Arm's length principle
The arm's length principle means using the transactional or profit results of independent parties as a guide or benchmark in allocating income or expenses in cross-border transactions with related parties.
It requires understanding what you have done in your business and whether or not your actions compare with what independent parties have done, or would have done, in the same or a similar situation.
The process requires judgment calls by:
- your business, in how you set prices and terms of trade with related parties and how you document this policy to support your position
- the ATO in reviewing the quality of your documentation file.
For more detail on arm's length principle refer to International transfer pricing: applying the arm's length principle (NAT 2726).
For the purposes of the definition of 'International related parties', means an interest in equity, voting rights, or income distribution of 20% or greater.
International related parties
International related parties are persons who are parties to international dealings that can be subject to section 136AD of the ITAA 1936 or the associated enterprises article of a relevant double tax agreement (DTA). The term includes:
- any overseas entity or person who participates directly or indirectly in your management, control or capital
- any overseas entity or person in respect of which you participate directly or indirectly in the management, control or capital
- any overseas entity or person in respect of which persons who participate directly or indirectly in its management, control or capital are the same persons who participate directly or indirectly in your management, control or capital.
International related party dealings
Means international transactions, agreements or arrangements between related parties; for example, an agreement with your foreign subsidiary. The term includes all transactions between an Australian resident and international related parties.
Life insurance policy
Has the meaning given to the expression life policy in the Life Insurance Act 1995 but includes:
- a contract made in the course of carrying on business that is a life insurance business because of a declaration in force under section 12A or 12B of that Act
- a sinking fund policy within the meaning of that Act.
Includes a right of participation, the exercise of which is contingent on an agreed event occurring.
Has the same meaning as in subsection 6(1) of the ITAA 1936 and section 995-1 of the ITAA 1997.
Are tax jurisdictions of interest as listed in Appendix 1.
Transfer pricing occurs when property has been supplied or acquired under an international agreement.
However there are rules in place to make sure that the parties to the transaction were, or are, dealing with each other at arm's length in relation to the supply or acquisition.
In the absence of transfer pricing rules, taxpayers might seek to shift profits out of Australia to jurisdictions that have lower rates of tax. This could be achieved by pricing transactions between Australian residents and related parties overseas at prices that do not reflect the arm's length price for those transactions.
Publications referred to in these instructions
- Business industry codes (NAT 1827)
- Company tax return instructions(NAT 0669)
- Income Tax Assessment Act 1936
- Income Tax Assessment Act 1997
- Income Tax Regulations 1936
- TR 92/11 Income tax: application of the Division 13 transfer pricing provisions to loan arrangements and credit balances
- TR 94/14 Income tax: application of Division 13 of Part III (international profit shifting) – some basic concepts underlying the operation of Division 13 and some circumstances in which section 136AD will be applied
- TR 97/20 Income tax: arm's length transfer pricing methodologies for international dealings
- TR 98/11 Income tax: documentation and practical issues associated with setting and reviewing transfer pricing in international dealings
- TR 1999/1 Income tax: international transfer pricing for intra-group services
- TR 2001/11 Income tax: international transfer pricing - operation of Australia's permanent establishment attribution rules
- TR 2004/1 Income tax: international transfer pricing – cost contribution arrangements
- TR 2010/7 Income tax: the interaction of Division 820 of the Income Tax Assessment Act 1997 and the transfer pricing provisions
- TR 2011/1 Income tax: application of transfer pricing provisions to business restructuring by multinational enterprises.
To get an ATO publication:
- go to for publications, tax rulings, practice statements and forms
- see the Individual tax return instructions and e-tax publications and rulings
- phone 1300 720 092, or
- go to one of our shopfronts.
If you are a registered tax agent, you can:
- go to
- order by fax on 1300 361 462.
Information about business income tax, fringe benefits tax (FBT), fuel tax credits (FTC), goods and services tax (GST), pay as you go (PAYG) and activity statements, including lodgement and payment, accounts and business registration (including Australian business number and tax file number), and dividend and royalty withholding tax.
13 28 66
For enquiries from registered tax agents
13 72 86
For information about choice of super funds and the role of the employer
13 28 64
For individual income tax and general personal tax enquiries
13 28 61
13 10 20
If you do not speak English well and need help from the ATO, phone the Translating and Interpreting Service (TIS) on 13 14 50.
If you are deaf, or have a hearing or speech impairment, phone the ATO through the National Relay Service (NRS) on the numbers listed below, and ask for the ATO number you need:
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