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Foreign banks operating through a branch in Australia typically use the safe harbour capital amount under section 820-405, which requires them to determine the part of the bank’s RWAs ‘attributable’ to the Australian branch. Until now, the ATO has not published formal guidance on how to do this, largely relying on branch accounts prepared for APRA reporting purposes.
Through its Justified Trust program, the ATO observed significant inconsistencies in how foreign banks approached RWA attribution. To address these inconsistencies, the ATO has released PCG 2026/D1, the culmination of a process that began with an industry letter in April 2021 and a Discussion Paper issued in April 2024.
The draft PCG introduces the concept of ‘economically significant activities’ as the primary test for RWA attribution, having regard to geographical location. Broadly, the ATO expects RWAs to be attributed to the jurisdiction of the relevant economic activity, including where negotiating loan terms, credit assessment and ongoing risk management is performed. Support functions are generally not economic significant activities.
Where activities span multiple jurisdictions, the RWA may be attributed wholly to the jurisdiction where majority of economically significant activities are performed, or the asset may be split between jurisdictions where the economically significant activities are carried out.
The draft PCG organises taxpayer arrangements into three compliance zones:
| Zone | Risk rating | ATO compliance approach | Implications for Foreign Banks |
|---|---|---|---|
|
Green |
Low risk |
No compliance resources devoted, other than to verify self-assessment. |
Lowest risk if policy and documentation are consistently applied at a transaction level. |
|
Amber
|
Medium risk |
ATO may conduct further analysis to understand the arrangement. |
Likely to attract review questions and data requests. |
|
Red |
High risk |
ATO likely to prioritise resources to review and potgentially audit. |
Methodology inconsistent with ATO expectations. |
To access the green zone, a foreign bank branch must both apply the economically significant activities test and maintain a written attribution policy and supporting documentation. Any transaction-level departure from the policy disqualifies the taxpayer from the green zone.
The amber zone is available for three alternative approaches (attribution by profit location under Subdivision 815-C, APRA guidelines, or loan currency/infrastructure) which the ATO accepts, but inherently this comes at a higher compliance cost and scrutiny. The ATO considers these approaches will generally produce attribution based on where the economically significant activities are undertaken, provided adequate documentation is maintained.
The documentation requirements are more demanding than most banks have historically maintained. In particular:
Relying solely on APRA branch accounts is not sufficient. Equally, transfer pricing documentation prepared for Division 815 purposes will not meet the RWA attribution documentation standard unless it also addresses these specific matters. The inclusion of a ‘policy’ requirement is also more broadly aligned with the ATO’s expectations of a foreign bank’s approach to tax risk management and governance.
While RWA attribution (Division 820) and profit attribution (Division 815) are separate exercises, changes to one can have flow-on effects to the other. Foreign banks that use residual profit split methodologies referencing RWAs or capital allocation as a component or allocation key should review whether those methodologies remain appropriate and are consistent with the functional profile of the Australian branch. Existing transfer pricing documentation may need to be updated to reflect any changes to the bank’s RWA attribution approach arising from the new framework.
PCG 2026/D1 refines the framework proposed in the April 2024 Discussion Paper. Notable changes include:
Our international tax and corporate and transfer pricing specialists can help you assess your position under the new framework, review and prepare your RWA attribution policy and documentation, and consider whether your transfer pricing arrangements require updating. If you would like to discuss how PCG 2026/D1 may affect your business, please contact your Grant Thornton adviser.
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