Like most other countries around the world Australia has its own taxation rules and regulations that are designed to ensure that each taxpayer pays their appropriate share of taxes. There are several different forms of taxation in Australia including income tax, Goods and Services Tax (a value-added tax), land tax and payroll tax.
Income tax is governed by the Income Tax Assessment Act, 1997 which prescribes that income tax shall be payable on taxable income. Taxable income is determined by deducting from assessable income all allowable deductions, irrespective of the legal form that the business is conducted (although the rate of tax may differ).
Australian resident taxpayer’s assessable income includes world-wide income. Generally, all expenses incurred by a business will be deductible if it is incurred in producing or maintaining assessable business income. Included in assessable income will be the net taxable capital gains made during the income tax year. However, the reverse is not the case for net taxable capital losses, as these are quarantined and carried forward to future years to be offset against subsequent net taxable capital gains.
Whilst Australian resident taxpayers are assessed on their world-wide income, Australia has number of International Tax Agreements with foreign jurisdictions which eliminates the double taxing of some income. The standard income tax year runs from 1 July through to 30 June, however this can be amended to align with the parent entities year end date.
The corporate rate of income tax is determined based upon the active revenues of the corporation. Small companies (those with an annual turnover of less than $2 million) have an income tax rate of 28.5% whilst companies with turnover of $2 million or more have an income tax rate of 30%. In addition to the lower income tax rates there are also several other tax concessions afforded to small business taxpayers.
Income tax is prepaid throughout the year each quarter (September, December, March and June) with a final reconciliation performed after the end of the income tax year. Where a holding company / subsidiary company relationship exists, the companies can elect to form a tax consolidated group so that any inter-group transactions are ignored for income tax purposes and only one entity (the head entity) pays the income tax for the group.
Tax losses can also be shared with other entities within a tax consolidated group.
Generally, partnerships do not pay income tax but rather it is the partners that are liable for income tax on their share of the taxable income of the partnership. The exception to this general rule is where one of the partners is a company and the partnership is regarded as a Limited Liability Partnership in which case the partnership would pay tax on the same basis as if it were a company.
Generally, branches of foreign companies are taxed on the Australian sourced income and are taxed on the same basis as companies, subject to any international tax treaty.
The income tax rates applicable to individuals is on a progressive basis such that the higher the taxable income of the individual the greater rate of tax is payable. The table overleaf sets out the income tax rates applicable to Australian resident individuals for the 2016-2017 taxation year.
|Taxable Income||Tax Payable|
|$18,201||$37,000||nil||19% of excess over $18,200|
|$37,001||$87,000||$3,572||32.5% of excess over $37,000|
|$87,001||$180,000||$19,822||37% of excess over $87,000|
|$180,001*||above||$54,232||45%* of excess over $180,000|
*for taxable incomes over $180,000 there is a temporary budget repair levy of 2% which increases the rate to 47% of the excess over $180,000.
In addition to the income tax rates applicable above, Australian resident taxpayers are also liable to a surcharge (Medicare Levy) which is a contribution to the federally funded basic health system. The rate of the Medicare levy is
2.0% or 3.0% depending upon whether an individual has private health insurance with hospital cover.
The following table sets out the income tax rates applicable to non-Australian resident individuals for the 2016-2017 taxation year:
|Taxable Income||Tax Payable|
|$18,201||$37,000||nil||19% of excess over $18,200|
Employers are obligated to withhold income tax at prescribed rates from the salary and wages paid to employees.
Generally, trusts are considered to be transparent in nature from an income tax point of view in that it is the unit holders or beneficiaries that are liable for their share of the taxable income of the trust. The exception to this rule is for public unit trusts which are taxed in the same manner as companies.
Superannuation funds receive a concessional rate of tax. This is 15% whilst the members are continuing to introduce funds via contributions (Accumulation Phase) and this is reduced to nil when the members start to draw a pension from the fund (Pension Phase). Recent changes were legislated whereby from 1 July 2017 members of superannuation funds will be limited to having $1.6 M of their account balance in Pension Phase, with the excess being retained in the Accumulation Phase where the income will be taxed at 15%.
Dividends are paid from after-tax profits by a company and, to avoid the double taxation of this income, taxpayers receive a credit for the income tax already paid by the company (an imputation credit). This effectively limits any additional tax to the difference between the tax rate and the company tax rate.
Capital Gains Tax (CGT) applies to all non-trading assets acquired (or deemed acquired) on or after 20 September 1985.
Whilst CGT is not a tax in its own right, it requires a taxpayer to include gains made upon the disposal of assets in their assessable income. An exemption applies for an individual’s principal place of residence and their private motor vehicle.
The amount to be included in the taxpayer’s assessable income will be determined by the type of taxpayer and the length of time that they have held the asset. The following table shows the rate at which a capital gain is to be included in a taxpayer’s assessable income:
|Type of Taxpayer||Asset Held for less
than 12 months
|Asset Held for more than 12 months|
Once the “taxable capital gain” is determined this is added to the taxpayer’s other taxable income and income tax is calculated in accordance with their applicable income tax rates. Capital losses are quarantined and carried forward to future years to be offset against subsequent capital gains.
There are numerous concessions and roll-overs for forced disposals, corporate restructures, death, divorce and certain small business disposals. It is important to note that there is a deemed acquisition on becoming an Australian resident and
a deemed disposal upon ceasing to be an Australian resident which could lead to a CGT liability. However, these harsh rules can be overcome in certain circumstances.
The value-added tax in Australia is the Goods and Services Tax but is more commonly referred to as the GST and is currently applied at the rate of 10% on most goods and services provided in Australia. Exemptions from the GST include exports, health, staple foods, education and certain other goods and services.
Each entity providing goods and services where the annual turnover is, or is likely to be, greater than $75,000 is required to be registered for GST. Entities with an annual turnover under this threshold may elect to register.
Most registered business enterprises are entitled to claim back the GST (known as input tax credits) for goods and services acquired and used in the operation of their business.
Each quarter (or monthly for large clients) registered businesses are required to report their GST transactions in a summary form (Business Activity Statement or BAS) and remit the difference between the GST charged to customers and the input tax credits claimed.
GST is normally included in the displayed or quoted price of goods and services. If the price does not include GST it must be clearly displayed as such.
Predominantly sales tax is levied through the application of the GST discussed above, however special excise duties are applied to certain goods such as fuel, tobacco and alcohol. These duties are imposed by each State at varying rates.
All income taxes and Value Added Tax are imposed at the Federal level. There are no local income taxes or Value Added Taxes. Each Australian State and Territory raises revenue through the imposition of land tax, payroll tax and limited sales taxes as noted above. Local authorities raise revenue through various real estate and other levies which are generally imposed on the home owner.
This is a tax imposed on the unimproved value of land owned by taxpayers. The thresholds and rates of tax are governed by each Australian State and Territory. Subject to certain thresholds, a person’s private residence will generally be exempt from land tax.
This is a tax imposed on employers whose payroll exceeds certain thresholds. The applicable thresholds and rates of tax are governed by each Australian State and Territory. There are grouping provisions which effectively allow a group of entities to claim one threshold. If a business enterprise operates in multiple states a national threshold is applied.
Fringe Benefits Tax (FBT) is a tax levied on employers where non-cash remuneration is paid to employees.
The rate of Fringe Benefits Tax is equal to the highest marginal tax rate applicable to Australian resident individuals (inclusive of the Medicare Levy), currently this is 47%. Generally, tax is levied on the GST inclusive value of benefits (i.e. the gross amount paid by the employer in providing the benefit).
Australia has entered into International tax agreements with many countries around the world. The agreements are largely in standard form, but there are subtle differences in the details of each. Australia does not condone the use of “tax havens” and has powerful disclosure rules to reduce the effectiveness of offshore tax havens.
Transfer pricing involves the transfer of profit from one entity to another by manipulating the amount paid for goods and services. Australia like most countries has strict rules in relation to transfer pricing, especially where cross borders are involved, and require that all transactions between associated parties be on and arm’s length basis.
Sufficient documentary evidence is required to be retained by Australian taxpayers supporting the premise that transactions with related parties are on an arm’s length basis.
This is a relatively complex area, however it essentially applies where equity is injected into an entity in the disguise of a loan so that they can shift profit to the other entity by way of an interest charge. In these situations, the entity receiving the contributions will be denied a deduction for the interest paid on the loan.
An Australian resident is liable to pay Australian tax on the net financial income of a non-resident controlled entity (“Controlled Foreign Company” or CFC). Similarly, Australian residents with interests in Foreign Investment Funds (FIF’s) are taxed in Australia if not caught under the CFC rules.