Australia is one of the most attractive destinations for multinational corporations looking to set a foothold in Asia Pacific. However, it's important for companies to understand the country's tax environment before starting local operations.
Australia remains one of the easiest places to do business globally, according to the World Bank's Doing Business 2018 report. Australia is now ranked 14th in the world, and it is also globally recognised for strong business practices in the area of enforcing contracts, where it is rated third out of 190 economies.
Australia is positioned 55th in TMF Group's Financial Complexity Index 2018, which ranks 94 jurisdictions according to their complexity for accounting and tax compliance. While it is not the least complex place in the world for financial compliance, many companies are still flocking down under to do business due to tax incentives on offer for foreign investments.
However, companies wanting to venture into Australia need to understand the local tax obligations. Most major business taxes, such as income tax and goods and services tax, are collected by the Australian Government through the Australian Tax Office (ATO).
All businesses in Australia are required to report their business activity statement to the ATO either through an online system, registered agent, phone or by mail.
Here is a summary of the types of taxes companies should know about before operating in Australia.
Business tax in Australia
Business taxes in Australia are governed and collected by the ATO as well as state government revenue offices in certain cases. The key taxes in Australia that businesses should be well informed of include:
- company (income) tax
- capital gains tax (CGT)
- goods and services tax (GST)
- payroll tax
- fringe benefits tax (FBT)
- stamp duty
- land tax
- other business taxes.
Businesses can choose to make tax payments monthly, quarterly or annually.
A non-resident company is taxed on its Australian source income at the same rate as a resident company. Taxable income and the tax rate may vary under limited circumstances, such as industry type or business structure.
However, in general, small businesses with an aggregated annual turnover lower than AUD $25m ($50m from 1 July 2018) are only required to pay tax at a 27.5% tax rate, while businesses with an aggregated annual turnover higher than AUD $10m ($50m from 1 July 2018) will be required to pay tax at a rate of 30%.
Capital Gains Tax (CGT)
Foreign entities are generally required to pay CGT on CGT assets used in carrying on an Australian permanent establishment and on direct and indirect interests in Australian real property, and keep records upon acquiring assets that may be subject to CGT in the future. This tax is paid as part of the income tax and all CGT assets acquired since the enforcement of the tax policy on 20 September 1985 are subject to CGT, unless specifically excluded.
Goods and Services Tax (GST)
If the supplier's GST turnover exceeds the annual registration turnover threshold of AU$75,000, the supplier will be required to register for GST with the ATO. Businesses are entitled to claim an equivalent input tax credit if they have paid for business supplies inclusive of GST. The GST rate in Australia is 10%, and applied on most goods, services and other items sold or consumed.
Payroll tax is a State tax on the wages that companies pay to employees. It is calculated based on the amount of wages paid each month, and must be paid if total Australian wages exceed the exemption threshold set by the respective State or Territory. In general for example, the payroll tax rate in Western Australia is 5.5%.
Other business taxes
Other types of business taxes in Australia may include items such as fuel tax, stamp duty, land tax and fringe benefits tax depending on the State and Territory a business is operating in. Businesses and investors should review these taxes to determine whether they are applicable.
Individual income tax in Australia
Operating in Australia means businesses will need to help their employees handle the payment of individual income tax. On 8 May 2018, the federal government announced new tax relief measures in the 2018 Federal Budget, with some taking effect from 1 July 2018 (2018/2019 financial year), subject to the passing of legislation.
For the 2018/2019 financial year, the federal government announced three significant changes to the income tax rules:
- from 1 July 2018 until 30 June 2022, the application of a Low and Middle Income Tax Offset (LAMITO) for Australians with a taxable income of less than $125,333. The Low Income Tax Offset (LITO) will continue to apply alongside the LAMITO. According to the federal government, the LAMITO will provide tax relief of up to $530 a year for affected taxpayers
- from 1 July 2018, the government will raise the marginal tax threshold for the 32.5% tax bracket to $90,000 from the previous $87,000
- from 1 July 2019, the Medicare levy will increase to 2% with the additional 0.5% to be directed to the National Disability Insurance Scheme (NDIS).
International tax treaties with Australia - and reporting requirements
Australia has direct agreements with more than 40 countries, and these tax agreements - or treaties - are designed to prevent double taxation and promote cooperation between international tax authorities.
For example, Australia signed the Multilateral Convention to Implement Tax Treaty Related Measures on 7 June 2017 to prevent Base Erosion and Profit Shifting (BEPS). BEPS refers to the tax planning strategies used by multinational companies to exploit gaps and differences between tax rules of different jurisdictions internationally to artificially shift profits to low or no-tax jurisdictions where there is little or no economic activity.
Financial institutions such as banks and other deposit-taking institutions, custodial institutions, investment entities, and specified insurance companies in Australia are also required to comply with the Common Reporting Standard (CRS). CRS is a single global standard for the collection, reporting and exchange of financial account information on foreign tax residents.
Talk to us
It can be both tricky and time-consuming to comply with Australia's regulations and adapt to the tax environment. Seeking the help of experts with local experience and in-depth knowledge can come in handy.
TMF Australia is well established with offices in Sydney and Melbourne, and in a unique position to provide the necessary back office administration services (accounting, corporate secretarial, tax, HR and payroll) to international companies of all sizes. We also offer the bespoke services required for Hedge, Real Estate and Private Equity Fund Administration.
Talk to us if you want to find out more about our services.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.