Transfer pricing for related party transactions: A guide for Australian businesses

Published 5 January 2025

Table of contents

• What is transfer pricing and why does it matter?
• When do transfer pricing rules apply to your business?
• Understanding arm's length pricing
• Common arm's length pricing methods
• Follow the ATO’s rules for transfer pricing documentation
• Domestic vs. international transfer pricing rules
• How to get your transfer pricing right
• Manage related party transactions with Xero
• FAQs on transfer pricing

Key takeaways

• Transfer pricing rules ensure that transactions between related parties are priced as if they were between independent businesses.
• Businesses with $50 million or more in turnover and international dealings must maintain formal transfer pricing documentation. Smaller businesses should also keep clear records to justify their pricing.
• The ATO monitors transfer pricing compliance for both domestic and international transactions, so even smaller businesses need to know and follow the rules.
• To comply with the rules, demonstrate good governance, and to avoid penalties, maintain consistent transfer pricing policies and accurate documentation.

What is transfer pricing and why does it matter?

Transfer pricing sets the prices that businesses with multiple entities charge one another when trading - for example, if one business sold office supplies to another under the same corporate group.

Transfer pricing also decides how profits are divided between locations. For example, if one entity produces goods and another entity sells them overseas, transfer pricing determines how much profit each entity reports and is taxed on.

In Australia, the Australian Tax Office (ATO) monitors international and domestic transfer pricing for corporate groups. Transactions between businesses (called ‘related parties’) must be transparent, fair, and reflect market conditions and prices. This is the ‘arm’s length’ pricing principle.

Transfer pricing doesn't just affect large multinational businesses – related party transactions can take place across multi-entity structures of all sizes.

Without careful planning of transfer pricing policies and ensuring your related parties meet the arms length principle, the ATO can penalise businesses in various ways, such as:

• Issuing fines
• Making tax adjustments
• Auditing the business

When do transfer pricing rules apply to your business?

Transfer pricing rules can apply whenever Australian businesses are trading between their businesses or entities – also called ‘related parties.’

Common trading situations between businesses where transfer pricing can apply include:

• Cross-border transactions – when your Australian entity deals with a related party across states or internationally, such as a parent, subsidiary, or affiliate business
• Domestic related party transactions – sales and services exchanged between related parties inside Australia
• Group reorganisations or restructuring – if you restructure asset ownership, centralise services, or create new entities in your group, you may need to set arm’s length prices for transferred assets or services
• Internal financing – loans, guarantees, or interest arrangements between related parties may require transfer pricing adjustments
• Intangible assets, licenses and royalties – the use or transfer of intellectual property (IP), trademarks, patents, or brand contributions across entities must be priced consistently with market value
• Support, management or administrative services – centralised services (like HR, IT, and Marketing) within the group require fair pricing and markups

Simplified transfer pricing for small or low-risk taxpayers

If your corporate group’s total turnover is under $50 million across all related parties, and it meets other eligibility criteria, it may qualify for simplified transfer pricing requirements to help minimise costs.

But even if your total revenue is below $50 million, you must still be able to show that your transactions comply with arm’s length principles.

Understanding arm's length pricing

Arm’s length pricing ensures transactions between related entities reflect what independent businesses would charge in the open market. Getting this right helps businesses avoid ATO adjustments and penalties.

Typically, the steps businesses take to establish arm’s length prices would include:

• Analysing the functions, assets, and risks faced for each entity
• Identifying similar or comparable independent transactions in the open market
• Selecting a pricing method that best suits the needs of the group
• Documenting the decisions made and the data used to support them

Common arm's length pricing methods

Here are some typical methods companies will apply when setting arm’s length pricing.

Comparable uncontrolled price (CUP)

CUP compares the prices charged in an ‘uncontrolled transaction’ –- the open market – to the prices charged in a comparable transaction between your entities (called a ‘controlled transaction’)

Example: If Branch A sold widgets to Branch B in the same corporate group, the CUP method expects Business A to charge the same price it would charge a regular customer for those widgets.

Resale price

This method uses resale prices charged to an independent party and subtract an appropriate gross margin to set the arm’s length purchase price

Example: Business A buys goods from Business B to resell. The resale price method sets the purchase price by subtracting a normal or expected profit from the price set for regular customers.

Cost plus

Cost plus adds an appropriate profit margin to the supplier’s costs to determine appropriate arm’s length prices

Example: When Business A provides a service to Business B, the cost plus method adds a fair profit on top of the service costs.

Other methods for complex transactions

Highly integrated or unique arrangements, such as intangibles or intra-group services, may use transactional profit-based methods like the profit split or the transactional net margin method.

Multi-entity groups will also factor in differences like scale, geography, or risk to their pricing. A business in a high-rent city may charge higher prices than a branch in a regional area.

Companies must document their reasoning, assumptions, and data supporting these pricing decisions and adjustments.

Common related party transactions that may need pricing review

Typically there are six categories of related-party transactions that you’ll need to review.

Sales of goods or services between entities

This includes supplying goods like raw materials, components, or finished products to a related company, or services like distribution or marketing support.

The sale price or service fee must faithfully represent an independent market rate for comparable goods or services.

Management fees and service charges

Your multi-entity business probably shares certain central functions, such as accounting, IT, HR, or marketing. These costs are typically charged out as management fees or service charges.

You should set prices for these fees that reflect the actual benefits received and allocate them appropriately with a reasonable markup.

Loans between related parties

Financing between related parties such as loans and guarantees – and related transactions, like interest payments – must also reflect arm’s length conditions.

To make sure lending conditions are fair and represent market conditions, review your interest rates, repayment conditions, and security arrangements against what an independent lender would offer under similar circumstances.

Intellectual property and royalty arrangements

Royalties and licence fees for trademarks, patents, or other IP need to be consistent with their value to the business. This includes cost sharing for research and development.

Market data that you can use to benchmark these transactions can be hard to find, so these transactions can attract closer ATO scrutiny.

Property leases within your group

When one of your entities leases property to another, the rental rate should reflect current market conditions for similar properties in the same or similar locations. The same principle applies if you share office space or facilities between your related parties.

Cost-sharing arrangements

Cost sharing often means dividing overhead or head-office expenses across multiple entities.

Ensure cost allocations follow a consistent, transparent method that clearly sets out the benefits to each entity. If the ATO decides your cost-sharing arrangements don’t adequately reflect market conditions, they may adjust these allocations which could affect your taxable income.

Follow the ATO’s rules for transfer pricing documentation

Clearly document your transfer pricing and arm’s length policies to avoid penalties and setbacks with the ATO.

Make sure to:

• Prepare documentation at the time the transaction occurs, not afterwards, and keep it securely filed
• Identify what each party does, the assets they use, and the risks they take to support your pricing and documentation
• Explain your process and rationale for the transfer pricing methods you choose, and show comparable market data to support your calculations in line with ATO guidance
• Disclose assumptions and rationale for any adjustments you make
• Show how your price fits within an acceptable range or benchmark to comply with the arm’s length principle
• Provide evidence such as contracts, invoices, intercompany agreements, and internal memos

Simplified record-keeping options

The ATO offers simplified record-keeping options so 'low-risk' businesses can meet Australian transfer pricing obligations with less paperwork.

There are seven ways businesses may qualify for simplified record-keeping under the Practical Compliance Guidelines 2017/2:

• Small taxpayers
• Distributors
• Low-value-adding intra-group services
• Low-level inbound loans
• Materiality
• Technical services
• Low-level outbound loans

If your business group qualifies for simplified record keeping under one or more of these categories, the ATO largely agrees not to review the covered transactions. Make sure you disclose relevant options in your International Dealings Schedule.

Transactions like royalty or IP deals, capital transactions and financing are excluded from simplified rules, so you’ll need full transfer pricing documentation for them.

Penalties and protection

If your transfer pricing documentation doesn’t adequately support your pricing decisions, the ATO can penalise you up to 50% (or more) of any underpaid tax amounts.

Even when simplified options are applied, you must still meet general record-keeping obligations under the Income Tax Assessment Act 1936 (ITAA).

Domestic vs international transfer pricing rules

When operating within Australia and across borders, it’s important to understand how domestic and international transfer pricing rules differ and interact.

These differences affect how related-party transactions are priced, documented, and reviewed by the ATO, and help you avoid double taxation or compliance issues.

International transfer pricing rules

Australia’s international transfer pricing rules are outlined in Division 815 of the ITAA and align broadly with the OECD guidelines for transfer pricing and tax treaties.

Here are some key provisions of Australia’s rules:

• The ATO can adjust profits of Australian entities if their transactions with foreign related parties don’t reflect arm’s length pricing and result in a tax benefit.
• Larger multinational groups must provide country-by-country reporting and detailed transfer pricing documentation, and share information with other tax authorities through international treaties.
• Businesses can use an advanced pricing arrangement to confirm their transfer pricing policies with the ATO and reduce the risk of audits.

Domestic (within Australia) transfer pricing rules

Australia doesn’t have standalone domestic transfer pricing rules. However, you should keep up-to-date records of your transfer pricing methodologies you’ve used and supporting evidence for domestic transactions in case the ATO asks to review them.

Overlaps, interactions and compliance risks

Be mindful of transfer pricing overlaps and interactions.

• Transfer pricing often interacts with other tax regimes. Always check local tax laws when operating across jurisdictions.
• Mispricing interest or financial transactions could trigger both transfer pricing adjustments and thin capitalisation or debt-limitation rules.
• Transfer pricing policies must be consistent across all jurisdictions and avoid double adjustments or conflicting treatment.

Multi-entity businesses with simpler structures and modest cross-border dealings may be eligible for simplified record-keeping options, but should still be alert to these risks to avoid unexpected adjustments and tax implications.

How to get your transfer pricing right

To make sure your transfer pricing is compliant with ATO rules, apply transfer pricing and arm’s length policies in real business situations by following a clear, practical process that manages both compliance and commercial risk to your business.

1. Identify your related party transactions

Start with a risk assessment for your business. Identify the related party transactions that exist within your group. These could include loans, service fees, intellectual property, or goods and asset transfers.

2. Set and document arm's length prices you can justify to the ATO

Once you understand your transactions, determine how to set reasonable pricing.

• Choose a transfer pricing method: Pick a pricing method that best fits your available data and comparability.
• Benchmark and adjust: Use external databases or published market data as supporting evidence for your pricing. If you can’t find exact comparable data, adjust for differences such as size, geography, or risk.
• Check your pricing: Use measures like the median or interquartile range to ensure your price is within a defendable arm’s length range.
• Document at the time of the transactions: Record your assumptions, methods, and reasoning when the transaction occurs. Keep contracts, invoices, internal memos, and calculations for at least 5 years.
• Review annually: Regularly compare actual results with your benchmarks. If pricing has drifted, make post-year adjustments or disclosures where needed.

3. Decide when to get professional advice

Transfer pricing is complex, especially when transactions involve financing, royalties, or intangible assets. It’s a good idea to get professional accounting advice when planning and setting transfer pricing policies to make sure you stay compliant.

A specialist can help you develop or review your transfer pricing documentation, model different scenarios, and assess audit risk.

4. Prepare for ATO review

The ATO expects that you’ve taken reasonable care in setting and documenting transfer prices. If your pricing position is challenged, strong documentation is your best defence.

Be audit ready by:

• Having contemporaneous documentation that explains how you set your prices and how they reflect the arm’s length principle
• Showing in your documentation that the pricing reflects real commercial value, not just tax outcomes
• Keeping and maintaining all supporting evidence
• Reviewing and updating your pricing approach every year to align with business changes

5. Decide if an advance pricing arrangement (APA) could reduce audit risk

An APA is a formal agreement with the ATO that sets out how you will apply your transfer pricing in the future. It can relate to one or more transactions and typically covers a period of 3–5 years.

For businesses with significant or complex cross-border transactions, an APA can provide certainty and reduce audit risk. This can mean greater predictability, fewer disputes, and a better relationship with the ATO.

Smaller or lower-risk entities could instead consider a pre-lodgment discussion or the ATO’s simplified record-keeping options.

Manage related party transactions with Xero

Xero’s accounting software helps simplify your domestic and international transfer pricing with powerful features that make compliance easier.

• Tag related-party transactions – Flag all intercompany dealings to make reporting and audits easier
• Clear, compliant invoicing – Issue detailed invoices with references, reducing errors and ensuring transparency
• Integrated transfer pricing records – Keep pricing worksheets, agreements, and supporting analyses alongside your ledger for easy access
• Automated reconciliations and dashboards – Spot anomalies, monitor balances, and track compliance with minimal manual effort

Xero integrates related-party transactions into your accounting workflow, helping you create a smooth, hassle-free process when preparing financial statements and documentation, responding to audits, or adjusting pricing. It’s transfer pricing made easy.

Ready to start? Try Xero for free

FAQs on transfer pricing

If you’re running a business with related entities or family trusts, transfer pricing rules may apply to you. Here are some answers to common questions about transfer pricing documentation and compliance.

Do I need transfer pricing documentation if my revenue is under $50 million?

Not necessarily – but you still need to be able to show that your related party transactions are priced at arm’s length.

The ATO has a simplified record‑keeping option for groups with turnover under $50 million and low-risk international dealings. But keep clear records to demonstrate how you determined your prices in case the ATO reviews your arrangements.

Can I charge whatever I want between my own companies?

Not quite. Even if you own both entities, the ATO expects the prices between them to reflect what independent parties would charge for the same goods or services.

Setting charges too high or too low could shift profits unfairly and attract the ATO’s scrutiny. So make sure you base your pricing policy on market evidence, and apply it consistently.

What happens if the ATO disagrees with my transfer pricing?

If the ATO reviews your pricing and decides your prices don’t reflect arm’s length conditions, it can make a transfer pricing adjustment – effectively changing your taxable income.

This could increase your tax bill, create double taxation (especially for international transactions), and potentially lead to penalties or interest charges.

How often do I need to update my transfer-pricing documentation?

You should update your documentation each income year, or whenever your business structure, transaction types, or pricing methods change.

This is because the ATO expects your pricing and tax documentation to be current and relevant, meaning it should reflect your decisions, data, and economic circumstances for that financial year.

Do transfer pricing rules apply to transactions with family trusts?

Yes. Related-party transactions between a company and a family trust, or between multiple family entities, still need to meet arm’s length standards.

This ensures profits and deductions are fairly allocated, even within family owned structures. Keep your documentation to help show you’ve applied reasonable commercial terms.

What is an advance pricing agreement and do I need one?

An advance pricing agreement (APA) is a formal arrangement between your business and the ATO that sets out how transfer pricing will be applied to your related party transactions for a set period.

APAs are generally used by larger or more complex businesses with significant cross-border dealings. If your operations are smaller, you may not need one, but you can still use similar principles to document your approach and stay compliant.