New Australian Short Form Local File disclosure requirements. Don’t be fooled by the ATO’s promise of “simplifying reporting requirements for the majority of CbCREs…”

Effective from 1 January 2025, the Australian TaxationOffice (“ATO”) updated its Short Form Local File (“SFLF”) instructions, which includes significant additional disclosure requirements for Australian Country-by-Country (“CbC”) Reporting Entities (“CbCREs”).

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These changes form part of a broader suite of transfer pricing measures aimed at enhancing tax transparency for Significant Global Entities (SGEs). Related initiatives include:

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• ‍Public CbC Reporting – effective for reporting periods commencing on or after 1 July 2024 (i.e., the 30 June 2025 income year for Australian reporting entities); and‍
• Revised CbC Reporting exemption and administrative relief guidance – applies to all CbC Reporting exemption requests submitted to the ATO from 1 January 2025. In particular, there is generally no administrative relief available for the local file with respect to reporting periods starting on or after 1 January 2024, even where the Australian CbCRE did not have international related party dealings.

Overview of new SFLF instructions

Since the new instructions took effect, it’s become increasingly clear that the impact is anything but minor, particularly for CbCREs with ‘inbound’ Australian operations. These entities are likely to require extensive input from their Ultimate Parent Entity (UPE) and other offshore affiliates to meet the new obligations.

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Key changes include:

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• ‍Schema update: From 1 January 2025, CbCREs must use Local File/Master File Schema Version 4.0 for reporting periods starting on or after 1 January 2024.
• Data analytics integration: The ATO has incorporated the SFLF directly into the Message Structure Table (MST) within Schema 4.0, replacing the prior standalone attachment. This allows the ATO to better analyse the data and flag high-risk international tax arrangements.‍
• Restructures and intangibles: Entities involved in restructures or new intangibles arrangements face expanded reporting obligations.‍
• Redefined “restructure”: The term now includes material changes to related-party financing arrangements, even those outside of Australia broadening the scope significantly.

The new requirements cover three primary disclosure areas:

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1. Business and strategy
2. Organisational reporting structure and overseas reporting
3. Restructures or new arrangements involving transfer, licence or creation of intangibles.

Each is explained in detail below:

1.    Business and Strategy

Australian reporting entities are required to:

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• Disclose the number of main business lines and functions within the Australian operations; and
• Provide descriptive information in relation to each of these business lines.

The disclosure requirements for business and strategy are largely unchanged as compared to the prior SFLF instructions. However, the new MST format requires systematic input of responses, which adds compliance complexities as compared to the prior “free text” format for the SFLF.

The ATO states that the reporting entity does not need to treat supporting / back-office functions (such as HR and IT) as main business lines if the supporting functions do not generate revenue or involve DEMPE functions for intangible assets. For example, if a taxpayer is involved in wholesale distribution, retail distribution, and franchising, each of these is treated as a separate business line and must be disclosed individually.

The ATO provides further clarification in relation to “main business line and functions” in Example 1 on its website. In this regard, the reporting entity should outline the main business lines that generate revenue (eg wholesale and distribution of products), and list the functions of each of these business lines (e.g., warehousing, inventory management, logistics and transportation, sales and marketing, etc).

2.    Organisational reporting structure and overseas reporting

Australian reporting entities are required to disclose all reporting arrangements for business lines or functions that have local individuals who effectively report to overseas individuals during the income year.

Key changes as compared to the prior SFLF instructions are:

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• Disclosure of overseas reporting arrangements for each business line or function;
• Provision of full names of the individual personnel and the individual overseas reporting personnel (note: following consultation feedback, the ATO has made this question non-mandatory);
• Description of the function and activities of your business or operations for which your individual personnel effectively reported to the individual overseas personnel during the income year; and
• Disclosure of whether there were any changes to your individual personnel’s reporting arrangements during the year. If so, the reporting entity must provide further details including when this overseas reporting arrangement commenced or ceased during the income year.

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This is a substantial expansion from previous guidance and aims to help the ATO identify offshore influence over Australian operations.

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3.    Restructures or new arrangements involving transfer, licence or creation of intangibles

Australian reporting entities are required to disclose whether there were any restructures (including changes in related party financing) or new arrangements involving transfer, license, or creation of intangibles during the current or previous income year (including restructures or arrangements affecting future Australian withholding tax).

The ATO have significantly overhauled this section of the SFLF, such that careful consideration is required by the Australian reporting entity, as well as seeking input from the UPE and relevant overseas affiliated entities. In this regard, the ATO has expanded the definition of a “restructure”, which is also no longer limited only to changes in the local entity’s arrangements.

Disclosure must be made if:

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• The change qualifies as a Deemed Significant Restructure; or
• The change is otherwise significant due to materiality or tax risk.

Deemed significant restructures

The ATO outlines restructuring arrangements that it considers to be significant. Various of these arrangements fall within the generally accepted financial definition of a restructure (eg (i) changes in ownership, residence or tax status, (ii) disposal, acquisition or transfer of assets or liabilities, (iii) changes in the nature or characterisation of arrangements between you and related parties).

However, the ATO’s definition of “restructures” in the updated SFLF instructions has a broader application and goes beyond the examples included at question 17 (restructuring events) of the International Dealings Schedule (“IDS”). Therefore, Australian reporting entities should not simply rely upon the disclosures at question 17 of the IDS for purposes of considering whether there has been a “significant restructure” for SFLF purposes.

For example, the ATO also regards the following scenarios as “deemed significant restructures”.

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• Changes in your related counterparties’ operations, transactions or structures:
  1. the related overseas counterparty acquires or licenses significant intellectual property or other intangibles from another overseas related party
  2. the related overseas counterparty restructures out of hybrid structures (including together with other members of the global group) into:
     
     1. a new arrangement considered to not be subject to the hybrid rules
     2. a different kind of hybrid arrangement or other effectively non-taxable global structure, for example, restructuring out of reverse or imported hybrid structures into a direct or synthetic hybrid arrangement
  3. The related overseas counterparty commences or expands an offshore structure or arrangement treated as impacting the ‘functional profile’ or level of remuneration of operations for Australian transfer pricing purposes, for example, commencing offshore ‘hub’ arrangements.

To appropriately consider the above scenarios, the Australian reporting entity will likely need to liaise with and obtain relevant information from relevant related overseas counterparties, and there may be challenges associated with accessing this information.

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• Restructures in response to the amended thin capitalisation and debt deduction creation rules in Division 820 of the ITAA 1997.

Australian reporting entities that have revised related-party funding arrangements in order to comply with these new rules may now be required to report these as a restructure in the SFLF.

Other significant restructures

The ATO outlines various additional transactions, arrangements and other changes that may need to be disclosed. However, these only need to be reported as a restructure if they are significant having regard to materiality or potential Australian tax risks (refer to “how to determine whether a restructure is significant” below).

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• Changes in the nature or characterisation of arrangements between you and overseas related parties, for example, sale of goods arrangements replaced with provision of services arrangements.
• Significant changes in your related counterparties’ operations, transactions or structures that may impact the nature or character of your payments or operations.
• Changes in your “material” related party financing arrangements:
  1. introduction of significant or material new cross-border related party financing arrangements;
  2. termination of significant or material existing cross-border related party financing arrangements (other than termination of borrowings or loans due to repayment on maturity in accordance with pre-existing terms of the borrowing or loan);
  3. replacing significant or material cross-border related party borrowings with private credit arrangements; and
  4. changes in significant terms or conditions, of your significant or material cross-border related party financing arrangements, for example, changes in parties, tenor or payment dates, rate, including fixed to floating rate (this does not include changes in rate due to floating of the underlying benchmark rate) currency denomination indemnification or security arrangements.

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The ATO defines material cross border related party financing arrangements as “arrangements where the capital value of the financing arrangement and any connected arrangements is $10 million or higher.”

How to determine whether a restructure is significant

In determining whether a restructure is significant, the ATO states that CbCREs must have regard to:

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• Materiality of the changes and any connected steps, including for both financial and operational impact; and
• Potential Australian tax risks associated with the changes and any connected steps for the income period and following income years.

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Potential Australian tax risks may include:

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• Australian withholding tax liabilities;
• Amount, tax characterisation or deductibility of payments to a related entity by you or your controlled entities;
• Hybrid mismatch outcomes within your global group that maybe relevant for your intra group payments (including effective offshore hybrid outcomes in your group determined to not result in tax adjustments under Division 832 or Division 974 of the ITAA 1997);
• Characterisation of operations for Australian tax (for example, characterisation for transfer pricing purposes);
• Amount, tax characterisation or assess ability of related party revenue or remuneration of you or your controlled entities; and
• Taxation of income or gains from disposal of direct or indirect interests in you (including where it is determined that a capital gain or loss is disregarded under Division 855 of the ITAA 1997).

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The ATO also provides examples of changes which it considers to be insignificant and, therefore, do not require disclosure in the SFLF. For example, where changes are organic in the ordinary course of commercial business operations which is not related to changes in related party arrangements or tax considerations.

What information is required if you have a significant restructure and / or new intangibles arrangement?

If it is determined that there is a significant restructure and / or new arrangement involving intangibles, CbCREs are required to provide the following information:

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• Description of the restructure or intangibles arrangement;
• Anticipated Australian and global tax impact of the restructure or intangibles arrangement;
• Commercial context and impact of restructure and / or intangibles arrangement;
• Total capital value of the restructure and / or intangibles arrangement; and
• The number of steps in the restructure and / or intangibles arrangement, and a copy of the step plan (if available).

Key takeaways

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1. ‍Start early: The new rules will demand significantly more time and coordination, especially when offshore input is needed.‍
2. Don’t assume it’s business as usual: The broadened definition of “restructure” creates significant uncertainty.‍
3. Accuracy matters: MST formatting enables data analytics and targeted reviews by the ATO.‍
4. Penalties are real: Failure to comply with the updated rules may trigger significant SGE penalties.

We recommend that all Australian CbCREs begin their Local File processes well ahead of year-end. The first year of adoption will be a learning curve, and early engagement with TPEQ will be critical to ensure compliance and manage risk.