ATO increases focus on international related party loans

In 2017, the ATO released Practical Compliance Guideline PCG 2017/4 (PCG) which outlines the ATO compliance approach to taxation issues associated with cross-border related party financing arrangements.

The PCG provides a risk framework to allow taxpayers to assess the level of risk across six zones.   White, green, blue, yellow, amber and red zones indicate the increasing level of risk (and compliance action) that the ATO considers applies to the particular arrangements. 

Taxpayers need to regularly review the level of risk of their arrangements and take action to reduce it.  The PCG outlines various factors and a scorecard to assess the level of risk.

Risk factors include:

• Pricing (interest rate and costs)
• Level of collateral
• Currency of debt
• Tax rate in lender jurisdiction
• Level of evidence supporting arm’s length term

The following table, copied from the PCG identifies the potential ATO actions for each level of risk:

*Table Source: Australian Taxation Office - Practical Compliance Guide

The PCG has been updated on a yearly basis.  In December 2020, Schedule 3 was added to include consideration of interest-free loans between related parties.

On 1 February 2021, the ATO announced its International Risk for Private Groups program will focus on non-resident withholding tax on interest expenses.  This campaign will focus on taxpayer compliance with:

• Withholding tax (generally 10%) from interest paid to international parties and remitting it to the ATO
• Lodging a PAYG withholding from interest, dividend and royalty payments paid to non-resident annual report (PAYG annual report)

https://www.ato.gov.au/Business/Business-bulletins-newsroom/Tax-Time-and-reporting/Private-wealth---withholding-tax-on-overseas-interest/

Any taxpayers with related party financing should take action to review their arrangements, assess the level of risk and take appropriate action.

Should you require further information, or advice in relation to these matters, please contact your usual Mazars advisor, or alternatively one of our tax specialists via phone or the form below. 

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Published: 04/02/2021

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