Prepare for your Pillar Two returns or risk hefty penalties…

Provisional transitional approach if MNE groups take reasonable compliance measures

Taxpayers should take immediate steps to comply with the Minimum Tax law to avoid administrative penalties in Sch 1 to the Taxation Administrative Act 1953 (TAA). Relevant provisions include s 286-75 for failing to lodge returns on time (FTL), s 284-75 for making statements that are false and misleading or adopt a position that is not reasonably arguable or failing to give a return, notice or document leading to a default assessment, and s 288-25 for failing to keep records.

Consistent with the OECD’s common understanding on transitional penalty relief, the ATO proposes a “soft-landing” approach in Draft PCG 2025/D3 to the enforcement of lodgment and penalties during the transition period, which covers fiscal years commencing on or before 31 December 2026 and ending on or before 30 June 2028. Remission of penalties and/or suspension of lodgment enforcement actions may be possible if applicable MNE groups act in good faith and take “reasonable measures” to comply with the Minimum Tax law during the transition period. Importantly, the onus is on the applicable MNE groups to demonstrate that they have taken reasonable measures to comply, as the ATO will not provide a blanket penalty concession.

According to Draft PCG 2025/D3, taking reasonable measures include:

• undertaking steps to prepare lodgment of returns in a timely manner
• maintaining adequate records of positions being taken
• proactively engaging with the ATO where delays in lodging are anticipated
• remedying mistakes or errors in a timely manner, including proactively contacting the ATO when the MNE group identifies errors which require amendments to the GIR or CGDMTR.

To illustrate, the following evidence is listed in Draft PCG 2025/D3 as relevant to demonstrating reasonable measures have been taken:

• internal policy or procedure documents, or advice obtained, setting out the Minimum Tax reporting requirements and how these requirements will be met
• a documented plan being in place that incorporates funding and resourcing needs to support implementation
• senior-level approval being sought or obtained for the implementation plan
• new processes and updates to existing processes are documented
• a gap analysis has been undertaken to review existing tax and financial systems to identify shortcomings that need to be addressed to meet the Minimum Tax compliance obligations
• advice has been obtained from external service providers to assist with implementation, if necessary
• modifications to the roles and responsibilities of staff involved in the Minimum Tax compliance process to reflect new responsibilities and required capabilities
• updated internal control testing plans to incorporate key controls
• evidence that relevant information from offshore MNEs has been sought
• records of positions taken, including lodgment exclusions, if applicable.

FTL penalties, lodgment delays and deferrals

An entity could be liable to an FTL penalty of 500 times of the penalty unit (currently A$330) for every 28-day period (or part thereof) the relevant return for the Minimum Tax law is outstanding, up to a maximum of 2,500 times of a penalty unit (see Div 286 of Sch 1 to the TAA). This translates to a maximum FTL penalty of A$825,000 for an entity.

According to the ATO, each entity with a lodgment obligation can be liable to a separate FTL penalty at law for each separate obligation. However, Draft PCG 2025/D3 provides that if reasonable measures have been taken FTL penalties would be typically remitted during the transition period to:

• one FTL penalty for the whole MNE group in respect of CGDMTR lodgment obligations, and
• one FTL penalty for the whole MNE group in respect of GIR lodgment obligations.

Notwithstanding the above transitional approach, the ATO may impose FTL penalties in circumstances where there is a failure to undertake reasonable measures to comply, including where there is poor compliance history, avoidance, fraud and/or evasion.

With regards to lodgment delays:

• applicable MNE groups will be given an opportunity to request remission before an FTL penalty is applied
• full remission would typically be granted to applicable MNE groups who proactively engage with the ATO and provide evidence to demonstrate reasonable measures have been taken
• the ATO acknowledges that unforeseen circumstances such as new legislative amendments may well cause lodgment delays, and
• consideration will be given to the remission grounds set out in Law Administration Practice Statement PS LA 2011/19 Administration of the penalty for failure to lodge on time.

The ATO may extend the lodgment deadline for the AIUTR and DMTR. Although the lodgment deadline for the GIR or FNF may not be extended, the ATO may agree to requests to suspend lodgment enforcement action during the transition period if applicable MNE groups can demonstrate they have taken reasonable measures to comply, especially if they provide supporting information to show reasonable measures have been taken. One should consider the principles in Law Administration Practice Statement PS LA 2011/15 Lodgment obligations, due dates and deferrals.

Penalties for errors or mistakes in forms

The base penalty amount for an entity making a statement that is false or misleading or takes a position that is not reasonably arguable, or failing to give a return, notice or document resulting in a default assessment, is doubled under s 284-90(1C) of Sch 1 to TAA if it arises in relation to the Minimum Tax law.

The following ATO guidance should be considered:

• Law Administration Practice Statement PS LA 2012/4 Administration of the false or misleading statement penalty - where there is no shortfall amount
• Law Administration Practice Statement PS LA 2012/5 Administration of the false or misleading statement penalty - where there is a shortfall amount, and
• Miscellaneous Taxation Ruling MT 2008/1 Penalty relating to statements: meaning of reasonable care, recklessness and intentional disregard.

As part of the ATO’s provisional compliance approach during the transition period:

• penalties would not be typically imposed for mistakes or errors which were a result of unfamiliarity with the rules, or where they were isolated mathematical or transposition errors, and these errors did not reduce the Minimum Tax liability in the current or future year
• penalties would not be typically imposed where mistakes or errors could be attributed to a lack of clarity in the relevant laws and rules, and the MNE group has taken appropriate steps to arrive at the correct interpretation
• the ATO will examine any circumstances leading up to any mistakes or errors that resulted in a reduction of the Minimum Tax liability, before considering if a penalty should be applied.

Other penalties

Taxpayers will generally be provided with an opportunity to engage with the ATO before the ATO imposes any other applicable penalties during the transition period.

Consideration should be given to the ATO’s observations in:

• Miscellaneous Taxation Ruling MT 2008/2 Shortfall penalties: administrative penalty for taking a position that is not reasonably arguable
• Law Administration Practice Statement PS LA 2014/4 Default assessment penalty, and
• Law Administration Practice Statement PS LA 2005/2 Penalty for failure to keep or retain records.

Take immediate steps now

The rules for the Minimum Tax law are complex and voluminous. Taxpayers are strongly urged to take immediate steps to comply.