This country-specific Q&A provides an overview to tax laws and regulations that may occur in Australia.
It will cover witholding tax, transfer pricing, the OECD model, GAAR, tax disputes and an overview of the jurisdictional regulatory authorities.
This Q&A is part of the global guide to Tax. For a full list of jurisdictional Q&As visit http://www.inhouselawyer.co.uk/index.php/practice-areas/tax-second-edition/
How often is tax law amended and what are the processes for such amendments?
The frequency with which Australian tax law is amended varies depending on the priorities of the government. Legislative changes can be made at any time. However, the federal government releases its budget annually each May, which often includes plans to reform taxation laws.
Generally, the government decides on tax policy, taking into account advice from the Australian Treasury. The government usually consults on significant tax law amendments. Consultation can occur at either or both the policy development and legislation development stages. The Australian Treasury undertakes the consultation on potential tax law amendments on behalf of the government, and generally works with the Board of Taxation and the Australian Taxation Office (ATO) in doing so. The consultation process varies for each measure, and may include open public consultation, targeted public consultation and targeted confidential consultation.
Draft legislation is then prepared, or updated, to reflect the outcomes of the consultation process. All tax law amendments are made following Australia’s ordinary parliamentary procedure. At a federal level, this involves the bill being introduced into the lower house of parliament, the House of Representatives, where it must be approved by a majority. Before receiving approval, the bill will be subject to parliamentary debate, which may result in amendments to the bill. Once passed by the House of Representatives, the bill then requires a majority approval from the upper house of parliament, the Senate. The Senate is not permitted to make amendments to the bill, but it can refer the bill back to the House of Representatives for further amendments. Once the bill is passed by both houses of parliament, it receives Royal Assent from the Governor General and becomes an Act of Parliament.
Amendments to state taxes follow a similar process.
What are the principal procedural obligations of a taxpayer, that is, the maintenance of records over what period and how regularly must it file a return or accounts?
We have limited our response to this question to obligations under Australia’s income tax laws.
Retention of records
Australia operates a self-assessment taxation regime which means that all taxpayers are obliged to retain their records for certain periods of time to substantiate their self-assessed tax positions. Statutory evidence records must be retained for five years after the records were prepared or obtained, or the completion of the transactions or acts to which those records relate, whichever is the later.
There are some exceptions to the time frames outlined above. For example:
- if an income tax assessment is amended, records must be kept for the later of five years after those records were prepared or obtained, or the completion of the transactions to which those records relate or the end of the assessment period as so extended by agreement or on the Commissioner’s application to the Federal Court to extend the period to amend an assessment;
- a taxpayer that makes a capital gain or loss from a CGT event is required to retain their records for five years after it becomes certain that no CGT event (or further event) can happen;
- a taxpayer that has incurred a tax loss should retain their records substantiating the loss until the later of the end of the statutory record retention period or the end of the period for reviewing assessments for the income year in which the loss is fully deducted or the net capital loss is fully applied; and
- in circumstances where the Commissioner of Taxation (Commissioner) can make a determination in respect of a taxpayer (e.g. under the transfer pricing regime in Division 815-B of the Income Tax Assessment Act 1997 (Cth) (ITAA97) or under the Diverted Profits Tax (DPT) regime, discussed further below at questions 9 and 10, respectively). Records ought to be kept for 7 years after the day on which the Commissioner issues a notice of an assessment.
In circumstances where a formal dispute arises, the taxpayer ought to retain relevant records until any objection or appeal is finally determined.
In addition, a breach of certain record keeping requirements set out in the Taxation Administration Act 1953 (Cth) (TAA) for a matter that is subject to an application of the transfer pricing rules in subdivisions 815-B or 815-C of the ITAA97, will result in the taxpayer being taken not to have a reasonably arguable position for the purposes of the application of the administrative penalties rules. The requirements under these record keeping rules include that the required records: (1) are prepared before the time by which the entity lodges its income tax return; (2) explain why the relevant subdivision does or does not apply, and (3) explain why the application of the subdivision to the matter in question best achieves consistency with the OECD’s transfer pricing guidance material.
Taxpayers are required to keep records in English so as to enable a person’s assessable income and allowable deductions and any credits to which the person is entitled, to be readily ascertained. The Commissioner’s Taxation Ruling “TR 96/7 - Record keeping” outlines the general principles concerning the retention of records.
Who are the key regulatory authorities? How easy is it to deal with them and how long does it take to resolve standard issues?
The ATO, led by the Commissioner, is the Australian federal tax regulator. Each of the Australian states and territories also has a state revenue authority which is led by its own Commissioner of State Revenue. The ATO also administers customs and excise duty in conjunction with the Department of Immigration and Border Protection.
For each of income tax and indirect tax purposes, the ATO categorises taxpayers (on an economic group basis) into one of four broad risk groups (higher risk, key taxpayer, medium risk and lower risk). This is known as the ATO’s Risk-Differentiation Framework (RDF). The RDF categorisation is based on the likelihood of a taxpayer taking taxation positions which the ATO considers do not comply with the law and the consequences of any such potential non-compliance. A taxpayer’s categorisation may affect the likelihood of its taxation affairs being reviewed by the ATO and the means by which the ATO undertakes such review. For example, taxpayers that are deemed to be higher risk will usually be under continuous review by the ATO and may be more likely to be the subject of an exercise of the Commissioner’s formal access and information gathering powers.
The ATO issues public guidance in the form of guidelines, rulings and determinations (among other things) and also encourages taxpayers to engage with the ATO to seek private rulings. A simple private ruling request may be resolved within 28 days; however, more complex requests will often take 60 days or longer and involve the ATO requesting further information and documents from the taxpayer before it will rule on the issue. Rulings can usually be applied for in advance of a transaction taking place in order to provide certainty to the taxpayer.
Audits of taxpayers can take a few months for a discrete issue or last for over four years for audits of complex issues where large amounts of tax are in dispute.
The various state and territory revenue authorities also undertake audits, issue guidance to taxpayers and issue private rulings upon request. Each revenue authority is different, but on average a standard issue would take 3 – 4 weeks to resolve, while more complex issues could take many months and involve the revenue authority requesting additional information and documents.
Are tax disputes capable of adjudication by a court, tribunal or body independent of the tax authority, and how long should a taxpayer expect such proceedings to take?
Yes, tax disputes are capable of adjudication by a court or tribunal.
Using income tax as an example, taxpayers that are dissatisfied with an income tax assessment or a private ruling from the Commissioner, can object to the assessment or ruling within a certain time period. There are some limited circumstances when a taxpayer cannot object to a private ruling. If the Commissioner disallows the objection, or is deemed to have disallowed the objection, then the taxpayer can apply to the Administrative Appeals Tribunal (AAT) for review of the decision or appeal the decision to the Federal Court. The following considerations are relevant when deciding whether to apply to the AAT or appeal to the Federal Court:
- cost – it generally costs more to appeal an objection decision to the Federal Court;
- formality – AAT proceedings are less formal than Federal Court proceedings;
- flexibility – the AAT has greater procedural discretion than the Federal Court;
- power to make orders – the AAT has power to ‘stand in the shoes’ of the original decision maker when making orders, whereas the Federal Court does not;
- relief that can be sought – the AAT has power to make a wider range of decisions and orders than the Federal Court; and
- costs – generally the AAT does not award costs, whereas the Federal Court does.
A taxpayer that decides to appeal to the Federal Court, has 60 days from the ATO’s disallowance (or deemed disallowance) of the objection to file the notice of appeal. The Federal Court has issued Taxation Practice Note TAX-1, which outlines the management of tax cases in the Federal Court, to ensure that cases are dealt with expeditiously. The first case management hearing will take place around 3 - 6 weeks from the date of filing the notice of appeal. At this hearing, the Court may fix the trial date. The Federal Court has published a practice note (CPN-1), which provides that the Court will endeavour to list the hearing within 6 months. The practice note also provides that the Court will endeavour to deliver its decision within 3 months of the final submissions. In practice, these time frames are often longer. If the decision has not been delivered within 6 months, then the Court will generally advise the parties of the date it expects judgement to be delivered.
If a taxpayer applies to the AAT for review of a decision, the first conference will generally be held within 6 to 10 weeks after lodging the application. If the matter cannot be settled at a conference, a hearing date will be set after the AAT has consulted the parties on their availability, the availability of witnesses and the likely length of the hearing. Following the hearing, a decision is likely within 2 months.
State revenue authorities
All states and territories permit appeals from taxation decisions by state or territory Commissioners either to a state or territory administrative tribunal, or the state or territory Supreme Court, or, in some cases, to both. How long it will take to receive judgement depends on the forum and the complexity of the issue. A court will usually take longer than a tribunal to deliver judgement. For example, in Victoria, the Victorian Civil and Administrative Tribunal will usually provide a decision within six weeks of the hearing, whereas the Supreme Court aims to deliver a judgement within three months from the date that judgement was reserved.
Are there set dates for payment of tax, provisionally or in arrears, and what happens with amounts of tax in dispute with the regulatory authority?
We have limited the response to this question to dealing with income tax. Before income tax can become due and payable, the Commissioner must make an assessment of the taxpayer’s income tax liability. For full self-assessment taxpayers (including companies), the filing of the tax return is deemed to be the making of an assessment. The due date for lodgement of a tax return depends on certain criteria, though for most taxpayers with a standard income year ending 30 June, their return will be due by 31 October. For other taxpayers (such as individuals), the Commissioner must issue a formal assessment. For most taxpayers, any income tax payable will be due 21 days after lodgement of their tax return.
Certain taxpayers with income exceeding specified thresholds are required to pay their expected tax liabilities by way of monthly, quarterly or annual instalments. These are referred to as Pay as you go (PAYG) instalments. The instalments are credited against the actual tax liability incurred, as assessed for an income year. The rationale behind requiring taxpayers to pay tax in instalments is to mitigate risks associated with taxpayers failing to adequately provide for their tax liabilities throughout the year. The Commissioner also has the discretion to grant extensions for payment due dates.
If a taxpayer disputes an assessment, the due date for payment of the assessed amount does not change. The taxpayer may lodge an objection to the assessment, but they are still required to pay the outstanding amount. For disputed tax liabilities, the ATO may offer taxpayers the option to enter into a ‘50/50 arrangement,’ under which the Commissioner agrees to defer payment of 50% of the disputed tax debt and related amounts (including any penalties or interest) until 14 days after the dispute is determined. In order to be granted this deferral, the taxpayer must agree to pay 50% of the disputed tax debt, along with the full amount of any undisputed tax debt, and cooperate fully with the ATO in providing information the ATO requests. Under these arrangements, if the taxpayer is unsuccessful in the dispute proceedings, then the Commissioner also agrees to remit 50% of the general interest charge that would otherwise be incurred by the taxpayer.
Is taxpayer data recognised as highly confidential and adequately safeguarded against disclosure to third parties, including other parts of the Government?
Taxpayer data is recognised in Australia as highly confidential.
It is a criminal offence for an ATO officer to disclose confidential taxpayer information. There are, however, a number of specific exceptions to this rule, including if information is already publicly available or if it is disclosed to Government Ministers, for other government purposes or for law enforcement and related purposes. In addition, the ATO has established various internal processes that must be followed when a disclosure is to be made in order to ensure taxpayer confidentiality is maintained wherever possible.
Also, the Parliamentary Privileges Act 1987 (Cth) enables a taxation officer to disclose protected information to a committee of one or both Houses of Parliament.
Is it a signatory (or does it propose to become a signatory) to the Common Reporting Standard? And/or does it maintain (or intend to maintain) a public Register of beneficial ownership?
Australia is a signatory to the Common Reporting Standard. Legislation implementing the Common Reporting Standard took effect on 1 July 2017.
At present, Australia does not maintain a public Register of beneficial ownership. Treasury is currently considering the potential operation of a Register of beneficial ownership and intends to make recommendations to the Government on the details, scope and implementation of such a Register.
To inform its recommendations, Treasury is currently consulting stakeholders and considering submissions made in response to a public consultation paper.
What are the tests for residence of the main business structures (including transparent entities)?
The main categories of business structures in Australia are:
- Sole traders (i.e. individuals);
- Partnerships; and
An individual is resident in Australia if he or she resides in Australia. An individual can also become resident if he or she is domiciled in Australia (unless their permanent place of abode is outside Australia) or has been in Australia for at least 183 days (continuously or otherwise) in the relevant income year (unless the Commissioner is satisfied that their permanent place of abode is outside Australia and the individual does not intend to take up residence in Australia). Members of certain superannuation funds (and certain members of their family) may also be taken to be Australian tax residents.
A company will be resident in Australia if it is incorporated in Australia, or if it is not incorporated in Australia, then it carries on business in Australia and either has its central management and control in Australia, or its voting power controlled by shareholders that are residents of Australia.
Partnerships and trusts
Partnerships and trusts are tax transparent entities (although there are exceptions). However, these entities may still be characterised as “resident” for specific purposes.
For example, for the purposes of Division 6 of the Income Tax Assessment Act 1936 (Cth) (ITAA36) (the general trust income provisions), a trust will generally be referred to as a “resident trust” for an income year if it had an Australian resident trustee or its central management and control in Australia at any time during the income year.
In contrast, for the purposes of Division 6C of the ITAA36 (the public trading trust provisions), a unit trust will be a resident of Australia if it has:
- property situated in Australia or the trustee carries on business in Australia; and
- the central management and control of the unit trust was in Australia or the majority of the beneficial interests in the income or property of the unit trust are held by Australian residents.
A partnership is not required to pay income tax, but is nevertheless required to file a partnership tax return which is broadly prepared as if the partnership were a resident taxpayer.
A corporate limited partnership, which is taxed as a company, is resident in Australia if it is formed in Australia or carries on business and has its central management and control in Australia.
Can the policing of cross border transactions within an international group to be a target of the tax authorities’ attention and in what ways?
Cross border transactions, specifically the transfer pricing associated with those transactions, is an area of focus for the ATO. This is manifested in a number of ways, through:
- taxpayers being required to disclose their cross border transactions and transfer pricing (for example, the requirement for some taxpayers to complete the international dealings schedule in the annual tax return and the requirement for SGEs with a taxable presence in Australia to provide general purpose financial statements);
- compliance and enforcement activity (e.g. risk reviews and audits) focused on cross border transactions and transfer pricing; and
- the ATO issuing guidance on its compliance approach to various cross border transactions and transfer pricing issues and what the ATO sees as risk factors which will attract the allocation of compliance resources. For example, “Practical Compliance Guidelines” have been issued in respect of intra-group financing transactions and the use of offshore marketing or procurement hubs.
More generally, the taxation of multinational enterprises has been the subject of political attention, with the Australian government introducing a DPT and a Multinational Anti-Avoidance Law (MAAL) (which targets arrangements designed to avoid the creation of a permanent establishment or other taxable presence in Australia, discussed further in question 10 below) in response to public sentiment that multinationals are not paying their “fair share” of tax in Australia.
Is there a CFC or Thin Cap regime? Is there a transfer pricing regime and is it possible to obtain an advance pricing agreement?
Australia’s income tax law includes controlled foreign company (CFC), thin capitalisation and transfer pricing regimes.
Very broadly, under Australia’s CFC regime, an Australian resident can be subject to tax in Australia on its share of certain types of income, as and when earned by a controlled foreign entity, by way of attribution.
Generally, a foreign company will be a controlled foreign entity if, in aggregate, 5 or fewer Australian entities, either directly or indirectly through associates, hold 50% or more of the interests in the company. A foreign company may also be a controlled foreign entity if an Australian entity holds 40% or more of the interests in the company.
The types of income which will be subject to attribution depend on where the controlled foreign entity is resident and whether it carries on an active business.
Despite its name, Australia’s CFC regime can also apply to controlled foreign trusts and partnerships.
Australia’s thin capitalisation regime can operate to disallow debt deductions where an entity is considered to be thinly capitalised.
Broadly, entities which are not authorised deposit taking institutions (ADIs) under Australian law are considered to be thinly capitalised if their level of debt exceeds their “maximum allowable debt”. Entities which are ADIs are considered thinly capitalised if they have less capital than the prescribed minimum capital amount.
The maximum debt an entity will be permitted to claim interest deductions on depends on whether the entity is characterised as an “outward investing entity” or an “inward investing entity”, whether the entity is a “general” investor or a “financial” investor and whether or not it is an ADI. The characterisation of the entity determines the safe harbor which applies and whether the entity is entitled to calculate and apply as its “maximum allowable debt” its “arm’s length debt amount” or “worldwide gearing debt amount” (for non-ADIs) or a minimum capital amount equal to its “arm’s length capital amount” or “worldwide capital amount” (for ADIs).
The safe harbor for non-ADI general investors is broadly equivalent to a debt to equity ratio of 1.5:1. Non-ADI financial investors are entitled to a safe harbor debt amount broadly equivalent to a debt to equity ratio of 15:1, although in some cases this may be reduced to 1.5:1. ADI investors are entitled to a safe harbor minimum capital amount that is broadly equivalent to 6% of assets.
Australia operates a complex transfer pricing regime which has recently undergone significant reform. Depending on the transaction in question, up to three different transfer pricing regimes may apply to the transaction:
- Former Division 13 of the ITAA36, which applies to income years which commenced before 29 June 2013;
- Subdivision 815-A of the ITAA97, which was introduced with retrospective effect to apply to income years commencing between 1 July 2004 and 28 June 2013 (inclusive). However, subdivision 815-A only applies to cross border transactions between Australia and a country with which Australia has a double tax agreement; and
- Subdivisions 815-B and 815-C of the ITAA97, which apply to income years commencing on or after 29 June 2013.
Unlike Division 13, Subdivisions 815-A, 815-B and 815-C explicitly require that the provisions be applied in a way which best achieves consistency with OECD transfer pricing guidance.
At the date of writing, the only case to have considered the substantive operation of Division 13 and Subdivision 815-A was Chevron Australia (Chevron Australia Holdings Pty Ltd v Commissioner of Taxation  FCAFC 62 (single judge of the Federal Court) and Chevron Australia Holdings Pty Ltd v Commissioner of Taxation (No 4)  FCA 1092 (Full Federal Court)). Subdivisions 815-B and 815-C have not yet been tested in Court.
Advance pricing agreements (APAs)
The ATO operates an advance pricing arrangements program. Whilst taxpayers can approach the ATO to request an APA, entry into the APA program is by formal invitation from the ATO.
Is there a general anti-avoidance rule (GAAR) and, if so, how is it applied by the tax authority? Eg is the enforcement of the GAAR commonly litigated, is it raised by tax authorities in negotiations only, etc?
Again, we have limited our response to income tax. Australia has a number of income tax GAARs, which apply to:
- Schemes to obtain an income tax benefit;
- Dividend stripping;
- Imputation benefit schemes;
- Multinational anti-avoidance (i.e. the MAAL); and
- Diverted profits (i.e. the DPT).
The most commonly applied GAAR is the GAAR which applies where there is a scheme that gives rise to an income tax benefit and it can be concluded, on an objective analysis, that a person or persons entered into or carried out the whole or a part of the scheme, for the sole or dominant purpose of enabling the taxpayer to obtain the tax benefit.
The GAAR is commonly raised by the ATO in negotiations and often litigated.
The ATO has internal procedures designed to ensure that the Commissioner applies the GAAR in a consistent and coherent fashion. The most important of these procedures is the ATO’s “General Anti-Avoidance Rules” (GAAR) Panel. The GAAR Panel is an internal ATO advisory body, comprised of senior ATO officers and business and professional people external to the ATO who are invited to participate. Where an ATO officer or audit team proposes to apply a GAAR to an arrangement, the matter will be considered by the GAAR Panel which will provide advice and recommendations to the officer or team on how they ought to proceed. However, the final decision on whether to apply the GAAR still rests with the relevant officer or team charged with responsibility for the matter. The ATO officer or team seeking to apply the GAAR must appear before the GAAR Panel and the taxpayer will also be extended an invitation to appear and provide submissions.
In recent years, the Australian government has sought to strengthen the GAAR by introducing two new elements specifically targeted at multinational enterprises – the MAAL and the DPT.
The MAAL commenced on 1 January 2016 and applies to schemes entered into by SGEs that avoid having a taxable presence in Australia.
The DPT commenced on 1 July 2017 and applies to SGEs to ensure the economic substance of their activities in Australia is properly taxed and profits are not diverted offshore. The DPT applies a penalty rate of 40% to any profit deemed to be diverted.
As the MAAL and the DPT have only just been introduced, they have not been the subject of litigation.
Are there any plans for the implementation of the OECD BEPs recommendations and if so, which ones?
Australia has publicly announced its commitment to the OECD’s BEPS regime. The table below summarises, as at September 2017, Australia’s response to the BEPS Action items.
BEPS Action item
Australia introduced amendments to its GST laws to ensure GST is payable on international sales of services and digital products provided to Australian consumers from 1 July 2017.
Australia has committed to implementation of BEPS Action Item 2 as well as measures to address hybrids more generally. The government announced in May 2017 specific rules to eliminate hybrid mismatches in relation to Additional Tier 1 regulatory capital, which is issued by entities such as banks and insurers. Legislation is currently being drafted and the rules are scheduled to apply from the later of 1 January 2018 or 6 months after royal assent.
Harmful tax practices
The ATO has implemented the BEPS transparency recommendation through the exchange of private ruling information. The ATO announced that it began exchanging future rulings information on 1 April 2016 and past rulings in December 2016.
Australia has begun incorporating this recommendation into its treaty practices. For example, the BEPS changes were incorporated into the Australia-Germany tax treaty that came into force on 7 December 2016.
Permanent Establishment status
Australia introduced the MAAL from 1 January 2016. This was contrary to the view of the OECD, which maintained it did not want countries taking unilateral action outside the BEPS regime.
Despite, and in addition to, the introduction of the MAAL, Australia has begun adopting the BEPS suggested wording changes to the definition of “permanent establishment” in its treaties (for example, see the Australia-Germany tax treaty that came into force on 7 December 2016).
8 – 10
Transfer Pricing – intangibles, risks & capital, high-risk transactions
Australia’s transfer pricing laws in Division 815 of the ITAA97 were amended to ensure the recommendations made under these action items are considered when interpreting Australia’s laws. The changes commenced on 1 July 2016.
Disclosure of aggressive tax planning
The ATO is working with Treasury to design a framework for mandatory disclosure rules under this action item.
Transfer pricing documentation
From 1 January 2016, Australia has implemented laws requiring SGEs to provide to the ATO a country by country report, a Master file and a Local file within 12 months of the end of their income tax year.
The ATO has reviewed its current mutual agreement procedure processes.
Australia signed the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting on 7 June 2017.
How will BEPS impact on the government’s tax policies?
As Australia has implemented most of the BEPS Action items, it is clear that BEPS has had a significant impact on the Australian government’s tax policies. That said, in our view, ultimately, the Australian government’s tax policies will remain driven by the needs of Australia’s economy and by reference to the prevailing political climate in Australia.
Does the tax system broadly follow the recognised OECD Model?
Does it have taxation of; a) business profits, b) employment income and pensions, c) VAT (or other indirect tax), d) savings income and royalties, e) income from land, f) capital gains, g) stamp and/or capital duties.
If so, what are the current rates and are they flat or graduated?
Australia has entered into an extensive network of tax treaties which broadly follow the OECD Model Convention.
Companies are subject to a flat rate of tax of 30% on their taxable income (broadly, gross income less allowable deductions).
Employment income and pensions
Employment income is taxed in the hands of the employee as part of an individual’s taxable income at progressive marginal rates.
The current income tax rates for the 2017/18 income year applicable to Australian tax resident individuals are:
Tax on this income
$0 – $18,200
$18,201 – $37,000
19c for each $1 over $18,200
$37,001 – $87,000
$3,572 plus 32.5c for each $1 over $37,000
$87,001 – $180,000
$19,822 plus 37c for each $1 over $87,000
$180,001 and over
$54,232 plus 45c for each $1 over $180,000
In addition to the headline tax rates above, additional levies, such as the “Medicare levy” of 2% can also apply.
Subject to the operation of a double tax agreement, individuals who are not tax resident in Australia, are subject to the following rates of income tax for the 2017/18 income year:
Tax on this income
$0 – $87,000
32.5c for each $1
$87,001 – $180,000
$28,275 plus 37c for each $1 over $87,000
$180,001 and over
$62,685 plus 45c for each $1 over $180,000
The income tax treatment of retirement income will depend on the particular type of payment received. Government pensions and private / self-funded superannuation are generally afforded concessional income tax treatment.
Further, benefits paid or provided to employees or their associates in lieu of a portion of the employees’ salary or wages (e.g. the provision of a motor vehicle, entertainment, interest free loans, etc) attract fringe benefits tax (FBT) (subject to certain exemptions) at a rate of tax equivalent to the top individual marginal rate of tax plus the Medicare levy (i.e. currently 47%). FBT is imposed on employers rather than on the employees or associates who receive the benefits.
VAT (or other indirect tax)
Australia’s value added tax is known as the “Goods and Services Tax” and is imposed at a rate of 10% of the value of goods and services which are not characterised as input taxed (i.e. exempt) supplies or GST-free (i.e. zero-rated) supplies.
There are also other more specific indirect taxes which can apply at both the Commonwealth and State and Territory levels. These include, but are not limited to, excises and tariffs on specific goods and services such as alcohol, tobacco, luxury cars and fuel.
Savings income and royalties
Income derived from savings is included in the calculation of a person’s taxable income and subject to income tax accordingly.
Whilst not a tax on savings per se, from 1 July 2017 a new “Major Bank Levy” of 0.015% of prescribed liabilities per quarter applies to authorised deposit taking institutions which have total liabilities of more than AU$100 billion.
Royalty income received by an Australian tax resident will be included in the calculation of that person’s or entity’s assessable income and subject to tax accordingly.
Subject to the operation of a double taxation agreement (and any specific exemptions which may apply), interest, dividends and royalties with an Australian source received by a non-resident will be subject to income tax. However, such payments will generally be subject to a final withholding tax imposed at the following rates (again, subject to the operation of any applicable double taxation agreement):
- Interest – 10%
- Dividends – 30%
- Royalties – 30%
Income from land
Income from the use of Australian land, such as rent, would ordinarily be included within the calculation of taxable income as assessable income and subject to income tax at the tax rates ordinarily applicable to the taxpayer.
Capital gains from the disposal of Australian land will also usually be included within the calculation of taxable income and subject to income tax. However, some taxpayers that have held the land in question for at least 12 months may be entitled to a discount which can potentially reduce the taxable gain by up to 50%. Further, there are exceptions to the taxation of capital gains, including for gains made on a taxpayer’s principal place of residence.
In certain circumstances, purchasers of a direct or indirect interest in Australian land from a non-resident may be required to withhold from the non-resident 12.5% of (broadly) the purchase price. This is not a final withholding tax for the vendor.
Capital gains or losses arise on the happening of “CGT events” to capital gains tax assets. There are numerous potential CGT events that might happen, including a sale or other disposal of an asset held on capital account. The net capital gain which a taxpayer derives in an income year is taken into account in the calculation of that taxpayer’s taxable income and taxed at the taxpayer’s applicable income tax rate.
A taxpayer’s net capital gain for an income year is, broadly, the sum of each of its capital gains less any capital losses for that income year less any available prior year capital losses. As noted in relation to capital gains arising from the disposal of land, some taxpayers may be entitled to have a capital gain included in the calculation of the taxpayer’s net capital gain discounted by as much as 50%.
Australia’s capital gains tax regime also includes a participation exemption for Australian tax resident companies. Under this exemption, an Australian tax resident company which holds a non-portfolio interest (broadly, an interest of 10% or more) in a foreign company which carries on an active business may be entitled to disregard (in part or in full) the capital gain it makes from disposing of its interests in that foreign company.
Non-resident taxpayers are generally exempt from income tax on capital gains unless the asset to which the capital gain relates is Taxable Australian Property (TAP). Broadly, TAP includes:
- real property (including leases) in Australia;
- mining, quarrying or prospecting rights in respect of resources situated in Australia;
- an indirect Australian real property interest, which, very broadly, is a share (or other types of membership interest) the value of which is principally derived from Australian real property; and
- assets used to carry on business at an Australian permanent establishment.
Stamp and/or capital duties
Stamp duties are imposed by each Australian State and Territory on transactions or property which exhibit the relevant nexus with that State or Territory. The types of transactions or property which are subject to duty vary between the jurisdictions and can include the transfer of intellectual property or business assets.
The rates of duty will vary as between jurisdictions and the type of transaction on which duty is being imposed.
Is the charge to business tax levied on, broadly, the revenue profits of a business as computed according to the principles of commercial accountancy?
Income tax is levied on an entity’s taxable income. An entity’s taxable income is, broadly, the entity’s assessable income, less any allowable deductions. The differences which exist between accepted commercial accounting principles and the income tax law means that a taxpayer’s taxable income may be materially different to its revenue profit for accounting purposes.
At a more practical level, broadly, a business’s income tax liability will be calculated by making adjustments to the revenue profit recorded in the business accounts to recognise the various differences which exist between the tax and accounting treatments of individual items of revenue and expense that contribute to the profit calculation.
Are different vehicles for carrying on business, such as companies, partnerships, trusts, etc, recognised as taxable entities? What entities are transparent for tax purposes and why are they used?
As set out at Question 7, companies, partnerships and trusts are all recognised as entities for income tax purposes. Partnerships are generally treated as fully tax transparent (i.e. a partnership’s net income and losses flow through to the partners) and trusts are generally treated as largely tax transparent (i.e. a trust’s net income can flow through to its beneficiaries, but its losses cannot), but there are exceptions. Partnerships and trusts which are (respectively) characterised as corporate limited partnerships and as public trading trusts or corporate unit trusts are broadly taxed like companies.
Taxation is one of many commercial and legal factors which can influence, or are relevant to, the choice of vehicle for carrying on a business. For example, when deciding upon the appropriate investment vehicle for a business expected to initially generate tax losses and involve capital assets such as land, from an income tax perspective, consideration may be given to the fact that:
- Tax losses are trapped within companies and trusts, but can flow through to, and be used by, the partners of a partnership to offset other income; and
- Companies are unable to access the 50% capital gains tax discount, whereas the beneficiary of a trust or a partner in a partnership may be entitled to the benefit of the discount.
Is liability to business taxation based upon a concepts of fiscal residence or registration? Is so what are the tests?
Australian income tax is levied based on the residence of the taxpayer and the source of its income. Subject to the application of any relevant double taxation agreement:
- Australian tax residents are subject to Australian income tax on their worldwide income (i.e. irrespective of source); and
- • foreign tax residents are subject to Australian income tax on income which has an Australian source.
Whether income has an Australian source is a question of fact and must be determined on a case by case basis.
Whether income has an Australian source is a question of fact and must be determined on a case by case basis.
The tests for residence are discussed in more detail at question 7 above.
Are there any special taxation regimes, such as enterprise zones or favourable tax regimes for financial services or co-ordination centres, etc?
Australia does not have any special taxation regimes in the sense alluded to in the listed examples. However, there is a range of special purpose provisions targeted at particular activities or circumstances which confer concessionary tax treatment. These include (but are not limited to):
- Managed investment trusts (MIT) and Attribution managed investment trusts (AMIT) regimes – The MIT provisions were introduced to encourage foreign investment into Australia and enhance the competitiveness of Australia’s fund management industry. MITs and AMITs are specific types of Australian trusts afforded special taxation treatment. For example, a MIT is able to elect to treat all of its gains and losses on capital account whilst the members of a MIT which is also an AMIT are taxed on an attribution basis.
- Offshore banking units (OBUs) – The OBU provisions were introduced to encourage offshore banking activity in Australia. Broadly, income derived by an offshore banking unit from its offshore banking activities may be eligible to be taxed at an effective rate of 10%.
- Investment manager regime (IMR) – The IMR provides a number of concessions to widely held foreign funds which invest into, or through, Australia. The regime is intended to attract foreign investment into Australia and promote the use of Australian fund managers. Very broadly, under the IMR, eligible returns or gains attributable to certain financial arrangements may be exempt from income tax.
- Venture capital limited partnerships and Early stage venture capital limited partnerships – these measures are intended to encourage venture capital investment in Australia by providing a variety of tax concessions for eligible local and foreign investors. For example, the tax concessions can include flow through tax treatment and the exemption from income tax of certain income and gains on eligible venture capital investments.
Are there any particular tax regimes applicable to intellectual property, such as patent box?
There is no specific tax regime which applies to intellectual property. However, there are some specific rules and concessions which are focused on intellectual property. For example:
- The research and development tax incentive which is intended to encourage research and development activity which benefits Australia; and
- Expenditure which falls within the software development pool provisions is eligible for accelerated depreciation.
Queensland, Western Australia and the Northern Territory impose stamp duty on transfers of intellectual property (IP). However, in Queensland, IP is not dutiable unless it is transferred with Queensland land or a Queensland business asset other than IP or personal property.
In Western Australia, a transfer of IP is not dutiable if the only dutiable property the subject of the transaction is IP. Note that a “business identity” (a business name, trading name or internet domain name, or a right to use such name) is a separate asset to IP in Western Australia. Therefore, if one of these items is transferred with IP (as defined), both the business identity and the IP will be dutiable.
Is fiscal consolidation employed or a recognition of groups of corporates for tax purposes and are there any jurisdictional limitations on what can constitute a group for tax purposes? Is a group contribution system employed or how can losses be relieved across group companies otherwise?
Under Australia’s income tax consolidation regime, a wholly-owned corporate group of Australian resident entities (companies, partnerships and trusts) can elect to be treated as if it were a single entity for the purpose of calculating its income tax liability or tax loss. The head company and subsidiary members of the consolidated group must not be prescribed dual residents. If an Australian-owned group chooses to consolidate, then the decision is irrevocable and all of the head company's eligible wholly-owned subsidiaries must become members.
Where a foreign-owned group of Australian resident subsidiaries does not have a single resident head company, the Australian group can elect to form a multiple entry consolidated group (an MEC group).
Very broadly, the subsidiary members of a consolidated group are treated as if they were divisions of the head company, rather than separate taxpayers. As a result, the tax attributes of the group, including losses, are recognised by and “belong to” the head company of the group and can be applied to reduce the taxable income of the group.
The head company of the tax consolidated group is primarily liable for the tax liabilities of the whole group. If the head company defaults in discharging the liabilities, then the subsidiary members of the group are jointly and severally liable unless there is a valid tax sharing agreement in place which effectively caps the liability of each subsidiary member.
The income tax consolidation regime only applies to income tax and does not impact on the member’s liability for other Federal taxes (although for completeness there are other consolidation regimes which can operate in respect of other taxes, such as the Goods and Services Tax).
Are there any withholding taxes?
Broadly, interest, dividends and royalties received by a non-resident from an Australian source will generally be subject to withholding tax (subject to the operation of a double taxation agreement and any specific exemptions which may apply).
Australia also imposes withholding tax on certain other payments (including payments for entertainment, sports and certain construction activities) received by foreign residents that do not have a permanent presence in Australia.
Under Australia’s PAYG withholding regime, employers withhold tax from salaries or wages paid to employees and certain other individuals taxed in the same way. The PAYG withholding regime also operates in respect of payments made to a business that does not quote an Australian Business Number or in respect of certain bank accounts and shares or trust interests, where an investor does not quote a Tax File Number.
Are there any recognised environmental taxes payable by businesses?
The Australian government abolished a short-lived carbon tax in 2014, instead opting in favour of an Emissions Reduction Fund. Under this scheme, organisations and individuals can receive Carbon Credit Units if they register projects with the Clean Energy Regulator and these credits are then purchased by the government through a competitive reverse auction.
Whilst there is no carbon tax, there is a number of environmental charges levied by both the State and Federal governments including, for example, waste charges and water charges.
Is dividend income received from resident and/or non-resident companies exempt from tax? If not how is it taxed?
Dividends paid by Australian tax resident companies
Under Australia’s dividend imputation system, an Australian tax resident company which pays a dividend may attach franking credits to those dividends. Conceptually, franking credits represent the tax that would have been paid by a company on an amount of taxable profits equivalent to the amount of profits from which the dividend has been declared.
Dividend income received by an Australian tax resident from an Australian tax resident company will be subject to income tax, but the recipient will ordinarily be entitled to apply, as a credit or offset against tax payable, any franking credits which have been attached to that dividend.
As a general rule, dividend income paid by an Australian tax resident company which is received by a non-resident will be subject to dividend withholding tax. The rate of withholding, subject to any applicable double tax agreement, is 30%. However, there are two main exceptions which may apply:
- If the dividend is fully franked (i.e. franked with the maximum number of franking credits permitted), the dividend will not be subject to any further withholding tax. A dividend which is only partially franked will be partially exempt from withholding tax (i.e. to the extent franked); and
- If the dividend is declared to be a distribution of “conduit foreign income” (broadly, foreign income which is not subject to Australian tax), then the dividend will not be subject to withholding tax.
Note that non-resident recipients of franked dividends are not entitled to a credit for the franking credits which they receive, although there is an exception to this rule for dividends received by Australian permanent establishments of foreign resident companies and individuals.
Dividends paid by non-resident companies
Generally, as Australian tax residents are taxable on their worldwide income, dividends received from non-resident companies will be subject to Australian income tax. However, such dividends may be exempt from income tax if the Australian resident recipient is a company and it holds, directly or indirectly, a participation interest of at least 10% in the non-resident company which declared the dividend. Further, if the Australian resident recipient has paid foreign tax on the dividends, then the recipient may be entitled to an Australian foreign income tax offset.
From the perspective of an international group seeking to re-locate activities from the UK in anticipation of Brexit, what are the advantages and disadvantages offered by the jurisdiction?
For an international group re-locating from the UK, Australia would offer the following advantages:
- Australian law operates under the Westminster system, so a group re-locating from the UK would be familiar with the legal structure and processes;
- Australian taxation law is relatively well-developed, so the group would be able to determine tax consequences with greater certainty compared to other jurisdictions;
- Australia has entered into Income Tax Treaties with 45 countries, mitigating the risk of double taxation; and
- Australia offers tax incentives for business innovation, including, for example, the research and development tax incentive.
The disadvantages include:
- The relatively high corporate tax rate of 30%;
- Australia acting unilaterally in introducing the MAAL and DPT outside the BEPS regime; and
- The relatively high complexity of Australia’s corporate tax system and high compliance costs.