A strict new Australian approach to transfer pricing will impact New Zealand businesses with Australian operations.
The Australian Tax Office (“ATO”) has indicated that recent law changes allow it to disregard, or reconstruct, related party transactions where the economic substance does not match the legal form. In a nutshell, the test is no longer only whether the transfer price (e.g. an interest rate on a related party loan) is “arms-length”, but also whether the transaction itself is (i.e. whether the company could have borrowed, and how much). The ATO’s threshold here is whether the transaction would have taken place between independent parties.
The ATO has also prescribed enhanced transfer pricing documentation requirements. Documentation will now need to comply with a “reasonably arguable position” standard, to mitigate risk of penalties. This includes documentation being in place by the time Australian tax returns are filed and regularly updated.
These developments will significantly increase the compliance burden for New Zealand businesses with Australian operations (i.e. subsidiaries or branches), from not only having to comply with the ATO’s “substance” tests for related party transactions, but also 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 is also no longer sufficient to treat the preparation of Australian transfer pricing documentation as a one-off, or irregular, exercise as the ATO now expects annual updates.
We consider it best practice to consider the Australian transfer pricing position in tandem with the New Zealand position, to ensure both are consistent, well supported and documented.