Volkswagen will face fines of tens of millions of dollars if a "defeat device" that rigged pollution tests was used on cars sold in Australia.
The Australian Competition and Consumer Commission is investigating Volkswagen. It said the embattled German carmaker faced a maximum fine of $1.1 million per breach if it used cheating software on cars sold locally. 
Volkswagen sales accounted for 6 per cent of the Australian market this year so far, with 36,928 cars sold between   January and   July, according to analysis from PPB Advisory.
"Using defeat devices is specifically prohibited under the Australian Design Rules, which are picked up as Australian Consumer Law (ACL) mandatory safety standards," ACCC chairman Rod Simms said. "As the enforcer of the ACL, the ACCC can take action against any corporation that has breached mandatory standards."
It could be the biggest fine in Australia's automotive history, after the tax office hit Toyota with a $247 million bill in 2010. Toyota Australia was fined for a practice known as transfer pricing, when a multinational carmaker moves profits between countries by changing the prices of vehicles and parts, breaching taxation laws in Australia.
Volkswagen's Australian subsidiary has been unable to respond to calls from the government to provide "urgent clarification" on whether cars sold locally have been caught up in the biggest scandal of the carmaker's 78-year history.
A spokesman for Volkswagen Australia said it was still waiting to hear from the carmaker's head office in Germany.
"At this stage, we are unable to comment on the local situation as we are still awaiting details with regards to our market," the spokesman said.
Last month, the company admitted it used software to beat emission tests in labs on cars sold in the US. It is facing fines of up to $US18 billion ($25.7b) from the US Environmental Protection Agency, which alleged the affected diesel engines spewed as much as 40 times the legal limit of pollutants when they were on the road.
The potential $1.1 million fine for one breach in Australia compares with the US's maximum penalty of $US37,500 ($53,152) per violation.
About $US25 billion has been wiped from Volkswagen's market value since the scandal broke as a growing list of countries demand to know if the carmaker cheated the system in their jurisdictions.
On Thursday the company said it would refit the affected diesel engines in what is expected to be a recall of possibly 11 million cars.
"Under the action plan, Volkswagen and the other group brands whose vehicles are affected will present the technical solutions and measures to the responsible authorities in   October," the German company said in a statement.
"Customers affected will be informed that the emissions characteristics of their vehicles will be corrected in the near future. All vehicles are technically safe and roadworthy."
In Australia, the scandal could affect over 40,000 diesel engine cars Volkswagen sold since 2009.