On May 16, 2017 the Australian Taxation Office (ATO) opened a consultation on very interesting draft practical compliance guidelines on cross border related party financing arrangements. Feedback on the consultation is to be submitted by June 30, 2017.
The draft Practical Compliance Guideline (draft Guideline) sets out the compliance approach of the Australian Taxation Office (ATO) to the taxation outcomes associated with a 'financing arrangement', as defined in section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997), or a related transaction or contract, entered into with a cross-border related party.
The draft Guideline will have effect from July 1, 2017 and will apply to existing and newly created financing arrangements / structures / functions.
The ATO will use the framework described in the draft Guideline and the accompanying schedules to differentiate risk and tailor its engagement with taxpayers according to the features of your related party financing arrangement, the profile of the parties to the related party financing arrangement and the choices and behaviours of your group. The tax risk associated related party financing arrangements is assessed having regard to a combination of quantitative and qualitative indicators.
The level of the tax risk associated with a related party financing arrangement is assessed by using a point system. Points are awarded with respect to a number of quantative and qualitative indicators. These points are then added together. Based on ta.o. he total number of points that is ‘awarded’ to a related financing arrangement, the arrangement is classified in one of the following six risk zones:
· White zone - arrangements already reviewed and concluded by the ATO;
· Green zone - low risk;
· Blue zone - low to moderate risk;
· Yellow zone - moderate risk;
· Amber zone - high risk; or
· Red zone - very high risk.
The Commissioner's compliance approach will vary depending on the risk rating of the related party financing arrangement. The higher the risk rating, the more likely the arrangements will be reviewed by the ATO as a matter of priority.
Taxpayers will need to test each financing arrangement they enter into with a related party that is not a resident of Australia at the start of each income year and, where a financing arrangement is entered into during an income year, when it is entered into.
While it is necessary to test each financing arrangement a taxpayer enters into with related parties, the taxpayers risk zone for an income year will reflect that of its highest risk financing arrangement. For example, if a taxpayer has entered into three related party financing arrangements, two of which it assesses as being in the yellow zone and one it assesses as being in the amber zone, the taxpayer’s overall risk zone will be amber.
Click here to be forwarded to the website of the ATO were more information in this consultation can be found.
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