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Global tax guide to doing business in Australia
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|Global tax guide to doing business in Australia by Kenyans247(1): Sun 08, November, 2020 08:30am|
The Australian tax year for most businesses ends on June 30. However, it is possible to apply for a substituted accounting period (SAP) that varies the year-end to coincide with the financial year of a foreign parent company.
Australian tax laws are amended frequently in response to changes both at the domestic level, such as changes in government, and at the international level, such as the Organisation for Economic Co-operation and Development’s (OECD) recent Base Erosion and Profit Shifting (BEPS) initiative. Careful consideration should be given to the nature of the business to be conducted in Australia and any resulting tax implications.
The federal government levies income tax, goods and services tax (GST), fringe benefits tax and capital gains tax, among others. State and territorial governments levy payroll tax, land tax and stamp duty, among others.
Australia, its six states and its two territories operate under common law. Both the federal government and state governments have lawmaking power. However, the federal government’s legislative power is limited to the exclusive heads of power set out in section 51 of the Australian Constitution. State governments are able to legislate on all other matters.
The Australian Taxation Office (ATO) is the federal authority responsible for overseeing and enforcing federally imposed taxes. The federal Commissioner of Taxation makes decisions and gives opinions on federal tax laws.
The principal direct tax is income tax, which is levied by the federal government and administered by the Federal Commissioner of Taxation, who is responsible for the operation of the ATO. The main laws governing income tax are the Income Tax Assessment Act 1936 (Cth), the Income Tax Assessment Act 1997 (Cth) and the Taxation Administration Act 1953 (Cth).
Each state and territory also has its own taxation oversight body:
State Taxation body
New South Wales Revenue NSW
Queensland Office of State Revenue Queensland
Victoria State Revenue Office Victoria
Western Australia Office of State Revenue Western Australia
South Australia Revenue SA
Tasmania State Revenue Office of Tasmania
Northern Territory Territory Revenue Office
Australian Capital Territory ACT Revenue Office
Determining the residency status of a business vehicle is essential in understanding how Australian taxation law will apply to that individual or entity. A non-resident can carry out business in Australia through an Australian resident entity or a foreign entity, though different processes for registration and reporting will apply depending on the choice.
A company is an Australian resident for tax purposes if it is incorporated in Australia. A company will also be considered to be resident in Australia if it carries on business in Australia and either (i) its central management and control is in Australia or (ii) its voting power is controlled by shareholders resident in Australia.
As a general rule, if the company’s directors usually carry on business and make decisions in Australia, the residence test will be satisfied. Again, residency is a question of fact decided in each case by reviewing the company’s business or trading activities.
Companies can be either proprietary or public companies. The types of companies that can be established include those limited by guarantee, limited by shares, unlimited with share capital or having no liability (this last only applies to certain mining companies).
Alternatively, a foreign entity can also register an Australian branch, rather than incorporating an Australian subsidiary company.
A partnership is an association of people who carry on business together, and can be with up to 20 people. Partnerships can be either general or limited, and are governed by state or territory legislation. Members of the partnership are personally liable for the debts of the partnership.
The residence of a general partnership is determined by the individual partners’ residency status. A limited partnership will be a resident of Australia if the partnership was formed in Australia, if it carries on business in Australia or if it has central management located in Australia.
Trust structures are also commonly used as business and investment vehicles. Trusts may be characterized as residents for tax purposes if, during a financial year, the trustee of the trust is a resident or the trust’s central management and control is in Australia.
Financing a corporate subsidiary
In Australia, companies can be financed using debt, where the company borrows from external lenders. If a company uses debt financing, it is able to retain full control of its business and governance, and typically, the interest on repayments is tax deductible.
Care should be taken to identify the specific entity from which the funding is sourced, as tax consequences for finance provided by an individual acting in their own right is very different to one acting as trustee or as director of a company.
Companies can also be financed through equity. Common ways that equity financing can be achieved include private equity investors, venture capitalists and an initial public offering on the Australian Stock Exchange.
The tax treatment of raising capital through equity financing will depend on the nature of the transaction.
Tests for debt and equity
Australia has tests for debt and equity interests, which determine whether a particular arrangement gives rise to a debt interest or an equity interest. These tests are set out in Division 974 of the Income Tax Assessment Act 1997 (Cth). Whether an interest is debt or equity is relevant in determining if returns are subject to interest or dividend withholding tax.
Investment income and royalties paid to foreign residents
Companies, whether Australian residents or foreign residents with a permanent establishment in Australia, may be required to withhold tax from investment income and royalties paid to non-residents.
Taxation of financial arrangements
Special rules for the Taxation of Financial Arrangements (TOFA) determine the tax treatment of gains and losses on financial arrangements, which usually only apply to large taxpayers. The TOFA rules are aimed at reducing the influence of tax consideration on how financial arrangements are structured.
Income tax is assessed on individuals, companies and trusts. Federal income tax returns must be filed annually. The income tax system is based on self-assessment, with the ATO conducting random or systematic audits as a way of monitoring and verifying the self-assessments. Some large businesses choose to participate in voluntary compliance programs with the ATO.
Partnerships are subject to pass through tax treatment. Participants in joint ventures who take a share in the product of the venture are generally taxed as separate taxpayers.
Australian residents are subject to tax on worldwide income, but tax credits may be available where foreign tax is paid by a resident taxpayer for income derived from a foreign source. Non-residents are normally taxed on income derived from Australian sources only.
Corporate income tax
The general income tax rate for companies is currently 30%, although a reduced rate is available for small businesses. Most businesses are required to pay quarterly “pay as you go” (PAYG) installments throughout the year based on their estimated tax liability, although it is necessary to file an annual tax return to determine their actual income tax liability for the year.
Income tax is payable on “taxable income,” which is calculated by deducting allowable deductions from assessable income. Allowable deductions include certain deductions for expenses incurred in carrying on business and capital allowances for depreciating assets. Deductions may also be allowed for losses carried forward from previous years.
Where allowable deductions exceed the amount of assessable income for a particular financial year, the taxpayer incurs a tax loss. Generally, tax losses can be carried forward indefinitely (subject to certain continuity rules). When determining the future taxable income of a company, a tax loss may only be deducted against future taxable income if the company satisfies the “continuity of ownership” test, or in some instances, the “same business” test.
Capital gains tax (CGT)
Tax is also payable on capital gains derived from the disposal of most capital assets, although foreign residents are generally only taxed on transactions involving Australian real property. The net capital gains of the taxpayer (reduced by capital losses) are included in the taxpayer’s total assessable income in the same way as other items of assessable income. A net capital loss may be carried forward and offset against future capital gains.
CGT applies to a wide range of events, such as an asset disposal, which affects most forms of property or enforceable rights. In broad terms, the CGT liability is determined by subtracting the cost base of the asset from the capital proceeds for the event. Gains are assessed on realization or another specified event (such as ceasing to be an Australian resident), and are not usually assessed on an accrual basis.
The ordinary income tax rates apply to capital gains. However, resident individuals (and certain trust structures) may be eligible for a 50% discount on CGT if they have held the asset for at least 12 months. There are a range of concessions and deferral mechanisms for businesses and individuals. Non-residents are generally taxed only on capital gains derived from “taxable Australian property,” such as land, indirect interests in land and mining or prospecting rights.
Dividends paid by Australian resident companies from profits that have already been taxed may carry franking credits for the tax paid by the company. Dividends are referred to as “fully franked,” “partially franked” or “unfranked,” depending on the extent to which a company has chosen to use its franking credits for the distribution. Special rules ensure uniformity of franking on distributions during a franking period. Non-resident shareholders are not eligible for credits or rebates on franked distributions. Rather, dividends paid to non-resident shareholders may be subject to withholding tax if the distributions are not fully franked. Withholding tax does not apply to “fully franked” distributions.
The consolidation regime allows qualifying groups of Australian resident entities (companies, trusts and partnerships, but excluding branches) to be treated as a single entity for income tax purposes. This is a “one-in-all-in” election, meaning that each wholly owned subsidiary will automatically and irrevocably become a member of the group for Australian tax purposes.
An important benefit of choosing to consolidate is that the consolidated group will generally be required to file only one income tax return and one franking account for the consolidated group. Once a consolidated group is formed, intra-group transactions will be ignored for tax purposes. Examples of such intra-group transactions include asset transfers, loans, payments of dividends and returns of capital. Under the “single entity” rule, losses attributable to the operations of a group member may be offset against income generated by other group members.
Multiple-entry consolidated groups
The consolidations regime includes rules for foreign-owned groups with entry points into Australia via multiple Australian holding companies. These rules allow flexibility in defining the consolidated group. Such groups are known as multiple-entry consolidated groups.
Administration of consolidated groups
The entity responsible for filing the group’s tax return (referred to as the “head company”) is the entity that is also responsible for ensuring the group’s income tax liability is paid. However, it is important to note that the other members of the group may be jointly and severally liable for the total income tax liability of the group if the head company defaults on its payment obligations to the ATO.
One way the group members may mitigate the risk of joint and several liabilities arising (which is particularly relevant if a member has or may eventually exit the group) is for each group member to enter into a valid tax-sharing agreement that allocates the tax liabilities of the group to each of its members. Where tax-sharing arrangements are in place, in the event of a default by the head company, an individual member’s liability may be limited to its allocation of income tax provided under the agreement.
Transfer pricing rules
Transfer pricing rules seek to counter international profit-shifting techniques by ensuring that related parties to international transactions determine their pricing based on arm’s length methodologies.
These rules allow the Tax Commissioner to reallocate income or adjust deductions to reflect an arm’s length arrangement. The rules extend to branches or divisions of the same enterprise, where non-arm’s length transactions are made between an Australian permanent establishment and an overseas permanent establishment of the same enterprise.
Country by country reporting
New country-by-country reporting rules affect significant global entities, which includes Australian-headquartered groups and Australian subsidiaries of foreign groups with global turnover exceeding A$1 billion. Unless exempted, affected groups may have additional “risk identification” reporting obligations with the ATO, including obligations to file a country-by-country report, a master file and a local file.
Australian tax laws also contain various anti-avoidance rules that may cancel tax benefits or alter the way the tax law applies to a particular taxpayer. Australian tax legislation also contains a number of specific anti-avoidance rules as well as general anti-avoidance law.
Multinational anti-avoidance law
There have been recent specific avoidance measures for global groups. These new measures include the Multinational Anti-Avoidance Law (MAAL), which aims to prevent multinationals using structured arrangements to avoid the consequence of a permanent establishment in Australia by making supplies to Australian customers with the involvement of an Australian entity that is associated with or commercially dependent upon the foreign supplier.
Diverted profits tax
Other new measures include the diverted profits tax (DPT), which affects significant global entities by targeting arrangements that artificially divert profits overseas through related entities if the arrangements result in foreign tax of less than 80% of that which would otherwise have been paid in Australia. Where the DPT is invoked, the special levy is imposed on the diverted profits at a penalty rate of 40%.
Multilateral treaty to prevent BEPS
On 1 July 2019, the Australian government signed a multilateral convention to implement tax treaty related measures to prevent BEPS.
The multilateral instrument will modify some of Australia’s bilateral tax treaties.
Australia’s thin capitalization rules are designed to prevent entities with cross-border operations from funding their operations with excessive levels of debt to procure a more favorable Australian tax result.
Deductions for interest incurred by inbound investment vehicles (which can include an Australian company where 40% or more of its total share capital is owned by a nonresident) and outbound investment vehicles (Australian entities investing overseas) may be limited under the thin capitalization rules.
Tax deductions on interest payments are limited by reference to a statutory debt/equity ratio assessed on the total debt of the Australian operations.
Generally, the thin capitalization rules apply to:
Australian entities that are foreign controlled and foreign entities that either invest directly into Australia or operate a business through and Australian permanent establishment
Australian entities that control foreign entities or operate a business through overseas permanent establishments and associate entities.
There are various exceptions to the thin capitalization rules, including:
A taxpayer if it (together with its associate entities) claim annual debt deductions of A$2 million or less
An outward investing Australian entity if at least 90% of its assets (excluding those of private or domestic nature) are Australian assets, or
A special purpose entity (SPE) established as an eligible securitization vehicle if at least 50% of its assets are funded by debt interests and the SPE is insolvency remove according to recognized criteria.
The general rule that non-residents are liable for Australian tax on all Australian-source income is modified in relation to dividends, interest and royalties.
Payers are required to withhold tax from interest, dividends and royalties paid to non-residents. Trustees, agents or others who receive interest, dividends or royalties on behalf of a non-resident, where withholding tax has not been withheld by the payer, are also required to withhold tax. The tax rates of withholding tax vary, depending on whether a double tax treaty applies. The dividend, interest or royalty does not need to be actually paid to the non-resident to be subject to withholding tax. The liability can arise where the income is reinvested, accumulated, capitalized or otherwise dealt with on behalf of the non-resident.
Certain other payments to nonresidents by a resident business are subject to withholding obligations. For example, foreign resident capital gains withholding (FRCGW) applies when a foreign vendor disposing of “taxable Australian property” (such a land, mining tenements or shares in a land-rich company) at the rate of 12.5%.
However, the FRCGW is a non-final withholding and, upon filing a tax return with the ATO, the foreign vendor may be entitled to a credit to be offset against the vendor’s CGT liability on the transaction.
Managed investment trusts
Certain distributions made by a managed investment trust (MIT) to its foreign investors are subject to a concessional tax rate of withholding tax.
The rate of withholding depends whether the investor’s address is in a jurisdiction with which Australia has an effective exchange of information (EIO) agreement: the UK, the US and New Zealand.
Jurisdiction Tax rate
EIO jurisdiction 15%
Non-EIO jurisdiction 30%
The concessional tax rate only applies to distributions from a MIT of Australian-source net income other than dividends, interest and royalties.
A special concessionary rate of 10% applies to fund payments by an eligible clean building MIT.
A new regime for attribution managed investments trusts (AMIT regime) applies from July 1, 2016. Generally, under the AMIT regime, qualifying MITs will (among other things) be treated as a fixed trust for income tax purposes and will be able to “flow through” taxable income to their unitholders on an “attribution” basis, and for that taxable income to retain its character for tax purposes as it flows through the trusts. This regime increases certainty and provides greater flexibility while reducing compliance costs for MITs.
Indirect taxes – GST
Goods and services tax overview
The principal indirect tax assessed and imposed by the federal government is the GST, which is levied on most supplies of goods and services by businesses at the rate of 10%.
The GST is a multi-stage tax payable by suppliers (similar to a value-added tax), where each stage in a supply chain is potentially taxable, but with registered entities being entitled to refunds of GST incurred on their business inputs, referred to as input tax credits. GST is not applied to most exports of goods and services. Businesses must register for GST if they make taxable supplies of more than A$75,000 per year, regardless of whether the business in Australia is conducted through an Australian company or an Australian branch. The liability to pay GST is generally imposed on the supplier. Most registered entities are required to account for GST either monthly or quarterly.
GST – types of supplies
Some supplies are classified as GST-free. These include certain supplies relating to health, aged care, education and food, as well as sales of farm land and supplies of businesses as going concerns.
Other supplies may be exempt so that no GST liability arises, but the supplier may be denied input tax credits on business inputs relating to that supply. Exempt supplies may include certain financial supplies (such as loans, currency and derivative transactions and share transfers), residential rents and sales of established residential premises.
Groups of related entities may be eligible to form a GST group and nominate a “representative member” to be responsible for recognizing the GST liabilities and input tax credits in respect of supplies and acquisitions to and from entities outside the GST group. The representative member is the entity primarily responsible for the group’s GST liability.
It is important to note, however, that the other members of the group can he held jointly and severally liable for the GST liability of the group should the representative member default in its payment obligations to the ATO. One way group companies may mitigate the risk of joint and several liabilities arising (which is particularly relevant for members exiting from the group) is for each group member to enter into a valid indirect tax-sharing agreement that allocates the GST liabilities of the group to each of its members. Where indirect tax-sharing arrangements are in place, in the event of a default by the group representative, an individual member’s liability may be limited to its allocation of GST provided under the agreement.
GST and cross border supplies
The Australian government introduced GST on all low value imported goods with a value under A$1,000 on July 1, 2018. These GST changes also affected Australian GST-registered suppliers, including Australian retailers who “drop ship” (i.e., sell goods that are located overseas at the time of sale, and sent directly to consumers in Australia from an overseas source). Imported goods valued above A$1,000, as well as tobacco products and alcoholic beverages continue to have GST applied. Overseas retailers that meet the registration threshold of A$75,000 will need to register for GST, charge GST on sales of low value imported goods (unless they are GST-free supplies), and lodge returns with the ATO.
However, recent changes also mean that some foreign businesses that make supplies to Australian businesses may not need to register, or the GST obligations may shift to the Australian business recipient of their supplies.
Supplies by a non-resident with no physical presence in Australia may no longer be connected with Australia (and may therefore not be subject to GST) if:
It is a supply of intangibles (such as services and digital products) and the recipient is an Australian-based business, or a non-resident acquiring the intangibles for their overseas enterprise
It is a transfer of ownership of leased goods located in Australia, where the transfer takes places between non-residents that do not have an enterprise in Australia, or
It is a supply of goods where the supplier installs or assembles the goods in Australia, but does not import the goods into Australia.
GST and Australian resident agents
Non-resident businesses that have Australian resident agents can agree that their resident agent is liable for GST on Australian supplies made through the resident agent. Notice of that arrangement should be given to any Australian-based business customer.
GST and reverse charged supplies
Generally, intangible supplies by non-residents to their Australian business customers will not be connected with Australia (and therefore are not subject to GST). However, the recipient of the supply may be liable to pay GST under “reverse charge” rules if the recipient is an Australian-based, GST-registered business and acquires the supply other than wholly for a “creditable purpose” (being for the purpose of its enterprise and not relating to the making of input tax supplies). This will often arise when a non-resident supplies intangibles to an Australian financial institution.
In other situations, Australian business customers of a foreign supplier may agree to a voluntary “reverse charge” of GST on supplies made to them.
Other indirect taxes
Customs and excise duties
In addition to the GST, which is imposed on taxable importations and supplies connected with Australia, there are also excise duties imposed on certain commodities and customs duties on imported goods.
Fringe benefits tax (FBT)
FBT is payable by employers on the value of certain benefits that have been provided to their employees or to associates of their employees. It typically applies to in-kind benefits and is payable at the top personal tax rate based on the taxable value of the benefit.
The FBT year is from April 1 to March 31. The FBT rate is currently 47%. FBT is calculated on the grossed-up value of fringe benefits (the calculation of which differs depending on the type of benefit and availability of input tax credits for GST).
Employers may claim a deduction for the payment of FBT. This results in the similar tax treatment of salary and wage income and fringe benefit remuneration provided to employees on the top marginal tax rate, except for certain concessionally taxed benefits.
There are a number of FBT exemptions and concessions, meaning benefits that are exempt from FBT. A concession is a reduction in the taxable value of a fringe benefit, which results in a reduced amount of fringe benefits tax payable (or in some cases, no FBT being payable at all). For example, concessions may be allowed for Remote Area Reductions, Transport Reductions and Relocation Reductions paid to employees. Some specific concessions also apply to some nonprofit organizations, such as public benevolent institutions, charitable institutions, health promotion charities and religious institutions.
Superannuation guarantee levy
All employers must make superannuation contributions for their employees. The minimum contribution is currently 9.5% and will remain at this rate until July 1, 2021, when the levy will increase to 10%, with incremental increases of 0.5% over the following four years to 12% from July 1, 2025.
Superannuation contributions are tax-deductible to the employer making the contributions if they are made to a fund that complies with federal legislation and if they do not exceed a maximum threshold. Income derived by a complying fund, including the contributions it receives, is taxable at the rate of 15%.
Under the Superannuation Guarantee Charge scheme, a charge is imposed on all employers who fail to provide a prescribed minimum of superannuation for their employees, including certain foreign events, which can have significant tax implications.
State and local taxes
The main State taxes are:
Stamp duties, levied on certain transactions and documents
Land tax, levied on the unimproved value of land
Payroll tax, levied on the gross payroll of a business.
Local government taxes are comprised of rates, which are generally levied by reference to the value of land.
Each state and territory imposes its own stamp duties (including transfer duty) and the rules are different in every state and territory. Transfer duty is a tax on transactions (including conveyances of real property and business assets). The rates and duties payable vary among the states and territories and depend on the nature of the transaction. Transfer duty is generally payable by the purchaser or transferee (although some jurisdictions may impose duty on all parties to the transactions).
An additional surcharge applies to certain acquisitions of residential land by foreign purchasers.
Land tax is an annual tax levied on the owner of land in Australia, based on the unimproved capital value of the land, which excludes the value of the building or capital improvements.
An additional surcharge applies to certain holdings of residential land by foreign or absentee owners.
Each state and territory imposes payroll tax, under which a registered employer is liable to pay tax on the employer’s payroll. The tax is only payable where the employer’s payroll exceeds a minimum threshold. While the state and territory legislation has been largely harmonized to support business efficiency, the payroll tax rates and thresholds still vary by state or territory.
In some instances, payments to contractors may be considered wages and subject to payroll tax.
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