Question 11

This question collects information about your dealings of a financial nature (including loans) with international related parties.

The dollar amounts or values asked for in this question are all based on your accounting records.

Loans and interest

A 'loan arrangement' should be given its ordinary meaning within the context of commercial and accounting practices. In general terms, a loan arrangement is defined as a contract whereby the lender pays a sum of money in consideration of a promise by the borrower to repay the money at some time in the future (and this promise may/may not include the promise to repay interest on the money borrowed). Any amounts that are not a loan but which would be considered to be a debt interest for the purposes of Division 974 of the ITAA 1997 should be included here. This will include redeemable preference shares or promissory notes which satisfy the conditions for a debt interest under subsection 974-20 of the ITAA 1997.

Financial arrangements that are economically in substance a loan arrangement would be regarded as a loan for the purposes of this question, for example, securities arrangements where the collateral is cash, sale and buyback arrangements to be settled in cash, or repurchase agreements (repos) to be settled in cash.

Whether a financial arrangement economically constitutes a loan arrangement is a matter to be decided based on the facts and circumstances of each arrangement.

For arrangements that are economically in substance loans, for the purposes of completing the labels of this question, treat:

• the cash collateral or cash settlement amount as the loan amount
• any fees paid/received in respect of those arrangements as interest
• any gain made / loss incurred in respect of those arrangements as interest.

We recommend that you obtain appropriate advice or guidance in light of the particular facts and circumstances of your case.

We expect interest to be the principal expense incurred and revenue earned in respect of your financial arrangements in the nature of loans, and this would be included at item 11c. However, any other expenses/losses or revenue/gains associated with these arrangements, such as borrowing costs or foreign exchange gains/losses, should be included at item 11g.

Do not show at this question principal and principal repayment amounts.

To complete this part of the question you need to:

• identify all your international related party dealings of a financial nature in the nature of loans
• divide those loan arrangements into:
  
  • interest bearing loans
  • interest free loans
   
• calculate the average balance of each of those loan arrangements by:
  
  • adding up the loan balance amount at the start of the year and the loan balance amounts at the end of each quarter
  • dividing the result by five
   
• in respect of interest bearing loans, determine the amount of interest expenditure or interest revenue in respect of these loans.

If you had any financial arrangements in the nature of loans with international related parties during the income year, answer 'Yes' at label A of question 11 and complete the required labels as follows.

For the labels at item 11a:

• At label I, write the average balance of interest bearing loans in relation to amounts borrowed from international related parties.
• At label K, write the average balance of interest free loans in relation to amounts borrowed from international related parties.

For the labels at item 11b:

• At label I, write the average balance of interest bearing loans in relation to amounts loaned to international related parties.
• At label K, write the average balance of interest free loans in relation to amounts loaned to international related parties.

For the labels at item 11c:

• At label C, write the total interest expenditure in respect of the interest bearing loans borrowed from international related parties.
• At label D, write the total interest revenue in respect of the interest bearing loans to international related parties.

Guarantees

The expenditure and revenue for guarantees include fees associated with a contract or arrangement under which a party agrees to perform an obligation or discharge a liability of another entity should that entity fail to do so.

Insurance and reinsurance

This part of question 11 asks you to provide details of your expenses incurred and revenue earned in relation to your insurance and reinsurance contracts with international related parties during the income year.

Insurance is a means by which an entity can protect itself with an insurance company against the risk of loss. Insurance is commonly categorised into general insurance, life insurance and health insurance.

Reinsurance is a means by which an insurance company can protect itself with other insurance companies against the risk of losses. Therefore, the question relating to reinsurance is applicable only to insurance companies.

The amounts reported for this question should include the expenditure and revenue that would qualify as expenditure or revenue in relation to insurance or reinsurance contracts under relevant Australian accounting standards or comparable foreign accounting standards (for example, premium revenue, claim recoveries, commissions received from reinsurers). At the time of this publication, the three key Australian accounting standards relevant to the recognition of expenditure and revenue in relation to insurance/reinsurance include AASB 4 Insurance Contracts, AASB 1023 General Insurance Contracts and AASB 1038 Life Insurance Contracts. As the dollar amounts in this question are based on your accounting records, you should include all of your reinsurance expenditure and revenue in terms of section 148(1) of the ITAA 1936.

If you engaged an intermediary (for example, a broker) in arranging your insurance or reinsurance contracts, even if the intermediary was acting as an independent agent, the intermediary is considered to be acting on your behalf. Therefore, the transactions undertaken by the intermediary on your behalf should be included in your answer to this question.

For each of your financial dealings with international related parties of a type covered by item 11d (Guarantees), item 11e (Insurance) or item 11f (Reinsurance), complete the labels for the item for that financial dealing type as follows:

• At label C, write the total expenditure you incurred for the financial dealing type.
• At label D, write the total revenue you derived for the financial dealing type.
• At label E, write the Appendix 5 code for the main pricing methodology you used to set or review consideration in respect of the financial dealing type.
• At label F, write the Appendix 9 code for the percentage of your international related party dealings involving the financial dealing type for which you have documentation.

'Percentage of dealings with documentation' refers to the aggregate dollar amount of transactions reported at this question for which you have relevant documentation (as per TR 98/11) expressed as a percentage of total dollar value of transactions reported at this question.

Other financial dealings

Item 11g asks you to provide details of your expenses/losses incurred or revenue/gains earned in relation to your other kinds of financial dealings with international related parties during the income year.

'Other financial dealings' refers to dealings in financial instruments that would qualify as financial assets or financial liabilities under relevant Australian accounting standards or comparable foreign accounting standards but excludes financial instruments that would be treated as a derivative for the purpose of completing question 9. At the time of this publication, the two key Australian accounting standards relevant to this question include AASB 132 Financial Instruments: Presentation and AASB 139 Financial Instruments: Recognition and Measurement. You do not need to take the debt/equity provisions in Division 974 of the ITAA 1997 into account.

The amounts reported at this question may be reported in the financial statements as revenue/gains or expenses/losses, depending on the accounting treatment of your relevant financial assets and financial liabilities. This includes amounts relating to hedging items that are classified in the financial statements as financial assets or financial liabilities. Therefore for the purposes of this question, the terms 'expenditure' and 'losses' are interchangeable and the terms 'revenue' and 'gains' are interchangeable.

For each of your financial dealings of any other kind with international related parties, complete the labels at item 11g as follows:

• At label C, write the total expenditure you incurred for the other kinds of financial dealings.
• At label D, write the total revenue you earned or derived for the other kinds of financial dealings.
• At label E, write the Appendix 5 code for the main pricing methodology you used to set or review consideration in respect of the other kinds of financial dealings.
• At label F, write the Appendix 9 code for the percentage of your international related party dealings involving the other kinds of financial dealings for which you have documentation. 'Percentage of dealings with documentation' refers to the aggregate dollar amount of transactions reported at this question for which you have relevant documentation (as per TR 98/11) expressed as a percentage of total dollar value of transactions reported at this question.
• At label H, write a description of the other kinds of financial dealings. The description should be limited to 200 characters.

Example

During the income year, the Australian taxpayer (a 30 June balancer) borrowed and loaned amounts for its financial arrangements in the nature of loans with international related parties. The Australian taxpayer has divided these loan arrangements into interest bearing and non interest bearing loans and calculated the average balance of each of the loan arrangements (by adding up the loan balance amount at the start of the year and the loan balance amounts at the end of each quarter and dividing the result by five).

For example, an amount is borrowed from a related United States entity (as shown in the first line of the table below). The loan arrangement is interest bearing and the loan balances are as follows:

The table below shows all the average loan balances for the taxpayer's borrowed and loaned amounts for its financial arrangements in the nature of loans with international related parties.

The Australian taxpayer extracts the relevant data from the information above.

With this information the Australian taxpayer completes question 11 as follows: