Who this information is for
This information will help you if you:
- are a member of a privately owned and wealthy group
- receive funding (such as a loan) from an overseas related entity or associate (such as a relative) to acquire or develop property.
If this applies, you need to consider the application of the transfer pricing rules because they may affect your tax outcomes.
Transfer pricing rules
The transfer pricing rules apply the arm's length principle. This determines terms and conditions (such as pricing) for cross-border arrangements between related entities. These rules also apply to cross-border arrangements between unrelated parties that are not acting at arm’s length.
Arm's length conditions
When applying the arm's length principle, you need to consider whether your funding is obtained on arm's length terms and conditions. These are terms and conditions that would be expected if you and the lender were both:
- independent of each other
- acting at arm’s length.
For more information on arm’s length conditions, see Taxation Ruling TR 2014/6 Income tax: transfer pricing – the application of section 815-130 of the Income Tax Assessment Act 1997.
Our concerns
We are concerned that some businesses claim excessive debt deductions and shift profits overseas. They are doing that by setting unrealistic interest charges for funding received from overseas related entities.
We are also concerned when businesses claim interest deductions but incorrectly defer or avoid interest withholding tax.
Our expectations
You need to support the commerciality and arm’s length nature of your funding arrangement. To do so, we expect you to:
- explain your funding arrangements
- maintain evidence
- understand and comply with your tax obligations.
Explain your funding arrangements
We expect you to explain:
- your consideration of the funding options realistically available to you at the time of entering into an arrangement (and any later refinancing decision)
- the commercial rationale for choosing a particular funding option
- how you structured your funding, including the
- mix of debt and equity
- types of debt used
- amount of debt used.
Maintain evidence
Once you have entered into an arrangement, we expect you to maintain evidence to support the ongoing commerciality and arm’s length nature of your arrangement.
Understand and comply with your tax obligations
We expect you to understand and comply with your tax obligations that arise from the arrangement, such as interest withholding tax.
You are at risk of review if your business has:
- significant related-party financing arrangements
- factors that attract our attention
- low tax performance
- thinly capitalised Australian operations.
Practical Compliance Guideline PCG 2017/4 ATO compliance approach to taxation issues associated with cross-border related party financing arrangements and related transactions explains which financing arrangements are at greatest risk of review.