Entity Setup
Machinations for Multinationals: Expanding GAAR Rules and New Penalties for Royalty Mispricing
Corporate entities with large global turnover in Australia face expanding General Anti-Avoidance Rule (GAAR) scope and new penalties for mischaracterised royalty payments from July 2026.
By NomadicTax Research Team • 7-8 min read • May 15, 2026
## What’s New on Tax Integrity
Australia is introducing reforms aimed at large multinational and high turnover companies:
- From **1 July 2026**, a **new penalty provision** kicks in targeting businesses with **annual global turnover over AU$1 billion** that have been mischaracterising or undervaluing royalty payments (i.e., attempting to lower withholding tax obligations).([ato.gov.au](https://www.ato.gov.au/api/public/content/0-b9b07383-b6e5-4084-90d8-7c446d5a573e?utm_source=openai))
- The Government is also looking to expand the reach of the **General Anti-Avoidance Rule** (GAAR) to catch arrangements that might be structured to avoid tax in abusive or contrived ways. This extended scope is part of the integrity reforms proposed in recent budgets.([ato.gov.au](https://www.ato.gov.au/api/public/content/0-b9b07383-b6e5-4084-90d8-7c446d5a573e?utm_source=openai))
## Who is Affected
- Multinational enterprises (MNEs) with **global turnover > AU$1 billion**. These companies must ensure royalties are properly valued and taxed under withholding tax rules.
- Intermediaries and promoters of avoidance schemes might also come under scrutiny if they advised arrangements now within the expanded GAAR scope.
## What Businesses Should Do
- Conduct an audit of your current royalty and IP arrangements. Ensure any royalty payments are appropriately documented, valued at arm’s length, and disclosure is accurate.
- If you’re paying royalty or intangible-based fees to entities in low or no tax jurisdictions, reassess with transfer pricing and withholding tax specialists to avoid non-compliance.
- Update internal tax risk management frameworks to include new GAAR exposure: arrange for legal/compliance review of potentially contrived structures.
## Example
- **Example**: A tech company with global operations reports royalty payments to a related party in a low-tax jurisdiction. If the royalty is undervalued to reduce withholding tax, the new rules would allow the ATO to impose penalties for that mischaracterisation.
## Risks and Penalties
- Strong penalties will apply for mischaracterisation of royalty payments from July 2026.
- GAAR expansion means more transactions will be tested for tax benefit intent and substance over form. Courts or ATO may employ “reconstruction” or “annihilation” approaches to investigate whether structures would have occurred but for the tax benefit.
## Bottom Line
Companies with significant scale should review their royalty, IP and transfer pricing arrangements now. With new rules in place from **1 July 2026**, the cost of getting royalty valuation or avoidance wrong is increasing. Proactive compliance, documentation and transparency will be your best defence.