A strong domestic tax regime

Recent enhancements to the tax regime

Australia’s tax regime has been significantly bolstered over recent years across a range of areas, including through:

• enhancements to the general anti-avoidance rules (GAAR) by introducing
  • the multinational anti-avoidance law (MAAL)
  • the diverted profits tax (DPT)
  • other amendments
• enhancements to the transfer pricing provisions to align with the Organisation for Economic Co-operation and Development (OECD) best practice
• Improvements and amendments to Australia's thin capitalisation regime and the introduction of new debt deduction creation rules (DDCR)
• adoption of a range of transparency measures, including country-by-country (CBC) reporting
• the introduction of a Global Minimum Tax and Domestic Minimum Tax (Pillar Two) in Australia.

General anti-avoidance rule

Australia is fortunate to be among the few countries with general anti-avoidance measures. In addition to many specific rules addressing tax avoidance, we have a robust income tax general anti-avoidance rule (GAAR).

The GAAR is a last resort measure used to protect the integrity of our tax system. It ensures the failure of blatant, artificial or contrived arrangements to obtain tax benefits. We assess the objective facts and circumstances of each case. It applies where a taxpayer enters into a scheme for the sole or dominant purpose of obtaining a tax benefit.

To determine the tax benefit, we look at the taxpayer’s tax position under the scheme. We compare this to the tax position that would arise, or may reasonably be expected to, if they had not entered into the scheme.

In past years, some Full Federal Court of Australia cases revealed a weakness in the capacity of the GAAR to determine a tax advantage gained from an arrangement. In a series of cases, the courts found a taxpayer would have abandoned its commercial project altogether if it could not avoid the tax on it – so there was no tax benefit.

These cases showed a gap in the capacity of the GAAR to address arrangements that, objectively viewed, had been carried out with a relevant tax avoidance purpose. To strengthen the law, the government amended the GAAR in 2013.

We can now determine the tax benefit in one of the following 2 ways:

• the annihilation approach, which simply ignores the steps that comprise the scheme
• the reconstruction approach, which provides the ability to reconstruct a transaction rather than erase it. It compares the tax consequences of the scheme with those of an alternative reasonably capable of achieving the same non-tax results and consequences as those achieved by the scheme.

Our advisory body is the GAAR Panel. The Panel is made up of senior ATO officers and external members, who advise us on applying the GAAR to particular arrangements. It brings consistency and independence to the consideration of the GAAR.

Multinational anti-avoidance law

The Multinational Anti-Avoidance Law (MAAL) is an extension of Australia's general anti-avoidance rules. This law ensures multinational enterprises pay their fair share of tax on the profits earned in Australia.

The MAAL counters the erosion of the Australian tax base by multinationals using artificial and contrived arrangements to avoid the attribution of profits to a permanent establishment in Australia.

The law applies to certain benefits derived on or after 1 January 2016. It only applies to significant global entities.

When we implemented the MAAL, we:

• issued guidance including tools to help clients self-assess their risk
• conducted tailored reviews of large multinationals.

By doing this, we encouraged voluntary compliance and self-correction. We also responded very strongly to any contrived attempts to avoid applying the MAAL.

We engaged with each identified taxpayer within the scope of the MAAL to assess their risks and provide assurance. As appropriate, we helped them transition into certain and compliant arrangements. Through these engagements, we gained confidence that large corporate groups had compliant arrangements in place.

We continue to monitor arrangements for compliance with MAAL in our compliance and engagement activities.

Diverted profits tax

The Diverted profits tax (DPT) ensures the tax paid by multinational enterprises properly reflects the economic substance of their activities in Australia. It aims to prevent the diversion of profits offshore through contrived arrangements.

The DPT applies to tax benefits for income years starting on or after 1 July 2017. (This is whether or not the tax benefits arise in connection with a scheme that was entered into, or was commenced to be carried out, before 1 July 2017). It imposes a 40% penalty rate of tax to be paid upfront. Like the MAAL, this applies to significant global entities.

The DPT applies where one of the principal purposes for entering into a scheme is to obtain an Australian tax benefit or both an Australian and foreign tax benefit. It is not a provision of last resort, but it complements the application of the existing anti-avoidance rules in Part IVA of the Income Tax Assessment Act 1936.

By applying a penalty tax rate, the DPT encourages large multinational enterprises to:

• increase compliance with their Australian tax obligations
• provide sufficient information to us so disputes can be resolved quicker and more efficiently.

Base erosion and profit shifting action plan

Base erosion and profit shifting (BEPS) refers to tax planning strategies that exploit gaps and mismatches in global tax rules.

BEPS schemes are associated with:

• inflating expenses (tax deductions claimed) in higher tax jurisdictions
• artificially shifting profits to low or no tax jurisdictions.

BEPS schemes can result in relatively low or zero tax rates for some large corporate groups. Australia supported the OECD BEPS program during our presidency of the G20 in 2014.

The OECD Action Plan on Base Erosion and Profit ShiftingExternal Link was delivered on 5 October 2015. It contains 15 action items and sets out a clear framework for dealing with BEPS issues. The plan supports all jurisdictions to get the right amount of tax and will develop a stronger international tax system.

The integrity of Australia’s tax system will increasingly rely on the implementation and enforcement of BEPS recommendations and actions. It is no longer feasible to deal with these issues in isolation. We are playing a key role in developing bilateral and multilateral cooperation among global tax administrations.

Australia has implemented several recommendations from the action plan. Key reforms include:

• better transparency from the CBC reporting and Exchange of rulings initiatives
• treaty reforms implemented via a Multilateral instrument and Global and Domestic Minimum Tax (Pillar Two) with Hybrid mismatch rules
• Enhancements to Thin capitalisation rules and introduction of the Debt deduction creation rules.

We continue to work with other jurisdictions to implement recommendations through our treaty framework. All of these will assist in mitigating challenges around applying the framework.

Country-by-country reporting

Significant global entities (SGEs) may also be country-by-country (CBC) reporting entities. Under the CBC regime, if an entity was a CBC reporting entity for the whole or part of an income year, it will be required to lodge a CBC report for the following income year unless granted an exemption or administrative relief.

CBC reporting requires multinational enterprises to disclose in their CBC report:

• their key financials, organised by jurisdiction, including their international related-party revenues, profits and taxes paid
• details of each constituent entity or member of the group, including their main business activities.

Australia exchanges and receives CBC reports with tax authorities from participating jurisdictions under multilateral and bilateral exchange arrangement.

To further enhance our risk assessment processes, CBC reporting also requires the Australian members of these large multinational enterprises to lodge a master file and local file:

• The master file discloses information about their global value chain.
• The local file discloses information about their Australian operations, activities, dealings and transactions, including detailed information about their international related-party transactions.

Information collected under the CBC reporting regime assists us in:

• forming a global picture of how multinationals operate
• carrying out assessments of transfer pricing and other base erosion and profit shifting risks.

CBC reporting helps us to ensure the transparency and tax compliance of the largest multinational enterprises with operations in Australia. It ultimately supports the trust and confidence that the wider community can have in the tax system.

We publish key statistics on international related party dealings (IRPDs) from processed international dealings schedule and local file – part A lodgments for income years commencing from 2016–17.

Exchange of rulings

In October 2015, the OECD released the final report on Action Item 5 to counter jurisdictions engaging in harmful tax practices. It introduced improved transparency through the spontaneous exchange of rulings between participating countries.

Rulings covering certain topics are subject to exchange when they apply to a specific taxpayer, who is entitled to rely on it. This includes:

• rulings related to preferential regimes
• cross-border unilateral advance pricing arrangements or other unilateral transfer pricing rulings
• rulings giving a downward adjustment to profits
• permanent establishment (PE) rulings
• conduit rulings
• any other type of ruling where the OECD Forum on Harmful Tax Practices agrees in the future that the absence of exchange would give rise to BEPS concerns.

Exchange began on 1 April 2016 for future rulings and 31 December 2016 for past rulings. Rulings exchanged provide vital intelligence in understanding the global operations of multinationals.

Legislative changes to update transfer pricing guidelines

Australia’s transfer pricing legislation was amended on 9 July 2024 to refer to the OECD’s 2022 transfer pricing guidelines as the relevant guidance material. It has retrospective application from 1 July 2022.

The OECD guidance material provides guidance on the application of the 'arm’s length principle'. This represents the international transfer pricing standard that OECD member countries, and many inclusive framework members, have agreed should be used when assessing cross-border transactions between associated enterprises for income tax purposes.

The legislative update forms part of Australia's ongoing commitment to strengthen our transfer pricing provisions in line with international standards. It will help ensure multinational enterprises are paying the right amount of tax in Australia.

For more information, see why tax is not simply 30% of profit.

Multilateral Instrument

The Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (Multilateral Instrument) allows jurisdictions to address multinational tax avoidance by quickly modifying the operation of their bilateral tax treaties.

Australia signed the Multilateral Instrument (MLI) on 7 June 2017 and it took effect on 1 January 2019. The date that the modifications, made by the MLI to Australia's tax treaties, take effect depends on the particular treaty partner's adoption of positions and its ratifying and lodging notification of its positions with the OECD.

The Multilateral Instrument implements several OECD BEPS Action Plan recommendations to Australia's tax treaties, including:

• denying treaty benefits under Australia's bilateral tax treaties where one of the principal purposes of the arrangement or transaction is to obtain those treaty benefits
• preventing the artificial avoidance of permanent establishment status
• improving the effectiveness of dispute resolution mechanisms with mandatory binding arbitration adopted through the Multilateral Instrument.

Global and Domestic Minimum Tax (Pillar Two)

The introduction of a global and domestic minimum tax is part of BEPS 2.0, the OECD 2- pillar initiative to reform international taxation and address the challenges arising from the digitalisation and globalisation of the economy.

Pillar Two introduces an effective global minimum tax rate of 15% on in-scope multinational corporations with a consolidated revenue of EUR 750 million or more. This tax comprises:

• a global minimum tax which consists of the following 2 interlocking rules
  • Income Inclusion Rule (IIR), this is the primary rule which broadly allows Australia to apply a top-up tax on multinational parent entities located in Australia if the group's effective tax rate in another jurisdiction is below 15%
  • Under-taxed Payments Rule (UTPR), the backstop rule which allows Australia to apply a top-up tax on constituent entities located in Australia if the group's effective tax rate in another jurisdiction is below 15% and where the profit is not brought into charge under an IIR
• a domestic minimum tax, which operates consistently with the GloBE Rules and provides Australia the ability to claim primary rights to impose top-up tax over any low-taxed profits in Australia, in priority over the IIR and UTPR.

Hybrid mismatch rules

The hybrid mismatch rules prevent multinational companies from obtaining double non-tax outcomes through arrangements that exploit differences in the tax treatment of an entity or instrument under the income tax laws of 2 or more tax jurisdictions.

The hybrid mismatch rules contained in Division 832 of the Income Tax Assessment Act 1997 apply to certain payments and income years starting on or after 1 January 2019.

The rules apply to payments between:

• related parties
• members of a controlled group
• parties under a structured arrangement.

We developed guidance to assist taxpayers to comply with the hybrid mismatch rules and to assist taxpayers manage their compliance risk, where their intention is to restructure out of their existing hybrid mismatch arrangements, consistent with the underlying objective of the hybrid mismatch rules.

Thin capitalisation and Debt deduction creation rules (DDCR)

The thin capitalisation rules may deny all or part of the debt deductions of the following entities:

• Australian entities with specified overseas investments
• Australian entities that are foreign controlled
• Foreign entities with certain investments in Australia, regardless of whether they hold the investments directly or through Australian entities.

For any given income year, the following entities are not affected by the thin capitalisation rules:

• an entity whose debt deductions, together with those of any associate entities, are less than the de-minimis threshold of $2 million for the income year
• an Australian entity with overseas operations or investments that meets the 90% Australian assets threshold test
• certain insolvency-remote special purpose entities.

General class investors are given the choice to apply one of the following 3 tests:

• Fixed ratio test – the default test, which limits an entity’s net debt deductions to 30% of its tax EBITDA. Fixed ratio test disallowed amounts may be carried forward for up to 15 years and claimed in a later income year, subject to the applicable requirements and available capacity.
• Group ratio test – if chosen, limits an entity’s net debt deductions by reference to the worldwide group’s net third-party interest expense as a proportion of the group’s EBITDA, based on the group’s financial statements.
• Third-party debt test – if chosen, generally allows debt deductions attributable to debt interests that satisfy the third-party debt conditions. These conditions extend beyond the lender not being an associate entity and include requirements concerning recourse and the use of the debt proceeds for commercial activities connected with Australia.

Note that separate rules apply to approved deposit-taking institutions and financial entities.

Debt deduction creation rules

The thin capitalisation rules are accompanied by the Debt deduction creation rules (DDCR), which apply to income years starting on or after 1 July 2024. Broadly, the DDCR may deny debt deductions arising in relation to certain related-party acquisitions or payments involving ‘associate pairs’. The relevant debt deduction need not itself be paid directly to an associate pair.

Subject to exclusions, the DDCR operates alongside the earnings-based thin capitalisation tests and are applied before those tests:

• Type 1 case: debt deductions arising in relation to the acquisition or holding of a CGT asset, or a legal or equitable obligation, from an associate pair
• Type 2 case: debt deductions arising in relation to the funding or facilitation of prescribed payments or distributions to an associate pair.

For detailed guidance, see:

• Practical Compliance Guideline PCG 2025/2 Restructures and the thin capitalisation and debt deduction creation rules – ATO compliance approach
• Taxation Ruling TR 2025/2 Income tax: aspects of the third party debt test in Subdivision 820-EAB of the Income Tax Assessment Act 1997.