Australia Scope of Income Tax
Taxable entities are resident companies (including limited partnerships) and the permanent establishments of non-residents that derive income from an Australian source.
A company is resident in Australia for tax purposes if it is incorporated in Australia or, although not incorporated in Australia, it carries on business in Australia and has either its central management and control in Australia, or its voting power controlled by shareholders who are residents of Australia.
A permanent establishment is a fixed place of business through which the business of an enterprise is wholly or partly carried on. It includes a sales outlet, a branch, a place of management, a factory, a workshop, an office or a dependent agent (who has authority to enter into contracts on behalf of the enterprise and habitually exercises that authority).
Corporate income tax applies to a resident entity’s worldwide income, including capital gains.
A foreign/non-resident who receives Australian sourced income (other than interest, “unfranked” dividends (see below) or royalties from which tax has been withheld by the payer) must lodge a tax return in Australia and pay tax.
Consolidation allows wholly owned corporate groups to operate as a single entity for income tax purposes from July 1, 2002. A foreign-owned group of Australian resident subsidiaries that does not have a single resident head company may instead choose to consolidate by forming a multiple-entry consolidated group.
Australia Income Tax Rates
The rate of corporate income tax in Australia for 2009 is 30%, reduced from 34% in 2001.
There is no alternative minimum tax.
Auastralia Calculation of Taxable Base
Taxable income includes trading income, “unfranked” dividends, capital gains and the profits of non-resident subsidiaries.
Dividends received from other resident companies are included in taxable income unless they have been “franked” under the Australian imputation system, under which companies that have paid Australian corporate income tax pass on to their shareholders an equivalent 30% “franking” credit for the tax paid on profits when distributing those profits.
Income received from non-resident companies in countries with a similar tax system to Australia is exempt from corporate income tax, subject to 10% Controlled Foreign Corporation (CFC) rules. No tax credit can therefore be claimed in Australia, even if the foreign tax rate is higher.
Income received from other countries is taxable. Tax rates are subject to the availability of tax credits (whether for corporate income, capital gains or withholding taxes) under double tax treaties.
If the corporate income tax payable in Australia is less than the tax that has already been paid in a foreign jurisdiction, the balance of the tax credit can be carried forward for five years or transferred to other companies within a group.
Thin capitalisation provisions can limit the deductibility of interest and other “debt deductions” in certain cases. In general, a deduction will be partly disallowed if the company’s debt exceeds three times its equity. These rules only apply if the interest and other “debt deductions” of an entity exceed AUD250,000 in any year.
Capital gains tax is not a separate tax – just part of corporate income tax. Small businesses have been given certain concessions, such as 50% active asset reduction and rollover provisions (for a maximum of two years).
A company can carry forward “primary production” losses incurred in any earlier income year. Special rules exist for non-primary production and foreign losses.
Normal business expenses are deductible from income. Incorporation costs may be claimed back over five years. Limited tax credits covering the cost of eligible fixed assets have been made available for purchases made up to December 31, 2009.
A capital gains tax concession is given to facilitate non-resident investment in the Australian venture capital industry. In addition, there is a research and development tax credit system.
Australia Filing Requirements and Payment of Tax
A company is usually required by the Australian Taxation Office (ATO) to have a tax year of 12 months (except in its first year) synchronised with the end of the standard tax year, which ends on June 30 each year. Only companies that are foreign controlled will normally be allowed to vary their tax year dates to match that of their overseas controlling entity.
Annual tax returns for most companies are due by February 28 each year, and companies generally pay their tax under the pay-as-you-go (PAYG) system in either a single lump sum or in quarterly instalments.
A letter will normally be sent out by the ATO advising what lodgement and payment due dates apply. There are penalties and/or interest charges for the late payment of taxes and the late filing of accounts and tax returns.
Australia Withholding Taxes
Interest, dividend and royalty payments to Australian corporate residents are not subject to withholding tax unless they do not provide an Australian Business Number to the payer, in which case tax must be withheld at 46.5%.
Interest, dividend and royalty payments to a non-resident of Australia are subject to a withholding tax rate of 10% for interest, 30% for dividends (although fully “franked” dividends are not subject to withholding tax) and 30% for royalties. The obligation for collecting the tax is placed on the person making the payment.
The interest, dividend or royalty does not need to be actually paid to the non-resident to be subject to tax. For example, if the income is reinvested, accumulated or capitalised, it is still deemed to be paid.
If the payment is made to a resident of a country with which Australia has a double tax treaty, the withholding tax may be reduced or nullified.
Australia has comprehensive tax treaties with over 40 countries which provide for exchange of information about income earned overseas by Australian residents and income earned in Australia by non-residents.
Dividends received by an Australian company from a non-resident CFC may be put into a special segregated account known as the “foreign dividend account”. Any dividend subsequently paid out of that account to a non-resident is exempt from withholding tax.
Australia Sales Taxes and VAT
The goods and services tax (GST) is a broad-based tax of 10% on most goods, services and other items sold or consumed in Australia.
The following are examples of GST-free supplies:
- health and medical care services; educational services;
- most food for human consumption (other than prepared foods, food in restaurants, confectionary, snacks, ice-cream, biscuits, and soft-drinks);
- international travel and transport; sales of “going concerns”;
- certain dealings with land; and
- exports of goods or services.
Excise duties apply to tobacco, spirits, beer and petroleum. They are increased bi-annually in February and August, based on upward movements in the consumer price index.
To ensure that imported goods are treated consistently with local goods, an equivalent rate of customs duty is imposed on imported alcohol, tobacco and petroleum. These goods are referred to as “excise equivalent goods” (EEGs).
Wine equalisation tax (WET) is a value-based tax that is applied to wine consumed in Australia. The tax is paid on the value of the goods at the last wholesale trade, or on an equivalent value when there is no wholesale trade. Currently there is an industry agreement that enables grape-wine manufacturers to use a half-retail-price method to determine this equivalent wholesale value. The current WET rate is 29%.