Taxation

Taxation in Australia — an overview

The Federal and state governments impose a number of taxes, including income tax, goods and services tax (GST), customs and excise duties, land tax (where land is owned), payroll tax, and stamp duty.

The taxation year for income tax purposes ends generally on 30 June and tax returns must be lodged within the specified period after that date. In certain circumstances a taxpayer may apply for a substituted accounting period instead of 30 June. This is more likely to be the case where the financial year needs to coincide with the financial year of a non-resident parent entity.

An individual will be treated as a tax resident if that person resides in Australia. An individual will be regarded as residing in Australia where they are domiciled in Australia (unless the authorities are satisfied that the person has a permanent place of abode outside Australia); or they are in Australia for at least 183 days in the year of income (unless the authorities are satisfied that the person has a usual place of abode overseas and does not intend to take up residence), or they are an eligible employee or member under certain superannuation legislation (or spouse or dependent child thereof).

A company will be treated as a tax resident if it is incorporated in Australia, as will a company that, although incorporated overseas, has its central management and control in Australia or its voting power controlled by Australian resident shareholders.

Income tax

Income tax is imposed by the Australian Federal Government on individuals, companies, and superannuation (or pension) funds. In some cases the trustee of a trust estate may be subject to tax although it is more usual for the beneficiaries or unit holders, as the case may be, to be subject to tax. Partnerships and joint ventures are not separately taxed, although the income entitlements of the partners or joint venturers will normally be subject to Australian tax.

The assessable income of an Australian resident includes gross income and net capital gains derived from all sources both inside and outside Australia.

The assessable income of a non-resident includes gross income derived from all sources in Australia and net capital gains on certain taxable Australian property.

All losses and outgoings are generally allowable deductions to the extent that 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 as long as those losses or outgoings are not of a capital, private, or domestic nature. For entities other than individuals and partnerships, to the extent that losses or outgoings exceed the income in any one year those losses can usually be carried forward and offset against income in a subsequent year. Companies and trusts may need to satisfy specified tests in order to carry forward losses.

The individual tax rates for Australian residents (2022 – 2023) are:
Taxable income (A$)	Tax on this income (A$)
0 – $18,200	nil
$18,201 – $45,000	19c for each $1 over $18,200
$45,001 – $120,000	$5,092 plus 32.5c for each $1 over $45,000
$120,001 – $180,000	$29,467 plus 37c for each $1 over $120,000
$180,001 and over	$51,667 plus 45c for each $1 over $180,000

From 1 July 2024, it is proposed that the 32.5% and 37% tax brackets will be merged into a single 30% tax bracket whereas the threshold for the top 45% tax bracket will increase from A$180,000 to A$200,000. In addition, there is a healthcare levy of 2% of taxable income in most circumstances, and a healthcare surcharge of up to 1.5% may apply where prescribed taxable income limits are exceeded and an appropriate level of private health insurance is not obtained.

There is also a Low Income Tax Offset for lower income earners (up to a maximum of A$700). This is subtracted from tax payable by taxpayers whose taxable income falls within certain thresholds and the entitlement to which is automatically calculated by the Australian Taxation Office (ATO).

For non-residents, the applicable tax rates (2022 - 2023) are:
Taxable income (A$)	Tax on this income (A$)
0 – $120,000	32.5c for each $1
$120,001 – $180,000	$39,000 plus 37c for each $1 over $120,000
$180,001 and over	$61,200 plus 45c for each $1 over $180,000

“Working holiday makers” are subject to a concessional tax rate of 15% on the first A$45,000 of income. Foreign residents are not required to pay the healthcare levy.

For companies the general rate of tax is 30% and this rate applies to all companies that are not eligible for a lower tax rate of 25%. Eligibility for the lower tax rate depends on whether the company is what is termed a “base rate entity”. A base rate entity is a company that has an aggregated turnover of less than A$50 million for the 2019-20 income year or each subsequent income year and 80% or less of its assessable income is “base rate entity passive income” (that is, no more than 80% of the company’s income includes certain passive types of income such as royalties, rent, capital gains and certain dividends and interest). The lower tax rate has been reduced from 26% in the 2020-21 income year and 27.5% in prior income years. Company tax is generally payable quarterly. The amount to be paid is based on income derived from the quarter multiplied by an instalment rate based on the last income tax return lodged.

Generally with trusts, it is the beneficiaries or unit holders, depending on the type of trust, that are subject to tax on their share of the net trust income at the tax rate applicable to the particular beneficiary or unit holder. The trustee will only be taxed (potentially at the maximum 45% rate) if the net income is not distributed to the beneficiaries of the trust by the end of the tax year. In those circumstances the trustee will be taxed and entitled to claim an indemnity out of the trust assets.

Certain types of trusts, such as public trading trusts, are taxed as if they were companies. Special tax rules apply to other types of trusts, such as those used for investment funds such as managed investment trusts (MITs) and attribution managed investment trusts (AMITs). There is a new regime applicable to corporate collective investment vehicles (CCIVs) which, although a type of company, will be subject to taxation as a trust on a similar basis to an AMIT. Superannuation or pension funds are generally taxed at the rate of 15% on various types of income as long as they are treated as, what is termed, a “complying fund”.

Imputation of dividends

Australia has an imputation system of company taxation. Under this system, dividends paid by Australian resident companies to Australian resident shareholders, and on which those shareholders are taxed, are subject to a tax offset that is generally equal to the amount of tax paid by the company declaring the dividend in respect of its profits. This is designed to eliminate double taxation at the company level and the shareholder level.

Companies are required to maintain “franking accounts” which record the tax paid by the company and the amount of a “franking credit” that can be paid in respect of dividends paid to shareholders. Dividends carrying such franking credits are referred to as “franked dividends” and those that carry no franking credit are referred to as “unfranked dividends”.

As a general rule, certain taxpayers are entitled to a refund if their tax offsets for franked dividends exceed their tax liability, ignoring those offsets. Once franking credits have been utilised to offset any income tax liabilities, any excess refunds will be refunded. The taxpayers entitled to the refund of excess franking credits include Australian resident (a) individuals; (b) certain exempt institutions; (c) trustees assessed on an Australian resident beneficiary's share of trust income; (d) complying superannuation funds, and (e) life insurance companies. Companies are generally not entitled to refunds (with limited exceptions).

Consolidated groups

Australia has a complex tax regime applying to consolidated groups of entities. Under this regime a consolidated group is treated as a single entity for income tax purposes. This means that transactions between members of the group are largely ignored for income tax purposes. The head company of the group, which must be an Australian resident company, is responsible for the income tax liabilities of the group and files a single tax return for the group. An election must be made to form a consolidated group and each member of the group must be a wholly-owned Australian resident. The choice to form a tax consolidated group is optional but irrevocable.

In the case of wholly-owned Australian resident subsidiaries of foreign corporations, there are specific rules allowing for the formation of “multiple entry consolidated” (MEC) groups to which the consolidation tax rules have application.

Withholding tax

Non-resident withholding tax is imposed on interest paid or credited to a non-resident. It is also imposed on interest paid to branches of Australian residents outside Australia. Interest withholding tax is imposed at the rate of 10% and in some cases reduced to nil under certain double taxation treaties. An exemption from interest withholding tax is also available for certain publicly offered debentures and dent interests.

Dividend withholding tax at the rate of 30% is payable on unfranked dividends paid to non-residents and, where a double tax treaty exists between Australia and the country to which the dividend is remitted, this rate of withholding is typically reduced. Dividends that are fully franked will not be subject to withholding tax, although the imputation credit attaching to the dividend will not be available to the non-resident. Withholding tax is also levied at the rate of 30% on royalties paid to non-residents, although this rate is reduced (typically to 5% or 10%) under the various double tax treaties.

Transfer pricing

Australia has robust transfer pricing laws. These laws seek to address arrangements that shift profits out of Australia through pricing arrangements with foreign entities. The provisions seek to evaluate whether such pricing arrangements can be justified according to arm’s length pricing principles. Australia seeks to align its law in this regard with the OECD’s transfer pricing guidelines.

Taxpayers are required to “self-assess” their compliance with the transfer pricing rules. Importantly, the laws require taxpayers to document how their arrangements satisfy arm’s length pricing principles. The Commissioner of Taxation may, under the law, substitute the arrangements entered into by taxpayers with what the Commissioner considers to be arm’s length pricing. This may result in an increase in the profits of the taxpayer subject to Australian tax and the imposition of penalties.

The ATO has indicated transfer pricing is a “key compliance focus” and has demonstrated an increased willingness to pursue taxpayers whom it believes have engaged in transfer pricing. It has had success in Australian courts in enforcing the transfer pricing laws.

Thin capitalisation

Australia maintains a thin capitalisation regime. In effect, Australian tax law will disallow a proportion of deductible finance expenses (such as interest) attributable to Australian entities which are foreign controlled and other foreign entities that either invest directly into Australia or operate a business through an Australian permanent establishment. The rules can also apply to Australian entities that control foreign entities or operate an overseas business. There are specific thin capitalisation provisions that apply to authorised deposit-taking institutions such as banks. The thin capitalisation provisions do not apply to taxpayers claiming annual debt expenses (particularly interest) of A$2 million or less.

The effect of these rules is that companies investing into Australia in a substantial way will need to ensure that they maintain the correct ratio of debt to equity in order to avoid having interest deductions disallowed by the ATO. There is a "safe-harbour" rule specified in the rules so that the amount of debt used to finance Australian operations will not be treated as excessive if it is not greater than a debt to equity ratio of 1.5:1. It is proposed that from 1 July 2023, new interest limitation rules will apply. In particular, the existing "safe-harbour" rule will be replaced by a new earnings-based "fixed ratio test" that limits an entity's net debt deductions to 30% of its tax determined earnings before interest, taxes, depreciation, and amortisation (EBITDA), with the ability to carry forward denied deductions for up to 15 years subject to an integrity rule. There are other more complex proposed changes.

Debt/equity rules

Financial arrangements entered into by corporate taxpayers can be tested under Australia’s tax laws to determine whether, notwithstanding the legal form of those arrangements, those arrangements should be treated for tax purposes as debt or as equity. For example, a loan arrangement may be treated under these rules as equity for tax purposes with the result that interest payments on that loan may be denied as a deduction. Conversely, equity held in a company may, under the rules, be treated as debt and dividends paid on the equity may be allowed as a deduction. Whether an arrangement is treated as debt or equity under these rules is also relevant to the tax treatment of that arrangement under the thin capitalisation rules referred to above.

There are tests specified to determine whether an arrangement will be treated as debt or as equity for tax purposes. An arrangement that is treated as both debt and equity under these tests will be treated as debt.

In brief terms, in order that an arrangement be treated as debt for tax purposes it is necessary that the “debtor” have an effectively non-contingent obligation to repay the amount obtained. It also needs to be substantially likely that the amount repaid is at least equal to the amount initially obtained, and this is measured in nominal terms for arrangements of up to 10 years and in present value terms for arrangements that exceed 10 years.

There are also rules to address certain cross-border hybrid arrangements that have a mismatch in tax treatment under the laws of two or more countries. For example, a deduction is allowed for an interest payment under the arrangement in Australia but that payment is not subject to tax in the foreign country. The rules seek to address such mismatches by denying a deduction or including an amount in assessable income.

Taxation of financial arrangements

Australia has complex rules addressing the taxation of the gains and losses from certain financial arrangements. The rules have particular application to large financial entities such as banks, insurance companies, and superannuation funds. It is possible for taxpayers to elect that the Taxation of Financial Arrangements (TOFA) rules apply to financial arrangements to which they are a party. Where TOFA applies, gains and losses are recognised in accordance with various prescribed tax-timing methods including the compounding accruals method and the realisation method.

Capital Gains Tax (CGT)

Capital gains in Australia are generally taxed at the same rate as income tax. Resident individuals and superannuation funds may, however, qualify for a discounted rate of tax in relation to gains from the disposal of assets held for at least 12 months. In the case of individuals, the gains subject to CGT may be reduced by 50%, and in the case of superannuation funds the gains may be reduced by 33⅓%.

In very general terms the amount of capital gain taxed is the difference between the sale price of the asset and its cost plus certain acquisition costs. Capital losses may be offset against capital gains and may be carried forward to be offset against future capital gains. The resulting net capital gain is included in the assessable income of the taxpayer.

There are certain CGT exemptions or concessions applicable to individuals, trusts, and small businesses. For example, individuals who are Australian tax residents are generally not subject to CGT on any gain resulting from the disposal of their main residence.

Foreign residents are subject to CGT on the disposal of interests in a narrower range of assets referred to as “taxable Australian property”. That term includes Australian real property interests and interests of 10% or more in an entity that has more than 50% of the value of its assets referable to interests in Australian real property. A foreign resident disposing of such “taxable Australian property” may be subject to a withholding of 12.5% of the sale proceeds. The withholding obligation is imposed on the purchaser of the relevant property.

Anti-avoidance

Australia’s tax laws contain various provisions directed at tax avoidance schemes. These include general anti-avoidance provisions that can apply to schemes that have a dominant purpose of obtaining a tax benefit under the scheme. There are also provisions specifically directed at “significant global entities” (SGEs), which have a global annual income of A$1 billion or more, which include “multinational anti-avoidance laws” that can apply to certain structures adopted by a SGE to minimise Australian tax from Australian operations; “diverted profits tax” which can apply to the diversion of profits offshore by a SGE to minimise Australian tax, and country-by-country (CBC) reporting obligations.

Goods and Services Tax (GST)

In addition to income tax and CGT, the Federal Government also requires GST-registered entities to pay GST on their taxable supplies. The current GST rate is 10% and is calculated on the (GST exclusive) value of a taxable supply. Australia's GST is a type of value-added tax, whereby the GST is imposed throughout the supply chain but with the end consumer usually bearing the full amount of tax. Generally, a GST-registered business in the supply chain will collect GST on their sales, but will deduct any GST they have incurred on their inputs.

Despite the name, GST applies to more than just the supply of goods and services. Any supply connected with Australia, including supplies of goods, services, real property, rights, licences and intellectual property, is subject to GST if the supplier meets or exceeds the GST registration threshold, unless an exemption applies. Currently, a supplier meets the GST registration threshold if it makes supplies connected with Australia in excess of A$75,000 in any 12-month period.

In response to the growing digital economy, the scope of Australia's GST has been significantly expanded to include certain supplies made by non-residents, or the operator of a digital marketplace, direct to Australian consumers. Essentially, a non-resident entity or operator of a digital marketplace may be required to register for, and pay, GST on any supply made to an "Australian consumer" of:

• intangible (digital) supplies, such as a service, software or licence (e.g. access to apps); or
• "low value goods", being goods with a customs value of A$1,000 or less.

In this context, an "Australian consumer" is an entity or individual who is either not registered for Australian GST or, if GST-registered, not acquiring the supply from the non-resident as part of their enterprise. Strict evidentiary rules apply to non-residents in terms of substantiating whether they are making supplies to Australian businesses or Australian consumers.

While the liability to pay GST to the Federal Government generally rests with the supplier, typically the burden of GST is economically passed on to the recipient. In most cases, Australia’s competition and consumer laws require any pricing to be displayed on a final GST-inclusive basis. As such, should a supplier wish to pass on the burden of GST to the buyer, the GST must either be built into the price displayed or there must be a clear contractual provision obliging the buyer to pay the supplier an additional amount in respect of GST. In the absence of a specific contractual provision, the supplier would not otherwise have an automatic right to recover GST from the recipient of the supply. The inclusion of such contractual provisions is the usual practice in drafting contracts in Australia in a business-to-business context.

Certain purchasers of new residential premises, or potential residential land, are obliged to withhold an amount on account of GST from the purchase price of the property acquired and remit the amount so withheld to the ATO.

Fringe Benefits Tax

Fringe Benefits Tax (FBT) is a federal tax payable by employers on the value of non-cash benefits provided to employees and their associates. FBT is imposed on employers due to the difficulty of collecting tax from employees on such non-cash benefits provided. The types of benefits to which FBT can potentially apply include the provision of a motor vehicle, the provision of accommodation and payment of an employee’s private expenses. Some benefits provided to employees are subject to concessional FBT treatment.

The rate of FBT imposed generally equates to the tax that would have been payable if, rather than the provision of a fringe benefit, an employee on the top marginal rate had been paid a cash amount. The FBT cost of providing fringe benefits to an employee is typically taken into account by the employer when structuring an employee’s remuneration package.

Superannuation Guarantee Charge

Employers in Australia are required to provide a minimum level of superannuation (or pension fund) support to employees by making superannuation contributions to complying superannuation funds. At present, the minimum level of superannuation required to be paid is 10.5% of an employee’s “ordinary time earnings” up to a specified level. This level will gradually increase until it reaches 12% on 1 July 2025.

Employees have the right to choose the complying fund into which payments are to be made by the employer. Employees generally have access to these funds on their retirement from the workforce.

Employers who do not pay the minimum amount of superannuation required will be subject to the Superannuation Guarantee Charge based on the amount that the employer has failed to contribute plus an interest charge and administration fee.

Stamp duty

Each of Australia’s states and territories imposes stamp duty on certain transactions. As stamp duty is a state-based tax, there are marked differences amongst the jurisdictions in terms of the types of assets that are dutiable. However, all states and territories continue to impose stamp duty on transactions involving real estate, including:

• the transfer of significant holdings of shares in private companies and trusts that directly or indirectly hold interests in land; and
• the direct transfer of interests in land.

The legislation in each state and territory is not uniform. For example, Queensland, Western Australia and the Northern Territory continue to impose duty on the transfer of “business assets” such as goodwill, intellectual property and licences located in the relevant state or territory. Further, each state and territory has its own definition of “land” which includes not only freehold land but also an entity’s interest in a lease or any assets physically fixed to land (e.g. tenant fixtures and leasehold improvements).

The rate of stamp duty varies among the states and territories and can be substantial. In New South Wales, for example, duty at rates of up to 7% of the transaction value can apply. In recent times, many states impose an additional stamp duty surcharge of up to a further 8% on acquisitions of residential property by foreign persons.

Payroll tax

Each of the states and territories imposes payroll tax. This is a tax based on the amount of wages paid by certain employers where the annual wages or deemed wages paid by the employer exceed a specified threshold (which varies among the states and territories). In this context, wages can include payments made to contractors and non-cash remuneration such as fringe benefits and share and share option schemes. The rates of payroll tax vary from 4% to approximately 7% of the annual wages bill.

Land tax

Land tax is levied by the six states and by the Australian Capital Territory on the unimproved value of land. All states other than Western Australia also impose a land tax surcharge of up to 4% which applies to foreign owners of land. Generally, concessions are granted in respect of agricultural land and residential land that is owneroccupied. Although land tax is payable by the owner, in the case of commercial leases, the owner may seek to pass the land tax cost on to the tenant.