AI and Data Privacy Laws : What Startups Need to Know

As Artificial Intelligence (AI) continues to transform industries such as healthcare, finance, and retail, its intersection with data privacy laws has become a crucial concern for startups in Australia. AI systems often process vast amounts of personal data, creating potential privacy risks and legal challenges.

To remain compliant and avoid penalties, startups must understand and adhere to Australian privacy laws, particularly the Privacy Act 1988 (Cth) (Act) and the Australian Privacy Principles (APPs).

This guide explains what Australian startups need to know about AI and data privacy, and how to stay compliant under the law.

Why AI and Data Privacy Matter

AI systems often process vast amounts of personal information, including sensitive data like health records or financial information. Mismanaging this data can:

• Breach the Privacy Act 1988 (Cth)

• Lead to fines, investigations, or enforcement action from the Office of the Australian Information Commissioner (OAIC)

• Damage your company’s reputation and investor confidence

For example, a health tech startup using AI to diagnose patients must ensure all data is collected, processed, and stored lawfully or risk regulatory scrutiny and serious penalties.

Compliance with the Australian Privacy Principles (APPs) in AI Systems

The Australian Privacy Principles (APPs) provide a structured approach for handling personal information. They cover all aspects of data management, including collection, usage, disclosure, and security. AI-driven systems must comply with these principles to ensure responsible and ethical handling of data.

Key Obligations for AI-Driven Systems

1. Privacy by Design (APP 1)
Startups should integrate privacy considerations into the design of their AI systems from the very beginning. This involves:

• Managing personal and sensitive information openly and transparently.

• Implementing practices, procedures, and systems that ensure compliance with the APPs.

2. Consent (APP 3)
When required under the APPs, AI systems must obtain informed consent before collecting or processing personal information. This means:

• Making users aware of the types of data collected.

• Clearly stating the purposes of data collection.

• Explaining users’ rights regarding their personal information.

Note: APP 3 specifically requires consent for sensitive information, while collection of other personal information must still be lawful and necessary.

3. Data Security (APP 11)
Startups must take reasonable steps to protect personal data from misuse, loss, or unauthorised access. AI systems can be particularly vulnerable, so robust security measures—such as encryption and access controls—are essential.

4. Transparency in Automated Decision-Making (APP 1 and 5)
AI systems that make automated decisions affecting an individual’s rights or interests, such as in credit scoring or hiring, must provide transparency:

• Individuals should understand how decisions are made.

• They should have opportunities to challenge or seek clarification about automated decisions.

Case Study: ABC’s AI Facial Recognition Controversy

In 2021, Clearview AI, Inc. faced widespread scrutiny for using AI-driven facial recognition technology to analyse attendees at an event without explicit consent. This case highlighted the ethical and legal concerns around AI deployment:

• Lack of informed consent breached privacy laws.

• The controversy emphasised the need for clear AI policies and transparent practices.

The incident serves as a warning for startups that deploying AI without proper privacy safeguards can attract regulatory action and public criticism.

Notifiable Data Breaches (NDB) Scheme under AI and Data Privacy Laws

The Notifiable Data Breaches (NDB) Scheme under the Privacy Act 1988 (Cth) mandates eligible organisations to report “eligible data breaches” that could cause serious harm to the OAIC and affected individuals as soon as practicable.

Legal Obligations for startups Using AI

• Timely Reporting: If an AI-driven system is involved in a data breach, startups must notify the Office of the Australian Information Commissioner (OAIC) and affected individuals as soon as practicable.

• Risk Assessment: Organisations must assess whether the breach could cause serious harm. If so, immediate notification is required. Serious harm can include physical, psychological, emotional, financial or reputational harm.

• Remedial Action: If remedial action is taken before any harm is likely to occur, notification to the OAIC may not be required (ensure that this assessment is documented).

Case Study: AI-Powered Data Breach at Qantas

On 30 June 2025, Qantas was involved in a data breach after cybercriminals targeted one of Qantas’s offshore IT call centres, enabling the cybercriminals to access a third-party system where Qantas’s information was stored. The incident underscored the importance of AI governance and robust data protection measures, particularly in high-risk sectors such as aviation and financial services.

Cross-Border Data Flows & APP 8 Compliance

Startups utilising offshore AI providers or cloud-based solutions must comply with APP 8, which governs cross-border data transfers. Data sent to countries with weaker privacy protections exposes starups to legal risks.

Compliance Measures for AI Providers

• Implement contractual safeguards when transferring data outside Australia.

• Establish data processing agreements to ensure compliance with Australian privacy laws.

• Conduct regular audits of data handling practices.

• Use data minimisation and encryption strategies.

• Strengthen access control and authentication procedures.

Failure to comply with APP 8 can lead to legal action and reputational damage, making it crucial for startups to assess the security of cross-border data transfers.

OAIC Enforcement & Upcoming Privacy Law Reforms

The Office of the Australian Information Commissioner (OAIC) actively regulates startups misusing AI technology. As highlighted before, in 2020, it investigated Clearview AI for scraping images from social media without consent, resulting in the company’s ban from operating in Australia.

Key Privacy Law Reforms (2024 & Beyond)

Recent amendments to Australia’s privacy laws have granted the OAIC increased enforcement powers, including:

• Higher financial penalties for serious breaches:

  • Individuals – Up to $2.5 million for serious interference with privacy.

  • Corporations – The greater of: $50 million, three times the value of the benefit obtained, or 30% of adjusted turnover during the breach period.

• Financial penalties for breaches of privacy:

  • Individuals – Up to $660,000 for interference with privacy.

  • Corporations – Up to $3.3 million.

• Enhanced transparency for automated-decision making: Startups will be required to disclose AI-driven decision-making processes affecting individuals’ rights. (Effective Date – 10 December 2026, 2-year transition period).

• Mandatory data breach reporting: Organisations must continue to provide timely and detailed notifications to individuals and the OAIC under the existing NDB scheme.

• OAIC’s expanded investigative and enforcement powers: Greater scope to conduct assessments, require documents and information, and issue infringement notices for non-compliance.

AI Compliance and Legal Risks

Startups adopting AI technology must implement rigorous data protection processes. Non-compliance can result in:

• Regulatory investigations by the OAIC

• Severe financial penalties

• Reputational damage

• Loss of stakeholder trust

Key Takeaways

AI offers startups incredible opportunities to innovate and scale—but also comes with significant legal and ethical responsibilities. Compliance with Australia’s privacy laws is not optional: it is essential for maintaining trust with customers, investors, and partners.

By staying informed on evolving AI and data privacy requirements, startups can:

• Mitigate legal and regulatory risks

• Avoid substantial financial penalties

• Build AI systems that are both effective and ethically responsible

The future of AI in Australia is promising, but only startups that prioritise privacy compliance will be able to fully benefit while safeguarding their reputation and operations.

Get in touch with Allied Legal today to ensure your AI-driven operations remain legally compliant and ethically sound.