This is about an Australian private company (Pty Ltd), but 100% of ordinary shares are held by overseas company. It has one Australian resident director and main activity is medical research and development.
Q1. 1- Ultimate and immediate holding company name and ABN or country code:
Should I put the name of overseas company for this question in the above scenario?
Q2. 26- International related party dealings/transfer pricing – Did you have any transactions or dealings with international related parties (irrespective of whether they were on revenue or capital account)? I just want to confirm that IDS (international dealings schedule) is required for Equity contribution from overseas parent company or not as some people say “not required” for equity contribution by overseas parent company.
- Overseas company provided the fund for issued capital for the value of shares (paid shares amount by overseas company). Should we say to YES to this question?
- Should we complete an International Dealings Schedule?
Q3. This Australian private company (Pty Ltd) is conducting the medical research in Australia. Total income / turnover of Parent and Australian company is AUD 6 mil. So, I believe that Australian private company (Pty Ltd) can apply for R&D tax incentive if all other conditions are met.
Australian private company (Pty Ltd) is wholly owned subsidiary of parent company. Is this going to affect the outcome of R&D tax incentive?
Q4. What is the impact / consequences if we answer Yes to above questions?
Q2. a. Yes
b. Yes. The following is a direct quote from International dealings schedule instructions 2020:
Trigger points that will require completion of this schedule.
If you are a relevant company, you must complete an International dealings schedule if you have written an amount or Y (for yes) at certain labels in your relevant tax return listed below:
“Company tax return 2020
Question 6 Calculation of total profit or loss
J Interest expenses overseas
U Royalty expenses overseas
Question 7 Reconciliation to taxable income or loss
C Section 46FA deductions for flow-on dividends
P Offshore banking unit adjustment
Question 27 International related party dealings/transfer pricing
Y Was the aggregate amount of the transactions or dealings with international related parties (including the value of property transferred or the balance outstanding on any loans) greater than $2 million?
Question 28 Overseas interests
Z Did you have overseas branch operations or a direct or indirect interest in a foreign trust, foreign company, controlled foreign entity or transferor trust?
Question 29 Thin capitalisation
O Did the thin capitalisation provisions affect you?”
Q3. The ownership of the subsidiary company has little impact on the eligibility of Research & Development Offset. As Division 355 covers company either incorporated in Australia or overseas.
We suggest that you consider two aspects of the R&D tax offsets.
- Whether or not the company is an R&D entity. You can only claim an R&D tax offset for expenditure on R&D activities conducted for you rather than for another entity. Working out for whom the R&D activities are conducted involves determining who receives the major benefit from carrying out the activities (for example, who owns the results of the activities). I refer you to Subdivision 355.35 & 355.220 of the ITAA 1997.
- Whether or not the company has incurred notional deductions of at least $20,000 on eligible R&D activities. I refer you to Subdivision 355.20, 355.25 & 355.30 of the ITAA 1997.
Q4. 1. Please refer to the Company Tax Return Instructions 2020, which states:
“Under the income tax transparency reporting requirements, the Commissioner of Taxation will publish Report of entity tax information about:
- Australian public and foreign owned corporate tax entities with total income of $100 million or more, and
- Australian resident private companies with total income of $200 million or more.
The information will be extracted from tax returns and amendments by the relevant entity that have been processed by 1 September in the year following the one being reported, and the report will be published around December. For example, information from 2018–19 will be extracted on 1 September 2020 and published around December 2020.
The information you include at items 1, 2 and 3, along with certain income labels, will be used to identify entities for inclusion in the Report of entity tax information.”
2. “International related parties are persons who are not dealing wholly independently with one another in their international commercial or financial relations, and whose dealings or relations can be subject to Subdivision 815-B of the ITAA 1997 or the associated enterprises article of a relevant double tax agreement (DTA). The term includes:
- any overseas entity or person who participates directly or indirectly in the company’s management, control, or capital.
- any overseas entity or person in which the company participates directly or indirectly in the management, control, or capital.
- any overseas entity or person in which persons who participate directly or indirectly in its management, control or capital are the same persons who participate directly or indirectly in the company’s management, control, or capital.
Participates includes a right of participation, the exercise of which is contingent on an agreed event occurring.
Person has the same meaning as in subsection 6(1) of the ITAA 1936 and section 995-1 of the ITAA 1997.
For more information as to the relevant degree of participation, see Taxation Ruling IT 2514 Income tax: Company Schedule 25A: Information return for companies that transact business with related overseas entities.
The type of ‘dealings or transactions’ that will require the entity to answer yes at this question are dealings by the entity with related parties (as mentioned above), such as an overseas holding company, overseas subsidiary, or a non-resident trust in which the entity has an interest. These dealings or transactions may be the provision or receipt of services, or transactions in which money or property has been sent out of Australia or received in Australia from an overseas source during the income year. The dealings may also include transfer of tangible or intangible property, or the provision or receipt of loans or financial services.”