On 26 November 2025, the Australian Taxation Office (ATO) published its Practical Compliance Guideline (PCG) 2025/4: Global and domestic minimum tax lodgment obligations — Transitional approachrelating to the implementation of the Organisation for Economic Co-operation and Development's (OECD) Pillar Two global minimum tax solution in Australia.

The final PCG follows an earlier draft and provides administrative guidance on new lodgment obligations and outlines the ATO's transitional compliance approach to penalties during the transition period. It also helps taxpayers understand expectations for compliance and how to demonstrate "reasonable measures" to mitigate penalties.

This Tax Alert also highlights several other recent updates in Australia's Pillar Two landscape including:

• ATO website guidance on Pillar Two to include new guidance on the Transitional Country-by-Country Reporting (CbCR) Safe Harbor, including Country-by-Country (CbC) Reports prepared using consolidated financial data and the application of the hybrid arbitrage rules to intragroup arrangements within tax consolidated groups
• Draft Legislative Instrument (LI) 2025/D17regarding Australian Pillar Two lodgment exemptions released for consultation
• Practice Statement (PSLA) 2005/2
• updated to include record-keeping requirements for Pillar Two and penalties for not keeping records
• Taxation Ruling (TR) 2006/11 updated to include Pillar Two provisions and a decline to rule provision
• Taxation (Multinational — Global and Domestic Minimum Tax) Amendment (2025 Measures No. 1) Rules 2025 released for consultation
• Taxation (Multinational — Global and Domestic Minimum Tax) (Qualified GloBE Taxes) Determination 2025 registered on the Federal Register of Legislation

Implications for taxpayers

Under Australia's implementation of the OECD Pillar Two rules, the first Pillar Two returns for in-scope multinational enterprise groups (MNE Groups) with a December year-end are due by 30 June 2026, which is 18 months after the end of the FY2024 fiscal year. MNE Groups must act now to consider the impact of these recent Pillar Two developments on their organizations, including whether certain entities are eligible for an exemption from lodging Pillar Two returns in Australia and if they can elect to apply the Transitional CbCR Safe Harbor (TSH), as this may streamline the compliance process and help mitigate risks.

PCG 2025/4 Global and domestic minimum tax lodgment obligations — transitional approach published

The final PCG 2025/4, published on 26 November 2025, outlines the ATO's transitional approach to penalties and expectations in relation to the four new Pillar Two lodgment obligations introduced for applicable MNE Groups, as well as the ATO's approach to failure to lodge penalties and statement penalties during the transition period.

The four new lodgment obligations are the (1) Australian DMT Tax Return (DMTR), (2) Australian IIR/UTPR Tax Return (AIUTR), (3) Global anti-Base Erosion (GloBE) Information Return (GIR) and (4) foreign lodgment notification for situations in which the GIR has been filed overseas. The ATO plans to consolidate the DMTR, the AIUTR and the foreign notification form into a single Combined Global and Domestic Minimum Tax Return (CGDMTR) for simplicity, while the GIR remains a standalone form.

The final PCG remains largely unchanged from the draft PCG (PCG 2025/D3). The transitional period, consistent with OECD guidance, applies to fiscal years starting on or before 31 December 2026 and ending on or before 30 June 2028. During this time, the ATO will adopt a supportive transitional compliance approach to penalties if entities act in good faith and take reasonable measures to understand and comply with their obligations. However, failure to take such measures may result in penalties.

To demonstrate reasonable measures, MNE Groups should implement strong governance and planning frameworks, including documented compliance policies, implementation plans with resourcing considerations and senior-level approval. Operational readiness is also critical, including updating processes, conducting system gap analyses and adjusting roles to support compliance. Early engagement with the ATO and maintaining robust records will help address potential risks.

After the transition period, the ATO will no longer apply a facilitative transitional approach, so businesses must ensure their systems are ready to capture the necessary Pillar Two data and apply the Pillar Two rules correctly to meet their compliance obligations.

ATO website guidance on Pillar Two includes new webpages on Transitional CbCR Safe Harbor

On 22 October 2025, the ATO updated its website guidance regarding the TSH. The revised guidance provides further background on the TSH eligibility criteria, including confirmation that an MNE Group must specifically elect for the TSH to apply within its GIR. It also outlines the requirements for accessing the TSH, notably that the relevant jurisdiction must not be subject to any specific exclusions from the TSH.

The ATO's guidance incorporates a dedicated section addressing the data sources permissible when applying the TSH under Pillar Two. Typically, this is information derived from a qualified CbC Report. Under Section 8-35 of the Pillar Two rules, a "Qualified CbC Report" is defined as a CbC Report prepared for a particular jurisdiction and filed using Qualified Financial Statements (QFSs). QFSs refer to accounts or statements that satisfy the standards set out in Section 8-70 of Australia's Pillar Two rules. When amounts are sourced from a Qualified CbC Report or QFS, the ATO guidance confirms that they must directly reflect the reported figures, with no adjustments permitted unless expressly allowed.

ATO website guidance on CbC Reports prepared using consolidated financial data

The ATO website guidance acknowledges that in Australia, CbC Reports are permitted to be prepared using consolidated financial data at the jurisdictional level if the CbCR parent is the head entity of a tax consolidated group, the consolidated data is reported for each jurisdiction in Table 1 of the CbC Report and the consolidation approach is consistently used across fiscal years.

In a CbC Report prepared using consolidated financial data, items of income and expense that arise from intra-group transactions between entities are eliminated if the entities are resident in the same jurisdiction for CbCR purposes.

The guidance states that foreign-headquartered MNEs that file their CbC Report in another jurisdiction instead of Australia may also prepare their CbC Reports using consolidated data at the jurisdictional level if the filing jurisdiction permits the use of consolidated data.

The ATO guidance stipulates that, if CbC Reports are prepared on a consolidated jurisdictional basis in accordance with the filing jurisdiction's requirements, the QFS for the purposes of the TSH are those prepared on a consolidated basis for the relevant jurisdiction, subject to compliance with all other conditions outlined in Section 8-70 of the Australian Pillar Two rules.

ATO website guidance on intragroup arrangements within tax-consolidated groups

The ATO guidance also covers the application of hybrid arbitrage arrangements within an Australian tax-consolidated group (TCG) and the impact associated with TSH. Specifically, the guidance relates to whether a deduction/non-inclusion arrangement under Section 8-120 could arise with respect to certain transactions occurring within an Australian TCG, such as intra-group financing arrangements, if the CbC data is reported on an aggregated basis. This is because an expense will be reflected in the borrower's stand-alone qualified financial statements, but the counterparty is not reasonably expected to have a commensurate increase in its taxable income over the life of the arrangement because the arrangement is disregarded for Australian local tax purposes under the Single Entity Rule.

If the hybrid arbitrage arrangement rules were to apply to such arrangements, the expenses associated with the arrangement would be excluded and therefore increase the MNE Group's profit or loss before income tax for Australia, which may result in a lower effective tax rate (ETR) under the Simplified ETR test.

The ATO acknowledges that if the MNE Group's CbC report is prepared using consolidated data at the jurisdictional level, there would be no expense (or income) relating to the intra-group arrangement between members of the TCG. In these circumstances, the hybrid arbitrage arrangement rules should not have any practical operation.

Notwithstanding the technical position set out above, the ATO will not apply compliance resources to an intra-group financing arrangement to test the application of Section 8-120 (and, consequently, Section 8-110) if:

• The MNE Group prepares its qualified CbC Report for Australia on an aggregated basis.
• An intra-group arrangement involving the provision of credit or making of an investment by an investor occurs between members of an Australian TCG or multiple entry consolidated (MEC) group and results in an expense in the qualified financial statements.
• The net effect of the intra-group financing arrangement on the profit or loss before income tax for Australia for the fiscal year in the qualified CbC Report is the same as it would have been had the qualified CbC Report been prepared and filed using consolidated data for the jurisdiction.

The proposed compliance approach is welcomed and should eliminate unnecessary compliance burdens that may arise if such arrangements resulted in the Simplified ETR test not being satisfied.

Draft LI 2025/D17 regarding Australian Pillar Two lodgment exemptions released for consultation

On 27 August 2025, the ATO released Draft Legislative Instrument (LI) 2025/D17 Taxation Administration (Exemptions from Requirement to Lodge Australian IIR/UTPR tax return and Australian DMT tax return) Determination 2025.

The draft LI outlines exemptions for certain types of entities from lodging the DMTR and AIUTR, specifically aimed at reducing unnecessary compliance for entities that would only ever report a nil liability under Australia's Pillar Two rules. However, the LI does not exempt these entities from the lodgment of the GIR if local lodgment is required, or from a foreign lodgment notification if the GIR is lodged in a foreign jurisdiction.

The categories of those exempt from lodging the DMTR include: (1) certain subsidiary members of TCGs or MEC groups; (2) entities that are not GloBE located in Australia other than a stateless Constituent Entity created in Australia or a GloBE Main Entity of a GloBE Permanent Establishment located in Australia; (3) certain GloBE securitization entities; and (4) certain flow-through entities that cannot have an Australian DMT tax liability.

Given that the AIUTR covers both Australian IIR tax and Australian UTPR tax liabilities, entities will only be exempt from lodging an AIUTR for a fiscal year under specific circumstances in which both these liabilities will always be nil.

The following entities cannot have an Australian IIR tax liability and may therefore be exempt from filing an AIUTR:

• Entities that are not parent entities (i.e., entities that do not hold ownership interests in another entity)
• Parent entities that are not GloBE located in Australia
• Parent entities that are GloBE located in Australia, but only hold ownership interests in other entities or GloBE Joint Ventures that are themselves GloBE located in Australia
• Parent entities that are GloBE located in Australia, but cannot have an Australian IIR liability greater than zero because a higher-tier parent entity is required to apply a qualified IIR

However, to benefit from the exemption, these entities must also fall into one of the following UTPR exemption categories:

• Certain subsidiary members of TCGs or MEC groups
• Entities that are not GloBE located in Australia other than a GloBE Main Entity of a GloBE Permanent Establishment located in Australia
• Entities that would have an Australian UTPR tax liability of zero, due to the application of a qualified IIR or the transitional UTPR safe harbor
• Certain GloBE investment entities, insurance investment entities and GloBE securitization entities

Consultation on the Draft LI 2025/D17 closed on 24 September 2025. The ATO is considering the submissions and working to finalize the LI. Once it is released in final, it must be registered on the Federal Register of Legislation.

PSLA 2005/2 updated to include recordkeeping requirements for Pillar Two

On 20 August 2025, the ATO updated PSLA 2005/2 to include guidance on the record-keeping obligations for entities subject to minimum tax law, including the IIR, UTPR and DMT. Entities must now retain comprehensive records for at least eight years, ensuring that all relevant transactions, elections, calculations and determinations are clearly documented and readily accessible in English.

Failure to comply with these recordkeeping requirements may result in significant penalties. The ATO may also impose additional penalties if poor recordkeeping leads to incorrect tax reporting. However, the ATO has discretion to remit penalties in cases in which entities have made genuine attempts to comply, or if records were lost or destroyed due to circumstances beyond their control and have been reconstructed.

These updates reinforce the importance of robust documentation and proactive compliance for all entities affected by the new minimum tax regime.

TR 2006/11 updated to include private rulings on Pillar Two and a decline to rule provision

On 15 October 2025, TR 2006/11 was updated to include guidance on private rulings regarding the new minimum tax provisions, including the IIR, UTPR and DMT. Although taxpayers can generally seek private rulings on how these rules apply to their circumstances, the ATO may decline to rule in certain cases.

Specifically, the Commissioner may refuse to issue a private ruling if the request involves interpretation of foreign tax law, relies on hypothetical or incomplete facts or relates to matters subject to evolving OECD or international guidance. Examples include scenarios in which the government is yet to incorporate OECD guidance into domestic law, or the ruling would require consideration of how other jurisdictions apply their own minimum tax regimes.

As a result, taxpayers should be aware that private rulings may not be available for complex cross-border or uncertain Pillar Two scenarios. The ATO's approach reinforces the importance of maintaining robust documentation and compliance processes for the IIR, UTPR and DMT, even if a private ruling cannot be obtained.

Taxation (Multinational — Global and Domestic Minimum Tax) Amendment (2025 Measures No.1) Rules 2025 (Amending Rules) released for consultation

On 27 October 2025, the Australian Treasury released Amending Rules as a draft legislative instrument as part of the Government's periodic update to the Amending Rules. The Explanatory Statement (ES) to the instrument indicates that these minor periodic changes, along with future minor changes, must maintain consistency with the OECD Model Rules and ensure that Australia achieves and preserves "qualified" status under the OECD/GloBE framework.

The amendments include:

• The Equity Investment Inclusion Election has been introduced to allow certain accounting gains, profits, and losses associated with equity investments to be included in GloBE Income. This change also introduces modified treatment for qualified flow-through ownership interests and proportional amortization method cases, reflecting a more tailored approach for specific investment structures.
• The limited circumstances under which securitization entities may be subject to UTPR Top-up Tax have been clarified to help ensure that that both employee and tangible asset values of securitization entities are appropriately considered when allocating UTPR Top-up Tax liabilities.
• Minor technical corrections have been made to the DMT rules, such as replacing references to "final Australian withholding tax" with simply "withholding tax," aligning terminology more closely with the OECD Model Rules.
• The amendments clarify that regulated mutual insurance companies may elect to be treated as tax transparent, provided they meet specific requirements.

Consultation on the draft legislative instrument closed on 21 November 2025. The legislative instrument will come into effect the day after its registration on the Federal Register of Legislation. These changes all apply retrospectively from 1 January 2024 consistent with the OECD's coordinated approach.

Taxation (Multinational — Global and Domestic Minimum Tax) (Qualified GloBE Taxes) Determination 2025 registered

The Qualified GloBE Taxes Determination was registered on 26 August 2025 and tabled in Parliament on 27 August 2025. The Determination sets out the jurisdictions that have a Qualified IIR and Qualified DMT (QDMTT), along with jurisdictions with a QDMTT that has qualifying QDMTT Safe Harbor status.

The recognition of this qualified status is important for determining the order in which the Pillar Two Rules apply. For example, in the case of a jurisdiction that has QDMTT Safe Harbor status, the application of the IIR or UTPR of other jurisdictions is prevented by deeming the Top-up Tax payable in other countries under these rules to be zero. This means the MNE Group only needs to undertake one calculation with respect to the QDMTT Safe Harbor jurisdiction.

The Determination is intended to align with the OECD Central Record of Legislation with Transitional Qualified Status which reflects those jurisdictions with transitional qualified status based on self-certification, pending full OECD peer review.

It is expected that the Determination will be periodically updated to include new jurisdictions based on the OECD Central Record.

Act now — first Pillar Two filings due in Australia by 30 June 2026

The introduction of PCG 2025/4 and updated ATO guidance marks a significant step forward in the administration of Australia's Pillar Two rules. MNE Groups face new compliance obligations, more stringent recordkeeping standards and a transitional penalty regime.

The ATO has also indicated that it will continue to increase its engagement with stakeholders through the release of additional guidance, information sharing sessions and the development of the necessary compliance infrastructure, including new forms and guidance.

To respond effectively, MNE Groups must take a structured approach to Pillar Two compliance. This starts with a comprehensive assessment of how the rules apply to their operations in Australia and globally, followed by identifying any available exemptions or safe harbor provisions that may reduce complexity and risk. It is equally important to ensure that compliance processes and recordkeeping systems are robust, technology-enabled and meet ATO expectations.

By acting now, organizations can transform Pillar Two compliance from a regulatory burden into an opportunity to improve systems, processes and governance.