Pillar Two income taxes. The instrument defines Pillar Two legislation as tax law enacted or substantively enacted to implement the OECD Pillar Two model rules, including qualified domestic minimum top‑up taxes (paragraph 27A). These rules aim to ensure that large multinational groups pay a minimum 15 per cent tax on excess profit in each jurisdiction where they operate (BC3). The top‑up tax is typically imposed on the ultimate parent entity on the profits of subsidiaries taxed below 15 per cent (BC3(c)). The rules apply to groups with consolidated revenue exceeding €750 million in at least two of the preceding four fiscal years (BC4). Income taxes arising from such legislation are termed Pillar Two income taxes.

Mandatory temporary exception. The core accounting concept is a mandatory exception from recognising deferred tax assets and liabilities that would otherwise arise from the implementation of Pillar Two model rules. The exception is temporary: it applies only for as long as the Board maintains it. The Basis for Conclusions does not specify a sunset date, but the term ‘temporary’ indicates the Board expects to revisit the issue when the IASB completes its work on deferred tax accounting for the model rules. The exception is applied by all entities within the scope of AASB 112,both Tier 1 and Tier 2,without any election.

Disclosure objective. The existing disclosure objective in AASB 112 paragraph 176 requires an entity to disclose information enabling users to evaluate the nature and financial effect of current and deferred tax consequences of recognised transactions and other events, including enactment or substantive enactment of tax rates and laws. The instrument clarifies that ‘other events’ includes Pillar Two legislation (paragraph 176, as amended). This ensures that, even before mandatory application, an entity must disclose the effect of enacted or substantively enacted Pillar Two legislation if it is material.

Exception disclosure. An entity applying the mandatory exception must state that it has done so. This alerts users that the entity’s balance sheet does not include any deferred tax amounts related to Pillar Two top‑up taxes.

Current tax expense disclosure. When Pillar Two legislation is in effect, the entity must disclose its current tax expense (income) relating to Pillar Two income taxes separately. The Board considered this disclosure useful for understanding the magnitude of Pillar Two income taxes relative to overall tax expense, and not costly to prepare because the entity would already be recognising current tax in those circumstances (BC19(b)).

Tier 2 simplified disclosures. Tier 2 entities apply AASB 1060 for general purpose financial statements. Appendix A of AASB 112 previously exempted Tier 2 entities from paragraphs 79‑88D of that standard (the detailed disclosure requirements). The instrument amends Appendix A to also exempt them from the new Pillar Two disclosure requirements in AASB 112 (paragraph 8 and amended AusA1). Instead, AASB 1060 is amended to impose equivalent disclosures: the fact that the exception has been applied, and the current tax expense related to Pillar Two income taxes. The Board considered that the model rules could materially affect Tier 2 entities, especially subsidiaries of large multinational groups (BC8).

Effective date and retrospective application. The instrument applies for annual periods beginning on or after 1 January 2023 that end on or after 30 September 2023. This means an entity with a 30 June 2023 year‑end would not be required to apply the amendments in that period (the period ended before 30 September 2023), but could elect to do so early. An entity with a 31 December 2023 year‑end would apply them for the first time. The instrument commences legally on 29 September 2023, which is the date of making.

The amendments affect any entity that prepares general purpose financial statements under Australian Accounting Standards and that is within the scope of AASB 112. This includes all reporting entities that apply Tier 1 (full IFRS) or Tier 2 (simplified disclosures) requirements. Practically, the most directly affected entities are large multinational groups with consolidated revenue exceeding €750 million in at least two of the preceding four fiscal years, because the Pillar Two model rules target those groups (BC4). However, the accounting exception and disclosures also apply to any entity that could become subject to Pillar Two income taxes,for example, a subsidiary of such a group that has its own standalone financial statements. The instrument does not limit the exception to entities within the revenue threshold; it applies to all entities that may have to account for Pillar Two income taxes. Tier 2 entities are explicitly in scope, and the Board noted that subsidiaries of large multinational groups may be affected even if they do not individually meet the revenue threshold (BC8). Accordingly, compliance professionals, auditors, and financial statement preparers for both public and private companies that have an international tax profile need to assess whether Pillar Two legislation has been enacted or substantively enacted in any jurisdiction where the entity operates. The amendments also affect users of financial statements,investors, analysts, and creditors,who rely on deferred tax disclosures to understand future tax cash flows. Under the exception, deferred tax assets and liabilities for Pillar Two will be absent from the balance sheet, potentially affecting deferred tax balances, effective tax rate reconciliations, and net asset calculations. Users must be aware that the exception is temporary and that future accounting may change.

Entities have a duty to apply the mandatory temporary exception when recognising deferred taxes. They do not have a right to recognise deferred tax assets or liabilities for Pillar Two income taxes, even if recognition would otherwise be required under AASB 112. This is a mandatory prohibition, not an accounting policy choice (paragraph 4A, referenced at 178A). The duty is to not recognise such deferred tax items.

Entities also have a duty to disclose that they have applied the exception (paragraph 178A). This disclosure must be made in all periods for which the exception is applied, even if no Pillar Two income taxes have arisen yet. In periods when Pillar Two legislation is in effect, entities must separately disclose the amount of current tax expense (income) related to Pillar Two income taxes (paragraph 178B). For Tier 2 entities, equivalent duties arise under AASB 1060 as amended.

The instrument does not impose duties on entities that are not within scope of Pillar Two legislation,there is no requirement to make a negative statement. However, the clarification to paragraph 176 of AASB 112 means that entities must disclose the nature and financial effect of enacted or substantively enacted Pillar Two legislation as part of their general disclosure of tax consequences. This duty applies regardless of whether the entity is within the revenue threshold, if the legislation is material to the entity’s financial statements.

Entities have the right to early apply the amendments. The instrument permits earlier application for any period before the mandatory effective date, including periods ending before 30 September 2023 (BC25). However, if an entity elects early application, it must apply all the amendments,the exception and the disclosures,consistently.

Auditors have a duty to verify that entities have complied with the exception and disclosures. The absence of deferred tax assets or liabilities for Pillar Two should be consistent with the entity’s assertion that it has applied the exception.

The instrument itself does not prescribe monetary penalties or criminal sanctions. It is a legislative instrument made by the Australian Accounting Standards Board under section 334 of the Corporations Act 2001. Non‑compliance with the accounting standards leads to financial statements that do not give a true and fair view and do not comply with the Corporations Act. The primary enforcement mechanism is through the audit process and regulatory oversight by the Australian Securities and Investments Commission (ASIC). If an entity fails to apply the mandatory exception or omits the required disclosures, its financial statements would be non‑compliant. This could result in ASIC issuing directions, seeking court orders for revised financial statements, or taking administrative action. Directors and officers may face liability for defective financial reports under the Corporations Act, including potential civil penalties for misleading statements. The instrument places a high burden on preparers because the exception is mandatory,there is no room for judgment. If an entity incorrectly recognises deferred taxes for Pillar Two, the error would likely be material and require restatement. Similarly, if an entity fails to disclose the fact that it applied the exception, users are deprived of knowledge about the accounting policy. The instrument’s Basis for Conclusions notes that the exception is temporary, so entities must monitor future IASB and AASB deliberations. A change in the exception could require retrospective adjustment, and failure to track developments could lead to non‑compliance in later periods. The instrument does not provide for any transitional relief beyond the effective date provisions; entities must apply the exception and disclosures from the date of mandatory application.

The instrument directly amends AASB 112 and AASB 1060. It must be read together with those standards. The amendments do not affect the recognition of current tax liabilities for Pillar Two income taxes; those are recognised under the general principles of AASB 112 when the tax liability arises. The exception only concerns deferred tax accounting. The instrument interacts with the Corporations Act 2001 in that financial statements must comply with accounting standards. It also interacts with the Taxation Administration Act 1953 and the Income Tax Assessment Act 1997 to the extent that Pillar Two legislation is enacted in Australia. The instrument does not impose tax obligations; it merely prescribes how those obligations are accounted for. Because the exception is temporary, entities must also consider the potential future implications once the IASB finalises permanent accounting for Pillar Two deferred taxes. Currently, the IFRS for SMEs Standard is also being amended (BC15), and the IASB has issued an exposure draft proposing similar amendments. The AASB has decided to align with that approach for Tier 2 entities. The instrument also interacts with foreign tax laws. If Pillar Two legislation is enacted in multiple jurisdictions, an entity may have to assess which legislation is substantively enacted for accounting purposes. The instrument does not change the definition of substantive enactment from AASB 112. For entities that apply AASB 1060, the amendments ensure that Tier 2 entities are not required to comply with the full AASB 112 disclosure requirements but must comply with the simplified disclosures. There is also interaction with the AASB’s standard‑setting frameworks (BC11‑BC12), which guided the Board’s decision to require Tier 2 disclosures despite no recognition and measurement difference. The instrument does not override any other legislation; it supplements the existing accounting framework.

The instrument amends AASB 112 (as amended by AASB 2023-2) and AASB 1060. AASB 2023-2, issued in June 2023, introduced the mandatory temporary exception and Tier 1 disclosure requirements for Pillar Two model rules (BC5). That standard amended paragraphs 79‑88D of AASB 112, among others. The present instrument builds on AASB 2023‑2 by extending the Tier 2 disclosure requirements. The Board issued Exposure Draft ED 325 in July 2023 proposing to amend Appendix A of AASB 112 and AASB 1060 (BC9). Two comment letters were received, both generally supportive (BC21). One stakeholder questioned the need to clarify paragraph 176, suggesting the clarification was unnecessary (BC22). The Board decided to generalise the wording and add Pillar Two legislation as an example (BC23). The instrument was made on 29 September 2023 and commences on that date for legal purposes. The effective date for mandatory application is annual periods beginning on or after 1 January 2023 that end on or after 30 September 2023. This two‑pronged approach avoids mandatory retrospective application to periods ending before 30 September 2023 (BC25). Earlier application is permitted. The instrument does not amend any other standards. The Basis for Conclusions notes that the Board considered feedback and made minimal changes from ED 325 (BC20). The instrument has no sunset clause, but the exception is described as temporary, meaning future amendment is expected when the IASB completes its project on Pillar Two deferred taxes. The AASB will monitor international developments and may issue further amendments.

As the instrument is very recent (commenced 29 September 2023), there is no litigation history reported in the source material. The source does not mention any court cases or tribunal decisions concerning the amendments. Because the instrument addresses accounting for a novel tax regime that is still being implemented globally, disputes are unlikely until Pillar Two legislation is enacted and entities’ financial statements are examined by auditors and regulators. Potential areas of future litigation could include: whether an entity correctly determined that Pillar Two legislation was substantively enacted for accounting purposes; whether the exception was applied appropriately to all relevant deferred tax items; and whether disclosures were adequate. The instrument itself does not provide a private right of action, but non‑compliance may lead to regulatory enforcement proceedings under the Corporations Act. There is no litigation history involving the underlying AASB 112 paragraphs that precede the amendments, as those were not the subject of reported disputes. Stakeholders should monitor ASIC’s surveillance of financial reports for any enforcement actions related to Pillar Two disclosures. The Basis for Conclusions notes that the Board received only two comment letters on ED 325, and neither raised litigation risk or legal challenges. The instrument is a legislative instrument and could be challenged in the Administrative Appeals Tribunal or the Federal Court on procedural grounds, but no such challenge is reported.

Several features could catch preparers off guard. First, the mandatory exception is absolute: entities cannot elect to recognise deferred tax assets or liabilities for Pillar Two income taxes even if they believe it would provide more useful information. This contrasts with some other accounting standards that contain optional exceptions. The exception applies to all temporary differences arising from Pillar Two legislation, including those that would otherwise meet the recognition criteria for deferred tax assets (such as tax credits). Entities must be careful not to inadvertently include Pillar Two items in deferred tax balances.

Second, the disclosure that the exception has been applied is required even if no Pillar Two income taxes have yet arisen and no legislation is enacted. The entity must state that it has applied the exception. This may lead to a generic disclosure in many entities’ financial statements, but it must be specific to Pillar Two.

Third, the separate disclosure of current tax expense (income) related to Pillar Two income taxes is required only when the legislation is in effect. However, the clarification to paragraph 176 means that entities must also consider disclosing the effect of enacted or substantively enacted Pillar Two legislation that is not yet in effect, if it could be material to users. This creates a disclosure obligation even before any tax is payable.

Fourth, Tier 2 entities face a trap: the exemption in Appendix A of AASB 112 is extended, so Tier 2 entities do not apply the new AASB 112 disclosure paragraphs. But they must ensure that AASB 1060 has been amended to require the same disclosures. If an entity relies on the exemption without checking whether AASB 1060 has been updated, it might omit the required disclosures. The instrument amends AASB 1060 simultaneously, so that should be applied.

Fifth, the effective date can be confusing. For a year ending 30 September 2023, the amendments are mandatory for that period? The instrument says annual periods beginning on or after 1 January 2023 that end on or after 30 September 2023. A period from 1 October 2022 to 30 September 2023 begins before 1 January 2023, so it is not caught. But a period from 1 January 2023 to 30 September 2023 ends on 30 September 2023, so it is caught. Entities with calendar year ends (31 December 2023) are caught. Those with June year ends (30 June 2023) are not caught because the period ends before 30 September 2023. However, early application is permitted. Entities may need to carefully determine whether they are within the mandatory scope, especially if they have changed reporting periods.

Sixth, the instrument is based on the OECD model rules, which may be transposed differently in various jurisdictions. The accounting exception applies only to Pillar Two legislation as defined. If a jurisdiction enacts a domestic minimum top‑up tax that is not described as Pillar Two but meets the definition, it is included. The definition is broad (paragraph 27A). Entities must monitor all jurisdictions where they operate to identify qualifying legislation.

Seventh, the exception is temporary. The Basis for Conclusions does not specify its duration. Entities must prepare for future amendment. This creates uncertainty: will deferred taxes be recognised retrospectively? The IASB may require recognition on transition. Entities should assess the potential impact of a future reversal of the exception on their balance sheets and establish systems to capture the necessary data.

Eighth, the disclosure requirements apply to both current and deferred tax. But because deferred tax is not recognised, the current tax disclosure becomes more important. If an entity fails to separately disclose Pillar Two current tax expense, users cannot distinguish it from other current tax. The disclosure must be separate, not aggregated.

Compliance requires a methodical approach. Entity‑level teams should first determine whether Pillar Two legislation is in effect or has been enacted or substantively enacted in any jurisdiction where the entity operates. This involves monitoring tax law developments across countries where the entity has subsidiaries or permanent establishments. If legislation is in effect, the entity must compute and recognise current tax liabilities under AASB 112 for Pillar Two top‑up taxes. For deferred tax, the entity must apply the mandatory exception: no deferred tax assets or liabilities are recognised for temporary differences arising from Pillar Two. This includes not recognising deferred tax assets for tax credits that would otherwise be recognised. The entity should document its application of the exception and ensure that its deferred tax reconciliation and effective tax rate calculation exclude Pillar Two items.

Second, the entity must prepare the required disclosures. In the notes to the financial statements, the entity must include a statement that it has applied the exception to recognising and disclosing deferred tax assets and liabilities related to Pillar Two income taxes (paragraph 178A). This statement should be unambiguous. If Pillar Two legislation is in effect, the entity must disclose the amount of current tax expense (income) related to Pillar Two income taxes separately. This can be presented as a line item within the current tax expense note. The entity should also consider whether the general disclosure objective in AASB 112 paragraph 176 (as clarified) requires additional narrative about the nature and potential financial effect of enacted or substantively enacted Pillar Two legislation that is not yet in effect. For example, if legislation is enacted but applies from a future date, the entity should disclose that fact and its expected impact, if material.

Third, Tier 2 entities must ensure their disclosures comply with AASB 1060 as amended. The instrument amends AASB 1060 to include equivalent requirements. Tier 2 entities should not rely on the exemption in AASB 112 Appendix A without also confirming that AASB 1060 has been updated. The disclosure that the exception has been applied and the separate current tax disclosure are both required.

Fourth, entities should review their accounting policies and update them to reflect the mandatory exception. The policy note should state that the entity does not recognise deferred tax assets or liabilities for Pillar Two income taxes in accordance with the mandatory exception. If the entity has previously disclosed a policy of recognising deferred taxes for all temporary differences, that policy must be amended to carve out Pillar Two items.

Fifth, internal controls should be established to capture Pillar Two‑related current tax amounts. This may require coordination between tax and finance functions. The separate current tax disclosure must be accurate and auditable.

Sixth, the entity should consider the effective date. For most entities, the amendments are mandatory for annual periods beginning on or after 1 January 2023 that end on or after 30 September 2023. If the entity’s period is not within that scope, it may choose to early apply. Early application must be applied consistently to all periods presented. If early application is elected, the entity should disclose that fact and apply the exception and disclosures for all comparative periods. The entity must also consider the impact on the financial report for the earliest period presented if it early applies to a period ending before 30 September 2023, as the instrument permits.

Seventh, disclosure should be reviewed by auditors. Auditors will need to verify that the exception has been applied appropriately and that disclosures are complete. The entity should prepare supporting documentation, including a list of jurisdictions with Pillar Two legislation, the status of enactment, and calculations of current tax expense.

Eighth, entities should monitor future developments. The exception is temporary, and the IASB and AASB may issue further amendments. Entities should assess the potential impact of a future requirement to recognise deferred taxes retroactively. Data on temporary differences that would have been recognised should be gathered now, even if not recorded, to avoid a costly retrospective reconstruction later. This is not required by the instrument, but prudent compliance suggests it.