Transfer pricing rules in Australia require related companies in different countries to price their dealings with each other the way independent businesses would. The rules apply to goods, services, management fees, royalties, licence fees, software and intercompany loans. Foreign-owned businesses with more than $2 million of international related-party dealings in a year must lodge an international dealings schedule with their tax return. Businesses that cannot support their pricing face ATO adjustments, higher penalties and the risk of the same profit being taxed in two countries.
Australia's transfer pricing rules apply from the first dealing between your foreign-owned Australian entity and an overseas related party. That includes stock supplied by the parent, a management or support fee charged to the Australian entity, software or intellectual property licensed to it, and working capital lent to it. There is no revenue threshold and no grace period for new subsidiaries.
What is transfer pricing?
Transfer pricing is the pricing of transactions between related parties in different countries. The ATO states plainly that Australia's transfer pricing rules exist to prevent the underpayment of tax in Australia, and that they require businesses to price related-party international dealings in line with what independent parties would do in the similar situation.
Transfer pricing covers various transaction types, including:
Goods supplied by an overseas parent or affiliate to an Australian entity
Services, including intercompany management and administrative charges
Royalties and licence fees
Software provided or licensed within the group
Intercompany loans, and the interest charged on them
Guarantees and other financial arrangements between group entities
Pricing must deliver a proper return for the activities carried out in Australia, the Australian assets used, and the risks assumed locally. Pricing that fails that test is what the ATO describes as international profit shifting.
What is the arm's length principle?
The arm's length principle uses the behaviour of independent parties as the benchmark for pricing goods and services and allocating income and expenses between related parties. It is embedded in both Australian domestic law and Australia's double tax agreements, and the ATO confirms that every country in the Organisation for Economic Co-operation and Development (OECD) supports it. The OECD sets the international transfer pricing standards its 38 member countries consider when building their domestic rules, which is why your parent company's tax team at home is working from the same framework as the ATO, but local legislations may have peculiar differences which need expert’s guidance. The methodology and the logic travel. The local thresholds, documentation requirements, timing and penalties do not. Some countries, including Australia, have wider requisites than set in OECD international transfer pricing standards as set in the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations.
Applying the principle means comparing what the business actually did against what an independent party would have done in the same or similar circumstances. Absolute precision is not achievable and is not the standard. Reasonable, evidenced commercial judgement is. Precise charaterisation of the related party dealings, and choosing between the available arm's length pricing methods is the technical heart of the exercise, and the method chosen has to suit the transaction rather than the tax outcome.
Transfer pricing example: a UK parent selling to an Australian subsidiary
This example shows why tax authorities examine related-party pricing. A UK manufacturer makes a product for $50 and sells it to end customers for $100. It establishes an Australian subsidiary to sell into the Australian market.
Transfer price to the Australian subsidiary | Profit retained in the UK | Profit earned in Australia |
$60 | $10 | $40 |
$90 | $40 | $10 |
The group earns the same $50 of total profit under both scenarios. Only the country that gets to tax the profit changes. That is why the ATO scrutinises intercompany prices, and why His Majesty’s Revenue and Customs (HMRC) does the same from the other side of the transaction. The correct transfer price is the one that reflects the work, assets and risk genuinely located in Australia. Transactions with a counterparty in a low tax jurisdiction attracts higher scrutiny as it does not only shift the profit base from one country to another but also may facilitate reduction in overall tax incidence for a multinational enterprise.
Why transfer pricing is harder for foreign-owned businesses
Foreign-owned Australian entities face three difficulties that domestic businesses do not.
Two tax authorities assess the same transaction
A price that satisfies the ATO may create an argument with the tax authority in the parent's home country. Neither authority is obliged to accept the other's view, and unresolved disagreements produce double taxation on the same profit.
Startup losses resemble profit shifting
New Australian subsidiaries commonly run losses while the overseas parent funds operations and charges for support. That pattern seems entirely commercial but requires expert review to determine that the losses from startup phase are borne by the entity which will also enjoy benefits from a thriving business at a later stage. Startup losses also look identical to profit shifting from the outside, which makes contemporaneous evidence essential.
Pricing decisions are made early and rarely revisited
An intercompany loan agreement signed at incorporation, a standard group management charge, or a default distributor margin set by head office will sit in the accounts for years before anyone tests whether it is arm's length.
When do you have to report transfer pricing to the ATO?
Foreign-owned Australian entities with more than $2 million of international related-party dealings in an income year must lodge an international dealings schedule (IDS) with the company tax return.
The IDS requires disclosure of:
The nature and amount of each category of related-party transaction
Details of dealings of a financial nature
Receipts or payments of non-monetary consideration
Details of restructuring events
The arm's length methodologies used
The schedule also asks you to state how much of your dealings are supported by documentation, using the ATO's documentation percentage codes. The ATO uses the IDS as a risk-assessment tool to decide which businesses to examine more closely.
There is also other eligibility criteria set by the ATO where an IDS may be required for your business to be lodged along with the tax return. This includes interest in the foreign entities and branches for Australian residents, transactions of the nature Royalties, and Interest payments to non-resident related parties, etc.
Is transfer pricing documentation mandatory in Australia?
Transfer pricing documentation is not mandatory in Australia. Arm's length pricing is mandatory. Contemporaneous documentation is what protects the business if the ATO disagrees.
The consequence sits in the penalty rules. Where a taxpayer has not prepared records meeting the documentation requirements of Subdivision 284-E of Schedule 1 to the Taxation Administration Act 1953 before lodging the return, the law treats the transfer pricing position as not reasonably arguable, and the base penalty applied to any ATO adjustment increases. Records only count as contemporaneous if they exist when the arrangement is developed or when it is reviewed before the return is prepared. Documentation written after the company tax return is lodged does not restore that protection.
Smaller groups have a legitimate shortcut. The ATO's simplified record-keeping options under PCG 2017/2 allow eligible low-risk businesses to reduce their documentation burden. Where an option is properly elected, ATO officers will not review the covered dealings beyond a check on eligibility. The criteria are specific and designed with a specific intention to not over complicate simpler, less risky and low quantum arrangements of multinational enterprises. The transfer pricing rules apply whether or not an option is used.
How ABN Australia helps with transfer pricing
ABN Australia provides transfer pricing advisory and compliance services in-house, including:
Advisory before transactions begin
We analyse what your foreign-owned Australian entity actually does, select the appropriate transfer pricing method, and set the arm's length outcome. That outcome is often expressed as a target profit margin for the Australian entity rather than a fixed dollar price, in absence of comparable transactions with unrelated parties. Practically, a margin holds up as volumes and costs move, thus requiring less frequent revisions, unless the functional profile of the transacting entities change or commercial business decisions warrant a review.
Monitoring through the year
Transfer pricing compliance is annual, but the transactions happen daily. We review results ahead of lodgement so pricing can be adjusted while adjustment is still simple. It is worthwhile to note that different tax authorities restrict or prohibit a downward adjustment to the taxable income on account of transfer pricing adjustments retrospectively. Thus, an early fix to align with arm’s length conditions can help our clients to avoid potential double taxation.
Documentation and disclosure at lodgement
We prepare the transfer pricing documentation, complete the international dealings schedule, and make sure return disclosures match the factual and technically correct positions..
What you get
A defensible arm's length position for Australian related-party dealings
Penalty protection if the ATO makes an adjustment
Loans, service charges and supply prices set correctly at the outset instead of restructured later
Clean disclosures the parent company's tax team and auditors can rely on
One Australian adviser already handling company secretarial, ASIC and tax obligations, so the group structure never has to be explained twice
Cross-border tax scrutiny is intensifying rather than easing. The ATO continues to expand its risk-assessment data and reporting requirements, and revenue authorities worldwide now share far more information about how multinational groups allocate profit. Any business entering Australia should assume its related-party pricing will be visible.
Setting a defensible transfer price at incorporation costs a fraction of defending an indefensible one three years later. Book a review with our tax and accounting team before your next lodgement. Pricing is far easier to fix before the return goes in than after the ATO asks about it.
Disclaimer: This article provides general information only and should not be relied on as specific tax, legal or financial advice. It’s an introduction to the basic concepts of transfer pricing in Australia, not a comprehensive guide, and it doesn’t take into account your business’s particular circumstances, structure or related-party arrangements. Transfer pricing outcomes depend heavily on the facts of each case, and the rules, thresholds and ATO guidance referred to here can change. Before acting on anything in this article, please speak with a qualified adviser. Our tax and accounting team is happy to help.
Last updated: 12th Oct 2026
About the Author
Rahul Chawla is ABN Australia’s Head of Tax and Associate Director, with more than 15 years of experience advising businesses on Australian and cross-border tax matters. Having held senior roles with EY, KPMG and PwC across Australia, Malaysia and India, Rahul specialises in international tax, transfer pricing, indirect tax, business structuring and tax compliance. He is a Fellow Chartered Accountant, Chartered Global Management Accountant, Associate Chartered Management Accountant and Certified Practising Accountant, with a Bachelor of Laws.
Rahul Chawla
Head of Tax, Associate Director