Entities with a global parent or that are part of a large group of companies are being caught in the multinational tax crackdown regardless of their size in Australia.
With effect from 1 July 2016, many smaller entities connected to a larger parent or group are now only grappling with the changes prior to the lodgement of the 2016-17 tax returns.
A series of laws targeting multinationals came into effect from 1 July 2016 to ensure that tax is paid on economic activity in Australia. But it's not just entities with revenues of $1bn or more that are affected. Subsidiaries may be caught by the new rules if they:
- Have a large global parent with annual global income of A$1bn or more, or
- Form part of a group of entities consolidated for accounting purposes where the global parent entity has an annual global income of A$1 billion or more.
This includes Australian headquartered entities (with or without foreign operations) and local operations of foreign head-quartered multinationals.
Australian entities (or a foreign entity with a permanent establishment) that meet these criteria are considered significant global entities (SGE). An SGE has additional reporting requirements if:
- It is not required to lodge general purpose financial statements with the Australian Securities and Investments Commission (ASIC). Many wholly or partially owned foreign entities rely on the reporting exemption from ASIC.
- A corporate tax entity a company, corporate limited partnership or public trading trust.
- An Australian resident or a foreign resident operating an Australian permanent establishment (PE), at the end of the income year.
The additional reporting requirements are to ensure that profits and economic gains from activities in Australia are not diverted.
If the Australian entity does not already lodge general purpose financial statements with ASIC, where for example the entity might be exempt, then these financial statements need to be lodged with the ATO prior to the entity's tax return being lodged.
So, you could run a local subsidiary of a multinational that might be generating very little income and still be subject to the same reporting requirements as billion dollar companies.
Being classified as an SGE has broader implications than just the additional paperwork. The administrative penalties that apply to SGEs for entering into a scheme to reduce the amount of tax payable in Australia, failing to lodge tax returns and the accompanying financial statements, and failing to lodge on time, all attract much more significant penalties than if the entity was not an SGE.