Assignment
Assignment in law or in equity, including without limitation assignment by declaration of trust.
Capital
For the purposes of the definition of ‘International related parties’, capital means an interest in equity, voting rights, or income distribution of 20% or greater.
International related parties
International related parties are persons who are not dealing wholly independently with one another in their commercial or financial relations and whose dealings or relations can be subject to Subdivision 815-B of the ITAA 1997 or the associated enterprises article of a relevant double tax agreement (DTA). The term includes:
- any overseas entity or person who participates directly or indirectly in your management, control or capital
- any overseas entity or person in respect of which you participate directly or indirectly in the management, control or capital
- any overseas entity or person in respect of which persons who participate directly or indirectly in its management, control or capital are the same persons who participate directly or indirectly in your management, control or capital.
The expression ‘not dealing wholly independently with one another in their commercial or financial relations’ is not restricted to scenarios involving common voting control or ownership of capital or distribution rights.
Without limiting the scope of the term international related parties, it includes the scenarios set out in the following examples.
Example A: bifurcated corporate structure
An Australian reporting entity is a member of a foreign owned multinational corporate group that is split into:
- members of the group directly or indirectly owned or controlled by one ultimate parent entity owned or controlled by a group of publicly undisclosed persons (Group 1), and
- members of the group directly or indirectly owned or controlled by a different ultimate parent entity owned or controlled by a group of publicly undisclosed persons (Group 2).
While the directors, officers and shareholders of the ultimate holding companies of Group 1 and Group 2 are not publicly disclosed, they are either effectively controlled or at least 20% owned by members of the founding family of the groups.
The Australian reporting entity is a member of Group 1. The Australian reporting entity has:
- dealings with entities in Group 1 not resident for Australian tax purposes, and
- dealings with entities in Group 2 not resident for Australian tax purposes.
The Australian reporting entity is not dealing wholly independently with the entities in Group 1, as well as not dealing wholly independently with the entities in Group 2, and those dealings can be subject to Subdivision 815-B of the ITAA 1997 or the associated enterprises article of a relevant DTA.
International parties in Group 1 and international parties in Group 2 are international related parties of the Australian reporting entity.
End of exampleExample B: right to acquire equity
A Singaporean investor agrees to lend funds to an Australian reporting entity. Prior to the agreement, the Singaporean investor and the Australian entity did not have any common ownership or control, and the Singaporean investor and its associates did not have dealings with the Australian entity or its associates.
The Australian reporting entity grants the Singaporean investor a convertible interest entitling the Singaporean investor, or its nominated associate, to acquire equity interests carrying entitlement to 25% of any distribution of profits or capital by the Australian entity.
Upon the grant of the convertible interests to the Singaporean investor, the Singaporean investor and the Australian entity are not dealing wholly independently with one another with respect to any transactions or dealings between them and can be subject to Subdivision 815-B of the ITAA 1997 or the associated enterprises article of a relevant DTA.
From the time of the grant of the convertible interests, the Australian reporting entity and the Singaporean investor are international related parties.
End of exampleExample C: management and control
An Australian reporting entity is an Australian resident company for tax purposes. CanadaCo is a Canadian resident company for tax purposes. CanadaCo has been a long-term investor in the Australian reporting entity, holding interests in the Australian reporting entity, entitling CanadaCo to 30% of any distributions of capital. Both CanadaCo and the Australian reporting entity operate as exclusive suppliers of similar branded products in their respective regions of North America and Australasia.
In an income year, CanadaCo:
- reduces its capital interests in the Australian reporting entity from 30% to 19%, and
- appoints 2 of its executive employees to the Australian reporting entity’s board of directors who participate in the management and control of AusCo’s business.
At all times, the Australian reporting entity and CanadaCo are not dealing wholly independently with one another in relation to their commercial or financial dealings, and those dealings can be subject to Subdivision 815-B of ITAA 1997 or the associated enterprises article of a relevant DTA.
At all times, the Australian reporting entity and CanadaCo are international related parties.
End of exampleExample D: synthetic equity
An Australian reporting entity is an Australian resident company for tax purposes. MalayCo is a Malaysian resident company for tax purposes. MalayCo enters into a funding and investment arrangement with the Australian reporting entity which results in:
- MalayCo providing funds to the Australian reporting entity under an agreement titled ‘Loan Facility’, which is repayable by the Australian reporting entity at a certain date subject to other terms and conditions
- MalayCo acquiring an option to acquire some or all of the shares in the Australian reporting entity at its election for a price satisfied by reduction, offset or other satisfaction of the whole of part of the amount owing by the Australian reporting entity to MalayCo under the agreement titled ‘Loan Facility’
- MalayCo appointing a director to the board of the Australian reporting entity who has a veto or casting vote over a range of decisions.
After this arrangement is in place, the Australian reporting entity and MalayCo are not dealing wholly independently with one another in relation to their commercial or financial dealings, and those dealings can be subject to Subdivision 815-B of ITAA 1997 or the associated enterprises article of a relevant DTA.
After the arrangement is in place, the Australian reporting entity and MalayCo are international related parties.
End of exampleInternational related party dealings
Means international commercial or financial dealings or relations between related parties including back-to-back arrangements.
For example:
- 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.
The term only covers dealings or relations between different persons or entities and therefore does not include a 'dealing' or commercial or financial relations with your own branch operations.
Life insurance policy
Life insurance policy has the meaning given to life policy in the Life Insurance Act 1995, but includes:
- a contract made in the course of carrying on business that is a life insurance business because of a declaration in force under section 12A or 12B of that Act
- a sinking fund policy within the meaning of that Act.
Participates
To participate includes a right of participation, the exercise of which is contingent on an agreed event occurring.
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.
For more information, see:
- Taxation Ruling TR 2001/11 Income tax: international transfer pricing - operation of Australia's permanent establishment attribution rules
- Taxation Ruling 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.
Person
Person has the same meaning as in subsection 6(1) of the ITAA 1936 and section 995-1 of the ITAA 1997.
Specified countries
Specified countries are tax jurisdictions of interest, as listed in Appendix 1.