Taxation is spread between Australia's three levels of government.
The Federal Government collects almost 80% of the tax paid in Australia and is the only level of government that levies income tax, its major form of revenue. In addition, it levies a Goods and Services Tax (GST) and also levies tariffs on a number of imported items.
State governments variously impose a large number of taxes. Principal among these are land tax, payroll tax, stamp duty and motor vehicle registration duty. Local governments also impose taxes – chiefly, rates payable by landowners – though these make up less than 5% of taxes levied on the private sector.
There are a number of issue-specific reviews (for example, trust taxation and transfer pricing) of the tax system currently underway. Australia is also in the process of introducing a new Minerals Resource Rent Tax as well as a new Carbon Pricing Mechanism and Tax. As with all decisions, businesses need to consider any proposed changes, factoring them into business plans and activities. In particular, businesses should prepare before any tax change commences.
Australia's income tax system is administered by the Federal Commissioner of Taxation (the Commissioner), who is responsible for the operations of the Australian Taxation Office (ATO).
Income tax is governed by many enactments. The main legislation is the Income Tax Assessment Act 1936 (Cth) and the Income Tax Assessment Act 1997 (Cth). These and the common law form the basis for Australia's current income and capital gains taxation system. Administrative rulings and determinations are also involved.
Federal income tax returns must be lodged annually. The Australian tax year, or year of income, ends on 30 June. A Substituted Accounting Period (SAP) may be adopted as the income tax year with the written approval of the Commissioner. An application for a SAP may be lodged where special circumstances exist to justify one.
The system operates by way of self-assessment, together with random ATO audits to verify assessments. Taxpayers may seek a binding private ruling from the Commissioner in relation to a transaction or arrangement.
Australian resident individual tax rates for 2012-13 are set out in the table below.
|TAXABLE INCOME AU$||TAX ON THIS INCOME|
|$18,201–$37,000||19c for each $1 over $18,200|
|$37,001–$80,000||$3,572 plus 32.5c for each $1 over $37,000|
|$80,001–$180,000||$17,547 plus 37c for each $1 over $80,000|
|$180,001 and over||$54,547 plus 45c for each $1 over $180,000|
A Medicare Levy of 1.5% of taxable income is payable on top of these rates unless the person is a low income earner. Certain other exemptions apply, including for non-Australian residents for tax purposes. In other cases, a reduced levy may be available to certain non-residents. An additional surcharge of 1% is payable by highincome earners who do not have private patient hospital cover for themselves and their dependents for the relevant income year.
This surcharge is also payable by single people without dependent children and who have a taxable income greater than AU$84,000 for the 2012-13 income tax year and by family members if the combined taxable income of the person and their spouse is greater than AU$168,000 for the 2012-13 income tax year. On top of this, the threshold increases by AU$1,500 for each dependent child after the first. A person is considered a family member if they have a spouse, dependent children, or both.
The Australian Government has introduced a Temporary Flood and Cyclone Reconstruction Levy (Flood Levy) applying to taxable income over AU$50,000 for the 2011-12 year only. This is payable by individual taxpayers (including foreign residents who have Australian income) unless the person is a low income earner or the taxpayer is affected by the natural disasters. The amount of the levy is calculated as follows:
- Taxpayer's taxable income is between AU$50,001 to AU$100,000: half a cent for each $1 over $50,000.
- Taxpayer's taxable income is over AU$100,000: $250 plus 1 cent for each $1 over $100,000.
Company tax rate
Both Australian resident companies and foreign resident companies (with Australian-sourced income) are subject to income tax at the company tax rate of 30%. The Federal Government has recently announced a reduction in the corporate tax rate to 29%, starting from 1 July 2012 for small businesses and 1 July 2013 for all other companies.
INCOME TAX LIABILITY
Australian residents are liable for tax on all their income and capital gains from sources anywhere in the world. Income from foreign service is assessable regardless of whether the employer is foreign or Australian. An Australian resident's foreign earnings, however, will generally be tax exempt if the resident is employed for longer than 91 days. However, this exemption is restricted to employees who are engaged in foreign service attributable to certain Federal Government and official development assistance or certain developing country relief work.
Non-residents are generally taxed on all income and capital gains from Australian sources. A network of Double Taxation Agreements (DTAs) operates to modify these rules. Income or capital gains not earned from an Australian source by people who are not Australian residents is generally not liable for tax in Australia.
Tax on income derived from an Australia source (foreign residents)
A number of situations exist in which foreign residents are taxed on nonAustralian income. These include interest, royalties, unfranked dividends and other similar payments to a non-resident by an Australian resident.
The residence test
Residence is determined primarily by the ordinary meaning of "resides". People domiciled in Australia are generally deemed residents of Australia.
One statutory test is whether a person is in Australia, continuously or intermittently, for more than six months of a financial year. In this case, he or she is considered a resident unless they can establish that their usual residence is outside Australia and that they do not intend to reside in Australia.
As residency is a question of fact, people who are in Australia for less than six months may also be able to establish that they are Australian residents. A number of factors determine a person's residency. Each DTA between Australia and a treaty country also contains rules to determine residency, including "tiebreaker" rules.
A company is resident in Australia if it:
- Is incorporated in Australia; or
- Carries on business in Australia and either:
- Its central management control is in Australia, or
- Its voting power is controlled by shareholders resident in Australia.
If company directors usually undertake business and make decisions in Australia then, as a general rule, the residence test will be satisfied. Again, residency is a question of fact decided in each case by reviewing the company's business and trading.
Trusts will be resident trust estates during a financial year if their trustee is an Australian resident or its central management and control is in Australia.
DTAs AND PERMANENT ESTABLISHMENTS
Residents in countries that have a DTA with Australia are only subject to taxes on business profits in Australia if they conduct business in Australia through a permanent establishment. A foreign company is not considered a permanent establishment simply because it has an Australian subsidiary. Similarly, if the foreign resident operates only through an independent agent who cannot bind it, then it also is not a permanent establishment.
Countries with which Australia has DTAs
Argentina, Austria, Belgium, Canada, Chile, China, Czech Republic, Denmark, Fiji, Finland, France, Germany, Greece, Hungary, India, Indonesia, Ireland, Italy, Japan, Kiribati, Korea, Malaysia, Malta, Mexico, Netherlands, New Zealand, Norway, Papua New Guinea, Philippines, Poland, Romania, Russia, Singapore, Slovak Republic, Spain, South Africa, Sri Lanka, Sweden, Switzerland, Taiwan, Thailand, Turkey, the UK, the US and Vietnam. Royalties include payments for the use of industrial, commercial and scientific equipment or knowledge and for spectrum licences. If they are paid as an Australian business's expense, royalties are taxed as if they were sourced in Australia and, in the absence of a DTA, royalties derived by non-residents are subject to a 30% withholding tax. A DTA generally reduces the withholding tax rate for royalties to 10%.
Company tax losses can be carried forward indefinitely and can be offset against assessable income. However, this right may be lost if a company's ownership changes. The test for this is whether more than 50% of all voting, dividend and capital rights are beneficially owned by the same people who held the rights when the loss was incurred.
A loss may remain deductible if the company carries on the same business after its ownership changes. Capital losses may also be carried forward indefinitely but may only be used to offset capital gains. Complex provisions apply to the carrying forward of tax losses.
For income tax purposes, a head company of a wholly owned group of entities can elect to consolidate with its wholly owned Australian subsidiaries. Under a "one in, all in" principle, the wholly owned subsidiaries become subsidiary members of the consolidated group. Together with the head company, these constitute the members of the group and, while consolidated, will be considered a single entity for income tax purposes. Thus certain intra-group transactions are ignored for income tax purposes. All group members can in some circumstances be liable for the group's tax debts. Such groups often enter into internal arrangements concerning an allocation of tax responsibilities known as "tax sharing" and "tax funding" agreements.
TRUST WITHHOLDING REGIME
Certain distributions made by an Australian Managed Investment Trust (MIT) to foreign resident investors in the MIT are subject to a concessional rate of withholding tax (prior to 1 July 2008, the withholding tax rate was 30%).
The rate of withholding differs depending on whether the investor's address is in a jurisdiction with which Australia has an effective Exchange of Information (EOI) agreement (which includes the UK, the US and New Zealand). The rate of withholding is 7.5% from 1 July 2010.
Where the investor does not reside in an EOI jurisdiction, the rate of withholding tax continues to be 30%.
The concessional tax rate only applies to distributions from a MIT of Australian source net income other than dividends, interest and royalties.
TAXATION OF FINANCIAL ARRANGEMENTS
The Taxation of Financial Arrangements (TOFA) rules apply mandatorily to certain financial arrangements of certain taxpayers entered into from 1 July 2010, although taxpayers can elect to apply the new rules from 1 July 2009.
The regime contains a set of rules that determines the tax timing and character treatment of gains and losses arising from such financial arrangements and more closely aligns the tax treatment with the accounting treatment.
Broadly, TOFA only applies mandatorily to certain financial sector entities with a turnover of AU$20 million or more, certain superannuation entities with assets of AU$100 million or more and to other entities with turnovers that meet certain turnover, asset or financial asset thresholds. However, any taxpayer can elect for the rules to apply to them.
Some financial arrangements are specifically excluded from the operation of the TOFA rules.
A taxpayer has to determine whether or not to make the following types of elections:
- Whether or not to enter into TOFA (if TOFA does not compulsorily apply)
- Timing of when to enter into TOFA
- Whether or not to apply TOFA to existing financial arrangements
- Elective tax timing methods – ie how gains and losses will be taxed under TOFA.
GST is a value-added tax of 10%, which is payable on supplies of any form whatsoever including goods, services, real property, rights and obligations and is generally applied at each stage of the production and distribution chain.
Individuals, companies, trusts, tax and legal partnerships and government entities that meet an annual turnover threshold of AU$75,000 are registrable for GST. Most registrable entities become liable for GST on the issue of an invoice or the receipt of a payment, whichever is the earlier.
There is no statutory right to increase prices on account of GST, so businesses generally seek reimbursement by way of a GST clause in their contracts or by charging a GST-inclusive price. Where the recipient is a business, it can generally claim back the GST charged to it as an input tax credit from the ATO in its GST return. However, input tax credits are not available for all businesses, for example where an expense relates to an input taxed supply made by the business, such as a financial supply. In this case, any GST borne by the recipient is a real cost.
Not all supplies are taxable. For example, financial supplies, which include granting loans and transfers of securities, are input-taxed where they involve Australian parties. Thus no GST liability arises for the supplier but it may not be entitled to claim a full input tax credit on expenses related to the input taxed supply. For example, there is no GST on a share sale, but the vendor and the purchaser may not be entitled to claim input tax credits on their transaction costs, such as legal and accounting advice. There are a number of special rules in this area.
Other supplies, such as exports, certain food products, health and education are GST-free. In these cases, there is no GST liability for the supplier and the supplier can generally claim an input tax credit on expenses related to GST-free supplies.
The sale of a business via an asset sale is generally sold as a GST-free going concern. The going concern test is a technical test and there are a number of requirements that need to be met. The benefits of using the going concern exemption include cash flow and stamp duty savings (the latter since stamp duty is calculated on the GST-inclusive purchase price).
Expert advice should be obtained on any business purchase. The Federal Government has proposed removing the going concern exemption and replacing it with a reverse charge mechanism. No start date has been given for when this change will be effective, however, it is expected to commence some time in 2012.
Cross-border transactions are another area that give rise to complex GST issues. Australia has very broad GST cross-border rules, such that many non-residents have a GST liability in Australia (even where they do not carry on business in Australia) and many Australian businesses need to charge GST to non-resident customers. All cross-border transactions require GST advice. The Federal Government is currently conducting a review into the GST cross-border rules, which is expected to lead to substantial amendments to these rules. The amendments are proposed to be effective from 1 July 2012, although this date may be deferred.
Capital Gains Tax (CGT) forms part of the income tax regime. CGT applies to net capital gains relating to assets and notional assets acquired after 19 September 1985 and capital losses where sale proceeds are less than the actual unindexed cost. However, these losses may only be offset against current or future capital gains.
Capital gain is calculated on the proceeds from the disposal of the asset less its cost and any incidental costs associated with its purchase and disposal. The taxable part of the gain is treated as assessable income.
Some assets are exempt from CGT, for example an individual's principal residence and motor vehicles, but generally the types of assets subject to CGT are very broad. Various small business CGT concessions are also available, for example where the business is related to an entity's own net assets of AU$6 million or less and the assets are used in a business, though special rules about control may apply. At times, CGT may be deferred where one CGT asset is rolled over into another.
In a recent alignment of Australia's CGT tax policy with Organisation for Economic Cooperation and Development practice, nonresidents are only subject to CGT where:
- They have a direct or indirect interest in Australian real property – an indirect interest includes an interest held through a non-portfolio interest, ie where an interest of 10% or more is held through an interposed entity. Nonportfolio interests held by non-residents in both Australian and foreign entities will only be subject to Australian CGT where at least 50% of the asset's value is attributable to underlying Australian real property; or
- The assets have been used to carry on a business through a permanent establishment.
Non-residents now have greater flexibility and efficiency in structuring their Australian investments. They are no longer subject to CGT on Australian share or unit trust investments where Australian real property is not held by the entity.
Assets held through a partnership and options over taxable Australian assets are included in the tax base.
For assets held for at least one year, individual taxpayers and trusts have the choice of including either half the realised nominal gain or the whole of the difference between the disposal price and the frozen indexed cost base in their assessable income. Complying superannuation funds would include twothirds of the net gain.
Companies must include in their assessable income the whole of the difference between the realised price of the asset and its cost base.
ANTI-AVOIDANCE PROVISIONS DIRECTED AT FOREIGN ENTITIES
Rules operate to prevent multinational entities allocating a disproportionate amount of debt to their Australian operations. Interest payable on debt may be deductible for tax purposes whereas dividends paid on equity are not.
Broadly, thin capitalisation rules operate when the amount of debt used to finance the Australian operations of multinational corporations exceeds specified limits. These disallow a proportion of the deductible finance expenses, for example interest attributable to the Australian operations.
Once a group consolidates, thin capitalisation rules apply to the head company. An Australian branch of a foreign bank can be part of a group's head company or part of a single resident company for the purpose of determining their thin capitalisation position.
The rules may apply to:
- Australian entities that are foreigncontrolled and foreign entities that either invest directly into Australia or operate a business through an Australian permanent establishment
- Australian entities that control foreign entities or operate a business through overseas permanent establishments and associate entities.
There are two exemptions from thin capitalisation rules:
- Taxpayers and their associates claiming annual debt deductions of AU$250,000 or less
- Outward investing Australian entities, if at least 90% of their assets (excluding those of a private or domestic nature) are Australian.
Application to Authorised Deposit- Taking Institutions
For Authorised Deposit-taking Institutions (ADIs) such as banks, debt deductions will be reduced where the equity capital that is funding Australian operations is less than the minimum equity requirement. For inward-investing ADIs, ie foreign ADIs with Australian permanent establishments, the minimum amount of equity capital is the lesser of the:
- Safe harbour capital amount of 4% of the risk-weighted assets of the Australian banking business
- Arm's length capital amount determined in a similar manner to the arm's length debt amount for non-ADIs, ie a notional amount representing what would reasonably have been expected to be the entity's minimum arm's length capital funding of its Australian business throughout the year.
Outward-investing ADIs, ie Australian ADI entities with foreign investments, have the same requirement but also must have capital to match certain other Australian assets. The minimum amount of equity capital for outward investing ADIs is the least of the:
- Safe harbour capital amount of 4% of the risk-weighted assets of the Australian banking business
- Arm's length capital amount, ie a notional amount representing what would reasonably have been expected to have been the bank's minimum arm's length capital funding of its Australian business throughout the year
- Worldwide capital amount allowing an Australian ADI with foreign investments to fund its Australian investments with a minimum capital ratio equal to 80% of the Tier 1 capital ratio of its worldwide group.
Application to non-ADIs
For organisations that are not ADIs, debt deductions reduce where the amount of debt funding of Australian operations exceeds a specified maximum, which varies according to whether the entity is a financial institution and whether it is inward- or outward-investing.
For non-ADI foreign entities with Australian investments, the maximum amount of debt will be the greater amount determined under either the safe harbour debt test or the arm's length debt test.
Under the safe harbour test, the amount of debt used will be considered excessive when it is greater than the gearing limit of 3:1. For financial entities, this gearing ratio only applies to their non-lending business.
An on-lending rule also operates. This removes from these calculations any debt that is on-lent to third parties or used for similar financing activities. Application of this rule is limited by an additional safe harbour gearing ratio of 20:1, which applies to the financial entity's total business.
Special rules delivering higher gearing ratios for financial entities with assets allowed to be fully debt-funded also apply. For the purposes of the safe harbour test, asset and liability take their accounting meaning.
The arm's length debt amount is determined by analysing an entity's activities and funding to deliver a notional amount that represents what would reasonably have been expected to be the entity's maximum arm's length debt funding during the period.
For non-ADI Australian entities with foreign investments, the maximum deductible debt amount will be the greatest determined under either the:
- Safe harbour debt test
- Arm's length debt test
- Worldwide gearing debt test.
The safe harbour limit and the arm's length test are fundamentally the same as those described for non-ADI foreign entities with Australian investments. However, they take account of the amount and form of investment in the Australian non-ADI's controlled foreign investments.
The worldwide gearing debt test allows an Australian entity with foreign investments to fund its Australian investments with gearing of up to 120% of the gearing of the worldwide group it controls. This test is not available if the Australian entity is controlled by foreign entities.
TRANSFER PRICING (SHIFTING PROFITS OUT OF AUSTRALIA)
Australia's Income Tax Assessment Act 1936 (Cth) deals with arrangements by which profits are shifted out of Australia. The Taxation Commissioner may impose arm's length prices in relation to:
- The supply or acquisition of property or services between related parties under an international agreement
- Internal dealings of an international organisation such as between international head office and an Australian branch.
Any management charges or supplies of services by foreign investors to related Australian companies must be commercially justifiable and at approximately arm's length prices. Several pricing methodologies exist that are acceptable to the ATO.
ATO RULLING AND ADVICE
The ATO and the different state revenue offices issue public rulings, determinations, interpretative decisions and practice statements, which set out their views on the operation of the relevant federal or state law. The various forms of ATO advice provide different levels of protection as to penalties, interest or primary liability.
In addition, a taxpayer can seek certainty in respect of how the ATO will treat the income tax, GST, Fringe Benefits Tax (FBT) or GST laws as they apply to their tax affairs by applying for a private ruling. A private ruling is legally binding on the Commissioner and protects the taxpayer from penalty, additional primary tax and interest when they rely on a ruling. Where a class of persons is involved, or the subject matter concerns the tax implications of a particular product, a class ruling or product ruling can be sought.
Fringe Benefits Tax
FBT is a federal tax of 46.5% paid by employers on the taxable value of specific non-cash benefits provided to employees and their associates, whether provided by the employer or by a third party. It is calculated annually and paid quarterly or annually.
The taxable amount is determined by classifying fringe benefits into two types to account for the different treatment of certain people and benefits under GST legislation. FBT paid by employers is taxdeductible.
FBT applies to the private use of motor vehicles, the waiver of debts, the giving of interest-free or low interest loans and free or cheap housing, to name a few. Concessions are available for certain benefits paid to employees who relocate for their employment.
States and territories levy payroll tax on an employer's total wages paid or their equivalent, eg fringe benefits. Standing at around 6% of the payroll value, the tax differs between jurisdictions and exemptions for total annual payrolls of around AU$600,000 or less are provided by individual states and territories. In some cases, if the total payroll of an employer is below this amount, no tax is payable. Generally, wages include some amounts paid to independent contractors.
Duty, sometimes referred to as stamp duty, is imposed differently in each state and territory. Duty applies principally to transactions such as transfers of land, transfers of businesses, transfers of unlisted shares and the taking of security for financial accommodation, eg mortgages and charges.
Depending on the nature of the instrument and transaction, duty varies from 0.4% to 6%. Each state's and territory's stamp duty law is different, with some transactions being dutiable in some but not in others. For example, only New South Wales and South Australia charge duty on the transfer of unlisted shares (both will abolish this duty from 1 July 2012).
Trades in all securities listed on the Australian Securities Exchange (ASX) are not dutiable in all states or territories, except in certain circumstances where the listed company owns significant land assets in particular Australian states or territories and at least 90% of the shares in the company are transferred.
A key area is the imposition of "land rich" or "landholder" duty on share or unit acquisitions where the vehicle owns significant land assets in Australia. Duty may then be up to 6.75% of the land value, multiplied by the proportionate interest acquired in the vehicle.
Each state and territory imposes land tax at varying levels and conditions. Generally, land tax is payable annually based upon the unimproved value of land owned and applying only above a certain threshold value.
A range of other imposts exists. For example:
Employers must pay a workers' compensation levy and each state and territory operates individual workers' compensation schemes, which vary in their rates and coverage.
Annual vehicle registration fees are payable.
Local councils may levy rates on real property.
Customs and excise duties are payable on some goods.
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