ATO overhauls local file reporting: key changes explained

On 23 December 2024, the Australian Taxation Office (ATO) introduced a new local file schema and finalised instructions for reporting periods beginning on or after 1 January 2024, marking significant changes for the 2025 income year.

What's new?

The ATO's new local file schema aims to gather more detailed and structured information to better identify high-risk international tax and transfer pricing arrangements. This means the short form local file (SFLF) must now be prepared in a message structure table (MST) format.

The final SFLF instructions now clarify that disclosures about "restructures" aren't just about transfer pricing. They also cover other Australian tax risks, including anti-avoidance rules, withholding tax, hybrid mismatches, capital gains and losses, and debt/equity rules.

What does this mean for taxpayers?

Taxpayers might need to do a lot of initial work to assess if they have any restructures to report. If they do, they'll need to provide detailed disclosures for each step of the restructure, including financial and tax impacts. The expanded scope of the SFLF means taxpayers will need to collect and analyse a significant amount of information annually, potentially from overseas affiliates.

Background

The local file is one of three statements required under Australia's country-by-country (CbC) reporting regime. Historically, taxpayers provided an SFLF attachment detailing their Australian operations, including:

• Organisational reporting structure
• Business and strategy
• Business restructures
• Transfers of intangibles
• Key competitor

SFLF format update

For CbC reporting entities (CbCREs), the new SFLF in MST format introduces 52 new questions. Taxpayers must provide detailed information on restructures, including step plans and summaries of global and Australian tax impacts, and commercial impacts.

SFLF instructions update

The Australian Taxation Office (ATO) made the following changes to the instructions:

Timeline

The first SFLFs complying with the new format are due by 31 December 2025, 12 months after the end of the financial year.

Consequences of not reporting

Failing to meet your reporting obligations can lead to hefty penalties, with fines reaching up to AUD $825,000. Additionally, making false or misleading statements can result in penalties of up to AUD $39,600 per statement. In this context, a "statement" could be any of the individual fields required in the new short form.

Some Australian taxpayers might face difficulties if they don't have sufficient access to records or information from offshore personnel. The ATO expects entities to make reasonable, documented inquiries of offshore group personnel, including those from the overseas parent and group tax area, to gather relevant information.

Key takeaways

Engage early:

Start discussions with key internal stakeholders to identify any potential reportable arrangements and information requirements that might not be readily available to the Australian management team.

Broad definitions:

Even minor changes in ownership structures or offshore transactions and operations may need to be reported in Australia.

Consistency is crucial: 

Ensure that disclosures in the new short form align with other filings required by the ATO, such as the master file, RTP schedule, CBC report, and corporate income tax return. This consistency is vital due to the overlap and interaction between these forms and other public documents, like Global Financial Statements.

This change underscores the importance of having a connected compliance strategy across all filings. By staying proactive and organised, you can navigate these new requirements more effectively and avoid costly penalties.