Tax as a governance risk: what Australia’s enforcement shift means for boards

Australia’s tax landscape is undergoing a structural shift. What is changing is not simply enforcement settings or technical rules, but the role tax now plays in governance, disclosure and foreign investment scrutiny. Legislative reform, a more assertive Australian Taxation Office (ATO) and heightened sensitivity to where value is created and allocated are converging to raise the stakes for boards and executive management. Tax is no longer a background technical function – it has become a visible proxy for economic contribution, commercial substance and risk appetite, with implications that extend well beyond revenue outcomes.

For multinational groups and large Australian enterprises, recent developments – from a broadened non‑resident capital gains tax (NRCGT) regime to tighter interest deductibility under thin capitalisation – signal a clear policy tilt. Enforcement is more proactive, engagement expectations are higher, and tolerance for structures perceived to misalign with economic reality is narrowing. In this environment, the differentiator is not compliance alone, but the quality of board-level oversight of tax risk, governance frameworks and external narratives as scrutiny and enforcement intensity continue to rise.

The most significant shift is not only the enactment of the OECD Pillar Two regime – which requires large multinational groups with global revenue of at least €750 million to pay a minimum effective tax rate of 15% in every country where they operate – but the broader transparency obligations now imposed on multinationals. These measures collectively reflect a move away from tax outcomes being assessed solely through regulatory processes, and towards tax positions being exposed to public and stakeholder scrutiny.

Country‑by‑Country (CbC) reporting, including public CbC, requires detailed disclosure of jurisdictional profit allocations, related‑party revenue splits and explanations of effective tax rates – effectively compelling organisations to explain any divergence between the tax actually paid and what might be expected based on headline tax rates. While increased transparency is a clear policy objective, there is a legitimate question as to whether this level of mandated disclosure creates real risks of misinterpretation or oversimplification, particularly where complex commercial or structural factors are involved. These disclosures may also place multinational groups at a competitive disadvantage relative to domestic peers or groups headquartered in jurisdictions without comparable public reporting obligations. In that context, boards should ensure that external tax narratives are deliberate, consistent and defensible – aligned with underlying positions, supported by robust transfer pricing evidence, and embedded within clear governance frameworks capable of withstanding regulatory and public scrutiny.

Foreign investment, tax and regulatory signalling: tightening fiscal scrutiny

Two developments in particular illustrate a broader tightening of the fiscal and regulatory settings applying to foreign investment into Australia, with implications extending beyond tax outcomes to capital structuring and investment signalling. 

First, proposed changes to the NRCGT regime are designed to widen the definition of ‘taxable Australian real property’, capturing a broader set of interests with an economic connection to Australian land. These rules determine when foreign investors are subject to Australian capital gains tax on the sale of interests connected to Australian land and natural resources. The exposure draft process will be critical in shaping the final contours of the regime, particularly in light of ongoing appeals in YTL (and potentially Newmont) regarding the definition of ‘taxable Australian real property’ and the meaning of ‘real property’. The unprecedented nature of the proposed 20-year retrospective change has understandably heightened concern among foreign investors about predictability and policy stability. 

A similar dynamic is evident in the thin capitalisation regime, which was substantially amended in 2024 and is now under active review, with a stated focus on limiting the extent to which profits generated in Australia can be shifted offshore through related-party debt arrangements. While further refinement is anticipated, the current settings have created practical distortions – in particular disadvantaging foreign capital and foreign-backed consortia relative to purely domestic bidders competing for the same assets, even where borrowing is sourced from the same third-party Australian lenders. 

Taken together, these reforms send a clear, if challenging, signal that Australia is tightening the fiscal terms applying to foreign capital. Investors will need to factor these developments into acquisition structures, financing arrangements and transaction risk assessments, particularly in sectors already subject to heightened FIRB and regulatory scrutiny. The 2026-27 Federal Budget reinforces this trajectory. Measures directed at multinational groups and large taxpayers – including expanded integrity settings, reforms aimed at limiting profit‑shifting and protecting the domestic tax base, and additional ATO funding to extend and intensify compliance activity – underscore a clear policy intent to align tax outcomes more closely with economic activity in Australia.

For boards, the significance of these measures lies not only in their technical impact, but in the consistency of direction. The Budget signals that scrutiny of multinationals and cross‑border arrangements will remain sustained and increasingly coordinated, heightening the importance of defensible tax positions, robust governance frameworks and clear alignment between tax outcomes and broader corporate narratives. That said, for agile and well-advised investors, this period of reform also presents opportunity. Those who engage early, invest in robust tax positions and governance, and anticipate regulatory sensitivities will be well positioned to navigate uncertainty and maintain confidence as the landscape continues to evolve. 

ATO enforcement and litigation strategy: narrowing tolerance for tax risk

One of the more instructive features of the current environment is the growing tension between judicial guidance, legislative intent and the ATO’s administrative and enforcement posture. While the courts have continued to recognise the legitimacy of tax planning within the bounds of the law, the ATO’s approach reflects a materially lower tolerance for structuring perceived to lack commercial substance.

Recent decisions – including the High Court’s decision in PepsiCo, the Federal Court in Mylan and the Full Federal Court in Morton – highlight that the mere presence of a tax benefit does not, of itself, establish a dominant tax‑avoidance purpose. These cases underscore that lawful tax outcomes remain available where arrangements are commercially grounded and properly implemented.

Against that backdrop, the legislative and administrative response has been to progressively narrow the space in which such structuring can occur. The ATO has shown an increased willingness to deploy Part IVA and the Diverted Profits Tax (DPT), complemented by a steady pipeline of Taxpayer Alerts and Practical Compliance Guidelines signalling a sustained uplift in compliance intensity. From property development arrangements (TA 2026/1, draft PCG 2026/D2) to captive MITs (TA 2025/1) and capital management transactions (including Hicks and Bendell), the commonality is the ATO’s focus on commercial substance – whether structures reflect a genuine economic reality or exist primarily to achieve tax outcomes. 

The ATO’s enforcement stance is increasingly backed by a readiness to litigate. The Coca-Cola matter, expected to be heard this year in the DPT context, alongside ongoing treaty-shopping disputes involving withholding tax, illustrate an appetite to test positions where the ATO considers the facts warrant it. In parallel, marketing hubs, related‑party financing and intellectual property structures remain front‑line risk areas, with the ATO increasingly pursuing primary transfer pricing arguments, often alongside alternative Part IVA or DPT positions.

This approach is not confined to any single sector. Multinational and domestic groups across superannuation, technology, life sciences, infrastructure, energy, mining and financial services can expect continued scrutiny under the ATO’s ongoing assurance and risk-based programs, including where those programs intersect with FIRB oversight. For boards, the implication is clear: tax risk now sits squarely within the organisation’s broader enforcement, dispute and governance strategy, rather than as a purely technical or reactive function.

State tax enforcement: workforce, investor and reputational risk

State taxes remain an active and increasingly contested area, with enforcement intensity continuing to rise across multiple fronts. In particular, the employee-contractor distinction remains a central focus for State Revenue Offices nationwide, affecting not only traditional contracting industries but also the gig economy and, increasingly, white-collar roles. Recent litigation underscores the breadth of this scrutiny and the associated payroll tax exposure for organisations operating at scale.

At the same time, foreign surcharge duties and land tax regimes continue to apply across major States, including to foreign investors with exposure to critical industries such as housing. While there are limited pathways for relief to apply, these are often dependent on discretionary exceptions or non-reviewable ex gratia arrangements, creating uncertainty and reducing predictability for long‑term investment and structuring decisions.

For boards, state taxes present a distinct but related layer of risk – one that can crystallise quickly, attract retrospective assessments and intersect with workforce strategy, transaction execution and reputational considerations. As enforcement activity intensifies, proactive assessment and governance of state tax exposure are becoming as important as managing federal tax settings.

Enforcement outcomes and dispute trends: signals for boards

The practical impact of these developments is already evident in enforcement outcomes. The ATO's Public Groups Disputes and Settlements Report provides a useful snapshot of where regulatory focus is concentrated and how disputes are resolving in practice. 70% of income tax audits are directed at global profit shifting, and 72% of settlements occurred before or during the audit phase, with a further 17% resolved at the objection stage and only 11% proceeding to litigation. Total settlement variance stands at 36%, meaning the ATO secured approximately 64% of the disputed amount it considered payable. 

These figures point to two parallel trends. While a significant proportion of matters are resolving short of litigation, the ATO has demonstrated a clear commitment and willingness to litigate where it considers the position warrants it. Over the next 12 to 24 months, organisations should expect sustained and heightened ATO assurance and compliance activity, with particular scrutiny of governance frameworks, data quality, technical positions and the documentation supporting key decisions. For boards, the data reinforces that early engagement, robust documentation and disciplined governance are central to managing tax enforcement risk in the current environment.

Governing tax risk in an era of heightened enforcement

In this environment, effective oversight of tax risk has become a core governance responsibility for boards and executive leadership. This requires more than awareness of individual reforms. It demands active engagement with legal and tax advisers to interpret evolving guidance, assess implications for existing and proposed tax positions, and understand how enforcement and transparency settings interact with broader business strategy. Equally important is maintaining strong governance and escalation frameworks to ensure that tax teams are appropriately resourced and emerging issues are identified and addressed early. 

Organisations that invest in this capability now will not only mitigate regulatory and dispute risk, but will also be better positioned to respond confidently to future reform and identify legitimate structuring opportunities, as the landscape continues to shift. The message is clear: in an era of heightened enforcement, greater transparency and rapid regulatory change, a proactive and well-governed approach to tax risk is no longer optional – it is a strategic necessity.