July 2017: ATO guidance on related party financing arrangements

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The Practical Compliance Guideline (Guideline) from the ATO outlines the compliance approach 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. Such an arrangement, transaction or contract is referred to in this Guideline as a ‘related party financing arrangement’. This Guideline does not cover financing arrangements characterised as equity in accordance with Division 974 of the ITAA 1997.

The framework in these Guideline and the accompanying schedules are used to assess risk and tailor engagement according to the features of the related party financing arrangement, the profile of the parties to the related party financing arrangement and the choices and behaviours of the group. The tax risk associated with the related party financing arrangement is assessed having regard to a combination of quantitative and qualitative indicators.

If the related party financing arrangement is rated as low risk, then the Commissioner will generally not apply compliance resources to review the taxation outcomes other than to fact check the appropriate risk rating. If the related party financing arrangement falls outside the low risk category, the Commissioner will monitor, test and/or verify the taxation outcomes. The higher the risk rating, the more likely the arrangements will be reviewed as a matter of priority.

The framework set out in this Guideline can be applied to:

(a) assess the tax risk of your related party financing arrangement

(b) understand the compliance approach we are likely to adopt given the risk profile of your related party financing arrangement

(c) work with us to mitigate the transfer pricing risk in relation to your related party financing arrangement and be confident you have reduced your risk
exposure, and

(d) understand the type of analysis and evidence we would require when assessing the risk outcomes of your related party financing arrangements.

 

ATO Financial transactions 2017





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