Australia's competition watchdog accused Microsoft on Monday of misleading people into paying for its AI assistant Copilot.

The authority said it had filed a suit in the Federal Court against Microsoft Australia and its parent Microsoft Corp.

The software giant is accused of making "false or misleading" statements to around 2.7 million Australians who subscribe by auto-renewal to Microsoft 365 plans, which include a suite of online Office services.

Microsoft allegedly told customers that they had two options: either pay extra for Microsoft 365 services integrated with Copilot, or cancel their subscriptions altogether.

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But there was a partly hidden third option, visible only when people started to cancel, of sticking to existing "Classic" plans without Copilot for the original price, the Australian Competition and Consumer Commission said in a statement.

"Microsoft deliberately omitted reference to the Classic plans in its communications and concealed their existence until after subscribers initiated the cancellation process to increase the number of consumers on more expensive Copilot-integrated plans," commission chair Gina Cass-Gottlieb said.

"The Microsoft Office apps included in 365 subscriptions are essential in many people's lives and given there are limited substitutes to the bundled package, cancelling the subscription is a decision many would not make lightly."

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The commission accused Microsoft of misleading subscribers on personal and family plans since October 31, 2024.

Annual subscriptions for Microsoft 365 plans incorporating Copilot were between 29 and 45 percent higher than those without, the watchdog said.

The commission is seeking penalties, injunctions, consumer redress, and costs.

Microsoft could face penalties of Aus$50 million or more (US$30 million) for each breach.

Microsoft did not immediately respond to AFP's request for comment.

Australia sues Microsoft over 'misleading' AI offer