On Thurs 5 May 2016, the ATO  released Practice Statement Law Administration PS LA 2016/2 – Administration of scheme penalties arising from the application of Subdiv 815-A for income years which started on or after 1 July 2004 and before 1 July 2012 (transition period).

For income years which commenced within the transition period, the Practice Statement explains when liability for a transfer pricing scheme penalty arises, how to apply a scheme penalty, how to assess an entity’s scheme penalty and matters the Commissioner considers in remitting such penalty.

For income years which commenced on or after 1 July 2004 and before 29 June 2013, Subdiv 815-A of the ITAA 1997 applies to bring to tax a “transfer pricing benefit” by empowering the Commissioner to make a determination under s815-30, by increasing taxable income, decreasing tax losses, or decreasing net capital losses, as appropriate. Subdivision 815-A is only relevant to entities to which one of Australia’s tax treaties containing the transfer pricing articles applies; that is, where the entity is a resident of one or both of the contracting states to the tax treaty.

At the same time, the ATO withdrew Taxation Ruling TR 98/16 – Income tax: international transfer pricing – penalty tax guidelines with effect from Thursday 5.5.2016.

[PS LA 2016/2] [LTN 85, 5/5/16]

PS LA 2016/2

2I. In summary, the transfer pricing rules, including relevant scheme penalty provisions, apply as follows:

Transfer Pricing Rules timeline

2J. Moreover, this diagram highlights the transition period applicable to this practice statement.

Section 284-145(2A) Penalty Amount (s284-160(2)) – Taxation Administration Act 1953, First Schedule

25% of the ‘scheme shortfall amount’ or only 10% if it is *reasonably arguable that the adjustment provision does not apply.


Section 284-145(2B) Penalty Amount (s284-160(2)) – Taxation Administration Act 1953, First Schedule

The 25% / 10% regime again unless the shortfall arose as a result of entering into a scheme for the sole or dominant purpose of getting a transfer pricing benefit.