Section 9 of Doing Business in Australia
The Australian tax system is known to be one of the most complex in the world. We have set out a basic description of the more significant taxes that may affect your business.
These are not detailed accounts of each tax law and you should seek professional advice taking account of your specific circumstances.
Income Tax
Taxable entities
Income tax is imposed on the taxable income of “taxable entities”. Taxable entities generally include individuals, companies, and limited partnerships (except certain venture capital limited partnerships). “Look-through” entities that are not taxable entities generally include trusts and general-law partnerships. Despite its name, taxable income is broadly accounting profits of the taxpayer that are subject to various modifications required by the tax law.
Tax Year
The standard tax year is 1 July to 30 June (which may be substituted with the approval of the Commissioner of Taxation).
Income tax rate
Companies: The income tax rate for companies is 30%, except that companies that have less than AU$ 50 million of “aggregated turnover” (which includes the turnover of affiliated and connected entities) and derive no more than 80% of their income in passive forms are taxed at 26% in the 2020-2021 income year. This lower rate will be reduced to 25% for the 2021-2022 and future income years.
Individuals: Individuals are taxed on a scale of marginal rates. The maximum rate in Australia is currently 45% plus additional levies (such as the Medicare Levy, if applicable) for individuals who earn more than AU$180,000. Employers must withhold income tax on wages paid to employees.
Grouping
Groups of qualifying entities may, in certain circumstances, choose to consolidate (i.e. to be grouped) for income tax purposes. Entities often elect to form a consolidated group as:
- only one income tax return is required each year for each consolidated group;
- intragroup transactions are generally ignored for income tax purposes; and
- tax losses from one group member can offset income from another.
Careful consideration needs to be given to the pros and cons of any consolidation decision, as it will usually result in a resetting of the tax cost bases in the underlying assets of the group, and can in certain circumstances result in taxable gains arising.
Capital gains tax
Capital gains tax (CGT) is not a separate tax but is broadly the income tax that applies to gains or losses calculated under the CGT rules in respect of “CGT events” (being broadly disposals and certain other events).
A sale of corporate groups acquired in a leveraged buyout or by a private equity entity will generally be on revenue account (and not be subject to CGT concessions).
Individuals and superannuation entities: Resident individuals and superannuation entities are typically entitled to a discount of 50% for individuals, and 33⅓% for complying superannuation entities on capital gains in respect of CGT assets held for at least 12 months before the time of the CGT event.
Non-residents: Non-residents are generally not subject to CGT except where the gain related to Australian land, interests in Australian land or shares or rights in Australian land-rich entities. Purchasers of Australian land, interests in Australian land or shares or rights to acquire interests in Australian land-rich entities, are required to pay 12.5% of the consideration payable to foreign resident sellers to the ATO (subject to certain exclusions and exemptions). This amount is usually collected by way of a deduction from the consideration otherwise payable.
Double Tax Agreements (DTAs)
Generally, resident entities are assessed on their worldwide income, while non-resident entities are only taxed on income derived from Australian sources. Australia has a highly developed network of DTAs, the main function of which is to avoid the double taxation of income for enterprises.
Non-resident withholding taxes
Australia imposes dividend (30%), royalty (30%) and interest (10%) withholding taxes on payments to non- residents. The withholding tax rates may be reduced under a DTA or as a consequence of exceptions under the domestic law..
In the case of dividends, distributions that are “franked” (i.e. paid from after tax profits) or represent income derived from foreign business operations (“i.e. conduit foreign income”) are generally not subject to withholding.
A reduced withholding tax rate of 15% (rather than 30%) applies to certain trust distributions (“i.e. fund payments”) made by qualifying managed investment trusts or attribution managed investment trusts (withholding MITs) to residents of information exchange countries. This rate is reduced to 10% where the withholding MIT holds interests in certain energy efficient buildings. Fund payments exclude distributions of dividends, interest and royalties (which are subject to the standard withholding regime).
An interest withholding tax exemption also applies to interest paid in respect of certain publicly offered debt.
Indirect taxes
Goods and services tax (GST)
GST is a federal value-added tax on the supply of goods, services and any other things, and the importation of goods. In general, an entity must be registered for GST if it carries on an enterprise in Australia and the value of its annual turnover is or exceeds $75,000. Registered entities must pay GST of 10% on the consideration received for its taxable supplies and importations (but it is usual commercial practice to contractually pass on the GST liability to recipients), and may claim input tax credits (i.e. refunds of GST) for the GST cost of its business acquisitions.
In addition, foreign entities may be liable to pay GST on supplies of digital products and other services to Australian private consumers.
Stamp duty
Stamp duty, levied by each state and territory government, applies to a wide range of transactions. The party liable to pay the duty depends on the type of duty.
Duty may be applied upon the following transactions:
- Transfers and other transactions concerning “dutiable property”
- transactions involving ‘land holder’ entities
- lease instruments granted for a premium or other consideration
- insurance
Additional stamp duty applies to ‘foreign persons’ (defined broadly to include foreign corporations and trusts) that purchase residential land either directly or indirectly through a land holder entity, in New South Wales, Victoria, Queensland, South Australia, Tasmania and Western Australia.
Land tax
Land tax, like stamp duty, is a state and territory-based tax which imposes a tax on investment land ownership.
Increased land tax rates apply to non-residents who own land in certain jurisdictions.
Other tax/charges
Some other taxes and charges include:
Fringe benefits tax
There is a fringe benefits tax (FBT), which is levied by the Commonwealth Government on the taxable value of “fringe benefits” provided to employees. This is charged at a flat rate of 47% after adjusting for GST credits on the grossed up value of the benefit.
Payroll tax
Each state and territory government levies payroll tax, which varies across each state and territory subject to differing exemptions and rates. For example, in New South Wales, from 1 July 2020 to 30 June 2021, payroll tax is imposed at the rate of4.85% of taxable wages, with an annual tax-exempt threshold of $1,200,000.
Death and gift duties
There are no death or gift duties in Australia.
Customs, excise and other taxes
The Australian Government also levies customs duties and excise duties (on goods such as petroleum, alcohol and tobacco). The state and territory governments also levy further taxes, including taxes with respect to gambling and motor vehicles.
Attracting overseas investors
In order to increase the attractiveness of Australia for foreign investors, the Australian Government has a number of attractive tax measures in place. These include:
CGT exemption for non-residents
Non-residents are generally not subject to Australian tax on the disposal of shares in a company (that are held on capital account) unless the company’s value is principally derived from Australian real property.
Managed investment trusts regime
Subject to integrity rules, non-residents who hold interests in a qualifying withholding MIT are subject to a final withholding tax of 15% (or 10% where the withholding MIT holds an interest in certain energy efficient buildings).
Conduit foreign income rules
Subject to integrity rules, no Australian tax (including withholding tax) is payable in respect of certain foreign sourced income that is ultimately received by a non-resident through one or more interposed Australian corporate tax entities.
Research and Development (R&D) tax incentive
Australia provides an incentive programme for entities incurring eligible expenditure on R&D activities. Depending on the size of a business, claimants under the R&D programme may be eligible for one of the following incentives:
- For small businesses (aggregated turnover of AU$20 million or more): a 43.5% refundable tax offset (i.e. cash in hand).
- For other businesses: a 38.5% non-refundable tax offset for eligible expenditure below AU$100 million and 30% for eligible expenditure over AU$100 million.
Significant changes to the R&D tax incentive programme have been enacted, which will apply from the first income year commencing on or after 1 July 2021. Under the changes, companies with an annual aggregated turnover of less than AU$20 million will be able to access a refundable offset of 18.5% above the claimant’s corporate tax rate, which from 1 July 2021 will be 25% providing a 43.5% refundable tax offset. The changes also include the introduction of an “incremental intensity threshold” which increases or decreases the non-refundable tax offset available to companies with an annual aggregated turnover of AU$20 million or more based on the proportion of their eligible R&D expenditure as a percentage of total business expenditure.
Venture capital investments
Australian venture capital investment vehicles may be structured as venture capital limited partnerships (VCLPs) or early stage venture capital limited partnerships (ESVCLPs), and receive favourable tax treatment for eligible venture capital investments. For VCLPs, benefits include tax exemptions for foreign investors (limited partners) on their share of any revenue or capital gains made on disposal of the investment by the VCLP, and concessional treatment of the fund manager’s carried interest in the VCLP. For ESVCLPs, the income tax exemption for VCLPs is extended to both resident and non-resident investors, plus investors can obtain a 10% non-refundable tax offset for new capital invested in the ESVCLP.
Incentives are available for eligible investments made in start-ups known as Early Stage Innovation Companies (ESICs), which are generally newly incorporated entities with low income and expenses. Investments of less than 30% of the equity in an ESIC would generally qualify for a 20% non-refundable tax offset (capped at AU$200,000 per investor including any offsets carried forward from the prior year’s investment) and a 10-year tax exemption on any capital gains arising on disposal of the investment.
This guide is current as of April 2021.
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