All legislative references are to the Income Tax Assessment Act 1997 (as amended) unless otherwise stated.
Accounting principles
Accounting principles has the meaning given by subsection 995-1(1).
Advance pricing arrangement (APA)
An APA is an arrangement that allows taxpayers the opportunity to reach agreement with us on the method of application of the arm’s-length principle to their international related–party dealings on a prospective basis over a fixed period of time.
An RTP is covered by an APA or an application for an APA if the RTP is a transfer pricing matter arising from related party transactions specifically covered by the APA or formal APA application that has been accepted in the APA program.
For more information about an APA, or an application for an APA that has been accepted into the program, refer to 'How to apply for an APA' in PSLA 2015/4 ATO's advance pricing arrangement program.
Economic group
An economic group includes all entities (companies, trusts and partnerships etc.) that lodge an Australian tax return under a direct or indirect Australian or foreign ultimate holding company or other majority controlling interest.
This includes all entities under a single ultimate holding company or under the ownership of a single individual, trust or partnership.
See examples to help you in determining your economic group.
Gross value
Gross value is the value of the supplies being made, rather than the price paid for those supplies.
Hybrid mismatch rules
Hybrid mismatch rules collectively refer to Division 832 of the ITAA 1997 with amendments to Subdivision 768-A of the ITAA 1997, and s23AH and Part IIIB of the ITAA 1936.
Materiality amount
Your materiality amount is 5% of your Australian current tax expense, except where:
- 5% of your Australian current tax expense exceeds A$30 million – the materiality amount is then A$30 million
- 5% of your Australian current tax expense is less than A$3 million – the materiality amount is then A$3 million
- you have no Australian current tax expense – the materiality amount is then A$3 million.
You must calculate your Australian current tax expense in accordance with accounting principles.
If you do not calculate your Australian current tax expense, use A$3 million as your materiality amount.
Where you prepare financial statements in respect of the 2018–19 income year, Australian current tax expense is current tax expense calculated in accordance with accounting principles. Where you are the head company of a tax consolidated or a multiple entry consolidated (MEC) group and prepare financial statements in respect of the 2018–19 income year, Australian current tax expense is the aggregate of the current tax expense of all members of the tax consolidated or MEC group calculated in accordance with accounting principles.
If the calculation of your Australian current tax expense requires significant additional effort or you consider that the materiality amount for RTP purposes is not appropriate to your circumstances, then you can substitute A$3 million as your materiality amount.
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.
Position
Position means your basis for lodgment in your 2018–19 income tax return in respect of particular circumstances, arrangements or transactions.
Your basis for lodgment of your income tax return is the effect for taxation purposes given to the particular circumstances, arrangements or transactions as reflected in the statements made in your income tax return.
This includes positions:
- due to interpretative matters (for example, legislative construction) and findings of fact (for example, market valuations)
- where the effect for tax purposes is an omission from your income tax return.
A single position exists when all of the following apply:
- the facts associated with a number of circumstances, arrangements or transactions are relatively the same or similar for the purposes of the position, or are related to each other in a way that makes it necessary to take them into account together to determine their treatment for tax purposes, and
- a common conclusion is reached on the tax treatment of those circumstances, arrangements or transactions (that is, there is a common basis for lodgment).
Potential adjustment
Potential adjustment means the sum of the following amounts in the 2018–19 income year, where these are applicable, should the RTP not be sustained:
- your tax rate multiplied by an amount or part of an amount that would be included in your assessable income
- your tax rate multiplied by a deduction or a part of a deduction that would not be allowable to you
- your tax rate multiplied by a capital loss or a part of that capital loss that would not be incurred by you
- a foreign income tax offset that would not be allowable to you
- a tax offset that would not be allowable to you.
Your tax rate is the applicable tax rate specified in the Income Tax Rates Act 1986.
Public company
You are a public company if you are not a private company as defined in section 103A of ITAA 1936.
See some examples to assist you determining whether you are a public company.
Related party
Related party has the meaning given by section 228 of the Corporations Act 2001.
If you are a proprietary company, apply the meaning given by section 228 as if you were a public company.
Substantially common ownership
The ownership of two or more entities is substantially common where at least 50% of the securities in each entity are held by the same ultimate owners.
Taxpayer’s or a related party’s financial statements
The taxpayer’s financial statements are the documents that constitute the financial statements or consolidated financial statements prepared by the taxpayer in accordance with accounting principles. They include the financial reports prepared by the taxpayer pursuant to Chapter 2M of the Corporations Act 2001.
Where there are multiple sets of financial statements that may be relevant for a taxpayer, the financial statements that apply are those that recognise or disclose the uncertainty about taxes payable or recoverable for the relevant entity to which the position relates.
Where the taxpayer is a foreign resident operating through a permanent establishment in Australia, financial statements are the statements (however described) that cover the activities of the Australian operations.
Where the taxpayer is a foreign bank with an Australian permanent establishment, financial statements include the reports prepared for submission to the Australian Prudential Regulation Authority (APRA) that cover the activities of the Australian operations.
Where the taxpayer does not prepare financial statements, or where the uncertainty about taxes payable or recoverable or the reportable transactions or events in respect of a position is recognised and/or disclosed in the financial statements of a related party (rather than the taxpayer), then the related party’s financial statements must be used.
For the purposes of this definition, determine if an entity is related to another entity in accordance with accounting principles.
Total business income
The total business income of a company is the amount reported at the 'total income' label of the company income tax return. For 2018, the 'total income' was reported at label 6S.
The total business income of an economic group is the sum of all income labels in the Australian tax returns of every group member. The income labels are added up in the company tax return (at S item 6), but need to be added up manually for trust and partnership tax returns
All Australian income of group members is included in the calculation. Foreign income of group members is only included where the entity generating that income is an Australian resident entity.