How Australia’s Tax Agency Is Trying to Redefine Transfer Pricing

The Australian Taxation Office increasingly has been testing the boundaries of its authority in the nation’s courts. From intellectual property and withholding tax to cross-border financing and tangible property arrangements, the ATO is on a mission to redefine the landscape of transfer pricing.

Yet the ATO has only had limited success, which raises a critical question: Is it pushing too hard? The courts appear to be pushing back, curbing the ATO’s discretion and signaling that not every bold interpretation of tax law will hold up under judicial scrutiny.

As Australia’s tax framework continues to expand, more litigation is to be expected. But litigation is a double-edged sword. While it may clarify legal interpretations, it also exposes the limits of the ATO’s reach.

Regardless of outcomes, the ATO undoubtedly will re-calibrate its approach, becoming more targeted and strategic in its scrutiny of taxpayers.

Pressure to Comply

In today’s climate, tax governance is essential. The ATO’s combined assurance review program revealed that most of the top 1,000 taxpayers only achieved low or medium assurance for transfer pricing. Many companies are falling short—and the ATO knows it.

Common deficiencies include the absence of contemporaneous documentation and vague connections between transfer pricing policies and actual business changes. The ATO sees this as an open invitation for deeper, more aggressive scrutiny.

But the agency isn’t stopping at the top 1,000 and is turning its attention to medium and emerging taxpayers—many of whom are expanding overseas without the infrastructure or maturity to manage complex transfer pricing issues. These businesses are being held to similar standards as their larger counterparts, and many are unprepared.

The ATO also continues to review contentious transfer pricing arrangements, particularly through its Tax Avoidance Taskforce. With AU$718 million ($461 million) in additional funding, it isn’t just well-resourced—it’s emboldened.

This shift underscores a critical point: Strong tax governance must be embedded early in a company’s lifecycle. This means implementing a well-defined transfer pricing control framework, and demonstrating it actually works in practice. Waiting until you are big enough to matter is no longer a viable strategy.

Complex Battleground

Taxpayers shouldn’t interpret the ATO’s August loss against PepsiCo Inc. in the Australia High Court as a green light for lax intellectual property arrangements. IP remains one of the most contentious areas in international tax, and the ATO is laser-focused on software-related royalty payments.

The PepsiCo ruling—which involved royalties and a diverted profits tax dispute—shows that tax characterization is about substance. When goods and IP are packaged together in a distribution model, judges will dig deep to see what’s really going on. Is the payment genuinely for goods, or is there a hidden royalty buried in the deal?

The burden is on taxpayers to prove their case. If contracts, invoices, and risk allocations consistently point to a clean sale of goods, the taxpayer’s in a stronger position. But any mismatch leaves the door open for the ATO to seize the opportunity to recharacterize the arrangement as a royalty.

Taxpayers should expect continued scrutiny and prepare accordingly—the complexity of IP demands proactive governance, not reactive defense. Make clear what is being paid for, who’s paying, and keep records showing money flow matches the contractual relationships.

Masterclass in Evidence

Alcoa Corp.’s April 30 victory against the ATO is a textbook example of how strong record-keeping and evidence-based arguments can win.

Alcoa prevailed in the case, which revolved around arm’s-length pricing, by presenting extensive documentation and aligning its tax practices with market pricing norms. Volumes of emails demonstrating commercial negotiations were presented, and prices were compared to the alumina trading market.

Alcoa’s victory shows there’s no substitute for robust evidence. The tribunal placed strong emphasis on substance. Taxpayers must be able to clearly demonstrate transaction flows, support pricing with industry data, and maintain detailed internal and external correspondence—not just how they were structured on paper.

Can’t Be Complacent

Inbound financing is another area where the ATO is tightening the screws. New legislation imposes strict limits on debt deductions, and intercompany debt arrangements can no longer be treated as “set and forget.”

Annual reassessment of debt quantum and pricing is essential, especially considering Australia’s deflationary interest rate environment. Rates that were set years ago may now be indefensible, and taxpayers must ensure their financing policies reflect current market realities.

The Singtel case, which involved multiple failed appeals by the taxpayer over tax deductions from a related-party loan, highlighted the importance of considering parental affiliation in pricing intercompany debt.

The ATO’s success in this case reinforces the influence of parental affiliation and underscores its growing confidence in applying this approach to scrutinize related party loans and reduce interest deductions.

Getting Review Ready

The ATO, now armed with additional funding, is signaling its intent to pursue contentious matters. This posture marks a shift toward a more calculated and strategic enforcement agenda, where taxpayers can expect sharper scrutiny.

Few taxpayers can match the ATO’s resources, making it imperative to invest early in robust tax governance, thorough record-keeping, and defensible transfer pricing policies. This is the most cost-effective shield against an increasingly challenging regulatory landscape.

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

Author Information

Jason Casas is a partner and national head of transfer pricing at Grant Thornton Australia.

Keith To is a transfer pricing principal at Grant Thornton Australia.

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