolidated (MEC) group
• 1 July 2020 for entities satisfying the updated SGE definition per Treasury Laws Amendment (2020 Measures No. 1) Act 2020
• 1 July 2017 for all other SGEs.

False or misleading statement penalty – shortfall amount

A SGE will be liable for this penalty if the entity makes a false or misleading statement (for example, in a tax return, activity statement or amendment request) that results in the entity having a shortfall amount. If the SGE has a tax agent, the entity will also be liable for any false or misleading statements made by the tax agent on the entity's behalf.

The shortfall amount is the difference between the correct tax liability or credit entitlement, and the liability or entitlement worked out using the information the entity provides. Generally, an entity will not be penalised where the entity:

• or the entity’s tax agent (if relevant) took reasonable care in making the statement – however the entity may still be subject to another penalty provision, such as taking a position that is not reasonably arguable
• applied a tax law in a particular way, and that way agrees with our advice, published statements or general administrative practices in relation to that tax law.

The base penalty is a percentage of the shortfall amount. The percentage used is determined by the behaviour that led to the shortfall, and is then doubled for SGEs. If the SGE has a tax agent, it will be determined by their behaviour as well.

The base penalty amount can be increased or reduced if there are aggravating or mitigating circumstances, or remitted where it is fair and reasonable to do so.

For more information, see PS LA 2012/5 Administration of the false or misleading statement penalty – where there is a shortfall amount.

False or misleading statement penalty – no shortfall amount

A SGE will be liable for this penalty if the entity, or their tax agent, makes a false or misleading statement (for example, in an objection, private ruling request or during an audit) that does not result in the entity having a shortfall amount. Generally, an entity will not be penalised where the entity:

• or the entity’s tax agent (if relevant) took reasonable care in making the statement
• applied a tax law in a particular way, and that way agrees with our advice, published statements or general administrative practices in relation to that tax law.

The base penalty is calculated as a multiple of a penalty unit. The multiple used is determined by the behaviour that led to the false or misleading statement, and is then doubled for SGEs. If the SGE has a tax agent, it will be determined by their behaviour as well.

The base penalty amount can be increased or reduced if there are aggravating or mitigating circumstances, or remitted where it is fair and reasonable to do so.

For more information, see PS LA 2012/4 Administration of the false or misleading statements penalty – where there is no shortfall amount.

Taking a position that is not reasonably arguable

If a SGE or their tax agent treats an income tax or petroleum resource rent tax (PRRT) law as applying in a manner that is not reasonably arguable, and the resulting shortfall amount exceeds a certain threshold, the SGE will be liable for a base penalty of 50% of the shortfall amount. The threshold is greater of:

• $20,000 or 2% of the entity's net income (if any) worked out on the basis of its return for partnerships and trusts
• $10,000 or 1% of the taxpayer's income tax or PRRT worked out on the basis of their income tax or PRRT return for all other taxpayers.

The base penalty amount can be increased or reduced if there are aggravating or mitigating circumstances, or remitted where it is fair and reasonable to do so.

For more information, see MT 2008/2 Shortfall penalties: administrative penalty for taking a position that is not reasonably arguable.

Penalty for failing to make a statement

A SGE is liable for a penalty of 150% of the tax-related liability if both of the following apply:

• the entity fails to lodge a document necessary to establish its tax-related liability
• in the absence of that document, we determine the entity's tax-related liability.

This penalty will apply if, for example, the entity fails to lodge a tax return and we determine the entity's income tax liability by other methods.

The base penalty amount can be increased in some instances, or remitted where it is fair and reasonable to do so.

Scheme penalties

Administrative penalties are doubled for a SGE that enters into tax avoidance and profit shifting schemes, unless they have a reasonably arguable position.

These doubled scheme penalties apply from:

• 1 July 2020 for entities satisfying the updated SGE definition per Treasury Laws Amendment (2020 Measures No. 1) Act 2020
• 1 July 2015 for all other SGEs.

Failure to lodge on time penalty

The FTL on time base penalty amount is multiplied by 500 where the entity is a SGE. FTL penalties apply when they do not lodge an approved form by its due date. Examples of approved forms include:

• income tax returns
• activity statements and GST annual returns
• fringe benefits tax returns
• country-by-country (CBC) reporting statements
• general purpose financial statements
• Single Touch Payroll reports
• PAYG payment summary annual reports
• taxable payments annual reports.

These increased FTL penalties apply to approved forms due on or after:

• 5 December 2019 for a SGE subsidiary member of a consolidated group or a MEC group
• 1 July 2020 for entities satisfying the updated SGE definition per Treasury Laws Amendment (2020 Measures No. 1) Act 2020
• 1 July 2017 for all other SGEs.

Approved forms that are discretionary, such as voluntary disclosures or objection requests, cannot have FTL penalties applied.

Before applying FTL penalties

We may issue a warning or reminder before we impose a FTL penalty. However, this is not required under the law. Not receiving a warning or reminder from us is not grounds for non-imposition or remission of an FTL penalty.

SGEs should be extra vigilant to have processes in place to ensure all lodgments are made on time to avoid the application of FTL penalties.

Avoid penalties

To avoid penalties, SGEs should:

• understand their reporting obligations
• lodge their approved forms on time.

A SGE is required to complete the relevant SGE label in their annual income tax return. This applies to the company, trust, partnership and fund income tax returns.

A SGE needs to determine whether it may also be a CBC (country-by-country) reporting entity. CBC reporting entities are a subset of the SGE population, and may have additional lodgment obligations. Entities that are also CBC reporting entities may have:

• an obligation to lodge CBC reporting statements
• an obligation to lodge a general purpose financial statement if they are a corporate tax entity.

A SGE that takes reasonable care with their tax obligations will not incur a false or misleading statement penalty.

Where we have imposed administrative statement penalties, scheme penalties or FTL penalties, a SGE will have the opportunity to seek a remission of the penalty.

Lodgment deferrals

If a SGE is unable to meet lodgment deadlines due to exceptional and unforeseen circumstances, they can request a deferral.

Entities should request a lodgment deferral as soon as practicable once they believe they cannot meet a due date. If they lodge after the deferred due date, it will be considered a failure to lodge on time and penalties may be applied.

Safe harbour

Safe harbour provisions aim to ensure that services provided to the public by registered tax agents and BAS agents are of an appropriate ethical and professional standard. In certain circumstances, a client of a registered tax agent or BAS agent will not be liable to certain administrative penalties.

Automatic Exchange of Information

Penalties applied to Automatic Exchange of Information reporting requirements are increased for SGEs. These reporting requirements include:

• Common Reporting Standard
• Foreign Account Tax Compliance Act.

Both reports contain statements required to be lodged in an approved form.

Practice statements

The following practice statements provide guidance on our administrative practice for the imposition and remission of penalties to which the increases for SGEs apply:

• MT 2008/1 Penalty relating to statements: meaning of reasonable care, recklessness and intentional disregard
• MT 2008/2 Shortfall penalties: administrative penalty for taking a position that is not reasonably arguable
• PS LA 2011/19 Administration of the penalty for failure to lodge on time
• PS LA 2011/30 Remission of administrative penalties relating to schemes imposed by subsection 284-145(1) of Schedule 1 to the Taxation Administration Act 1953
• PS LA 2012/5 Administration of the false or misleading statement penalty – where there is a shortfall amount
• PS LA 2012/4 Administration of the false or misleading statement penalty – where there is no shortfall amount
• PS LA 2014/2 Administration of transfer pricing penalties for income years commencing on or after 29 June 2013
• PS LA 2014/4 Default assessment penalty.

More information

If you have any questions related to SGE penalties, email us at SGE@ato.gov.au.

For information on law changes that impact the application of SGE penalties, see:

• Treasury Laws Amendment (2019 Measures No. 3) Act 2020External Link (Application of penalties to subsidiary entities)
• Treasury Laws Amendment (2020 Measures No. 1) Act 2020External Link (Transitional penalty provisions for entities that meet the expanded SGE definition.

The significant global entity (SGE) concept determines whether an entity is within the scope of a suite of tax integrity and reporting measures. The original concept of SGE was introduced by the Tax Laws Amendment (Combating Multinational Tax Avoidance) Act 2015External Link.

The SGE concept was subsequently amended by the Treasury Laws Amendment (2020 Measures No. 1) Act 2020, with application to income years or periods starting from 1 July 2019.

The information below explains the SGE concept as applicable to income years commencing before 1 July 2019.

See also

• Treasury Laws Amendment (2020 Measures No. 1) Act 2020External Link
• Significant global entities

Significant global entity definition

An SGE is defined in Subdivision 960-U of the Income Tax Assessment Act 1997 (ITAA 1997). For income years commencing prior to 1 July 2019, an entity is an SGE for a period if it is one of the following:

• a global parent entity whose annual global income is 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.

This definition includes both:

• Australian-headquartered entities (with or without foreign operations)
• the local operations of foreign-headquartered multinationals.

An entity is also an SGE for a period when the Commissioner makes a determination in relation to the relevant global parent entity. A determination may be made if global financial statements have not been prepared and, based on available information, it is reasonable for the Commissioner to conclude that the annual global income of the global parent entity would have been A$1 billion or more.

The global parent entity, or another entity that becomes an SGE as a result of a determination, must be notified in writing. Any such determination by the Commissioner is reviewable under Part IVC of the Taxation Administration Act 1953 (TAA 1953).

The SGE status may change for a subsequent period. This may be caused by the annual global income of the global parent entity falling below A$1 billion, or changes to the group structure.

An entity is required to complete the relevant SGE label on its income tax returns from 2017 if it is an SGE. This applies to company, trust, partnership and superannuation fund income tax returns.

Global parent entity

A global parent entity is an entity that is not controlled by another entity according to Australian accounting principles, or, where they don't apply in relation to the entity, commercially accepted principles related to accounting.

Commercially accepted principles relating to accounting would usually be the standards in use in the country where the entity is resident or carries on its principal business activities. These standards are typically developed and enforced by the relevant country. In addition, these principles must ensure that the relevant financial statements provide a true and fair view of the global parent entity's financial position. Examples of recognised principles include International Financial Reporting Standards (IFRS). Also, accounting standards that are IFRS-compliant, such as Australian Accounting Standards and US generally accepted accounting principles, are recognised as commercially accepted accounting principles.

Where, as determined in accordance with recognised accounting standards, an incorporated joint venture is not controlled by any single entity it will be a global parent entity.

A global parent entity is usually a member of a group of entities. However, it is possible for a global parent entity to be a single entity that does not control any other entities.

An entity directly owned and controlled by an individual can also be a global parent entity.

Member of a group of entities consolidated for accounting purposes

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.

A subsidiary excluded from the consolidated financial statements of its global parent entity (for example on the grounds of materiality or because its global parent entity is an investment entity), is not an SGE.

Joining or leaving an accounting consolidated group

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

• you remain outside of a group and your annual global income as shown in your global financial statements, relevant for the period, is A$1 billion or more
• you are 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 you have joined, is A$1 billion or more.

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

Annual global income

If a global parent entity is a member of a group of entities that are consolidated for accounting purposes, the global parent entity’s annual global income for a period is the total of the income amount of the consolidated group disclosed in one or more items in its latest global financial statements.

For a global parent entity that is not consolidated for accounting purposes with any other entities, the annual global income for a period is the total income of the entity disclosed in one or more items of that entity's latest global financial statements (referred to as stand-alone financial statements).

The latest global financial statements for a global parent entity for an income year are financial statements (whether stand-alone or consolidated) that:

• are prepared and audited in accordance with Australian Accounting Standards and auditing principles
• cover the most recent period (not necessarily the income year) ending within 24 months before the end of the income year.

If Australian Accounting Standards and auditing principles don’t apply in relation to a global parent entity, its global financial statements (whether stand-alone or consolidated) must be prepared and audited in accordance with commercially accepted principles relating to accounting and auditing. They must ensure the financial statements give a true and fair view of the financial position and performance of the global parent entity.

Amounts shown in global financial statements in currencies other than Australian dollars must be converted into Australian currency at the average exchange rate for the period for which the statements are prepared. The exchange rates or average exchange rate the entity uses to convert amounts into Australian currency must come either from sources specified by notice from the Commissioner or from sources other than the entity itself or any of its associates.

If the accounts of an entity are not included in the consolidated financial statements of its global parent entity – for example, on the grounds of materiality or because the global parent entity is an investment entity – then, subject to any exception from consolidation under accounting standards, the income is not included in the amount of annual global income.

The definition of 'income' under Australian Accounting Standards includes:

• revenue
• extraordinary income
• gains from investment activities
• other inflows that go to the determination of the profit or loss.

The annual global income is the total of income that goes to the determination of profit or loss in accordance with Accounting Standard AASB 101External Link, as shown on the global financial statements. While the definition of income also encompasses other comprehensive income, annual global income does not include other comprehensive income, as it does not go to the determination of profit or loss.

Where commercially accepted principles relating to accounting are used, similar principles should be applied in determining which items in the financial statements are taken into account in working out the annual global income.

Some transactions may be recorded as part of income on a net basis in accordance with the accounting standards. Items might be labelled as ‘net banking product’, 'net gains', 'net losses', or ‘net revenues’ in the financial statements. For example, an income or gain from a financial transaction, such as an interest rate swap, may be reported on a net basis under the accounting rules.

The term ‘income’ for the purposes of annual global income includes the net amount (whether positive or negative), as long as that net amount is in accordance with the applicable accounting standards. For example, the net amount may be included in working out the 'Total net investment income/loss' or 'Other income'.

If financial statements are prepared for a period other than 12 months (for example, because it is the first accounting period after formation), then the annual global income should be prorated if longer than 12 months, or extrapolated, if shorter, to an annual amount.

Superannuation fund annual global income

Accounting Standard AASB 1056, applicable from 1 July 2016, excludes member contributions from the calculation of income for superannuation entities. Some superannuation funds could potentially exceed the annual global income threshold for the income year ended 30 June 2016, when they would not have met that threshold if AASB 1056 had applied to that income year.

In working out whether a superannuation fund is an SGE, entities where AASB 1056 applies may calculate annual global income in a manner consistent with AASB 1056 (i.e. excluding member contributions) for the income year prior to the first income year commencing on or after 1 January 2016.

See also

• AASB 1056 (PDF, 958KB)This link will download a file (June 2014)

Related measures

Country-by-country reporting

CBC reporting (BEPS Action 13This link opens in a new window) is part of a suite of international measures aimed at combating tax avoidance, in particular through the exchange of information between countries.

For income years starting on or after 1 January 2016 but before 1 July 2019, this measure requires SGEs to give us CBC reporting statements.

For income years commencing on or after 1 July 2019, this measure requires CBC reporting entities to give us CBC reporting statements.

See also

• Country-by-country reporting
• Country-by-country reporting entities

Multinational anti-avoidance law (MAAL)

The MAAL applies to SGEs that are involved in certain schemes on or after 1 January 2016, irrespective of when the scheme started. Under the MAAL, we can cancel any tax benefits an SGE and its related parties obtain from certain schemes.

See also

• Combating multinational tax avoidance – a targeted anti-avoidance law

General purpose financial statements

For income years starting on or after 1 July 2016, but before 1 July 2019, this measure requires SGEs that are corporate tax entities to give us a general purpose financial statement (GPFS) if they do not lodge one with the Australian Securities and Investments Commission (ASIC).

For income years commencing on or after 1 July 2019, GPFS obligations apply to CBC reporting entities that are corporate tax entities that don't lodge a GPFS with ASIC.

See also

• General purpose financial statements
• Country-by-country reporting entities
• ASICExternal Link

Increased administrative and other penalties for SGEs

Increased penalties apply to SGEs. Administrative statement penalties and scheme penalties are doubled, and the failure to lodge on time penalties are significantly higher.

For entities that are SGEs as a result of the expanded definition introduced by the Treasury Laws Amendment (2020 Measures No. 1) Act 2020, the increased administrative penalties do not apply until 1 July 2020.

If you have any questions about SGE penalties, email SGE@ato.gov.au.

See also

• Significant global entities – penalties

Diverted profits tax

The diverted profits tax (DPT) aims to ensure that the tax paid by SGEs correctly reflects the economic substance of their activities in Australia and prevent the diversion of profits offshore through contrived arrangements.

It also encourages SGEs to provide sufficient information to us to allow for the timely resolution of tax disputes.

See also

• Diverted profits tax

Related guidance

Law companion ruling

We have developed a law companion ruling (LCR) that describes how we apply the law as amended by Schedule 4 to the Tax Laws Amendment (Combating Multinational Tax Avoidance) Act 2015External Link.

More information on what is an SGE and the meaning of annual global income is in paragraphs 6 to 13 of LCR 2015/3 Subdivision 815-E of the Income Tax Assessment Act 1997: Country-by-country reporting.

Contact details

If you have any questions, email SGE@ato.gov.au.

The concept of country-by-country reporting entity (CBC reporting entity) defines a subset of the significant global entity (SGE) population that may have CBC reporting obligations or general purpose financial statement (GPFS) lodgment obligations or both.

It applies in relation to income years or other periods commencing on or after 1 July 2019. For earlier income years or periods, an entity's SGE status determines whether they may have CBC reporting or GPFS lodgment obligations.

An entity's CBC reporting obligations for an income year are triggered by their CBC reporting entity status in their previous income year. By contrast, an entity's GPFS obligation will be triggered, amongst other things, by their CBC reporting entity status for the income year.

An entity is required to complete the relevant CBC reporting entity label on the annual income tax return if it is a CBC reporting entity. The label should always be completed for the income year of reporting.

Note: The examples provided in this content are illustrative only and should not be taken as representing a conclusive outcome with respect to a particular fact pattern as it is acknowledged that an entity's circumstances will be unique, including whether the taxpayer is part of a tax consolidated or MEC group.

Find out about:

• CBC reporting entity definition
• CBC reporting parent
• Member of a group of entities consolidated for accounting purposes
• Notional listed company groups and CBC reporting entities
• Overlapping CBC reporting groups
• Further examples
• Contact details

See also:

• Significant global entities
• Significant global entities – prior to July 2019
• Country-by-country reporting
• General purpose financial statements

CBC reporting entity definition

A CBC reporting entity is defined in Subdivision 815-E of the Income Tax Assessment Act 1997. An entity is a CBC reporting entity if it is a CBC reporting parent or is a member of a CBC reporting group that includes a CBC reporting parent. An individual can never be a CBC reporting entity or CBC reporting parent.

A CBC reporting group refers to either:

• a group that is consolidated for accounting purposes as a single group, or
• a notional listed company group.

Each entity of such a group is a member of the CBC reporting group.

A CBC reporting entity includes:

• Australian-headquartered entities (with or without foreign operations)
• foreign-headquartered multinationals (with or without local operations).

CBC reporting entity status may change for a subsequent period. This may happen if the annual global income of the CBC reporting parent of a group falls below A$1 billion; this may occur in some circumstances due to changes to a group's structure.

CBC reporting parent

A 'CBC reporting parent' is an entity that is a member of a CBC reporting group that is not controlled by another entity in that group according to Australian accounting principles (AAP), or where accounting principles do not apply in relation to the entity, commercially accepted principles related to accounting (also known as commercially accepted accounting principles or CAAP).

A CBC reporting parent is usually a member of a group of entities. However, a CBC reporting parent may be a single entity that does not control any other entities. In either case, to be a CBC reporting parent, the entity's annual global income must be A$1 billion or more.

An entity such as a private company, partnership or a trust can be a CBC reporting parent of a group even if it's not required to apply Australian accounting principles or other CAAP.

An individual, however, cannot be a CBC reporting parent. In circumstances where an entity is an SGE because it is controlled by an individual that qualifies as a global parent entity (GPE), that entity must consider, as a distinct exercise, whether it is also a CBC reporting entity because it is a CBC reporting parent, or otherwise belongs to a CBC reporting group that has a CBC reporting parent.

Whether an entity controls other entities must be determined by applying Australian accounting principles or other applicable CAAP, subject to any modifications required by the legislation. The membership of a group consolidated for accounting purposes or a notional listed company group is also determined by the operation of these rules.

The following key principles (which are explained in Significant global entities) are relevant in working out whether an entity is a CBC reporting parent entity, a CBC reporting entity, or both:

• determining control using accounting principles
• global financial statements
• what constitutes CAAP (where Australian accounting standards don’t apply)
• annual global income.

When working out the annual global income of a CBC reporting parent under the notional listed company group rules, specific consideration must be given to the rules that modify the accounting standards for the purposes of determining an entity's CBC reporting entity status. These are distinct from the rules that modify the accounting standards for the purposes of determining an entity's SGE status.

Member of a group of entities consolidated for accounting purposes

One way an entity will be a CBC reporting entity is if:

• it is a member of a group of entities that is consolidated for accounting purposes as a single group, and
• one of the other members of the group is a CBC reporting parent.

Notional listed company groups and CBC reporting entities

Another way in which an entity may be a CBC reporting entity is if it is a member of a notional listed company group.

The Treasury Laws Amendment (2020 Measures No. 1) Act 2020 expanded the CBC reporting regime to ensure that, for income years commencing from 1 July 2019, it applies to a group of entities headed by an entity other than a listed company in the same way as it applies to a group headed by a listed company.

A notional listed company group is a group of entities that would be required to be consolidated as a single group for accounting purposes had an entity (the test entity) been a listed company. The test entity would generally be the CBC reporting parent entity of the group of entities that are potentially in scope of the CBC reporting entity definition. The test entity for CBC reporting purposes can be any kind of entity but cannot be an individual.

For the purposes of the CBC reporting entity definition, the test entity is treated as if its shares were listed for quotation in the official list of a stock exchange in Australia or elsewhere. The following principles should be used when determining the accounting standards that must be applied:

• If the test entity is currently subject to Part 2M.3 of the Corporations Act 2001, the notional consolidation must follow Australian accounting standards, including AASB 10.
• If the test entity is not subject to Part 2M.3 of the Corporations Act 2001, the notional consolidation must apply CAAP.

The test entity is assumed to be a company and is then treated as if it were listed in its jurisdiction of operation and had to apply the accounting standards that would apply to it under the relevant listing rules. The appropriate stock exchange is that on which the entity would be most likely to seek listing of its shares, having regard to factors such as the entity's residence, place of formation, regulatory context and financial market access. These principles apply irrespective of whether there is a stock exchange in the jurisdiction in which a test entity is resident.

Where the listing of shares on the relevant stock exchange would require the entity to use a particular accounting standard or standards for the purposes of financial reporting, this mandatory standard or one of the relevant permitted standards will be the CAAP to be applied in identifying the notional listed company group.

The test entity may be various kinds of entity, including a partnership, a limited partnership, a trust or a private company. Irrespective of whether the test entity in its own capacity could be listed on a stock exchange under the relevant listing rules, the notional listed company group test is applied as if the test entity were a listed company.

For example, while a partnership cannot be listed on a stock exchange, for the purposes of the CBC reporting entity definition, it should be hypothesised that had such an entity been listed, it would be required to prepare financial statements in accordance with the relevant accounting standards, which may require the preparation of consolidated financial statements.

The notional listed company group identified with the test entity covers the group of entities that would have been required to be consolidated by the test entity as a single group for accounting purposes had the test entity been a listed company. When determining an entity's CBC reporting entity status, should one entity (such as the test entity) within the notional listed company group be a CBC reporting entity, all other entities of the notional listed company group will also be a CBC reporting entity.

Modification to accounting standards

In determining whether an entity is a CBC reporting entity by virtue of its membership of a notional listed company group that is a CBC reporting group:

• exceptions to consolidation, such as those that may apply to investment entities in AASB 10, are applied when determining the CBC reporting group
• however, entities that are disregarded due to being immaterial under the relevant accounting rules must be included as members of a CBC reporting group.

The SGE and CBC reporting entity definitions diverge in this respect: whereas the SGE definition requires exceptions to consolidation to be disregarded, the CBC reporting entity definition does not disregard all exceptions to consolidation. However, both definitions include, within scope, entities that are immaterial to the group.

Exceptions to accounting consolidation can apply

As a general proposition, exceptions to consolidation under the applicable accounting standards can be applied when determining whether an entity is a CBC reporting entity.

An example of an exception to consolidation can be found in AASB 10 (and equivalent rules in other accounting standards) with respect to investment entities. Entities that may have the profile of an investment entity under the accounting standards include those that operate as private equity, superannuation and sovereign wealth funds.

Under the notional listed company group rules, while such exceptions to consolidation must be disregarded for the purposes of working out an entity's SGE status, some exceptions may operate for the purposes of determining an entity's CBC reporting entity status.

Disregard exclusion of immaterial entities

The modification of the accounting rules under the notional listed company group rules requires exceptions to consolidation relating specifically to materiality to be disregarded when identifying the members of a notional listed company group.

This means that an entity that is not included in a group's consolidated financial statements, and whose non-inclusion is based on it being immaterial, is a member of the notional listed company group.

See also:

• Further examples

Overlapping CBC reporting groups

In certain situations, an entity may be a member of more than one CBC reporting group. If so, the relevant CBC reporting group for such an entity is the group that has the most members.

For example, a CBC reporting parent's consolidated financial statements may be prepared on the basis of excluding a group entity. It may also decide not to reissue its financial statements on the grounds that the exclusion does not materially affect the accuracy of its statements. In the event this occurs, the CBC reporting group is thus solely comprised by the entities it included in its consolidated financial statements.

However, the notional listed company group (also the CBC reporting group) is comprised by all entities regardless of whether they have been included in the consolidated financial statements. In this scenario, the relevant CBC reporting group is the larger group that includes the entity excluded from the consolidated financial statements.

Further examples

The following examples are intended to provide further illustration of how the principles outlined above are intended to operate, particularly in determining control and identifying the relevant GPE and CBC reporting parent.

These examples are intended to be illustrative of important concepts and aspects of the definition of ‘control’ but are not intended to be exhaustive or to cover what ‘control’ means in every circumstance. As with the other examples in this guidance, they should not be taken as providing a conclusive outcome with respect to a particular fact pattern, as it is acknowledged that an entity's circumstances will be unique. In addition, conclusions may vary depending on whether the taxpayer is part of a tax consolidated or MEC group.

Related measures

Country-by-country reporting

CBC reporting (BEPS Action 13This link opens in a new window) is part of a suite of international measures aimed at combating tax avoidance, in particular through the exchange of information between countries.

See also:

• Country-by-country reporting

General purpose financial statements

This measure requires CBC reporting entities that are corporate tax entities and have local operations to give us a GPFS if they do not lodge one with ASICExternal Link.

See also:

• General purpose financial statements

Contact details

If you have any questions, email SGE@ato.gov.au.

Overview of obligations

For income years starting on or after 1 July 2019, country-by-country reporting entities (CBC reporting entities) that are also corporate tax entities with an Australian presence must give us a general purpose financial statement (GPFS) unless one has already been provided to the Australian Securities and Investments Commission (ASIC).

For previous income years starting on or after 1 July 2016 but before 1 July 2019, this lodgment obligation applied to significant global entities (SGEs) that are also corporate tax entities.

We must give a copy of the GPFS to ASIC. ASIC will place this copy on their register and make it accessible to the public.

These requirements are set out in section 3CA of the Taxation Administration Act 1953, which aims to provide greater transparency, particularly of entities belonging to large multinational and certain large private groups.

Note: All legislative references in this document are to the Taxation Administration Act 1953 unless otherwise stated.

The ATO has detailed guidance on how to fulfil section 3CA lodgment obligations. This is set out in Guidance on providing general purpose financial statements, which includes:

• who must give us a GPFS
• best practice
• how to prepare a GPFS
• how to give us your GFS
• when to give us your GPFS
• administrative arrangements.

Helping you comply

If you have difficulty complying with your section 3CA obligations, you should contact us to discuss your circumstances. In particular, you can contact us to apply for an extension of time to lodge your GPFS if you consider you are at risk of not complying because you are:

• experiencing difficulty in establishing systems within the time that you have to give us a GPFS prepared in accordance with Australian Accounting Standards
• encountering unexpected additional costs, particularly if you haven't previously prepared your financial reports in accordance with Australian Accounting Standards.

The Commissioner is obliged to apply the law. In the rare circumstances where you continue to encounter difficulties in fully complying with your 3CA obligations, you may contact us so we can work together to solve your particular issues. This may mean we can consider a practical compliance approach which takes into consideration your circumstances so you can meet your 3CA obligations.

Applying for a lodgment deferral

You need to give us your GPFS on or before the day you are required to lodge your income tax return.

If you have exceptional and unforeseen circumstances, you can request to defer your GPFS lodgment due date by sending an email to GPFS@ato.gov.au.

A deferral request may take up to 28 days in peak lodgment periods. Ensure your deferral request is lodged ahead of time or you may be liable for failure to lodge (FTL) on time penalties.

Changes to reporting obligations

Section 3CA applies to corporate tax entities that do not lodge a GPFS with ASIC, such as those that lodge special purpose financial statements (SPFS) with ASIC.

In March 2020, the Australian Accounting Standards Board (AASB) released AASB 2020-3, which removed the ability of certain for-profit private sector entities to prepare SPFS for annual reporting periods starting from 1 July 2021, with earlier application permitted. Such entities are now required to prepare a GPFS and lodge them with ASIC.

Where entities within scope of AASB 2020-3 lodge a GPFS to ASIC for the financial year most closely corresponding to their income year, they won't be required to give the Commissioner a GPFS under section 3CA.

For more information see:

• AASB 2020-2 (PDF 1.5MB)This link will download a file Amendments to Australian accounting standards – Removal of special purpose financial statements for certain for-profit private sector entities, effective 1 July 2021

Other relevant resources

• Significant global entities – penalties
• Country-by-country reporting entities
• Significant global entities – prior to 1 July 2019

Contact details

If you have any questions, email GPFS@ato.gov.au.

Legislation

The foreign exchange (forex) measures are contained in Division 775 and Subdivisions 960-C and 960-D of the Income Tax Assessment Act 1997 (ITAA 1997).

These provisions were inserted into the ITAA 1997 by the New Business Tax System (Taxation of Financial Arrangements) Act (No. 1) 2003.

Foreign currency gains and losses

Division 775 of the ITAA 1997 contains rules under which foreign currency gains and losses are brought to account when they have been ‘realised’. This is the case even if the monetary elements of the transaction are not converted to Australian dollars.

These rules apply when one of the following forex realisation events happens:

• Forex realisation event 1 – Disposal of foreign currency
• Forex realisation event 2 – Ceasing to have a right to receive foreign currency
• Forex realisation event 3 – Ceasing to have an obligation to receive foreign currency
• Forex realisation event 4 – Ceasing to have an obligation to pay foreign currency
• Forex realisation event 5 – Ceasing to have a right to pay foreign currency.

These rules apply to gains or losses that are attributable to fluctuations in a currency exchange rate, or to an agreed exchange rate differing from an actual exchange rate.

If a gain or loss is brought to tax both under Division 775 and under another provision of the tax law, it is respectively assessable or deductible only under these measures.

Special rules apply to some short-term transactions if capital gains tax (CGT) and depreciating assets are acquired or disposed of, unless an election is made that these rules not apply – Capital assets and the 12 month rule.

Common forex transactions include those made through foreign currency denominated accounts, shares and hedging transactions.

Division 775 does not apply to financial arrangements that are subject to Division 230 of the ITAA 1997 – refer to Taxation of financial arrangements (TOFA).

Translation rules

Subdivision 960-C of the ITAA 1997 provides for a general translation (conversion) rule which, broadly, expresses all tax relevant amounts in Australian currency. There is a regulation-making power under which, for example, a particular translation method could be prescribed.

Subdivision 960-D of the ITAA 1997 allows certain entities to make an election to use a foreign currency (applicable functional currency) to account for its transactions.

When the forex measures started

The measures generally apply prospectively to the realisation of assets, rights and obligations acquired or assumed on or after the applicable commencement date. This is most commonly the first day of the 2003-04 income year (that is, for most taxpayers, 1 July 2003).

If, however, you have an early substituted accounting period, and the first day of your 2003-04 income year is earlier than 1 July 2003, the applicable commencement date is the first day of the 2004-05 income year.

Generally, tax consequences of gains or losses on existing forex assets, rights and obligations that were acquired or assumed before the applicable commencement date are to be determined under the law as it was before these measures.

Two exceptions to the prospective application of the measures are:

• Transitional election
• Extension of an existing loan contract measure

Transitional election

You could choose to have the measures apply to the realisation of existing foreign currency, rights and obligations. For most taxpayers, this election had to be made by 16 January 2004. A specific anti-avoidance rule can be applied if you used this election to take undue advantage of differences in treatment between the current and previous laws.

Extension of an existing loan contract measure

If you have an existing loan that is extended by either a new contract, or a variation of the existing contract, the measures will apply after the extension.

Forex realisation event 1

Forex realisation event 1 occurs when there is a disposal from one entity to another (that is, a change in the beneficial ownership happens - capital gains tax (CGT event) A1 – of foreign currency, or a right or part of a right to receive foreign currency.

The time of the event is when the foreign currency, or the right or part of the right is disposed of.

You make a foreign exchange (forex) realisation gain if you dispose of foreign currency, or a right or part of a right to receive foreign currency for more than you paid for it, to the extent that the gain is due to fluctuations in the value of the foreign currency. This will usually be when the proceeds on disposal of the foreign currency, measured in Australian dollars, are more than the cost of acquiring the foreign currency, measured in Australian dollars.

You make a forex realisation loss if you dispose of foreign currency, or rights or parts of rights to foreign currency for less than you paid for them. This is to the extent that a loss is due to fluctuations in the value of the foreign currency.

Forex realisation event 2

Forex realisation event 2 occurs when you cease to have a right, or part of a right, to receive foreign currency. A right to receive foreign currency includes a right to receive an amount of Australian currency that is calculated by reference to an exchange rate. The term 'right' includes a right that is contingent upon something happening.

The right, or part of a right, must cease, and be one of the following:

• a right to receive income, or a right that represents ordinary income or statutory income – other than under the capital gains tax (CGT) provisions
• a right created in return for ceasing to hold a depreciating asset
• a right created or acquired for paying or agreeing to pay Australian or foreign currency
• a right created in return for a realisation event happening for a CGT asset.

If you cease to hold a right to receive foreign currency because you have disposed of that right to another entity, forex realisation event 2 does not apply, but forex realisation event 1 does.

The event happens when you cease to have the right - commonly when a right to receive foreign currency is satisfied by the actual receipt of that currency.

You make a forex realisation gain if the value of the foreign currency received when the event happens exceeds the amount you were entitled to receive, measured at the tax recognition time. This is to the extent that the gain is due to a currency exchange rate effect. The amount you are entitled to receive is called the 'forex cost base'.

The values of the foreign exchange at the relevant times will, for most taxpayers, be measured in Australian dollars.

The measures specify when the forex cost base is to be measured. The specified time when the forex cost base of a right is measured depends on the particular type of right. The classes of right used to specify the tax recognition time correspond to the classes of right to which forex realisation event 2 applies. For example, in the case of a right received which represents ordinary or statutory income, the tax recognition time is the time when the income first becomes assessable. In the case of ordinary income, that time is the time of derivation. For statutory income, that time is when the requirement first arises to include the statutory income in assessable income.

You make a forex realisation loss to the extent that the value of the foreign currency you receive when the event happens is less than the amount you were entitled to receive, measured at the tax recognition time, because of a currency exchange rate effect. You can also make a loss if you have paid for an option entitling you to receive foreign currency, and that option is not exercised. The amount of the loss is the amount paid for the option.

A currency exchange rate effect occurs when either currency exchange rates fluctuate, or when an agreed exchange rate differs from an actual exchange rate.

Forex realisation event 3

Forex realisation event 3 occurs when you cease to have an obligation, or part of an obligation, to receive foreign currency if the obligation was assumed in return for the creation or acquisition of a right to pay either foreign currency or Australian currency, or is an obligation under an option to sell foreign currency.

An obligation to receive foreign currency includes an obligation to receive an amount of Australian currency that is calculated by reference to an exchange rate. The term 'obligation' includes an obligation that is contingent upon something happening.

The event happens when you cease to have the obligation - commonly when an obligation to receive foreign currency is satisfied by the actual receipt of that currency.

Broadly, you make a forex realisation gain to the extent that the value of the foreign currency bought exceeds the amounts expended to acquire it because of a currency exchange rate effect. Generally, the amounts expended to acquire the foreign currency are referred to as the net costs of assuming the obligation. In the case of an option issued by you that is not ultimately exercised, the gain is the amount you received for issuing the option.

For most taxpayers, the values of the foreign exchange at the relevant times will be measured in Australian dollars.

The net costs of assuming the obligation are, broadly speaking, any consideration you must provide to fulfil the obligation, less any consideration received for assuming the obligation that has not already been brought to account as assessable income.

The value of the consideration to be provided by you to fulfil the obligation is measured at the time you receive an amount in satisfaction of the obligation.

Broadly, you make a forex realisation loss to the extent that the value of the foreign currency bought is less than the amount expended to acquire it because of a currency exchange rate effect. The amounts expended (the net costs of assuming the obligation) are calculated as for forex realisation gains.

A currency exchange rate effect occurs when either currency exchange rates fluctuate, or when an agreed exchange rate differs from an actual exchange rate.

Forex realisation event 4

Forex realisation event 4 occurs when you cease to have an obligation, or part of an obligation, to pay foreign currency. An obligation to pay foreign currency includes an obligation to pay an amount of Australian currency that is calculated by reference to an exchange rate. The term 'obligation' includes an obligation that is contingent upon something happening.

The obligation, or part of the obligation, must cease and be one of the following:

• an obligation that is an expense or outgoing you can deduct
• an obligation that is an element in the calculation of a net assessable or deductible amount
• an obligation that is (broadly speaking) an element of the cost base of a capital gains tax (CGT) asset
• an obligation incurred for certain depreciating assets, or a project amount, under the capital allowances regime
• an obligation incurred in return for receiving Australian or foreign currency, or the right to receive such currency
• an obligation under an option to buy foreign currency.

The event happens when you cease to have the obligation, or part of the obligation - commonly when you actually make the payment of foreign currency.

You make a forex realisation gain if the amount paid to meet the obligation is less than the proceeds of assuming the obligation, measured at the tax recognition time. This is to the extent that the gain is due to a currency exchange rate effect. You also make a forex realisation gain if you receive a payment in return for granting another party an option obliging them to sell foreign currency, and that option is not exercised.

The proceeds of assuming the obligation are, broadly, the consideration you are entitled to receive in return for incurring the obligation, less any amounts already brought to account as assessable income.

The measures specify when the proceeds of assuming the obligation are to be measured. The specified time when the proceeds of assuming the obligation are to be measured depends on the particular type of obligation. For example, if the obligation relates to an expense that is deductible, the tax recognition time is when the expense is incurred.

For most taxpayers, the values of the foreign exchange at the relevant times will be measured in Australian dollars.

You make a forex realisation loss if the amount paid to satisfy the obligation is more than the proceeds of assuming the obligation, measured at the tax recognition time. This is to the extent that the loss is due to a currency exchange rate effect.

A currency exchange rate effect occurs either when currency exchange rates fluctuate, or when an agreed exchange rate differs from an actual exchange rate.

Forex realisation event 5

Forex realisation event 5 occurs when you cease to have a right or part of a right to pay foreign currency, and the right is created or acquired in return for assuming specified types of obligations for either foreign currency or Australian currency, or is a right under an option to sell foreign currency.

A right to pay foreign currency includes a right to pay an amount of Australian currency that is calculated by reference to an exchange rate. The term 'right' includes a right that is contingent upon something happening.

The event happens when you cease to have the right, or part of the right - commonly when the right is exercised by paying the foreign currency.

Broadly, you will make a forex realisation gain to the extent that the value of the foreign currency paid under the right is less than the value of the amount you are entitled to receive in satisfaction of the right because of a 'currency exchange rate effect'. Generally, the amount you are entitled to receive in satisfaction of the right is called the 'forex entitlement base'.

For most taxpayers, the values of the foreign exchange at the relevant times will be measured in Australian dollars.

The forex entitlement base is, broadly, any consideration you are entitled to receive in satisfaction of the right, less any consideration provided to acquire the right that has not already given rise to an allowable deduction.

The value of the consideration you are entitled to receive in satisfaction of the right is measured at the time you pay an amount in satisfaction of the right.

Broadly, you will make a forex realisation loss to the extent that the value of the foreign currency paid under the right is greater than the value of the amount you are entitled to receive in satisfaction of the right because of a currency exchange rate effect. In the case of an option bought by you that is not exercised, the loss is the amount paid to acquire the option.

A currency exchange rate effect occurs either when currency exchange rates fluctuate, or when an agreed exchange rate differs from an actual exchange rate.

Forex realisation event ordering rules

The following foreign exchange (forex) information deals with the ordering rules which may apply where transactions denominated in a foreign currency give rise to multiple forex realisation events.

Under section 775-65 of the Income Tax Assessment Act 1997 (ITAA 1997), generally, only one of the five main forex realisation events is to be counted if multiple forex realisation events occur simultaneously.

Multiple forex realisation events

The most common situations in which multiple forex realisation events occur is in relation to:

• options to buy or sell foreign currency for another foreign currency
• forward exchange contracts involving two foreign currencies.

Specific rules for particular forex events which occur in the case of options and forward contracts are outlined in subsections 775-65(1), (2) and (3) of the ITAA 1997.

When more than one of the five main forex realisation events occur simultaneously in respect of the same rights or obligations, but none of the specific rules for options and forward contracts apply, the 'residual rule' contained in subsection 775-65(4) of the ITAA 1997 applies. This residual rule prescribes that you are to apply the forex realisation event that is most appropriate and ignore any remaining events.

The following examples illustrate the application of the specific rules to:

• the holder of an option to buy a foreign currency for another foreign currency
• a taxpayer with a forward contract to purchase a foreign currency using another foreign currency.

The following forex realisation events occur when AustCo exercises the option:

• Forex realisation event 1 occurs when AustCo disposes of NZ$1,500.
• The option held by AustCo is a right to receive foreign currency (namely US$), and when AustCo exercises this option and receives US$1,000 this right ceases and a forex realisation event 2 occurs.
• The option held by AustCo is also an obligation to pay foreign currency (namely NZ$) - contingent on it exercising the option - and when AustCo exercises this option and pays NZ$1,500 to the option writer, its obligation to do so ceases and a forex realisation event 4 occurs.

The forex realisation gain or loss made on each of these forex realisation events is summarised below.

Forex realisation event 1 (disposal of NZ$1,500 cash)

Forex realisation event 2 (ending of right to receive US$1,000 under the option contract)

Forex realisation event 4 (ending of obligation to pay US$1,000 under the option contract)

Under subsection 775-65(1) of the ITAA 1997, AustCo will ignore forex realisation event 4 in this transaction. It will, therefore, make a forex realisation loss of A$200 under forex realisation event 1 through the disposal of its NZ$1,500, and a forex realisation gain of A$250 under forex realisation event 2 through the exercise of its option.

The residual rule in subsection 775-65(4) of the ITAA 1997 has no operation as the specific rule in subsection 775-65(1) of the ITAA 1997 (relating to options to buy foreign currency) applies, and because the forex realisation event 1 happens to a right and/or obligation separate to that under the option contract to which the forex realisation event 2 happens.

The following forex realisation events occur upon settlement of the forward contract:

• Forex realisation event 1 occurs when AustCo disposes of US$1,000.
• The forward contract held by AustCo is a right to receive foreign currency (namely Euros), and when AustCo receives 850 Euros under that contract, this right ceases and a forex realisation event 2 occurs.
• The forward contract held by AustCo is also an obligation to pay foreign currency (namely US$), and when AustCo pays US$1,000 under that contract this obligation ceases and a forex realisation event 4 occurs.

The forex realisation gain or loss made on each of these forex realisation events is summarised below.

Forex realisation event 1 (disposal of the US$1,000 cash)

Forex realisation event 2 (ending of right to receive 850 Euros under the forward contract)

Forex realisation event 4 (ending of obligation to pay US$1,000 under the forward contract)

Under subsection 775-65(3) of the ITAA 1997, AustCo will ignore forex realisation event 4 in this transaction. It will, therefore, make a forex realisation gain of A$500 under forex realisation event 1 through the disposal of its US$1,000, and a forex realisation loss of A$1,437.50 under forex realisation event 2 through the settlement of the forward contract.

The residual rule in subsection 775-65(4) of the ITAA 1997 has no operation as the specific rule in subsection 775-65(3) of the ITAA 1997 (relating to options to buy foreign currency) applies, and because the forex realisation event 1 happens to a right and/or obligation separate to that under the forward contract to which the forex realisation event 2 happens.

Special rules apply to some short-term transactions if capital gains tax (CGT) and depreciating assets are acquired or disposed of, unless an election is made that these rules not apply. These special rules are an exception to the operation of the general rules that apply when foreign exchange (forex) realisation events 1 to 5 occur. Broadly, they provide that if these sort of assets are acquired or disposed of, and the time between the acquisition or disposal and the due date for payment is not more than 12 months, any forex realisation gains and losses realised in the course of acquiring or disposing of the relevant asset are integrated into the tax treatment of the underlying asset, instead of being treated as a separate revenue item.

For depreciating assets, if the time between the asset beginning to be held and the due date for payment is not more than 12 months, forex realisation gains and losses on payments made not more than 12 months before or 12 months after the date the asset began to be held are integrated into the tax treatment of the depreciating asset.

If you choose the Election out of the 12 month rule, this exception does not apply and the general rules will apply.

If you make a forex realisation gain and the 12 month rule applies, the effects will most commonly be as follows:

• If you dispose of a CGT asset (other than a depreciating asset), the forex gain is not assessable as revenue under the forex measures, but is assessed as a non-discountable capital gain.
• If you have acquired a CGT asset (other than a depreciating asset), the forex gain is not generally assessable under these measures, but reduces the cost base or reduced cost base of the asset.
• If you have acquired a depreciating asset, the forex gain is not assessable under these measures, but reduces the cost of the asset. If the asset has begun to depreciate under the capital allowance provisions, the gain will reduce the adjustable value of the asset, or the opening value of the pool in which the asset resides.

In general, if the forex realisation gain on acquisition is more than the cost or opening adjustable value or the relevant opening pool balance, the excess is included in your assessable income under these measures.

If you make a forex realisation loss and the 12 month rule applies, the effects will most commonly be as follows:

• If you dispose of a CGT asset (other than a depreciating asset), the forex loss is not deductible under these measures, but is treated as a capital loss.
• If you have acquired a CGT asset (other than a depreciating asset), the forex loss is not deductible under these measures, but increases the cost base of the asset.
• If you have acquired a depreciating asset, the forex loss is not deductible under these measures, but will increase the cost of the asset. If the asset has begun to depreciate pursuant to the capital allowance provisions, the loss will increase the adjustable value of the asset, or the opening value of the pool in which the asset resides.

The 12 month rule does not apply if you have disposed of a depreciating asset.

See also:

• Election out of the 12 month rule

Forex acquisition of a CGT asset

An investor acquires a capital gains tax (CGT) asset.

How should the forex realisation gain or loss be assessed?

As Art Ltd pays for the painting within 12 months of acquiring it, the forex realisation gain reduces the cost base of the painting by an amount equal to the gain.

The 12 month rule generally requires that forex realisation gains and losses on the acquisition or disposal of capital assets be folded into the CGT treatment of the underlying assets, if the time between that acquisition or disposal and the due time for payment is not more than 12 months.

Most taxpayers had a choice to elect out of the 12 month rule by 16 January 2004. The effect of such an election is that forex realisation gains will be included in assessable income and forex realisation losses will be allowable as a deduction.

Art Ltd has not made an election out of the 12 month rule.

If Art Ltd pays for the painting within 12 months of acquiring the painting, any forex realisation gain or loss is not treated as assessable income or an allowable deduction. Rather, it is effectively captured under the CGT provisions.

Art Ltd acquires the painting on 1 August 2003. It pays for the painting on 1 June 2004. As the period between acquisition of the painting and payment is less than 12 months, the forex realisation gain of A$375,000 is not assessable income for Art Ltd.

Instead, the cost base of the painting is reduced by this amount – subsection 775–70(1) Item 2. Any capital gain or loss on a subsequent disposal of the painting will then be calculated from this reduced cost base.

Disposal price of CGT asset denominated in foreign currency

An investor disposes of foreign shares.

This example does not discuss the capital gains tax (CGT) consequences of the disposal of the shares.

When will the foreign exchange realisation gain or loss arise?

Eleanor will make a forex realisation loss of A$400 when she receives payment on 1 August 2005.

What are the consequences of any forex realisation gain or loss?

As Eleanor receives payment within 12 months of disposal of the shares, the forex realisation loss will be a capital loss for the purposes of the CGT provisions.

The 12 month rule, as it applies to the above facts, requires that any forex realisation gain or loss on the disposal of the capital assets be dealt with under the CGT provisions because the time between that disposal and the due time for payment is not more than 12 months.

Most taxpayers had a choice to elect out of the 12 month rule by 16 January 2004. The effect of this election is that forex realisation gains will be included in assessable income and forex realisation losses will be allowable as a deduction. Eleanor has not previously made an election out of the 12 month rule.