News and Insights

Written By Kathleen Jess and Stephen Tsaketas

In 2015, the Australian Government established a taxation regime targeting entities known as Significant Global Entities (SGEs) with the introduction of the Tax Laws Amendment (Combating Multinational Avoidance) Act (the Act). Under the regime, SGEs are subject to additional taxation laws including the Diverted Profits Tax (DPT) and the Multinational Anti-Avoidance Law (MAAL), reporting obligations such as the lodgment of general purpose financial statements and country-by-country reports (CBC), and significantly increased administrative penalties. Since the commencement of the Act, there have been amendments that have expanded the scope of entities categorised as SGEs. Therefore, whilst at first glance you may not consider your organisation to be subject to these obligations, if it has an overseas parent entity, there’s a chance it may be an SGE. To avoid potential liability under Australian law, it is necessary to ascertain whether your organisation is are an SGE for taxation purposes.

Categories of SGEs

1. A Global Parent Entity

An entity is an SGE if it is a ‘global parent entity’ with ‘annual global income’ of AU$1 billion or more. A ‘global parent entity’ is an entity that is not controlled by another entity according to Australian accounting principles, or commercially accepted accounting principles where Australian accounting principles do not apply to the entity. It is important to note that SGEs and global parent entities can be local Australian entities despite the use of the term ‘global’.

2. Member of a single group of entities consolidated for accounting purposes

An entity is an SGE if it is a member of a group of entities that are consolidated for accounting purposes as a single group, and the global parent entity of the group has an annual global income for the period of AU$1 billion or more. If a global parent entity is a member of a group of entities that are consolidated for accounting purposes as a single group, the global parent entity’s ‘annual global income’ for a period is the total of the annual global income amounts of the consolidated group, as shown in total or disclosed in parts in its latest ‘global financial statements’ for that period. For example, if Company A is an Australian subsidiary of Company B and reports AU$2 million in total income in the income year and the annual global income of company B, including its consolidated group, is AU$1.2 billion in the same income year, Company A will be treated as an SGE for that income year.

3. Member of a notional listed company group

An entity is an SGE if it is a member of a ‘notional listed company group’ and one of the other members of the group is a global parent entity whose annual global income for the period is AU$1 billion or more. A notional listed company group is a group of entities that would be required to be consolidated for accounting purposes as a single group, on the assumption that an entity (the test entity) were a listed company. Any type of entity can be considered a test entity. These include individuals, partnerships, trusts, and private companies. For example, whilst a partnership cannot be listed on the stock exchange, it may still be regarded as an SGE if it can be hypothesised that had it been listed it would be required to prepare financial statements that were to be consolidated with other entities for accounting purposes.

4. As determined by the Commissioner

The Commissioner has the authority to make a determination that an entity is a global parent entity. If global financial statements have not been prepared by the entity for the period, the Commissioner may determine that an entity is a global parent entity on the basis that they reasonably believe on the available information that the entity’s annual global income for the period would have been AU$1 billion or more if global financial statements had been prepared. The Commissioner must give a notice of the determination to the global parent entity, or to another entity that becomes an SGE following the decision. The entity subject to the decision has an opportunity to object against any such determination.

Obligations of SGEs

1. Tax obligations

If an entity falls within the definition of an SGE, it is subject to the MAAL and the DPT. The MAAL negates certain tax avoidance schemes used by multinational SGEs to artificially avoid the attribution of profits to a permanent establishment in Australia. The DPT imposes a 40 per cent penalty tax on the profits of SGEs that have been artificially diverted from Australia.

2. Country-by-country reporting obligations

SGEs are subject to CBC reporting obligations which require the lodgement of three CBC reporting statements to the Commissioner within 12 months of the end of the relevant reporting period. These reporting statements are required to disclose information including the revenues, profits, taxes, operations, and activities of the global group to which an entity belongs, as well as an entity’s international related party dealings.

3. General purpose financial statement obligations

CBC reporting entities that have a presence in Australia are also required to lodge yearly general purpose financial statements. Australian Accounting Standards specify the information required to be disclosed in a general purpose financial statement as well as how that information is presented. Information required to be disclosed includes an entity’s financial position, financial performance, and cash flows.

Administrative Penalties

It is important to note that the failure to meet an entity’s SGE obligations will potentially result in significant penalties being incurred. Further, the administrative penalty base is doubled for any SGE making a false or misleading statement, or taking a tax position that is not reasonably arguable. Furthermore, the penalty base for any SGE failing to lodge its tax returns and other similar documents on time is multiplied by 500. The base penalty amount can be increased in certain circumstances, as well as reduced where the Commissioner decides it is fair and reasonable to do so.

If you think your organisation may be an SGE or are unsure of its status and want to discuss its potential obligations, please contact Kathleen Jess on (03) 9612 7212.