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The ATO has ramped up reporting requirements for the local file. Further, these modifications reflect the ATO’s continued focus on understanding and reviewing broader international tax risks that may exist within a global group.
Contents
The changes are relevant for statements lodged from 1 January 2025 for reporting periods starting on or after 1 January 2024.
These changes are significant, and Country-by-Country Reporting Entities (“CbCREs”) need to be aware that these changes will warrant additional time, resources, and potentially assistance from global group entities to comply.
What these changes mean for you
If you are a CbCRE, you should:
review the changes and ascertain how the scope of the additional questions will impact you,
coordinate with the relevant global group entities (typically headquarters) to convey the changes and confirm whether there are any global restructures that need to be disclosed,
allow additional time to complete the local file, particularly for the first year in which this applies, and
be aware that the changes reflect the ATO’s increased scrutiny on international risk risks.
Rationale behind the changes
Responses to the local file (including the Short Form local file (SFLF)) are used by the ATO to detect higher risk international tax structuring and profit shifting arrangements. CbCREs were historically required to submit a SFLF attachment, as part of their local file lodgements, disclosing general information about the organisational structure and reporting lines relevant to the Australian business, business and strategy, competitors in the local market, and details for any business restructures or the transfer of intangibles.
Upon review, the ATO found the design of the SFLF in free text format was resulting in insufficient level of information from Australian taxpayers. More specifically, the responses received were inconsistent in content and format and incomplete in some instances. The changes to the requirements are therefore intended to redress these issues.
These changes coincide with the ATO’s recently announced tightening of exemptions granted to taxpayers from lodging Country-by-Country reporting statements. Grant Thornton has prepared a separate alert detailing these changes.
Key changes
The key changes to the SFLF have been summarised below:
The SFLF is now required to be prepared in the standardised message structure table (MST) format. This means that any missing information will create validation errors and require completion prior to lodgement.
CbCREs are required to identify the number of main business lines or functions within the local Australian operations. In addition, CbCREs will need to:
describe each business line or function,
delineate the strategies employed for each business line or function,
discuss whether any of the business lines or functions overlap, and
identify key competitors for each business line or function.
CbCREs are required to confirm whether there are any personnel employed within the Australian operations that have accountability to report to overseas personnel. Where the response is ‘yes’, CbCREs will need to:
provide the job title of these local personnel, and Australian Business Number/Tax File Number of the employing entity,
confirm the number of overseas personnel to whom the local person reports to,
provide the job title, principal office location, and employing entity details for the overseas personnel,
describe the functions or activities for which reporting occurs, and
provide relevant dates, if the overseas reporting commenced or ceased during the income year.
The above will need to be answered for each local individual with an overseas reporting line, and an organisational structure diagram is also required.
A CbCRE is required to annually assess whether it has had any:
restructures, or
any new arrangements involving the licence, transfer, or creation of intangibles.
The definition for what constitutes a ‘restructure’ has been broadened and is no longer contained to that affecting the local business. Transactions occurring between overseas members of the group related to a restructure may also now require disclosure under the updates, despite the Australian taxpayer having no direct involvement in the restructure.
Restructures also includes changes to the taxpayers’ ‘material’ related party financing arrangements such as introduction of new arrangements, termination of existing arrangements (prior to maturity), replacing borrowings with private credit arrangements or significant changes to the terms and conditions of existing arrangements. The ATO defines arrangements with a capital value of $10m or higher as ‘material’.
Where the response is ‘yes’, CbCREs will need to:
provide a description of the restructure or intangibles arrangement,
disclose anticipated Australian tax impact and global tax impact of the restructure or intangibles arrangement,
provide the commercial context and impact of restructure/arrangement,
provide total capital value of the restructure/arrangement, and
number of steps in the restructure/arrangement.
If there was a step plan, then the relevant step plan should also be attached.
We’re here to help
It is important for CbCREs to be aware of the updates announced by the ATO, and to account for these when collating information for or preparing the SFLF. This is particularly true as the additional work required may be significant for any given year and require input from global group entities.
Please contact Jason Casas, Christine Cornish, Keith To, if you wish to discuss the above or the broader implications of this outcome further.
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