Recent enhancements to the tax regime
Australia’s tax regime has been significantly bolstered over the past few years across a range of areas. This includes through:
- enhancements to the general anti-avoidance rule (GAAR) by introducing
- the multinational anti-avoidance law (MAAL)
- the diverted profits tax
- other amendments
- enhancements to the transfer pricing provisions to align with OECD best practice
- adoption of a range of transparency measures, including country-by-country (CBC) reporting.
General anti-avoidance rule (GAAR)
Australia is fortunate to be among the few countries to have general anti-avoidance measures. In addition to many specific rules addressing tax avoidance, we have a robust income tax 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. It's assessed on 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 2 ways:
- The annihilation approach simply ignores the steps that comprise the scheme.
- The reconstruction approach 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 called the GAAR Panel. It's made up of senior ATO officers and external members. The panel advises us on applying the GAAR to particular arrangements. It brings consistency and independence to the consideration of the GAAR.
Multinational anti-avoidance law (MAAL)
The 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 administered 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 are confident that large corporate groups have compliant arrangements in place.
Diverted profits tax (DPT)
The 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 income tax years starting on or after 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 more efficiently.
Base erosion and profit shifting (BEPS) action plan
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’s Action Plan on Base Erosion and Profit Shifting (PDF, 1.4MB)This link will download a file 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's no longer feasible to deal with these issues in isolation. We're 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
- hybrid mismatch rules
In May 2023, as part of the 2023–24 BudgetExternal Link, the government announced it will implement key aspects of Pillar Two of the OECD/G20 Two-Pillar Solution to address the tax challenges arising from the digitalisation of the economy. Implementation of a global minimum tax and a domestic minimum tax is currently underway.
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 (CBC)
Significant global entities (SGEs) may also be 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
- the 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 provides 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, and 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:
- private binding rulings
- advance pricing arrangements
- settlement deeds (for future years)
- rulings on international arrangements.
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.
This version of the OECD guidance material provides guidance on the application of the 'arm’s length principle', which represents the international consensus on the valuation, for income tax purposes, of cross-border transactions between associated enterprises.
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 it 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.
Hybrid mismatch rules
Hybrid mismatch rules were enacted into Australian law in August 2018. The rules prevent multinational companies from avoiding income tax or obtaining double tax benefits through arrangements that exploit differences in the tax treatment of an entity or instrument in the laws of 2 or more tax jurisdictions.
The hybrid mismatch rules 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 who want to eliminate hybrid outcomes and avoid the application of the new rules.