Related Party Financing
Risk Calculator

Cross border related party financing arrangements and related transactions (collectively, financing arrangements) are of particular investigative focus for the Australian Taxation Office (ATO).

This calculator provides a risk rating for your financing arrangements and guidance on the likely approach of the ATO to allocating its compliance resources to reviewing and auditing your financing arrangements.

This calculator is also suitable for foreign investors who are required to make Foreign Investment Review Board (FIRB) applications. FIRB often requires applicants to disclose the risk rating for new and existing financing arrangements.

INSTRUCTIONS FOR USING THIS CALCULATOR

This calculator is optimised for Google Chrome and Firefox and in landscape desktop format.

Enter the calculator by answering the three questions below.

You will then be taken to the Check-In section which will guide you through some preliminary questions to determine whether this calculator will provide you with useful and appropriate results.

Once you have been through the Check-in section, you will enter either the Inbound Financing or Outbound Financing sections based on your answers.

Let's begin!

Does the wholly owned group of which the borrower is a member include an authorised deposit taking institution (ADI)?

An ADI is supervised by the Australian Prudential Regulation Authority and authorised under the Banking Act 1959 (Cth) to accept deposits from the public.

Does the wholly owned group of which the borrower is a member include an Australian resident securitisation vehicle or an entity to which section 820-39 of the Income Tax Assessment Act 1997 (Cth)?

Broadly, a securitisation vehicle is established for acquiring, funding and holding certain assets that are acquired from another entity and funded by issuing debt interests by the vehicle. Section 820-39 of theIncome Tax Assessment Act 1997 (Cth) applies to certain insolvency remote special purpose entities that are established for the purposes of managing some or all of the economic risks associated with assets, liabilities or investments.

Does the wholly owned group of which the borrower is a member include an Australian taxpayer that has appropriately applied the simplified transfer pricing record keeping options in relation to inbound and outbound loans?

The ATO permits certain taxpayers to use simplified transfer pricing record keeping options as an administration and cost saving measure where the taxpayer and its activities are likely to be low risk. A taxpayer's eligibility is set out in Practical Compliance Guideline PCG 2017/2.

Using the calculators You must answer every question in the relevant section; otherwise, a risk rating will not be available.
Each question contains a heading, a brief description and an answer scale (which contains a sliding scale, a yes/no switch, or both). Detailed information on each question can be obtained by clicking on the ? symbol on the top left corner of the question box.

Once all of the questions have been completed, you will be prompted to provide your details. Once done, click on the final button to get your risk rating.

Why do we ask for your details and how do we use your information? Although we provide this calculator free for your use, it is important to us to ensure the results are meaningful. We manually review the information you have provided to see if we can give you further observations that may be useful. We also collate aspects of your information to ascertain patterns based on taxpayer profiles, that may also be useful to you. We will contact you using your details if we can provide such assistance.

We also use your details to e-mail you a copy of your risk rating.

We do not disclose your information or details to any person, unless required by a law.

We will automatically remove personal details from any information we retain within 6 months of you using the calculator, unless you have engaged us to provide advice.

Our liability to you We disclaim any liability to you. We have tested the calculators and ensured they align with the ATO's guidelines in PCG 2017/4. However, the risk rating is a function of your inputs. We do not review your financing arrangements (unless you separately engage us to do so) and cannot confirm whether your inputs are correct or appropriate. Even if your inputs are correct, the ATO may choose to treat your financing arrangements as higher risk than indicated by the calculator or otherwise review and audit you.

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Completing the ‘check-in’ questions below will automatically determine if the inbound or outbound calculator (or neither) is applicable to your financing arrangements.
Answer each question below by first clicking to make active.
Is your financing arrangement a debt interest under Division 974 of the Income Tax Assessment Act 1997 (Cth)?

Division 974 of the Income Tax Assessment Act 1997 (Cth) treats a financing arrangement as a debt or as equity based on the substance of the arrangement. Broadly, a financing arrangement is debt for tax purposes if you are obligated to pay back at least the same amount that you received under the arrangement.

Is your financing arrangement with a related party that is not a resident of Australia?

Broadly, a related party is one who has an equity interest in you or in which you have an equity interest. An entity is typically resident of Australia if it is incorporated or otherwise established in Australia, or if its central management and control is located in Australia.

Does the cross border test under Subdivision 815-B of the Income Tax Assessment Act 1997 (Cth) apply to your financing arrangement?

The cross border test is satisfied broadly where some or all of the conditions of the financial arrangement do not operate purely domestically in Australia - for example, the requirement to pay interest offshore would be sufficient.

Does the financing arrangement comprise a form of Islamic financing?
Is your financing arrangement subject to any of the following for the relevant income year:
  • An advance pricing arrangement;
  • A settlement agreement between you and the ATO;
  • A court decision; or
  • The ATO has conducted a review commencing on or after 1 January 2015 and the arrangement was given a low risk rating,
AND there has not been a material change in the conditions of the arrangement.
Are you an Australian resident borrower or lender under the financing arrangement?
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+61 488 102 106
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+61 434 486 810
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Use the inbound calculator to rate the risk of a financing arrangement where you are the Australian-resident borrower under the arrangement.
Answer each question below by first clicking to make active. Complete the form to get your INBOUND score.
RELATIVE FINANCING COST What is the price of the financing arrangement compared
with the most relevant of these unrelated third party arrangements:
  • Cost of external debt to which the financing arrangement can be traced
  • Comparative external debt of the Australian-resident borrower
  • Cost of funds for the global group (AUD equivalent)
Rounding rules: any decimal rounds up e.g. 139.1 bps rounds up to 140 bps
bps over cost of referrable debt
  • 0bps
    or less
  • 50bps
  • 100bps
  • 150bps
  • 200bps
  • 250bps or more

To answer this question, use the most relevant finalised financials available. If these are not appropriate, you may use other financials, but you must be prepared to substantiate the reasons why. The ATO expects that you will clear the use of such financials prior to using them.
Use the all in cost of your debt, not just the interest rate. This includes guarantee fees, hedging costs, other fees and anticipated exchange gains and losses.
Only one of the three comparatives can be used. They are listed in order of priority. If one higher in the order is available, it must be used.
Traceable third party debt means external third party debt of the global group, the key terms of which and payments relating to which are mirrored in your related party debt. This would occur, for example, where your global parent has raised debt from unrelated parties and has back-to-backed that loan to you. Comparative third party debt means your (or, if you have none that are comparable, your global group's) external third party debt that has consistent terms to your related party debt. For example, long term debt is not comparable to working capital facilities. The global group's cost of funds is determined by the formula:
Relative Financing Cost equation
using the consolidated global group's accounts in AUD equivalents.

LEVERAGE What is the leverage of the Australian-resident borrower? Is it the same as or lower than (consistent with) the leverage of the global group?
%
  • 0%
  • 25%
  • 50%
  • 75%
  • 100% or more
Debt less than or
equal to 50% of
historic cost base of assets
Same as or lower
than the leverage
of the global
group?

Your leverage is calculated as:
Leverage equation
The leverage of the global group is calculated as:
Leverage of Global Group equation
Your leverage is consistent if it is within 10% of the global group's leverage.

INTEREST COVERAGE RATIO What is the interest coverage ratio of the Australian-resident borrower? Is it the same as or higher than (consistent with) the interest coverage ratio of the global group?
  • 0 or less
  • 2.5
  • 5
  • 7.5
  • 10 or more
Same as or higher than the interest
coverage ratio of the global
group?

Interest coverage ratio is calculated as follows:
Interest Coverage Ratio equation
per your (or, for comparison, the global group's consolidated) income statement. Note interest expense includes interest that is paid or credited, including amounts accrued, accumulated or capitalised.
Your interest coverage ratio is consistent with the global group's if you ratio is within 10% of the global group's.

APPROPRIATE COLLATERAL Has the Australian-resident borrower provided appropriate levels of protection as would be expected in third party dealings? Select yes if appropriate security has not been provided, but it has been priced into the debt.

Collateral (such as guarantees, securities and covenants) may be provided. What is appropriate will depend on market practice for comparable borrowers, having regard to their credit ratings.

SUBORDINATED OR MEZZANINE DEBT Does the financing arrangement rank (including by structural subordination) below other loans or securities in relation to claims on the borrower's assets? Select yes if your debt is subordinated and that subordination has been priced into the debt.
LENDER’S HEADLINE TAX RATE What is the headline corporate tax rate (nearest whole percent, rounding down for decimals) for the country in which the lender is a tax resident, based on the OECD tax database? Is the lender the global parent of the Australian-resident borrower?
%
  • 0%
  • 10%
  • 20%
  • 30%
  • 40% or more
Lender is the ultimate parent
entity (or one of its subsidiaries in the same jurisdiction) or the global treasury entity for the group.

Where the tax rate applied to the lending entity or the lending entity's interest income (for example, because of tax holidays or concessional tax treatment of certain income) is different to the headline rate (even temporarily), the actual rate applied should be used.
If the lending entity is not a tax resident of any jurisdiction, assume the headline tax rate is 0%.

CURRENCY Is the currency of the financing arrangement different to the currency in which the Australian-resident borrower earns the majority of its revenues?
Alternatively, is the currency of the financing arrangement different to any currency in which the borrower has free cash equal to or greater than 150% of the anticipated interest expense in that currency?
TAXPAYER ALERTS Is the financing arrangement covered by a taxpayer alert?

Current applicable taxpayer alerts include TA 2016/1, TA 2016/3, TA 2016/9 and TA 2016/10.

HYBRIDS Is the income, gain, expenditure or loss of the borrower from the financing arrangement not subject to consistent or symmetrical treatment under the tax system of the lender’s jurisdiction (but not merely because of a difference in tax rates)?
EXOTIC FEATURES Does the financing arrangement contain any exotic features? Select yes if the existence of exotic features has been priced into the debt.

Exotic features include payment in kind or other forms of interest deferral (but not mere interest compounding in the event interest is not paid when due).

ENTER YOUR DETAILS TO CALCULATE YOUR INBOUND RISK SCORE

Although we provide this calculator free for your use, it is important to us to ensure the results are meaningful. We manually review the information you have provided to see if we can give you further observations that may be useful. We also collate aspects of your information to ascertain patterns based on taxpayer profiles, that may also be useful. We will contact you using your details if we can provide such assistance.

OUR EXPERTS
+61 488 102 106
+61 2 9263 4715
Image of Chris Merjane
+61 434 486 810
+61 2 9263 4079
Use the outbound calculator to rate the risk of a financing arrangement where you are the Australian-resident borrower under the arrangement.
Answer each question below by first clicking to make active. Complete the form to get your OUTBOUND score.
RELATIVE FINANCING COST What is the price of the financing arrangement
compared with the most relevant of these unrelated third party arrangements:
  • Cost of external debt to which the financing arrangement can be traced
  • Comparative external debt of the Australian-resident lender
  • Cost of funds for the global group (AUD equivalent)
  • No interest charged
  • Less than
    cost of referable debt
  • Same as or more than
    cost of referable debt

To answer this question, use the most relevant finalised financials available. If these are not appropriate, you may use other financials, but you must be prepared to substantiate the reasons why. The ATO expects that you will clear the use of such financials prior to using them.
Use the all in cost of your debt, not just the interest rate. This includes guarantee fees, hedging costs, other fees and anticipated exchange gains and losses.
Only one of the three comparatives can be used. They are listed in order of priority. If one higher in the order is available, it must be used.
Traceable third party debt means external third party debt of the global group, the key terms of which and payments relating to which are mirrored in your related party debt. This would occur, for example, where your global parent has raised debt from unrelated parties and has back-to-backed that loan to you. Comparative third party debt means your (or, if you have none that are comparable, your global group's) external third party debt that has consistent terms to your related party debt. For example, long term debt is not comparable to working capital facilities.
The global group's cost of funds is determined by this formula:
Global Group Cost of Funds equation
using the consolidated global group's accounts in AUD equivalents.

SOVEREIGN RISK What is the sovereign risk of the foreign jurisdiction in which the borrower is resident, as assessed by Standard & Poors/Fitch? Has your financing arrangement been adjusted for sovereign risk?
  • CC or no
    rating
  • CCC
  • B
  • BB
  • BBB
  • A
  • AA
  • AAA
Pricing adjusted
for soverign
risk?

Comparative ratings across different agencies are:

Sovereign Risk Rating table

S&P's current risk rating of countries

CURRENCY Debt is not consistent with borrower’s operating currency.
  Debt is consistent with lender’s accounting and tax functional currencies.
TAXPAYER ALERTS Is the financing arrangement covered by a taxpayer alert?

Current applicable taxpayer alerts include TA 2016/1, TA 2016/3, TA 2016/9 and TA 2016/10.

HYBRIDS Is the income, gain, expenditure or loss of the borrower from the financing arrangement not subject to consistent or symmetrical treatment under the tax system of the lender’s jurisdiction (but not merely because of a difference in tax rates)?
ENTER YOUR DETAILS TO CALCULATE YOUR OUTBOUND RISK SCORE

Although we provide this calculator free for your use, it is important to us to ensure the results are meaningful. We manually review the information you have provided to see if we can give you further observations that may be useful. We also collate aspects of your information to ascertain patterns based on taxpayer profiles, that may also be useful. We will contact you using your details if we can provide such assistance.

OUR EXPERTS
+61 488 102 106
+61 2 9263 4715
Image of Chris Merjane
+61 434 486 810
+61 2 9263 4079