Australia’s Budget Puts Many Tax Issues on Multinationals’ Radar

The Australian Budget released earlier this month had measures for multinational enterprises that ranged from barely a surprise to some game-changers from a tax administration perspective on transactions.

No legislation has been passed by Parliament yet for any of the new tax measures, so MNEs will need to stay aware of developments as draft legislation is released by Treasury in the coming months.

What to Watch

Here is our cheat sheet of 10 items that MNEs should have on their radar for their Australian operations.

ATO reviews. Keep preparing in advance for the Australian Taxation Office’s Top 100 or Top 1,000 reviews. The budget has extended the funding of the ATO’s Tax Avoidance Taskforce out to financial year 2028, which is no surprise given that the taskforce has produced a tenfold result on the government’s investment in some years since its creation in 2017.

Expect the ATO to continue its scrutiny of transfer pricing for both financing arrangements and sales of goods, withholding tax avoidance, general anti-avoidance, and treaty benefits.

Royalty payments. Check your royalty position, particularly for intellectual property-intensive industries. From financial year 2027, a new penalty regime will apply to mischaracterized or undervalued royalty payments that avoid Australian withholding tax.

This is a critical issue regardless of whether the arrangements in question are between third parties—the Pepsi/ATO litigation example—or related parties, where transfer pricing rules are also relevant. The analysis can require a combination of tax, IP law, and economic input, so get started early.

Notifying share sales. Plan for how the proposed requirement to notify the ATO of share sales above AU$20 million ($13.3 million) in value might impact any disposals you are planning. There is scant detail available about this measure, but we expect it to be practically difficult.

Will all industries have the notification requirement even though the measure is focused on land-rich assets? Will notification be required prior to deal signing (a very early regulatory notification), prior to completion (giving the ATO little time to move), or by some other time? Will the ATO start issuing early assessments or negotiating payment arrangements with sellers if it might want to challenge the proposed tax outcomes?

Capital gains tax. Review if any disposals might not be subject to Australian CGT after the foreign resident exemption is narrowed from financial year 2026. The government forecasts an extra AU$200 million of revenue each year, so the changes are unlikely to be at the margins. The specifics of the narrowing aren’t yet known but expect more classes of assets to be treated as land for the purposes of these rules.

Additional compliance. Plan for any additional compliance work required by the CGT exemption for sales from financial year 2026. We expect at the least that the movement from a point in time test at sale to a 365-day test will require at least two assets valuations to be prepared rather than one, for example. Disputes about asset valuations are common in this area because taxpayers that fall within this exemption obtain complete relief from CGT.

Extensions to general anti-avoidance rule. Review any existing structures that might be captured by the extensions to the general anti-avoidance rule. The two extensions were announced in last year’s budget, with the GAAR to also capture arrangements that reduce an Australian withholding tax rate or were defensible because the main purpose was to obtain foreign tax benefits. These changes will now only become effective once the law passes, not from July 1, but existing structures won’t be afforded any ongoing protection, so the changes present a risk.

Intangibles measures. Cross the proposed intangibles measure off your list. This was proposed to commence from July 2023, denying a deduction for payments relating to intangibles held in jurisdictions with a corporate tax rate below 15%. With many countries having announced 15% domestic minimum taxes as part of Pillar Two, the government has decided not to proceed.

Pillar Two. Prepare for Pillar Two, with a 15% domestic minimum tax and income inclusion rule for income years commencing on or after Jan. 1. Keep a close eye on detail in the enacting legislation—consultation is closed but the law isn’t before Parliament yet.

New incentives. Check any eligibility for new incentives announced for producers of critical minerals and hydrogen. The details for these incentives are still to come, but the policy announcements are substantial, with the incentives being 10% of production costs for critical minerals and AU$2 per kilogram of hydrogen produced.

Changes to rules. Keep on the lookout for whether any other previously announced measures are taken up by the government this year. One example is the tax residency rules for companies, for which simplification changes were announced by the previous government but for which no legislation has been passed.

In the meantime, the ATO continues to issue further guidance on what it will accept in practice as evidence of companies being nonresident for Australian tax purposes. The current legislative test is qualitative, so it requires careful management in practice.

Where Next for MNEs

The Australian tax outlook for MNEs remains tough, with the positive developments overshadowed by the possibility that the new developments will be difficult to manage in practice. In parallel, the rigorous reviews of MNEs in the Top 100 or Top 1,000 program will continue on a cyclical basis, sometimes with a review or audit barely completed before the next one commences.

In the coming months, watch for the devil in the details as further information about the measures emerges, particularly the royalty withholding tax penalty regime, the narrower CGT exemption, and the ATO notification requirement for offshore vendors.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Angela Wood is partner and national practice group leader for tax at Clayton Utz.

Andy Bubb is special counsel at Clayton Utz, specializing in tax controversy.

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