Australia

Introduction

The Australian Transfer Pricing legislation is found in subdivisions 815-B, 815-C, and 815-D of the Income Tax Assessment Act 1997 (ITAA 1997) and subdivision 284-E of the Tax Administration Act 1953 (TAA 1953).

The Australian Transfer Pricing legislation was introduced on May 27, 1981. Thereafter, the Australian Taxation Office (ATO) issued several important rulings and publications to guide the application of the legislation.

In 2011, the Australian government initiated a review of the Transfer Pricing legislation. The first stage of amendments was enacted in 2012 while pending more in the pipeline.

The Australian Transfer Pricing Rules were amended in February 2020 to specify that the 2017 edition of the OECD Transfer Pricing Guidelines is the relevant guidance material for income years after 2017.

Related Parties

Related parties are not defined in the country’s Transfer Pricing legislation. Although there is no definition in the legislation, the Tax Officer’s guidance on its website defines a related international party as those with a share of equity, voting rights, or profit-sharing of 20% or more.

It includes another definition of “related international parties.” According to the IDS (International Related Parties) instructions, the term includes:

Any foreign entity or person directly or indirectly participating in the management, control, or capital; any foreign entity or person in whose management, control, or capital you directly or indirectly participate.
Any foreign entity or person whose management, control, or capital you directly or indirectly participate in.
Any foreign entity or person in which the persons who directly or indirectly participate in the management, control, or capital are the same persons who directly or indirectly participate in its management, control, or capital.

Transfer Pricing Methods

Australian law does not specify any particular method for related party transactions. Paragraph 815-125(2) of the Income Tax Assessment Act 1997 (ITAA 1997) states that “in identifying terms, the most appropriate and reliable method or combination of methods shall be employed under all relevant factors.”

The five Transfer Pricing methods recognized by the OECD are accepted methods.

Transfer Pricing Documentation

International Dealing Schedule (IDS)

In Australia, entities forming part of international groups must maintain records of their transfer pricing policies, known as “Transfer Pricing Manuals.” In addition, if transactions with international parties exceed A$2 million, they must disclose them in an International Dealing Schedule (IDS) as part of the company’s tax return.

Companies with related party transactions may have their transfer prices reviewed or audited by the Australian Taxation Office at any time. Therefore, an accurate preparation of your IDS and an updated Transfer Pricing manual is essential to avoid unfavorable audit results.

Country by Country Report

It is generally filed by the global parent entity and includes tax-relevant country-specific information, such as aggregate revenues, profits, income taxes paid and accrued, owned assets, and the number of employees by country. Australia has signed several international agreements facilitating the exchange of Country-by-Country Reports with other countries.

Under Subdivision 815-E, entities filing Country-by-Country Reports must also file the statements recommended by the OECD Action 13 report, i.e., Master File and Local File. These filing obligations are limited to entities in the scope of the Country-by-Country Reports, i.e., entities belonging to groups with more than US$1 thousand million in annual global revenues.

Local Report

The local report is prepared for each entity in Australia and provides a line-by-line description of intercompany transactions with other group entities. Its format is exclusive to Australia and has a completely different setup compared to local reports in other countries. There are simplifications available to reduce the compliance burden for smaller taxpayers. This report must be drafted and filed by the Australian entity and prepared by its Australian accountant.

Master File

It is prepared centrally by the global parent entity and contains general information concerning the group’s organizational structure, business activities, and finances. Likewise, it describes the functions of the individual entities, the assets and intangibles they use, and their risks.

Transfer Pricing Penalties

Failure to file or misfiling a Country-by-Country Report, Master File, or Local Report will result in significant penalties in Australia. Although there are no specific penalties for failure to prepare or file the Transfer Pricing documentation, the general provisions in Australian tax law will apply for failure to retain and/or file applicable documentation.

For incomplete or incorrect filing, penalties can range from AUD 26,640, 17,760, and 8,880 in different situations.

Source: Australian Taxation Office (ATO)

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