Since 1 July, Australian law has required ‘Significant Global Entities’ (SGEs) to lodge General Purpose Financial Statements (GPFS) with the Australian Tax Office where they do not lodge one with the Australian Securities and Investments Commission (ASIC). What is the definition of a Significant Global Entity and what additional measures apply to SGEs?
Is your entity a Signficant Global Entity (SGE)?
Your company will be classed as a ‘Significant Global Entity’ (SGE) if it is:
- A global parent entity with an annual global income of A$1 billion or more, or
- A member of a group of entities consolidated for accounting purposes and one of the other group members is a global parent entity with an annual global income of A$1 billion or more.
This definition includes:
- Australian-headquartered entities (with or without foreign operations)
- The local operations of foreign-headquartered multinationals.
Note that wholly-owned subsidiaries may only be able to rely on relief if their parent company lodges a General Purpose Financial Statement with ASIC.
This requirement may also be applicable to some entities currently exempted from reporting requirements under Corporations Act (ASIC Corporations Instrument 2017/204 & 2016/785). These include:
- Subsidiaries of foreign groups controlled by a foreign company but not part of a large group
- Australian branches of foreign companies that do not currently prepare branch accounts
How annual global income of an SGE is determined
Annual global income for a period is the total annual income of all members of a group of entities consolidated for accounting purposes as a single group. Otherwise, it is the total annual income of the entity as shown in the latest global financial statements for the entity for the period.
Amounts in the global financial statements that are not in Australian dollars must be converted using the average exchange rate for the relevant period. If financial statements are for a period other than 12 months, the annual global income should be pro-rated or extrapolated to an annual amount.
Other measures that apply to Significant Global Entities
Significant Global Entities also need to lodge Country-by-Country (CbC) reports, and are subject to targeted Multinational Anti-Avoidance Law (MAAL) measures, and the Diverted Profits Tax (DPT).
Country-by-Country (CbC) Reporting
CbC reporting applies to income years commencing on or after 1 January 2016 to entities who were an SGE in the prior income year. CbC reporting is part of Australia’s measures to combat tax avoidance and implements OECD Base Erosion and Profit Shifting (BEPS) action plan. Under these obligations, SGEs must lodge a Master File, a Local File and a CbC Report with the ATO within 12 months of the end of the relevant income year. A range of exemptions may be available in specific circumstances, for example where a company is dormant or has no International Related Party Dealings.
See SGEs what are your additional lodgement obligations which covers CbC reporting in more detail.
Multinational Anti-Avoidance Law (MAAL)
Australia’s MAAL is designed to target inbound SGEs which supply goods or services to Australian customers but structure the sale so that revenue is not attributed to an Australian permanent establishment (PE) of the non-resident entity. MAAL is designed to avoid sales falling outside the Australian tax net. Broadly it applies to an entity that:
- Is a non-resident entity who makes a supply to an Australian customer and derives income from the supply which is not attributable to an Australian Permanent Estatablishment of the non-resident
- Undertakes activities (eg marketing) in Australia directly in connection with the supply by an Australian resident entity or Permanent Establishment
- The principal purpose of the arrangement was to obtain an Australian tax benefit.
Diverted Profits Tax (DPT)
Diverted Profits Tax applies to income years commencing on or after 1 July 2017. Australia’s DPT imposes a penalty rate tax of 40% on SGEs, plus interest, in circumstances where the amount of Australian tax paid is reduced by diverting profits offshore through contrived related-party arrangements. The 40% DPT penalty tax rate applies if the principal purpose of an arrangement was to obtain an Australian tax benefit, and/or to reduce foreign tax liabilities. There are also several exceptions for DPT, including for certain entity structures or where an entity’s Australian income does not exceed $A25m.
Being a Significant Global Entity has significant consequences. Please contact the author, Steven Zabeti, regarding any areas of the law that your organisation finds unclear or has difficulty implementing. If you would like to know more about how your company’s financial reporting is affected, please get in touch with an Accru audit & assurance partner.