What is the routine profits test
The routine profits test is one of the 3 tests that can be used to determine if the transitional CBC reporting safe harbour applies to a jurisdiction for a fiscal year.
The test compares the multinational enterprise group's (MNE group) profit for the jurisdiction, as reported in its qualified CBC report, against a prescribed percentage of its eligible payroll costs and tangible assets for the jurisdiction.
The test is set out in Subdivision D of Division 2 of Part 8-2 of the Taxation (Multinational–Global and Domestic Minimum Tax) Rules 2024 (Australian Minimum Tax Rules).
Conditions to meet the routine profits test
To satisfy the routine profits test for a fiscal year, the MNE group's profit (loss) before income tax must be equal to or less than its substance-based income exclusion (SBIE) amount for the tested jurisdiction.
The test is passed if: profit (loss) before income tax ≤ SBIE amount.
SBIE amount
Unlike the profit (loss) before income tax, the SBIE amount is determined under the detailed computational rules in Part 5-3 of the Australian Minimum Tax Rules, with certain modifications.
These modifications ensure that the calculation only includes an amount from a constituent entity if it is both located in, and a CBC reporting resident of, the jurisdiction for the fiscal year.
The SBIE amount for a jurisdiction for a fiscal year is, broadly, the sum of:
- payroll carve-out amount for these constituent entities – (eligible payroll costs for eligible employees − exclusions) × percentage
- eligible payroll costs include employee compensation expenditures, payroll and employment taxes, social security contributions and stock-based compensation recorded in financial accounts
- eligible employees include employees of the constituent entity, as well as certain independent contractors
- excludes amounts capitalised as eligible tangible assets and certain costs related to international shipping.
- tangible asset carve-out amount for these constituent entities – (total carrying values of each eligible tangible asset − exclusions) × percentage
- eligible tangible assets include property (including plant and equipment) and natural resources located in the jurisdiction and owned by the constituent entity, a lessee's right to use tangible assets located in the jurisdiction and certain licenses from a government to use immovable property or exploit natural resources in the jurisdiction
- generally excludes the carrying value of assets held for sale, lease or investment.
This summary does not include all adjustments that may be required to be made in calculating an SBIE amount. For further information, MNE groups should refer to Part 5-3 of the Australian Minimum Tax Rules.
The percentages applied to calculate both amounts are set out under section 9-30 and section 9-35 of the Australian Minimum Tax Rules, explained below.
Carve-out amount transitional percentages
The percentages to be applied in determining the payroll and tangible asset carve-out amounts are as follows:
|
Fiscal year begins |
Tangible asset percentage |
Payroll percentage |
|---|---|---|
|
2024 |
7.8 |
9.8 |
|
2025 |
7.6 |
9.6 |
|
2026 |
7.4 |
9.4 |
Automatic qualification
If a jurisdiction has a loss or zero profits, it automatically passes the routine profits test for that fiscal year. There is no need to calculate its SBIE amount.
Worked example
Example: SBIE amount worked example
For the fiscal year 1 July 2025 to 30 June 2026, MNE group A has:
- $10 million in payroll costs in Country A
- $20 million in tangible assets in Country A.
The payroll carve-out percentage is 9.6% and the tangible asset carve-out percentage is 7.6% for fiscal years beginning in 2025. Therefore:
- payroll carve-out amount = $10 million × 9.6% = $960,000
- tangible asset carve-out amount = $20 million × 7.6% = $1,520,000
- total carve-out = $2,480,000.
If MNE group A's profit before income tax for Country A for the fiscal year is equal to or less than $2.48 million, it will satisfy the routine profits test.
End of example