Significant global entities – Do you qualify for relief when submitting your first general purpose financial statements with ATO?
Australian SGEs are now scratching their heads trying to determine what needs to be submitted to the ATO and when.
Australian entities are a ‘significant global entity’ (SGE) where they are part of an accounting group with a worldwide consolidated revenue of A$1 billion or more. For income tax years starting 1 July 2016, SGEs will for the first time lodge general purpose financial statements (GPFS) with the Australian Tax Office (ATO). You will only be impacted by these changes if you are a SGE and currently do not lodge GPFS with the Australian Securities and Investments Commission (ASIC) to meet your Corporations Act reporting requirements.
Australian SGEs are now trying to work out what needs to be submitted to the ATO and when. Professional advisors are hard at work trying to understand the ATO guidance and how it applies to companies’ particular circumstances.
In summary, the GPFS:
- May be prepared applying reduced disclosures (RDR)
- Must be prepared applying Australian Accounting Standards, or in some limited cases, commercially accepted accounting principles (CAAP)
- Are not required to be audited, however the ATO recommends that, in order to demonstrate compliance with the relevant accounting standards, audit will achieve best practice. We recommend that the best way to demonstrate compliance to the ATO is through an audit.
Please refer to our Accounting News article (October 2017) for more information.
Are you ready to prepare GPFS?
Entities already lodging GPFS with ASIC will not be affected by these changes.
A large number of SGEs will be affected, either because they currently only lodge special purpose financial statements (SPFS) with ASIC, or don’t lodge anything at all. These include the following types of entities:
- Small foreign controlled proprietary companies not reporting to ASIC because they apply the relief available in ASIC Legislative Instrument 2017/204
- ‘Grandfathered’ large proprietary companies preparing, but not lodging financial reports with ASIC (these are usually special purpose)
- Entities lodging special purpose financial statements with ASIC, and
- Corporate limited partnerships and trusts which currently have no financial reporting responsibilities.
Entities noted in (d) above are permitted to submit GPFS in accordance with CAAP (e.g. IFRS/US GAAP or other accounting standards determined on a case-by-case basis) so these may be able to submit their global parent consolidated GPFS. We recommend that such entities seek advice to ensure compliance.
Companies noted in (a) to (c) above must prepare GPFS in accordance with Australian Accounting Standards. This is likely to be a big task for entities that currently do not prepare any financial statements, or those preparing SPFS that do not comply with all the measurement and recognition requirements of Australian Accounting Standards.
Transitional relief from having to comply with all Australian Accounting Standards is available to most of the affected entities for income tax years starting between 1 July 2016 and 30 June 2017. It would therefore provide qualifying entities with much-needed time to develop adequate systems to produce GPFS.
Is any relief available in the first year?
The ATO indicated in its 28 September 2017 guidance that it recognises some entities may experience difficulties preparing GPFS in accordance with Australian Accounting Standards in such a short time frame if they have not done so before, and may encounter unexpected additional costs for systems changes required to facilitate preparation of GPFS. These entities therefore run the risk of incurring administrative penalties for not meeting these requirements (which can be up to AUD 525,000). The ATO will therefore provide a transitional administrative approach to ease this burden for some affected entities.
What is the transitional administrative approach?
Relief is only available to entities if they:
- Are required to prepare GPFS in accordance with Australian Accounting Standards (as indicated in (a) to (c) above)
- Choose not to submit a GPFS at the Australian group level, and
- Instead satisfy the s3CA requirement of the Taxation Administration Act 1953 by lodging consolidated financial statements that include the Australian SGEs.
For the entities meeting the above criteria, the ATO will not review whether the accounts submitted comply with the Australian Accounting Standards, as long as they comply with the CAAP of another country.
The relief applies only to the first year that s3CA requires an SGE to lodge a GPFS with the ATO, i.e. for income years beginning 1 July 2016 to 30 June 2017.
What does this mean in practice?
Australian entities that ordinarily would be required to prepare GPFS applying Australian Accounting Standards can submit their global parent group financial statements prepared under CAAP.
Example 1: Single Australian SGE
Australian Sub Pty Limited is a small foreign controlled proprietary company and therefore has financial reporting responsibilities to ASIC under s292(b) of the Corporations Act 2001 because it is not included in any consolidated financial statements lodged with ASIC. However, because it is not part of a large Australian group, it applies ASIC Corporations (Foreign Controlled Company Reports) Instrument 2017/204 and is therefore exempt from preparing and lodging its financial statements with ASIC.
The ATO Guidance issued 28 September 2017 clarifies that entities with financial reporting responsibilities under Part 2M of the Corporations Act 2001 will need to prepare the GPFS applying Australian Accounting Standards.
This would be a difficult task for Australian Sub Pty Limited as it has never lodged financial statements with ASIC before. Under the ATO’s transitional administrative approach, Australian Sub Pty Limited can submit the consolidated financial statements of USA Parent to the ATO in this first year, but after that, it will need to lodge its own GPFS statements applying Australian Accounting Standards.
It should not be assumed under this transitional administrative approach that the ATO will accept global group financial statements from any country.
The global parent consolidated financial statements can only be submitted if they are prepared under ‘commercially accepted accounting principles’ (CAAP). Other than Australian Accounting Standards, IFRS and US GAAP, whether the accounting standards of other countries is considered CAAP needs to be determined on a case-by-case basis, and may include, amongst other things, considering whether accounting principles applied ensure financial statements that give a ‘true and fair’ view.
Example 2: Australian SGE group
Australian Parent Pty Limited is a large proprietary company and lodges SPFS with ASIC (no consolidation). Australian Sub Pty Limited is a small foreign controlled proprietary company but is not exempt from lodging financial statements with ASIC because:
- It is not consolidated by Australian Parent Pty Limited, and
- It is part of a large Australian group.
It therefore also lodges SPFS with ASIC.
As noted in the ATO Guidance issued 28 September 2017, entities with financial reporting responsibilities under Part 2M of the Corporations Act 2001 are to prepare the GPFS applying Australian Accounting Standards. This means that a consolidation is required for the Australian group unless it is exempt from preparing a consolidation under AASB 10 Consolidated Financial Statements, paragraphs 4 and Aus 4.2).
An entity that is a parent shall present consolidated financial statements. This Standard applies to all entities, except as follows:
(a) A parent need not present consolidated financial statements if it meets all the following conditions:
- It is a wholly-owned subsidiary or is a partially-owned subsidiary of another entity and all its other owners, including those not otherwise entitled to vote, have been informed about, and do not object to, the parent not presenting consolidated financial statements
- Its debt or equity instruments are not traded in a public market (a domestic or foreign stock exchange or an over-the-counter market, including local and regional markets)
- It did not file, nor is it in the process of filing, its financial statements with a securities commission or other regulatory organisation for the purpose of issuing any class of instruments in a public market
- Its ultimate or any intermediate parent produces financial statements that are available for public use and comply with IFRSs, in which subsidiaries are consolidated or are measured at fair value through profit or loss in accordance with this Standard.
Extract of AASB 10, paragraph 4
Notwithstanding paragraphs 4(a) and Aus4.1, the ultimate Australian parent shall present consolidated financial statements that consolidate its investments in subsidiaries in accordance with this Standard when either the parent or the group is a reporting entity or both the parent and the group are reporting entities, except if the ultimate Australian parent is required, in accordance with paragraph 31 of this Standard, to measure all of its subsidiaries at fair value through profit or loss.
AASB 10, paragraph Aus 4.2
As USA parent prepares consolidated financials under US GAAP (and not IFRS), Australian Parent Pty Limited is NOT EXEMPT from preparing a consolidation under Australian Accounting Standards. Again, this could be a huge first-time endeavour and involve significant cost and effort. Both Australian SGEs in this example can therefore utilise the transitional approach in the first year and instead submit USA Parent global financial statements (that include the entities in question), prepared under US GAAP, with the ATO. In subsequent years, however, a consolidation for Australian Parent Pty Limited applying Australian Accounting Standards is required.
Lodgment extension for 30 June 2017 income tax years
In another olive branch extended by the ATO, for income tax years ended 30 June 2017 only, entities will have until 31 March 2018 to lodge GPFS.
If you require more information on the financial reporting requirements for SGEs, please contact your local engagement partner or a member of the IFRS Advisory team. For administrative queries please refer to your Transfer Pricing advisers.