A new reporting (and auditing) requirement has been introduced into the Corporations Act 2001 (Corporations Act), affecting public companies from the 30 June 2024 financial year end. It may affect you if your entity is a public company, or if you have controlled entities that are public companies. While we do not usually include blog articles on individual legislative changes, we want to make sure those of you who are affected are informed of this late change.

It does not affect departments, statutory bodies, local governments, or universities. However, if you are one of those entities, the new requirement may apply to your controlled entities’ financial reports.

It will also not apply to:

• companies that are registered charities and report under the Australian Charities and Not-for-profits Commission Act 2012
• ‘small’ public companies limited by guarantee that are not required to lodge a financial report under the Corporations Act (even if QAO audits their financial report)
• proprietary companies (also referred to as Pty Ltd companies), as they are not public companies.

The new requirement – consolidated entity disclosure statement

The new requirement is a component of the financial report titled the ‘consolidated entity disclosure statement’. Despite its title, the requirement applies even when entities do not prepare consolidated financial statements.

The reporting requirements for the consolidated entity disclosure statement are included in Schedule 1 of the Treasury Laws Amendment (Making Multinationals Pay Their Fair Share—Integrity and Transparency) Act 2024. The Act is part of the Commonwealth Government’s intention to address multinational enterprise tax avoidance, which is where a business artificially structures its activities to avoid tax.

The new disclosures aim to enhance public scrutiny of multinational tax arrangements and facilitate an informed discussion on tax compliance (Treasury Laws Amendment (Making Multinationals Pay Their Fair Share—Integrity and Transparency) Bill 2023 Explanatory Memorandum paragraph 1.3).

While the focus is on multinationals, the Act still requires entities to include the disclosures even if all their controlled entities are not-for-profits and/or Australian tax residents. Consequently, there is no exemption for not-for-profit public sector entities.

Disclosures

The detailed disclosures apply when a public company is required to prepare consolidated financial statements under accounting standards. In summary, details entities must include are:

• the controlled entity’s name
• the type of entity
• where the controlled entity was formed
• the percentage owned
• whether it is an Australian and/or foreign tax resident
• whether the controlled entity is a party to typical tax avoidance structures within the consolidated group (specifically, a trustee of a trust, a partner in a partnership, or a participant in a joint venture).

Some public companies may not be required to prepare consolidated financial statements. Examples include parent only financial statements (no, or no material, controlled entities), or where the entity has an exemption as an intermediate parent company. If so, the public company is still affected and is required to prepare a consolidated entity disclosure statement stating that it is not required to apply subsection 295(3A)(a) of the Corporations Act 2001.

Location of the disclosures in financial statements 

While the disclosures may appear similar to those already provided in the controlled entities note of consolidated financial statements, the wording in the legislation is for a separate statement with a separate compliance statement. Current thinking, as expressed in accounting firm publications on the change, is a preference to prepare a separate consolidated entity disclosure statement at the end of the financial statements. This helps separate financial statement information from tax information. 

Illustrative financial statements

As the new requirement does not apply to departments or statutory bodies, Queensland Treasury will not be updating the financial reporting requirements (FRRs), nor the Sunshine Department and Future Bay Regional Health Foundation illustrative financial statements.

Similarly, as the new requirement does not apply to local governments, Tropical Council illustrative financial statements will not be updated.

Example disclosures will be available from the usual providers of illustrative financial statements for private sector entities.

Obligations for directors

As noted above, the consolidated entity disclosure statement is an additional component of the financial report. Directors are required to state in the directors’ declaration that, in their opinion, the consolidated entity disclosure statement is true and correct. 

The term ‘true and correct’ is deliberate and should not be confused with ‘true and fair.’ The government’s policy intention is to ensure complete and accurate disclosures (Treasury Laws Amendment (Making Multinationals Pay Their Fair Share—Integrity and Transparency) Bill 2023 Explanatory Memorandum paragraph 1.16).

The implication is that all controlled entities need to be included in the statement. This will include immaterial controlled entities, and controlled entities that are dormant.

Requirement to be audited

The Act requires the consolidated entity disclosure statement to be audited, including the directors’ declaration ‘true and correct’ compliance statement.

We are currently expecting the Australian Auditing and Assurance Standards Board (AUASB) to provide guidance on the changes, including the application of materiality.

Recommended actions for all entities

• Identify if you and/or your controlled entities are public companies.
• Identify which of your public companies report under the Corporations Act.
• Discuss the new requirements with your audit contact.
• Discuss the new information you will need to provide to your audit contact, as audit evidence.
• Determine if your audit timetable needs to be adjusted to accommodate the extra work.

For more information on the upcoming changes, please refer to the Act. The larger accounting firms are also producing publications on the change, which may be of use for entities to refer to.