|Corporate Income Tax Rate (%)||30 (a)|
|Capital Gains Tax Rate (%)||30 (a)|
|Branch Tax Rate (%)||30|
|Withholding Tax (%):|
|Conduit Foreign Income||0 (d)|
|Interest Paid by Australian Branch of Foreign Bank to Parent||5 (f)|
|Interest (Debentures, State and Federal Bonds and Offshore Banking Units)||0 (g)|
|Royalties from Patents, Know-how, etc.||30 (h)|
|Construction and Related Activities||5 (I)|
|Fund Payments from Managed Investment:|
|Branch Remittance Tax||0|
|Net Operating Losses (Years):|
a) The rate is 28.5% for eligible small business entities with turnover of less than AUD2 million. For corporations, capital gains are taxed at the relevant corporate income tax rate.
b) Franking of dividends is explained in Section B.
c) This is a final tax that is imposed on payments to nonresidents only. A reduced rate (in recent treaties, reduced rates typically are 0%, 5% or 15%, depending on the level of ownership) applies to residents in treaty countries.
d) An exemption from dividend withholding tax applies to the part of the un-franked dividends that is declared in the distribution statement to be conduit foreign income.
e) In general, this is a final withholding tax that is imposed on payments to nonresidents only. However, withholding tax is imposed in certain circumstances on interest paid to residents carrying on business overseas through a permanent establishment (branch). Modern Australian tax treaties exempt government and unrelated financial institutions from withholding tax.
f) Interest paid by an Australian branch of a foreign bank to its parent is subject to a rate of 5% on the notional interest rate based on the London Interbank Offered Rate (LIBOR).
g) Unilateral exemptions from interest withholding tax are provided for certain publicly offered debentures, for state and federal government bonds and for offshore borrowing by offshore banking units.
h) In general, this is a final withholding tax that is imposed on gross royalties paid to nonresidents. A reduced rate (5% in recent treaties) applies to residents of treaty countries.
i) The filing of an Australian tax return to obtain a refund may be required if this withholding results in an overpayment of tax. A variation of the rate to mitigate the adverse cash flow impact is available to certain taxpayers that have previously filed tax returns in Australia.
j) Effective from 1 July 2012, managed investment trusts that hold only newly constructed energy-efficient commercial buildings may be eligible for a 10% withholding tax rate.
Taxes on corporate income and gains
Corporate income tax. An Australian resident corporation is subject to income tax on its non-exempt worldwide income. A nonresident corporation is subject to Australian tax only on Australian-source income.
Corporations incorporated in Australia are residents of Australia for income tax purposes, as are corporations carrying on business in Australia with either their central management and control in Australia or their voting power controlled by Australian residents.
Rates of corporate tax. For the 2015–16 income year, resident corporations are subject to tax at a rate of 30%. Income of nonresident corporations from Australian sources is similarly taxable at 30% if it is not subject to withholding tax or treaty protection. However, a nonresident corporation not operating in Australia through a permanent establishment is generally subject to tax only on Australian-source passive income, such as rent, interest, royalties and dividends.
A 28.5% rate (reduction of 1.5%) applies for years beginning on or after 1 July 2015 for eligible small business entities (aggregate turnover of less than AUD2 million). For corporations, capital gains are taxed at the relevant corporate income tax rate, with no reduced tax rates.
Resource taxation. The Petroleum Resource Rent Tax (PRRT) was expanded effective from 1 July 2012. Previously, the PRRT applied only to offshore projects (that is, companies undertaking petroleum activities in Commonwealth waters, excluding projects located in the North West Shelf and certain areas within the Australian/East Timor Joint Petroleum Development Area [JPDA]).
The expanded PRRT applies to all projects, including onshore petroleum projects and projects in the North West Shelf, but projects in the JPDA continue to be excluded. Transitional measures apply to pre-existing projects. The PRRT is imposed at a rate of 40% on project profits from the extraction of non-renewable petroleum resources.
The Mining Resources Rent Tax (MRRT) was repealed, effective from 1 October 2014. It applied to iron ore and coal production, effective from 1 July 2012. The MRRT applied at a rate of 30% less a 25% extraction allowance (resulting in an effective tax rate of 22.5%) on mining profits after allowance for certain operating and capital expenditure. A credit against MRRT was allowed for state royalties. MRRT was deductible for corporate income tax purposes.
Under an Exploration Development Initiative, mineral exploration companies undertaking greenfields minerals exploration (very broadly, companies with no assessable income from extracting minerals) in Australia may be able to issue tax credits to shareholders for a portion of eligible exploration costs, effective from 1 July 2014. However, tax credits available for issuance by all eligible companies in Australia combined is capped at a total of AUD100 million over a three-year period (AUD25 million for the 2015 income year, AUD35 million for the 2016 income year and AUD40 million for the 2017 income year).
For mining rights and information that begin to be held after 7:30 p.m. on 14 May 2013, an immediate deduction is no longer available for the cost of exploration rights and information first used for exploration if the price paid reflects the value of resources already discovered. Costs of acquiring exploration rights or information first used for exploration that are not eligible for an immediate deduction will be depreciated over the lesser of 15 years or the effective life of the mine. Further rules are proposed to confirm the immediate deduction for farm-out arrangements, and also to clarify the treatment of interest realignments in joint venture common developments.
Carbon-pricing mechanism. Effective from 1 July 2014, the previous carbon-pricing mechanism was repealed and replaced by a Direct Action Plan.
Income and capital gains. Australia’s tax law distinguishes income (revenue) gains and losses from capital gains and losses, using principles from case law. Broadly, capital gains and losses are not assessable or deductible under the ordinary income tax rules. How ever, the capital gains tax (CGT) provisions in the tax law may apply.
CGT. The CGT provisions apply to gains and losses from designated CGT events. The list of designated CGT events includes disposals of assets, grants of options and leases, and events arising from the tax-consolidation rules (see Section C).
Capital gains are calculated by identifying the capital proceeds (money received or receivable or the market value of property received or receivable) with respect to the CGT event and deducting the cost base. CGT gains are reduced by amounts that are otherwise assessable.
Special rules apply to assets acquired before 20 September 1985.
CGT deferrals or rollovers. CGT rollover relief may be elected for various transfers, restructures and takeovers, including scrip takeovers. The effect of the relief is the deferral of taxation until a subsequent disposal or CGT event, if further rollover relief is not available. Transfers within a tax-consolidated group are ignored for tax purposes (see Section C).
Capital losses are deductible only from taxable capital gains; they are not deductible from ordinary income. However, ordinary or trading losses are deductible from net taxable capital gains.
Foreign residents and CGT. Foreign residents are subject to CGT if an asset is “taxable Australian property,” which includes broadl y the following:
- Taxable Australian real property: real property located in Australia including a leasehold interest in land, or mining and quarrying or prospecting rights, if the minerals, petroleum or quarry materials are located in Australia.
- Indirect Australian real property interest: broadly, a non-portfolio interest in an Australian or foreign entity if more than 50% of the market value of the entity’s assets relates to assets that are taxable Australian real property. A law change was announced to introduce stricter asset valuation rules for mining rights and mining information, effective from 14 May 2013, to protect the integrity of the principal asset test, but these rules may no longer be required after the recent Full Federal Court decision in Resource Capital Fund III decided in favor of the Australian Tax Office (ATO). Integrity rules to prevent the double counting of intercompany assets apply to consolidated and multiple-entry consolidated groups (see Tax consolidation in Section C) from 14 May 2013 and to other entities from 13 May 2014.
- The business assets of an Australian permanent establishment.
Australia has introduced a 10% non-final withholding regime to support the operation of the foreign resident CGT regime, effective from 1 July 2016.
CGT participation exemption for disposals of shares in foreign companies. The capital gain or capital loss derived by a company from the disposal of shares in a foreign company may be partly or wholly disregarded to the extent that the foreign company has an underlying active business, if the company has held a direct voting interest in the foreign company of at least 10% for a period of at least 12 months in the 2 years before the disposal. This participation exemption can also reduce the attributable income arising from the disposal of shares owned by a controlled foreign company in another foreign company (see Section E).
Venture capital. Venture capital investment concessions proposed to apply from 1 July 2016 will provide a 20% nonrefundable tax offset on investments in eligible innovation companies, capped at AUD200,000 per investor per year and a capital gains tax exemption up to 10 years (provided investments are held for at least three years).
Administration. The Australian tax year ends on 30 June. For corporate taxpayers with accounting periods ending on other dates, the tax authorities may agree to use a substituted accounting period.
In general, companies with an income year-end of 30 June must file an annual income tax return by the following 15 January. Companies granted permission to adopt a substituted accounting period must file their returns by the 15th day of the 7th month after the end of their income year.
Under a pay-as-you-go (PAYG) installment system, companies with turnover of AUD20 million or less continue to make quarterly payments of income tax within 21 days after the end of each quarter of the tax year. The amount of each installment is based on the income earned in the quarter. The installment obligations for larger companies with turnover in excess of AUD20 million are changed to monthly payments.
Dividends. Dividends paid by Australian resident companies are franked with an imputation credit to the extent that Australian corporate income tax has been paid by the company on the income being distributed. Tax rules discourage companies from streaming imputation credits to those shareholders that can make the most use of the credits, at the expense of other shareholders.
A company may select its preferred level of franking with reference to its existing and expected franking account surplus and the rate at which it franked earlier distributions. However, under the “benchmark rule,” all distributions made by a private company within a franking period must generally be franked to the same extent. For eligible small business entities subject to the reduced 28.5% company rate, the franking credit cap remains at the full 30% rate.
The consequences of receiving a franked dividend vary depending on the nature of the recipient shareholder.
A New Zealand company may choose to maintain an Australian franking account and attach Australian franking credits to dividends paid to Australian resident shareholders, for Australian company tax paid on that income.
Resident corporate shareholders. Franked distributions received by resident companies from other Australian resident companies are effectively received free from tax. A resident company receiving franked distributions grosses up the dividend amount received by the amount of its franking credit (the credit equals the tax paid by the paying entity). The grossed-up amount is included in the assessable income of the recipient company. The recipient company is entitled to a tax offset (rebate) equal to the amount of the franking credit on the distribution that may be used against its own tax payable. In addition, the recipient company is allowed a franking credit in its own franking account, which may in turn be distributed to the company’s shareholders.
A resident company is subject to tax on unfranked dividends received, but special rules apply for certain income passed to nonresident shareholders (see Nonresident shareholders: corporate and non-corporate).
If a company’s entitlement to a tax offset exceeds its tax payable, it can convert the excess franking offset into an equivalent amount of tax loss. The tax loss may then be carried forward indefinitely for deduction in subsequent years.
Resident individual shareholders. The shareholder includes the dividend received plus the full imputation credit in assessable income. The imputation credit can be offset against personal tax assessed in the same year. Excess credits relating to dividends received are refunded to the shareholder.
Nonresident shareholders: corporate and non-corporate. Issues relevant to dividends and foreign shareholders include the following:
- Franked dividends paid to nonresidents are free from dividend withholding tax.
- Refunds of imputation credits are not available for nonresidents.
- Special rules apply to unfranked dividends received and flowed on by an Australian company to its nonresident parent company. If the Australian company receives unfranked non-portfolio dividends (from holdings of at least 10% of the voting power in the company paying the dividends) and in turn pays a flow-on dividend to its nonresident parent company, the Australian company may be eligible for a deduction equivalent to the unfrank-ed non-portfolio dividend. Various conditions must be satisfied.
- Special rules apply to “conduit foreign income” that flows through Australian companies to foreign investors. Broadly, conduit foreign income is foreign-source income earned by an Australian company that is not taxed in Australia. A distribution that an Australian corporate tax entity makes to a foreign resident is not subject to dividend withholding tax and is not assessable income, to the extent that the entity declares it to be conduit foreign income.
Foreign tax relief. Australian residents are subject to Australian tax on their worldwide income, but they may receive a foreign income tax offset (FITO) for foreign taxes paid on foreign-source income included in assessable income. FITOs must be used in the year in which the related foreign-source income is included in assessable income. Otherwise, they are lost without having provided any relief from double taxation. For controlled foreign companies (CFCs; see Section E), a modified system applies.
Determination of trading income
General. Taxable income is defined as assessable income less deductions. Assessable income includes ordinary income and statutory income (specifically listed in the tax law as being assessable income). Non-cash business benefits may be included as income in certain circumstances.
Australia’s tax law distinguishes income (revenue) gains and losses from capital gains and losses, using principles from case law. Broadly, capital gains and losses are not assessable or deductible under the ordinary income tax rules; however, the capital gains provisions in the tax law may apply, and, for corporations and foreign residents, capital gains tax is paid at the income tax rate (see Section B).
Broadly, the following types of income are not included in assessable income:
- Profits from foreign branches of Australian companies (other than, broadly, income that would be attributable under the CFC rules, see Section E).
- Amounts paid out of income previously taxed under the CFC rules (see Section E).
- Foreign equity distributions received by Australian corporate entities on participation interests. This covers dividends or non-share dividends received from a foreign company with respect to an interest in a company classified as equity under Australian tax rules, subject to a 10% participation requirement. Distributions received through interposed entities, such as trusts and partnerships, may now also be eligible.
Expenses. Expenses are deductible to the extent they are incurred in gaining or producing assessable income or are necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income. However, expenses of a capital nature (except business black hole expenditure; see Five-year deduction for black hole business expenditure) and those incurred in the production of exempt income are not deductible. Apportionment of expenses having dual purposes is possible.
Fringe benefits tax (see Section D) is deductible. Entertainment expenses are not deductible unless they represent fringe benefits provided to employees. Penalties and fines are not deductible.
Under commercial debt forgiveness rules, the net amount of debts forgiven during an income year reduces the debtor’s accumulated revenue tax losses, capital losses, certain undeducted expenditure and cost bases of assets.
Research and development. A tax credit system applies for research and development (R&D) expenditure. The incentives apply to companies incorporated in Australia for R&D conducted in Australia. The location of ownership of the resulting intellectual property is not a barrier to a tax concession.
Core and supporting R&D activities must be registered under the new R&D tax credit system. Supporting R&D activities must be directly related to core R&D activities. Activities that result in the production of goods or services are eligible only if they are undertaken for the dominant (or sole) purpose of supporting the core R&D activity (the “dominant purpose” test).
Eligible expenditure in excess of AUD20,000 is not deductible but gives rise to the following:
- Nonrefundable tax credits of 40% for large companies (proposed reduction to 38.5%, effective from 1 July 2014)
- For companies with group turnover of less than AUD20 million, refundable tax credits of 45% (proposed reduction to 43.5%, effective from 1 July 2014)
The above turnover thresholds also apply to local companies conducting foreign-owned R&D.
R&D expenditure claims are capped at AUD100 million per taxpayer and, for expenditure above AUD100 million, companies can claim a 30% tax offset. This replaces earlier proposals to deny R&D tax incentives for very large companies (with turnover exceeding AUD20 billion).
Debt and equity classification. Specific debt-and-equity rules focus on economic substance rather than on legal form. If the debt test is satisfied, a financing arrangement is generally treated as debt, regardless of whether the arrangement could also satisfy the test for equity. The test is complex and extends well beyond an examination of whether a borrower has a non-contingent obligation to repay an amount of principal.
The debt or equity classification affects the taxation of dividends (including the imputation requirements), payments received from nonresident entities, thin-capitalization regime, dividend and interest withholding taxes and related measures.
The government has requested that the Board of Taxation consider the implementation of changes recommended by the Organisation for Economic Co-operation and Development (OECD) affecting hybrid financing into Australian law and to report by March 2016. The government may respond to those recommendations as part of the 2016–17 Federal Budget. However, no information is available with respect to the start date or transitional arrangements for any rules that may be adopted.
Financial arrangements. Extensive rules deal with the taxation of “financial arrangements” (as defined) for specified taxpayers.
The default methods are accruals and realization methods. These are supplemented by various methods available at a taxpayer’s election, using accounting approaches with respect to certain financial arrangements. The elective accounting methods include hedge treatment, fair-value reporting, retranslation for foreign-currency arrangements and, in certain cases, use of the values in financial reports for the financial arrangements.
Individuals are not mandatorily covered by these rules. Superannuation entities must apply the rules if the value of their assets exceeds AUD100 million. Approved deposit-taking institutions or securitization vehicles must apply the rules if their aggregate turnover exceeds AUD20 million. All other entities must apply the rules if either their aggregate turnover exceeds AUD100 million or if the value of their assets exceeds AUD300 million. Taxpayers not covered by the rules can nevertheless elect to apply the rules.
The rules apply to financial arrangements first held in income years beginning on or after 1 July 2010.
Foreign-exchange gains and losses. Specific rules govern the tax treatment of foreign-currency gains and losses. Broadly, they provide the following:
- Foreign-currency gains and losses are brought to account when realized, regardless of whether an actual conversion into Australian currency occurs.
- Foreign-currency gains and losses generally have a revenue character.
- Specific translation rules apply to payments, receipts, rights and obligations denominated or expressed in a foreign currency.
- Functional-currency rules allow an entity that operates predominantly in a particular foreign currency to determine its income and expenses in that currency, with the net results being translated into Australian currency for the purposes of calculating its Australian income tax liability.
Inventories. In determining trading income, inventories may be valued at cost, market-selling value (the current selling value of an article of trading stock in the particular taxpayer’s trading market) or replacement price, at the taxpayer’s option. The last-in, first-out (LIFO) method may not be used. If the cost method is elected, inventories must be valued using the full-absorption cost method.
Provisions for future expenditure. Provisions for amounts not incurred during the year, such as leave entitlements of employees, are generally not deductible until payments are made. Similarly, provisions for doubtful trading debts are not deductible until the debt, having been previously brought to account as assessable in come, becomes bad and is written off during an income year.
Capital allowances (depreciation)
Uniform capital allowance regime. Capital allowance rules allow a deduction for the decline in value of a “depreciating asset” held during the year.
A “depreciating asset” is defined as an asset with a limited effective life that may be expected to decline in value over the time it is used. Land, trading stock and intangible assets not specifically in cluded in the regime are not considered to be depreciating assets.
The depreciation rate for a depreciating asset depends on the effective life of the asset. Taxpayers may choose to use either the default effective life determined by the tax authorities or their own reasonable estimate of the effective life. A taxpayer may choose to recalculate the effective life of a depreciating asset if the effective
life that was originally selected is no longer accurate as a result of market, technological or other factors.
Taxpayer re-estimation of effective life is not available for certain intangible assets; the law prescribes their effective lives (for example, 15 years for register ed designs or 20 years for standard patents). The government has announced plans to allow companies to self-assess the effective life of acquired intangible assets that is currently fixed by statute, for assets acquired from 1 July 2016. Statutory life caps that result in accelerated rates are provided for certain assets used in the oil and gas, petroleum, agricultural, and transport industries, and by irrigation water providers as well as for Australian-registered ships.
Taxpayers may choose the prime cost method (straight-line method) or the double diminishing value method (200% of the straight-line rate) for calculating the tax-deductible depreciation for all depreciating assets except intangible assets. For certain intangible assets, the prime cost method must be used.
The cost of a depreciating asset is generally the amount paid by the taxpayer plus further costs incurred while the taxpayer holds the asset. The depreciable cost of a motor car is subject to a maximum limit of AUD57,466 for the 2015–16 income year.
Pooling of assets may be chosen for pool assets costing more than AUD300 but less than AUD1,000 as well as assets that have been depreciated to less than AUD1,000. The pool balance is depreciable at a rate of 37.5% (18.75% for additions during the year), applying the declining-balance method. If the choice is not exercised, the relevant assets are depreciated on the basis of their respective effective lives.
Software development expenditure may be allocated to a software development pool. Beginning in the year following the year of the expenditure, the expenditure is deductible at a rate of 30% for three years, followed by a 10% rate in the final year. This change applies to expenditure incurred in income years beginning on or after 1 July 2015.
Construction of buildings. Capital expenditure on the construction of buildings and structural improvements may be eligible for an annual deduction of either 2.5% or 4% of the construction expenditure, depending on the type of structure and the date on which construction began. The 2.5% rate applies to construction begun after 15 September 1987.
Disposals of depreciable assets. Depreciation on assets other than buildings is recaptured if the proceeds received on the disposal of an asset exceed its adjustable value. Any amounts recaptured are included in taxable income. If the proceeds received on the disposal of an asset are less than its adjustable value, a deductible balancing adjustment is allowed.
Five-year deduction for black hole business expenditure. Certain types of business expenditure of a capital nature may be deducted under the capital allowance regime to the extent that the expenditure is not taken into account elsewhere in the income tax law and is not expressly nondeductible for tax purposes. This type of expenditure is known as “black hole business expenditure.”
The deduction is available on a straight-line basis over five years. Expen diture qualifying for the deduction includes expenditure to establish or alter a business structure, expenditure to raise equity and expenditure in an unsuccessful takeover attempt or takeover defense. However, eligible small business taxpayers may be entitled to an immediate deduction for certain start-up costs incurred in income years beginning on or after 1 July 2015 that would have been otherwise classified as “black hole business expenditure.”
Relief for losses. Tax losses may be carried forward indefinitely against assessable income derived during succeeding years. A loss is generated after adding back net exempt income.
To claim a deduction for past losses, companies must satisfy either a continuity of ownership test (more than one-half of voting, dividend and capital rights) or a same business test. A modified continuity of ownership test applies to widely held companies. The modified rules simplify the application of the continuity test by making it unnecessary to trace the ultimate owners of shares held by certain intermediaries and small shareholdings. The government has announced plans to introduce a more flexible “predominantly similar business test” to replace the same business test, applying to losses made in the current and future income years.
As a result of the introduction of the tax consolidation regime (see Tax consolidation), losses are generally not transferable to other group members.
Designated infrastructure projects loss concessions. Companies that only carry on activities for certain designated infrastructure projects are not required to test the recoupment of losses incurred in the 2012–13 and following income years under the continuity of ownership or same business tests. The losses are also increas ed by the long-term government bond rate. Projects must be designated by Infrastructure Australia by 30 June 2017, and a cap of AUD25 billion on the value for all projects applies.
Tax consolidation. Tax consolidation is available for groups of wholly owned companies and eligible trusts and partnerships that elect to consolidate. Australian resident holding (head) companies and their wholly owned Australian resident subsidiary members of the group are taxed on a consolidated basis. Consolidation is desirable because no grouping concessions (such as the ability to transfer losses to other group members) are otherwise provided. The head company becomes the taxpayer, and each subsidiary member of the group is treated as if it were a division of the head company. Transactions between members of a consolidated group are generally disregarded for Australian income tax purposes. The head company assumes the income tax liability and the associated in come tax compliance obligations of the group.
Tax consolidation is also available for Australian entities that are wholly owned by a single foreign holding company. The resulting group is referred to as a multiple entry company (MEC) group, which includes the Tier-1 companies (Australian resident companies directly owned by a foreign member of the group) and their wholly owned Australian resident subsidiaries. A Tier-1 company is selected as the head company. The types of entities that may be subsidiary members of an MEC group are generally the same as those for a consolidated group.
The consolidation rules are very significant for merger and acquisition and restructuring transactions. If a tax consolidated group acquires a “joining entity,” the tax cost base of the underlying assets of the joining entity is reset, under complex rules, which can affect the tax treatment of those assets (including the calculation of any tax deductions with respect to such assets). If an entity leaves a consolidated group, the group’s cost base of shares in the leaving entity is reset under specific exit rules. MEC groups are subject to cost base pooling rules to determine the cost base of shares in Tier-1 companies.
The tax-consolidation rules have been subject to various complex ongoing changes. The treatment of rights to future income and residual assets when an entity joins a consolidated group was altered in 2010, applying retrospectively from 2002. However, the 2010 changes were heavily modified in 2012, affecting arrangements that began on or after 31 March 2011 (but transitional rules preserved aspects of the 2010 changes for some groups).
The government has proposed the following integrity measures affecting acquisitions and divestments from 14 May 2013:
- Certain deductible accounting liabilities held by a “joining entity,” which are taken into account in tax cost resetting of the entity’s assets will be assessable income over 12 months (for current liabilities) or 48 months (for non-current liabilities).
- No tax cost resetting will be allowed with respect to assets held by a “joining entity” for foreign-owned consolidated groups or MEC groups if the underlying majority beneficial ownership of the joining entity has not changed and if the foreign resident CGT exemption applies to the transferor of the “joining entity.”
- The calculation of the tax cost of intra-group assets (including financial arrangements) that are recognized when an entity leaves a consolidated or MEC group will be clarified.
On 13 May 2014, the government released a Treasury report following a review of the rules applying to MEC groups. No immediate changes were recommended, with three potential minor amendments referred for further consultation.
Assets that are subject to the taxation of financial arrangements rules (see Financial arrangements) are subject to separate tax consolidation interaction rules. These complex rules may affect transactions and reorganizations.
Demergers. Tax relief is available if eligible company or fixed-trust groups divide into two separately owned entities. The de-merging company (or fixed trust) must dispose of at least 80% of its ownership interests in the demerged entity, and the underlying ownership interests must not change as a result of the demerger. The rules provide investors optional CGT rollover relief, as well as dividend exemptions, which are available at the option of the demerging entity. The demerger group is also provided with limited CGT relief.
Other significant taxes
The following table summarizes other significant taxes.
|Nature of tax||Rate (%)|
|Goods and services tax||10|
|Fringe benefits tax on non-cash employee benefits From 1 April 2015 (under a Temporary Budget Repair Levy, the highest personal marginal income tax rate applicable for individuals is increased by two percentage points, effective from 1 July 2014 until 30 June 2017; a corresponding increase in the fringe benefits tax rate from 47% to 49% is effective from 1 April 2015 until 31 March 2017)||49|
|From 1 April 2017||47|
|Payroll taxes paid by employers (vary by state)||4.75 to 6.85|
Customs duty is levied on imports of various products into Australia. Other significant taxes include stamp duty and land tax.
General anti-avoidance regime. The general income tax anti-avoidance regime (Part IVA) plays an important role in complementing specific anti-avoidance rules. It includes rules to counter certain arrangements for avoidance of a permanent establishment in Australia.
Part IVA applies if, taking into account eight specified matters, it is determined that the dominant purpose of the parties entering into a scheme was to enable the taxpayer to obtain a tax benefit. If the Commissioner of Taxation makes a Part IVA determination, the tax benefit is denied and significant penalties may be imposed.
Part IVA was amended, effective from 2012, to limit the scope for taxpayers to argue that no tax benefit exists and that Part IVA is therefore inoperative.
A multinational anti-avoidance law (MAAL) was introduced into Part IVA, effective from 1 January 2016. Broadly, the MAAL targets schemes entered into by multinational entities with global turnover greater than AUD1 billion if all of the following apply:
- A foreign entity makes a supply of certain goods or services to an Australian customer.
- Activities are undertaken directly in Australia in connection with the supply by an Australian entity or permanent establishment that is an associate of or commercially dependent on the foreign entity.
- The foreign entity making the supply derives income, some or all of which is not attributable to an Australian permanent establishment of the foreign entity.
- Taking into account the relevant factors, it can be concluded that one principal purpose of the transaction is the enabling of a relevant taxpayer to obtain an Australian tax benefit and/or reduce tax liabilities arising under foreign law, including some deferrals of foreign taxes. Relevant factors include the role of the parties in the value chain and their capacity, staffing and resources to carry out their designated functions (to distinguish the parties from insubstantial parties).
Value shifting. A general value-shifting regime applies to counter certain transactions involving non-arm’s-length dealings between associated entities that depress the value of assets for certain income tax and CGT purposes.
Transfer pricing. Australia’s tax law includes measures to ensure that Australian taxable income associated with cross-border transactions is based on arm’s-length prices. Several methods for determining the arm’s-length price are available. The Australian Taxation Office provides guidance in a binding tax ruling on the appropriate methods, and taxpayers can enter into Advance Pricing Arrangements.
For transactions with parties entitled to benefit from foreign tax treaties, the law confirms the ATO view that Australia’s tax treaties provide a separate and unconstrained transfer pricing taxing power. The amendments also allow the use of the OECD transfer-pricing guidance material.
For all other transactions, a new law applies to income years beginning on or after 1 July 2013, to bring the transfer-pricing rules into the self-assessment regime. It requires broader and timely documentation. The new law increases the risk of transfer-pricing adjustments, particularly for companies that are involved in significant intragroup financing arrangements or business restructurings or that have losses or low levels of profits. Significant aspects include the following:
- The onus is on the Public Officer who signs the income tax return to confirm that the actual conditions are in line with arm’s-length conditions. If the actual and arm’s-length conditions do not align and if a transfer-pricing benefit is received, the taxpayer must adjust taxable income, tax losses or other tax attributes. Penalties apply if a Public Officer makes a false or misleading statement in this regard.
- As a basic rule, the arm’s-length conditions should be based on the form and substance of the actual commercial or financial relations. However, documentation must address reconstruction, which refers to situations in which the transactions or arrangements actually entered into are ignored and (in some cases) other transactions or arrangements are substituted.
- Taxpayers are treated as not having a reasonably arguable position with respect to any international related-party transaction that is not appropriately documented. A transfer-pricing adjustment with respect to such undocumented transactions attracts a penalty of at least 25%. The penalties are proposed to be doubled for income years beginning on or after 1 July 2015 for tax-avoidance and profit-shifting schemes, with respect to groups that have global turnover of greater than AUD1 billion. It is essential that appropriate transfer-pricing documentation be in place at the time of the filing of the tax return to have a reasonably arguable position.
- The law incorporates the 2010 OECD guidelines.
- Adjustments can only be within seven years of the date on which the Commissioner of Taxation gives the notice of assessment.
For business income tax returns, the International Dealings Schedule requires detailed disclosures designed to flag potential risk areas. To align with recommendations under Action 13 of the OECD Base Erosion and Profit Shifting (BEPS) Action Plan, Australia has enacted a law and the ATO has released administrative guidance to implement Country-by-Country (CbC) Reporting requirements. For income years beginning on or after 1 January 2016, the CbC Reporting rules require certain multinational entities to prepare and file up to three of the following documents with the ATO:
- A CbC Report
- A Master File
- A Local File
Treasury is consulting on the timing of implementation (possibly as early as 1 July 2016) of the changed Transfer Pricing Guidelines in the BEPS Action Items 8-10, which were agreed to in October 2015.
Debt-to-equity (thin-capitalization) rules. Thin-capitalization measures apply to the total debt of Australian operations of multinational groups (including foreign and domestic related-party and third-party debt). In addition, the transfer-pricing measures may affect the deductions available for related-party debt.
Thin-capitalization. The thin-capitalization measures apply to the following:
- Foreign-controlled Australian entities and foreign entities that either invest directly into Australia or operate a business through an Australian branch (inward investing entities)
- Australian entities that control foreign entities or operate a business through an overseas branch (outward investing entities)
Exceptions to the thin-capitalization rules apply in either of the following circumstances:
- The total debt deductions of the taxpayer are AUD2 million or less for the year of income, effective from income years beginning on or after 1 July 2014 (previously AUD250,000).
- Australian assets account for 90% or more of total assets of outward investing entities (that are not also inward investing entities).
Debt deductions are partially denied if the company’s adjusted average debt exceeds the maximum allowable debt.
In most cases, the maximum allowable debt is calculated by reference to the safe harbor debt amount. The safe harbor debt amount approximates a debt-to-equity ratio of 1.5:1 (or 60% debt-to-total-assets ratio), effective from income years beginning on or after 1 July 2014 (previously 3:1, or a debt-to-total-assets ratio of 75%). Separate methodologies apply to financial institutions or consolidated groups with at least one member classified as a financial entity (these ratios were also reduced, effective from income years beginning on or after 1 July 2014).
Taxpayers can also determine the maximum allowable debt by reference to an arm’s-length debt amount that is based on what amount an independent party would have borrowed from an independent lender. This determination requires the consideration of several factors. The operation of the arm’s-length debt test is under review, with a Board of Taxation report expected by December 2014.
Effective from income years beginning on or after 1 July 2014, inward investors can also determine the maximum allowable debt of an Australian entity by reference to the group’s worldwide gearing debt amount (previously this was only available to outward investors that were not also inward investors). The ratio for the worldwide gearing debt is reduced from 120% to 100%, effective from 1 July 2014.
Transfer pricing. The transfer-pricing provisions apply to the pricing of related-party debt, even if an arrangement complies with the thin-capitalization rules. The Commissioner of Taxation can substitute a hypothetical arm’s-length capital structure to set an arm’s-length interest rate if the amount of debt is considered not to be arm’s length, even if the taxpayer is within the thin-capitalization safe harbor debt levels. The arm’s-length interest rate is then applied to the actual amount of debt.
Controlled foreign companies. A foreign company is a CFC if five or fewer Australian residents hold at least 50% of the company or have de facto control of it, or if a single Australian entity holds a 40% interest in the company, unless it is established that actual control does not exist.
A foreign company is a CFC if five or fewer Australian residents hold at least 50% of the company or have de facto control of it, or if a single Australian entity holds a 40% interest in the company, unless it is established that actual control does not exist.
The tainted income of a CFC is attributed to its Australian resident owners, which are required to include such income in their assessable income. In general, the tainted income of a CFC is its passive income and income from certain related-party transactions.
Income is generally not attributable if the CFC passes an active-income test. To pass this test, the CFC’s tainted income may not exceed 5% of the CFC’s gross turnover.
Whether an amount earned by a CFC is attributable to Australian residents depends on the country in which the CFC is resident. The CFC rules identify “listed countries,” which have tax systems that are considered to be closely comparable to the Australian system. The following are the “listed countries”:
- New Zealand
- United Kingdom
- United States
All other countries are “unlisted countries.”
Certain amounts are unconditionally attributed regardless of whether the CFC is resident in a listed or unlisted country.
If a CFC resident in a listed country fails the active-income test, its attributable income includes “adjusted tainted income,” which is eligible designated concession income prescribed by the regulations on a country-by-country basis. This income includes items such as income subject to tonnage taxation or concessionally taxed capital gains.
If a CFC resident in an unlisted country fails the active-income test, its attributable income includes all of its adjusted tainted income, such as passive income (including tainted interest, rental or royalty income) and tainted sales or services income.
Income derived by a CFC is exempt from Australian income tax if it is remitted as dividends or non-share dividends made with respect to an interest in the company classified as equity under Australian tax rules to an Australian company.
Foreign investment fund rules. Foreign investment fund (FIF) rules dealing with attribution of income related to certain non-controlling interests were repealed and last applied to the 2009– 10 income year. The FIF rules were to be replaced by a narrowly defined anti-avoidance measure targeting “interest-like returns in certain foreign entities,” but this project has not progressed.
Withholding taxes. Interest, dividends and royalties paid to nonresidents are subject to Australian withholding tax (also, see Section F for treaty withholding tax rates).
The 10% withholding tax rate on interest is generally the same as the rate prescribed by Australia’s treaties (see Section F). However, modern treaties provide for a 0% rate for government and unrelated financial institutions. The interest paid by an Australian branch of a foreign bank to its parent is subject to a rate of 5% of the notional interest paid by the branch on internal funds of the foreign bank entity; the notional interest is limited by reference to the LIBOR. Unilateral exemptions from interest withholding tax are provided for certain publicly offered debentures, state and federal government bonds and offshore borrowing by offshore banking units.
For dividends paid, the withholding tax rate of 30% applies only to the unfranked portion of the dividend. A reduced rate applies if dividends are paid to residents of treaty countries. An exemption from dividend withholding tax applies to the part of the un-franked dividends that is declared in the distribution statement to be conduit foreign income.
A final withholding tax at a rate of 30% is imposed on gross royalties paid to nonresidents. The withholding tax rate is typically reduced under a double tax treaty.
A concessional withholding tax regime applies to distributions by eligible managed investment trusts (MIT) to nonresidents, other than distributions of dividends, interest and royalties. The withholding tax rate is 30%, but a reduced 15% rate applies if the nonresident’s address or place of payment is in a country that is listed in the regulations as an “information exchange country” (see Countries listed as “information exchange countries”). MITs that hold only newly constructed energy efficient commercial buildings may be eligible for a 10% withholding tax rate.
The government has announced that it will proceed with a new taxation system for MITs, effective from 1 July 2016, with an optional election to apply the rules from 1 July 2015. The new taxation system will use an “attribution model” to determine tax distributions from MITs that meet certain criteria. Specific rules will deal with how this new system will interact with withholding tax obligations.
Australian investment manager regime (IMR) rules (including a third installment known as IMR3) allow certain foreign managed funds that have wide membership or use Australian fund managers, and their nonresident investors to qualify for income exemptions for certain income from qualifying investments (in particular, the income exemptions do not apply to income subject to withholding taxes). The IMR applies to conduit foreign income and to Australian-source income from certain passive investments and other financial arrangements for the 2015–16 income year and subsequent income years. Eligible funds have the option to use the broader IMR3 exemptions for the 2011–12 to 2014–15 income years, instead of the more restricted “interim” IMR1 amnesty and IMR2 exemptions.
Countries listed as “information exchange countries.” The conces-sional withholding tax rates for eligible MITs are restricted to investors in countries listed in the relevant regulation as an “information exchange country.” At time of writing, the regulation listed 60 countries, including the countries that have entered into double tax treaties with Australia except Austria and the Philippines (the information exchange articles in their tax treaties need to be updated) and Switzerland (the treaty, which entered into force on 14 October 2014, contains modern information exchange and mutual assistance provisions, but the regulation needs to be updated). Recent additions to the list include the following:
- Bahamas, Belize, the Cayman Islands, Monaco, St. Kitts and Nevis, St. Vincent and the Grenadines, San Marino and Singapore (effective from 1 July 2011)
- Anguilla, Aruba, Belgium, Malaysia and the Turks and Caicos Islands (effective from 1 January 2012)
- Cook Islands, Korea (South), Macau Special Administrative Region and Mauritius (effective from 1 July 2012)
Common Reporting Standard. Australia is adopting the international Common Reporting Standard (CRS) to apply to financial institutions, such as banks, asset managers, funds, custodians and certain insurance companies, from 1 July 2017 and to later calendar years. The initial exchange of information with foreign tax authorities is planned for 2018.
Foreign-exchange controls. The Financial Transaction Reports Act 1988 requires each currency transaction involving the physical transfer of notes and coins in excess of AUD10,000 (or foreign-currency equivalent) between Australian residents and overseas residents, as well as all international telegraphic and electronic fund transfers, to be reported to the Australian Transaction Reports and Analysis Centre. This information is then available to the Commissioner of Taxation, Federal Police, Australian Customs Service and other prescribed law enforcement agencies.
Stronger focus of the Foreign Investment Review Board on tax issues. The Foreign Investment Review Board (FIRB) approval process for relevant foreign investments involves tax issues, and the ATO is playing a greater role. For approvals since 22 February 2016, the national interest test contains eight standard tax conditions plus possible additional conditions that may be imposed if a significant tax risk is identified by the FIRB and ATO. The expanded requirements do not only affect new foreign investment; they may also affect current inbound investors undertaking certain reorganizations. They increase the role of tax discussions in FIRB approval processes and may add time, particularly if the ATO requires further actions.
Treaty withholding tax rates
The table below provides treaty withholding tax rates for dividends, interest and royalties paid by Australian companies to nonresidents.
Under Australian domestic law, certain dividends and interest payments to nonresidents are exempt from withholding tax.
For dividends, Australian domestic law provides that no withholding tax is imposed on dividends to the extent they are franked under Australia’s imputation system introduced in 1987 (see Sections B and E). Some of Australia’s double tax treaties specifically refer to withholding taxes imposed on franked dividends in some circumstances but, under the domestic tax law, dividend withholding tax is not imposed with respect to franked dividends.
For interest, Australia does not impose withholding tax on interest paid to nonresidents on certain publicly offered company debentures or on interest paid on state and federal government bonds. No withholding tax is imposed on interest paid on offshore borrowings by offshore banking units.
|Argentina||10/15 (b)||12||10/15 (c)|
|Chile (z)||5/15 (aa)||5/10 (bb)||5/10 (cc)|
|Czech Republic||5/15 (l)||10||10|
|Finland (w)||0/5/15 (a)||0/10 (g)||5|
|France (w)||0/5/15 (q)||0/10 (g)||5|
|India (dd)||15||15||10/15 (c)|
|Japan||0/5/10/15 (o)||0/10 (g)||5|
|Korea (South) (w)||15||15||15|
|Mexico||0/15 (i)||10/15 (h)||10|
|New Zealand||0/5/15 (x)||0/10 (y)||5|
|Norway (w)||0/5/15 (a)||0/10 (g)||5|
|Papua New Guinea||15||10||10|
|Philippines (u)||15/25 (d)||15||25|
|Russian Federation||5/15 (j)||10||10|
|South Africa||5/15 (r)||0/10 (g)||5|
|Switzerland (u)(w)(ee)||0/5/15 (ff)||0/10 (gg)||5 (hh)|
|Thailand||15/20 (f)||10/25 (n)||15|
|Turkey||5/15 (s)||0/10 (v)||10|
|United Kingdom (t)||0/5/15 (a)||0/10 (g)||5|
|United States||0/5/15 (a)||0/10 (g)||5|
- a) Australia does not impose withholding tax on dividends to the extent they are franked. To the extent dividends are unfranked, the rate is 0% or 5%, if the beneficial owner of the dividends is a company that holds at least 80% or 10%, respectively, of the voting power in the payer. In all other cases, the rate is generally 15%.
- b) Australia does not impose withholding tax on dividends to the extent they are franked (notwithstanding that the treaty provides for a rate of up to 10% for franked dividends paid to a person holding directly at least 10% of the voting power in the payer). To the extent dividends are unfranked, the withholding tax rate is 15%, regardless of voting power.
- c) The 10% rate applies to specified types of royalties.
- d) Australia does not impose withholding tax on dividends to the extent they are franked. To the extent dividends are unfranked, the rate is 25%, or 15% if a tax rebate or credit is granted against Australian tax to the beneficial owner of the dividends.
- e) Australia does not impose withholding tax on dividends to the extent they are franked (notwithstanding that the treaty provides for a rate of up to 5% for dividends paid out of fully taxed profits if the recipient is a company that holds directly at least 10% of the capital of the payer). To the extent dividends are unfranked, the withholding tax rate is 15%, regardless of voting power.
- f) Australia does not impose withholding tax on dividends to the extent they are franked. To the extent dividends are unfranked, the 20% rate applies to dividends paid to a company that holds directly at least 25% of the capital of the payer of the dividends. The 15% rate applies if the condition described in the preceding sentence is satisfied and if the payer is engaged in an industrial undertaking.
- g) The 0% rate applies to government institutions and unrelated financial institutions.
- h) The 10% rate applies if any of the following conditions are satisfied:
- – The recipient is a bank or insurance company.
- – The interest is derived from bonds and securities traded on a recognized securities market.
- – The payer is a bank or the purchaser of machinery and equipment with respect to a sale on credit.
- i) Australia does not impose withholding tax on dividends to the extent they are franked. To the extent dividends are unfranked, the 0% rate applies if the recipient of the dividends is a company holding directly at least 10% of the voting power in the payer, and the 15% rate applies in all other cases.
- j) Australia does not impose withholding tax on dividends to the extent they are franked (notwithstanding that the treaty provides for a rate of up to 5% for dividends paid out of fully taxed profits to a company that holds at least 10% of the capital of the payer and that has invested at least AUD700,000 [or the equivalent in Russian rubles] in the payer). To the extent dividends are unfranked, the withholding tax is 15%, regardless of voting power.
- k) Australia does not impose withholding tax on dividends to the extent they are franked (notwithstanding that the treaty provides for a rate of up to 5% for franked dividends if the beneficial owner of the dividends is a company that controls at least 10% of the voting power in the payer). To the extent dividends are unfranked, the rate is 15%, regardless of voting power.
- l) Australia does not impose withholding tax on dividends to the extent they are franked (notwithstanding that the treaty provides for a rate of up to 5% for franked dividends). To the extent dividends are unfranked, the rate is 15%.
- m) Australia does not impose withholding tax on dividends to the extent they are franked (notwithstanding that the treaty provides for a rate of up to 10% for franked dividends). To the extent dividends are unfranked, the rate is 15%.
- n) The 10% rate applies to interest derived by financial institutions or insurance companies.
- o) Australia does not impose withholding tax on dividends to the extent they are franked. To the extent dividends are unfranked, the rate is 0% or 5% if the recipient holds at least 80% or 10%, respectively, of the voting power in the payer and 10% in other cases. However, a 15% withholding tax rate applies to fund payments from managed investment trusts but, under Australian law, this rate is reduced to 10% for funds payments by clean building managed investment trusts.
- p) The withholding tax rates listed in the table apply to income derived by nonresidents on or after 1 January 2015.
- q) Australia does not impose withholding tax on dividends to the extent they are franked (notwithstanding that the treaty provides for a 0% rate if the dividends paid out of profits that have borne the full company tax and if the recipient is a company that holds directly at least 10% of the voting power of the payer). To the extent dividends are unfranked, the rate is 15%, or it is 5% if the dividends are paid to a company that holds at least 10% of the voting power of the payer.
- r) Australia does not impose withholding tax on dividends to the extent they are franked. To the extent dividends are unfranked, the rate on unfranked dividends is 15%, or 5% if the beneficial owner of the dividends is a company that holds directly at least 10% of the voting power of the company paying the dividend.
- s) Australia does not impose withholding tax on dividends to the extent they are franked. To the extent dividends are unfranked, the 5% rate applies to dividends paid by a company that is resident in Australia to a company (other than a partnership) that holds directly at least 10% of the voting power in the company paying the dividends. The 15% rate applies in all other cases.
- t) Australia is renegotiating its double tax treaty with the United Kingdom. An exemption from withholding tax for interest payments to related financial institutions is one area for potential change. However, further details are not yet available.
- u) These countries are not currently listed as “information exchange countries” (see Section E).
- v) Interest derived from the investment of official reserve assets by the government of a contracting state, its central bank or a bank performing central banking functions in that state is exempt from tax in the other contracting state. The 10% rate applies in all other cases.
- w) Australia has most-favored-nation clauses in its treaties with Austria, Finland, France, Italy, Korea (South), Malaysia, the Netherlands, Norway and Switzer land. Under the most-favored-nation clause, Australia and the other treaty country must try to renegotiate their tax treaties if the withholding tax rates in another of Australia’s tax treaties are lower.
- x) Australia does not impose withholding tax on dividends to the extent they are franked. To the extent dividends are unfranked, the 0% rate applies if the recipient holds at least 80% of the payer or if the dividends are paid with respect to portfolio investments by government bodies including government investment funds. The 5% rate applies if the recipient holds at least 10% of the payer. The 15% rate applies to other dividends.
- y) The 0% rate applies to interest paid to government institutions and unrelated financial institutions. The 10% rate applies in all other cases.
- z) The withholding tax rates listed in the table apply to income derived on or after 1 April 2013.
(aa) Australia does not impose withholding tax on dividends to the extent they are franked. To the extent dividends are unfranked, the 5% rate applies if the recipient beneficially owns at least 10% of the voting power in the company paying the dividends. The 15% rate applies in all other cases.
(bb) The 5% rate applies if the recipient is a financial institution that is unrelated to and dealing wholly independently with the payer. The 10% rate applies in all other cases.
(cc) The 5% rate applies to royalties paid for the use of, or the right to use, industrial, commercial or scientific equipment. The 10% rate applies to other royalties.
(dd) An amending protocol to the treaty signed on 16 December 2011 entered into force on 2 April 2013. It updates various aspects of the agreement including cross-border services, source-country taxation and assistance in collection of taxes. However, it does not contain any changes to withholding tax rates.
(ee) Australia and Switzerland signed a revised tax treaty, which entered into force on 14 October 2014. It applies to withholding taxes on income that is derived by a resident of Switzerland on or after 1 January 2015.
(ff) Australia does not impose withholding tax on dividends to the extent they are franked. To the extent dividends are unfranked, a 0% rate applies to dividends paid to the following:
- Publicly listed companies or subsidiaries thereof, and unlisted companies in certain circumstances, that hold 80% or more of the paying company
- Complying Australian superannuation funds and tax-exempt Swiss pension schemes that did not hold more than 10% of the direct voting power or capital in the company, respectively, during the preceding 12-month period
The 5% rate applies to dividends paid to companies that hold 10% or more of the paying company. The 15% rate applies in all other cases.
(gg) Under the revised treaty, the 0% rate applies to interest paid to the following:
- Bodies exercising governmental functions and banks performing central banking functions
- Banks that are unrelated to, and dealing independently with, the payer
- Complying Australian superannuation funds and tax-exempt Swiss pension schemes
The 10% rate applies in all other cases.
(hh) Under the revised treaty, royalties are taxed in the source (of the royalty) country at a rate of up to 5%. The revised definition of “royalties” in the revised tax treaty excludes the right to use industrial, commercial or scientific equipment from the definition, and accordingly, may lower the costs for companies that lease such equipment.
(ii) Australia and Germany signed a revised treaty that will apply for withholding taxes from 1 January following the date of entry into force of the treaty (no earlier than 1 January 2017).
Tax treaty negotiations between Australia and Israel have begun.