Australia
Ross Forrester
by Ross Forrester
The Australian transfer pricing regime is robust and vigorously applied. Australia’s corporate tax intake is relatively high, with 19% of total revenue from companies (compared to a 9% OECD average). Australia also sits in the bottom 25% of least-taxed OECD countries (2022 OECD Centre for Tax Policy). So, preserving the corporate tax intake through transfer pricing is a priority.
Transfer pricing is a crucial compliance focus for the Australian Taxation Office (ATO), including restructures of Australian operations, artificially complex financial arrangements, excessive royalties, interest & fees, provision of services by Australian operations offshore with no charge, and allocating income and expenses to Australian operations with no substance.
While transfer pricing is focused on large businesses, around a third of SMEs are involved in international activities. So, transfer pricing is also a key priority for SMEs.
The Australian transfer pricing regime rests upon the internationally accepted “arms-length” principle. Accepted methodologies include:
The comparable uncontrolled price (CUP) method
The resale price method
The cost-plus method
The transactional net margin method.
The ATO provides that the method chosen should be the one that is the most appropriate for the situation. The aim for identifying the method is to achieve consistency with the OECD 2015 publication, Aligning Transfer Pricing Outcome with Value Creation, Actions 8-10 – 2015 Final Reports.
If there is a difference between the form and substance of the services, the ATO can reconstruct the contract so that the substance prevails. If independent parties would not have entered a contract because of the contract's contrived nature, the ATO can adjust the terms of the contract to a commercially realistic contract.
When reporting on transfer pricing dealings, Australia adopts a country-by-country reporting approach by lodgement of an International Dealings Schedule for global business with a turnover exceeding AUD 1 billion. This includes notification of the percentage of dealings with documentation.
Australia offers relief for preparing transfer pricing documentation to reduce compliance costs. The relief has 7 simplified transfer pricing records keeping options available for:
Small taxpayers;
Distributors;
Low value-adding intra-group services;
Low-level inbound loans;
Materiality;
Technical services; and
Low-level outbound loans.
To enjoy relief, taxpayers should lodge an International Dealings Schedule notifying the ATO that the taxpayer is choosing relief.
Sadly, we have seen many taxpayers review the relief criteria, self-assess that they qualify, and proceed to ignore the lodgement obligations. This then means that the taxpayer does not qualify for relief.
As a guide, small taxpayer relief is available where the taxpayer:
Has a turnover under AUD 50 million;
Has not made sustained losses;
Has not had a restructure;
Does not have related party dealings, including royalty payments, license fees or research and development arrangements over AUD 500,000;
Has specified service-related-party dealings (either expenses or income) at less than 15% of the turnover; and
Is not a distributor.
A specified service-related-party dealing is merely not of a support nature – the service contributes significantly to creating, enhancing, or maintaining value. It requires using unique and valuable intangibles or the assumption of control of substantial risk or gives rise to significant risk for the service provider.
Further, transfer pricing is a key focus for thinly capitalised entities. While Australia has no thin capitalisation rules where the interest paid is less than AUD 2 million, taxpayers are still required to support the market value interest rate.
The need for documentation is approached with a practical sense of what a taxpayer should reasonably expect to retain. The complexity of the transaction, together with the materiality of risk, is paramount.
When a taxpayer is documenting their transfer pricing treatment, they have 5 key questions to consider and answer:
What are the actual conditions that are relevant to the matter?
What comparable circumstances are relevant to identifying the arm’s length conditions?
What methods are used to identify the arm’s length conditions?
What is the arm’s length conditions, and is the transfer pricing treatment appropriate?
Have any material changes and updates been identified and documented?
For taxpayers with international-related party dealings of more than AUD 2 million, the Australian local file and Section A of the International Dealings Schedule must be lodged. The local file is due within 12 months of the end of the income tax year and can only be filed electronically.
The Local File and International Dealings Schedule must disclose information about international related party dealings, the transaction's magnitude, and the transfer pricing documentation level.
A Short Form Local File exists for taxpayers whose international related party dealings are less than AUD 2 million, and they meet the simplified transfer pricing record-keeping criteria for small taxpayers and the criteria for materiality. There are also requirements regarding the type of related party dealings. Otherwise, the Local File will need lodgement that includes the Short Form Local File information.
Several Practical Compliance Guidelines allow taxpayers to self-assess the ATO’s risk perception with specific transfer pricing positions.
A taxpayer can enter an APA with the ATO to reduce transfer pricing risk. This will only occur for material dealings. However, simply because a taxpayer qualifies for Simplified Transfer Pricing Record Keeping does not mean the transaction is not material.
Typically, most APA’s require that a taxpayer prepare and lodge an annual compliance report (ACR). It ordinarily contains details of the actual results of the taxpayer to show compliance with the APA.
Given the technical difficulties of documentation, our approach is to identify one of the 7 ways taxpayers can adopt the simplified record-keeping regime.
The Australian Taxation Office (ATO) has a formal approach to encouraging tax compliance and governance rather than imposing penalties. And the audit focus is on significant global entities or those whose tax paid is lower than industry norms or entities who have recently restructured in a way that materially affects the related party's international dealings.
The penalties for transfer pricing adjustments range from 10% to 50%. The lower range requires a reasonably arguable position. The higher range is where the arrangement was entered with the sole or dominant purpose of a transfer pricing benefit.
You need documentation to argue lower transfer pricing penalties. The lack of documentation is not reasonably arguable.
If the entity is a Significant Global Entity, the penalties can be double.
Westcourt is an advice firm with one focus: it makes family-owned businesses great. Westcourt believes that family-owned businesses can and should be Australia's primary drivers of employment, innovation, and profits.
GGI member firmWestcourt Family Business AccountantsPerth, AustraliaT: +61 08 9221 8811Advisory, Corporate Finance, Fiduciary & Estate Planning, Tax
Ross Forrester is a Director of Westcourt in Perth, Western Australia. He is the Regional Chair Asia-Pacific of the GGI International Taxation Practice Group, and WA Chair of The Tax Institute in Western Australia.Contact Ross.
