Australia Pillar Two lodgement exemptions finalised

Australian Pillar Two tax return exemption rules finalised

The Australian Taxation Office (ATO), on 22 December 2025, finalised the rules relating to the exemptions from filing Australian Pillar Two returns, being the domestic minimum tax (DMT) return and Australian Income Inclusion Rule (IIR)/ Undertaxed Profits Rule (UTPR) returns.

These rules are set out in a legislative instrument, Taxation Administration (Exemptions from Requirement to Lodge Australian IIR/UTPR Tax Return and Australian DMT Tax Return) Determination 2025 (the Determination).

The Determination was released in draft in August 2025.

Apart from minor clarifying changes, the filing exemptions in the finalised Determination are the same as the draft.

Pillar Two tax returns: key exemptions for Australia

The key exemptions from lodging Pillar Two tax returns in Australia are summarised below, with the minor changes in the finalised Determination noted.

Australian DMT exemptions
Australian IIR/UTPR exemptions

Exemption from the need to file an Australian DMT return applies to the following entities:

Group Entities that are subsidiary members of tax consolidated groups and multiple entry consolidated (MEC) groups. The head company of the tax consolidated group or MEC group will file an Australian DMT Return.
The Explanatory Statement (ES) provides an example of a Group Entity of one Multinational Enterprise (MNE) Group being acquired by another MNE Group. The entity will prima facie have two DMT tax return obligations for the Fiscal Year. It will need to determine if it meets the conditions for exemption for each DMT return obligation separately. For example, it may be a subsidiary member of a tax consolidated group in its capacity as a Constituent Entity (CE) of one MNE Group but not the other, and so it may meet the conditions for exemption for one DMT return but not the other.
Certain GloBE Joint Ventures (GloBE JVs) and GloBE JV Subsidiaries – two exemptions are provided here. The first is for GloBE JV Subsidiaries that are subsidiary members of a tax consolidated group or MEC group. The second exemption is for GloBE JVs or GloBE JV Subsidiaries that are not located in Australia, are not Flow-through Entities created in Australia, and are not Main Entities in respect of an Australian permanent establishment (PE), with all three criteria needing to be satisfied.
Certain Group Entities that are not located in Australia – for example, foreign GloBE Entities (other than those with Australian PEs) or Stateless Entities, but not if they are Stateless Flow-Through Entities created in Australia such as an Australian trust (these may be eligible for an exemption in (e) below).

The ES provides an example of an Ultimate Parent Entity (UPE) that is located in a foreign jurisdiction and may have subsidiaries located in Australia. The UPE itself would be exempt from lodging an Australian DMT tax return. However, if the UPE was also a Main Entity in respect of an Australian PE, then that exemption would not apply.

GloBE Securitisation Entities – unless the only CEs of the MNE Group located in Australia are Securitisation Entities.
Certain Group Entities or GloBE JV Subsidiaries that are Flow-through Entities – the exemption is available where the Financial Accounting Net Income or Loss has been reduced to zero under the GloBE Flow-Through Entity rules, or it benefits from the Transitional Safe Harbour, except where the Flow-Through Entity is a Australian Reverse Hybrid Entity, an Australian PE or an Australian UPE (as such entities could have a top-up tax obligation). The exemption also does not apply to partial Flow-Through Entities or any other entities with a top-up tax amount.

This exemption is good news for Australian trusts and partnerships that are fiscally transparent in both Australia and the owner jurisdiction. The ES notes that the exemption may also apply to other unincorporated entities that are neither trusts or partnerships but which fall within the definition of "Entity" in the Pillar Two rules (whilst not explicitly stating this, we consider this should include unincorporated JVs).

However, the ES notes that this exemption is not available to GloBE JVs as these entities are treated as the UPE of a separate MNE Group and may have a DMT top-up tax amount.

The exemption also does not apply where the Group Entity would have been the GloBE UPE if any Controlling Interest in the Group Entity held by a GloBE Excluded Entity had been disregarded.

The ES notes that Group Entities will only be exempt from lodging an Australian IIR/UTPR tax return for a Fiscal Year under specific circumstances in which neither a liability to Australian IIR or UTPR top-up tax can arise. That is, for an exemption to apply, the Group Entity needs to satisfy the conditions relating to the IIR as well as the conditions relating to the UTPR, both outlined below.

In relation to the IIR, the exemption applies to a Group Entity where it is:

not a Parent Entity located in Australia (e.g. Parent Entities which are Stateless Constituent Entities and Parent Entities located in foreign jurisdictions);
is a Parent Entity located in Australia and all the CEs, GloBE JVs and GloBE JV Subsidiaries of the MNE Group in which it holds a Direct Ownership Interest or an Indirect Ownership Interest are located in Australia. This is because only the Australian DMT would produce a top-up tax amount and with no foreign subsidiaries the IIR could not apply; or
is a Parent Entity located in Australia and to which the ordering rule applies, such that a higher-tier Parent Entity applies a Qualified IIR in its jurisdiction and the Australian Intermediate Parent Entity does not have an IIR Top-up Tax Amount. Note that if the Australian Intermediate Parent Entity is a Partially-owned Parent Entity (POPE) then the exemption will not apply unless there is a higher-tier POPE that applies a Qualified IIR.

In relation to the UTPR, the exemption applies to a Group Entity where it is any of the following:

a subsidiary member of a tax consolidated group or MEC group (given the deeming rules for tax consolidated groups which deem the head company to be liable for the UTPR top-up tax of the group). The head company will need to file the Australian IIR/UTPR Return;
not a GloBE Entity located in Australia or with an Australian PE;
a GloBE Investment Entity or Insurance Investment Entity (as such entities cannot be distributed an amount of UTPR Top-up Tax);
a GloBE Securitisation Entity(unless the only CEs of the MNE Group in Australia are Securitisation Entities);
the Fiscal Year starts on or before 31 December 2024. This is a new criterion in the Determination, given there is no UTPR liability in these circumstances before the UTPR is in effect; or
the total UTPR top-up tax amount for the MNE Group is zero as i) a Qualifying IIR applies upstream to switch off Australia's UTPR taxing rights, or ii) the Transitional UTPR Safe Harbour applies (making a number of assumptions set out in the Determination).

We note that GloBE JVs and JV Subsidiaries are not required to file an Australian IIR/UTPR return under the existing legislation.

The filing exemptions provided by the ATO are reasonable overall, given the approach of the ATO to only provide an exemption in circumstances where there can never be a top-up tax liability

Alia Lum

Partner, ASPAC Tax Policy Lead

KPMG Australia

KPMG summary

The ATO has now finalised all its planned binding guidance ahead of the first Pillar Two filing deadlines taking place this year.

As outlined above, there are no major changes to the ATO's position in the final Determination.

One helpful clarification regarding the IIR/UTPR return is that it will not be required in the first year of Pillar Two filings (when the UTPR is not yet in application) for Australian CEs that do not have an Australian IIR obligation.

For example, Australian subsidiary companies or branches with a foreign UPE would typically only require an Australian DMT return and Foreign Lodgement notification in that first year (e.g. year ended 31 December 2024 for a December year-end).

The filing exemptions provided by the ATO are reasonable overall, given the approach of the ATO to only provide an exemption in circumstances where there can never be a top-up tax liability.

In relation to the Australian IIR/UTPR return, once the UTPR applies we expect that an exception from filing will be very limited for Group Entities located in Australia given the need to satisfy both the IIR and UTPR criteria.

Where there is an Australian filing requirement, we note that the compliance will be typically reduced through the ATO's approach of a combined return which includes both the DMT and IIR/UTPR returns and asks for minimal disclosures.

With the first Pillar Two filings due 30 June 2026 for 31 December year ends, multinational groups should be in the process of finalising their Pillar Two positions, confirming which calculation and compliance requirements will be prepared by head office and which will be prepared locally, and engaging advisors early.