Did you know that Significant Global Entities (SGEs) are subject to a range of additional compliance obligations including harsh penalties, such as, for example, an up to A$520,000 penalty for the late lodgement of a tax related document? If you didn’t know this, read on.
The concept of SGE was introduced as part of the Tax Laws Amendment (Combating Multinational Tax Avoidance) Act 2015 legislation. The introduction of this concept was to increase the transparency of multinationals and was in line with the OECD’s Base Erosion and Profit Shifting (BEPS) initiatives. This concept is of significant importance as it triggers additional tax law obligations and significantly increased penalties.
What is an SGE?
An SGE is an Australian entity that is part of a worldwide group where the worldwide group has a turnover of A$1 billion or more. This is measured using the accounting standards test for consolidation and applies whether or not consolidated accounts are prepared for the group.
There is no minimum size for the Australian entity - an Australian entity may be an SGE irrespective of its own size. Any entity that is an SGE clearly carries additional risk.
An expanded definition of a SGE was broadened in measures announced in the 2018-19 Federal Budget to ensure it includes members of large groups controlled by private companies, trusts and partnerships for income years commencing on or after 1 July 2018, which would not have been captured under the original SGE definition. As such, even a small Australian company can be caught under the various SGE provisions, depending on their ownership structure and group size.
Critically, SGE taxpayers must self-assess themselves under the definition of an SGE and notify the Australian Taxation Office (ATO) on their annual company tax return. We understand that the ATO has been increasing its compliance activity in relation to the special tax rules applying to SGEs recently, despite the measures having been announced in 2015/16 Federal Budget.
Importantly, SGEs are subject to a range of additional compliance obligations, including the:
- Potential imposition of late lodgement penalties exponentially higher than for other entities
- Potential imposition of shortfall penalties for false or misleading statements at double
the rates for other entities - Requirement to lodge country by country (CbC) reporting documents (constituted by a country by country report, master file and local file)
- Obligation to lodge general purpose financial statements (GPFS) with the ATO, unless such statements have already been lodged with the Australian Securities and Investments Commission (ASIC)
- Potential application of Multinational Anti-Avoidance Law (MAAL)
- Potential application of Diverted Profits Tax (DPT).
What are the higher level of potential penalties?
There are a range of administrative penalties that can apply to taxpayers under Australian tax laws. These include penalties for entering into tax avoidance and profit shifting schemes, failure to lodge documents with the ATO on time, and making false or misleading statements to the ATO.
From 1 July 2017, for SGEs, the quantum of these administrative penalties is increased as set out below to encourage full compliance with relevant tax obligations:
- make false or misleading statements – starts from 50% of the shortfall amount (instead of 25% for non-SGEs) to 150% of the shortfall amount (instead of 75% for non-SGEs), depending on what caused the false or misleading statements to be made;
- fail to have a reasonably arguable position – 50% of the shortfall amount (instead of 25% for non-SGEs);
- fail to provide a document where the document is necessary for the Commissioner to determine a tax-related liability accurately where the lodgment due date was on or after 1 July 2017 – multiplied by 500 times
Failure to lodge (FTL) penalties will increase for lodgments of approved forms with a due date on or after 1 July 2017. The FTL penalty range for SGEs changed from $180 to $4,500 prior to 1 July 2017, to a range of $105,000 (for documents up to 28 days late) up to $525,000 (for more than 112 days late).
The increased penalties apply to all late filings made on or after 1 July 2017 regardless of due date, including but not limited to:
- Income Tax Return
- Fringe Benefits Tax Return
- Business Activity Statement
- Instalment Activity Statement (PAYG withholding requirements)
- Superannuation Guarantee Charge statements
Key Takeaways
- SGEs can avoid administrative penalties by lodging on time and without error.
- SGEs should continuously review their internal processes and systems to deal with the risks of the increased administrative penalties, reporting obligations and transfer pricing law changes impacting them. The severe new penalty environment poses a serious financial risk unless these obligations are carefully assessed and managed.
- Make sure you understand what documents must be filed by SGEs to whom and by when.
If you would like to discuss any of your SGE obligations and concerns, please contact Cameron Allen, Partner, of the AA Corporate and International Tax Team.