Key compliance risks for large corporate groups

The risks of non-compliance with large corporate groups and how we combat tax avoidance.

Last updated 31 October 2024

Non-compliance risks within large corporate groups

Because the large corporate groups have complex business structures, there will always be a non-compliance risk in this population.

In most cases this will be the result of:

a difference in the interpretation of the law
an error in applying it to a taxpayer's particular circumstances.

However, a small number of large corporate groups will choose to deliberately avoid their tax obligations.

We focus on helping the majority who want to comply and providing assurance their tax payments are correct. We do this through our one-to-one prevention activities and population-wide approaches.

Where we do see deliberate attempts to avoid tax obligations, we act decisively to address these arrangements.

The Reportable tax position schedule findings report provides insights on the prevalence of key corporate tax risks in the large market.

International risks

Profit shifting

Increased globalisation has brought many benefits for countries, including increased economic growth. But it has also brought new challenges from the increasing share of global gross domestic product and trade attributable to multinational enterprises.

Companies no longer need to locate their operations close to customers or have fully integrated operations in a single location. Instead, there is increasing centralisation of functions regionally or globally with supply chains dispersed across countries.

The rise of the information and service economies, as well as advances in technology, have allowed multinational enterprises to place staff and operations in locations geographically distant from their customers. Some nations may also seek to attract investment by multinational enterprises by offering attractive tax rates and other incentives.

These factors have also allowed for tax planning that takes advantage of arbitrage opportunities to minimise global tax payments. For some multinational enterprises, this tax planning goes beyond acceptable bounds. That's why we have an increasingly strong focus on global profit shifting.

Related party debt

A key corporate tax avoidance tactic is the excessive allocation or pricing of debt into Australian companies. The transfer pricing, thin capitalisation and general anti-avoidance rules may apply to these schemes.

We currently focus on the more prevalent forms of related party debt risks. We have:

warned taxpayers and their advisers of high-risk arrangements through our taxpayer alerts
provided guidance to assist taxpayers self-assess the tax risk of their related party financing arrangement and our likely compliance approach given that risk profile
undertaken litigation in the most serious cases.

For related practical compliance guidance, tax rulings and determinations, see:

PCG 2017/4 ATO compliance approach to taxation issues associated with cross-border related party financing arrangements and related transactions
TD 2019/12 Income tax: what type of costs are debt deductions within scope of subparagraph 820-40(1)(a)(iii) of the Income Tax Assessment Act 1997?
TD 2020/2 Income tax: thin capitalisation - valuation of debt capital for the purposes of Division 820.

Offshore service hubs

Some multinational enterprises use centralised operating models, often referred to as hubs, to undertake various activities. These arrangements are usually based on commercial considerations but sometimes the tax treatment may not be appropriate.

We issued a practical compliance guideline to assist taxpayers to manage the risks and costs associated with hubs. Two schedules in the PCG cover marketing and procurement hubs.

See our Practical Compliance Guideline PCG 2017/1 ATO compliance approach to transfer pricing issues related to centralised operating models involving procurement, marketing, sales and distribution functions.

Inbound supply chains

Appropriate profit being recognised in Australia

Many multinational businesses operate their Australian operations through subsidiaries. They may use these subsidiaries to buy goods or services manufactured or originated offshore from their offshore parent or related companies and on-sell to Australians.

The key tax question is whether the price paid for those goods or services is an appropriate price under the law. Determining this can be particularly difficult when the goods or services have unique features. This can be difficult even for taxpayers trying to do the right thing.

Looking at the entire supply chain through a variety of lenses helps to determine if the pricing is giving sensible or distorted results. It can help clarify if the appropriate profit is being recognised in Australia.

In March 2019, we published Practical Compliance Guideline PCG 2019/1 Transfer pricing issues related to inbound distribution arrangements, outlining our compliance approach. The PCG includes industry-specific schedules to provide more detailed guidance.

Example: Australia inbound supply chains – determining if appropriate profits are recognised

USA headquartered BrownGoodsCo is a worldwide electronic goods company. It undertakes significant research and development activities in its home jurisdiction. This is to develop new electronic goods and market its products. The worldwide profits of BrownGoodsCo are $12 billion on global sales of $60 billion. This gives an implied profit to sales ratio of 20%.

BrownGoodsCo establishes a wholly owned subsidiary company, BGAus Ltd, in Australia. BGAus undertakes sales and distribution activities in Australia. It purchases the goods from offshore related parties located in low tax jurisdictions, and on-sells them. It also provides significant after-sales support in relation to its products.

Sales of BrownGoodsCo products in Australia are $2 billion. After paying $1.8 billion for the products, BGAus has $105 million in other costs, mostly salary, leasing and similar. BGAus makes an accounting profit of $95 million on its business operations in Australia. BGAus reports these profits in its Australian income tax return.

BGAus reports a taxable income of $100 million and pays income tax of $30 million. The difference to the accounting profit relates to employee-related expenses (such as annual leave and long service leave), which are only deductible when paid out.

For accounting purposes, BGAus reports a tax expense of $28.5 million, an effective tax rate of 30%. It recognises a deferred tax benefit of $1.5 million for the deduction it will receive when it actually pays the leave costs.

Overall, their tax expense is $30 million (or $28.5 million for accounts) against $2 billion in sales. This looks low at 1.5% of sales.

The key tax issue is whether the $1.8 billion paid by BGAus to BrownGoodsCo for the goods is an appropriate arm's length price. In judging the risk of ‘transfer mispricing’, we will look at factors such as the:

margin on local costs – the profit of $95 million on local costs of $105 million implies a relatively high return for the functions being performed in Australia
profitability of the local operations compared with the entire supply chain. That is, BGAus is booking $95 million of profit compared with an estimated whole of supply chain profit of $400 million (assuming Australian supply chain profit ratios align with global profitability). Given significant R&D and manufacturing offshore, booking 24% of profit for sales and distribution and after sales support appears reasonable
implied commission on the goods – there is an implied commission of 10%, which appears reasonable for this industry
motivation to transfer misprice – there is a higher motivation to misprice, as significant profits are being booked in a low tax jurisdiction.

Overall, the transfer price of the goods appears lower risk and the tax payable in Australia appropriate. However, given the booking of significant profits in a low tax jurisdiction, we're likely to review the transfer pricing of BGAus.

Note: The local effective tax rate of BGAus doesn't provide any guidance as to whether there is ‘transfer mispricing’, as any mispricing will affect its profit as well as the tax. On the other hand, simply focusing on cash tax versus gross sales won't reflect the degree of support provided by the Australian operations versus the rest of the global supply chain.

End of example

See our Practical Compliance Guideline PCG 2019/1 Transfer pricing issues related to inbound distribution arrangements

Intangible assets and non-arm's length arrangements

Intangible assets, including but not limited to intellectual property, are highly mobile assets.

Australian tax advantages may be inappropriately obtained in connection with arrangements involving the location of intangible assets, or the rights to use intangible assets. The risk includes tax advantages obtained in connection with non-arm’s length or contrived arrangements that:

migrate or artificially allocate Australian generated intangible assets (or the right to use Australian generated intangible assets) to offshore related parties
involve intangible assets with significant value derived from, or maintained by, the activities of Australian entities (or in Australia)
subsequently grant rights in these intangible assets back to Australian entities in exchange for deductible payments or shift income relating to the intangible assets from Australia
mischaracterise payments in connection with the use of intangible assets to reduce or avoid Australian royalty withholding tax.

Intangible assets, particularly ‘hard to value’ intangibles, may have special or unique characteristics. These complicate the search for comparable transactions and make market prices difficult to determine at the time of the transaction. Consider OECD public guidance – in particular, BEPS Action 8: Implementation guidance on hard-to-value intangiblesExternal Link.

We have issued the below advice and guidance to taxpayers and their advisors of our concerns with intangibles arrangements:

TA 2018/2 Mischaracterisation of activities or payments in connection with intangible assets
TA 2020/1 Non-arm's length arrangements and schemes connected with the development, enhancement, maintenance, protection and exploitation of intangible assets
PCG 2024/1 Intangibles migration arrangement.

Example: Migration of intellectual property

A foreign-owned Australian company (AusCo) holds internally generated patents that have not yet been commercialised. AusCo assigns the patents to a foreign subsidiary of its foreign parent (ForCo) for an amount less than the cost of development. ForCo then licenses the use of the patents back to AusCo.

AusCo continues to carry out R&D activities in connection with the patents and enters into a contract with ForCo. Under the contract:

AusCo’s R&D activities are treated as services provided by AusCo to ForCo
ForCo owns any patents or other intellectual property resulting from AusCo’s R&D activities.

For Australian tax purposes, AusCo:

claims a capital loss from the assignment of the patents to ForCo
claims deductions for the licence fees payable by AusCo to ForCo under the licence back of the patents to AusCo
does not withhold royalty withholding tax on these licence fees
only returns the compensation for its activities payable by ForCo under the contract.

We're concerned that:

the assignment of the patents by AusCo and their licence back were not arm’s length dealings or were undertaken for the purpose of obtaining an Australian tax benefit
AusCo may not be returning adequate compensation from ForCo for
- the R&D activities it conducts under the contract for ForCo’s benefit
- other activities which preserve or develop the patents or other intellectual property
AusCo has incorrectly not withheld tax on its royalty payments
the amount of Australian tax paid by AusCo since the arrangement with ForCo was put in place is not commensurate with the economic activity undertaken by AusCo in Australia
the general anti-avoidance provisions may potentially apply.

End of example

Foreign resident disposal of Australian property

We're concerned about foreign residents who obtain a tax benefit or avoid Australian tax obligations when they dispose of Australian property. We want to ensure asset characterisation, classifications and valuations are consistent with legal requirements. For example, gains made from the sale of taxable Australian property (and related assets) should be taxed in Australia. Some schemes seek to shift or attribute value to non-taxable Australian real property assets to escape taxation.

Domestic risks

Re-characterisation of income from trading enterprises

We're concerned with arrangements that seek to divert and re-characterise business trading income into concessionally-taxed passive income flows.

This may involve a single business being divided into separate enterprises. We've issued Taxpayer Alert TA 2017/1 Re-characterisation of income from trading businesses about our concerns.

Legislative amendments have addressed some of these concerns by:

applying a 30% withholding tax on trading income converted to passive income via a stapled structure or distributed by a trading trust, and income from agricultural land and residential housing
amending the thin capitalisation rules to prevent foreign investors using double gearing structures to convert active business income to more favourably taxed interest income
limiting existing tax exemptions for foreign pension funds and sovereign wealth funds to passive income and portfolio investments only.

The legislative amendments don't cover all the arrangements we have outlined in our taxpayer alert. We continue to look closely at these other types of arrangements and will take compliance action where we consider an arrangement poses a compliance risk.

We're also reviewing transitional election forms to ensure taxpayers electing to obtain transitional relief are entitled to that relief and complying with the legislation.

Recent LRCs include LCR 2020/2 Non-concessional MIT income.

Find out more about stapled structures.

Research and development

The research and development (R&D) tax incentive program is administered jointly between AusIndustry and the ATO.

As part of the co-administration, we developed a joint risk strategy to cover particular activities of concern. These include claims attributing business-as-usual nature expenses to eligible R&D activities and claiming R&D incentives for software development.

We focus on incorrect claims in the building and construction, agriculture and mining industries. The strategy also highlights some R&D consultants as potential contributors to the risk.

We issued the following taxpayer alerts, jointly with AusIndustry, outlining our concerns with specific arrangements:

TA 2017/2 Claiming the Research and Development Tax Incentive for construction activities
TA 2017/3 Claiming the Research and Development Tax Incentive for ordinary business activities
TA 2017/4 Claiming the Research and Development Tax Incentive for agricultural activities
TA 2017/5 Claiming the Research and Development Tax Incentive for software development activities
TA 2023/4 Research and development activities delivered by associated entities
TA 2023/5 Research and development activities conducted overseas for foreign related entities

Property and construction activities of large private groups

Property and construction is a significant industry in the Australian economy. There has been strong growth in some property markets.

Despite this, there is low tax performance and higher tax debts and insolvency rates than other industry segments. This has led us to take an industry-wide approach to risks in the segment for large private groups.

Group structuring and business events

Significant business events attract our attention. These may be mergers and acquisitions, divestments of major assets and demergers, capital raisings and returns of capital. The structure of groups and changes that occur in those structures can present significant tax issues.

We issued Taxpayer Alert 2020/4 on the use of multiple entry consolidated groups to avoid Australian tax through the transfer of assets to an Eligible Tier-1 company prior to disposal.

For more information, see corporate restructures involving acquisitions or disposals.

Combating corporate tax avoidance

Tax Avoidance Taskforce

We resolutely tackle tax avoidance by multinational enterprises, large public and private groups, and highly wealthy individuals and their advisers. The government funding of the Tax Avoidance Taskforce provides more investment in this work to improve and expand our outcomes.

Recent cases

Several court cases reinforce our commitment to addressing tax avoidance and arrangements that seek to stretch the bounds of acceptable tax planning through the courts, where necessary. This includes taking appropriate action against advisers who seek to promote tax avoidance schemes.

In Collies and Commissioner of Taxation [2024] AATA 440 and Grant and Commissioner of Taxation [2024] AATA 427 the issues were whether trust income was assessable income of the taxpayer and whether the arrangement for appointment of the trust income to a company with losses gave rise to a tax benefit under the general anti-avoidance rule. The Administrative Appeals Tribunal found that the general anti-avoidance rule applied but allowed the taxpayer's appeal in part, finding a tax benefit in an amount less than that assessed by the Commissioner.

In Ausnet Services Limited v Commissioner of Taxation [2024] FCA 90 the issue was whether a valid rollover election was made with respect to a restructure involving a stapled group. The taxpayer made an appeal to the Full Federal Court.

In GQHC and Commissioner of Taxation [2024] AATA 409 the issue raised was whether the t0061payer's activities were 'R&D' activities and if the Commissioner can challenge the eligibility of registered activities in the absence of a 'finding' by Innovation and Science Australia. The Administrative Appeals Tribunal dismissed the taxpayer's appeal.

In Merchant v Commissioner of Taxation [2024] FCA 498, the issue was whether the general anti-avoidance rule applies to deny a tax benefit where company profits were reduced through debt forgiveness to another company. The Federal Court dismissed the taxpayer's appeal.

In Singapore Telecom Australia Investments Pty Ltd v Commissioner of Taxation [2024] FCAFC 29 the issue was whether the lending arrangements between the taxpayer and an offshore related entity gave rise to a transfer pricing benefit. The court handed down a decision favourable to the Commissioner. Taxpayer has applied for special leave to appeal to the High Court of Australia.

In Commissioner of Taxation v Bogiatto (No 2) [2021] FCA 98, the Federal Court found the respondent and several associated companies contravened the promoter penalty legislation by promoting R&D incentive schemes to his clients. The Court imposed a penalty of $22.68 million on the respondent.

The Full Federal Court considered the validity of a notice issued under the Commissioner’s formal information gathering powers requiring the taxpayer to provide particulars of documents over which the taxpayer claimed legal professional privilege in CUB Australia Holding Pty Ltd v Commissioner of Taxation [2021] FCA 43. The Court held the Commissioner's purpose in issuing the notice was to determine whether to challenge the claim for legal professional privilege and that the notice was validly issued.

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