What's new?
Hybrid mismatch rules
On 24 August 2018, legislation was passed implementing the Organisation for Economic Cooperation and Development (OECD) hybrid mismatch rules. Subject to some exceptions, the rules apply to relevant payments after 1 January 2019 and to income years commencing on or after 1 January 2019. Where an importing payment is made under a structured arrangement, the rules will apply to income years starting on or after 1 January 2019. However, other than where an importing payment is made under a structured arrangement, the imported mismatch rules will apply to income years starting on or after 1 January 2020.
The hybrid mismatch rules prevent entities that are liable for income tax in Australia from avoiding income tax, or obtaining global double tax benefits through hybrid mismatch arrangements that exploit differences in the tax treatment of an entity or instrument under the laws of two or more tax jurisdictions.
The hybrid mismatch rules operate to deny a deduction or include an amount in assessable income for payments that give rise to a hybrid mismatch outcome.
For more information, see Hybrid mismatch rules
Changes to the thin capitalisation rules to prevent double gearing structures
On 5 April 2019, legislation was passed to improve the integrity of the income tax law by modifying the thin capitalisation rules to prevent double gearing structures. Double gearing structures involve the use of multiple layers of ‘flow-through’ entities (such as trusts and partnerships) to issue debt against the same underlying asset.
These changes apply to income years starting on or after 1 July 2018.
The changes will affect entities with interests in trusts (other than public trading trusts) and partnerships, as the threshold for the purposes of the associate entity debt, associate entity equity, and the associate entity excess amounts has been reduced from 50% to 10%.
The changes also affect how the arm’s length debt amount is calculated. To determine both the independent lender and independent borrower amounts of the test, an entity must consider the debt-to-equity ratios of any other entity in which it has an interest.
For more information, see Stapled structures.
Trigger points that will require completion of this schedule
If you are a relevant company, partnership, trust or attribution managed investment trust, you must complete an International dealings schedule if you have written an amount or Y (for yes) at certain labels in your relevant tax return listed below.
Company tax return 2019
Question 6 Calculation of total profit or loss
J Interest expenses overseas
U Royalty expenses overseas
Question 7 Reconciliation to taxable income or loss
C Section 46FA deductions for flow-on dividends
P Offshore banking unit adjustment
Question 27 International related party dealings/transfer pricing
Y Was the aggregate amount of the transactions or dealings with international related parties (including the value of property transferred or the balance outstanding on any loans) greater than $2 million?
Question 28 Overseas interests
Z Did you have overseas branch operations or a direct or indirect interest in a foreign trust, foreign company, controlled foreign entity or transferor trust?
Question 29 Thin capitalisation
O Did the thin capitalisation provisions affect you?
Partnership tax return 2019
Question 22 Attributed foreign income
S Did you have overseas branch operations or a direct or indirect interest in a foreign trust, foreign company, controlled foreign entity or transferor trust?
Question 29 Overseas transactions
W Was the aggregate amount of your transactions or dealings with international related parties (including the value of any property or service transferred or the balance of any loans) greater than $2 million?
O Did the thin capitalisation provisions affect you?
D Interest expenses overseas
E Royalty expenses overseas
Trust tax return 2019
Question 22 Attributed foreign income
S Did you have overseas branch operations or a direct or indirect interest in a foreign trust, foreign company, controlled foreign entity or transferor trust?
Question 29 Overseas transactions
W Was the aggregate amount of your transactions or dealings with international related parties (including the value of any property or service transferred or the balance of any loans) greater than $2 million?
O Did the thin capitalisation provisions affect you
D Interest expenses overseas
E Royalty expenses overseas
Attribution managed investment trust (AMIT) tax return 2019
If any of the following apply, you must lodge an International dealings schedule 2019.
At Overseas transactions/thin capitalisation on the AMIT tax return you:
- answered Yes at either of the questions about overseas transactions or thin capitalisation, or
- included an amount for overseas interest or royalty expenses.
Lodging the IDS for separate AMIT classes
Lodge only one International dealings schedule for the AMIT, including where you have made an election to treat classes as separate AMITs (elective multi-class AMITs).
Permanent establishments (branch operations)
Permanent establishment is defined in subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936). It includes business operations carried on by:
- an Australian resident entity at or through a fixed place of business in another country
- a foreign resident entity at or through a fixed place of business in Australia.
For more information, see TR 2002/5 Income tax: Permanent establishment - What is 'a place at or through which [a] person carries on any business' in the definition of permanent establishment in subsection 6(1) of the Income Tax Assessment Act 1936?
Although branch operations are not an 'entity' or 'party' separate from the taxpayer who undertakes those operations, working out the taxable profits of branch operations involves attributing actual income and expenditure of the taxpayer on a separate entity basis. Australia has not adopted the OECD's new ‘functionally separate entity’ approach.
For income and expenditure of the taxpayer that is not wholly or directly earned from, or incurred in, its branch operations, the income or expenditure may be attributed to branch operations on the basis of internally recorded 'dealings' on the proviso that those records both:
- reflect the functions and assets of the business operations carried on at or through the permanent establishment
- represent the best estimate of branch profits that can be made in the circumstances.
See also:
- TR 2001/11 Income tax: international transfer pricing- operation of Australia's permanent establishment attribution rules
- TR 2005/11 Income tax: branch funding for multinational banks
The information collected at question 18 in this schedule includes what you have internally recorded as dealings between you and your branch operations, and income and gains you have returned or the expenses and losses you have claimed in respect of those internally recorded dealings. In the schedule and instructions, unless otherwise stated, a reference to your branch operations includes:
- business operations carried on by an Australian resident entity at or through a fixed place of business in another country
- business operations carried on by a foreign resident entity at or through a fixed place of business in Australia.
International related party dealings do not include any 'dealings' with your own branch operations
Questions 2 to 17 collect information in connection with your international related party dealings.
International related party dealings are international commercial or financial dealings or relations between two or more related persons. This includes back-to-back arrangements involving two or more connected transactions involving you and one or more related persons.
For example, international related party dealings include:
- an agreement with your foreign subsidiary
- you borrowing from a foreign bank taken together with a relevantly connected loan to the foreign bank from your overseas holding company.
International related party dealings will therefore not include any 'dealing' or commercial or financial relations with your own branch operations.
See also: