On 1 August 2018, the Australian Taxation Office (ATO) issued a draft Schedule 2 to PCG 2017/4 for public consultation.
This guidance addresses the ATO’s compliance approach to taxation issues associated with cross border related party financing arrangements and related transactions. It sets out specific risk indicators for related party derivative arrangements that are used to hedge or manage the economic exposure of a company or group of companies.
Where a derivative is used for commercially rational hedging purposes, that is, to manage an economic exposure for a company or group of companies, the derivative will normally be entered into with an unrelated third party (either directly or indirectly via one or more interposed related parties). Where the derivative is entered into with a related party, the ATO is likely to consider the arrangement as higher risk unless the terms and conditions of the related party derivative are backed out to the external market on mirror terms.
