12 November 2018
On 20 July 2018, Treasury released Exposure Draft legislation to extend the definition of a significant global entity (SGE). As a result, the extended definition of an SGE may include members of large private groups headed by unlisted companies, trusts (including discretionary trusts), partnerships or other investment vehicles. This will have wide ranging implications for affected large private groups which were previously outside the scope of some anti-avoidance provisions, increased administrative penalties and the requirement to lodge general purpose financial statements.
The change is proposed to apply for income years starting on or after 1 July 2018.
Under the current law, an entity is regarded as an SGE for a particular income year if it is:
- a "global parent entity" (GPE) with "annual global income" of A$1 billion or more; or
- a member of a group of entities consolidated for accounting purposes and the GPE of the consolidated group has annual global income of A$1 billion or more.
The definition requires the identification of a potential GPE to which the test is to be applied. Under current law, this must be a listed company that sits at the top of the ownership chain of the relevant group of entities. Under the proposed changes, irrespective of its legal form, the test entity must assume it is a listed company in determining whether it is required to consolidate for accounting purposes. If, based on this assumption, the entity and its group members would be required to consolidate and the consolidated annual global income of the GPE exceeds A$1 billion, the members of the group may fall within the extended SGE definition.
For example, if a discretionary trust is the ultimate holding entity for a large private group, a conclusion needs to be drawn as to which entities would form part of its "notional" accounting consolidated group if it were assumed that the discretionary trust was in fact a listed company. This could include many entities that sit "below" the discretionary trust.
Once the notional group of entities is identified, the consolidated annual global income of the GPE must be determined. The annual global income includes the total annual income of each of the members of the "notional" accounting consolidated group. Under the current law, annual global income is the annual income of the relevant entity/group as shown in its latest global financial statements. A second proposed change in the Exposure Draft seeks to widen the definition of annual global income to deal with entities that do not prepare global financial statement; their income will include the amount a reasonable person in the position of the entity would believe its annual global income would be were such global financial statements prepared for the relevant period and/or group.
Therefore, an entity may satisfy the definition of SGE regardless of whether global financial statements are prepared for the entity and/or its group for the relevant period.
Potential impact for large private groups
If the GPE of the large private group satisfies the definition of an SGE, it and any other entity that would form part of its notional accounting consolidated group would be regarded as an SGE. This would mean that exposure to additional anti-avoidance provisions (the Multilateral Anti-Avoidance Law and the Diverted Profits Tax) and increased administrative penalties will now follow for large private groups.
However, the proposed changes will not flow through to attract Country-by-Country reporting obligations. Amendments in the Exposure Draft will limit that regime to 'country by country reporting entities' rather than SGEs.
Impact on reporting and public disclosure
One further ramification of the amendment to the definition of GPE will arise in respect of the disclosure to the general public of financial and other information about private groups. Information about companies and entities within groups can become public because of the requirements of at least three different regimes:
- the requirements under ch. 2M of the Corporations Act 2001 for various kinds of entities and groups to lodge financial reports with ASIC. Some entities which are required to lodge financial statements, have been allowed to lodge "special purpose financial statements" rather than general purpose financial statements prepared in accordance with the accounting standards (i.e., on a consolidated basis), although this may change under developments in the accounting world raised earlier this year. The Exposure Draft does not change the rules about who must lodge financial reports with ASIC or what the documents must disclose;
- the disclosure by the ATO of specific information (extracted from tax returns) about resident private companies with income in excess of $200m. The Exposure Draft does not change these rules (although the ALP has introduced a Bill into the Senate which would reduce the threshold to $100m, and one would expect the Bill to move ahead if the ALP wins the next election); and
- the requirement for an SGE (not otherwise required to lodge financial reports with ASIC) to lodge "a general purpose financial statement" with the ATO for an income year. The ATO must then give a copy of this statement to ASIC where it will be available to the public – under s. 1274 of the Corporations Act a person may request a copy of most classes of documents lodged with ASIC. The amendments being proposed in the Exposure Draft will expand the scope of the entities which are subject to this requirement.
The general purpose financial report must be prepared in accordance with accounting principles (or generally accepted accounting principles) and be prepared on a consolidated basis for entities that "are consolidated for accounting purposes." The expansion of GPE and SGE will potentially, therefore, reveal to the public information about -
- large private groups headed by entities other than companies, and
- the non-corporate entities inside groups that are consolidated for accounting purposes.