Related party financing (RPF) refers to financing arrangements (such as a loan) between related parties or associates. Our program focuses on PW taxpayers engaging in cross-border financing arrangements to achieve a tax benefit.
For example:
- related party financing arrangements which adopt non-arm’s length terms and conditions resulting in excessive debt deductions, particularly for property investment or development – see Inbound related party financing for private groups in property and construction
- claiming interest deductions on your related party loan, whilst failing to pay, credit or regularly capitalise interest amounts, resulting in the deferral or non-payment of interest withholding tax.
Other issues we commonly observe with cross-border related party financing arrangements include:
- debt versus equity characterisation (for example, interest-free loans)
- purported interest deductions on interest that is accrued and never paid
- outbound funding provided to overseas related parties on non-arm's length terms (for example, interest-free loans)
- the deferral or avoidance of income recognition in Australia
- use of purported loans to disguise foreign income or wealth in order to avoid assessment of offshore monies received by Australian resident taxpayers – see Taxpayer Alert TA 2021/2 Disguising undeclared foreign income as gifts or loans from related overseas entities
- the deductibility of interest under section 8-1 or TOFA (taxation of financial arrangements) – see Taxation of financial arrangements (TOFA)
- non-lodgment of annual PAYG withholding from interest, dividend and royalty payments paid to non-residents reports
- thin capitalisation
- incorrectly applying the $2 million de minimis exemption threshold, which should be calculated on an associate inclusive basis
- compliance with safe harbour test (applicable before 30 June 2023)
- inappropriate use of arm's length debt test (prior to its repeal).
For income years starting on or after 1 July 2023, new thin capitalisation rules apply as part of the Treasury Law Amendment (Making Multinationals Pay Their Fair Share – Integrity and Transparency) Act 2024External Link.
We have resources available to help you. For more information, see:
- Inbound related party financing for private groups in property and construction to learn about what to consider from a transfer pricing perspective if you have an inbound funding arrangement
- Practical Compliance Guideline PCG 2017/4 ATO compliance approach to taxation issues associated with cross-border related party financing arrangements and related transactions to help you assess the risk of your related party financing arrangements
- Characterisation of inbound foreign funds to learn about cross-border arrangements that mischaracterise inbound foreign funds provided by non-residents to Australian taxpayers, covering inbound foreign funds of interest, foreign investors investing directly into businesses, loans and gifts and guidance on inbound foreign funds
- Documenting genuine loans from related overseas entities to learn about how to document your loan arrangements
- Transfer pricing to learn about the transfer pricing rules, including the arm’s length principle
- Practical Compliance Guideline PCG 2017/2 Simplified transfer pricing record-keeping options for guidance on applying simplified record-keeping options and eligibility requirements for low-level inbound and low-level outbound loans
- Thin capitalisation for information about the rules and who is affected.