Taxation
Companies
An Australian resident company is currently subject to tax at a rate of 30 per cent of its taxable income. Taxable income is assessed on the basis of assessable income less allowable deductions.
A company is resident in Australia for income tax purposes if it is incorporated in Australia or, if not incorporated in Australia, it carries on business in Australia and either has its central management and control in Australia, or its voting power is controlled by shareholders who are residents of Australia.
A non-resident company is taxed on its Australian source income (apart from interest, dividends, royalties and certain distributions by managed funds, which are subject to withholding tax) at the same rate as a resident company. A non-resident company may obtain relief from, or a reduction in Australian tax under a relevant Tax Treaty in certain circumstances.
Australia has a consolidation regime that allows grouping between wholly-owned subsidiaries for tax purposes.
Capital Gains Tax
Capital Gains Tax (CGT) applies to the disposal of assets acquired (or deemed to have been acquired) after 19 September 1985. A net capital gain arises if the capital gain made by a taxpayer in a year of income exceeds the capital loss made by the taxpayer in that year or carried forward from previous years.
Very broadly, a capital gain arises to a taxpayer on a disposal of an asset if the proceeds received on its disposal exceed the cost base of that asset to the taxpayer.
A CGT asset is any kind of property or a legal or equitable right that is not property.
Foreign residents who are individuals may be subject to CGT on disposals of:
• Direct interests in real estate located in Australia.
• An interest in an entity where they and their associates hold 10 per cent or more of the entity and the value of their interest is principally attributable to Australian real estate.
• An asset they have used in carrying on a business through a permanent establishment in Australia.
• An option or right to acquire one of the above.
Individual tax rates — Residents
The ATO provides advice for people (individuals) entering the Australian tax system for the first time to assist them in understanding Australian tax law.
An individual may receive various types of income, including salary and wages, pensions, interest, royalties, partnership and trust distributions and company dividends. The income may have a foreign or an Australian source.
A resident of Australia will generally be liable to Australian income tax on income and capital gains derived throughout the world (although there are a number of exceptions).
A ‘temporary resident’ of Australia is generally only liable to Australian income tax on income sourced in Australia (although the ‘temporary resident’ may be assessable on worldwide income in limited cases, such as, salary and wage income).
As every person’s circumstances are different, there may be various tax credits, tax offsets (rebates), levies, liabilities, and tax treaty provisions, that may apply.
Under Australian law, there are different tax rates for residents and non-residents. Resident individuals pay tax on their taxable income at progressive rates ranging from 0 to 45 per cent. Determining whether an individual is a resident of
Australia for income tax purposes depends on the detailed circumstances of each person. The tests the ATO uses to determine residency are not the same as those used by the Department of Immigration and Citizenship or Centrelink. Advice on residency for tax purposes can be obtained from the ATO.
This table sets out the rates and thresholds for resident taxpayers (a low income tax offset also applies, which acts to provide an effective tax free threshold of $16,000 for those taxpayers earning up to $30,000 per annum in 2010-2011 (compared to $15,000 in the previous year)):
Tax Thresholds from 1 July 2010 (income range) Tax Rate (%)
$0 - $6,000 0
$6,001 - $37,000 15
$37,001 - $80,000 30
$80,001 - $180,000 37
$180,001 + 45
Resident taxpayers are subject to the Medicare levy. Normally, the Medicare levy is calculated at 1.5 per cent of taxable income. A variation to this calculation, by way of a reduction or exemption, may occur in certain circumstances.
Resident taxpayers and families on incomes above the Medicare levy surcharge thresholds who do not have adequate private patient hospital cover during the income year may have to pay the Medicare levy surcharge. The surcharge is in addition to the Medicare levy and is calculated at the rate of 1 per cent of taxable income (including total reportable fringe benefits and any amount on which family trust distribution tax has been paid).
Individual tax rates — Non-residents
Apart from amounts that are subject to withholding tax (which are the same as for companies), non-resident individuals are liable to tax only on income derived from Australian sources. They are not entitled to a tax-free threshold. Non-residents are not required to pay the Medicare levy or the Medicare levy surcharge.
This table sets out the rates and thresholds for non-resident taxpayers:
Tax Thresholds from 1 July 2010 (income range) Tax Rate (%)
$0 - $37,000 29
$37,001 - $80,000 30
$80,001 - $180,000 37
$180,001 + 45
Normally, the tax year is the 12-month period starting on 1 July and ending on 30 June. However, in certain circumstances, a substituted accounting period may be approved. This could be used, for example, to allow Australian subsidiaries of foreign companies to align reporting periods with a foreign parent.
Franked dividends
Dividends are taxed differently depending on whether the shareholder is a resident or non-resident of Australia.
Generally, if a company pays or credits dividends out of income that has been subject to Australian company tax, Australian resident shareholders are entitled to a credit (‘franking credit’) to offset other tax liabilities.
Dividends paid to non-residents are generally exempt from withholding tax to the extent that the dividend has been franked.
Goods and Services Tax
A 10 per cent Goods and Services Tax (GST) was introduced into Australia in 2000. The GST is a broad-based tax on goods and services. Generally, a business is required to register under the GST legislation. The GST is a consumer tax. Businesses which have paid for business supplies inclusive of the GST are entitled to claim an equivalent input tax credit.
Australian exports are generally GST-free, while imports are generally liable to GST.
Fringe Benefits Tax
Fringe Benefits Tax (FBT) is a tax paid on certain benefits employers provide to their employees (or an employee’s associate) in place of, or in addition to, salary.
FBT is separate from income tax. Fringe benefits arise, for instance, where an employer provides an employee (or an employee’s associate) with the use of a work car for private purposes, a cheap home loan, payment of the employee’s private health insurance or cleaning services for the employee’s private residence.
Australia’s tax treaties
Australia has entered into bilateral tax treaties (agreements) with a number of countries to prevent double taxation and fiscal evasion and foster cooperation between Australia and other international tax authorities by enforcing their respective tax laws. These agreements are also referred to as ‘Double Tax Agreements’ or ‘Double Tax Conventions’.
The general effect of a tax treaty is to limit Australia’s taxing rights in respect of certain types of income derived by a resident of the other country and vice-versa.
The Australian tax law generally requires tax to be withheld on interest, dividends, royalties and certain managed funds distributions paid or deemed to be paid to non-residents of Australia.
The general rate of withholding tax on interest is 10 per cent, while the withholding tax rates on the unfranked portion of dividends and on royalties is 30 per cent. However, Australia’s tax treaties provide for reduced withholding rates and some withholding tax exemptions for specified dividend, interest and royalty payments. The withholding tax rate for managed funds is 30 per cent or 22.5 per cent (being phased-down to 7.5 per cent over three years), depending on the investor’s country of residence.
The above information provides an overview of the Australian federal taxation system. It is not a comprehensive explanation of Australian tax law. For detailed information on Australian tax law it is imperative to contact a tax professional. The Australian Taxation Office’s (ATO) Legal Database can be searched freely and the Australian Taxation Office website has various A-Z topic indices including information for businesses and individuals.
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