Your business entity may have a small presence in Australia but if you are part of a global group, you may be affected by the Significant Global Entity (SGE) legislation.
- Extension of the definition of SGE
- Why you need to determine whether your entity is an SGE
- What is a significant global entity?
- Tips to determine your eligibility as a Significant Global Entity
- How the grouping works for an SGE
- Filing general purpose financial statements
- Country by country reporting
- Significant Global Entities penalties
Extension of the definition of SGE
As a key player at the G20 and the OECD, the Australian Federal Government had been setting rules to fight multinational tax avoidance.
Exposure Draft legislation was released by Treasury on 20 July 2018 to extend the definition of Significant Global (SGE). An SGE now includes members of large private groups headed by unlisted companies, trusts (including discretionary trusts), partnerships or other investment vehicles.
This extension has been in response to large multinationals legally channelling billions of dollars of Australian earned revenue to low tax jurisdictions such as Singapore, Switzerland, The Netherlands and Ireland.
To capture this revenue and the income tax dollars that come with it, the ATO has broadened the definition of SGE – and with this more companies potentially may fall into its definition.
Why you need to determine whether your entity is an SGE
With these changes, more taxpayers potentially may be within the scope of several measures that apply under the extended definition of Significant Global Entity, it is timely to revisit your potential obligations as an SGE.
If your business does come under the definition of an SGE, it may have added administrative compliances such as having to file general purpose financial statements and attend to Country By Country reporting.
The ATO has been stepping up its activity in relation to the special tax rules applying to Significant Global Entities (SGEs) recently, despite the rules having been around for a few years now.
Large penalties can be imposed not only on non-reporting but on late lodgements of any tax documents required by SGEs.
What is a significant global entity?
An SGE status may apply to –
- Australian-headquartered entities (with or without foreign operations)
- the local operations of foreign-headquartered multinationals.
This entity will be considered 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 new SGE definition will apply to income years commencing on or after 1 July 2018.
Your 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 their income tax return if it is an SGE. This applies to company, trust, partnership and superannuation fund income tax returns.
Tips to determine your eligibility as a Significant Global Entity
- Annual global income is determined in accordance with commercially accepted accounting principles (CAAP) and includes revenue, extraordinary income, gains from investment activities such as the gain on sale of assets and other incursions, plus other inflows that go to the determination of the profit or loss.
- All amounts on the global financial statements should be converted to Australian dollars using the average exchange rate for the period the statements relate to.
- The size of your Australian portion of the entity is irrelevant. Your SGE status is assessed based on your total global income, even if your Australian entity is very small or inactive, it is considered part of the overall group.
- For financial statements that are prepared for a period other than 12 months, the annual global income should be prorated or extrapolated to calculate the annual amount.
How the grouping works for an SGE
An entity under SGE refers to a company, trust, partnership, superannuation funds. For a grouping to be considered under SGE legislation, it includes –
Global parent entity
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.
A 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 an annual global income of AUD$1 billion or more. A subsidiary excluded from the consolidated financial statements of its global parent entity is not an SGE.
Filing general purpose financial statements
Corporate tax entities (that is, companies and entities taxed like companies) that are SGEs and are required to file an income tax return in Australia, must lodge their general purpose financial statement (GPFS) with the ATO unless they already lodge their GPFS with ASIC.
The GPFS must be lodged with the ATO by the due date for lodgement of your entity’s income tax return, however, this may be subject to administrative extensions.
What you need to know about international transfer pricing
Australian international transfer pricing refers to the prices that multinational companies set for their related party international transactions.
By setting transfer prices too high or too low, multinational companies can shift profits to low-tax countries. To combat this and ensure that Australian entities are reporting the appropriate amount of profit, the ATO requires companies to substantiate their transfer pricing.
Your entity must provide detailed documentation to verify the international transfer pricing method used to help the ATO understand your company’s tax position and ensure that the correct profits are accounted for. This transfer pricing documentation should be completed before the Australian income tax return is filed.
Depending on the type of business and the transactions across the financial year, smaller Australian companies can use the simplified transfer pricing record keeping (STPR) option. The STPR option could be considered for businesses with transactions for items such as intra-group services, technical or administrative services or a company with low-level inbound and outbound loans.
For larger, more complex international pricing transfers, detailed transfer pricing documentation is required and at a minimum should contain:
- Your group’s organisational structure
- A detailed evaluation of the Australian and international industry/industries in which the group operates in
- An outline of the groups and the Australian business activities
- Information about the entity’s dealings with their international headquarters and group entities
- A benchmarking test of all inter-company transactions in the given financial year to show the transactions meet the ‘arm’s length principle’.
- Show that the Australian entity is compliant with their obligations under the Australian-specific tax legislation.
Country by country reporting
Like many countries, Australia has recently adopted Country-by-Country (CbC) Reporting. This is an additional measure to prevent multinationals from shifting their profits to low-tax jurisdictions through comprehensive exchanges of information between countries.
In Australia, CbC Reporting only applies to Significant Global Entities (SGE’s), which are classified as part of a multinational group with global revenue of AU$1billion or more.
In addition to a Transfer Pricing Manual and International Dealings Schedule, SGEs are required to lodge the following reports in Australia within 12 months (subject to any extensions granted) after the entity’s financial year-end:
- Master File
- A Local File
- Either a CbC report or notification
Significant Global Entities penalties
There are two separate penalties (under each Act) charged for any SGE entity that fails to lodge accounts. The maximum penalties can be as high as $525,000 in some instances.
Here are FAQs about SGE penalties and how they can be avoided.
If you are unsure if your business is or will be in the near future, part of this expanded definition of SGE, it may be time to review your overall position.
Penguin Management has extensive knowledge and experience working with SGE’s across the globe and can assess your situation and the SGE implications. Call us now on 1300 319 870 or contact us here.
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