Health of the system
Graph 1 – Tax paid and total business income (TBI) for the 2023 year by overall assurance ratings for the last income tax reviews completed
Graph 2 – No tax payable for the 2023 year by overall assurance ratings for the last income tax reviews completed
|
Population status |
Latest rating (%) |
Total business income (%) |
Tax paid (%) |
Tax losses carried forward (%) |
Tax losses deducted (%) |
|---|---|---|---|---|---|
|
Totals |
100% |
$1,199.4b |
$55.5b |
$30.1b |
$20.3b |
|
High |
64% |
$958.4b (80%) |
$41.9b (76%) |
$12.5b (42%) |
$10.2b (50%) |
|
Medium |
19% |
$131.7b (11%) |
$6.7b (12%) |
$7.4b (25%) |
$5.3b (26%) |
|
Low |
13% |
$99.7b (8%) |
$6.6b (12%) |
$9.1b (30%) |
$4.7b (23%) |
|
Unrated |
4% |
$9.4b (1%) |
$0.1b (>1%) |
$0.9b (3%) |
$0 (0%) |
Note: Based on 2023 income tax returns, Top 100 economic groups paid about $59.2 billion income tax of which about $55.5 billion was paid by Top 100 entities that have been subject to a justified trust review.
As shown by Graph 1, based on 2023 income tax returns high assurance taxpayers accounted for 80% of TBI reported and 76% of tax paid by top 100 taxpayers who have had an assurance review as at 30 June 2025.
Of the $59.2 billion of income tax paid by Top 100 economic groups in 2023, $48.6 billion was reported by taxpayers that have achieved a high or medium assurance rating in their latest review.
Of the top 100 taxpayers who have had an assurance review as at 30 June 2025, 31% paid no tax in the 2023 year. There are legitimate and genuine commercial reasons why a business may not pay tax. For example, they may not have made a profit due to economic factors or the life cycle of their investment may not yet have generated income or may still be recouping prior year losses. We assure that losses are legitimate and able to be carried forward and deducted against future profit.
As shown by Graph 2, 85% (22 of 26) of taxpayers that did not pay tax achieved overall high or medium assurance providing high levels of confidence over the tax outcomes for this group.
Taxpayers who achieved low assurance are subject to further review. Typically, there are systemic issues that concern us in relation to the business model of these taxpayers.
Obtaining high assurance for income tax
In the Top 100 program, we apply a principled approach to reaching overall high assurance (justified trust). This is based on 2 elements:
- a quantitative threshold of more than 90% tax assured and economic activity correctly reported
- an objective assessment of 7 qualifying factors.
The quantitative threshold of element 1 must be met before the qualifying factors in element 2 can be applied.
The 7 qualifying factors are outlined below:
- Governance
Governance has been rated at least a Stage 2 in the last tax assurance report (TAR).
- Tax risks flagged to market
Any tax risks flagged to market (published in practical compliance guidelines, taxpayer alerts, public rulings, including those set out in the Reportable tax position (RTP) schedule Category C disclosures) have been rated at least a medium level of assurance in the TAR, and are not of immediate concern or identified as necessitating further action based on the information provided.
- International related party dealings and CFCs
International related party dealings, profit attribution to permanent establishments and controlled foreign companies (CFCs) have received at least a medium level of assurance in the TAR and are not identified as necessitating further action based on the information provided.
- Losses
Losses, if applicable, have received at least a medium level of assurance in the TAR. This includes the commerciality of tax losses that have been verified and we understand when a taxpayer expects to utilise carried forward balances and move into a tax payable position.
- Effective tax borne
The effective tax borne (ETB) calculation in the TAR and any underlying assumptions or proxies have been verified with the taxpayer. The ETB calculation hasn't highlighted any new areas of concern that pose a potential tax risk, for example, holding overseas interests in jurisdictions where there is not a substantiated commercial purpose.
- Reportable tax position (RTP) schedule
There are no inconsistencies in RTP schedule disclosures which are identified between lodgment of the tax return and finalisation of the review.
- Cooperative and collaborative behaviour
It has been a cooperative and collaborative process, and when working with a taxpayer we have not observed any non-cooperative behaviour.
An overall provisional high assurance rating may be possible in limited circumstances. This may include where the taxpayer has provided an undertaking and is actively working on addressing a specific design gap in their tax governance framework or there is ongoing compliance activity. Where there is ongoing compliance activity, provided the quantitative threshold is met (inclusive of the unassured issue), the availability of a provisional rating will depend on the nature and stage of the compliance activity.
Ratings
We apply consistent rating categories when considering our overall level of assurance.
|
Colour indicator |
Rating |
Category description |
|---|---|---|
|
|
High |
We obtained assurance that the taxpayer paid the right amount of Australian income tax or reported the right Australian income tax outcomes for the income year reviewed. |
|
|
Medium |
We obtained assurance in relation to some but not all areas reviewed. For those areas not yet assured, further evidence or analysis will be required before we obtain assurance that the taxpayer paid the right amount of Australian income tax for the income year reviewed. |
|
|
Low |
We have specific concerns around the taxpayer's compliance with the Australian income tax laws and the amount of Australian income tax paid for the income year reviewed. |
Overall levels of assurance
As at 30 June 2025, almost two-thirds (64%) of top 100 taxpayers have attained overall high assurance (that is, justified trust). This means that we have obtained assurance that these taxpayers have paid the right amount of Australian income tax for the year reviewed.
The overall level of assurance is based on an objective view (having regard to objective evidence) of whether the taxpayer is considered to have paid the right amount of tax.
The reviews completed to the end of June 2025 resulted in the following ratings.
Graph 3 – Overall assurance ratings for the last income tax reviews completed as at 30 June 2025
Note: All outcomes data used in this report in relation to income tax is based on the last review completed, which can include:
- a standard justified trust review
- monitoring and maintenance review
- annual compliance arrangement (ACA) review
- refresh year review.
Not rated is applied to taxpayers where a recent full justified trust review across all 4 focus areas has not been undertaken.
Graph 4 – Overall assurance ratings for the last income tax reviews completed by industry as at 30 June 2022, 30 June 2023, 30 June 2024 and 30 June 2025
You can also view overall assurance ratings for the last income tax reviews completed by industry data in table format.
Note:
- These groupings align with the industry segments we use as part of our corporate tax transparency reporting except where we have amalgamated the Banking, finance and investment (BFI), Insurance (ISR) and Superannuation (SUP) segments into a Financial services (FS) segment. The groupings are:
- Banking, finance and investment, superannuation funds and insurance (FS)
- Manufacturing, construction and agriculture (MCA)
- Mining, energy and water (MEW)
- Wholesale, retail and services (WRS).
- The population depicted in Graph 4 comprises taxpayers in the current top 100 population during each of the 2022, 2023, 2024 and 2025 income years.
Observations
Of the top 100 taxpayers reviewed up to 30 June 2025, 83% obtained either an overall high assurance rating or an overall medium assurance rating.
We've seen a marked increase in the number of taxpayers achieving overall high assurance with a shift from 6% in 2019 to 59% in 2024. During 2025 the number of overall high assurance taxpayers has further increased to 64%.
For top 100 taxpayers who've had more than one TAR issued, over 66% have increased their overall assurance rating between the first and last TAR issued.
The number of taxpayers at overall low assurance has remained stable in 2025 at 13%.
The increase in the number of high assurance taxpayers shows the efforts taxpayers have made to resolve key disputes with the ATO as well as continuing to pro-actively engage with us during the year to progress and finalise assurance reviews. Taxpayers have also continued to embed justified trust principles (particularly those relating to governance) as well as make efforts to provide objective evidence that support higher ratings.
This year, all top 100 taxpayers have maintained or improved their overall assurance rating. That is no taxpayers have had their assurance ratings downgraded.
High assurance taxpayers
We've seen a further increase in 2025 in the number of top 100 taxpayers achieving overall high assurance, with a shift from 59% in 2024 to 64% in 2025. This reflects improved assurance ratings from taxpayers in the Manufacturing, construction and agriculture (MCA), Mining, energy and water (MEW) and Wholesale, retail and services (WRS) industries.
We expect that we will continue to have incrementally more taxpayers attain overall high assurance in time. However, we don't expect that the entire population will achieve high assurance due to ongoing concerns about systemic tax risk or behaviour of a small number of entities in the group.
This improvement will come from the cooperation of the ATO and taxpayers in achieving timely completion of the planned assurance reviews for the year. It also relies on taxpayers actively addressing areas of concern identified by the ATO, including resolution of key disputes and taxpayers continuing to maintain their overall high assurance ratings in the refresh reviews.
In limited circumstances, we may give an overall provisional high assurance rating. Such circumstances may include where the taxpayer has provided a written undertaking and is actively working on addressing a specific design gap in their tax governance framework, or there is ongoing compliance activity.
There were 13 taxpayers in the current top 100 population who had a provisional high assurance rating as at 30 June 2025. The main reasons for a provisional rating are because the taxpayer had some areas that required further assurance, amendments had not yet been lodged, or they had other ongoing compliance activity. Another reason is because some taxpayers had committed to but not yet developed a periodic tax control testing plan in relation to their governance framework at the time of the rating. This is typically because the testing plan is developed closer to the time of the testing which may occur after the issuance of the TAR depending on the organisation’s internal review cycle.
There were 6 taxpayers who had provisional high assurance who have been able to complete the required work and improve their assurance rating to unqualified high assurance.
During 2025 we completed 36 monitoring and maintenance reviews for taxpayers in the current population. We also completed 6 annual compliance arrangement (ACA) reviews during 2025 for taxpayers who have an ACA and have attained overall high assurance. All these reviews resulted in the taxpayers maintaining their justified trust ratings.
Many taxpayers have completed or are currently into their second or third round of the monitoring and maintenance approach with their overall high assurance rating being reaffirmed.
We've further observed the following in relation to the monitoring and maintenance reviews:
- Taxpayers are proactively engaging with us and making disclosures of significant or new transactions, or where there are material changes.
- Our focus on governance is typically limited to reviewing the implementation of our recommendations, addressing any specific design gap that is the subject of a provisional Stage 2 rating, and reviewing the outcomes from an independent operational effectiveness testing to assess whether a Stage 3 rating has been achieved.
- Further verification work was required in the 2025 year for most reviews in relation to significant new transactions or tax risks flagged to market, or both. We've also completed 7 refresh reviews for taxpayers in the current population during 2025. These reviews enabled us to refresh our understanding and evidence base and reaffirmed our confidence that these taxpayers continue to pay the right amount of tax.
The refresh reviews completed to date have resulted in most taxpayers maintaining their justified trust ratings.
For 2025 we have further observed the following in relation to the refresh reviews:
- Most taxpayers who had a refresh review concluded during this year are already at Stage 3, with one having increased their governance rating in the refresh review from Stage 2 to Stage 3.
- All had new transactions where a tax risk flagged to market applied. These were identified from the RTP schedule alongside other taxpayer information. All these new risks were rated as high or medium assurance.
- Most of the reviews identified one or more new significant transactions that required review.
Medium assurance taxpayers
In 2025, 19% of top 100 taxpayers attained an overall medium level of assurance. This means that we obtained assurance in most areas reviewed or to a level that we had confidence that the likelihood of tax risk is low. This reflects, to some degree, the complexity of large businesses.
In practice, the main blockers to taxpayers achieving overall high assurance are:
- demonstrating design effectiveness of their governance framework
- the display of what we perceive to be non-cooperative behaviours
- non-assured matters relating to tax risks flagged to market (that is, key corporate tax risks)
- significant transactions that require further information to be provided to us in order to assure the tax outcome
- in a small number of cases, analysis still to be conducted by us.
Low assurance taxpayers
In 2025 the percentage of top 100 taxpayers at overall low assurance remained stable at 13%. We consider most of these taxpayers to have a higher risk profile. They are typically involved in complex and numerous tax disputes and are more likely to use audits to progress the resolution of issues.
Overall, low assurance taxpayers typically have a combination of low and red flag assurance ratings across the 4 justified trust focus areas that prevent them from attaining a higher level of overall assurance. Resolving the higher risk tax issues (such as those that go to the heart of their business model), as well as making improvements to the design effectiveness of their tax risk management and governance frameworks, will likely see these taxpayers increase their overall assurance ratings.
Tax governance framework
Tax governance is a key focus area under the justified trust methodology for large public and multinational businesses.
We consider the existence, design and operation of a tax control framework for income tax and GST focusing on the 8 controls set out in the Tax risk management and governance review guide and the GST Governance, Data testing and Transaction Testing Guide (collectively, the Guides).
- Board-level control 1: Formalised tax control framework
- Board-level control 3: The board is appropriately informed
- Board-level control 4: Periodic internal control testing
- Managerial-level control 1: Roles and responsibilities are clearly understood
- Managerial-level control 3: Significant transactions are identified
- Managerial-level control 4: Controls in place for data
- Managerial-level control 6: Documented control frameworks
- Managerial-level control 7: Procedures to explain significant differences
The Guides:
- set out principles for board-level and managerial-level responsibilities, with examples of evidence that demonstrate the design and operational effectiveness of tax control frameworks
- focus on the processes and controls in place and may not necessarily reflect the tax risk appetite or capabilities and experience of the tax or finance team, or their advisers.
Ratings
We apply the following staged rating system when reviewing and assessing tax governance. For practical guidance about how we rate tax governance, see Reviewing tax governance for large public and multinational businesses.
|
Colour indicator |
Rating |
System description |
|---|---|---|
|
|
Stage 3 |
Evidence was provided to demonstrate that a tax control framework exists, has been designed effectively and is operating effectively in practice. |
|
|
Stage 2 |
Evidence was provided to demonstrate that a tax control framework exists and has been designed effectively. |
|
|
Stage 1 |
Evidence was provided to demonstrate a tax control framework exists. |
|
|
Not evidenced or concerns |
We have not been provided with sufficient evidence to demonstrate a tax control framework exists or we have significant concerns. |
The reviews completed to the end of June 2025 resulted in the following ratings which have been grouped by industry.
Graph 5 – Overall governance ratings for the last income tax reviews completed as at 30 June 2025
Graph 6 – Overall governance ratings for the last income tax reviews completed by industry as at 30 June 2022, 30 June 2023, 30 June 2024 and 30 June 2025
You can also view overall governance ratings for the last income tax reviews completed by industry data in table format.
Observations
During 2025 we observed continued improvement in governance reflecting the efforts of many taxpayers to enhance their income tax control frameworks, provide objective evidence in support of their governance policies and processes, and undertake testing of their income tax control frameworks.
The number of taxpayers attaining the highest rating for tax governance (Stage 3) increased to 41% (up from 35% in 2024) as more taxpayers completed independent testing of their income tax control frameworks and shared the findings with us. The number of taxpayers attaining Stage 2 decreased from 43% to 40%. This means that 81% of the top 100 population have at least a well-designed and effective tax governance framework because they have obtained a Stage 2 or Stage 3 rating. We expect that this will result in greater organisational understanding of the tax risks taken on (or not) by the organisation as well as a greater alignment between an organisation’s tax risk appetite and their risk framework.
Stage 3
To obtain the highest rating (Stage 3), we look for evidence that the documented income tax control framework is both designed and operating effectively in practice. This stage requires evidence in the form of a detailed report of findings that demonstrates taxpayers have independently tested the operation of their framework in practice. This should conclude that the documented tax control framework is operating effectively.
Where the report of findings recommends improvements or enhancements, we will seek to understand whether these have been (or will be) implemented before assigning a Stage 3 rating.
We've seen taxpayers being assigned an overall Stage 3 rating increase from 2024 with 41% of taxpayers receiving an overall Stage 3 rating.
We note that some taxpayers are testing their income tax controls over a 3-to-5-year period. These taxpayers are not expected to be assigned an overall Stage 3 rating until testing has been completed and the results have been provided to us at the conclusion of the 3-to-5-year period. Accordingly, whilst we expect the number of taxpayers that have achieved Stage 3 to increase, this will occur over several years.
Stage 2
A minimum Stage 2 rating is required to achieve an overall high assurance rating or justified trust. This means taxpayers have provided objective evidence to demonstrate a tax control framework exists for income tax and has been designed effectively.
For income tax, 40% of taxpayers were assigned a Stage 2 rating for the year ended 30 June 2025, a decrease from 43% in 2024.
When reviewing governance for Stage 2, we'll leverage existing processes or identify compensating controls where the better practice elements are either not present or only partially present.
An increasing number of top 100 taxpayers at Stage 2 are working with us to demonstrate that their income tax control framework is not only designed effectively but also operating effectively, to proceed to the next rating (Stage 3).
Stage 1
A Stage 1 rating recognises that an income tax control framework exists but reflects that further work is needed to demonstrate that the framework is designed effectively. Most top 100 taxpayers have provided objective evidence that a tax control framework for income tax exists.
For income tax, 17% of taxpayers were assigned a Stage 1 rating for the year ended 30 June 2025 compared to 19% for the year ended 30 June 2024. The decrease in the number of taxpayers at Stage 1 can be attributed to taxpayers providing us with objective evidence addressing their design gaps.
We continue to work with those top 100 taxpayers with a Stage 1 rating to progress to a Stage 2 rating as part of current and future reviews. In this regard, reporting tax risks to the board, tax provision procedures (relevant to procedures to explain significant differences between accounting and tax), and the periodic internal controls testing program were the main areas observed with limited formal documentation in 2025.
We note that although some taxpayers have documented their income tax controls, they have not documented a plan as to when and how frequently, their income tax controls will be tested by an independent tester (rather than the control owner). This remains a key blocker to taxpayers achieving a Stage 2 rating.
Red flag
A red flag rating is only applied after careful consideration if we have:
- no evidence demonstrating that an income tax control framework exists
- significant concerns with the taxpayer’s income tax control framework as evidenced by the high level of errors identified
- fundamental concerns about the robustness of existing income tax controls.
There remains a small percentage (2% in 2025) of top 100 taxpayers that have been assigned a red flag rating for income tax governance.
Tax risks flagged to market, significant or new transactions and specific tax risks
We seek to understand, and review, the income tax treatment of the taxpayer’s business activities, particularly significant and new transactions. We also look for, and review, risks or concerns communicated to the market and determine if they are present.
Ratings
We apply a consistent rating system when reviewing and assessing the income tax treatment of a taxpayer’s business activities, including significant and new transactions and tax risks communicated to the market.
|
Colour indicator |
Rating |
System description |
|---|---|---|
|
|
High |
With respect to this issue, we obtained a high level of assurance that the right Australian income tax outcomes were reported in the taxpayer's income tax return. |
|
|
Medium |
More evidence and or analysis is required to establish a reasonable basis to obtain a high level of assurance. |
|
|
Low |
More evidence and or analysis is required to determine whether a tax risk is present. |
|
|
Red flag |
Likely non-compliance with the income tax law. |
|
– |
Not rated |
We have not evaluated this item and not expressed a rating. |
For some issues or transactions, we require more evidence or analysis, or both, to obtain high assurance. We work with top 100 taxpayers to identify the areas that require further evidence or analysis. In some cases, medium assurance ratings on specific transactions may be satisfactory and, depending on the area and the significance of the transaction, it may still be possible to achieve overall high assurance.
High quality information, relevant supporting documentation, and an open and transparent relationship are required for taxpayers to be able to achieve high assurance.
Large companies are required to disclose information in the RTP schedule on uncertain tax positions and arrangements that are considered to pose a systemic risk to the corporate tax base. These arrangements often involve tax avoidance or profit shifting (or both).
The latest Findings report Reportable tax position schedule Category C disclosures provides the aggregated disclosures made by companies for the 2023–24 income year. The report provides insights to the types of arrangements large companies are entering, including arrangements in addition to those outlined below.
Observations
The assurance areas covered in the analysis for tax risks flagged to market, and significant and new transactions often have material tax consequences if they've been incorrectly treated or calculated for tax. This also has a significant impact on the overall assurance ratings.
Many top 100 taxpayers have arrangements that are covered by a public advice and guidance product (such as a practical compliance guideline, taxpayer alert or public ruling). Where a public advice and guidance product may be applicable, our approach is to seek to understand the arrangement to determine the presence of risk. Where risk is present, we work with the taxpayer to mitigate or address this.
As part of our Top 100 assurance reviews, we check on an annual basis, the accuracy and completeness of disclosures made by top 100 taxpayers in tax returns, accompanying schedules (including the RTP schedules), country-by-country (CBC) reporting statements and financial statements. We also follow up on disclosures in the RTP schedules relating to unamended mistakes or omissions in tax returns.
We have observed that over time many taxpayers who have previously been engaged in high-risk arrangements now have either:
- no new tax risks flagged to market
- typically
- fall in the low risk or white zone of the practical compliance guidance, or
- have been given high assurance.
This is consistent with our observations about taxpayers committing to long term behavioural change.
The following sections outline specific areas of concern and items that attract our attention. We do not see these in all cases.
Transfer mispricing
Transfer pricing is a natural feature of the international tax system, requiring entities to deal with related parties on arm's length terms. Our concern is where arrangements or transactions are mischaracterised or mispriced (or both), resulting in the tax base being shifted from Australia. This is a particular risk in a country like Australia, being a net importer of capital with a high tax rate. As such, the appropriateness of transfer pricing is a common assurance area with approximately 90% of top 100 taxpayers reporting related party dealings in the 2024–25 income year. This area encompasses a substantially large number of dealings, the nature of which can range from simple to very complex.
We continue to work with impacted taxpayers to improve the level of assurance on arrangements that attract a low assurance or red flag rating. Given the prevalence and significant tax outcomes involved, we actively investigate these arrangements and undertake assurance activities on top 100 taxpayers.
Where transactions are covered by an Advance Pricing Arrangement (APA), or Bilateral Advance Pricing Arrangement (BAPA) we will review the arrangements and the annual compliance report that is required to be submitted for APAs and BAPAs to ensure that taxpayers are continuing to follow the terms of the arrangements.
Where transactions are subject to settlement agreements or private rulings, we also review these to confirm that taxpayers are adhering to the terms of the settlement agreement or implementing the relevant transactions in accordance with the ruling.
Common issues which arise in relation to transfer pricing matters where we are yet to obtain assurance include the following:
- The inadequacy of information available to support transfer pricing positions.
- The size and complexity of the global value chain in the top 100 population – top 100 taxpayers often have very complex businesses and Australia can be a significant part of the value chain. We are finding it takes time to source relevant information to support the transfer pricing analysis particularly when the information is held offshore.
- Businesses in Australia are fragmented and housed in various entities who each play a key role in delivering the services or products in the Australian market but are then priced or characterised individually, for example as distinct service providers to the offshore parent.
- Transfer pricing mischaracterisation of arrangements, transactions or Australian activities (or both) that result in inappropriate profit and tax outcomes.
- Changes in transfer pricing policy or methodologies without an underlying change to the functional profile of a taxpayer.
- Artificial structuring, bifurcation and risk allocation of the taxpayer that are misaligned with commercial substance and result in the application of inappropriate transfer pricing methodologies.
The following is a breakdown of the key transfer pricing areas reviewed across a range of dealings.
Related party finance
International related party financing transactions includes arm’s length conditions, related party derivatives, interest free loans (outbound and inbound), cash pooling arrangements and guarantee fees.
|
Assurance ratings as at 30 June 2025 |
Percentage of Top 100 review outcomes |
|---|---|
|
High |
46% |
|
Medium |
38% |
|
Low and red flag |
12% (7% and 5%) |
|
Not rated |
4% |
Related party financing arrangements continue to be one of the largest assurance areas for the Top 100 program. In particular, PCG 2017/4 is a key focus of our reviews including taxpayers’ self-assessment of the risk indicators and risk zone rating, and evidence required to support any relevant disclosures.
We have observed the proportion of high and medium assurance ratings have improved from 63% in 2022 to 84% in 2025. There has also been a reduction in the proportion of low assurance ratings from 14% last year to 7%, reflecting the improvement of several taxpayers to a medium rating.
The ATO was successful in the Full Federal Court in relation to the Singtel related party financing case. The favourable decision provides further support to our existing compliance approach to related party financing and will help to reinforce the positive assurance trend.
Offshore hubs (marketing or procurement)
|
Assurance ratings as at 30 June 2025 |
Percentage of Top 100 review outcomes |
|---|---|
|
High |
47% |
|
Medium |
23% |
|
Low and red flag |
30% (19% and 11%) |
|
Not rated |
0% |
We are primarily concerned about offshore hubs that derive high profits from marketing or procuring goods or services for Australian operations.
PCG 2017/1 sets out our compliance approach to transfer pricing issues related to the location and relocation of certain business activities and operating risks into a centralised operating model.
In 2025 we further extended our coverage and provided an assurance rating on previously unrated arrangements from 2024 building further on our high levels of coverage.
We have focused on offshore hubs for several years, in particular offshore marketing hubs. During this time, we have been able to resolve a number of disputes, including with the largest commodity exporters in Australia, providing confidence that the right amount of tax is being paid in relation to our largest commodity exports. The majority of the offshore centralised operating models (hubs covering marketing and non-core procurement activities) that have been reviewed are rated high or medium assurance rating.
However, there continues to be a number of arrangements across a small number of taxpayers where we continue to have concerns. Further compliance action, such as reviews and audits, is underway in relation to these arrangements. For completeness we note that these taxpayers may have multiple marketing or procurement hub arrangements, some of which may be rated as medium or high assurance.
Inbound distribution arrangements
|
Assurance ratings as at 30 June 2025 |
Percentage of Top 100 review outcomes |
|---|---|
|
High |
25% |
|
Medium |
13% |
|
Low and red flag |
37% (25% and 12%) |
|
Not rated |
25% |
PCG 2019/1 concerns the transfer pricing risks associated with distribution of goods purchased from related foreign entities for resale, and distribution of digital products or services where intellectual property in those products or services is owned by related foreign entities. Less than 10 taxpayers have arrangements that potentially fall within PCG 2019/1.
We have observed the proportion of high and medium assurance ratings have improved from 14% in 2024 to 38% in 2025. There has been a corresponding reduction in the proportion of low assurance and unrated arrangements, reflecting the improvement of several taxpayers to a higher rating.
We continue to work with taxpayers to improve our level of assurance in respect of those arrangements attracting a low assurance or red flag rating. Where necessary these arrangements have been escalated to specific investigations, including audits.
We continue to focus on a number of related party arrangements where a number of related Australian subsidiaries each significantly contribute to the creation of the digital products or services or the intellectual property in the digital products or services in Australia, including data centres. We consider these arrangements are not merely inbound distribution arrangements within the meaning provided by the PCG and are reviewing whether the tax outcomes are appropriate.
Inbound distribution arrangements (especially as they relate to digital products or software) may also raise concerns about the extent to which payments made to offshore associates are royalties, subject to withholding tax. This continues to be an enquiry requiring regard to the terms of the agreements and other relevant facts and circumstances.
Structured arrangements designed to reduce Australian tax
In some cases, we see arrangements that are structured to reduce or avoid Australian tax. In those cases, the low assurance ratings and red flags are generally associated with related party transactions or other structured transactions (including third party back-to-back transactions) promoted or designed to achieve Australian tax savings, such as the following:
- Contrived related party financing arrangements, including the use of financing transactions with special terms designed to
- artificially defer or avoid interest withholding tax while having obtained annual Australian income tax deductions
- avoid or reduce dividend withholding tax upon repayment/redemption of contrived related party financing arrangements
- otherwise obtain deductions or avoid assessable income using arrangements designed to circumvent thin capitalisation, debt or equity classification and the hybrid mismatch rules.
- Intangibles arrangements designed to reduce or avoid Australian taxable income or reduce or avoid royalty withholding tax, including
- intangible migration arrangements falling within the higher risk zones of PCG 2024/1 Intangibles Migration Arrangements
- arrangements of the kind described in Taxpayer Alert TA 2018/2 Mischaracterisation of activities or payments in connection with intangible assets or within the scope of Draft Tax Ruling TR 2024/D1 Income tax: royalties – character of payments in respect of software and intellectual property rights
- We’ve recently released the Draft Practical Compliance Guideline (PCG) 2025/D4 – Low-risk payments relating to software arrangements – ATO compliance approach which provides certainty about when the ATO will not review software arrangements to determine whether any part of a cross-border payment made to a non-resident is a royalty and subject to withholding tax (royalty risk).
- Arrangements or variation of arrangements of the kind described in Taxpayer Alert TA 2020/4 – these arrangements broadly involve the transfer of assets to an Eligible Tier 1 (ET-1) and an ET-1 company leaving or anticipating leaving, the multiple entry consolidated (MEC) group.
- Arrangements designed to avoid income being attributable to an Australian permanent establishment.
- ‘Inversion’ or ‘top-hatting’ arrangements, or the interposition of partnerships or other entities, designed to
- shift recognition of income, or change or mischaracterise the nature of income
- facilitate related party transactions to obtain Australian tax deductions
- reduce or eliminate withholding tax
- avoid the application of targeted or general anti-avoidance measures.
- Arrangements of the kind described in Taxpayer Alert TA 2020/5 – Structured arrangements that provide imputation benefits on shares acquired where economic exposure is offset through use of derivative instruments.
Capital allowances
|
Assurance ratings as at 30 June 2025 |
Percentage of Top 100 review outcomes |
|---|---|
|
High |
57% |
|
Medium |
30% |
|
Low and red flag |
8% (8% and 0%) |
|
Not rated |
5% |
In 2025 there has been a noted improvement in assurance ratings for taxpayers with capital allowances matters with the majority (87%) achieving high or medium assurance rating.
When assuring capital allowances claims, we consider the systems and governance processes adopted, as well as the supporting evidence provided (including working papers).
Common areas of focus include the use of project pools, balancing adjustment calculations, self-assessed effective lives, and correct asset classification (particularly for composite assets and leasehold improvements). Other areas of assurance include blackhole expenditure, exploration expenditure and capitalised labour costs.
Research and development (R&D) expenditure
|
Assurance ratings as at 30 June 2025 |
Percentage of Top 100 review outcomes |
|---|---|
|
High |
16% |
|
Medium |
72% |
|
Low and red flag |
12% (12% and 0%) |
|
Not rated |
0% |
We have seen an improvement in assurance ratings for R&D over time. We've observed an improvement in the high assurance ratings from 10% to 16%. There was a significant improvement in medium assurance ratings to 72% (previously 43% in 2024) as taxpayers have improved their previously low assurance rating. Furthermore, a small number of taxpayers that were previously not rated for R&D matters due to pending amendment claims have subsequently attained medium assurance.
However, we continue to see some taxpayers unable to reach higher assurance ratings due to a lack of contemporaneous documentation to evidence that notional deductions claimed by taxpayers are incurred on R&D activities and whether expenses (such as overheads and fixed costs) are appropriately apportioned between eligible and non-eligible R&D activities.
We'll continue to work with taxpayers to address issues that are leading to lower assurance ratings. In some cases, taxpayers are required to provide further information to substantiate the amounts claimed. Additionally, some taxpayers are expected to make improvements to their governance and record keeping. Where appropriate, we will refer activities for review to the Department of Industry, Science and Resources.
Thin capitalisation
|
Assurance ratings as at 30 June 2025 |
Percentage of Top 100 review outcomes |
|
|---|---|---|
|
High |
81% |
|
|
Medium |
14% |
|
|
Low and red flag |
5% (3% and 2%) |
|
|
Not rated |
0% |
|
The majority of our reviews of the thin capitalisation provisions attracted a high assurance or a medium assurance rating (95%). However, given the change to the thin capitalisation provisions, this will remain an ongoing focus for us.
The Treasury Law Amendment (Making Multinationals Pay Their Fair Share – Integrity and Transparency) Act 2024 applies to income years commencing on or after 1 July 2023 (except for the new debt deduction creation rules which apply to income years commencing on or after 1 July 2024). The new rules will be supported by changes to the application of the transfer pricing rules that may affect a taxpayer's quantum of debt.
The new thin capitalisation and debt deduction creation rules are likely to have a significant impact on top 100 taxpayers. This will be a key focus area in upcoming reviews.
We expect taxpayers are implementing strong processes to deal with the new thin capitalisation provisions, including appropriate consideration of the matters set out in the following draft guidance products, which are expected to be finalised soon:
- Practical Compliance Guideline PCG 2025/2 Restructures and the thin capitalisation and debt deduction creation rules – ATO compliance approach
- Draft Taxation Ruling TR 2024/D3 Income tax: aspects of the third party debt test in Subdivision 820-EAB of the Income Tax Assessment Act 1997.
Deductions
|
Assurance ratings as at 30 June 2025 |
Percentage of Top 100 review outcomes |
|---|---|
|
High |
73% |
|
Medium |
21% |
|
Low and red flag |
3% (2% and 1%) |
|
Not rated |
2% |
Most of the general deductibility issues we're seeing relate to revenue or capital classification and the subsequent tax treatment of the expense. This includes capitalised labour, exploration expenses and repairs and maintenance. About 94% of reviews relating to deductions have been rated as high or medium assurance.
Consolidation
|
Assurance ratings as at 30 June 2025 |
Percentage of Top 100 review outcomes |
|---|---|
|
High |
69% |
|
Medium |
27% |
|
Low and red flag |
2% (2% and 0%) |
|
Not rated |
2% |
Consolidation areas reviewed include the allocable cost amount process including some instances where the allocable cost amount has not been prepared at the time of the assurance review, asset recognition, valuation, reconsolidation events and MEC groups. Nearly 70% of reviews relating to consolidation issues have been rated as high assurance.
Losses
|
Assurance ratings as at 30 June 2025 |
Percentage of Top 100 review outcomes |
|---|---|
|
High |
57% |
|
Medium |
28% |
|
Low and red flag |
13% (11% and 2%) |
|
Not rated |
2% |
We holistically focus on generation, carry forward, transfer and utilisation of any losses. Our reviews consider not only the tax analysis, but we also look to understand the origin of the losses and the commercial environment of the business at the time the losses were incurred. We also seek to understand when top 100 taxpayers will use any carry forward losses and move into a tax payable position. About 85% of reviews relating to losses have been rated as high or medium assurance.
Revenue
|
Assurance ratings as at 30 June 2025 |
Percentage of Top 100 review outcomes |
|---|---|
|
High |
84% |
|
Medium |
13% |
|
Low and red flag |
3% (3% and 0%) |
|
Not rated |
0% |
In some cases, we're seeing a need for more evidence and analysis of sales revenue and other material revenue amounts. These are needed to establish a reasonable basis to obtain a high level of assurance where we've been unable to reconcile revenue figures reported in the tax return with audited financial accounts. Over 80% of reviews relating to the derivation of revenue have been rated as high assurance.
Controlled foreign companies and permanent establishments
|
Assurance ratings as at 30 June 2025 |
Percentage of Top 100 review outcomes |
|---|---|
|
High |
64% |
|
Medium |
29% |
|
Low and red flag |
5% (3% and 2%) |
|
Not rated |
2% |
Controlled foreign companies (CFCs) and permanent establishments (PEs) are areas that commonly arise in our justified trust reviews. About 93% of reviews relating to CFCs and PEs have been rated as high or medium assurance. We continue to work with the small number of taxpayers where assurance has not been attained. This includes obtaining further objective evidence in relation to issues arising from CFCs and PEs including their entitlement to foreign tax offsets, CFC attribution amounts, and conduit foreign income balances.
Hybrid mismatch
|
Assurance ratings as at 30 June 2025 |
Percentage of Top 100 review outcomes |
|---|---|
|
High |
42% |
|
Medium |
46% |
|
Low and red flag |
9% (7% and 2%) |
|
Not rated |
3% |
In 2025 we have completed further reviews of hybrid mismatch arrangements. The improvement in the proportion of high assurance ratings from 23% in 2024 to 42% in 2025 largely reflects taxpayers whose hybrid arrangements were not previously assured, or where taxpayers have improved from a prior medium level of assurance.
A common reason contributing to medium or low assurance ratings continues to be a lack of evidence or any substantial effort being made to comply with obligations in respect of the hybrid mismatch rules, in particular, the imported hybrid mismatch rule. As part of our assurance reviews, we refer to PCG 2021/5 Imported hybrid mismatch rule – ATO’s compliance approach and request evidence to support the processes and procedures taxpayers are taking to ensure compliance with the imported hybrid mismatch rule in Subdivision 832-H. It is important that this evidence is retained and provided to us during the assurance review.
Alignment of tax and accounting outcomes
We analyse the differences between the accounting and tax results. This includes understanding the effective tax rates and ETB. We seek to understand, and be able to explain, any variances between tax and accounting outcomes. This provides an objective basis to obtain greater assurance.
Ratings
We apply a consistent rating system when reviewing and assessing the alignment of tax and accounting outcomes, which is outlined below.
|
Colour indicator |
Rating |
System description |
|---|---|---|
|
|
High |
We understand and can explain the various streams of economic activity and why the accounting and income tax results vary. |
|
|
Medium |
Further analysis and explanation are required to understand the various streams of economic activity and why the accounting and tax results vary. |
|
|
Low |
We identified concerns from our analysis of the various streams of economic activity and why accounting and tax results vary. |
|
|
Red flag |
We don't understand and cannot explain the various streams of economic activity and why accounting and tax results vary. |
The reviews completed to the end of June 2025 resulted in the following ratings.
Graph 7 – Alignment of tax and accounting ratings for the last income tax reviews completed as at 30 June 2025
Graph 8 – Alignment of tax and accounting ratings for the last income tax reviews completed as at 30 June 2022, 30 June 2023, 30 June 2024 and 30 June 2025
You can also view alignment of tax and accounting ratings for the last income tax reviews data in table format.
Observations
Most (96%) of the top 100 taxpayers have obtained a medium or high assurance rating with respect to the alignment of tax and accounting outcomes, with the proportion at high assurance increasing from 67% as at 30 June 2024 to 74% as at 30 June 2025.
We're generally able to obtain assurance over a significant proportion of reported income and expenses as most taxpayers have audited financial statements. This is supported by a book-to-tax reconciliation between net profit or loss reported in the financial statements and the total profit or loss disclosed in the relevant tax return. This can be more challenging for taxpayers with MEC groups, foreign branches, or stapled groups. However, in many cases, we've been able to overcome these challenges through active collaboration with top 100 taxpayers with these structures to deepen our understanding of these taxpayers’ various streams of economic activity and why the accounting and income tax results vary.
We're also generally being provided with detailed book-to-tax reconciliations which allow us to obtain assurance over the key adjustments from the accounting results to calculate the taxable income (and tax payable) figures. We have a particular focus on permanent differences.
The increase in high assurance ratings has resulted in a corresponding decrease in the number of medium ratings (22%) for this focus area. In some cases, further analysis is required and underway to understand the various streams of economic activity where the accounting and tax results vary for the top 100 population.
Another component of this focus area is the ETB calculation, which we use to analyse the tax and economic performance of corporate groups.
We've observed that the ETB analysis provides a good cross-check or confirmation in relation to our analysis and assurance over global supply chains. The ETB offers a useful sense check on any related party dealings and whether they are giving plausible, common-sense outcomes, or conversely if they are having the effect of skewing profits to low tax jurisdictions. This is done by identifying the economic group’s worldwide profit from Australian-linked business activities and the Australian and offshore tax paid on that profit.
Boards and tax representatives of corporate groups should understand their ETB calculation and where they are booking profits around the world. We require taxpayers to provide information around their global value chains and foreign taxes paid on Australian-linked activities and encourage taxpayers to continue to work with us to refine and enhance their ETB analysis.
To further streamline reviews for high assurance taxpayers that are wholly or substantially domestic in operations and ownership with predominantly domestic transactions, we will no longer undertake the ETB calculation in our monitoring and maintenance and refresh reviews (unless there's exceptional or changed circumstances).