The following example shows how the appropriate answers are determined for Schedule 25A for a hypothetical situation involving an Australian resident company.
Example 9
The Australian company, XYZ Pty Ltd, has its head office in Australia and is a parent company to several wholly owned subsidiaries overseas. XYZ Pty Ltd also has a permanent establishment in Hong Kong.
Subsidiaries and permanent establishments qualify as international related parties - see the definition in Appendix 2.
During the year ending 30 June 2009, XYZ Pty Ltd had related-party dealings with its international related parties, the subsidiaries and the permanent establishment. These dealings included both capital and revenue transactions. Some of the dealings were transacted at arm's length prices, ensured by implementing and following various arm's length pricing methods, while other dealings were not.
The following related-party dealings, shown in Australian dollars, occurred during the year and are grouped under the headings in item 2 of the schedule.
Stock in trade and raw materials
- Stock in trade was sold to subsidiaries for $146,450. All sales were priced at bona fide arm's length prices, of which 50% were based on CUP and 50% based on the cost-plus method.
- For the CUP dealings, the method for pricing was selected, applied and documented as discussed in the introduction to item 4.
- For the cost-plus dealings, the pricing method was selected and documented for all the dealings, but written documentation on the application of the method was kept for only one-quarter of all these dealings.
- Raw materials were purchased from subsidiaries for $178,750. Of this total dollar amount, 60% was priced on comparative uncontrolled prices, and the remaining 40% was invoiced at a price XYZ Pty Ltd considered reasonable.
- For all CUP dealings, the method was selected, applied and documented as discussed in the introduction to item 4.
- Stock in trade was transferred to the Hong Kong permanent establishment which then on-sold to third parties in Hong Kong.
- XYZ Pty Ltd's internal transfer price for the stock transferred from Australia to Hong Kong was $60,000.
- The arm's length transfer price for the stock was $70,000.
- For taxation purposes, XYZ Pty Ltd selected, applied and documented a bona fide CUP. The arm's length price was reflected in the taxable income by an adjustment at item 7 Reconciliation to taxable income or loss on XYZ Pty Ltd's tax return.
Raw materials were transferred from the permanent establishment at an internal company invoice price of $45,000.
No adjustment was considered or made to taxable income.
Other tangible property
- Shares in a listed company were sold to a subsidiary for $23,345, being the quoted share price at the time. This method was selected, applied and documented as discussed in the introduction to the notes to item 4.
- Machinery was purchased by a subsidiary and transferred to XYZ Pty Ltd for $18,850.
This was the actual price paid by the subsidiary, including handling charges. This method was also selected, applied and documented as discussed in the notes to item 4.
Royalties
The subsidiaries used trademarks owned by XYZ Pty Ltd but did not pay royalties.
Other intangible property
XYZ Pty Ltd sold a trademark to a subsidiary. This was a 'once-only' occurrence and was invoiced at cost plus a nominal mark-up. The amount invoiced was $17,800.
Management and marketing fees
XYZ Pty Ltd performed management services for its subsidiaries, and charged them cost plus 5%.
The amount invoiced was $16,000.
For taxation purposes XYZ Pty Ltd selected, applied and documented a bona fide CUP of $21,700.
This arm's length price was reflected in the taxable income by an adjustment at item 7 Reconciliation to taxable income or loss on XYZ Pty Ltd's tax return.
- Training was provided for the sales staff of one subsidiary. No amount was invoiced for this service but, in exchange, the subsidiary completed a specific research project for XYZ Pty Ltd.
- XYZ Pty Ltd provided ongoing administrative services for the Hong Kong permanent establishment and invoiced these for internal accounting purposes at cost, being $10,200. XYZ Pty Ltd did not use any pricing method.
Technical and construction
XYZ Pty Ltd provided ongoing technical services regarding manufacturing processes to a subsidiary, and invoiced those services at rates equivalent to prices for similar services performed for arm's length customers. The process was not analysed in detail, neither was it documented.
- The amount invoiced was $12,650.
Research and development
XYZ Pty Ltd maintained a research and development (R&D) division and incurred R&D expenditure on behalf of all subsidiaries and its own activities. Subsidiaries paid their own share of the total annual cost, and no mark-up was included in the invoiced price. The total amount was $24,600.
Loans
On 29 June 2009, XYZ Pty Ltd approved the interest-bearing loan of $450,000 to a subsidiary.
Summary of the dealings
Suggested answer to item 2 (show whole dollars only)
Purchases/expenditure |
Amount |
|---|---|
Stock in trade: Raw materials – subsidiary |
$178,750 |
Raw materials – permanent |
$45,000 |
Total |
$223,750 |
Sales/revenue: Stock – subsidiary |
$146,450 |
Stock – PE (taxation value) |
$70,000 |
Total |
$216,450 |
Other tangible: Shares sold |
$23,345 |
Machinery purchased |
$18,850 |
Royalties: No royalties were paid. There were no related-party international dealings. |
$0 |
Other intangibles: Trademark – value of the amount invoiced |
$17,800 |
Management fees: Subsidiaries: management fees (taxation value) |
$21,700 |
Subsidiaries: staff training/research 'barter'; no amount was invoiced and no amount is included at item 2 |
$0 |
PE: show invoiced amount |
$10,200 |
Total fees |
$31,900 |
Technical and construction: Include the amount invoiced |
$12,650 |
Research and development: Include the amount invoiced |
$24,600 |
| Loan from parent | $24,600 |
| Total | $450,000 |
Suggested answer to item 3a
Y for yes is required. This is because XYZ Pty Ltd has provided management services to an international related party and consideration was settled by means of a swap or barter (in this case staff training in return for the research project).
Suggested answer to item 3b
Y for yes is also required here. The subsidiaries used trademarks owned by XYZ Pty Ltd but did not pay royalties - therefore, this is a dealing for which there was no consideration.
Suggested answer to item 4a
The percentage of the related-party dealings for which written documentation is held to support the selection of arm's length pricing methods is calculated as follows.
The total dollar value of related-party dealings, from items 2a to 2d, is $569,345.
The total dollar value of the dealings for which supporting documentation as to selection is held is determined as follows:
Stock |
$146,450 |
|
$73,225 |
|
$73,225 |
Stock – PE |
$70,000 |
|
$70,000 |
Raw materials |
$178,750 |
|
$107,250 |
Royalties |
$0 |
Other tangible property |
$23,345 + $18,850 |
|
$23,345 |
|
$18,850 |
Other intangible property |
Nil |
Management etc |
- |
|
$21,700 |
|
$21,700 |
|
Nil |
|
$10,200 |
|
$12,650 |
Research and development |
Nil |
Total |
$387,595 |
The percentage is calculated as 68.1% ($387,595 divided by $569,345). The appropriate code from the table at item 4a is entered at F item 4a - that is, code 4.
Suggested answer to item 4b
The percentage of the related-party dealings for which there is written documentation to support the application of arm's length pricing methods is calculated as follows:
- The total dollar value of related-party dealings is determined as $569,345, based on the amounts shown at items 2a to 2d.
- The total dollar value of the dealings for which supporting documentation as to application is held, is determined as follows:
Stock |
$146,450 |
|
$73,225 |
|
- |
|
$18,306 |
Stock – PE |
$70,000 |
|
$70,000 |
Other dealings listed at 4a above – all dealings in 4a below Stock – PE |
$171,145 |
Total |
$332,676 |
The percentage is calculated as 58.4% being $332,676 divided by $569,345. The appropriate code from the table at item 4a is entered at G item 4b - that is, code 4.
Suggested answer to item 5
This item asks you about revenue dealings in items 2a to 2d. Item 6 asks you about capital dealings.
The revenue items in this example are all those items mentioned except the shares in the listed company which were sold to a subsidiary, the machinery purchased by the subsidiary and transferred to XYZ Pty Ltd, and the trademark sold to the subsidiary.
The value of the revenue dealings was $509,350:
($569,345 − [$23,345 + $18,850 + $17,800])
The value of the capital dealings was $59,995:
($23,345 + $18,850 + $17,800)
The two arm's length pricing methods used in items 2a to 2d were the CUP method, code 1, and the cost-plus method, code 3.
The method codes are listed at item 5 column A.
The percentages of total dollar value of revenue that each method covers - from related-party dealings identified in items 2a to 2d - are calculated as follows:
The appropriate codes for these percentages are in the table at item 5 column B.
CUP |
$272,175 |
53.4% |
Cost plus |
$73,225 |
14.4% |
The appropriate answer for item 5 is:
Column A |
Column B |
|---|---|
H 01 |
I 4 |
J 03 |
K 2 |
Item 6
This item concerns related-party dealings of a capital nature. These dealings are:
Sale of shares to a subsidiary |
$23,345 |
Purchase of machinery |
$18,850 |
Sale of a trademark to a subsidiary |
$17,800 |
Total |
$59,995 |
Suggested answer to item 6a
The purchase of machinery, the sale of shares and the sale of the trademark to subsidiaries will all be CGT events within the context of Division 104 of the ITAA 1997, and so the appropriate response to this item is Y for yes at P.
Suggested answer to item 6b
This item asks for the four principal methods used for pricing the capital dealings. In this example only three methods were used:
- the quoted market price method for the share dealing - code 7
- the cost price method for the machinery - code 2, and
- other methods for the trademark - code 8.
These codes are from the table at item 6b.
The appropriate answer to item 6b is:
- Label Q: 728
Suggested answer to item 6c
This item asks for the percentage of related-party dealings of a capital nature - by value - compared with the total dollar value of all related-party dealings, both capital and revenue.
In this example, the total of all related-party dealings is $569,345.
The dealings of a capital nature which are CGT events in terms of Division 104 are:
Sale of shares |
$23,345 |
Sale of the trademark |
$17,800 |
Purchase of machinery |
$18,850 |
Total |
$59,995 |
As a percentage:
$59,995 ÷ $569,345 = 10.5%
The appropriate code, from the table at the instructions for item 6c is code 2; the appropriate answer for item 6c is:
- Label R: 2