Australian transfer pricing changes
The Australian Tax Office (ATO) has indicated that recent law changes allow it to disregard—or reconstruct—related-party transactions when the economic substance of a transaction does not match the legal form.
Basically, the test is no longer only whether the transfer price (e.g., an interest rate on a related-party loan) is at arm’s length, but whether the transaction itself is at arm’s length (i.e., whether the company could have borrowed, and how much). Stated another way, the ATO’s threshold determination is whether the transaction would have taken place between independent parties.
The ATO also now requires enhanced transfer pricing documentation. Such documentation will now need to comply with a “reasonably arguable position” standard, to mitigate the risk of penalties. This includes transfer pricing documentation being in place by the time Australian tax returns are filed and being regularly updated.
Effects of Australian transfer pricing changes on New Zealand businesses
The Australian transfer pricing developments will significantly increase the compliance burden for New Zealand businesses with Australian operations (i.e., subsidiaries or branches).
Not only will these New Zealand businesses have to comply with the ATO’s “substance” tests for related-party transactions, but also will need to satisfy the enhanced transfer pricing documentation requirements.
The legal form and substance of trans-Tasman transfer pricing arrangements will need to be regularly monitored for mismatches. It will no longer be sufficient to treat the preparation of Australian transfer pricing documentation as a one-off, or irregular, exercise because the ATO now expects annual updates.
A best practice would be to consider the Australian transfer pricing position in tandem with the New Zealand position, so that both are consistent, well supported, and documented.
Read a May 2014 report prepared by the KPMG member firm in New Zealand: Transfer Pricing – strict approach adopted by ATO will increase compliance costs for NZ businesses
Contact a tax professional with KPMG's Global Transfer Pricing Services.