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Table of contents :
GENERAL SYSTEM OUTLINE
ARTICLES AND BUDGET REPORTS
About CCH New Zealand Limited CCH New Zealand Limited is a leading provider of accurate, authoritative and timely information services for professionals. Our position is built on the delivery of expert information that is relevant, comprehensive and easy to use. We are a member of the Wolters Kluwer group, a leading global information services provider with a presence in more than 25 countries in Europe, North America and Asia Pacific. CCH — When you have to be right. Enquiries are welcome on 0800 500 224.. National Library of New Zealand Cataloguing-in-Publication Data CCH New Zealand Limited. Doing business in Australia: a quick tax guide. ISBN 978-1-77547-041-0 1. Commercial law—Australia. 2. Income tax—Accounting—Law and legislation—Australia. 3. Taxation—Law and legislation—Australia. I. Title. 346.9407—dc 23
ISBN 978-1-77547-041-0 © 2013 CCH New Zealand Limited Published by CCH New Zealand Limited Published September 2013 All rights reserved. No part of this work covered by copyright may be
reproduced or copied in any form or by any means (graphic, electronic or mechanical, including photocopying, recording, recording taping, or information retrieval systems) without the written permission of the publisher. Printed in New Zealand by Ligare Limited
Contents Foreword Although the New Zealand and Australian tax systems have a common ancestry, and that one effect of business globalisation has been one of standardising the broad concepts underpinning taxation regimes across jurisdictional borders, the devil, without question, is in the detail. It would be foolhardy for a New Zealand business person to assume that, even given the comforting commonality of acronyms like PAYG, FBT, GST and CFCs, tax in Australia is simply a replication of tax in New Zealand. In fact, quite the opposite is true as many of the differences are fundamental. Furthermore, for closely-held/SME businesses seeking to expand into Australia from New Zealand, any tax paid in Australia can result in a disproportionate reduction of net funds able to be distributed to the shareholders in New Zealand. Until such time as our respective Governments agree on common recognition of tax credits transTasman, there is inevitably a risk of Australian-sourced income being over-taxed, as compared to income derived solely in New Zealand. Accordingly, careful tax planning early on in a trans-Tasman venture is the best way to reduce exposure to this type of tax leakage. This may be achieved through a mixture of structuring (using different types of entitles): transfer pricing arrangements or careful management of affairs to ensure no permanent establishment is created. This book is designed to highlight many of the tax issues that can arise in Australia for the New Zealand business or investor contemplating crossing the “ditch”. It should raise some red flags for those businesses and their accountants, and lead to better quality
discussions with specialist tax advisors on both sides of the Tasman. Without question, this is an area where prevention is better than the cure. Scott Mason Managing Principal NZ — Tax Advisory Crowe Horwath Australia/New Zealand
CCH Acknowledgments CCH New Zealand Limited wishes to thank the following who contributed to and supported this publication: Managing Director: Bas Kniphorst General Manager: Julie Benton Head of Content: Andrew Campbell Product Manager: Dione Kimpton Production Team Leader: Yeong Wai Heng Production Editor: Gnaliny Tigarajan Cover Designer: Envisage Design
AUSTRALIA ¶AUS ¶1-001 SNAPSHOT Tax authority
Australian Taxation Office www.ato.gov.au
1 July – 30 June A taxpayer may apply to use a different tax year. This application is normally granted where the substituted tax year coincides with the tax year of an overseas holding company. (AUS ¶1-016)
2013/14 income tax rates (AUS ¶1020)
Corporate tax rate — 30%
Resident individuals: Taxable income
19c for each A$1 over 18,200
A$3,572 plus 32.5c for each A$1 over 37,000
A$17,547 plus 37c for each A$1 over 80,000
A$54,547 plus 45c for each A$1 over 180,000
Non-resident individuals: Taxable income
32.5c for each A$1
A$26,000 plus 37c for each A$1 over 80,000
A$63,000 plus 45c for each A$1 over 180,000
10% GST — basic food exempt (AUS ¶1-185)
Capital gains tax (CGT)
Taxable capital gains are calculated under special rules and included in a taxpayer’s assessable income and taxed at the taxpayer’s applicable rate. (AUS ¶1-060)
Losses may be offset against all income received in the same accounting period, carried forward indefinitely and offset against future trading profits, or carried back for up to two years and offset against trading profits in those past years. (AUS ¶1-080)
Treaty network 44 treaties in effect (AUS ¶1-005) Withholding tax (nonresidents)
10% (AUS ¶2-050(a))
30% (AUS ¶2-050(b))
30% (AUS ¶2-050(c))
Construction and related activities
5% (AUS ¶2-020(b))
3% (AUS ¶2-020(b))
30% or applicable
individual rate (AUS ¶2020(b)) Technical fees
30% (AUS ¶1-005(a))
Under the tax consolidation regime, wholly-owned Australian resident group companies can elect to be treated as a single entity for tax purposes, with the head company (ie representative of the group) able to lodge a company tax return on behalf of the whole group. (AUS ¶1-180)
Yes (AUS ¶3-060)
Thin capitalisation restrictions
Yes — 3:1 debt/equity ratio (AUS ¶1-110(h))
Australian dollar — A$
No exchange control restrictions apply on the inflow or outflow of funds to and from Australia.
¶AUS ¶1-003 GUIDE TO AUSTRALIAN CITATIONS Authority
Federal legislation A New Tax System (Goods and Services Tax) Act 1999
GST Act s
A New Tax System (Goods and Services Tax) Regulations 1999
GST Regs reg
Corporations Act 2001
Corporations Act s
Corporations Regulations 2001
Corporations Regs reg
Financial Transaction Reports Act 1988
Foreign Acquisitions and Takeovers Act 1975
Fringe Benefits Tax Assessment Act 1986
Income Tax Assessment Act 1936
ITAA 1936 s
Income Tax Assessment Act 1997
ITAA 1997 s
Income Tax Rates Act 1986
Income Tax Rates Act s
Income Tax (Transitional Provisions) Act 1997
IT(TP)A 1997 s
International Tax Agreements Act International Tax Agreements Act 1953 s Tax Laws Amendment (Loss Recoupment Rules and Other Measures) Act 2005
TLA (Loss Recoupment Rules and Other Measures) Act 2005 s
Taxation Administration Act 1953 TAA s Taxation Administration Regulations 1976
Other legislation Partnership Act 1892 (New South Partnership Act (NSW) s Wales) Trustee Act 1925 (New South Wales)
Trustee Act (NSW) s
Tax authority materials Australian Taxation Office (ATO) rulings, determinations and alerts Income Tax Ruling IT Interpretative Decision ID Practice Statement PS LA
Taxation Determination TD Taxation Ruling TR Taxpayer Alert TA Cases Australian Tax Cases (published by CCH)
Commonwealth Law Reports (Australian)
UK Law Reports (Appeal Courts (year) (AC), King's Bench (KB), Queen's Bench (QB))
¶AUS ¶1-005 TAX TREATIES — WITHHOLDING TAX RATES (a) Withholding tax rates Australia has concluded tax treaties with a number of countries which specify the withholding tax rates that apply. Non-treaty withholding tax rates apply when they are lower than the rate specified in the treaty. The following rates of Australian withholding tax apply to non-resident entities: Country
Korea, Republic of
Czech Republic Denmark East Timor Fiji
Malaysia Malta Mexico Netherlands
Papua New Guinea Philippines Poland
(b) Tax treaty developments The following table outlines the status of treaties that have been signed by Australia but are not yet in effect, including the withholding tax rates specified under the pending treaties. Non-treaty withholding tax rates will apply where they are lower than the rate specified in the treaty.
Switzerland 30 Jul 2013
Status Replacement tax treaty signed; withholding tax rates: Dividends: 0% if the foreign company owns directly or indirectly at least 80% of the voting rights in the paying company for at least 12 months prior to payment of the dividend and (a) its principal class of shares are listed and regularly traded on a recognised stock exchange, or (b) it is owned directly or indirectly by one or more companies whose principal class of shares are listed and regularly traded on a recognised stock exchange; the 0% rate also applies to dividends paid to a government organisation that owns no more than 10% of the voting rights in the paying company; 5% if the foreign company owns directly at least 10% of the voting rights in the paying company; otherwise 15% Interest: 0% if paid to a government organisation, the central bank, an unrelated financial institution or a pension fund (excluding back-to-back loans); otherwise 10% Royalties: 5%
5 Jun 2013
First tax treaty entered into force and will be effective 1 January 2014; withholding tax rates: Dividends: 5% if the foreign company (not through a partnership) owns directly at least 10% of the voting rights in the paying company; otherwise 15%
Interest: 0% if paid to a government organisation or the central bank; otherwise 10% Royalties: 10% (c) Tax information exchange agreements (TIEAs) Australia has signed the following TIEAs based on the OECD model convention (date of signature in parentheses): Andorra (24 September 2011) Anguilla (19 March 2010) Antigua and Barbuda (30 January 2007) Aruba (16 December 2009) Bahamas (30 March 2010) Bahrain (15 December 2011) Belize (31 March 2010) Bermuda (10 November 2005) British Virgin Islands (27 October 2008) Brunei (6 August 2013) Cayman Islands (30 March 2010) Cook Islands (27 October 2009) Costa Rica (1 July 2011) Curacao (1 March 2007) Dominica (31 March 2010)
Gibraltar (26 August 2009) Grenada (30 March 2010) Guernsey (9 October 2009) Isle of Man (29 January 2009) Jersey (10 June 2009) Liberia (11 August 2011) Liechtenstein (21 June 2011) Macao (12 July 2011) Marshall Islands (12 May 2010) Mauritius (8 December 2010) Monaco (1 April 2010) Montserrat (22 November 2010) Saint Kitts and Nevis (5 March 2010) Saint Lucia (30 March 2010) Saint Vincent and the Grenadines (5 March 2010) Samoa (20 March 2010) San Marino (4 March 2010) Sint Maarten (1 March 2007) Turks and Caicos Islands (30 March 2010) Uruguay (11 December 2012)
Vanuatu (21 April 2010). Footnotes 1
The lower rate applies to franked dividends, being company shareholder distributions sourced from profits subject to the corporate taxation rate of 30% — see AUS ¶2-050(h) or the tax file numbering system for non-residents receiving franked dividends.
The lower rate applies if the foreign company owns directly at least 10% of the voting rights in the paying company and the dividend has been franked in accordance with Australia’s tax law (although in practice, Australia does not withhold tax on franked dividends).
The lower rate applies to interest paid to a government organisation or the central bank; otherwise the non-treaty rate applies rather than the higher 12% rate specified in the treaty.
The lower rate applies (a) to copyright royalties (excluding films and recordings), (b) to equipment royalties, and (c) to the supply of scientific, technical, or industrial knowledge or information.
The lower rate applies to interest paid to an unrelated financial institution (excluding interest paid in respect of back-to-back loans).
The lower rate applies to equipment royalties.
The lower rate applies if the dividend has been franked in accordance with Australia’s tax law (although in practice, Australia does not withhold tax on franked dividends).
The lower rate applies to payments made in respect of petroleum activities sourced in the Joint Petroleum Development Area, an area of seabed between Australia and East Timor; otherwise the non-treaty rate applies because there is no reduction under the treaty.
The 0% rate applies if the foreign company owns directly or indirectly at least 80% of the voting rights in the paying company for 12 months prior to payment of the dividend and (a) its principal class of shares are listed and regularly traded on recognised stock exchanges, and (b) it is owned directly or indirectly by one or more companies whose principal class of shares are listed and regularly traded on recognised stock exchanges; the 5% rate applies if the foreign company owns directly at least 10% of the voting rights in the paying company.
The lower rate applies to interest paid to a government organisation or the central bank, or to an unrelated financial institution (excluding interest paid in respect of back-to-back loans).
The 0% rate applies if the foreign company owns directly at least 10% of the voting rights in the paying company and the dividends are paid out of profits subject to the standard rate of corporation tax in Australia; the 5% rate applies if the foreign company owns directly at least 10% of the voting rights in the paying company.
The lower rate applies to interest paid to a government organisation or the central bank.
The non-treaty rate applies rather than the higher 15% rate specified in the treaty.
The lower rate applies to equipment royalties, or to fees
for technical services associated with the use of equipment. 13
The lower rate applies to equipment royalties, or to the supply of scientific, technical, industrial or commercial knowledge or information.
The 0% rate applies if the foreign company owns directly at least 80% of the voting rights in the paying company for 12 months prior to payment of the dividend and (a) its principal class of shares are listed and regularly traded on a recognised stock exchange, or (b) it is at least 50% owned by five or fewer companies whose principal class of shares are listed and regularly traded on a recognised stock exchange; the 5% rate applies if the foreign company owns directly at least 10% of the voting rights in the paying company.
The lower rate applies if the interest is paid to a government organisation or the central bank; otherwise the non-treaty rate applies rather than the higher 15% rate specified in the treaty.
The lower rate applies if the foreign company (not through a partnership) owns directly at least 10% of the voting rights in the paying company and the dividend has been franked in accordance with Australia’s tax law (although in practice, Australia does not withhold tax on franked dividends).
The 0% rate applies if the foreign company owns directly or indirectly at least 80% of the voting rights in the paying company for 12 months prior to payment of the dividend and (a) its principal class of shares are listed and regularly traded on a recognised stock exchange, or (b) it is owned directly or indirectly by one or more companies whose
principal class of shares are listed and regularly traded on a recognised stock exchange; the 0% rate also applies if the dividends are paid to a government organisation that owns no more than 10% of the voting rights in the paying company; the 5% rate applies if the foreign company owns directly at least 10% of the voting rights in the paying company. 18
The 0% rate applies if the foreign company owns directly or indirectly at least 80% of the voting rights in the paying company for 12 months prior to payment of the dividend and (a) its principal class of shares are listed and regularly traded on a recognised stock exchange, or (b) it is owned directly or indirectly by one or more companies whose principal class of shares are listed and regularly traded on a recognised stock exchange; the 5% rate applies if the foreign company (not through a partnership) owns directly at least 10% of the voting rights in the paying company.
The lower rate applies if the foreign company is granted relief, either by way of a tax rebate or credit, in the receiving country.
The lower rate applies if the foreign company (not through a partnership) owns directly at least 10% of the paying company’s capital and the dividends have been franked in accordance with Australia’s tax law (although in practice, Australia does not withhold tax on franked dividends).
The lower rate applies if the foreign company (not through a partnership) owns directly at least 10% of the paying company’s capital with a minimum investment of A$700,000 or equivalent and the dividends have been franked in accordance with Australia’s tax law (although in practice, Australia does not withhold tax on franked dividends).
The lower rate applies if the foreign company owns directly at least 10% of the voting rights in the paying company.
The lower rate applies if the foreign company (not through a partnership) owns directly at least 25% of the paying company’s capital and the paying company is engaged in an industrial undertaking.
The 0% rate applies if the foreign company owns directly or indirectly at least 80% of the voting rights in the paying company for 12 months prior to payment of the dividend and (a) its principal class of shares are listed and regularly traded on a recognised stock exchange, or (b) it is at least 50% owned by five or less companies whose principal class of shares are listed and regularly traded on a recognised stock exchange; the 5% rate applies if the foreign company owns directly at least 10% of the voting rights in the paying company.
¶AUS ¶1-007 LIST OF ABBREVIATIONS ABN — Australian Business Number ACN — Australian Company Number ADF — approved deposit fund ADI — authorised deposit-taking institution APA — advance pricing arrangement ASIC — Australian Securities and Investment Commission ASX — Australian Stock Exchange AUSTRAC — Australian Transaction Reports and Analysis Centre
ATO — Australian Taxation Office CFC — controlled foreign company CGT — capital gains tax COT — continuity of ownership test Cth — Commonwealth (the Commonwealth of Australia) Div — Division DVM — diminishing value method (a method of depreciation) FATA — Foreign Acquisitions and Takeovers Act 1975 FBT — fringe benefits tax FBTAA — Fringe Benefits Tax Assessment Act 1986 FIF — foreign investment fund FIRB — Foreign Investment Review Board FRW — foreign resident withholding tax FTL — Failure to Lodge on Time penalty FTRA — Financial Transaction Reports Act GIC — general interest charge GST — goods and services tax ITAA — Income Tax Assessment Act IT(TP)A — Income Tax (Transitional Provisions) Act MEC — multiple entry consolidation MIT — managed investment trust NSW — New South Wales (an Australian state) NTS(GST)A — A New Tax System (Goods and Services Tax) Act NTS(GST)R — A New Tax System (Goods and Services Tax) Regulations OBU — offshore banking unit
PAYG — Pay-As-You-Go PCM — prime cost method (a method of depreciation) PDF — pooled development fund PE — permanent establishment PRRT — petroleum resource rent tax PST — pooled superannuation trust Pt — Part reg — regulation R&D — research and development RHQ — regional headquarters s — section SAP — substituted accounting period SBT — same business test Sch — Schedule SIC — shortfall interest charge SME — small-medium enterprise (company with total audited asset value of $50m or less) STS — Simplified Tax System Subdiv— Subdivision TAA — Taxation Administration Act TAR — Taxation Administration Regulations TFN — tax file number TIEA — tax information exchange agreement TLA — Tax Laws Amendment TSA — tax sharing agreement Vic — Victoria (an Australian state)
VCLP — venture capital limited partnership WWGDA — worldwide gearing debt amount
GENERAL SYSTEM OUTLINE ¶AUS ¶1-010 FORMS OF DOING BUSINESS IN AUSTRALIA (a) Overview Businesses in Australia may be conducted through a range of entities. These include limited, unlimited or no liability companies, partnerships, trusts, and sole proprietorships. The choice of business entity has significant and ongoing implications on the tax treatment of income derived by the entity, capital gains, the costs of compliance with regulatory requirements, and opportunities to expand, restructure or sell the business or entity. The following entity types exist in Australia: • company • discretionary trust • unit trust • hybrid of discretionary and unit trust • sole proprietorship • general partnership/joint venture • limited partnership, and • branch of an overseas entity. For resident and non-resident businesses, the most common type of business structure is a proprietary limited company. A company structure allows the owner to limit their exposure to risk and simplify
their Australian taxation by establishing an Australian resident entity (ie company or trust) to operate the business locally in Australia. Some foreign businesses use an Australian branch to conduct their local business; however, this structure provides no tax advantage. Ref: www.abr.business.gov.au
Each business entity is subject to specific tax laws. Limited liability and no liability companies and branches of overseas companies are generally subject to entity-level corporate tax under the ITAA 1997 and are taxed at the corporate tax rate. Individuals (being natural persons) including partners of partnerships, joint venturers and sole proprietors are taxed at progressive marginal tax rates. Beneficiaries entitled to trust income are taxed in respect of income derived by a discretionary or unit trust at their applicable tax rate. Trust income which is not allocated to a beneficiary, or where the beneficiary is under a legal disability, is taxed in the hands of the trustee at the top marginal individual income tax rate. The Australian taxation system also includes a capital gains tax regime and a final withholding tax on individuals and companies. (b) Companies A company is defined for tax purposes as a body corporate or any other unincorporated association or body of persons (such as a club). It does not include a partnership or non-entity joint venture. Furthermore, under Australian tax law, certain entities are treated as companies for tax purposes (eg public trading trusts and limited partnerships). A company can be registered as either a proprietary or a public company. All types of companies must have at least one shareholder. A proprietary company is not permitted to have more than 50 nonemployee shareholders. Public companies do not have limits on the maximum number of shareholders. Ref: Corporations Act s 113
Companies are required to have a board of directors comprised of natural persons. The director and secretary must be at least 18 years of age. A proprietary company must have at least one director but is
not required to have a secretary. At least one of the directors and the secretary, if there is a secretary, of a proprietary company must be Australian residents. A public company must have at least three directors and at least one secretary. At least two of the directors and one secretary must be Australian residents. Ref: Corporations Act s 201A, 201B
The majority of companies in Australia are “limited liability” companies. A limited liability company constitutes an entity separate from its owners and directors for legal and tax purposes. It is this separate legal identity of a company that limits the shareholders’ exposure to risk. A shareholder’s risk is limited to their direct capital investment in the company. Foreign investors generally conduct business in Australia through a proprietary limited company structure. This provides limited legal liability and isolates the tax consequences of the business operations from other businesses the foreign investor may control elsewhere. Ref: ITAA 1997 s 995-1(1)
In a no liability company, the shareholders with partly paid shares are not bound to pay for the unpaid capital. Non-payment of these calls results in the forfeiture of their shares. Under the Corporations Act, a no liability company must be a public company and is required to have a constitution that restricts its business activities to mining purposes only. No liability companies are rare. A no liability company is required to end its trading name with the words “No liability” or “NL”. Ref: Corporations Act s 9 and 112
A company limited by guarantee is a public company whose members or shareholders are liable as contributories upon the winding up of the company up to a specified amount. Only public companies can elect to be registered as a company limited by guarantee. Each member must agree in writing to the amount of guarantee for which they will be responsible upon the company’s wind-up. A company limited by guarantee is generally established for the purpose of operating as a non-profit entity or charity. Ref: Corporations Act s 9, 112 and 150
Limited liability companies are divided into public and proprietary companies, which are both regulated by the Corporations Act. Public companies may or may not be listed on the Australian Stock Exchange (ASX). They are able to raise capital from the public, subject to complying with the related regulations. These regulations include the preparation of a detailed prospectus. Listed companies are subject to continuous disclosure obligations by the ASX Listing Rules. Proprietary companies cannot raise capital from the public, and are subject to less onerous reporting requirements. Further, proprietary companies have greater control over their membership as the company directors often retain the right of approval for share transfers in the company. A company’s financial statements are required to be audited by a registered auditor, except where the company is a “small proprietary company”. A small proprietary company is one that satisfies at least two of the following conditions: • consolidated gross operating revenue of the company and any entities it controls for the financial year is less than A$25m • the value of consolidated gross assets of the company and any entities it controls at the end of the financial year is less than A$12.5m, and • the company and its controlled entities have less than 50 employees at the end of the financial year. Ref: Corporations Act s 45A(2)
Companies are required to prepare annual accounts and lodge a company tax return. Under the tax consolidation regime, wholly-owned Australian resident group companies can elect to be treated as a single entity for tax purposes, with the head company (ie representative of the group) able to lodge a company tax return on behalf of the whole group. In addition, Australian incorporated foreign owned companies are required to have their accounts audited, subject to some limited
exemptions. Ref: Corporations Act s 601CK
All companies are subject to corporate tax. Profits paid to shareholders in the form of dividends are subject to tax again in the hands of the shareholders. Companies are able to pass on franking credits to resident shareholders under the imputation system to reflect the corporate tax paid on the income earned. Not all shareholders are entitled to receive franking credits, eg nonresident shareholders do not receive the benefit of franking credits. However, a franked dividend paid to a non-resident is exempt from withholding tax. Only unfranked Australian source dividends are subject to withholding tax when paid to non-resident shareholders (see AUS ¶1-020, AUS ¶1-130 and AUS ¶1-140). Ref: ITAA 1997 s 207-70
For unfranked dividends, the rate of withholding ultimately depends on the country of residence of the shareholder. Withholding tax is a final tax and there is no further Australian tax liability on dividends paid to non-residents which are subject to withholding tax (eg unfranked dividends). The maximum withholding rate is 30%, but may be reduced where a tax treaty exists between Australia and the shareholder’s country of residence (see AUS ¶1-005). Rights to acquire shares in companies Historically, when a shareholder received a right to acquire shares in a company, the Australian income tax law treated the situation as not giving rise to any assessable income or capital gain for the shareholder. However, recent Australian case law cast doubt on this previous practice, see FC of T v McNeil 2007 ATC 4223;  HCA 5. In September 2008, the Tax Laws Amendment (2008 Measures No 3) Act 2008 was enacted to restore the previous taxation treatment of call options that existed before the McNeil decision, ie making them non-assessable. Ref: Tax Laws Amendment (2008 Measures No 3) Act 2008; Commissioner of Taxation v McNeil 2007 ATC 4223;  HCA 5
For registration requirements, see AUS ¶1-012(a). (c) Discretionary trusts In Australia, each state administers its own trust laws. A trustee generally will be held personally liable for all debts of the trust with a right of indemnity against the trust assets. New South Wales, for example, grants the courts the power to excuse a trustee from personal liability if the court finds that the trustee has acted honestly and reasonably in exercising their trustee powers. The use of a corporate trustee often avoids exposing a trustee to personal exposure. However, under the Corporations Act 2001, the directors of a corporate trustee may be exposed to personal liability where: • the trust estate does not have sufficient assets to indemnify the trustee; and • there has been a breach of trust by the corporation; or • the corporation is found to be acting outside its powers as trustee; or • the corporation has a limited right to be indemnified against the liability. Ref: Trustee Act (NSW) s 85; Corporations Act s 197
A discretionary trust is a legal entity used to enable income to be distributed to beneficiaries stipulated by the trust deed. A trust comprises a fiduciary obligation imposed on an entity (the trustee) to hold property or income for a particular purpose or for the benefit of the beneficiaries. The trustee will generally hold the legal title to the trust property, but is required to deal with it in accordance with the terms of the trust. In a discretionary trust, the trustee may exercise its discretion to distribute or apply the income and capital of the trust to particular beneficiaries. The trust deed may provide for the income and/or capital to be accumulated in the trust.
A trust is not a separate taxable entity and is treated as an intermediary, with a flow-through effect for tax purposes. That is, trust income retains its character for tax purposes in the hands of the beneficiaries. For example, tax exempt income of the trust is treated as exempt income in the hands of the entitled beneficiary. Despite a trust not being recognised as a separate legal entity, the trustee must file a tax return for the trust and in certain circumstances, the trustee itself may become liable to pay tax on the trust income in its representative capacity. Ref: ITAA 1936 s 98
In general terms, the presently entitled beneficiaries are taxable on their share of the net income of the trust. The trustee is taxed in two situations: (1) if there is income not allocated to any beneficiary, but remains in the trust, and (2) where a beneficiary is presently entitled, but cannot immediately receive income because of some legal incapacity such as infancy or insanity. Ref: ITAA 1936 s 97
For registration requirements, see AUS ¶1-012(a). (d) Unit trusts A unit trust is a legal entity used to enable income and corpus (the capital of the trust) to be distributed to the unitholder beneficiaries, as stipulated by the trust deed. A unit trust is a trust in which the entitlement of the beneficiaries is divided into units. The amount of a beneficiary’s entitlement to income or capital of the unit trust is determined by the number of units held and the rights attaching to the units. A unit trust comprises a fiduciary obligation imposed on an entity (the trustee) to hold property or income for a particular purpose or for the benefit of the unitholders. Although the trustee may hold the legal title to property, the trustee is required to deal with it in accordance with the terms of the trust. As with a discretionary trust, a unit trust is not a taxable entity, and tax on the trust income is usually paid by the unitholders. However, the trustee is required to pay the tax where no beneficiary is presently
entitled or otherwise under a legal disability (except public trading trusts). Certain unit trusts, known as public trading trusts, are treated as if they are companies for tax purposes. The trust is taxed at the corporate tax rate and distributions to unitholders are assessable on the same basis as dividends. A unit trust is generally a public trust for tax purposes if: • any of the units are listed for quotation on a stock exchange • any of the units were offered to the public • the units are held by 50 or more persons, or • a tax-exempt entity, a complying superannuation fund, or a special investment vehicle (approved deposit fund (ADF) or pooled superannuation trust (PST)) holds a beneficial interest in 20% or more of the property or income of the trust, or during the income year concerned was paid 20% or more of the moneys paid by the trust to unitholders, or an arrangement exists whereby such an entity could have been given such a holding during the year or could have been entitled to 20% or more of any moneys paid to unitholders during the year concerned. A public trust is treated as a public trading trust if it carries on a trading business, or controls directly or indirectly a trading business other than investments in financial instruments or real property. Ref: ITAA 1936 s 102M to 102T
For registration requirements, see AUS ¶1-012(a). (e) Sole proprietorships A sole proprietor is an individual (natural person) who owns and operates a business. In a sole proprietorship there is no use of a separate legal entity — the operator is effectively the business. A sole proprietorship structure involves the least number of formalities and involves minimal cost to set up. If the sole proprietor intends to use a business name, different to the individual’s own name, that
name must be registered in accordance with the corresponding Australian state legislation (eg for New South Wales businesses, a business name must be registered in accordance with the Business Names Act 2002 (NSW)). A sole proprietorship carrying on a business is required to obtain an Australian Business Number (ABN). In addition, the sole proprietor may be required to be registered for goods and services tax (GST). Generally, after 1 July 2007, all businesses with annual turnovers of A$75,000 or more must register for GST; previously, the turnover threshold was A$50,000. The main disadvantage of sole proprietorships is that they have unlimited liability and therefore very little asset protection. All the assets and liabilities of the business belong to the sole proprietor personally. Business creditors can make a claim on all assets of the sole proprietor (not just the relevant business assets) in order to satisfy any outstanding claims against the business. Another disadvantage of a sole proprietorship is that the business income is taxed at the sole proprietor’s individual marginal income tax rate. This is often a higher tax rate than if the income was earned in a limited liability company. This is because the corporate tax rate is significantly lower than the highest marginal tax rate. For registration requirements, see AUS ¶1-012(a). (f) General partnerships Under Australian tax law, a partnership is an association of persons who: • carry on business as partners, or • are in receipt of income jointly. Ref: ITAA 1997 s 995-1 definition of “partnership”
A partnership is not a separate legal entity and is not subject to tax. A partnership is required to calculate net income as if it were a resident taxpayer and is required to file a tax return each financial year and disclose the net income share of each partner.
Each partner is taxed (at their respective individual income tax rates) on their share in the net income of the partnership. Any losses from the partnership business are available to the partner as a deduction against their other income. This is subject to the losses satisfying the non-commercial loss provisions. The non-commercial loss provisions limit an individual’s ability to apply certain losses against assessable income from other sources. That is, if an individual makes a net loss in a particular business activity, only where they satisfy the non-commercial loss provisions can they offset that loss against their income from other sources. Broadly, the non-commercial provisions will allow a loss to be claimed against other income where: • the business activity passes one of four tests (the real property test, profits test, other assets test, or assessable income test), or • the Commissioner of Taxation exercises a discretion to allow the loss to be offset against other income. Ref: ITAA 1936 s 91 to 92; ITAA 1997 Div 35
From 1 July 2009, an income test applies for non-commercial loss provisions. Taxpayers with adjusted income of A$250,000 or more will have excess deductions quarantined to the business activity. However, these taxpayers will have the ability to apply to the Commissioner of Taxation for relief from the rules under exceptional circumstances. A further exception is available for any losses generated due to the small business and general business tax break. Ref: ITAA 1997 s 35-10(2E)
For Australian tax purposes, the profits and losses of the partnership are recognised as being distributed in accordance with the partnership agreement except where the partnership agreement does not reflect the partners’ true interests in the partnership. Ref: Income Tax Ruling IT 2316
The Partnership Act of each Australian state governs the operation of a partnership (eg a Victorian partnership must comply with the Partnership Act 1958 (Vic)). In general partnerships, the partners are
responsible for the daily management of the partnership and are jointly and severally liable for the debts the partnership incurs. The maximum number of partners in a partnership is limited by the Corporations Act. The maximum number of partners is usually 20; however, partnerships comprised of certain professionals may have more partners. For example actuaries, medical practitioners and sharebrokers can form partnerships of up to 50 partners. Architects, pharmaceutical chemists and veterinary surgeons can form partnerships of up to 100 partners. Up to 1,000 partners are allowed for partnerships of accountants or lawyers. Ref: Corporations Act s 115
A partner has a fractional interest in the assets of the partnership such that certain income and gains of the partnership (such as tax incentives and tax-free capital gains) retain their character and pass through to the partners. This is contrasted with a company, where the income and gains of the company do not retain their character and are distributed to shareholders in the form of dividends. Tax preferred amounts though tax-free at the company/trustee level become taxable in the hands of the shareholder or beneficiary due to the operation of the imputation system. For registration requirements, see AUS ¶1-012(a). (g) Joint ventures A joint venture is not defined for Australian income tax purposes, other than a partnership being defined as an entity type distinct from a joint venture. For income tax purposes, the distinction between a joint venture and a partnership is dependent on whether the parties to the arrangement are said to be deriving income separately or jointly. A partnership generally refers to a profit sharing arrangement where the parties derive income jointly and share the profits. In a joint venture, there is no joint derivation of income, rather an arrangement whereby costs and facilities are shared between the parties in order to enable each party to maximise their returns from a project which yields a quantity of outputs to each party. The joint venture itself is not a taxable entity; rather each venturer is taxed on their separate taxable income derived from the output of the venture.
Ref: ITAA 1936 s 6 and 128A; ITAA 1997 s 995-1. Also refer to the respective state’s legislation governing partnerships.
For registration requirements, see AUS ¶1-012(a). (h) Limited partnerships Unlike a general partnership, a limited partnership can have one or more partners with limited liability and one or more partners with unlimited liability (ie general partners). In limited partnerships, partners are divided into general and non-executive partners where the liability of the general partners is unlimited and the liability of the nonexecutive partners is limited to their contribution to the partnership. Regarding the number of partners, general partners and limited partners, the states administer partnership law in Australia. For example, under the New South Wales partnership laws, there is no restriction on the number of limited partners in a limited partnership whilst the maximum number of general partners is restricted to 20 or more where the partnership is of the type where a higher number of partners is allowed under the Australian regulations. For tax purposes, most limited partnerships are effectively treated as companies (ie they are “corporate limited partnerships” and taxed at the corporate tax rate). However, there is no flow through of any tax losses or of any other tax advantaged income or capital gains. Ref: ITAA 1997 s 995-1 definitions; ITAA 1936 s 94D; Corporations Act s 115, Corporations Regs reg 2A.1.01; Partnership Act (NSW) s 52
For registration requirements, see AUS ¶1-012(a). (i) Branches A branch, or permanent establishment (PE), is defined as a place at or through which a person carries on any business. Foreign enterprises that generate business profits through a PE in Australia are taxable in Australia to the extent the profits are attributable to the Australian PE. If there is a tax treaty between Australia and the relevant foreign country in force, this must be considered as it will determine which country has taxing rights on the business profits of the PE. Ref: ITAA 1936 s 6(1)
A foreign incorporated company with a PE in Australia is treated as an Australian tax resident (subject to any tax treaty between Australia and the relevant foreign country). These companies are also required to register with the Australian Securities and Investment Commission (ASIC) as a foreign entity carrying on business in Australia. The net income of the company with a PE in Australia will generally be subject to tax at the corporate tax rate. Branches of foreign companies are required to lodge separate annual financial reports with ASIC. The exception is where the foreign parent registers as a foreign company in Australia. In these circumstances, the foreign parent is responsible for lodging financial reports in respect of the branch. A company that acquires or establishes a business overseas can either: • incorporate or acquire a foreign subsidiary — which may be commercially more desirable (eg in obtaining local finance), or • establish a foreign branch of the home company. The compliance costs associated with a branch are similar to those of an Australian subsidiary. Establishing an Australian branch does not result in any material economies of cost compared to the establishment of a subsidiary. For registration requirements, see AUS ¶1-012(a).
¶AUS ¶1-012 BUSINESS REGISTRATION AND LICENSING (a) Registration requirements Companies A company must be registered with the Australian Securities and Investments Commission (ASIC). The registration process includes selecting a name and obtaining an Australian Company Number (ACN). Information on this process can be found on the ASIC website
www.asic.gov.au. A company is also required to register with the Australian Taxation Office (ATO) and apply for an Australian tax file number (TFN) and an Australian Business Number (ABN) for the purpose of managing its taxation affairs. (An application for a TFN and an ABN can be made on the same form.) Registration information can be found on the ATO website www.ato.gov.au. The ABN is an 11 digit number used by the ATO to identify a business. After obtaining an ACN, a company should register for an ABN to communicate with the ATO regarding tax related matters, including goods and services tax (GST), fringe benefits tax (FBT) and the Pay-As-You-Go (PAYG) system. ABN details become part of the Australian Business Register (ABR), which the ATO maintains for all Commonwealth purposes. The Australian Business Registrar, who is also the Commissioner of Taxation, administers the register. The registration process will depend on the administration body, ie ASIC, ATO, etc. The registration form for establishing a company with ASIC requires the following information: • the proposed company name • the type of company (eg proprietary, public no liability, etc — see AUS ¶1-010(b)) • the registered office address • the principal business office address • the directors and secretary information (name, age, address and birthplace) • the shareholders (name and address), and • details of the shares to be taken up (number, class, amount payable and amount to be paid on allotment).
Registration fees apply to the lodgment of registration forms with ASIC as follows: • a public or proprietary company having a share capital must pay A$412 • a public company limited by guarantee must pay A$340. Late lodgment fees may also apply where forms are lodged outside of the prescribed time. Additional registration requirements may apply depending on the nature of the business (see (b) below). Unit and discretionary trusts The following registration rules apply to both discretionary trusts and unit trusts. The trustee of a trust that will carry on a business must register with the ATO and apply for a TFN and an ABN for the purpose of managing the trust’s taxation affairs. (An application for a TFN and an ABN can be made on the same form.) Generally, there is no fee for the lodgment or registration of a TFN or ABN with the ATO. Additional registration information can be found at www.ato.gov.au. The ABN is an 11 digit number used by the ATO to identify a business. A business should register for an ABN to communicate with the ATO regarding certain tax related matters, including GST, FBT and the PAYG system. ABN details become part of the ABR which the ATO will maintain for all purposes. Additional registration requirements may apply depending on the nature of the business to be operated by the trust (see (b) below). Sole proprietorships An individual who intends to carry on a business as a sole proprietor must use their own TFN for lodging their income tax returns. They must apply to the ATO for an ABN for the purpose of their business dealings. Generally, TFN and ABN registration forms can be obtained from the ATO website. No application fee is charged for the lodgment or registration of a TFN or ABN with the ATO. Further registration information can be found at www.ato.gov.au.
The ABN is an 11 digit number used to identify a business by the ATO. A sole proprietor should register for an ABN in order to communicate with the ATO regarding certain tax related matters, including GST, FBT and the PAYG system. ABN details become part of the ABR which the ATO maintains for all Commonwealth purposes. The Australian Business Registrar, who is also the Commissioner of Taxation, administers the register. Limited partnerships and joint ventures The following rules apply to general and limited partnerships as well as joint ventures. A partnership must have its own TFN separate from those of its individual partners. If the partnership plans to carry on a business, it must also register with the ATO for an ABN for the purpose of managing its taxation affairs. (An application for a TFN and an ABN can be made on the same form.) There is no application fee for the lodgment or registration of a TFN or ABN with the ATO. Generally, TFN and ABN registration forms can be obtained from the ATO website. Refer to www.ato.gov.au for registration information. The ABN is an 11 digit number used by the ATO to identify a business. The business will need to register for an ABN in order to communicate with the ATO regarding certain tax related matters, including GST, FBT and the PAYG system. ABN details become part of the ABR, and the ATO maintains these records for all Commonwealth purposes. The Australian Business Registrar, who is also the Commissioner of Taxation, administers the register. A limited partnership must register under each state law, specifying the limited liability of each limited partner. Additional registration requirements may apply depending on the nature of the business, the partnership or joint venture intends to operate (see (b) below). Branches A foreign entity that wishes to conduct business in Australia will incur Australian income tax obligations and, therefore, must register with the
ATO and obtain a TFN and ABN. Generally, TFN and ABN registration forms can be obtained from the ATO website www.ato.gov.au. There is no application fee charged for the lodgment or registration of a TFN or ABN with the ATO. The ABN is an 11 digit number used by the ATO to identify a business. A branch must register for an ABN to communicate with the ATO regarding certain tax related matters, including GST, FBT and the PAYG system. ABN details become part of the ABR that the ATO maintains for all Commonwealth purposes. The Australian Business Registrar, who is also the Commissioner of Taxation, administers the register. Additional registration requirements may apply depending on the nature of the business intended to be operated by the branch (see (b) below). A branch of a foreign company is also required to register with ASIC. (b) Licensing requirements Additional registration requirements may apply to business entities depending on the nature of the business they conduct. Some businesses require licences to operate. The relevant state government usually issues these licenses. All states in Australia have a small business department, which has the information necessary to determine whether a license is required and where a taxpayer can obtain such license. The operation of a business may also require a local government (council) permit, for example, to use a building for a specific purpose or to sell or manufacture food or dangerous goods. Further information can be found at the Australian Government’s principal business resource website www.business.gov.au. (c) Business regulation and compliance An Australian Business Number (ABN) provides a single unique number to identify businesses which have dealings with other businesses and federal, state and local governments. This number must appear on all invoices. Payers are required to withhold tax at the
top marginal rate for individuals where payees do not quote their ABN. This is subject to limited exceptions, eg the payer is not required to withhold an amount in respect of a payment for a supply if: • the payment (or total of all payments to the entity for the supply) does not exceed A$75, or such higher amount as is specified in the regulations • the payment is subject to Pay-As-You-Go (PAYG) withholding for investments where no tax file number (TFN) has been quoted, or would have been subject to withholding had the investor not quoted a TFN or ABN, or had an exemption not applied • the payment is not made in the course or furtherance of an enterprise carried on in Australia by the payer, or • the payee is an individual and has given the payer a written statement to the effect that the supply is made in the course of a private recreational pursuit or hobby or is wholly of a private or domestic nature. In such a case, the payer must have no reasonable grounds to believe that the statement is false or misleading in a material particular. Ref: TAA Sch 1, s 12-140 and 12-190(4) to (6)
Companies registered under the Corporations Act, government bodies, business entities and other entities are also required to be registered for goods and services tax (GST) purposes where the gross annual turnover is A$75,000 (or above A$100,000 for non-profit entities and charities). Building and construction sector With effect from 1 July 2012, businesses operating in the building and construction sector are in certain cases required to make annual reports in relation to payments made to their contractors. This requirement applies where the following criteria are met: • a payment to a contractor is made as consideration for building and construction services, or
• the business making the payment operates “primarily” in the building and construction sector; this arises in either of the following cases: – when in the current or last financial year, the business derived at least 50% of its income from the provision of building and construction services (income test), or – when in the current financial year at least 50% of the activity of the business consists of building and construction services (activity test). Ref: TAA Div 405; TAR
¶AUS ¶1-014 EXTENT OF TAX LIABILITY (a) Liability to tax Australia’s principle income tax legislation can be found in the Income Tax Assessment Act 1936 (ITAA 1936) and the Income Tax Assessment Act 1997 (ITAA 1997). Residents Australian residents, including all business entities, are generally taxed on ordinary and statutory income from worldwide sources. Where an Australian resident’s foreign income is subject to foreign tax, a foreign tax offset (credit) may be available to offset Australian tax payable on that foreign income. The foreign tax offset available is limited to the lesser of the foreign tax paid or the Australian tax payable on that foreign income. Ref: ITAA 1997 s 6-5(2) and 6-10(4)
Non-residents Non-residents are generally taxed only on their ordinary and statutory income from Australian sources. However, a non-resident’s liability to Australian capital gains tax is dependent on whether the gain is from the sale of Australian property (see AUS ¶1-060). Ref: ITAA 1997 s 6-5(3)(a) and 6-10(5)(1)
A non-resident’s Australian source passive income is generally only subject to withholding tax. Unfranked dividends, interest and royalties are subject to withholding tax. The payer of the dividend, interest or royalty must withhold the relevant amount of tax and remit this to the Australian Taxation Office under the Pay-As-You-Go withholding system. Withholding tax is a final tax (see AUS ¶1-060). Ref: TAA Sch 1, Subdiv 12-F; ITAA 1936 s 128D
(b) Residence defined Companies A company is deemed to be a resident if: • it is incorporated in Australia, or • if not incorporated in Australia, it carries on business in Australia and has either its voting power controlled by resident shareholders, or its central management and control in Australia. What constitutes central management and control is a question of degree and fact, and exists where the directors meet to do the business of the company. This may be divided between two places, in which case the company may be recognised as a resident in both places. If this is the case, the relevant tax treaty may contain a tiebreaker test to help determine the country of residence, ie which country has the authority to collect tax. Ref: ITAA 1936 s 6(1)
Trusts and partnerships For Australian income tax purposes, a trust is a resident trust where: • a trustee of the trust estate was a resident at any time during the year of income, or • the central management and control of the trust estate was in Australia at any time during the year of income. A partnership is a resident of Australia when the partnership’s central management and control is located in Australia.
An entity may be considered a resident of more than one country by application of the relevant countries’ domestic legislation. If this is the case, the relevant tax treaty may contain a tie-breaker test to determine the country of residence. Individuals An individual is an Australian resident if the person: • resides in Australia, based on factors such as the person’s intention/purpose to reside in Australia, the extent of the person’s family or business/employment ties, maintenance and location of the person’s assets and the person’s social and living arrangements • is domiciled in Australia (unless that person’s permanent place of abode is outside Australia) • has actually been in Australia for more than one-half of the income year (unless that person’s usual place of abode is outside Australia) (the 183 day test), or • is an eligible employee or member of a superannuation fund under the Superannuation Act 1990 (Cth). Ref: ITAA 1936 s 6(1); Taxation Ruling TR 98/17; Income Tax Ruling IT 2681
¶AUS ¶1-016 TAX AND ACCOUNTING YEAR (a) Standard financial year for taxpayers The financial year for all taxpayer entities is the 12-month period starting on 1 July and ending on the following 30 June. Income tax is levied for each financial year by reference to a taxpayer’s taxable income for an income year. For information on tax filing, assessment, payment and penalties, see AUS ¶1-240. (b) Substituted accounting period (SAP) Taxpayers are permitted to apply to the Australian Taxation Office
(ATO) for a substituted accounting period (SAP) if there is some factor peculiar to the taxpayer’s business that makes a 30 June balance date wholly inappropriate or impractical. A taxpayer’s application for approval to operate on the basis of an income year ending other than on 30 June must be submitted to the Commissioner of Taxation on the official SAP application form. For further information, refer to the Commissioner’s guidelines for approval of SAPs contained in Practice Statement PS LA 2007/21. A SAP is normally granted where the purpose of the substituted tax year is to coincide with the tax year of an overseas holding company. The Commissioner is under no obligation to approve an application for a SAP. Whether a SAP is granted will depend on the Commissioner exercising his discretion and on the appropriateness of the circumstances. Each case is decided on its own merits. The principles underlying the Commissioner’s decision as contained in PS LA 2007/21 are summarised as follows: • there is a basic initial presumption that an annual accounting period ending on 30 June is appropriate, at least in the generality of cases • there must be a demonstrated business need that makes 30 June inappropriate or impractical as a balance date in the circumstances of the taxpayer • as far as it permits, the income tax law must be administered to operate fairly over the whole range of entities so that no one entity is advantaged or disadvantaged in relation to other entities, and • the Commissioner has a responsibility to ensure that the affairs of the ATO are conducted in an efficient and businesslike manner while taking into account commitments under the taxpayers’ charter and compliance model. Ref: ITAA 1936 s 18; Practice Statement PS LA 2007/21
For information on tax filing, assessment, payment and penalties, see
¶AUS ¶1-020 TAX RATES ON INCOME (a) Companies The basic corporate tax rate is 30%. Special or reduced corporate tax rates apply to the following elements of income or expense: Income Tax Rates Act reference
Type of company
Complying superannuation class
Life insurance companies:
Non-profit companies: First A$416 of taxable income
Shade-in above A$416 to A$915
Taxable income above shade-in range
On SME income component
On unregulated investment component
Pooled development funds (PDFs): Companies that are PDFs throughout the year of income:
Companies that become PDFs during
the year of income and are still PDFs at the end of the year: On SME income component
On unregulated investment component
On so much of the taxable income as exceeds the PDF component
Small credit unions
Medium credit unions (on amount of taxable income over A$49,999)
Large credit unions
Credit unions: Interest received by:
Ref: Income Tax Rates Act 1986
(b) Individuals Individuals, including partners of partnerships, joint venturers, sole proprietors and presently entitled individual beneficiaries are all taxed at progressive tax rates. Trust income to which no beneficiary is entitled is taxed in the hands of the trustee at the top marginal rate. Rates for income year 1 July 2013 to 30 June 2014 Taxpayer Resident individuals
Applicable rate calculation Taxable income A$ 0–18,200
Tax rate on this level of income Nil
19c for each A$1 over 18,200
A$3,572 plus 32.5c for each A$1 over 37,000
A$17,547 plus 37c for each A$1
A$54,547 plus 45c for each A$1 over 180,000
Taxable income A$
Tax rate on this level of income
32.5c for each A$1
A$26,000 plus 37c for each A$1 over 80,000
A$63,000 plus 45c for each A$1 over 180,000
The rates for the previous tax year were the same. Ref: Income Tax Rates Act 1986 Sch 7
Medicare levy The rates listed above are exclusive of the 1.5% Medicare levy which is payable by resident taxpayers on their taxable income.
Developments From 1 July 2014, the Medicare levy rate will be increased from 1.5% to 2%. Ref: Medicare Levy Act 1986 s 6
An individual’s Medicare levy is reduced if their taxable income is A$24,167 or less. If their taxable income is A$20,542 or less, the individual does not have to pay the levy. If a family’s taxable income is A$32,743 or less, they do not have to pay the levy. Additionally for families, the amount added to the threshold in respect of each dependent child or student is A$3,007.
An additional surcharge on a taxpayer’s taxable income applies where a resident taxpayer is not covered by approved private health insurance and their taxable income is above the Medicare levy surcharge thresholds (A$84,000 for single taxpayers and A$168,000 for married couples, increased by A$1,500 for each dependent child). The rate of the surcharge ranges from 1% to 1.5% depending on the taxpayer’s taxable income as indicated in the following table:
Couples and families
Medicare levy surcharge
88,001 to 102,000
102,001 to 136,000
136,001 and above
176,001 to 204,000
204,001 to 272,000
272,001 and above
Ref: ITAA 1936 Pt VIIB; Medicare Levy Act 1986
Tax reductions for certain taxpayers The senior Australians tax offset (low income aged persons rebate) and the pensioner tax offset may reduce or eliminate tax for eligible persons whose taxable income is below certain thresholds. Ref: ITAA 1936 s 160AAA(2) and 160AAAA; Income Tax Regulations Pt 8
¶AUS ¶1-030 ACCUMULATED EARNINGS INCOME The Australian tax system does not impose an accumulated earnings tax. There are no tax disincentives to the retention of profits in a company.
¶AUS ¶1-040 TAXES ON CAPITAL
Australia imposes no taxes on the capital or net assets of corporations. For capital gains tax, see AUS ¶1-060.
¶AUS ¶1-050 LOCAL TAXES There are no local or state level income taxes, but a variety of other taxes are levied by the state governments and municipalities, eg stamp duty (a capital transfer tax), land tax and payroll tax (see AUS ¶1-190).
¶AUS ¶1-060 TAXES ON CAPITAL GAINS (a) Basic rule Residents Australia does not levy a capital gains tax (CGT) distinct from income tax. Instead, taxable capital gains are calculated under special rules and included in a taxpayer’s assessable income and taxed at the applicable taxpayer rate. CGT applies to all worldwide CGT assets held by a resident taxpayer, including property inside and outside of Australia (see AUS ¶1-020 and (g) below). Ref: ITAA 1997 Pt 3-1
Non-residents Non-residents are liable to Australian CGT only where capital gains are realised in respect of taxable Australian property they hold. Australian taxable property is defined as the following five classes of assets: • Australian real property • a direct or indirect interest in taxable Australian property • an asset used in carrying on business through a PE in Australia • an option or right to acquire the types of property described above, and
• an asset currently owned by a non-resident who elected to defer Australian CGT on ceasing to be an Australian resident. Ref: ITAA 1997 Div 855 and s 855-15
Taxable Australian real property Taxable Australian real property is defined as real property situated in Australia. It also includes mining, quarrying or prospecting rights where the minerals, petroleum or quarry materials are situated in Australia. A direct or indirect interest in taxable Australian property This rule is intended to cover situations where a non-resident disposes of shares or units in an interposed entity which has direct or indirect interests in Australian taxable property. If this is the case, the nonresident is liable to Australian CGT where: • the non-resident is selling a non-portfolio interest in the entity (ie an interest of at least 10%), and • more than 50% of the value of the disposed entity is represented by Australian real property. Ref: ITAA 1997 s 960-195 and 855-30
Prior to 12 December 2006, non-residents were subject to capital gains tax in respect of capital assets that had a necessary connection with Australia, specifically including: • land or buildings situated in Australia • assets used in a business, trade or PE in Australia • shares in a resident private Australian company • shares in a resident public Australian company where that shareholder’s interest exceeded 10% of the issued share capital, and • an interest in an Australian resident trust, estate, partnership or
unit trust (where more than 10% of the units were held), including options or rights over any of the assets mentioned above. Ref: ITAA 1997 Div 136 (repealed)
Under the modified foreign resident CGT rule, there may be an advantage for foreign residents to transfer the business assets of an Australian branch to an Australian subsidiary if the Australian business is intended to be sold. In this case, the sale of the shares of a company carrying on business in Australia is not taxable to the nonresident shareholder, whereas the sale of the business assets by a non-resident is subject to CGT. Before any such transfer were to take place though, it is necessary to consider whether the transaction triggers liability to stamp duty. Staggered sell down arrangements It should be noted that a non-resident’s exposure to Australian capital gains tax may still apply in certain circumstances, despite the broad exemption for non-taxable Australian property under Div 855 of ITAA 1997. A capital gains tax liability could be triggered for non-resident taxpayers disposing of non-taxable Australian property under a “staggered sell down arrangement”. A staggered sell down arrangement attempts to progressively “sell-down” an interest held by a foreign vendor through a series of transactions intended to avoid Australian capital gains tax. The Australian Tax Office will closely examine arrangements where the following features exist: • A foreign resident holds an existing membership interest of 10% or greater in a resident entity whose assets consist principally of Australian real property. • The foreign resident vendor enters into an arrangement to dispose of part of its interest, retaining less than 10% of that interest under a sale agreement. • The foreign resident vendor concurrently enters into an option agreement to dispose of the remaining interest at a later time. • This is intended to ensure that the foreign resident vendor can
argue that they do not maintain a 10% or more membership interest at both: – the time of the second disposal, and – throughout a 12-month period that began no earlier than 24 months before that time and ends no later than that time. • Such structural planning may result in some capital gains tax being circumvented despite the fact that overall, a greater than 10% interest was held and eventually disposed of by the foreign resident vendor. Depending on the individual facts, such staggered sell down arrangements may trigger capital gains tax consequences. Ref: Taxpayer Alert TA 2008/19
(b) Calculation of taxable capital gains Basic rule Capital gains tax applies only to assets acquired (or deemed acquired under the anti-avoidance rules) after 19 September 1985. A capital gain realised in respect of an asset acquired on or before 19 September 1985 is not liable to Australian CGT. Liability to Australian CGT arises only where a CGT event occurs. Australian tax law provides an exclusive list of CGT events that potentially give rise to CGT. The most common CGT event covers disposals, or the change in ownership of the CGT asset. Generally, the capital gain or loss from a disposal is calculated as the difference between the capital proceeds from the disposal and the asset’s cost base. Ref: ITAA 1997 s 104-5 (containing a summary table of the CGT events) and 104-10
A capital gain arises where the capital proceeds (ie sale price) from a CGT event exceed the taxpayer’s cost base (ie purchase price) of the CGT asset. A capital loss arises if the taxpayer’s cost base of the CGT asset exceeds the proceeds from disposal. An asset’s cost base generally describes the total value of money and
property paid to acquire, hold and dispose of an asset. For assets acquired before 21 September 1999, the cost base may be eligible for indexation up to 30 September 1999. Assets acquired after 21 September 1999 are not eligible for indexation (where the indexation method is used, the 50% general discount is not available). Ref: ITAA 1997 s 110-36
Capital proceeds from a CGT event are generally the total value of money and property received in respect of an asset. In certain circumstances, the value of capital proceeds is deemed to equal the current market value of the relevant CGT asset. Ref: ITAA 1997 Div 110 and 116
However, capital gains or losses that arise from the cancellation or surrender of shares or units in widely held entities are calculated using the actual proceeds received rather than the asset’s market value. For the purposes of the capital gains tax provisions, a “widely held entity” is defined broadly as a company that: • is listed on a stock exchange, or • has more than 50 members during an income year. Ref: ITAA 1997 s 995-1; Budget Paper No 2 p 16; Treasurer’s media release No 048, 13 May 2008 (treasurer.gov.au)
A taxpayer’s total capital gains and losses for a period are netted off to produce a net capital gain figure. A net capital gain is included in a taxpayer’s assessable income. For the 2013/14 tax year, up to A$1m of capital losses can be carried back for up to two tax years (one tax year in 2012/13). Before the 2012/13 tax year, a net capital loss was effectively quarantined, and could only be offset against current or future net capital gains. Ref: ITAA 1997 s 102-10(2)
Capital gains made by resident individual taxpayers (including capital gains attributable to individuals via a trust or partnership structure) are subject to the individual’s marginal tax rate and may be reduced by the general 50% discount where the relevant asset has been held for more than 12 months. Non-resident individual taxpayers could apply
the 50% discount on capital gains realised before 8 May 2012. This discount is no longer available to non-residents in respect of capital gains realised from 8 May 2012, unless the assets are valued at their market value as of 8 May 2012. Ref: ITAA 1997 s 115-10 and 115-100(a)
Note that a complying superannuation entity taxpayer is eligible for the general CGT discount at the rate of 33⅓%. However, company taxpayers are not eligible for the general discount in respect of assets held for more than 12 months. There are additional conditions to be satisfied before corporate taxpayers can offset their carry-forward net capital losses against current year capital gains. A company taxpayer must satisfy either the continuity of ownership test (COT) or the same business test (SBT) in order to apply carry-forward capital losses against its current year gains (see (c) below). Ref: ITAA 1997 s 115-100(b) and 102-3(2)
Developments In the May 2011 Budget, the Government announced the introduction of amendments that will bring about more flexible rules relating to the COT (see AUS ¶1-080(a)).
Where a taxpayer sells either a business, a share in a company or a unit in a trust that carries on a business, that taxpayer may be able to access certain small business concessions. These concessions are only available if certain conditions are satisfied. One of the possible concessions is rollover relief for business reorganisations. General CGT exemptions • Pre-CGT assets: As discussed above, there is generally no CGT liability arising from CGT events that happen in relation to CGT
assets acquired on or before 19 September 1985. However, where pre-CGT assets are owned by entities (ie companies, partnerships or trusts), the consequences of a change in the underlying ownership of the entity may result in the pre-CGT assets being deemed to be post-CGT assets. • Cars and motor vehicles: A capital gain or loss realised in relation to a car, motorcycle or similar vehicle is disregarded for CGT purposes. • Personal use assets: A capital gain from a personal use asset is exempt from capital gains tax if the asset was acquired for A$10,000 or less. A personal use asset is an asset that is used or kept mainly for the personal use or enjoyment of a taxpayer. Land, buildings and structures are specifically precluded from being personal use assets. • Collectables: A capital gain from a collectable (eg artwork, an item of jewellery, an antique, coin, rare book, etc) is also exempt if the asset was acquired for A$500 or less. • Trading stock: Assets that are trading stock at the time of the disposal are excluded from the Australian capital gains provisions. Ref: ITAA 1997 Div 104 and 149, subdiv 108-C and 108-B, s 104-10(5)(b), 108-20(1) to (3), 118-5 and 118-25
Developments In the May 2011 Budget, the Government announced that gains or losses arising from a right to a financial incentive granted to taxpayers under an Australian Government scheme that encourages taxpayers to acquire renewable resource assets, or to agree to preserve a part of Australia’s environmental amenity, will be exempt from CGT. Eligible schemes may be provided by the Commonwealth or a State or Territory government. Examples
of renewable resource assets include photovoltaic solar cells or solar hot water systems. An example of preserving environmental amenity is refraining from removing remnant vegetation. This measure will also discontinue the income tax recoupment rules in relation to any underlying assets (eg a solar hot water system) to ensure that the incentive keeps its full financial value. It will apply to income tax assessments for the 2007/08 income year and later income years. As of August 2013, legislation to implement this measure has not yet been introduced. Ref: Budget 2011/12, Paper No 2, Part 1, p 16
(c) Offset rules Net capital gains can be offset against net revenue losses of the current year. However, a net capital loss cannot be offset against revenue profits. Net capital losses can be carried forward indefinitely for offset against future net capital gains (subject to further requirements), and up to A$1m of capital losses can be carried back for up to two tax years. They can also be transferred to another tax consolidated group company. If an entity is part of the consolidated group, these capital losses may be utilised by the head entity under the single entity rule. Capital losses which arise on the sale of a personal use asset are ignored. A capital loss incurred with respect to a collectable can only offset capital gains relating to collectables (see AUS ¶1-080). Ref: ITAA 1997 s 108-20(1) and 108-10(1)
(d) Credit against capital gains tax The only taxes that can be credited against capital gains tax are foreign income tax offsets (see AUS ¶3-080). Ref: ITAA 1936 s 6AB; ITAA 1997 Div 770
(e) Rollovers for business reorganisations
A CGT rollover allows a capital gain or loss resulting from a CGT event (eg disposal) to be deferred until a later time. There are two types of rollovers: • A replacement asset rollover allows a taxpayer to defer a capital gain or loss from one CGT event until a later CGT event happens, where a CGT asset is replaced with another one. An example of such a rollover is scrip-for-scrip rollover. • A same-asset rollover allows the transferor to disregard a capital gain or loss from disposing of a CGT asset to, or creating a CGT asset in, the transferee. Any gain or loss is deferred until another CGT event happens in relation to the asset in the hands of the transferee. An example of such a rollover is the transfer of a CGT asset to a wholly-owned company (see AUS ¶1-180). Ref: ITAA 1997 s 112-115 and 112-150
A scrip for scrip roll-over allows a taxpayer to defer the CGT consequences associated with a scrip for scrip transaction. A scrip for scrip transaction is a transaction where shares or similar interests held in one entity are exchanged for replacement interests in another entity, typically as a result of a takeover offer or merger. A roll-over can only be chosen for a capital gain made on such an exchange on or after 10 December 1999. Ref: ITAA 1997 Subdiv 124-M
There are certain conditions that need to be satisfied before the CGT rollover relief is available (eg where no change occurs in the underlying ownership of the asset concerned, or where the underlying assets against which the taxpayer has a claim do not change). Such conditions apply to transactions where stakeholders in the target and acquiring entities have the potential to influence both entities, including companies that own interests for the benefit of another entity (such as trusts, superannuation funds and life insurance companies). Rollovers between companies which are members of the same wholly-owned group are now available under the consolidations regime. Companies within a tax consolidated group are able to transfer assets to other members of the group without any tax
implications. Capital gains tax relief is also available for scrip-for-scrip company mergers or takeovers and certain involuntary asset disposals. The relief takes the form of a cost base rollover election which is available to a taxpayer who exchanges shares in a target company for shares in an acquiring company. The acquiring company must acquire at least 80% of the voting shares of the target company for the rollover to be available. Under the rollover arrangements, the affected taxpayer is deemed to have acquired the shares in the acquiring company for an amount equal to the indexed cost base of the shares that were originally held in the target company. Rollover relief is also available to non-residents, subject to the condition that the replacement shares they receive in the acquiring entity are themselves taxable Australian property. Where both companies are residents of Australia, the asset which is the subject of the rollover is not required to have an Australian nexus. Where either the transferor or the transferee is a non-resident company, rollover relief for capital gains purposes is only available where the asset which is the subject of the rollover is taxable Australian property. Taxable Australian property is defined to include the following: • taxable Australian real property • an indirect Australian real property interest • a business asset of an Australian PE, or • an option or a right over the above items. Relief is also available for demergers if the ultimate shareholders have at least a 20% holding in the demerged entity and at least 80% of that holding is demerged. (f) Gains on foreign assets The Australian CGT regime applies to foreign assets held by Australian residents. Relief from any foreign tax levied on the gain is
provided for gains realised overseas by Australia granting a credit for foreign tax paid on the gains. Under the participation exemption available to Australian resident companies, a capital gain or loss made by a resident company on or after 1 April 2004 on the sale of shares in a foreign company may be disregarded to the extent of the active foreign business asset percentage of the foreign company at the time of the sale. The resident corporate taxpayer is eligible for the exemption if the company holds a direct voting percentage in the foreign company of at least 10%, and it has held the requisite interest for a continuous period of at least 12 months in the two years prior to the sale. The active foreign business asset percentage for a company is broadly equal to the value of active foreign business assets held by the foreign company as a percentage of the value of all the assets included in the total assets of the foreign company (see (a) above). Ref: ITAA 1997 Div 768
The Australian taxation office has held that a foreign company’s interest in a partnership or the assets of a partnership is not considered an active asset for the purposes of the active foreign business asset percentage calculation. Ref: TD 2008/23
Non-residents are only subject to capital gains tax with respect to taxable Australian property. The disposal of foreign assets by nonresidents does not give rise to Australian CGT liability, unless the CGT event occurs in relation to one of the categories of taxable Australian property. (g) Joining or leaving a tax consolidated group In some circumstances, the process of resetting the tax cost of a subsidiary’s assets on joining a consolidated group may give rise to a capital gain or loss to the group. A gain may also arise in certain situations where a subsidiary leaves a consolidated group. (h) Commencement date The date of transfer of ownership of an asset under a contract will generally be the date on which the contract for disposal of the asset
¶AUS ¶1-070 CALCULATING TRADING PROFITS Trading profits are usually computed on an accrual basis for tax purposes in accordance with the accounting treatment in the financial accounts, adjusted for specific items (eg business entertainment expenses). The tax basis for both resident and non-resident business is broadly the same. Business profits are calculated according to accepted accounting standards with tax adjustment being undertaken to reflect that certain income may not be assessable for tax purposes and certain expenditure may not be tax deductible. As non-residents are only taxable on Australian sourced income, foreign income and expenditure incurred in the derivation of foreign income are not included in the Australian tax basis. (a) Assets provisions Provisions for the replacement of assets are not deductible, except as expressly allowed in the form of depreciation (see AUS ¶1-100). (b) Entertainment expenses and club fees Expenditure on entertainment, club fees and expenditure that relates to leisure facilities (eg corporate boxes at sporting events and boats) are not deductible. However, a deduction is allowed where such expenditures are incurred in providing benefits to employees. Such expenditures are deductible, but the employer entity is liable to fringe benefits tax (see AUS ¶1-190(h)). Ref: ITAA 1997 Div 32 and s 32-30
(c) Capital expenditure A capital expenditure itself does not represent an allowable deduction for Australian tax purposes. Under Australian tax law, the uniform capital allowance regime provides standardised rules for claiming a deduction (ie capital allowance) on certain types of capital expenditure. A taxpayer is able to claim a deduction for certain capital expenditure either:
• immediately • over the useful life of the capital asset, or • over a prescribed time frame (see AUS ¶1-100). Ref: ITAA 1997 s 8-1(2)(a), 40-880, Div 40 and 43
(d) General reserves General reserves and provisions are not deductible. General reserves can either be specific (eg asset revaluation reserve) or non-specific where they are for example used to record amounts set aside for future economic expansion of the economic entity. Reserves can arise through differing accounting treatments. An asset revaluation reserve would arise where the directors of a company undertake a revaluation of the assets of the company to reflect the increase in an asset’s value. A provision is an amount set aside for some future expected liability event which may arise. (e) Realised foreign exchange gains and losses Realised foreign exchange gains are generally taxable, and realised foreign exchange losses are generally deductible (see AUS ¶1-210). (f) Losses incurred Losses incurred in deriving domestic (Australian sourced) or foreign income may be offset against domestic and foreign source income to the extent that the foreign income is not exempt from taxation in Australia. That is, losses incurred in deriving income which is tax exempt for any reason are generally not deductible. Ref: ITAA 1997 s 8-1(2)(c); ITAA 1936 s 79D and 160AFD
(g) Accrued employee benefits Amounts recognised in respect of long service leave, annual leave, sick leave and other leave are not deductible until incurred (ie paid to the employee). (h) Fines, penalties and bribes
Fines, penalties and bribes imposed by the federal, state or a foreign government are non-deductible. Ref: ITAA 1997 s 26-5; Mayne Nickless Ltd v FCT 84 ATC 4458
(i) Fringe benefits tax Fringe benefits tax (FBT) is a tax paid on certain benefits provided to employees and their associates (see AUS ¶1-190(h)). FBT payments are deductible, provided the necessary nexus exists between the provision of the fringe benefits and the income-producing activities of the taxpayer. FBT is separate from income tax and is incurred by an employer at the end of the FBT year, which runs from 1 April to 31 March. FBT instalments are incurred when the liability to pay them arises, and a company must self-assess its FBT liability. The fringe benefits taxable amount is calculated with one of two separate gross-up rates: • where the benefit provider is entitled to GST credits for GST paid on benefits to an employee, the provider must use the higher gross-up rate. The ATO provides a formula to calculate the higher gross-up rate, and it currently works out at 2.0647 where the FBT rate is 46.5% and the GST rate is 10% • where the provider is not entitled to GST credit, it must use the lower gross-up rate. According to the ATO’s calculations, the lower gross-up rate is 1.8692 where the FBT rate is 46.5%. For the income tax year ending June 2012, most employers can claim a deduction for: • the amount of the actual FBT liability for the FBT year ending 31 March 2012, plus • the June 2012 quarter FBT instalment, less • the June 2011 quarter FBT instalment. Ref: Taxation Rulings TR 95/24; TR 2001/2
(j) Deductibility of certain interest and royalty payments Where an interest and/or royalty withholding amount is not remitted to the ATO, the payer is not entitled to claim a deduction for the interest or royalty payment until the withholding tax is remitted. The payer may, however, retrospectively request an amendment in order to obtain a deduction for the royalty or interest. Ref: ITAA 1936 s 170
(k) Regional headquarters The cost of setting up regional headquarters (RHQ) operations in Australia is deductible. RHQ operations involve the provision to offshore associated companies of services such as data processing, finance and treasury, management advice, accounting, etc (see AUS ¶1-200(c)). (l) Commercial debt forgiveness In certain instances, the extinguishment by a creditor of its commercial debts affects the tax attributes of the debtor entity under the commercial debt forgiveness rules. The tax attributes of the debtor entity are: • prior year revenue losses • prior year net capital losses • undeducted balances of other expenditure being carried forward for deduction (including depreciable assets), and • the CGT cost base of certain other assets. Where commercial debt forgiveness rules operate, the net forgiven amount of a debt will be applied to reduce in the order of the tax attributes noted above. The reduction of tax attributes of the debtor has the effect of increasing tax liabilities of the debtor by effectively either reducing tax deductions (eg available losses) or decreasing the cost base of asset which has the effect of increasing future capital gains. The operation of this provision may cause a misalignment
between accounting expenses and allowable deductions for income tax purposes.
Example A company was forgiven a debt of A$90,000 it borrowed some years prior from an unrelated party. When preparing its current income tax return, the debt forgiven will affect the income tax position of the company as follows:
Opening balance of carried forward revenue losses Less: Amount of debt forgiven in current year Revenue losses available in current year for deduction against assessable income
A$50,000 (A$50,000) A$0
Opening balance of carried forward capital losses
Less: Amount of debt forgiven in current year
Capital losses available in current year for deduction against assessable income
Ref: ITAA 1936 Sch 2C
(m) Prepaid expenditure Businesses are denied a deduction for prepaid expenditures. The entitlement to deduction is instead spread over the period to which the prepayment relates. This rule does not relate to businesses covered by the small business entity rules, which are allowed to deduct 12month prepaid expenses. For this purpose, a small business is defined as one with a turnover of less than A$2m a year. Where prepaid expenditure is not “excluded expenditure” (broadly relating to expenditure of amounts less than A$1,000, salary or wages, or expenditure required by law or a court order) and the eligible service period is longer than 12 months, or is 12 months or less but ends after the end of the income year following that in which the expenditure is incurred, the deduction is spread (on a daily basis)
over the eligible service period. The eligible service period generally begins on the day when the thing to be done is required or permitted to commence and ends on the day when it is required or permitted to cease or 10 years from the start date, whichever is the earlier (ie the eligible service period cannot exceed 10 years). There are different eligible service periods for prepayments of interest, rent, lease payments and insurance premiums. A consequence of the prepayment rule is that, if the eligible service period is 12 months or less and ends in the expenditure year or the income year immediately following, the expenditure is deductible outright. Ref: ITAA 1936 Pt III Div 3 Subdiv H, s 82KZM
(n) In substance dividends/interest Under the debt/equity rules, dividends may be reclassified into deductible interest for tax purposes, but the deductible interest is limited to a predetermined percentage of the capital contributed by the company. The rules seek to identify the underlying substance of an equity or debt interest, rather than relying on its legal form, in determining the tax treatment of dividend or interest payments for the payer and recipient (see AUS ¶1-140(g)).
¶AUS ¶1-075 ANTI-AVOIDANCE AND REVENUE PROTECTION (a) General anti-avoidance rules Australian legislation contains general anti-avoidances rules (GAAR) aimed at countering schemes entered into by taxpayers for the purpose of obtaining a tax benefit for any taxpayer, including those that are not party to the scheme. The definition of what constitutes a scheme for the purposes of the GAAR includes arrangements, understandings, undertakings, plans, proposals, actions and other acts aimed at reducing the tax burden. The GAAR grant the ATO the authority to cancel any tax benefits resulting from such schemes, or to
amend the assessments as it deems appropriate. Ref: ITAA 1936 Pt IVA, s 177A to 177G
(b) Dual-resident companies A company that is deemed to constitute a dual-resident company under Australian law is precluded from enjoying a number of benefits, including rebates in respect of unfranked dividends (see AUS ¶1-130 and AUS ¶1-140), and the ability to form part of a consolidated group for tax purposes (see AUS ¶1-180). A company will be a “prescribed dual-resident” if: • it qualifies as a tax resident under Australian law (see AUS ¶1014(b)), and • there is a double tax treaty in effect (see AUS ¶1-005) containing a dual residence tie-breaker provision under which the company is deemed to be a tax resident solely of the other country. A company will also be a “prescribed dual-resident” if: • it qualifies as a tax resident under Australian law for the sole reason that it carries on business in Australia and has its central management and control in Australia, and • it also qualifies as a tax resident of a foreign country and also has its central management and control located in that country. Additionally, tax treaties concluded by Australia generally resolve any issue of dual residence. Ref: ITAA 1936 s 6 and 46FA
(c) Tax shelter disclosure rules There are no specific tax shelter rules in Australia. However, there is an advance tax ruling process available for some shelters to obtain ATO approval regarding tax issues prior to the investment being made (see AUS ¶1-250). (d) Treaty shopping
Australian GAAR rules can be used to counter improper treaty shopping practices (see (a) above). Additionally, Australia’s tax treaties include anti-treaty shopping provisions. Ref: ITAA 1936 Pt IVA, s 177A to 177G; OECD Model Convention art 10 to 12
(e) Thin capitalisation rules Australian companies are subject to thin capitalisation rules (see AUS ¶1-110(h)). (f) Transfer pricing rules Australian companies are subject to transfer pricing rules (see AUS ¶1-220). (g) Controlled foreign companies Australia imposes controlled foreign company (CFC) rules on corporate taxpayers (see AUS ¶3-060).
¶AUS ¶1-080 TRADING LOSSES Unlike capital losses, the trading losses of corporate taxpayers may be offset against all income received in the same accounting period or carried forward indefinitely and offset against future trading profits, subject to the satisfaction of certain conditions discussed below. For the 2013/14 tax year, up to A$1m of trading losses can be carried back for up to two tax years (one tax year in 2012/13). In certain circumstances, companies can limit the amount of available tax losses utilised in a particular period. This prevents waste of tax losses and enables a corporate tax entity with prior year losses to increase the amount of franking credits it has available to pay franked dividends. This is done so a company: • is able to pay taxes so as to generate franking credits so the company can pay fully franked dividends and therefore distribute tax credits to its shareholders, and • can save its excess franking offsets which would otherwise be lost
if the company used all required tax losses to reduce its assessable income. Where a company has excess franking offsets without deducting any amount of a tax loss, then it must choose to deduct a nil amount of the tax loss. Similarly, a company cannot choose an amount of tax loss that would give rise to an excess franking offset. The following example is taken from ITAA 1997 s 36-17 and illustrates how the tax loss limitation rule works.
Example For the year ending June 2013, a company has the following: • a tax loss of A$150 from a previous income year • assessable income of A$200 (a franked distribution of A$70, a franking credit of A$30 and A$100 of income from other sources) • no allowable deductions, and • no net exempt income. The tax offset of A$30 from the franking credit is not refundable under Div 67 of ITAA 1997. The loss limitation rule under s 36-17(5)(a) of ITAA 1997 does not apply because the company would not have excess franking offsets for that year if the tax loss were disregarded (ie the tax offset of A$30 is less than the A$60 in income tax that the company would pay if it did not have the tax offset and tax loss). If the company chooses to deduct the full amount of the tax loss (A$150), it would have excess franking offsets of A$15 (ie A$15 gross tax payable less A$30 tax offset). However, this choice would breach the loss limitation rule in s 36-17(5)(b) that precludes a loss amount choice that would give rise to an excess franking offset. However, if the company chooses to deduct A$100 of the tax loss, it would not have an excess franking offset and would not be in breach of s 36-17(5)(b). Therefore, the company can choose a maximum of A$100 or nil (if it wanted to pay tax).
A company is able to convert its excess franking offsets into income tax losses to be utilised in future tax years if it satisfies either the continuity of ownership test (COT) or, failing that, the same business
test (SBT). Ref: ITAA 1997 s 36-17(2)
Developments Infrastructure projects Parliament has passed legislation uplifting project losses associated with designated infrastructure projects at the Government bond rate and exempting those losses from the COT and the SBT. Infrastructure projects often experience long lead times between incurring deductible expenditure and earning income, leading to tax losses being incurred in the early stages of the project. Under current arrangements, this leads to the erosion of the real value of tax deductions over time. Further, investors face a risk that a change in ownership of an infrastructure project and change in business operation, means future owners will not be able to access previous years’ losses. Designated infrastructure project status will be conferred on privately financed public infrastructure projects of national significance based on a range of criteria, including a global capital expenditure cap of A$25b over the period from the effective date of the enabling legislation to 30 June 2017. These proposals will be effective from 29 December 2013 or a date fixed by proclamation, whichever is sooner. Ref: Tax Laws Amendment (2013 Measures No 2) Act 2013, 29 June 2013
(a) Continuity of ownership test (COT) The COT requires that shares carrying more than 50% of all voting, dividend and capital rights be beneficially owned by the same persons at all times during the ownership test period. The ownership test
period runs from the start of the loss year to the end of the income year in which the loss is to be deducted. If a company is not able to pass the COT because interests in the company are held by non-fixed trusts, the company may still be able to deduct its losses or debts if alternative conditions are satisfied. Special tracing rules apply to widely-held companies. This rule makes it unnecessary for an eligible company to trace the ultimate ownership of shares held by certain intermediaries. Further, small shareholdings of less than 10% are treated as belonging to a single notional shareholder (similar to the existing less than 1% rule for listed companies). For widely-held companies (ie listed companies or companies with dispersed shareholdings between 50 or more members), tracing through beneficial ownership is simplified under the modified COT. A modified COT applies for listed public companies and the wholly owned subsidiaries of listed public companies. The modified COT can be used by these companies rather than the regular COT when the company is unable to satisfy the other tax and capital loss recoupment test being the “same business test” (SBT). The modified COT modifies the way the regular COT rules apply to a widely held company by making it easier for the company to apply the COT rules. If the company maintained the same owners as between certain points of time, it does not need to prove it has maintained the same owners throughout the periods in between, which is the case under the regular COT. In certain cases, special concessional tracing rules deem entities to hold voting, dividend and capital stakes in the company so that the company does not have to trace through to the ultimate beneficial owners. Ref: ITAA 1997 Div 166
Developments In the May 2011 Budget, the Government announced that the COT rules will be amended so that companies will no longer have
to trace ownership through certain superannuation entities. The amendments will also remove technical deficiencies in the modified rules for widely held entities where: • an entity is interposed between certain stakeholders and the loss company in certain circumstances • an interposed entity demerges • an interposed foreign entity issues bearer depository receipts, or • a corporate change arising from the issue of new shares takes place. Under the amendments, membership interests in an entity will be treated as a single asset when applying the low value asset exclusion under the loss integrity rules. As of August 2013, legislation to implement this measure has not yet been introduced. Ref: Budget 2011/12, Paper No 2, Part 1, p 28; Budget 2012/13, 8 May 2012
(b) Same business test (SBT) If a company fails the COT, or modified COT where applicable, the company must satisfy the SBT before a tax loss, net capital loss or bad debt can be deducted. A company satisfies the SBT if it carries on the same business in the claim year as it has carried on immediately before the test time. The SBT contains three test elements: • there must be a continuation of the actual business carried on by the company immediately before and throughout the test time • the company must not have derived assessable income during the SBT period from a business of a kind that it did not carry on before the test time, and
• the company must not have derived assessable income during the SBT period from a transaction of a kind that it had not entered into in the course of its business operations prior to the loss making year the test time. Where a foreign resident company carries on business both in and out of Australia, the ATO has taken the view that the SBT is applied to the company’s global business, not just its Australian business. Ref: ITAA 1997 s 165-13, 165-210 and Div 166; Taxation Ruling TR 1999/9; Interpretative Decision ID 2006/258
(c) Carry-forward of federal losses Tax losses may be carried forward indefinitely for utilisation in the next tax year. Where there has been a change in ownership of a company, the carried forward tax losses of that company can still be utilised if the company satisfies the SBT. For the 2013/14 tax year, up to A$1m of losses can be carried back for up to two tax years (one tax year in 2012/13). Ref: ITAA 1997 Div 36
¶AUS ¶1-090 TREATMENT OF INVENTORY/STOCK-INTRADE For tax purposes, a taxpayer may adopt the lowest of the cost, market value or replacement value for valuing trading stock, regardless of the basis adopted in valuing trading stock for accounting purposes. A different basis may be adopted for each class of stock and even for each individual item of stock. Further, the basis adopted for any one item may be changed by making an election to adopt a different valuation method each year. The chosen method cannot be amended after the relevant assessment has been issued. The closing value adopted for an item of trading stock at the end of one income year automatically becomes its opening value at the beginning of the following income year. Ref: ITAA 1997 s 70-45(1) and 70-40(1)
¶AUS ¶1-100 DEPRECIATION
Under the uniform capital allowance rules, a deduction for depreciation is allowed in respect of equipment and other assets at various rates over the useful life of an asset. (a) Plant, machinery and equipment Deductions are generally allowable for plant, machinery and equipment (collectively referred to as “plant”) at various rates depending on: • the method of depreciation used • when the asset came into existence or was acquired • the effective life of the asset, and • the status of the taxpayer. Generally, the effective life of a depreciating asset reflects how long the asset can be used for a taxable purpose. To calculate the rate of depreciation applicable to a particular depreciating asset, reference must be made to the formulas prescribed by Australian tax law. Ref: ITAA 1997 s 40-70, 40-72 and 40-75
To assist with this calculation, the Commissioner publishes an annual taxation ruling which provides guidance for determining the effective life for a broad range of depreciable assets. The Commissioner’s effective life determination for the 2013/14 income tax year is Taxation Ruling TR 2013/4. Depreciation rates The depreciation rate applied to a particular asset is determined by reference to the effective life of an item of plant. Taxpayers may self assess the effective life of plant at the time of its acquisition or may adopt rates published by the Tax Commissioner. Ref: ITAA 1997 s 40-95(1)
Taxpayers may choose one of two methods to calculate depreciation. Depreciation is calculated on a diminishing value basis, unless a taxpayer elects to use prime cost. • Prime cost method (PCM): PCM gives a uniform deduction throughout the effective life of the plant (ie an item which has an effective life of 10 years is depreciated at a fixed annual amount over 10 years). • Diminishing value method (DVM): DVM applies to all depreciating assets. A depreciating asset is an asset that has a limited effective life and can reasonably be expected to decline in value over the time it is used. Three general categories are specifically excluded from the definition of a depreciating asset, including land, items of trading stock and intangible assets. Under this scheme, higher depreciation deductions are allocated in earlier years and lower deductions in later years. For depreciating assets acquired before 10 May 2006, the depreciation rate used under the diminishing value method is 150%. For depreciating assets acquired on or after 10 May 2006, the depreciation rate used under the diminishing value method is 200%. The new 200% DVM rates also apply to post-9 May 2006 project pools. For illustrative purposes, under the post-9 May 2006 rules, an item which has an effective life of 10 years is depreciated at 20% per year (200%/10), whereas an item which has a useful life of five years is depreciated at 40% (200%/5), etc. Ref: ITAA 1997 s 40-30, 40-70 and 40-72
A balancing adjustment arises where a taxpayer stops holding a depreciating asset (ie it is disposed of or destroyed). The balancing adjustment aims to reconcile the recognised depreciation with the actual change in value. The balancing adjustment results in one of the following: • an upward adjustment and amount of assessable income being recognised where the termination value of the asset is more than the written-down value
• a downward adjustment and an allowable deduction where the termination value of the asset is less than the written-down value, or • no adjustment where the termination value equals the writtendown value. Ref: ITAA 1997 s 40-285(1) to (2)
From the 2012/13 income year, businesses with annual turnover of less than A$2m can benefit from the following tax depreciation mechanisms: • an immediate write-off of depreciating assets valued up to A$6,500, and • the write-off of other assets in a single general small business pool at a rate of 15% for the first year and 30% thereafter. Ref: ITAA 1997 s 328-170 to 328-180
(b) Motor vehicles The Commissioner of Taxation prescribes an upper limit threshold for depreciation purposes on the value of depreciating motorcars. The limit is indexed and generally increases annually. The last three prescribed upper limits for the depreciation of motor vehicles were set as follows: • For the year ending 30 June 2014 — A$57,466 (Taxation Determination TD 2013/15) • For the year ended 30 June 2013 — A$57,466 (Taxation Determination TD 2012/16) • For the year ended 30 June 2012 — $57,466 (Taxation Determination TD 2011/18). Ref: ITAA 1997 s 40-230
From the 2012/13 income year, businesses with an annual turnover of less than A$2m can benefit from an immediate write-off of up to
A$5,000 on purchased vehicles. The remainder of the purchase value is depreciated in the general small business pool at a rate of 15% for the first year and 30% thereafter. Ref: ITAA 1997 s 328-190
(c) Income-producing buildings The depreciation expense of tax amortisation allowed in respect of buildings and foundations is provided for under the capital works provisions and not the uniform capital allowance rules. The applicable amortisation rates for buildings are summarised below: Amortisation rate (% per year) Non-residential income-producing buildings: Industrial buildings used for manufacturing: After 19 July 1982
After 21 August 1984
After 15 September 1987
After 26 February 1992
Other (eg retail and office buildings): After 19 July 1982
After 21 August 1984
After 15 September 1987
After 26 February 1992
Residential income-producing buildings: After 18 July 1985
After 15 September 1987
After 26 February 1992
Short-term traveller accommodation: After 21 August 1979
After 21 August 1984
After 15 September 1987
After 26 February 1992
Income-producing structural improvements that are not connected with a building: Before 26 February 1992
After 26 February 1992
The tax amortisation allowed in respect of buildings is calculated on a prime cost basis on the historical construction cost of the building (ie not its acquisition cost). Higher depreciation rates are available for plant in a building, such as an air conditioning plant, lift or elevator. Generally, Australian tax law distinguishes between repairs, which are deductible for tax purposes, and improvements, which are capital items and are not deductible. However, there are categories of repairs which are regarded as improvements. The term “repair” is not defined under tax law, but is generally understood to mean the restoration of a thing to a condition it formerly had without changing its character. It involves restoration or renewal of a dilapidated part of a thing but not reconstruction of the whole thing in its entirety. An “improvement” involves bringing a thing or structure into a more valuable or desirable form, state or condition than a mere repair would do, that is, there has been a significant change in the character, form or material. Whether or not work done upon a thing is properly described as a repair or an improvement is a question of fact and degree. An assessment of the facts must be undertaken to determine the true character of the work.
Ref: ITAA 1997 Div 43 and s 43-70; W Thomas & Co v FC of T (1965) 115 CLR 58; Taxation Ruling TR 97/23
(d) Agricultural and pastoral plant or plant used in the fishing or forestry industries Effective for the 2007/08 tax year, the provision permitting depreciation on agricultural and pastoral plant or plant used in the fishing or forestry industries has been repealed. Under prior law, these types of plant were subject to a flat rate of depreciation, but certain types were excluded (eg structural improvements and motor cars and other small road vehicles). Ref: ITAA 1936 former s 54(2)(b), 57AE and 57AH
(e) Agricultural buildings considered to be items of plant Effective for the 2007/08 tax year, the provision permitting depreciation on agricultural buildings considered to be items of plant has been repealed. Under prior law, these buildings were subject to depreciation rates from 1% to 4%, depending on the materials from which they were constructed. Ref: ITAA 1936 former s 54(2)(b), 57AE and 57AH
(f) Patent rights, industrial know-how and other industrial property These assets attract capital allowances in respect of the expenditure incurred. The costs are allowable in equal parts over the term of the right. The tax law specifies effective lives for the following assets: • copyrights: 25 years • standard patents: 20 years • petty patents: 6 years • designs: 15 years. Ref: ITAA 1997 s 40-95(7) Items 1 to 5
(g) Investment in Australian feature films Film industry incentives apply to certain eligible taxpayers in the film
industry. The tax incentives include: • the producer offset, which is a refundable tax offset for Australian expenditure in making Australian films. The refundable tax offset is set at 40% for feature films and 20% for non-feature films, and is subject to a minimum qualifying expenditure threshold of A$500,000 in respect of productions commencing during the 2011/12 and later tax years (A$1m in respect of productions commencing during the 2010/11 and earlier income years) • the location offset, which enhances the existing 12.5% refundable film tax offset for Australian production expenditure. The refundable tax offset is set at 16.5% in respect of productions commencing on or after 10 May 2011 (15% between 8 May 2007 and 9 May 2011), and • the PDV offset, which is a refundable film tax offset for “post, digital and visual effects production” in Australia. The refundable tax offset is set at 30% in respect of productions commencing during the 2011/12 and later tax years (15% in respect of productions commencing during the 2010/11 and earlier tax years). Ref: ITAA 1997 Div 376
(h) Mining and exploration expenditure There is a wide range of capital allowances and concessions with respect to these items. Expenditure relating to mineral exploration and mining is deductible against income from any source. Capital allowances in respect of oil exploration near or in Australia may be offset against income from any source. (i) Amortisation of software Taxpayers are able to amortise systems and application software at the rate of 40% per year over 2½ years. This rate of depreciation also applies to expenditure on specifically commissioned software and inhouse development of software. Software is not specifically defined in the Australian tax law. The
Commissioner has provided guidance on what is meant by the term “computer software” in Taxation Ruling TR 93/12, which describes computer software as “computer programs consisting of encoded instructions designed to cause a computer to perform a particular task or to produce a particular result”. Ref: Taxation Ruling TR 93/12
(j) Capital blackhole expenditure Blackhole expenditure specifically relates to expenditure that, due to its nature, is not deductible or depreciable under the capital allowance or capital works provisions, nor is it able to form part of the cost base of a related asset for CGT purposes. In certain circumstances, these items are deductible on a straight line basis over a five-year period, provided the expenses are not otherwise deductible or specifically precluded from being deductible under another provision. General examples include: • expenditures of a capital nature that are not included in the cost base of a particular CGT asset or in the cost of a depreciating asset • amounts incurred before a business commences or after it ceases, and • amounts incurred in relation to capital raising costs. Ref: ITAA 1997 s 8-1 and Div 40 and 43
¶AUS ¶1-110 INTEREST DEDUCTIBILITY (a) Interest payments Interest is deductible to the extent it is incurred in producing assessable income. Generally, interest expenditure is deemed incurred once the interest becomes due and payable, and not necessarily when it is paid. Whether interest is incurred for the purpose of producing assessable income depends ultimately on the purpose of the borrowing (ie the use to which the borrowed funds are put).
Ref: ITAA 1997 s 8-1; FCT v James Flood (1953) 88 CLR 492; Kidston Goldmines Ltd v FCT 91 ATC 4538
(b) Interest paid between related entities Interest payable between related entities is deductible only to the extent it is reasonable to the Commissioner of Taxation. Any additional interest above that deemed reasonable is not deductible and is neither assessable income nor exempt income of the related entity recipient. If the amount paid to the related entity is equivalent to an arm's length payment, the entire payment will be considered a reasonable amount. An arm’s length test determines an acceptable level of debt for a taxpayer. Legislative assumptions within this test assume that the entity’s Australian business was independent from the foreign operations and that there was no guarantee, security or other credit support provided by any associates. If a company is able to obtain a loan from an unrelated party because of a guarantee from a related party, then for the purposes of the debtequity ratio the loan would be treated as a loan of the borrowing party where the loan arrangement is considered a debt interest. Interest payments within a tax consolidated group are disregarded given the nature of a consolidated group, which treats the group as a single entity. Ref: ITAA 1997 Div 820, s 26-35 and Div 701; Interpretative Decision ID 2006/239
(c) Interest prepayments Business taxpayers are generally required to spread deductions for prepayments over the period to which the prepayment relates or 10 years, whichever is shorter. Ref: ITAA 1936 s 82KZL and 82KZMD
(d) Interest paid to a non-resident When interest is paid to a non-resident, there is an obligation on the payer to withhold tax from the gross amount of the payment. Interest withholding tax does not apply in the case of certain widely issued debenture stock issued outside Australia.
Ref: ITAA 1936 s 128B(2)
(e) Interest on funds borrowed to acquire foreign shares The general rule is that expenditure incurred in deriving nonassessable or exempt income (eg foreign non-portfolio dividends) is not deductible, because the outgoing cannot be said to have been incurred in deriving assessable income. Specifically, foreign dividends derived by Australian corporate shareholders are not assessable where they reflect a non-portfolio shareholding interest (ie a shareholding interest of less than 10%). Notwithstanding this general rule, interest incurred by an Australian corporate resident on funds borrowed to acquire shares in a foreign company that generates dividend income is generally deductible, even though the foreign interest was incurred in deriving exempt income. Dividends arising from certain non-portfolio holdings of foreign companies may be exempt. In some circumstances where the thin capitalisation ratio of 3:1 is exceeded, the amount of debt deductions will be limited to the extent of the excess (see (h) below)). Ref: ITAA 1936 s 23AJ; ITAA 1997 s 25-90
(f) Prior exchange control approval This approval ceased to be necessary for all transactions from 1 July 1990, including for funds remitted abroad. However, all financial institutions have a duty under the Cash Transactions Reporting Act to report certain transactions which they suspect may involve breaches of criminal or tax law. (g) Failure to quote tax file number (TFN withholding tax) Interest paid by certain financial institutions to residents who fail to quote a TFN is subject to the retention of tax at source at the top individual marginal tax rate (including the Medicare levy) applicable to resident taxpayers. Ref: TAA Sch 1 s 12-140
(h) Thin capitalisation arrangements Australia's thin capitalisation rules are intended to limit the amount of
debt used to fund a corporation's operations or investments in Australia. The thin capitalisation rules basically limit an entity's allowable debt deductions when the entity's debt used to fund Australian assets exceeds certain limits. The thin capitalisation rules generally apply to Australian entities that are foreign controlled or that control foreign entities, including offshore finance companies. Control is determined in a similar manner as under the controlled foreign company (CFC) rules. The rules for determining control apply on a “category of entity” basis with the focus on fitting an entity into a particular category and then determining the consequences that might arise from that categorisation. This categorisation involves a range of variables including whether the entity is outward or inward investing; general or financial (to reflect the different gearing levels required for each type of business); a subsidiary or branch operation (in the case of inward investors); and non-ADI or ADI (authorised deposit-taking institution). An outward investing entity includes an Australian entity that controls a foreign entity or an Australian entity that operates a business at or through an overseas permanent establishment (PE) and associated entities. An inward investing entity is an Australian entity that is foreign controlled or a foreign entity that either invests directly into Australia or operates a business in Australia at or through an Australian PE. For example, an entity which is categorised as an outward investing entity is considered as such because it has the requisite control. This level of control is broadly defined as the Australian entity which has not less than 50% of a foreign company. In most cases, the thin capitalisation rules only apply where an entity's debt/equity ratio exceeds the acceptable level of 3:1. However, for banks and other financial institutions, a debt/equity ratio of 20:1 applies. The main test (ie the safe harbour debt test) calculates the permissible debt amount as 75% of the assets of the entity's Australian operations. The regime also applies an arm's length test if the safe harbour test is failed. Outward investors only may utilise a worldwide gearing test.
Developments The Government has proposed amending the debt/equity ratios as follows: • from 20:1 to 15:1 for banks and financial institutions, and • from 3:1 to 1.5:1 for all other entities. A proposals paper containing this proposal was released for consultation in May 2013. The closing date for comments was 12 July 2013. If enacted, the proposed changes will be effective from 1 July 2014. Ref: Budget 2013/14, 14 May 2013; Proposals Paper — Addressing profit shifting through the artificial loading of debt in Australia, 14 May 2013
The “worldwide gearing debt amount” (WWGDA) is a test which an entity that is classified as an outward investing entity (non-ADI) but that is not also foreign owned, ie is not also an inward investment vehicle (general or financial), can use to determine its maximum allowable debt. Two amounts or tests available to a non-ADI entity are the safe harbour debt amount and the arm's length debt amount. The WWGDA allows the entity to gear its Australian operations up to 120% of the actual gearing of its worldwide group in recognition of the need of some Australian businesses to borrow in order to expand offshore.
Developments The Government has proposed:
• extending the application of WWGDA to inward investment vehicles, and • reducing the 120% rate to 100% for WWGDA gearing purposes. A proposals paper containing this proposal was released for consultation in May 2013. The closing date for comments was 12 July 2013. If enacted, the proposed changes will be effective from 1 July 2014. Ref: Budget 2013/14, 14 May 2013; Proposals Paper — Addressing profit shifting through the artificial loading of debt in Australia, 14 May 2013
In addition to the debt/equity ratio, Australia also applies an interest coverage ratio to determine if thin capitalisation rules apply. The maximum interest coverage ratio for non-ADI entities (financial institutions) is 75%, meaning that 75% of the assets of an Australian entity may be financed by debt without a denial of interest deductibility (within the context of the thin capitalisation rules). An entity falls outside the thin capitalisation rules if interest deductions are below A$250,000 or if the entity is an outward investor (and not also an inward investor) and its foreign investments represent no more than 10% of its total assets. For the purposes of the thin capitalisation rules, debt is any amount that must be repaid (at least to the extent of the loan), and is not contingent on the economic performance of the company. Ref: ITAA 1997 Div 820, 974, s 820-90, 995-1
Following on from Australia’s adoption of International Financial Reporting standards, entities are allowed to depart from the current accounting treatment in relation to certain intangible assets and to exclude deferred tax assets and liabilities and surpluses and deficits in defined benefit superannuation funds when doing their thin
capitalisation calculations. Ref: ITAA 1997 Div 820
(i) In substance dividends/interest Under the so-called “debt/equity rules”, dividends paid by a resident company are in certain circumstances reclassified as interest payments, which (in contrast to dividends) are deductible to the paying company. However, the amount of the interest deductible is limited to a prescribed percentage return on the capital contributions. Similarly, certain non-share equity interests are treated as ordinary shares for tax purposes. As a result, a payment that is on its face an interest payment may be treated as a non-deductible dividend payment. The objective of the debt/equity rules is to determine the substance of the situation of a payment, rather than its legal form, as either a debt or equity interest (see AUS ¶1-140(g)).
¶AUS ¶1-120 ALTERNATIVE FINANCING INSTRUMENTS (a) Discounted and deferred interest securities Income accruing on discounted and other deferred interest securities is taxable to the investor each year on an accrual basis, provided there is an eligible return. Qualifying securities are discounted and deferred interest securities that satisfy the following conditions: • they must be issued after 16 December 1984 • their expected term must exceed or be likely to exceed 12 months, and • the sum of the payments under the security must exceed the issue price. Qualifying securities may be issued by a variety of entities, including public companies and government treasury departments. These securities can be structured in a variety of ways. However, their common feature is that the expected term must be likely to or exceed
12 months and the payments on the securities must exceed their issue price. Generally, the issue of securities in Australia is subject to the Corporations Act 2001. Where an entity seeks to issue a security, it must generally comply with the requirement to issue a prospectus. An investor may apply for such securities on the application form that accompanies the prospectus. An eligible return is the amount by which the sum of the payments made in respect of a security exceeds the issue price of the security. Ref: ITAA 1936 Pt III Div 16E
(b) Interest receipts An investor is taxed on any actual and imputed interest receipts. Interest receipts for Australian purposes are compensation to the lender for being kept out of the use and enjoyment of the loan principal. An interest receipt stems from a “debt interest”. Broadly, a debt interest is one which satisfies the following conditions: • the debt is an arrangement to raise finance for an entity • there is an effectively non-contingent obligation to repay the debt, and • the amount repaid is at least equal to the debt raised. These securities may be structured in numerous ways. Australian tax law does not prescribe the manner in which they may be structured. The rules contained in Div 974 of ITAA 1997 contain tests which determine whether a security is a debt interest. In order to obtain a debt interest, entities must generally comply with the requirements of the Corporations Act 2001. This requires an entity to issue a prospectus before it can raise many forms of debt securities. Ref: ITAA 1997 s 6-5 and 974-20; ITAA 1936 Pt III Div 16E; FCT v Myer Emporium 87 ATC 4363; Taxation Determination TD 2008/D14
(c) Indexed capital securities Where the security is an indexed capital type and an increase in
capital is met with a specified interest rate being applied each year, the assessable income of the investor in the year of redemption includes interest imputed on the increase in the capital value as well as the actual interest receipt. Companies that issue such securities are generally allowed a deduction for interest as it accrues. Ref: ITAA 1936 s 26BB
(d) Exceptions Exceptions to the rules discussed above are: • where the maturity date of the security is a year or less from its date of issue, or • where the difference between the issue price of the security and the amount to be paid on redemption, for each year in the security’s term, is 1.5% of the redemption price or less. Ref: ITAA 1936 s 26BB
(e) Non-residents and trading stock The provisions taxing such securities do not apply to non-residents who hold qualifying securities or to such qualifying securities which are held as trading stock. Trading stock for Australian purposes is anything that is produced, manufactured or acquired that is held for purposes of manufacture, sale or exchange in the ordinary course of a business. If the item becomes part of trading stock on hand before or during the income year in which the outgoing is incurred, a deduction for the cost of acquiring the trading stock is available in that income year. Otherwise, the cost of acquiring the trading stock is deducted in the first income year during which the item becomes part of trading stock on hand, or for which an amount is included in assessable income in connection with the disposal of that item. A taxpayer that carries on a business must compare the value of all its trading stock on hand at the start of the income year and the value of all its trading stock on hand at the end of the income year. Assessable
income includes any excess of the value at the end of the income year over the value at the start of the income year. Furthermore, a taxpayer can deduct any excess of the value at the start of the income year over the value at the end of the income year. Ref: ITAA 1997 s 70-10, 70-15 and 70-35
Qualifying securities are securities that satisfy the following conditions: • they must be issued after 16 December 1984 • their expected term must exceed or be likely to exceed 12 months, and • the sum of the payments under such security must exceed the issue price. Income from qualifying securities are taxed on an accruals basis. Income from non-qualifying securities is generally taxed on a receipts basis. Ref: ITAA 1936 Pt III Div 16E
(f) Bank bills and other securities Bank bills and other securities issued at a discount or with deferred interest for a term of less than 12 months give rise to deductions on a daily accrual basis in most circumstances. The daily accrual method is a method that is used to calculate the amount of the discount on a commercial bill that is an allowable deduction in a year of income. This method is available to all taxpayers who raise funds by way of commercial bills for the purpose of producing assessable income or carrying on a business. The Australian Taxation Office applies this method to entities that account for their income on an accrual basis. Ref: Coles Myer Finance Ltd v FCT 93 ATC 4214; Taxation Ruling TR 93/21
¶AUS ¶1-130 DIVIDENDS RECEIVED (a) Imputation system
The basis of the dividend imputation system is that shareholders who receive dividends from a company are entitled to a tax offset for the tax paid by the company on its taxable income (ie the payment of company tax is imputed to shareholders). The tax paid at the corporate level is allocated to shareholders by way of franking credits attached to the distributions they receive (ie franked dividends). The imputation system applies to dividends paid by Australian resident companies to Australian resident shareholders. Non-resident shareholders do not receive the benefit of franking credits on franked dividends. An amount equal to the franking credits attached to franked distributions is included in the assessable income of Australian resident shareholders. These taxpayers are then entitled to a tax offset equal to the franking credits included in their income. Ref: ITAA 1997 s 202-5 and 207-20
Example Austco is an Australian resident company with two equal shareholders, B (a resident individual) and C (a non-resident individual), both of whom are taxed at the same individual marginal tax rate. In 2009/10, Austco had taxable income of A$10m, and paid tax at 30% (ie its tax was A$3m). Austco distributes its net after tax income, A$7m equally to B and C, fully franked (ie A$3m of franking credits are included in the total distribution). B receives a A$3.5m cash dividend, plus A$1.5m franking credits. B is assessed on a A$5m dividend (ie cash dividend plus franking credits), but receives the benefit of a franking credit to the value of A$1.5m for the tax already paid by Austco. In effect, B only pays tax to the extent that its marginal rate exceeds the corporate rate (ie a top-up tax), such that the effective rate of tax on corporate profits is the individual shareholder's marginal tax rate. C also receives a A$3.5m cash dividend, plus A$1.5m franking credits. C pays no further Australian tax (ie there is no withholding tax on the franked dividend, and, presuming there is no other Australian source income, is not obligated to lodge an Australian income tax return). As the imputation system does not apply in respect of non-resident shareholders, the effective final rate of tax on taxed corporate profits is simply the Australian corporate tax rate.
From this example it is clear there is a preference for a company to
frank distributions to certain shareholders. To address the inequality, anti-avoidance provisions operate to prevent companies streaming franked and unfranked dividends to different types of shareholder (eg residents and low marginal rate taxpayers). The shares, in respect of which a franked dividend is paid, must be held at risk for at least 45 days (90 days for preference shares) during a defined primary qualification period in order to be eligible for the franking credit. Franking credits will also be denied if the shareholder enters into a risk reduction arrangement within that time. Ref: ITAA 1997 Div 204
(b) Foreign dividends Australian resident companies are exempt from tax in Australia to the extent that dividends are paid by a non-resident company in which the Australian resident holds at least 10% voting power (ie “non-portfolio” dividends). Ref: ITAA 1936 s 23AJ
The “non-portfolio” dividend exemption only applies in respect of Australian resident companies receiving foreign dividends as the beneficial owner. That is, corporate partners in a partnership receiving foreign dividends are not covered by the “non-portfolio” dividend exemption. Further, corporate beneficiaries receiving foreign dividends through a trust are also not covered by the “non-portfolio” dividend exemption. Ref: TD 2008/24 and TD 2008/25
(c) In substance dividends/interest Under the debt/equity rules, certain non-share equity interests (ie equity-like instruments) are treated as ordinary shares for the purposes of the imputation system, and also for applying either dividend or interest withholding tax. Thus, certain payments made with respect to non-share equity interests are treated as frankable dividends instead of interest payments, both in the hands of the recipient and the payer. The objective of the debt/equity rules is to determine the substance of the situation of a payment as debt or equity interest rather than its legal
form. Similarly, under the debt/equity rules, certain dividends paid by a resident company may be reclassified as interest payments. However, from the perspective of the recipient shareholder, the payment remains assessable without the benefit of franking credits (see AUS ¶1-140). Ref: ITAA 1997 s 202-40, Subdiv 974-C
(d) Refund of excess franking credits A cash refund is available for excess franking credits attaching to franked dividends received by individuals and superannuation funds. Since corporate shareholders are already taxed at the corporate rate, they are not entitled to a cash refund. However, a company's excess franking credits may create a revenue loss that can be carried forward to be utilised in a future year. Ref: ITAA 1997 s 67-25
¶AUS ¶1-140 DIVIDENDS PAID (a) Australian resident shareholders Franked dividends Franked dividends carry the level of franking credits determined by the company. A distribution cannot be franked by more than 100% (ie an entity cannot allocate a greater franking credit to a distribution than tax paid by the entity on its underlying profits). For example, assuming a A$100 total distribution, the maximum franking credit for a A$70 dividend is A$30 (for a corporate tax rate of 30%). Furthermore, as part of the anti-streaming rules, all frankable distributions made by non-listed companies (ie private companies) during the franking period must be franked to the same extent (ie benchmark franking percentage). This ensures that franking credits are not streamed selectively to shareholders who can better utilise the franking credits. Tax paid and tax imputed to members is recorded in a corporate tax entity’s franking account. A credit to the entity’s franking account (ie franking credit) arises when the entity pays income tax or receives a
franked dividend. A debit arises when the entity franks a dividend or receives a tax refund. Where a corporate tax entity has a franking account deficit at the end of a year, it is required to pay franking deficit tax shortly after the end of the year to make good this deficit. Ref: ITAA 1997 Subdiv 202-D and s 200-30
Unfranked dividends Unfranked dividends paid by an Australian company to an Australian resident attract TFN withholding tax where the shareholder fails to quote their tax file number to the company. The company is then required to withhold from the unfranked dividend distribution at the highest marginal rate applicable to resident individuals (see AUS ¶1110(g)). Ref: TAA Sch 1 Subdiv 12-E
(b) Non-resident shareholders of Australian companies Non-resident shareholders are not subject to Australian income tax on the dividend income that is paid out of profits derived from sources in Australia where the dividends are fully franked. Non-resident dividend income attracts withholding tax to the extent that dividends are unfranked. Franked dividends and dividends paid from pooled development funds are exempt from withholding tax. The amount of tax that may be levied on dividends flowing from residents in that country to residents of the other country is generally limited by the terms of a tax treaty (if any) between the source country and the country of residency. Ref: ITAA 1936 s 44(1)(b) and 128B(3)(ga)
Franked dividends Franked dividends are not subject to withholding tax. Dividends are franked to the extent that tax paid at the corporate level has been imputed to shareholders. Unfranked dividends Unfranked dividends are dividends paid without any imputed underlying credit for company tax. The withholding tax is imposed on
the gross amount of the dividends at the general withholding tax rate. Note that the exact withholding tax rate may be stated in the relevant tax treaty (if any). The following types of dividend are not able to be franked, even where franking credits are available in the dividend franking account: • dividends paid out of share capital accounts, share premium accounts or revaluation reserves, and • loans or advances to shareholders or associates of closely-held companies that are deemed dividends. Unfranked dividends paid to non-residents are subject to withholding tax, thus, there is no further Australian income tax liability levied on the dividend income. This means that dividends in respect of which withholding tax is payable, are excluded from a non-resident’s assessable income for Australian tax purposes; withholding tax is the final tax (see AUS ¶1-005). Ref: ITAA 1936 s 128D
(c) Conduit foreign income withholding tax exemption In general terms, “conduit foreign income” is foreign income that is ultimately received by a foreign resident through one or more interposed Australian corporate tax entities (eg foreign dividends derived from a non-portfolio shareholding interest in a foreign company). Special rules allow conduit foreign income to flow through Australian corporate tax entities to foreign shareholders without being taxed in Australia. Australian corporate tax entities that receive an unfranked distribution that is declared to be conduit foreign income do not pay Australian tax on that income if the conduit foreign income is on-paid to shareholders (net of related expenses) within a certain period. In such a case, the conduit foreign income in the unfranked distribution is treated as nonassessable income of the Australian corporate tax entity. Conduit foreign income is exempt from dividend withholding tax when it is on-paid to a foreign shareholder as an unfranked distribution (see AUS ¶1-130 and AUS ¶3-010).
Ref: ITAA 1997 s 802-20 and 802-15
(d) Tax treaty countries Australia is a party to various tax treaties with certain countries (see AUS ¶1-005). The applicable withholding tax rate on dividend income depends on the rate prescribed under the particular treaty. There are still some countries with which Australia has not concluded a tax treaty, most notably tax havens and other low-tax jurisdictions. For dividends paid to residents of these countries, the applicable Australian tax rate is based solely on the maximum rates prescribed under Australian tax law. For dividends paid to residents of countries with which Australia has a tax treaty, the taxpayer may be entitled to a credit for the Australian withholding tax actually paid, and in some cases may also be entitled to a credit for the underlying tax paid. These credits may then be offset against the tax payable in that other country. A number of Australia’s tax treaties, including its treaties with the United States and with China, contain anti-treaty-shopping provisions to combat companies manipulating their resident status. One of the purposes of these provisions is to deny the benefit of the reduced rates of withholding (provided by the treaty) that the source country can impose on dividends, interest and royalties derived by a resident of the other country. Ref: International Tax Agreements Act; ITAA 1936 Pt III Div 18
(e) Deemed dividends Loans, payments or debt forgiveness made to shareholders or associates of a private company are deemed to be an unfranked dividend in the hands of the recipient. The deemed dividend may also result in a debit to the private company’s franking account. In certain circumstances (eg deemed dividends triggered by honest mistakes or inadvertent omissions), the Commissioner has the discretion to limit or disregard the application of the deemed dividend consequences. Ref: ITAA 1936 s 109 and Pt III Div 7A
(f) In substance dividends/interest The objective of the debt/equity rules is to determine the substance
(rather than the legal form) of a payment as either debt or equity. Under the debt/equity rules, dividends paid by a resident company are in certain circumstances reclassified as interest payments, which — in contrast to dividends — are deductible to the paying company. In these situations, the recipient accordingly is unable to access any franking credits attaching to the deemed interest payment. Similarly, certain non-share equity interests may be treated as ordinary shares for tax purposes. As a result, a payment that is on its face an interest payment may be treated as a non-deductible dividend payment. A debt interest is treated as an equity interest if an entity provides a financial benefit to a company (ie in the form of a payment) and the company does not have an effectively non-contingent obligation to return at least that amount to the contributing entity. In this circumstance, the debt is treated as a share interest for tax purposes. Payments made by the company in respect of the interest are nondeductible (as they are not interest payments for tax purposes), and are instead treated as non-deductible frankable dividends. A resident recipient may claim appropriate franking credits. Where the payment is made to a non-resident, the payment may be subject to dividend withholding tax if unfranked. Related party at-call corporate loans are deemed to be debt if the company satisfies a less than A$20m annual turnover test in that income year, regardless of when the loan was made. As there may be fluctuations in turnover, the taxpayer may elect to alter the loan so that it is a debt interest (as if the change occurred at the beginning of the previous year). A private company may elect to have such a loan treated as debt from the start of the year of income in which it failed the turnover test. An at-call loan is a loan that is repayable on demand by the company or on the death of the associate of the company. A related party at-call loan is a loan that is made by a company to a connected entity. An entity is connected to a company if it is associated. Tax law applies a very wide meaning of the term “associate”. An associate includes shareholders and entities associated with the shareholders of a
company. The A$20m annual turnover test requires that the turnover of the company is less than A$20m. Turnover is the value of supplies made by the company as at the end of the income year. Turnover does not include the following: • the value of turnover/supplies from residential rents or residential premises and financial supplies • the value of supplies that are made not for consideration, and • the value of supplies that are not made in connection with an enterprise. The value of a supply is not included in the turnover amount if: • it is not connected with Australia • the supply is related to the use of commercial residential premises • it is not made in Australia, and • it is made through an enterprise that the company does not carry on in Australia. Ref: ITAA 1936 s 318; ITAA 1997 s 215-15; 974-75; GST Act s 188-15
(g) Dividend streaming Anti-avoidance rules also exist to counter streaming arrangements which involve a company disproportionately directing franked dividends to certain shareholders (eg to low marginal rate taxpayers who can most use franking credits, and away from non-resident shareholders who cannot use franking credits). Ref: ITAA 1997 Pt 3-6
¶AUS ¶1-150 REDUCTION OF CAPITAL (a) Limited liability
Australian law protects a person dealing with a limited liability company by prohibiting any reduction of capital without undertaking the detailed steps required under the share buy-back provisions of the Corporations Act. There is no requirement that a reduction of capital be approved by the courts (see
AUS ¶1-160). (b) Share purchase restrictions Under the Corporations Act, a company is only able to deal in its own shares in limited circumstances. This restriction aims to prevent a company from entering into loans where shares in the company are used as security, or from providing financial assistance to potential shareholders for the purpose of acquiring shares in the company. Penalties are imposed on any person involved in these types of activities. Additionally, a company must complete certain notification requirements as stipulated under the Corporations Act. The Australian Securities and Investment Commission (ASIC) is the Federal government body responsible for the administration and governance of corporations and the enforcement of the legislative provisions of the Corporations Act. For an equal capital reduction, a corporation must lodge with ASIC Form 2560 (notification of a reduction in share capital) and Form 484 (change to company details). There are certain prescribed times to lodge the forms which vary according to certain variables. Form 2205 (notification of resolution regarding shares) must be lodged where there is a selective capital reduction. Ref: Corporations Act Pt 2J.3, s 260D and Pt 2J.1 Div 2
(c) Share cancellation provisions Australian tax law nullifies any advantage obtained by a holding company that cancels shares it has issued which are held by its subsidiary. Special rules cover this situation by providing that: • the tax effects of the transaction for the subsidiary are determined as if the consideration received was equal to the market value of the shares, and • the tax consequences for the holding company on the disposal of its interests in the subsidiary are determined as if the subsidiary had received market value for the cancelled shares.
A corresponding provision ensures that an entity interposed between the holding company and the subsidiary obtains no undue benefit. An undue benefit may be gained by an interposed entity where the subsidiary (to the interposed entity) has its shares cancelled by the holding company. The share cancellation may result in the value of the subsidiary decreasing (as its asset value is reduced due to the share cancellation). The interposed entity’s share value may correspondingly decrease, in which case an unrealised capital loss may arise in respect of these shares, yet the value of the group will not have changed. Ref: ITAA 1936 Pt III Div 16J; ITAA 1997 Subdiv 165-CD
(d) Share capital account The Company Law Review Act 1998 abolished par value of shares and associated concepts of share premium, share premium accounts and paid-up capital. As a result, the distinction between share premium and paid-up capital was removed, which effectively created one share capital account. (e) Dividends Any amount returned to shareholders on a reduction of capital is deemed to have been paid from the available profits of the company and may, subject to qualifying as a genuine return of capital, be treated as a dividend for tax purposes. This dividend may be franked if the company has sufficient franking credits available. Care must be exercised for any share capital reduction or buy-back. Ref: ITAA 1936 s 6, 44(1B) and 159GZZZP
¶AUS ¶1-160 REPURCHASE OF SHARES (a) Repurchase The strict guidelines a company must follow in order to undertake a repurchase of its own shares are contained in the Corporations Act. These include the approval by a resolution passed at a general meeting of the shareholders of the company and the lodging of various forms with ASIC which give notification of the company’s
intention to do so. The guidelines are designed to protect the interest of the shareholders and creditors of the company by addressing the risk of the transactions leading to the company’s insolvency, seeking to ensure fairness between the company’s shareholders and requiring the company to disclose all material information. The tax consequences for shareholders depend on whether the buyback was conducted on-market or off-market (ie according to whether the repurchase is implemented through a stock exchange or by private arrangement). If an individual disposes of shares in a buy-back arrangement, the individual may have made a capital gain or loss from the transaction, depending on the conditions of the buy-back arrangement. Share buy-backs are tax-neutral for the company buying back its shares. For taxation purposes, a payment made to a shareholder by the company for the share repurchase is often treated as a dividend and the amount assessable to the shareholder. Ref: Corporations Act Pt 2J.1; ITAA 1936 Pt III Div 16K and s 159GZZZN
(b) Exceptions A payment made to a shareholder for a share repurchase is not treated as a dividend if the funds used by the company for the share repurchase constituted a payment made from the company's capital account (ie not from the company's distributable profits). This exception only applies where the buy-back takes place on-market, (ie through the stock exchange, where the shareholder is unaware that the company is the purchaser of the shares and the vendor/shareholder is subject to capital gains tax (CGT) on the disposal). In this case, the capital proceeds include the total amount received. In the case of an off-market buy-back, the capital proceeds on disposal of the shares exclude the assessable dividend component of the buy-back price. For the purposes of the imputation system, if there is an on-market buy-back where there is no deemed dividend to the vendor/shareholder, the company is nevertheless treated as if it had
paid a dividend equal to the buy-back price, reduced by the sum of amounts drawn from its capital account for the buy-back. The company's franking account is debited accordingly. Ref: ITAA 1936 s 159GZZZR and 159GZZZP; ITAA 1997 s 205-30 item 9
(c) Anti-avoidance For off-market share buy-backs, the full buy-back price is treated as buy-back consideration for both income and capital gains tax purposes. However, to prevent double taxation, the amount of any resulting capital gain or income is reduced by any dividend component of the buy-back consideration which is either included in the assessable income or, where not included in the assessable income, paid out of profits (excluding revaluation reserve). Non-arm's length off-market share buy-backs are treated as having occurred at market value, to prevent the understatement of capital gains or the creation of capital losses. Ref: ITAA 1936 s 159GZZZQ(2) to (3)
¶AUS ¶1-170 LIQUIDATION (a) Paid-up capital A distribution of capital on liquidation of a company is normally treated as a return of capital and may give rise to a capital gains tax liability. Ref: Inland Revenue Commissioners v Burrell (1924) 2 KB 52
(b) Distributions of profits Distributions by a liquidator in the course of winding-up a company are deemed to be dividends, except where the company's income represents: • a capital gain derived on pre-CGT assets • that part of the exempt component of a gain represented by the active asset (small business) concession available, or • the replacement of a loss of paid-up share capital.
As such, a liquidator's distribution is taxable in the hands of recipients, subject to the above noted exceptions. Ref: ITAA 1936 s 47
(c) Exempt income A distribution made by a company out of exempt income is not exempt when paid to shareholders, either while the company is operating or during liquidation. (d) Parent company A distribution made by a company out of exempt income is not exempt when paid to shareholders, even if the shareholder is a parent company of the liquidated subsidiary and the entities are not part of a tax consolidated group. However, dividends deemed to arise on liquidation are frankable in the same manner as ordinary dividends. Where the parent company and the liquidated subsidiary form part of a tax consolidated group, no tax implications arise on return of paid-up capital and distribution of profits to the parent company. The tax attributes of these distributions retain their character in the event of a later liquidation of the parent (see AUS ¶1-140). (e) Foreign parent company In the case of a foreign parent company, payment out of profits, in the course of winding up the subsidiary, is liable to withholding tax as a dividend payment to the extent the dividend is not franked (see AUS ¶1-130). (f) Use of losses by a successor A parent company may use the losses of its subsidiary if the subsidiary is liquidated, but this is only allowed if the parent and subsidiary are members of the same consolidated tax group. If they are not part of the same consolidated tax group, the parent and subsidiary are effectively treated as separate entities for tax purposes. Ref: ITAA 1997 Div 701
¶AUS ¶1-180 COMPANY GROUPS
(a) Single entity principle Entities that form part of a wholly-owned group can elect to consolidate and be treated as a single entity for income tax purposes. Only Australian resident entities are recognised as members of a tax consolidated group. A foreign company cannot be recognised as either a head company or a subsidiary member of an Australian tax consolidated group. A consolidated group can exist between Australian companies wholly owned by the same foreign parent entity. This is known as a multiple entry consolidated group (MEC group). An MEC group is treated as a consolidated group for income tax purposes. It is, however, subject to certain modifications under ITAA 1997 Div 719. Ref: ATO Consolidation reference manual (download from www.ato.gov.au); ITAA 1997 s 703-15 and Div 719
In order to elect tax consolidation, the head company of a group must notify the Tax Office of its decision to consolidate by the time it lodges the group’s first consolidated income tax return or, if a return is not required, by the date it would otherwise be due. The head company or its tax agent can notify of the formation of a consolidated group online or by completing and lodging a “Notification of formation of an income tax consolidated group” form available at the ATO website, www.ato.gov.au. Alternatively the tax agent can notify of formation when lodging an income tax return via the electronic lodgment service (ELS). The choice by an Australian parent company to consolidate for tax purposes is irrevocable. Under the one-in all-in principle, all whollyowned subsidiaries and wholly-owned unit trusts become subsidiary members of the tax consolidated group. Two or more resident companies (and their wholly-owned resident subsidiaries) that are wholly-owned by the same ultimate foreign parent company may also choose to form a consolidated group and benefit from single entity treatment (ie multiple entry consolidation (MEC) group). Ref: ITAA 1997 Pt 3-90, Subdiv 104-L, s 703-50 and 703-15
As a result of tax consolidation, all intra-group transactions, such as the payment of dividends or the transfer of assets, are disregarded for
tax purposes. The single entity rule treats a consolidated group as a single entity for income tax purposes. As a single taxpayer, the consolidated group lodges a single annual tax return and pays consolidated income tax instalments. Eligible losses, franking credits and foreign tax credits of subsidiary members are transferred to the reporting entity on joining or forming a consolidated group, subject to satisfying certain tests discussed below. Losses, franking credits and foreign tax credits generated after consolidation are “pooled” under the single entity rule. Ref: TAA Sch 1 Subdiv 45-Q and 45-R; ITAA 1997 Subdiv 709-A
Losses transferred to a head company of a consolidated group or an MEC group by a joining entity that is insolvent at the joining time can be used by the head company in certain circumstances. The head company can choose to apply the loss to: • reduce the net forgiven amount under the commercial debt forgiveness rules • reduce the capital allowance adjustment under the limited recourse debt rules, or • reduce the capital gains that arises under CGT event L5 when the joining entity subsequently leaves the group. Ref: ITAA 1997 s 707-415
(b) Transfer and use of losses When an entity first becomes a member of a consolidated group (as either a subsidiary member or head company), any carry-forward losses that cannot be utilised in the period immediately prior to joining the group are tested to determine whether they can be transferred to the group. Any unutilised losses that fail the transfer tests are permanently lost. Under the transfer tests, losses incurred prior to joining/forming a tax consolidated group may be transferred into the tax consolidated group only in limited circumstances and require an annual recalculation of the amount available for recoupment. The transfer tests are a modified version of the loss utilisation tests (see
AUS ¶1-080). The use of losses transferred into the tax consolidated group by a subsidiary is generally restricted, with the intent that the losses are able to be used by the group at approximately the same rate that they would have been used by the subsidiary if it had remained outside the group. This is achieved by limiting the rate at which a head company can deduct or apply transferred losses by reference to their available fraction. The available fraction is the proportion that the subsidiary's market value (at the time of joining the group) bears to the value of the whole group (including the relevant subsidiary) at that time (see AUS ¶1-080). Ref: ITAA 1997 Subdiv 707-A and 707-C, Div 707; ATO Consolidation reference manual (download from www.ato.gov.au)
Developments In December 2010, the Government launched a discussion paper regarding the alleviation of certain tax consequences that apply when a consolidated group demerges. Under the proposals (which would be retroactively effective for mergers taking place after 9 November 2010), where a consolidated group demerges and the demerged entities form a new group, any capital gain arising where a demerged entity has net liabilities at the time that the demerger takes place will be discounted, and the tax costs of assets held by subsidiary members of the newly formed group will be retained. Submissions on the discussion paper closed on 28 January 2011. The submissions will be considered before legislation to enact this proposal is drafted. As of August 2013, no further progress has been reported. Ref: Assistant Treasurer’s media release No 021, 7 December 2010 (assistant.treasurer.gov.au)
(c) Resetting tax cost of assets on entry When an entity joins an existing consolidated group, the tax cost for capital gains tax, trading stock or depreciation purposes of each asset brought into the group is set at the asset's tax cost setting amount. The relevant tax cost setting amounts are worked out by allocating the consolidated group's cost for the joining entity to the joining entity's assets in proportion to their market value. The tax cost for so-called “retained cost base assets” remains unchanged on entering a tax consolidated group. A retained cost base asset includes Australian currency, debts owed to the entity and bank deposits and, in certain circumstances, trading stock. Goodwill is a reset cost base asset. As such, the act of consolidating may result in an increase in the tax cost of the company's goodwill or the tax depreciation base. Ref: ITAA 1997 s 705-20 to 705-55, 705-25 and 705-35(1); Taxation Ruling TR 2005/17
The process of resetting the tax cost of a subsidiary's assets on joining a consolidated group may give rise to a capital gain or loss to the group. When an Australian subsidiary is acquired, its latent tax liabilities are assumed by the head entity. Care should be taken to ensure all potential tax liabilities are identified prior to the acquisition of the subsidiary. It is not possible to step up the cost of the assets of the acquired Australian subsidiary. A step-up is only possible where a whollyowned Australian company is set up for the purpose of acquiring the target company and the Australian company and the newly acquired Australian subsidiary tax consolidate. (d) Exit rules Specific rules also apply when either shares in a subsidiary are sold or a tax consolidated group ceases to exist. When a subsidiary leaves a tax consolidated group (ie because it is no longer wholly-owned by the group), the head company is treated as having acquired the shares in the leaving company at a cost that
reflects the group's cost for the net assets of the leaving entity. This represents the terminating values for the assets taken by the leaving entity, less the liabilities taken by the leaving entity. Where the result is negative, the head company reports a capital gain equal to that amount. Based on the deemed cost of its membership interests in the leaving entity, the head company may realise a capital gain or capital loss on the disposal of those interests. On exiting a group, the capital assets of the leaving subsidiary are treated as having been acquired by the company at the time the head company originally acquired them. The leaving entity's franking account becomes active again, starting with a nil balance, and all losses and foreign tax credits remain in the head company. Ref: ITAA 1997 Div 711, s 711-5 and 104-520
(e) Liability to group tax In the absence of a tax sharing agreement (TSA), the head company and all subsidiaries are jointly and severally liable for the income tax debts of the consolidated group that are applicable to the period of consolidation. However, the tax law provides for recovery of income tax debts from subsidiary members in certain circumstances. The head company can enter into a TSA with one or more subsidiary members. On entering a valid TSA, each subsidiary party to the TSA is liable to pay an amount of tax equal to its contribution amount under the agreement. A subsidiary that is not party to a TSA may be liable for tax incurred by the consolidated group while it was a member of the group, even after the subsidiary has left the consolidated group. Ref: ITAA 1997 Div 721
¶AUS ¶1-185 VAT/GST (a) General information Australia introduced a goods and services tax (GST, which is equivalent to a value added tax (VAT)) from 1 July 2000. All states within Australia are subject to GST. The GST is administered by the ATO and principally governed by the A New Tax System (Goods and
Services Tax) Act 1999 (GST Act). Ref: GST Act Div 1
GST applies to taxable supplies and taxable importations. The following are GST-free: • medical and health services • education services • child care services • exports of goods • religious services • activities of charitable institutions • certain supplies made to health insurers • certain supplies made to operators of compulsory third party schemes, and • certain supplies made to Australian Government agencies. A taxpayer is entitled to input tax credits for creditable acquisitions and importations. GST and input tax credits offset one another for the net amount of tax due per period. Ref: GST Act Div 7 and 38
(b) Tax rates and special regulations A tax rate of 10% applies to the value of the taxable supply of most goods and services as well as to taxable importations. The value of taxable supplies must be expressed in Australian dollars. Ref: GST Act Div 9 and 13
Australia has specific regulations for financial supplies. Examples of financial supplies include: • debt or a right to credit
• an interest conferred under a public or private superannuation scheme • a mortgage over land or premises • a right under a contract of insurance or a guarantee • a right to receive a payment under a derivative, and • a right to future property. Specific regulations also exist for the following: • beverages supplied on a premises from a vending machine for consumption on the premises • food additives packaged and marketed for retail sale • food additives supplied for use solely or predominantly in the composition of food • medical aids and appliances including advanced wound care, communication aids for people with disabilities, continence, daily living for people with disabilities, hearing and speech, infusion systems, prostheses, mobility seating aids and walking aids, personal hygiene, respiratory appliances and stoma, and • export of goods by travellers as accompanied baggage. Ref: GST Regs Subdiv 38-A, 38-B, 38-E, 40-A and Sch 3
(c) Registration An entity must register for GST with the ATO if it carries on an enterprise and its GST turnover meets the registration turnover threshold. The registration turnover threshold for a profit enterprise is A$75,000 or higher (as specified in the regulations). The registration turnover threshold for a non-profit enterprise is A$150,000 or higher (as specified in the regulations). A taxpayer must register for GST within 21 days of being required to register. Registered entities receive
GST identification numbers known as the Australian Business Number (ABN). This number consists of 11 digits. A typical example of an ABN would be 55 666 777 888. The ABN is issued under the law referred to as A New Tax System (Australian Business Number) Act 1999. The penalty for failure to register for GST for non-residents or resident businesses is A$2,200. If an entity’s turnover falls below the relevant threshold, it may apply to cancel its GST registration. An entity must cancel its GST registration if it no longer carries on an enterprise. There is no requirement to appoint a special representative in Australia for GST purposes. Ref: GST Act Div 23 and 25; TAA Sch 1 s 288-40
(d) Returns, payment and penalties A company must file a GST return if it is required to be registered. It files quarterly tax returns and remits quarterly payments to the ATO for quarterly tax periods that end on 31 March, 30 June, 30 September or 31 December on or before the 21st day of the month following the end of that period. If the net amount of GST for a tax period is less than zero, the ATO must pay that amount to the company. The penalty for failing to lodge a document on time depends on whether the entity is small, medium or large. A large entity is liable to a penalty of A$550 for each 28 day period that the GST return is late, up to a maximum of A$2,750 or five periods. For a medium entity, the penalty is A$220 per 28 day period that the GST is late, up to a maximum of A$1,100 for five periods. For a small entity, the penalty is A$110 per 28 day period, up to a maximum of A$550 for five periods. The penalty for late payment of GST is called the general interest charge (GIC). The GIC is levied on the unpaid amount of GST for each day the amount is unpaid. The charge is applied from the beginning of the first day the amount was due for payment and ends at the end of the day on which the GST amount or the GIC is paid. There is no maximum amount at which the GIC is capped. The GIC will continue to accrue until the GST amount and GIC is paid in full. The GIC rate for July–September 2013 is 9.82%. Recent previous
rates were: • 9.95% for April–June 2013 • 10.24% for January–March 2013, and • 10.62% for October–December 2012. Ref: GST Act Div 27, 31, 33 and 35; TAA Sch 1 s 105-80 and 286-75
(e) Records and invoices GST records must be retained for at least five years from the completion of the transaction or acts to which it relates. Where records relate to any election, choice, estimate, determination or calculation, the records must be retained for five years from the time that the relevant election, etc, ceases to have effect. Where there is a delay in claiming input tax credits to a later GST period, the records must be retained for five years from the date the GST return in which the credits are claimed is lodged. The principal of an agency relationship must retain a record of the agency arrangement indefinitely. Non-profit entities that choose to treat identifiable branches as separate entities must keep records detailing elections, records of each branch for five years after the election is revoked. There is no specific requirement that records must be maintained in Australia. However, records should be available when requested by the ATO. Records must be kept in English or be readily accessible and easily convertible into English. Electronic forms of records are acceptable if these can be easily converted into English. Ref: TAA Sch 1 s 382-5
Specific invoicing requirements apply to all transactions. Within 28 days of making a supply, a supplier making a taxable supply must issue an invoice to the recipient. Tax invoices must be issued by the supplier; however, the recipient of the supply may issue a Recipient Created Tax Invoice in certain situations. A tax invoice must contain the ABN of the issuer and must set out the
price for the supply. If the consideration stated in the tax invoice exceeds A$1,000, the invoice must also contain the supplier’s ABN, show the name of the recipient, and the address or ABN of the recipient. If the invoice only relates to taxable supplies, the invoice may show either a statement that the price includes GST, or it may show the amount of the GST payable. In all other circumstances, it is necessary to show the GST amount separately. There are no specific invoicing requirements for intra-community transactions. Electronic tax invoices are accepted. Tax invoices must be in English and expressed in Australian dollars. Ref: GST Act Div 29
(f) Input tax credits Resident agents of non-residents conducting business in Australia are also liable for GST on taxable supplies or taxable importations and are also entitled to the input tax credit. If the non-resident is registered or required to be registered, it must register its agent. A non-resident need not file a GST return if its net amount for a tax period is zero and its only taxable supplies or taxable importations are made through a registered agent. If a non-resident company utilises an agent and makes a taxable supply, in addition to the agent issuing an invoice, the non-resident also must issue an invoice. Ref: GST Act Div 57
(g) Reverse charge rule The reverse charge rule applies to all types of supplies made by nonresident entities to Australian residents, provided the customer and the non-resident agree. If this is the case, the customer charges itself GST at 10% and also claims an input tax credit for the same amount. The purpose of this rule is to remove the requirement for the nonresident to register in Australia, in particular where the non-resident does not have a presence in Australia. The reverse charge rule also applies to supplies of anything other than goods or real property that are not connected with Australia, and where the recipient is registered and acquires the supply solely or
partly for the purpose of an enterprise that it carries on in Australia. The supply must not be acquired solely for a creditable purpose. This rule does not apply if the supply is connected with Australia. There are no special rules that relate to which supplies of goods and services fall under the reverse charge rule. The reverse charge rule can apply to all types of supplies, provided they satisfy the conditions for a reverse supply. Ref: GST Act Div 83 and 84
¶AUS ¶1-190 OTHER AUSTRALIAN TAXES (a) Withholding tax Tax must be withheld by the payer from the gross amount in respect of: • Interest: The scope of the withholding tax on interest covers a variety of payments which are commercially akin to interest (eg the interest component of hire purchase rental payments). The interest withholding tax rate of 10% is generally not reduced under Australia’s tax treaties. However, the UK treaty and US protocol provide for 0% interest withholding tax in certain limited circumstances (eg where interest is paid to a UK financial institution). Federal and state government bonds are exempt from interest withholding tax. Bonds (but not other debentures or debt interests) issued in Australia by federal, state or territory borrowing authorities are eligible for exemption from interest withholding tax, provided certain requirements are met. Ref: ITAA 1936 s 128F(5A) and (5B)
Developments The Government is proposing to phase down the interest withholding tax incurred by financial institutions (Australian
subsidiaries and Australian branches) when they pay interest to their overseas parents. The phase down will not apply to interest paid on non-resident retail deposits in Australia or offshore borrowings by non-financial institutions. The changes were originally intended to commence from the 2013/14 year, but on 23 November 2011, the Government announced that the proposed phase down is being deferred for commencement from the 2014/15 year. In May 2013, the Government re-announced this proposal as part of the 2013/14 Budget. As of August 2013, legislation to implement these changes has not yet been introduced. The current and proposed interest withholding tax rates and exemptions for financial institutions are listed in the table below: Type of borrowing
From Current 2014/15
Financial institution borrows from a foreign financial institution (where not exempt under a tax treaty)
5% Aspirational target of zero
Foreign bank branch borrows from overseas
head office Financial institution borrows from offshore retail deposits (proceeds used and traced to Australian operations)
5% Aspirational target of zero
Financial Exempt Exempt institution borrows through a publicly offered debenture issue, nonequity share or syndicated loan
Offshore Exempt Exempt banking unit borrows and on-lends offshore
Financial institution borrows from nonresident
retail deposits held in Australia Ref: Australia’s Future Tax System Review (http://taxreview.treasury.gov.au); Stronger, Fairer, Simpler — Fact Sheet: Phasing down the interest withholding tax on financial institutions to support banking competition (see www.futuretax.gov.au); Assistant Treasurer’s media release No 157, 23 November 2011 (assistant.treasurer.gov.au); Budget 2012/13, 8 May 2012; Budget 2013/14, 14 May 2013
• Royalties: The royalty withholding rate of 30% may be subject to reduction if the royalty payment is to a resident of a treaty country. • Dividends: The withholding tax of 30% on unfranked dividends may be reduced in the case of some treaty countries. Note, however, that fully-franked dividends are not subject to withholding tax. • Rental income: Rental income is taxable at the ordinary company tax rate of 30% and is thus not subject to withholding tax. • Managed investment trust income: Certain types of income (other than interest, dividends and royalties) distributed via a managed investment trust or intermediary to non-resident investors are subject to a special withholding tax, at the rate of 15%. (b) Stamp duties Stamp duty is a state or territory based tax levied at various rates on instruments (ie documents or contracts) which give effect to certain dutiable transactions. All Australian states and territories impose their own stamp duty regime, requiring the instruments that effect a dutiable transaction to be stamped by the respective government authority. Depending on the nature of the transaction, duty is charged at various
rates based on the nature of the transaction and the dutiable value of the transaction. Generally, stamp duty is payable by the transferee (ie purchaser) in the transaction. The following transactions are general examples of dutiable transactions which may attract stamp duty liability under the applicable state or territory stamp duty regime: • land transfers • creation of mortgages or further advances • registration or transfer of registration of motor vehicles • insurance • certain share transfers • transfers of landholder entities (eg companies/trusts with landholdings). There are differing stamp duty rates charged on the direct transfer of land, as opposed to the transfer of interests in an entity. Therefore, transfers of land-rich landholders (ie companies or trusts with significant land holdings) are subject to a higher rate of stamp duty. The key features of stamp duties can be summarised as follows: • documents liable to stamp duty must be duly stamped to be admissible as evidence in a court • share or land transfers must be stamped in order to be registered • failure to pay a stamp duty liability may incur penalty fines and interest, and • non-disclosure of information in relation to stamp duty obligations is, in certain instances, an offence. Of particular note is duty charged on the conveyance of property which, in the case of New South Wales, is ascertained by reference to
a rate scale, depending on the value of the property being transferred. When that value is A$1m, the stamp duty payable is A$40,490; above A$1m an additional amount of 5.5% of the excess over A$1m is payable. Certain exemptions are available in all Australian states for some corporate reconstructions, usually subject to a retention period for holding the transferred assets after the transaction. (c) Excise taxes The state and Commonwealth governments levy excise taxes on selected articles. Excise tax applies to cigarettes, alcoholic beverages (aside from wine, which is subject to the wine equalisation tax) and petroleum products manufactured in Australia. Examples of such products include diesel, petrol, aviation fuel, heating oil, kerosene, fuel ethanol, bio-diesel and crude oil. The rates of tax vary by type of product. From February 2011, alcohol product rates range from nil to A$72.46 per litre of alcohol; tobacco rates are A$0.33633 per stick or A$420.43 per kg of tobacco content where not in stick form; and petroleum product rates are generally A$0.38143, however some products are free of excise.
Developments The Government has proposed increasing the excise tax rate on tobacco by 12.5% on 1 December 2013, 1 September 2014, 1 September 2015 and 1 September 2016. These increases would be in addition to indexation increases. Ref: Joint Media Release of the Treasurer and Minister for Health, 1 August 2013
Excise and excise-equivalent customs duty applies to alternative fuels, including liquefied petroleum gas (LPG), liquefied natural gas (LNG) and compressed natural gas (CNG) used in transport.
Ref: Excise Tariff Act 1921
(d) Sales tax The sales tax levied by the Commonwealth Government was abolished on 1 July 2000 when the GST was introduced (see AUS ¶1185). (e) Production taxes or royalties Production taxes or royalties are payable to the state governments and Commonwealth Government on various classes of minerals and petroleum. The petroleum resource rent tax (PRRT) applies to all onshore and offshore oil and gas projects. PRRT does not apply to permits in the joint petroleum development area. Before 1 July 2012, PRRT did not apply to petroleum projects in onshore areas, or to those operating under production licences derived from the North West Shelf exploration permits WA-P-1 and WA-P-28. PRRT is assessed on either a project basis or in respect of a production licence area. It is applied to taxable profits derived from the recovery of all “marketable petroleum commodities” in a project and to profits from incidental products that were recovered, extracted or produced, including: • crude oil • shale oil • condensate • sales gas • natural gas • liquefied petroleum gas (LPG) • coal seam methane, and
• ethane. PRRT is levied on the taxable profits of a petroleum project at a rate of 40%. The tax point occurs when a marketable petroleum commodity or incidental product: • is in its final form for the purpose of being sold • is used as feedstock for conversion into another product, or • is consumed directly as energy, as applicable in the respective circumstances. A product cannot be a marketable petroleum commodity if it was produced from something that was itself a marketable petroleum commodity. Ref: Petroleum Resource Rent Tax Assessment Act 1987
From 1 July 2012, a minerals resource rent tax (MRRT) regime applies to all new and existing mining projects involved in mining iron ore and coal in Australia. The MRRT is applied on a project interest basis. A taxpayer has an interest in a project if they have a production licence and/or an entitlement to share in the output of a mining venture. The MRRT tax rate is 30%. However, this rate is reduced by a 25% extraction allowance making the effective tax rate 22.5%. The tax applies to the value of the resource when it is extracted. Operating and capital expenses incurred from 1 July 2012 are immediately deductible. Unused losses can be carried forward and uplifted. The regime also recognises past investments through an allowance, known as the starting base, which can either be: • the market value of the past investment, written down over a period of up to 25 years, or • the book value of past investment, written down over a five-year period.
The MRRT regime provides a full credit for royalties paid by a taxpayer for a mining project by way of royalty allowances. Mining companies with profits from qualifying projects of less than A$125m receive offsets which reduce taxable profits, even to zero in some cases. Ref: Minerals Resource Rent Tax Act 2012
(f) Land tax Land tax is levied by the state governments on the unimproved capital value of held land. Every year the Valuer General in each state determines the unimproved value for all land in that state. The unimproved value of land is the market value of the land under normal sales conditions, assuming that no structural improvements have been made to the property. Exceptions from land tax include cases where the land is held for primary production purposes and where the land is owned by a natural person as that person’s principal place of residence (up to a maximum unimproved value). Local governments levy land tax rates according to the annual rental value of the land concerned. (g) Payroll tax Payroll tax is imposed by state governments on taxable wages paid by employers. An employer is liable to payroll tax where the level of taxable wages exceeds a threshold level. The level is increased from time to time in line with inflation, but in most states is around 5.65% (only on payrolls exceeding the respective state’s threshold level). The Australian states and territories implemented new payroll nexus rules in 2010, with provisions that are uniform across all states and territories. The changes only affect wages paid or payable for persons providing their services in more than one jurisdiction in a month, or partly in more than one jurisdiction and partly overseas in a month. Where a worker provides their services wholly in one jurisdiction, as is the case for the majority of workers, payroll tax will continue to be paid to the jurisdiction where those services are performed. (h) Fringe benefits tax (FBT)
Fringe benefits tax (FBT) is a tax payable by employers on the taxable value of certain fringe benefits provided in respect of the employment of their employees or the associates of those employees. Employers are liable to pay FBT at the highest marginal tax rate for individuals (including the Medicare levy) on the taxable value of fringe benefits. However, the cost of providing these benefits, including the FBT paid with respect to the benefit, is deductible for income tax purposes. Ref: FBTAA s 6 and 136; ITAA 1997 s 8-1
The year for calculating and lodging a return for FBT is from 1 April to 31 March. The FBT rate for the year commencing 1 April 2013 is 46.5%.
Developments From 1 July 2014, the FBT rate will be increased from 46.5% to 47%. Ref: FBTAA s 6
Subject to various exemptions, some of the general fringe benefits which attract FBT include: • the provision of private car use to employees • the waiver of an employee’s debt to their employer • the provision of interest-free or low interest loans to employees • payment or reimbursement of employees’ expenses • the provision of free or below market value housing to employees • payments of certain living away from home allowances • free or below market value airline transport provided to airline and
travel industry employees • meals and associated travel or accommodation provided to employees • entertainment provided to employees • free or discounted car parking provided to employees, and • residual benefits (ie benefits not otherwise covered by the legislation). The taxable value of a fringe benefit depends on the type of benefit, whether the recipient makes any financial contribution to the employer, and whether the legislation provides any additional concessions. An employer’s FBT liability is calculated on the basis of the taxinclusive value of the fringe benefits provided in the year. The taxinclusive value of a benefit depends on whether the employer who provides the benefit is entitled to a GST input tax credit for the acquisition. In light of the different treatment of certain persons and benefits under the GST rules, an employer’s fringe benefits taxable amount is divided into two amounts, using two separate gross up calculations (see AUS ¶1-070(i)). Ref: FBTAA s 6
(i) Capital gains tax (CGT) CGT is levied at the ordinary corporate tax rate for companies and the applicable marginal rate for individuals (see AUS ¶1-060). (j) Superannuation guarantee levy Australian superannuation rules require employers to pay superannuation contributions for the benefit of their employees to a complying superannuation fund. A complying superannuation fund is one where the superannuation fund has elected to be regulated under the Superannuation Industry (Supervision) Act 1993. From 1 July 2013, regulated superannuation funds may also offer “MySuper”
products which aim to be simpler and more cost-effective products. It is compulsory for employers to pay superannuation contributions to the correct superannuation fund by the cut-off dates, for all eligible employees. The minimum contribution required as a percentage of employee payroll is 9.25% for the 2013/14 tax year. Previously, the rate had remained unchanged at 9% since 2003/04. Before 1 July 2013, employers were not required to pay superannuation contributions in respect of employees aged 70 years or older. This age limit has now been removed. The levy does not apply to individual salaries to the extent the quarterly earnings base amount exceeds A$48,040 (threshold for the 2013/14 year). This amount is indexed annually. Superannuation contributions paid for employees are usually tax deductible to the employer. If minimum required contributions are not made voluntarily, however, any shortfall is collected by the tax authorities and is nondeductible. Employers who have a superannuation guarantee shortfall are liable to pay a superannuation guarantee charge for the quarter, equivalent to the amount of the shortfall plus an interest component and an administrative charge. To avoid incurring a superannuation guarantee charge liability in a quarter, the superannuation guarantee contributions must be made within 28 days after the end of the quarter. Ref: Superannuation Industry (Supervision) Act 1993; Superannuation Guarantee Charge Act 1992; Superannuation Guarantee (Administration) Act 1992
Developments From 1 January 2014, employers will be required to use a fund offering a MySuper product, unless the employee requests contributions to be made to an alternative fund of their own choice. Ref: Superannuation Legislation Amendment (MySuper Core Provisions) Act 2012
The superannuation guarantee contribution will be increased as follows:
• to 9.5% from 2014/15 • to 10% from 2015/16 • to 10.5% from 2016/17 • to 11% from 2017/18 • to 11.5% from 2018/19, and • to 12% from 2019/2020 onwards. Ref: Superannuation Guarantee (Administration) Amendment Act 2012
International superannuation agreements Australia has entered into international agreements with a number of countries which address the issue of double superannuation coverage. Under the agreements, an employer and/or employee is generally exempt from the requirement to make superannuation (or equivalent) contributions in the country to which the employee has been temporarily sent, provided the employer and/or employee is required to make compulsory contributions under the law of their home country in respect of that employment. A certificate of coverage is required in order to obtain the exemption. Such certificates can be obtained from the revenue authority of the home country. Such agreements currently exist with the following countries: • Austria (signed February 2010) • Belgium (effective 1 July 2005) • Canada (effective 1 January 2003) • Chile (effective 1 July 2004) • Croatia (effective 1 July 2004)
• Cyprus (effective 1 January 1993) • Czech Republic (signed September 2009) • Denmark (effective 1 January 2001) • Finland (effective 1 July 2009) • Germany (effective 1 October 2008) • Greece (effective 1 October 2008) • Hungary (effective 1 October 2012) • Ireland (effective 1 January 2006) • Italy (effective 1 October 2000) • Japan (effective 1 January 2009) • Korea (effective 1 October 2008) • Macedonia (effective 1 April 2011) • Malta (effective 1 July 2005) • Netherlands (effective 1 April 2003) • New Zealand (effective 1 July 2002) • Norway (effective 1 January 2007) • Poland (effective 1 October 2010) • Portugal (effective 1 October 2002) • Slovak Republic (effective 1 January 2012) • Slovenia (effective 1 January 2004)
• Spain (effective 3 June 1991) • Switzerland (effective 1 January 2008) • United States (effective 1 October 2002). Further agreements with other countries are expected to be finalised in the future. Ref: Social Security (International Agreements) Act 1999
(k) Non-resident insurers of Australian risk There is no tax on insurance premiums in Australia. Non-resident insurers with no principal or branch office in Australia are taxed on a deemed taxable income equal to 10% of gross premiums, excluding life policy premiums, receivable in respect of their Australian business. Where the actual profit or loss on the Australian business is established to the Commissioner’s satisfaction, the taxable income or loss is calculated by reference to actual receipts and expenditure. Ref: ITAA 1936 Pt III Div 15
(l) Carbon pricing From 1 July 2012, a carbon levy applies to: • facilities whose emissions during the tax year are no less than the equivalent of 25,000 tonnes of carbon dioxide, and • large gas consuming facilities (ie where emissions during the tax year are attributable to the combustion of natural gas which is no less than the equivalent of 25,000 tonnes of carbon dioxide). The levy is A$24.15 per tonne of carbon emitted (A$23 per tonne before 1 July 2013). Emissions from agriculture, the land sector and from the combustion of biomass, biofuels and biogas are exempt. Ref: Clean Energy Act 2011
Developments The carbon levy will rise to A$25.40 per tonne of carbon emitted from 1 July 2014. From 1 July 2015, the levy will be determined by the market under an emissions trading scheme. However, the Government has since proposed moving to determining the levy by this method from 1 July 2014. If enacted, the current carbon levy increase to A$25.40 on 1 July 2014 will not go ahead. Ref: Clean Energy Act 2011; Prime Minister Announcement, 16 July 2013
¶AUS ¶1-200 SPECIAL INCENTIVES, GRANTS, ETC (a) Special incentives Special incentives exist in the form of tax deductions related to the capital invested in local manufacturing and scientific research operations. These incentives include reduced rates of payroll tax, low cost industrial land, access to low interest financing and the provision of government guarantees. In addition, various grants and tax rebates are available for the development of export markets (see AUS ¶1100). A taxation write-off is allowed for expenditure incurred in establishing new horticultural plantations. Investments in the Australian film industry may also qualify for concessional tax treatment (see AUS ¶1-100(g)). (b) Offshore banking units (OBUs) Income (excluding capital gains) derived by an offshore banking unit (OBU) from offshore banking activities is taxed at a preferred rate of 10%. The other income and capital gains of the OBU are taxed at normal company rates. OBUs may provide fund management services which allow nonresidents to invest in Australian assets. The maximum amount of the
investment portfolio which can be invested in Australian assets is set at 10% by value. Ref: ITAA 1936 Pt III Div 9A and s 121B(3)(a)
Developments The Government has proposed removing the preferred tax rate of 10% that is applicable to income derived by an OBU from offshore banking activities, if the income is received from • a related party, or • another OBU. Such income would be subject to tax at normal company rates. If enacted, the proposed change will be effective from 1 October 2013. A discussion paper containing this proposal was released for consultation in June 2013. The closing date for comments was 19 July 2013. Ref: Budget 2013/14, 14 May 2013; Discussion Paper: Improving the Offshore Banking Unit Regime, June 2013
(c) Regional headquarters (RHQs) To encourage multinationals to set up RHQ companies in Australia there are a variety of incentives, including: • streamlined immigration procedures • deductions in respect of set-up costs incurred no earlier than 12 months before, and no later than 12 months after, the date the RHQ company first derives assessable income in Australia from the provision of RHQ support
• deduction for certain relocation costs, and • limited payroll tax relief in some states.
Example 1 The Australian Treasury determines that a company is an RHQ company from 15 July 2006. The RHQ company first derives assessable income from the provision of RHQ support on 29 July 2006. The RHQ company can claim deductions for any set-up costs incurred from 29 July 2005 to 29 July 2007.
Example 2 Assume the same facts as in Example 1, except that an associated offshore company incurred set-up costs on behalf of the RHQ company on 1 April 2006 and the RHQ company reimburses the associated offshore company on 31 July 2006. The reimbursement is deductible, as it was incurred by the RHQ company during the required two-year period. However, if the associated company incurred set-up costs on behalf of the RHQ company on 1 April 2005, the reimbursement payment is not deductible, because it relates to costs incurred by the associated company more than 12 months before the RHQ first derived assessable income from the provision of RHQ support.
Ref: ITAA 1936 s 82C to 82CE
(d) Venture capital concessions Incentives apply to encourage foreign investment into the Australian venture capital market and to promote the development of the Australian venture capital industry by encouraging international venture capital managers to locate in Australia. The incentives involve the taxation of certain venture capital entities as “flow-through” vehicles, and a capital gains tax exemption for certain gains made by foreign residents on venture capital investments. For a venture capital limited partnership (VCLP) to be characterised as a flow-through vehicle (ie a partnership) it must be registered under P2 of the Venture Capital Act 2002.
As flow-through vehicles, limited partnerships used to invest in Australian venture capital companies are treated as ordinary partnerships. As a consequence, the income, profits, gains and losses of the partnership flow through to the partners, who are taxed according to their tax status. Capital gains derived by a VCLP are disregarded if both the VCLP (including its partners) and the investment itself satisfy a range of conditions including registration; the holding of the investment for at least 12 months; the investment is in an eligible venture capital investment, and the partners are from either Canada, France, Germany, Japan, the UK or the US. Ref: ITAA 1936 Pt III Div 5; ITAA 1997 Subdiv 118-F
(e) Research and development (R&D) A tax incentive relating to R&D expenditure is available to companies that are resident in Australia and to companies that are resident in a country that has a double tax treaty in place with Australia and that operate in Australia through a PE, as well as to public trading trusts having a corporate trustee. The R&D tax incentive has the following two main components: • a 45% refundable tax offset, equivalent to a deduction of 150%, to companies having a yearly turnover below A$20m, and • a 40% non-refundable tax offset, equivalent to a deduction of 133%, to companies having a yearly turnover of A$20m or more. Offsets that are not utilised in the current income year may be carried forward to subsequent income years. This incentive applies with respect to R&D expenditure incurred from 1 July 2011. Furthermore, a 100% deduction over 40 years is allowed for expenditure on R&D buildings. Ref: ITAA 1997 Div 43 and 355
The Government has proposed limiting the application of the R&D expenditure tax incentive to companies having a yearly turnover below A$20b. Therefore, the 40% non-refundable tax offset would apply to companies having a yearly turnover that is greater than A$20m but below A$20b. If enacted, the proposed changes will be effective retrospectively from 1 July 2013. As of August 2013, the Bill is progressing through Parliament. Ref: Tax Laws Amendment (2013 Measures No 4) Bill 2013
(f) Carry forward of unused credits A company cannot have excess tax offsets (unused credits) other than foreign tax credits and R&D tax offsets. A company receives franking credits (from the receipt of dividend income which has franking credits attached to it and uses the credits against the tax liability of the company). An excess franking credit can also be converted into a tax loss. There is no carry forward of excess foreign income tax offsets for use in a later year. However, an exception applies to excess foreign tax credits pertaining to the five years prior to 1 July 2008. These credits may be carried forward for a period of five years. Ref: ITAA 1997 Div 36, 63, 65, Subdiv 165-A, Div 770
(g) Temporary investment allowance (business tax break) The following temporary concessions were made available to businesses: • an additional tax deduction of 50% of the cost of eligible new depreciating assets for small business entities where the entity committed to investing in the asset between 13 December 2008 and 31 December 2009, and had it installed ready for use before 31 December 2010
• an additional tax deduction of 30% of the cost of eligible new depreciating assets acquired (or, alternatively, construction of the asset commences) after 13 December 2008 and before the end of June 2009 and installed ready for use by 30 June 2010, and • an additional tax deduction of 10% of the cost of eligible new depreciating assets acquired (or, alternatively, construction of the asset commences) after 13 December 2008 and before the end of June 2009 and installed ready for use after 30 June 2010. Broadly, to be eligible for the tax break, the following conditions were required to be satisfied: • assets must be tangible assets • assets must exceed an “expenditure threshold” (A$1,000 or A$10,000, depending on the size of the taxpayer’s business) • assets must otherwise be eligible for deduction under the core capital allowance provisions, ie eligible for Australian tax depreciation • assets must be installed ready for use by the specified dates (see above) • assets must be used in carrying on a business in Australia, and • improvements to existing assets will be eligible, provided the improvement expenditure exceeds the expenditure threshold. The tax break could be claimed as a tax deduction against income tax of the year in which the asset was first used or installed for use. Ref: ITAA 1997 Div 41
(h) Energy efficiency and climate change From 1 July 2012, a Carbon Farming Initiative (CFI) has been introduced to complement the carbon levy (see AUS ¶1-190(l)). The CFI allows those engaged in farming or forestry activities to earn carbon credits by storing carbon or by reducing greenhouse gas
emissions. Credits can then be sold to businesses wishing to offset their carbon emissions. Ref: Carbon Credits (Carbon Farming Initiative) Act 2011
¶AUS ¶1-210 FOREIGN EXCHANGE TRANSACTIONS (a) Basic rule An entity subject to Australian corporate tax is generally required to use the Australian dollar as its functional currency. Foreign currency gains and losses are generally brought to account as assessable income or allowable deductions on a realisation basis. This is to the extent such gains or losses are attributable to a fluctuation in a currency exchange rate, or to an agreed exchange rate differing from an actual exchange rate. The measures provide for a general translation rule which expresses all tax relevant amounts in Australian currency. The foreign exchange measures generally apply to the following five categories of foreign exchange events, subject to certain concessions discussed below: • disposal of foreign currency, or a right thereto • cessation of a right to receive foreign currency • cessation of an obligation to receive foreign currency • cessation of an obligation to pay foreign currency, and • cessation of a right to pay foreign currency. Ref: ITAA 1997 Div 775
In response to the broad range of financial instruments being introduced into the financial markets, the Australian Government introduced the final stages of its Taxation of Financial Arrangements (TOFA) Rules in 2008. Earlier amendments in relation to debt/equity rules and foreign currency gains and losses were undertaken in 2001 and 2003.
The final stages of the TOFA rules cover the timing treatment for financial arrangements, including elective tax timing and character hedging rules designed to minimise tax timing and character mismatches. The rules permit eligible taxpayers to elect to have financial arrangements taxed on a fair value or retranslation basis, or to rely on their financial reports for taxation purposes. Generally, the TOFA rules: • are not mandatory for individual and small business taxpayers • apply to: – approved deposit-taking institutions – securitisation vehicles, and – entities required to register under the Financial Services (Collection of Data) Act 2001, if their aggregated annual turnover is A$20m or more. The TOFA rules apply for income years commencing on or after 1 July 2010. However, taxpayers may elect to have the measures apply earlier, starting from 1 July 2009. Ref: Tax Laws Amendment (Taxation of Financial Arrangements) Act 2008; ITAA 1997 Div 230
(b) Capital assets Foreign currency gains or losses arising under a transaction for the acquisition or realisation of a capital asset are integrated into the gain or loss calculation applicable to the asset, provided the due date for payment is within 12 months of acquiring the asset or disposing of it for tax purposes. Ref: ITAA 1997 s 775-70 and 775-80
(c) Concessions Elective compliance cost relief is available for certain transactional bank accounts denominated in a foreign currency. A taxpayer makes a written election by completing an approved form. The election is
retained with the taxpayer’s records. The exemption applies to the low balance transaction account until it is withdrawn in writing. Under these concessions, taxpayers can make an election to disregard foreign currency gains and losses arising in respect of some low-balance transactional accounts (ie the A$250,000 limited balance election for qualifying foreign exchange amounts), or retranslate some transactional accounts on an annual basis (ie the retranslation election). Ref: ITAA 1997 Subdiv 775-D, s 775-70, 775-80 and 775-245
(d) Functional currency Taxpayers who keep their accounts solely or predominantly in a foreign currency can elect that foreign currency as their functional currency to work out their annual net income. This amount is then translated to Australian dollars. This rule applies to residents and nonresidents carrying on a business through a PE in Australia. A taxpayer may elect to use a foreign currency as its functional currency. The election should be kept with the taxpayers records and not sent to the ATO. Entities that can so elect are: • residents required to prepare financial reports under s 292 of the Corporations Act 2001 • residents carrying on a business through an overseas permanent establishment • non-residents carrying on a business through an Australian permanent establishment • offshore banking units • attributable taxpayers of a controlled foreign company (CFC), and • transferor trusts. An election is automatic and is only invalid if the entity does not satisfy
the above criteria. Ref: ITAA 1997 s 960-60
Developments In the May 2011 Budget, the Government announced that the range of entities allowed to use a functional currency will be extended to include certain trusts and partnerships keeping accounts solely or predominantly in a foreign currency. These entities will be able to calculate their net income by reference to that foreign currency. This measure will take effect from the date of assent of the amending legislation. As of August 2013, legislation to implement this measure has not yet been introduced. Ref: Budget 2011/12, Paper No 2, Part 1, p 23
(e) Combating money laundering Australia recently introduced anti-money laundering laws that cover the financial and gambling sectors, bullion dealers, lawyers and accountants (but only to the extent they provide financial services in direct competition with the financial sector) who provide designated services listed under the legislation. The obligations imposed on accountants and financial planners providing designated services in direct competition with the financial sector include: • initial verification of a client’s identity when accepting business related to a designated service • conducting ongoing risk-based customer due diligence throughout the business relationship • reporting suspicious matters and specified high-value transactions
to the Australian Transaction Reports and Analysis Centre (AUSTRAC) whenever reporting obligations are triggered • ensuring appropriate originator information is provided with domestic and international funds transfer instructions, and • keeping records of dealings with clients. Ref: Anti-Money Laundering and Counter-Terrorism Financing Act 2006
¶AUS ¶1-220 INTERCOMPANY PRICING (a) Basic rule The transfer pricing provisions are designed to ensure that transactions with foreign affiliates are carried out at arm’s length values for tax purposes (OECD transfer pricing guidelines apply). Specifically, the ATO has released a number of taxation rulings in which it sets out its interpretation of various transfer pricing methodologies and also indicates that it will refer to various OECD guidelines including, but not limited to, the “Report of the OECD Committee on Fiscal Affairs” (1979), “Transfer Pricing and Multinational Enterprises” (1979), and “Transfer Pricing and Multinational Activities, Three Taxation Issues” (1984). Ref: Taxation Rulings TR 92/11, TR 94/14, TR 98/11 and TR 1999/8
The provisions are specifically aimed at underpriced sales to foreign affiliates and overpriced purchases from foreign affiliates. Adjustments are made to equate these transactions to arm’s length prices for tax purposes. Companies operating in Australia, whether Australian or foreign owned, that engage in international transactions with related overseas entities, are required to disclose information about these transactions in their tax returns using a Schedule 25A Form (Overseas Transactions Information). In addition, the Tax Commissioner may use his or her powers in the issue of an offshore information notice (see AUS ¶1-260). Ref: ITAA 1936 Pt III Div 13
The ATO has issued guidance in regard to the application of transfer
pricing rules to certain intra-group transactions. The guidance specifically relates to intra-group transactions in the nature of finance guarantees and loans. The guidance aims to assist entities dealing with cross-border related parties in calculating an appropriate fee or price to charge where there is no market for arm’s length comparison. Ref: Discussion paper “Intra-group finance guarantees and loans: Application of Australia’s transfer pricing and thin capitalisation rules”, June 2008 (see www.ato.gov.au)
(b) Tax Commissioner’s powers Under the transfer pricing rules, the Tax Commissioner has the power to adjust consideration deemed to be received or given, to arm’s length prices. Transactions of all types are affected, including the purchase and sale of inventory, the provision of services and financial facilities such as the making of loans and the giving of guarantees. (c) International agreements The transfer pricing rules apply to international agreements where: • the taxpayer has supplied or acquired property (defined very broadly to include services) under an international agreement • the Tax Commissioner is satisfied that two or more parties involved were not dealing at arm’s length in relation to the supply, and • the consideration involved was not an arm’s length amount. (d) Valuation The Tax Commissioner ascertains the arm’s length value by reference to market value. Where no such reference is available, the arm’s length value is at the Commissioner’s discretion. For example, the Commissioner is able to reduce the cost of trading stock to an acceptable arm’s length price. Ref: ITAA 1936 s 136AD(4)
(e) Tax audits International transfer pricing and profit shifting is covered under the Australian Taxation Office (ATO) audit programme. In rare cases, the
mutual cooperation procedures of a tax treaty may be invoked, and a simultaneous audit may be undertaken in both Australia and a foreign jurisdiction. This procedure has been adopted with respect to both New Zealand and the United States. (f) Advance pricing arrangements (APAs) Taxpayers may apply to the ATO for an APA. An APA represents an arrangement between a taxpayer and a tax authority that establishes the transfer pricing methodology to be applied to specified future transactions. There is no time frame in which the APA procedure must be completed. APAs are negotiated in a cooperative environment in which the ATO and a business agree on a transfer pricing methodology that will result in an appropriate allocation of income and expenses between the related parties. An APA operates on a prospective basis to eliminate uncertainties surrounding cross-border transactions, agreements or arrangements between related parties, and allows for potential double taxation issues to be resolved. The information requirements of each APA depend on the individual facts and circumstances of the particular case to which the APA applies. Where an APA has been concluded with a taxpayer and the critical assumptions specified in the APA are met (see Taxation Ruling TR 95/23), apart from some checking to ensure that the terms of the APA have been implemented as originally agreed, there will be no further action in relation to the transactions covered by the APA. An APA can be concluded either bilaterally, which means it is binding on the ATO and the administration of another country, or unilaterally. A unilateral APA is concluded between the ATO and a business, but does not guarantee the agreement of the other jurisdiction’s tax administration. A concluded APA generally lasts for between three to five years and may be renewed on an ongoing basis. In 2003, the ATO and the tax authorities of Canada, Japan, the Netherlands and the US jointly developed a multilateral transfer pricing documentation package. Taxpayers who prepare transfer
pricing documentation in accordance with the package meet the requirements of all five countries and avoid the imposition of penalties. The package was last updated in June 2009. Ref: Taxation Rulings TR 98/11 para 4.10 and TR 95/23
(g) Transfer pricing documentation In the preparation of its annual income tax return, a company engaging in international transactions with related parties with an aggregate amount exceeding A$1m is required to complete a “Schedule 25A” which is a questionnaire of its related party dealings, the pricing methodologies adopted and the level of documentation the company has to support the methodologies adopted. It is then open to the ATO to question the responses provided by the company, including the submission of documentation. Ref: ITAA 1936 s 161 and 161A; TAA Sch 1 s 388-50; Taxation Ruling IT 2514; Company income tax return: Schedule 25A
With some exceptions, qualifying Australian entities are also required to complete a “thin capitalisation schedule” alongside Schedule 25A. Ref: ITAA 1997 Div 820
From the 2011/12 tax year onwards, certain entities must complete International Dealings Schedule (IDS) 2012, which replaced Schedule 25A and IDS-FS that applied in previous years. Taxpayers engaged in international transactions with related parties, where the aggregate amount exceeds A$2m, are required to complete Section A of IDS 2012 as well as the remainder of the form. Section A requires more information on a taxpayer’s related party dealings than previously required by Schedule 25A. IDS 2012 is available electronically, via the ATO website, and in paper form. The ATO has acknowledged an initial transitional year and has advised taxpayers to use their “best efforts” when completing IDS 2012 for the first time. Ref: International Dealings Schedule (IDS) 2012
(h) Business restructuring The ATO released a ruling in February 2011 setting out its finalised
transfer pricing view on business restructuring by multinational enterprises (MNEs). It considers situations where transfers occur between MNE members to implement changes in the MNE’s existing business arrangements or operations. Common examples are product supply chain restructurings involving conversion of a distributor into a sales agency arrangement or of a manufacturer into a provider of manufacturing services. The ruling applies both before and after the date of its issue. Ref: Taxation Ruling TR 2011/1
¶AUS ¶1-230 MIGRATION OF COMPANIES There are no provisions in Australian tax law for the prevention of companies transferring their residence outside Australia. The Foreign Investment Review Board controls the transference of an Australian business to a foreign entity. The foreign entity acquiring the business is, in normal circumstances, given permission to obtain the Australian business, but has to comply with certain conditions (eg a debt/equity ratio requirement). If a taxpayer ceases to be tax resident, there is a deemed disposal at market value of all the taxpayer's assets. This arises at the time of the change in residence. Taxable Australian property (eg business assets used in carrying on an Australian branch and Australian real property) owned by the taxpayer at that time are exempt from these rules. This may result in the crystallisation of significant capital gains tax liabilities at the time of ceasing residency (see AUS ¶1-060). Where a resident company ceases to be a resident, CGT Event I1 occurs. The effect of CGT Event I1 is to deem the non-resident company as having disposed of all their non-taxable Australian property prior to becoming a non-resident, such that a capital gain (or loss) is realised to the extent that the market value of the asset at the time of the event exceeds (is less than) the asset’s cost base (or reduced cost base). Ref: ITAA 1997 s 104-160
¶AUS ¶1-240 CORPORATE TAX FILING, PAYMENT & PENALTIES (a) Returns and assessment Australian business entities, including companies, work on a selfassessment system (ie they self-calculate their tax and take responsibility for the accuracy of their tax returns). Tax is collected in quarterly instalments. Company income tax returns are generally due by 15 December for the previous income year. The following types of returns must be lodged by the relevant entities: • companies, limited partnerships and branches of foreign companies — a company income tax return • discretionary trusts and unit trusts — a trust income tax return • sole proprietors — an individual income tax return • general partnerships — a partnership income tax return. The Australian Taxation Office (ATO) has an electronic lodgment service (ELS) which allows participating tax agents to lodge their clients’ tax returns and other tax forms with the ATO electronically over the internet. Forms that can be lodged electronically include individual, partnership, trust, company, superannuation fund, FBT and GST returns. The process for lodging a tax return is handled by the taxpayer’s tax agent. The Commissioner has the discretion to grant an extension of time for the lodgment of a taxpayer’s return in limited circumstances. To obtain an extension, the taxpayer must apply to the Commissioner. There is no prescribed extension request application form. However, the ATO Receivables Policy document provides guidance on the form and content of an extension request. In summary, the extension request should: • be made in writing
• state the reasons for the need for an extension • propose a deferred date for lodgment, and • give an assurance that future obligations will be met on time once the circumstances giving rise to the delay are resolved. A taxpayer must make the extension request before the return’s due date. Otherwise late lodgment penalties may apply. An extension of time to file does not also extend the time for the payment of tax. Ref: ITAA 1936 s 161A; TAA Sch 1 s 388-55; ATO Receivables Policy, which is contained in Practice Statement PS LA 2006/11
(b) Corporate tax Corporate tax is collected under a self-assessment system. Companies are required to calculate and remit their own tax by specified due dates. Under the self-assessment system, only limited information is required to be provided in income tax return forms. However, taxpayers are required to retain extensive reporting records. The company tax instalment due dates are as follows: Date for quarterly activity lodgers
Instalment rate* × instalment income** for September quarter
Instalment rate* × instalment income** for December quarter
Instalment rate* × instalment income** for March quarter
Instalment rate* × instalment income** for June quarter
Note: Final tax payments are due on the first day of the sixth month after the end of the income year. For companies that report and pay monthly, the due date is the 21st
day of the following month. If the due date is on a weekend or public holiday, the form can be lodged and paid on the next business day. A company may vary its instalment rate but is penalised if the instalment rate is underestimated by more than 15%. Companies with less than A$8,000 prior year’s tax may choose to pay an annual instalment, provided they satisfy other conditions which are generally prohibitive. A company may choose to pay instalments annually instead of quarterly if, at the end of the starting instalment quarter, the company: • has prior year tax of less than A$8,000 • is not a participant in a GST joint venture • is not part of an “instalment group” (being two or more companies of which one company, not being majority owned by any other company, has the majority interest in the other), or • the company is the head company of a tax consolidated group. Ref: TAA Sch 1 Subdiv 45-B, s 45-140 and 45-145; GST Act Div 51
Taxpayers with a substituted accounting period (SAP) SAP corporate taxpayers (see AUS ¶1-016(b)) must lodge their tax returns by the 15th day of the 7th month from the end of their SAP income year. Lodgment and payment due dates should be confirmed with the ATO lodgment program, but start from the 1st day of the 5th month from the SAP year end. (c) Withholding tax The responsibility for the payment of withholding tax remains with the resident payer (ie the company or individual paying interest, royalty or dividends to the non-resident). Withholding tax is usually deducted by the resident from the amount due to the non-resident and remitted to the Australian Taxation Office (ATO) directly by the payer within 21 days of the end of the month. Franked dividends paid to a nonresident entity are not subject to withholding tax (see AUS ¶1-140). A resident taxpayer holding funds due to a non-resident who derives
Australian source income or capital gains is deemed to be a nonresident’s agent. As a practical matter, the ATO does not require a deemed agent to retain sufficient funds for the payment of the nonresident’s tax (unless they notify the agent to do so). Failure to comply when so notified renders the agent liable for the payment of the tax. To ensure collection of withholding tax in respect of interest or royalty paid to a non-resident, the payer of the interest or royalty is precluded from obtaining a deduction for the payment until the withholding tax is paid. Ref: ITAA 1997 s 26-25
(d) Late payment interest and penalties The Commissioner of Taxation can impose fines and interest on a taxpayer due to: • a failure to pay by the due date (including a failure to pay electronically if required) • a failure to notify or lodge a tax return by the due date (including a failure to notify or lodge electronically if required) • a failure to register for PAYG withholding (if applicable) (see AUS ¶1-012(a)) • claiming excess credits or underestimating tax liabilities • making false or misleading statements, or • entering into schemes (see AUS ¶1-075(a)). Interest charges There are two types of interest penalties imposed by the ATO on taxpayers; the general interest charge (GIC) and the shortfall interest charge (SIC). Payments of tax not made by the due date attract a general interest charge (GIC). The GIC is calculated daily on a compounding basis and begins accruing from the due date of a tax liability. The GIC is
determined based on the monthly average yield of 90-day Bank Accepted Bills plus 7%. It may be applied via an automated batch process or manually by tax officers when they are actioning accounts. The GIC rate for July–September 2013 is 9.82%. Recent previous rates were: • 9.95% for April–June 2013 • 10.24% for January–March 2013, and • 10.62% for October–December 2012. Ref: www.ato.gov.au/taxprofessionals/content.aspx?doc=/content/2832.htm
The SIC is a common rate of interest which is applied across all liabilities administered by the ATO. A taxpayer may be subject to SIC interest on penalties if the self-assessed tax return contains a lower tax amount than that assessed by ATO. The SIC rate for July–September 2013 is 5.82%. Recent previous rates were: • 5.95% for April–June 2013 • 6.24% for January–March 2013, and • 6.62% for October–December 2012. Ref: www.ato.gov.au/content/65367.htm
The ATO has the authority to refund interest charges where it deems there are special circumstances making a refund fair and reasonable. For example, in relation to GIC, unforeseen circumstances that contributed to a late payment, such as a natural disaster or industrial action, can be taken into account upon application for remission. A request for remission must be made in writing, setting out the relevant circumstances. Ref: TAA Pt IIA, s 8AAA to 8AAH and Sch 1; ITAA 1936 s 163A
Standard penalties Taxpayers may also be liable to the “failure to lodge on time” penalty
(FTL) in respect of the late lodgment of income tax returns. The FTL penalty is calculated in penalty units, at present a single penalty unit is A$110. A penalty unit is levied every 28 days (or part thereof) that a document is late, up to a maximum of five penalty units. The penalty amount depends on the length of time past the due date and on the size of the taxpayer (small, medium or large). (A small entity is defined as having assessable income or annual turnover of up to A$1m; a medium-sized entity is one with income or annual turnover of between A$1m and A$20m; and a large entity is one with income or annual turnover in excess of A$20m.) Current penalty amounts are as follows: Small A$
28 days or less
29 to 56 days
57 to 84 days
85 to 112 days
113 days or more
Days late or not lodged
Ref: TAA Sch 1 Div 286; Crimes Act 1914 s 4AA
Instalment rate is used by the Tax Commissioner and is based on a company’s most recently lodged tax return by dividing tax over turnover. Tax and turnover are adjusted to exclude capital gains, if any.
Instalment income is a company’s turnover minus capital sales, if any.
¶AUS ¶1-250 ADVANCE RULINGS (a) Advance rulings The Tax Commissioner may give advance rulings on the tax effect of an actual or proposed transaction prior to its implementation. Both public and private rulings are binding on the Commissioner and no penalties are imposed on taxpayers acting in accordance with a private ruling or a generally published public ruling. Public rulings The public ruling system is intended to provide guidance in a general sense to all taxpayers by way of publishing the Commissioner’s opinion in respect of the broad application of certain tax laws, including: • income tax • Medicare levy • fringe benefits tax • franking tax • withholding taxes • petroleum resource rent tax, and • the administration or collection of the above taxes. A public ruling, once issued and in force, is binding on the Commissioner and can be relied on by taxpayers in applying the tax law. Private rulings A private ruling is the Commissioner’s answer to a taxpayer’s question regarding the operation of Australian tax law to a particular fact scenario. The private ruling contains a written response applying the law to the particular facts and circumstances of the applicant and can
be relied on by the taxpayer so far as the actual facts correspond to those disclosed in the ruling. To obtain a private ruling, a taxpayer must make a request in writing to the ATO using the appropriate form. The facts and circumstances should be included in sufficient detail to enable a ruling to be issued. A standard private ruling application form can be downloaded from the ATO website (www.ato.gov.au). There are no time restrictions for making a private ruling application. A taxpayer can object to a private ruling regarding: • income tax, fuel tax credit, product grants and benefits and fringe benefits tax (FBT) • withholding tax or mining withholding tax only where the tax has yet to become due and payable, or • an assessment that has yet to be issued in respect of the private ruling period. (Where an assessment has been issued, an objection must be made to the relevant assessment, not the private ruling). An objection must be made within 60 days of the issue of a private ruling. Ref: TAA s 14ZW, Sch 1 s 359-60
(b) Product rulings The Tax Commissioner may issue a product ruling (PR). These rulings allow the Commissioner to rule publicly on the availability of claimed tax benefits from products (ie arrangements in which a number of taxpayers individually enter into substantially the same transactions with other entities). The promoter of the product is usually responsible for obtaining a product ruling. The ruling ensures the eligibility of the deductions claimed by a taxpayer who is investing in the promoter's investment product. (c) Consents There are a number of specific transactions in respect of which advance clearances or consents may or must be obtained, including:
• a person in receipt or control of funds for and on behalf of a nonresident • the remission of funds overseas by a person paying a royalty to a non-resident taxpayer • the import or export of Australian or foreign cash in amounts of A$10,000 or more, for which a form must be completed and lodged with the Australian Transaction Reports and Analysis Centre (AUSTRAC), and • international transactions, agreements or arrangements between related parties or associates. An advanced pricing arrangement (APA) may be entered into between the taxpayer, the ATO and, where appropriate, a foreign tax authority regarding the income tax treatment of these international dealings. The APA establishes what transfer pricing methodology or methodologies that should be used to determine arm's length prices or results for future transactions (see AUS ¶1-220). Ref: TAA Sch 1 Div 358 and 359; Taxation Ruling TR 2006/10
¶AUS ¶1-260 TAX AUDIT The Tax Commissioner carries out tax audits on a random basis, designed to cover all taxpayers over a number of years. The statute of limitations on tax audits is generally four years. For individuals and certain small business taxpayers, this period is reduced to two years. In the event of fraud, the statute of limitations is unlimited. The statute begins to run from the time the Commissioner issues a Notice of Assessment to the taxpayer. Ref: Tax Laws Amendment (2010 Measures No 2) Act 2010
Tax audits may cover an entire tax year or tax audits may be limited to specific issues only. If a taxpayer is subject to a specific issue tax audit, the statute of limitations stays open for other tax issues in that tax year.
A taxpayer must retain any documents that are relevant for the purpose of ascertaining income and expenditures. A taxpayer must also retain documents containing particulars of any election, choice, estimate, determination or calculation made under the tax laws and, in the case of an estimate, determination or calculation, particulars showing the basis on which the estimate, determination or calculation was made. A taxpayer must retain documentation for a period of five years. An audited taxpayer is required to provide all requested tax returns and other information that may be requested to the taxation authority. Specific situations There are a number of specific foreign-related situations in which the taxation authority may examine books and accounts including: • inter-company pricing • international agreements • international non-arm’s length transactions, and • businesses carried on partly in and partly out of Australia. International Dealings Schedule (IDS) 2012 — transactions with related overseas entities The company tax return requires the completion of the IDS 2012 form (replacing the previously applicable Schedule 25A) if the company has engaged in transactions with related overseas entities. The Commissioner uses this information in focusing on transactions involving international tax avoidance. The IDS requires details of principal business activities, relative sizes of the business activities, the gross value and nature of international transactions with related entities, segregated into categories (eg services, tangible and intangible property, etc). For further information, see AUS ¶1-220(g). Offshore information notice
The Commissioner may issue a taxpayer with a 90-day offshore information notice requesting a taxpayer to furnish information and/or documents which the ATO has reason to believe are relevant to the assessment of the taxpayer. Failure to comply with the notice is not an offence, but the information or documents which the taxpayer fails to produce are not admissible in subsequent proceedings disputing the taxpayer’s assessment. Sanctions Tax administration sanctions include culpability penalties and shortfall interest charges. There are fines and possible imprisonment for noncompliance. Imprisonment can arise for specific non-compliance designated as a crime. The sanctions increase for fraud. The culpability penalty can potentially be levied at the legal maximum of 200% of the unpaid tax. Privileged data General Australian law recognises legal professional privilege between a client and their solicitor. This privilege is limited to advice provided by the solicitor to the client. Legal professional privilege does not apply to tax returns and supporting work papers, unless the work papers are advice provided by a solicitor. The ATO applies a limited form of privilege to advice provided by nonsolicitors. These advice documents are known as “restricted source documents”. The ATO has stated that as a general rule, it will not seek access to such documents where these are advice documents provided to the client. Ref: ITAA 1936 s 170 and 262A
¶AUS ¶1-270 TYPICAL CORPORATION TAX CALCULATION The following is a typical tax calculation for an Australian resident company with an accounting year to 30 June 2014: A$
Profit as per accounts
Add: Gross-up for A$70,000 fully franked dividend received
Vessel maintenance, entertainment expenses and club fees
Provision for depreciation
Less: Depreciation allowable
Less: Capital allowances as computed
Amounts actually incurred and charged to provision accounts
Corporation tax payable 30%
Less: Tax offset in respect of dividend received
Less: Instalments paid in advance NET TAX PAYABLE
See AUS ¶1-070, AUS ¶1-110 and AUS ¶1-130.
INBOUND INVESTMENT ¶AUS ¶2-010 EXCHANGE CONTROLS (a) Policy Exchange control policies are formulated by the Australian Government with the advice of the Reserve Bank and the Treasury. The Australian Transaction Reports and Analysis Centre (AUSTRAC) monitors cash transactions involving A$10,000 or more. Reporting of transactions out of Australia of A$10,000 or more are made to AUSTRAC. Reporting must occur within 10 business days after the day the transaction takes place. Anti-avoidance rules designed to counter schemes set up to come under the A$10,000 threshold also apply. Notice must be given to AUSTRAC within three days, and in some instances 24 hours, after the reporting entity (including the holder of an Australian financial services licence that provides designated services) suspects on reasonable grounds that a suspicious activity has occurred. Ref: AUSTRAC website: www.austrac.gov.au; FTRA; Anti-Money Laundering and CounterTerrorism Financing Act 2006; Anti-Money Laundering and Counter-Terrorism Financing (Transitional Provisions and Consequential Amendments) Act 2006
(b) Threshold cash transactions into and out of Australia Australian exchange regulations are concerned with the transmission of Australian funds into and out of Australia. At present, all cash transfers into and out of Australia of A$10,000 or more (or the foreign currency equivalent) must be reported. Ref: FTRA Pt II Div 1A
(c) Purchase of Australian businesses or property The acquisition of an Australian business, company shares or real estate by a foreign resident (ie natural person, corporation or other
foreign resident entity) is regulated by the Foreign Investment Review Board (FIRB). Subject to certain exemptions and monetary thresholds (discussed below), proposed acquisitions by foreign residents must be submitted to the FIRB for review. The FIRB’s role as regulator is to make recommendations to the Australian Government as to the suitability of the proposed acquisition, and to assess whether such investment may be contrary to the national interest. There are substantial penalties where individuals, companies and trusts proceed with such transactions in breach of the foreign investment laws. Breaches of the Foreign Acquisitions and Takeovers Act 1975 (FATA) are treated seriously and other government agencies may be advised of such breaches (including the Department of Immigration and Citizenship, the Australian Federal Police and the ATO). This may result in delays in visas being issued, further character assessment and an assessment of any tax payable. The FIRB can order a foreigner who has breached the law concerning investment to sell the investment. Penalties for individuals include fines of up to 500 penalty units and/or imprisonment not exceeding two years. For a corporation, the fine is up to 2,500 penalty units. A penalty unit is A$110 unless a state or national law states otherwise. For example, in the state of Victoria, a penalty unit is A$144.36 for the 2013/14 tax year. Ref: FIRB website: www.firb.gov.au; FATA; Foreign Acquisitions & Takeovers Regulations 1989; Foreign Takeovers (Notices) Regulations; Crimes Act 1914 s 4AA
Acquisition of urban real estate An acquisition of any interest in Australian urban real estate generally requires FIRB approval. There are certain exemptions to the approval requirement (see further below). Note that foreign investors are not permitted to buy “second-hand” (ie established) dwellings for investment purposes; however, temporary residents can buy such property to use as their residence in Australia, although approval must be sought. The approval process requires completion of a “section 26A notice” (as provided under FATA s 26A). Three forms are available under a
section 26A notice: • Form 3 (all non-residential property) • Form 4 (residential property being purchased by an individual), and • Form 5 (residential property being purchased by a company or trust). However, the section 26A notice is applicable only on condition that the interest in the property has not yet been acquired (eg under unconditional contract). If such interest has already been acquired, the purchaser is in breach of the FATA approval requirements and is required to submit an application for retrospective approval; again, separate forms are available for individual and company/trust purchasers. Retrospective approval applications must include a covering letter that explains the reason for having to make such application, along with a copy of the contract or agreement showing that it is conditional on FIRB approval. FIRB approval for development of commercial real estate is generally subject to two conditions: • that construction will be continuous, and commenced within five years of approval, and • that the highest of at least 50% of: (i) the land’s current market value, or (ii) the acquisition cost is to be spent on the development. In the case of applications that involve government-related entities, the applicant must refer to the “Guidelines for foreign government proposals”, which can be downloaded from the FIRB website. Application forms and statutory notices may also be found at the FIRB
website (www.firb.gov.au). Once the relevant form has been submitted, the application process can take up to 30 days; the FIRB may request further supporting documents in order to reach its decision. Until December 2008, developers were required to seek advance approval (pre-approval) to sell up to 50% of a new residential development to foreign persons. However, in light of the global financial crisis, this rule was relaxed, although pre-approval arrangements approved under the old D2 form continue to apply if they have been operating for some time. Current pre-approvals remain valid. Developers are advised to contact FIRB for specific advice. Ref: FATA; Foreign Acquisitions & Takeovers Regulations 1989; Foreign Takeovers (Notices) Regulations
Monetary thresholds The acquisition by a foreign investor of a business or real estate interest in Australia requires FIRB approval when the value of the Australian business or real estate exceeds certain monetary thresholds. Approval must be sought regardless of the monetary value of the investment in the case of: • vacant, non-residential land • residential real estate (subject to the exemptions listed on the FIRB website) • shares or units in Australian urban land corporations or trusts, and • foreign government direct investment, or foreign government proposals to establish a business in or acquire urban land in Australia. “Foreign government” includes any entity related to that government. For other acquisitions, the monetary threshold depends on the type of investment, and whether the applicant is a US or a non-US investor.
As at 1 January 2013, the thresholds are as follows: • For US investors: – where the interest is in a prescribed sensitive sector, and is in either (i) an Australian business, or (ii) an offshore company holding Australian assets or conducting business in Australia — A$248m – where the interest is not in a prescribed sensitive sector, and is in either (i) an Australian business, or (ii) an offshore company holding Australian assets or conducting business in Australia — A$1,078m – developed, non-residential commercial property — A$1,078m. • For non-US investors: – heritage-listed, developed, non-residential commercial property — A$5m – non-heritage listed, developed, non-residential commercial property — A$54m, and – an interest in either (i) an Australian business, or (ii) an offshore company holding Australian assets or conducting business in Australia — A$248m. An investment protocol was signed between Australia and New Zealand on 16 February 2011. When the protocol comes into effect, New Zealand investors will be subject to the same thresholds as for US investors. Ref: FIRB website (www.firb.gov.au); Protocol on investment to the Australia-New Zealand Closer Economic Relations Trade Agreement
Exemptions from the requirement to seek approval Under FATA, certain acquisitions do not require FIRB approval. Exemption applies where the investor:
• is an Australian citizen living abroad • has a spouse who is an Australian citizen and residential property is being purchased in both names as joint tenants • is a New Zealand citizen purchasing residential property • holds a permanent residence permit and is purchasing residential property • is purchasing a new dwelling from a developer, on condition the developer has pre-approval to sell the dwelling to foreign investors • is acquiring an interest in a time share scheme, so long as such interest does not exceed more than four weeks per year • is purchasing certain residential real estate in an integrated tourism resort • is acquiring an interest in developed commercial property, subject to monetary thresholds (see above) • is acquiring an interest in developed commercial property that is to be used immediately for industrial or non-residential commercial purposes • is acquiring the interest as ordered by a court, such as under a divorce settlement, or • is purchasing government property. (d) Secrecy Where tax avoidance or money laundering is involved, information gathered from AUSTRAC can be used as the basis for ATO or criminal proceedings. (e) Notification
Prior approval from the ATO or Australian Reserve Bank is not required for foreign currency or international transactions. Since the deregulation of Australian financial markets, the role of the regulatory bodies concerned with exchange control is to monitor transactions for signs of illegal activity or tax evasion.
¶AUS ¶2-020 TRADING IN AUSTRALIA (a) Liability to tax The scope of taxation for non-resident businesses is based on the source of income derived. Non-residents are subject to Australian taxation only on Australian source income. Non-residents are not liable to Australian tax on trading or business profits unless they are trading or doing business in Australia. This rule is subject to the operation of the relevant tax treaty. Ref: ITAA 1997 s 6-5
(b) Foreign resident withholding tax (FRW) FRW requires a payer to withhold amounts from certain payments made to foreign resident payees in respect of particular types of activities, and is part of the PAYG withholding system. FRW: payments for entertainment and sports activities Payments made to foreign residents in respect of entertainment or sporting activities are subject to FRW at the prescribed withholding tax rate. Entertainment activities include activities of a performing artist (eg acting, dancing, promotional or similar activities). Sports activities include activities of an individual athlete or sports team. The withholding tax rates for entertainment and sport activities are as follows: • if the payee is a company — 30% • if the payee is an individual — between 29% and 45% (depending on the level of ordinary taxable income). Payments made to foreign resident support staff working in the
entertainment industry may, subject to certain conditions, be exempt from withholding obligations. Foreign resident support staff are not subject to withholding where they: • are residents, for taxation purposes, of a country with which Australia has a tax treaty, and • are present in Australia for no more than 183 days in the financial year. The rate of withholding is nil as these payees will not have a tax liability in Australia. They are also not required to obtain a tax file number (TFN) or an Australian business number (ABN). For certain construction and related activities, the withholding rate is 5% on each payment under contract. Ref: Income Tax Rates Act s 23, Sch 7 Pt II; TAR reg 44B, Div 6; Legislative Instrument “Variation to the rate of withholding for certain foreign resident staff that provide support to those engaged in entertainment activities”; TAA Sch 1 s 12-315
FRW: payments for construction and related activities Payments made to foreign residents in respect of construction activities are subject to FRW at the prescribed withholding tax rate. The withholding rate for certain construction and related activities is 5% of each payment under contract. Payers are required to withhold amounts from payments made to foreign residents for the following types of activities: • construction works, including installation, upgrading of building, plants and fixtures, and • related activities, including administration, assembly, engineering, project management, etc. Ref: Income Tax Rates Act s 23, Sch 7 Pt II; TAA Sch 1 s 12-315; TAR Div 6
FRW: payments for casino gaming junket activities Payments made to foreign residents (individuals or entities) that arrange for foreign gamblers to come to Australia for the purpose of
gaming at casinos are subject to FRW at the prescribed withholding rate. The withholding rate for gaming junkets (gaming travel packages) is 3% of the total payment. These individuals or entities are generally known as casino gaming junket operators. They receive payments, incentives and non-cash benefits as a reward for bringing people to a casino to gamble. Such activities may include: • contracting with casinos • contracting with players • recording player gambling statistics • credit and debt management • casino settlement and liaison • providing customer liaison services (eg translating and interpreting), and • associated services (eg arranging hotel accommodation, transportation, entertainment and other forms of endearment). Ref: Income Tax Rates Act s 23; TAA Sch 1 s 12-315; TAR reg 44C, Div 6
(c) Trading defined A non-resident is not considered to have commenced trading until: • a contract of sale is concluded • manufacturing has commenced, or • services are performed in Australia. Ref: Common law defining the phrase “carrying on a business”: Martin v FCT (1952) 90 CLR 470; Ferguson v FCT 79 ATC 4261; Colonial Mutual Life Assurance Society v FCT (1946) 73 CLR 604
(d) Tax treaties
The terms of a tax treaty between Australia and the non-resident’s country of residence specify that non-residents are liable to Australian tax only if they have an Australian branch, PE or dependent agent with power to conclude contracts. Ref: Typically located in Art 7 (Business Profits) of Australia’s tax treaties
(e) Mining and exploration in Australia Special tax concessions are available to taxpayers engaged in mining (including petroleum mining) and quarrying operations for the following types of expenditure. Exploration or prospecting expenditure Expenditure on exploration or prospecting for minerals (including petroleum) or quarry materials obtainable by mining or quarrying operations are deductible in the year in which it is incurred. The mining property may be located in or outside Australia. Exploration or prospecting expenditure is deductible from income derived from any source. Examples of deductible expenditure include transport, materials, labour, administrative costs (office rental, salaries of office staff, etc) incurred in carrying out exploration or prospecting activities. Pooled project expenditure incurred in the working of mine sites, petroleum fields and quarries Certain project expenditure not related to a depreciating asset and not otherwise deductible may be deductible over the estimated life of the project at an accelerated rate of 150%. This deduction is not limited to mining projects. The types of expenditure deductible as pooled project expenditure includes mining capital expenditure and transport capital expenditure that are directly connected with carrying on the mining operations. Infrastructure expenditure directly connected with a project is also deductible. Examples of eligible expenditure includes: • expenditure on site preparation, buildings and improvements • cost of feasibility studies and environmental assessments for the
project • buildings used in operating or maintaining a treatment plant, and • buildings or other facilities for storage. Expenditure incurred in rehabilitating former mine sites, petroleum fields and quarries Current and capital expenditure incurred on rehabilitation of sites (Australian and foreign) used by the taxpayer for mining, quarrying or petroleum operations or ancillary activities (eg preparing a site for mining, quarrying or petroleum operations, providing infrastructure for such a site, treating minerals or quarry materials, storing minerals and quarry materials, and liquefying natural gas) are currently deductible. Payments of petroleum resource rent tax Payments of petroleum resource rent tax are deductible in the year in which they are paid. Petroleum resource rent tax is imposed in respect of offshore petroleum projects (see AUS ¶1-190(e)). These deductions are in addition to the deductions allowable for general operating expenses and for the depreciation of assets including mining, quarrying or prospecting rights or information. An exemption from capital gains tax applies in certain circumstances to the sale of mining rights over an area in Australia. The exemption applies where rights are sold by a bona fide prospector and the rights relate to mining for gold and other prescribed metals and minerals. Ref: Exploration or prospecting – ITAA 1997 s 40-730; Pooled project expenditure – ITAA 1997 s 40-840; Expenditure incurred in rehabilitating former sites – ITAA 1997 s 40-735; Payment of petroleum resources rent tax – ITAA 1997 s 118-12
Mineral resource rent tax A mineral resource rent tax (MRRT) applies with effect from 1 July 2012 in relation to mined iron ore and coal (see AUS ¶1-190(e) for more information).
¶AUS ¶2-030 AUSTRALIAN BRANCH
(a) Calculating taxable trading profits An Australian branch's taxable trading profits are calculated on the same basis as an Australian resident company. Under the business profits articles of most tax treaties, the profits of an enterprise of one country may be taxed in the other country only if the enterprise carries on business in that other country through a PE, and only to the extent that the profits are attributable to the PE. Accordingly, capital profits derived by the branch in Australia are taxable in the normal manner (see AUS ¶1-060). Ref: Typically located in Art 7 (Business Profits) of Australia’s tax treaties
(b) Branch profits tax There is no branch profits tax. (c) Branch in receipt of dividends Dividends paid by an Australian company to an Australian branch of a non-resident company are taxed on a net assessment basis, instead of being subject to withholding tax. Consequently, the dividends are included in the non-resident's assessable income, and relevant expenses are allowed as deductions against the non-resident's assessable income. Ref: Typically located in Art 10(4) (Dividends) of Australia’s tax treaties; ITAA 1936 s 128B(3E)
(d) Tax treaties The amounts of tax may be affected by the provisions of a tax treaty to which Australia is a party. (e) Withholding tax Consistent with dividends paid to non-residents generally, dividends paid out of taxed income do not attract further tax in the hands of a branch, but dividends paid out of tax-preferred income attract dividend withholding tax (see AUS ¶1-005). Ref: Typically located in Art 7 (Business Profits) of Australia’s tax treaties
(f) Taxed branch profits The remittance of taxed branch profits out of Australia is free of
exchange control restrictions and withholding taxes. (g) Head office charges Head office charges to an Australian branch are generally not tax deductible to the Australian branch, as the branch and the head office are both part of the same entity and not separate entities. However, direct costs attributable to the operation of the branch and a reasonable apportionment of general operating overheads are deductible. Ref: ITAA 1936 Div 13; Taxation Ruling TR 2001/11
(h) Branch capital gains For CGT purposes, all CGT assets used at any time in carrying on a business in Australia through a PE are “taxable Australian property” for CGT purposes. Therefore, CGT events that happen to the business assets used in carrying on that PE's business may give rise to a taxable capital gain or capital loss. There is a reduction in the capital gain or loss where the asset is used in the business of the PE for only part of the time that the foreign resident owned the asset (see AUS ¶1-060). Ref: ITAA 1997 s 855-15 and 855-35
¶AUS ¶2-040 AUSTRALIAN ADMINISTRATION OR LIAISON OFFICE Australia is a strategic location for South Pacific operations and many non-Australian businesses wish to establish an administrative or liaison presence here. Foreign banking units are not subject to withholding tax in respect of certain foreign transactions. Interest withholding tax is not payable in respect of interest paid by an offshore banking unit (OBU) in respect of an offshore borrowing. Administrative or liaison activities carried out in Australia do not cause the administered non-Australian companies to be taxed as an Australian resident, provided crucial board-level type decisions are not made in Australia. Similarly, such activities do not cause the nonAustralian companies to be taxed as trading in Australia, provided the
Australian office does not engage in any type of trading in Australia (see AUS ¶1-010 and AUS ¶2-020). Most of Australia's tax treaties provide that an Australian office used for buying goods, collecting information or advertising products does not constitute an Australian taxable branch of the overseas entity which it represents in Australia. Ref: ITAA 1936 s 6(1) definition of “resident”, 128GB(2); ITAA 1997 s 6-5(3)
¶AUS ¶2-050 OTHER AUSTRALIAN SOURCE INCOME OF NON-RESIDENTS (a) Interest Interest paid to a non-resident is subject to withholding tax at source, which is deducted at the prescribed withholding tax rate of 10%. For Australian financial institutions that borrow from their overseas parents, the interest withholding tax rate will gradually be phased down (see AUS ¶1-190(a)). The following interest payments are exempt from Australian withholding tax: • interest derived by a non-resident carrying on business in Australia at or through a branch • interest on certain publicly offered debentures • interest paid to certain foreign tax-exempt entities • interest paid to certain offshore testamentary charitable trusts established before 1 July 1997 • certain interest derived by a trust estate where the trustee is liable to be assessed in Australia • interest paid in relation to infrastructure borrowings • interest derived by a non-resident foreign superannuation fund exempt in the country where the fund resides
• a non-share dividend to the extent to which an amount is a return on an equity interest, and • interest paid by temporary residents on or after 6 April 2006. Ref: ITAA 1936 s 128B(2); ITAA 1997 s 768-980
(b) Royalties Withholding tax on royalties paid to non-residents is deducted at source at the royalty withholding tax rate of 30% (may be reduced by the relevant tax treaty royalty withholding tax limiting rate (see AUS ¶1-005)). The term “royalty” is broadly defined in the Australian tax legislation. In the Tax Commissioner’s view, the distinction between royalties and service payments is that a payment for use of some preexisting product (ie knowledge, information, technique, formula, process, plan, etc) is treated as a royalty. By contrast, a contract for services involves a contractor creating some new “product” which is generally owned by the buyer of the services. Ref: ITAA 1936 s 128B(2B); Income Tax Ruling IT 2660
Royalty withholding tax applies to rental payments made to nonresidents under certain arrangements involving cross-border leasing. Non-treaty countries A payment a non-resident head lessor receives from leasing substantial equipment to the sublessor is subject to royalty withholding tax if the sublessor is carrying on business at or through a permanent establishment (PE). This is not the case if the lease contracts between the sublessor and sublessee are entered into outside Australia and no other activities, apart from the receipt of lease rentals, are conducted by the sublessor in Australia. However, if the sublessor carries on business activities, such as undertaking maintenance checks or conducting lease negotiations in Australia at or through a PE, then the sublessor is carrying on business at or through the PE with the effect that the payment it makes to the head lessor is subject to royalty withholding tax. Treaty countries
Where the non-resident head lessor is a resident of the US, the UK or Norway for tax treaty purposes, it is not liable for royalty withholding tax because the payment is not a royalty for the purposes of the definition of “royalty” in these treaties. A non-resident head lessor is also not liable for royalty withholding tax where, under one of Australia’s tax treaties, the non-resident head lessor itself has a PE in Australia to which the lease payments are effectively connected. Tax on an assessment basis applies where the non-resident head lessor itself has a PE in Australia to which the lease payments are effectively connected. The crediting or capitalising of a royalty is also treated as a payment. A royalty is treated as paid at the time when the debt owed for the royalties is satisfied, discharged or otherwise deemed to have been paid. Payment may occur by an agreed set-off, by a transfer in kind, or by an agreement between the parties whereby royalties are credited to a payee, but retained by the payer as a loan. A payment is deemed to occur whenever money due to a non-resident is dealt with on behalf of the non-resident or as the non-resident directs. Ref: ITAA 1936 s 128B(2B); Taxation Ruling TR 2007/11
Exempt royalties The following royalties are exempt from Australian royalty withholding tax: • royalties paid to tax-exempt foreign entities • royalties paid to certain offshore testamentary charitable trusts established before 1 July 1997, and • certain royalties derived by a trust estate where the trustee is liable to be assessed. In 2008, the Australian Tax Office (ATO) clarified the Australian withholding tax treatment of licensing and assigning copyrights. The definition of a “royalty”, under Australia’s current tax treaties includes a payment for the “use, or right to use” copyright. This restricted definition created scope for an “assignment” of a copyright to avoid
withholding tax exposure. However, under the ATO’s view: “All amounts paid as consideration for an assignment of copyright are royalties under the standard tax treaty definition of that term unless the assignment is properly characterised as an outright sale of the copyright.” Ref: Taxation Ruling TR 2008/7
(c) Unfranked dividends Dividend withholding tax is deducted at source at the prescribed rate of 30% (may be reduced by the relevant tax treaty dividend withholding tax limiting rate). It is imposed on unfranked dividends received directly or indirectly from a resident company by a nonresident. Dividends paid to residents of countries with which Australia has a tax treaty have the applicable withholding rate limited under the terms of the treaty (see AUS ¶1-005). Withholding tax is imposed without allowance for deductions against the gross dividend. It does not matter whether the non-resident has other income subject to Australian tax by the ordinary assessment process. Ref: ITAA 1936 s 128B(2B)
(d) Rents Rental income received from Australian real property is treated as ordinary assessable income and taxed at the normal rates net of any expenditure incurred (eg depreciation and interest). (e) Managed investment trust distributions Australian managed investment trusts (MITs) are subject to a simplified withholding regime with respect to distributions to nonresident investors. The MIT withholding tax requires trustees of MITs to withhold tax from certain types of “fund payments” distributed to non-residents. In the case where the MIT distribution is made indirectly through an intermediary, it is the intermediary (not the MIT) who is obliged to withhold the appropriate amount. The regime generally imposes a withholding tax of 30% on distributions from managed funds to non-residents. This is irrespective of the tax status
of the non-resident recipient. Ref: ITAA 1997 Div 840
In June 2008, changes were announced which reduced the level of withholding tax on certain distributions from MITs to foreign resident investors. The withholding tax rate applicable from the 2012/13 income year is 15%. The rate was 7.5% in the 2010/11 and 2011/12 tax years. The precise nature of this withholding tax regime will, however, depend on whether the foreign investor is resident in a jurisdiction with which Australia has effective exchange of information agreements on tax matters. It should be noted that a reduced withholding tax rate of 10% applies to income received by foreign residents from MITs that hold an energy-efficient office building, hotel or shopping centre whose construction began on or after 1 July 2012. The reduced rate only applies to payments made to residents of a country with which Australia has tax information exchange provisions. Ref: TAA Sch 1 Subdiv 12-H
Effective from 3 June 2010, eligible Australian MITs are able to make an irrevocable election to apply the capital gains tax provisions for the taxation of gains and losses on disposal of certain assets held under the MIT. The relevant legislation also clarifies that distributions on and disposals of “carried interest” units in an MIT are treated on revenue account. Ref: ITAA 1997 Div 275
With effect from July 2010, the definition of an MIT was amended to broaden the range of trusts eligible to apply the reduced withholding rates and capital account election MIT concessions. Under the broadened definition: • the MIT assets must be substantially managed in Australia • the MIT can operate at a retail or a wholesale level • qualified investors in an MIT can include an expanded range of collective investment vehicles (eg superannuation fund, etc), and
• closely held trusts (with concentrated ownership) are ineligible to be an MIT. Ref: Tax Laws Amendment (2010 Measures No 3) Act 2010
Developments A new taxation system for MITs is to be introduced from 1 July 2014. The key aspects of the new tax system will be: • an elective attribution system of taxation where investors will be taxed only on income that the trustee allocates to them on a fair and reasonable basis, consistent with their rights under the trust deed • ability to deal with “under” or “over” distributions within a 5% cap so that trusts are not required to reissue distribution statements and investors are not required to revisit tax returns • removal of double taxation that can arise in certain circumstances, and • the repeal of Div 6B of the Income Tax Assessment Act 1936, which will mean that if a public unit trust complies with Australia’s eligible investment business rules, it will be subject to the trust taxation rules, and not to corporate taxation. Division 6B was introduced in 1981 to discourage the reorganisation of companies involving the transfer of assets or businesses into a resident public unit trust in which the shareholders would take equity in order to avoid continued company tax and shareholder treatment and to attract trust tax treatment instead. The Government originally intended to implement the changes from 1 July 2012 and subsequently deferred this date to 1 July 2013. However, in July 2012 the Government announced its
intention to defer this start date further to 1 July 2014. It is possible there will be further amendments to this date. As of August 2013, no further progress has been reported. Ref: The Tax Laws Amendment (2010 Measures No 1) Act 2010 Sch 3; Treasurer’s media release No 148, 29 November 2011 (treasurer.gov.au); Assistant Treasurer’s media release No 080, 30 July 2012 (assistant.treasurer.gov.au)
(f) Other source income Should the non-Australian company have other Australian source income arising that is effectively connected with a trade or business carried on through a PE in Australia, royalties and interest are generally taxed as trading profits rather than being subject to withholding tax. Ref: Various tax treaties, ITAA 1936 Pt III Div 11A
(g) Remittances of taxed income The remittance of a branch’s income, as it has already been subject to Australian taxation, is not regarded as dividends and is not subject to any further tax or withholding. Ref: ITAA 1936 Pt III Div 11A
(h) Tax file number (TFN) Under the TFN system, both residents and non-residents are required to quote a TFN with respect to certain Australian investments, outlined below. Failure to do so results in tax being withheld at the highest marginal rates applicable to resident individuals on income paid from those investments. The TFN does not need to be quoted for dividend and interest income paid to non-residents if such payments are subject to withholding tax. Non-residents receiving fully franked dividends from public companies (ie dividends which are not subject to withholding tax) are deemed to have quoted a TFN. Obtaining a TFN
A TFN is available to all entities and individuals. For entities and individuals who have previously lodged an Australian income tax return, the TFN is the number allocated to them from the Australian Tax Office (ATO) and is printed on any notices of assessment issued. Individuals may apply for a new TFN to any Australian Post Office or the ATO. Entities may only apply for a TFN to the ATO. Investments for which a TFN is required Non-residents investing in Australia need to be aware of the above requirements and the need to obtain a TFN for certain types of investments and income. Listed below are some of the investments for which a TFN must be quoted by a non-resident, unless the nonresident comes within the exemption for withholding tax discussed above: • new and existing bank, building society or credit union accounts • investments with companies, Commonwealth and state, and territory government and semi-government agencies • investments through solicitors’ trust funds • purchase of shares in public companies where unfranked dividends may be paid, and • investments in unit trusts and cash management or property trusts. In many cases, there is provision for quoting the number only once with the investing institution, without the need to quote the number on every transaction. A person may quote their TFN to an investing institution when they become an investor. Once this quotation has been given, there is no further requirement to quote their TFN again. In the case of investment in shares in public companies, if the public company has not informed the investor that the company has lost the investor’s TFN, the person is taken to have quoted their TFN in respect of the investment. Ref: ITAA 1936 Pt VA Div 4, s 202DB(1) and s 202DD
Use of TFNs by superannuation fund trustees and RSA providers Under a legislative measure which came into force on 1 July 2011, superannuation fund trustees and retirement savings account (RSA) providers are allowed to make greater use of TFNs. This measure removes the former requirement for fund trustees and RSA providers to use other methods of identification to locate accounts before TFNs can be used. It also allows them to facilitate the consolidation of multiple member accounts with effect from 1 January 2012, unless proclaimed earlier. Ref: Tax Laws Amendment (2011 Measures No 2) Act 2011 Sch 3
(i) Dual-resident companies Australian companies that are resident for Australian tax purposes, but non-resident under a tax treaty are deemed to be non-resident for the purposes of certain tax concessionary measures, such as capital gains rollovers. Ref: ITAA 1936 s 6(1)
(j) Anti-avoidance Certain measures extend the scope of withholding tax on royalties, bonus shares issued from revaluation of reserves and payments via interposed tax-exempt bodies. Restrictions are also placed on the ability of charitable trusts to make distributions to overseas organisations that do not meet strict criteria. The anti-avoidance measures that apply to extend the scope of withholding tax on royalties operate by extending the definition of royalty. The ordinary meaning of royalty includes items such as a payment to a land owner by the lessee of a mine, a payment to the owner of patent for the use of it, and a payment to an author, editor or composer for each copy of a book, piece of music, etc, sold by a publisher or for the representation of a play. The tax law extends the meaning of royalty. Examples of payments that are included as royalties for tax purposes include payments for the right to use any copyright, patent, design or model, the use of any industrial, commercial or scientific equipment, supply of knowledge, right to use motion picture films, films or video tapes for use in
connection with television, or tapes for use in connection with radio broadcasting. Charitable trusts A charitable trust must be physically present in Australia and must pursue its objects and incur its expenditure principally in Australia. A charitable trust that fails to do this risks losing its tax exempt status. Furthermore, as a legal principle in Australia, charitable trusts are prevented from making distributions. A charitable trust must constantly monitor its activities and expenditures, as it risks losing its tax exempt status at any time. Ref: ITAA 1936 s 6(1), 128AF and 128B(2C); ITAA 1997 Div 50
¶AUS ¶2-060 AUSTRALIAN SOURCE CAPITAL GAINS OF NON-RESIDENTS (a) Basic rule Non-residents are only subject to Australian capital gains tax (CGT) in respect of taxable Australian property (ie Australian real property held directly by a foreign resident and any capital asset other than Australian real property used by the foreign resident at any time in carrying on a business through an Australian branch). Australian capital gains tax also applies to interests in an interposed entity in which the non-resident has a 10% or greater interest, and where more than 50% of the value of the interposed entity's assets is attributable (directly or indirectly) to Australian real property. A resident who is in control of such income is obliged to withhold sufficient funds to pay the tax (see AUS ¶1-060). Ref: ITAA 1997 Div 855
(b) Investments in Australian fixed trusts Non-residents that make a capital gain or loss in respect of interests in Australian resident trusts, including managed funds, may be exempt from CGT. This rule applies to gains or losses arising on or after 12 December 2006, in respect of a CGT event involving a CGT asset of a trust (the CGT event trust) that is:
• a fixed trust, or • the owner of an interest of another fixed trust (directly, or indirectly through a chain of fixed trusts), and either: – the asset is not taxable Australian property for the CGT event trust at the time of the CGT event, or – the asset is an interest in a fixed trust that is taxable Australian property, and either at least 90% (by market value) of the underlying assets of the trust are not taxable Australian property, or at least 90% (by market value) of the assets held by other fixed trusts in which the first trust has an interest (directly or indirectly through a chain of fixed trusts) are not taxable Australian property. The object of the rules is to provide comparable tax treatment between indirect ownership of interests in fixed trusts and direct ownership of such interests. The relief comprises the following three concessions: • a capital gain or capital loss made by a foreign resident in relation to an interest in a fixed trust (eg disposal of the interest) is disregarded to the extent that the underlying assets of the trust are not taxable Australian property • a capital gain taken to be made by a foreign resident beneficiary of a fixed trust is disregarded if the gain relates to an asset that is not a taxable Australian property, and • a distribution of foreign source income by the trustee of a trust to a foreign resident beneficiary is not considered a capital gain for CGT purposes (or assessable income of the beneficiary for income tax purposes). Ref: ITAA 1997 s 855-40
¶AUS ¶3-010 FOREIGN SOURCE INCOME (a) Basic rule Specific rules apply with respect to the tax treatment of foreign dividends, foreign branch profits, and attributed income of controlled foreign companies (CFCs). Foreign source income that is not otherwise specifically dealt with is taxable to an Australian resident company at the corporate tax rate (eg foreign rental income derived by an Australian resident). Foreign source income that is subject to withholding tax in the overseas country is still subject to tax in Australia (eg foreign royalty or interest payments derived by a resident company) (see AUS ¶3-060 and AUS ¶3-080). (b) Foreign dividends Foreign dividends received by an Australian resident company are exempt from tax in Australia to the extent the dividends are paid by a non-resident company in which the Australian resident holds at least 10% voting power (ie non-portfolio dividends). Prior to 1 July 2004, non-portfolio dividends were only exempt from tax in Australia if the dividends were paid from comparably taxed profits (ie if they were paid by a company resident in a listed country). Ref: ITAA 1936 s 23AJ
(c) Conduit foreign income In general terms, conduit foreign income is foreign income that is ultimately received by a foreign resident through one or more interposed Australian corporate tax entities. Special rules allow conduit foreign income to flow through Australian corporate tax entities to foreign shareholders, without being subject to tax in Australia. Australian corporate tax entities that receive an unfranked distribution declared to be conduit foreign income do not pay Australian tax on that income if the conduit foreign income is on-paid to shareholders (net of related expenses) before the due date for lodging an income tax return for that year of income. In such a case, the conduit foreign
income in the unfranked distribution is treated as non-assessable income of the Australian corporate tax entity. Conduit foreign income is exempt from dividend withholding tax when it is on-paid to a foreign shareholder as an unfranked distribution. A company's conduit foreign income includes foreign income on which no Australian company tax is payable. Typical examples are foreign branch income and dividends from foreign companies in which the Australian company holds a 10% or greater interest, and whose income is not caught under the CFC rules because they conduct an active business or reside in a listed country (see AUS ¶1-140 and AUS ¶3-060). Ref: ITAA 1997 Subdiv 802-A, s 802-20
¶AUS ¶3-020 FOREIGN SOURCE LOSSES Current year and carry-forward foreign losses can be offset against domestic and foreign assessable income. That is, there is no distinction between foreign source and domestic deductions and prior period losses for the purposes of reducing assessable income for Australian tax purposes. Prior to 1 July 2008, foreign losses were subject to foreign loss quarantining rules which required foreign losses to be categorised and grouped on a class of income basis (ie according to their source being: interest, modified passive income, offshore banking income and other). These class grouped losses were then only available to offset foreign income of the same class and could not be used against domestic assessable income. Following the introduction of the existing rules on 1 July 2008, transitional rules allowed any unutilised foreign losses accrued before 1 July 2008 (up to 10 preceding income years) to be converted into a single “domestic” tax loss amount to be applied against any future assessable income. The converted tax loss could thereafter be utilised at a maximum of 20% of the total unutilised foreign losses accrued on 1 July 2008 per year for the first four years (note the 20% annual limit only applies where the initial total converted loss is more than
A$10,000). In the fifth year after commencement (1 July 2008), a taxpayer can deduct any remaining converted foreign losses, subject to satisfying the ordinary loss utilisation rules. Ref: IT(TP)A 1997 Div 770
Previously, under Australian tax law, partnerships were unable to utilise foreign losses carried forward to offset future income. Recently introduced legislation enables partnerships to carry forward and utilise foreign losses going forward. Further, Australian partnerships can convert foreign losses into tax losses which can be deducted for the calculation of its net income or loss. This prevents the foreign losses from being “trapped” inside the partnership. Ref: Tax Laws Amendment (2009 Measures No 4) Act 2009; www.treasury.gov.au
¶AUS ¶3-030 FOREIGN BRANCH INCOME Income and capital gains derived by Australian resident companies from foreign branches are exempt from tax in Australia, where the foreign branch is carrying on a business through a permanent establishment and the branch satisfies the “active income test”. This active income test for branches is the same as that for CFCs (see AUS ¶3-060). The following modifications are made to the test for branches: • the only amounts taken into account are those derived through the branch • the income year of the company with the branch is used for the purposes of the test • those conditions of the active income test relating to the existence and residency of a CFC do not apply because they are not relevant to branches, and • the modifications to the adjusted tainted income of a branch referred to above also apply in determining the adjusted tainted
income of the branch for the purposes of the active income test. Ref: ITAA 1936 s 23AH
¶AUS ¶3-040 FOREIGN BRANCH LOSSES Where branch income is treated as exempt from tax in Australia, no deduction is allowable for: • outgoings or expenses connected to branch income and gains that are non-assessable non-exempt income, or • capital losses on the disposal of a branch asset if, had there been a profit on the disposal, the profit would have been nonassessable non-exempt income. Furthermore, current year losses or carried forward losses of a resident company are not reduced by branch income or gains that are non-assessable non-exempt income and foreign tax credits are not allowed for foreign taxes paid on branch income that is nonassessable non-exempt income. Ref: ITAA 1936 s 23AH; ITAA 1997 Div 820
¶AUS ¶3-050 FOREIGN SOURCE CAPITAL GAINS (a) Basic rule Foreign source capital gains are fully liable to Australian capital gains tax (CGT), unless they qualify for the participation exemption. A foreign tax credit is generally available for the applicable foreign tax (see AUS ¶1-060(f) and AUS ¶3-080). (b) CGT concession for active foreign companies Capital gains or losses made by a resident company or its controlled foreign company (CFC) from the sale of shares in a foreign company in which the Australian resident holds at least 10% voting power (ie a non-portfolio interest), are reduced to the extent the foreign company has an underlying active business. To be eligible for this concession, a company must hold a non-portfolio interest (ie a direct voting
percentage of at least 10% in the foreign company). Further, the requisite interest must be held for a continuous period of at least 12 months in the two years before the CGT event. Ref: ITAA 1997 Subdiv 768-G and s 768-505
The extent to which a foreign company carries on an active business is determined by calculating an active foreign business asset percentage for the company. The active foreign business asset percentage is the value of the foreign company's active business assets as a percentage of the value of all the assets of the foreign company. The CGT exemption for active foreign companies took effect on 1 April 2004. Prior to that date, the disposal of shares in foreign companies was subject to capital gains tax in Australia. By contrast, the disposal of active business assets by foreign companies was exempt from tax in Australia under the CFC rules.
¶AUS ¶3-060 CONTROLLED FOREIGN COMPANIES (a) Basic rules The purpose of the controlled foreign company (CFC) rules is to tax Australian shareholders on their share of a CFC’s passive (ie tainted) income as it is earned, unless that income is comparably taxed offshore. Tainted income basically includes dividends, interest income, royalties, or amounts arising from related party transactions. This result is achieved by attributing tainted income to the Australian resident controllers of the CFC. Income earned by a CFC from active business activities is not attributed to Australian resident shareholders under the CFC rules. For CFCs resident in listed countries, the CFC rules do not apply where a de minimis exemption is satisfied. The de minimis exception applies by adding the sums determined under s 385(2)(a) and (ca) of ITAA 1936. The de minimis exception applies if this amount does not exceed the lesser of A$50,000 and 5% of the gross turnover of the CFC.
Foreign income not taxed in a comparable tax country is taxed in the current year to the Australian shareholders of the CFC in proportion to their shareholdings on an accrual basis. The CFC rules only apply to companies with Australian resident shareholders who have strict or de facto control of the CFC. Portfolio interests (ie less than 10% shareholdings) are dealt with under the foreign tax credit system. There are other rules, similar in effect to the CFC rules, for the taxation of non-resident trusts. Capital gains which arise from a CFC which ceases to be a member of a group are included in the attributable income of the resident controller. Ref: ITAA 1936 Pt X Div 1, s 385(2)(a) and (ca), (4)
(b) Attributable resident shareholder A taxpayer is subject to attribution with respect to a CFC if the taxpayer has either: • a minimum 10% control interest in the CFC (including both direct and indirect control interests held by the taxpayer and the taxpayer’s associates), or • a minimum 1% control interest in the CFC (including both direct and indirect interests held by the taxpayer and the taxpayer’s associates) and is one of five or fewer Australian entities that controls the CFC. Ref: ITAA 1936 s 361
(c) Determination of whether a company is a CFC Only CFCs are subject to the CFC rules. For the purposes of determining whether or not the company is a CFC, it must be nonresident and satisfy either one of the two tests below at the end of its accounting year. • Strict control Five or fewer resident shareholders (and associates) own or are able to acquire or control an interest of 50% or more in the company. • De facto control and deemed de facto control Five or fewer
resident shareholders (and/or associates) have effective control of the company, irrespective of their interests in the foreign company. For example, where the resident shareholder (and associates) owns or can acquire an interest of 40% or more, it is deemed to have de facto control unless that resident shareholder can show that non-resident disassociated shareholders with the remaining interest in the company exercise control. There are also provisions that deal with tracing interests through other CFCs, partnerships, trusts or associates. The provisions that deal with tracing interests broadly provide that the percentage interests held in a CFC, partnership or trust are calculated by multiplying the percentage interest of each interposed entity.
Example If A owns 100% of B Co, which in turn owns 60% of USA Co, the tracing interests result in A holding 60% of USA Co. This is simply calculated as 100% × 60%.
Ref: ITAA 1936 s 340, Pt X Div 3 Subdiv A
(d) Residence of a CFC A CFC is deemed to be resident in a listed country if it is liable to pay tax as a resident of that country, and is not a resident of Australia under Australian domestic tax law (listed countries are set out below). A CFC is regarded as resident in an unlisted country if it is treated as resident for taxation purposes by that unlisted country, or if it is neither a resident of Australia under Australian domestic laws nor a resident of a particular listed country. Countries are classified as either listed or unlisted countries. The unlisted category includes countries previously classified as limitedexemption countries. The listed category consists of countries previously classified as broad-exemption listed countries. Listed countries are countries considered to have tax systems closely
comparable to Australia’s. Listed countries Canada1 France1 Germany1 Japan
New Zealand United Kingdom United States of America
Unlisted countries Argentina Armenia Austria Azerbaijan Bangladesh Belarus Belgium Bosnia and Herzegovina Brazil Brunei Bulgaria China Croatia Czech Republic2 Denmark Estonia Fiji Finland French Polynesia Greece Hungary Iceland
India Indonesia Iran Ireland Israel Italy Kenya Kiribati Korea, Republic of Luxembourg Malaysia Malta Mexico Myanmar Netherlands New Caledonia Norway Pakistan Papua New Guinea Philippines Poland Portugal
Romania Russian Federation Saudi Arabia Singapore Slovak Republic Slovenia Solomon Islands South Africa Spain Sri Lanka Sweden Switzerland Taiwan Tajikistan Thailand Tokelau Tonga Turkey Tuvalu Vietnam2 Western Samoa Zimbabwe
Both Vietnam and the Czech Republic were treated as listed countries from 24 December 1996 to 30 June 1997. Transitional legislation applied for countries which have emerged from the dissolution of
Czechoslovakia, the USSR and Yugoslavia. Taxpayers had the option of treating the new states as listed countries for the period between the dissolution and 24 December 1996. Special transitional arrangements applied after this date, depending on the country. Ref: ITAA 1936 s 331
(e) Income subject to attribution The types of income attributable under the CFC rules differ depending on the country of residency of the CFC. If the CFC is resident in an unlisted country, income subject to attribution includes passive income (ie rent, dividends, interest or royalties) and related party transactions. If the CFC is resident in a listed country, income subject to attribution includes eligible designated concession income. This is income derived by a CFC which is not taxed in the listed country of residence (eg from capital gains or income sourced in an unlisted country). Such income is termed “designated concession income” and is attributed to Australian resident shareholders of the CFC, subject to the active income and de minimis exemptions. Ref: ITAA 1936 Pt X Div 7
(f) Active income exemption Subject to satisfying the active asset test, some or all of the income that would otherwise be attributed to a resident shareholder is exempt from attribution. The test provides, in effect, an exemption from accruals taxation for small amounts of tainted income which are incidental to the overall operations of a CFC. Tainted income is passive income (eg from dividends, interest and royalties) and income from gross sales and services from transactions on behalf of (and with associates of) Australian residents. The exemption is particularly important for Australian enterprises engaging in genuine business activities in unlisted countries. A CFC satisfies the active income test if less than 5% of its gross turnover is in the form of tainted income. If the tainted income percentage is exceeded, the tainted income derived by an unlisted country CFC is subject to accruals tax in Australia. Ref: ITAA 1936 Pt X Div 8
(g) De minimis exemption Income derived by a CFC resident in a listed country is exempt from attribution if the sum of the CFC’s: • eligible designated concession income • foreign investment fund (FIF) income, and • income from sources outside the listed country that is either not taxed in a listed country or tainted income not taxed in a listed country, is less than A$50,000 (where the CFC has a gross turnover of over A$1m) or constitutes 5% or less of its gross turnover (where the CFC has a gross turnover of less than A$1m). Ref: ITAA 1936 s 385(4)
(h) Capital gains A capital gain made by a CFC from the disposal of an asset is included in the attributable income of the resident shareholder. Ref: ITAA 1936 Pt X Div 7 Subdiv A
(i) Losses incurred by a CFC Unlike attributable income of a CFC, losses incurred by a CFC are not able to be attributed to the underlying shareholders of the CFC for tax purposes, nor can they be transferred to another CFC in the same group. Losses incurred by CFCs in listed and unlisted countries are dealt with in the same manner and are not deductible where any profits of the CFC would be exempt from Australian tax. Since the abolition of Australia’s foreign loss quarantining rules (effective 1 July 2008 — see AUS ¶3-020), a CFC’s losses do not need to be grouped according to income class. From 1 July 2008, foreign losses can be applied in totality against a CFC’s current and future assessable income (as calculated for Australian tax purposes). There are no provisions within the Australian tax law that limit the number of years that a loss incurred by a CFC can be carried forward. Moreover, there are no provisions within the Australian tax law that
allow a CFC loss to be carried back. Ref: ITAA 1936 Pt X Div 7 Subdiv D
(j) Dividends paid out of attributed income Income which has been previously attributed to the taxpayer under the CFC measures is exempt to the extent that such income was previously included in the assessable income of the taxpayer. In order to determine these amounts, attribution accounts must be maintained by the companies. An attribution account is a record of the attribution debits and attribution credits of a taxpayer. An attribution debit arises when a CFC makes a payment of a dividend. An attribution credit arises when an amount is included in the assessable income by virtue of it being attributed to the taxpayer under Pt X of ITAA 1936. Ref: ITAA 1936 s 23AI, 370, 371, 372; Taxation Determination TD 2003/27
(k) Accounting and calculation requirements Where a company is a CFC at the end of its statutory accounting period, the attributable income of the CFC is calculated separately for each attributable taxpayer. Records must be kept for five years and should include a determination of attributable interest, attribution percentages (ie the share of the CFC’s attributable income that is attributable to a particular taxpayer) and the attribution account amount to be included in assessable income. Ref: ITAA 1936 s 262A(4), Pt X Div 11
In May 2009, the Australian Federal Government announced amendments to the anti-deferral rules — including the CFC and FIF rules. These included: • repealing the FIF rules, to be replaced with a specific, narrowly defined anti-avoidance rule that applies to offshore accumulation or roll-up funds • rewriting the existing CFC rules, together with a modernisation of the definitions of active and passive income • allowing attributed taxpayers to choose the CFC attribution
method, including the branch equivalent, market value, and deemed rate of return methods • closely held fixed trusts to be brought into the CFC rules • repealing the deemed present entitlement rules, and • amending the transferor trust rules, with the aim of enhancing effectiveness and integrity. The FIF and the deemed present entitlement rules were repealed with effect from 14 July 2010, with a new “anti-roll-up fund” regime to replace the repealed FIF rules. The anti-roll-up rule was proposed to ensure Australian residents cannot defer or avoid tax liability for income held in foreign accumulation funds. As yet, the replacement regime has been released in draft form only. In November 2010, the Treasury published the 27 submissions it received during the consultation period but no further developments have taken place. Ref: www.budget.gov.au; Tax Laws Amendment (Foreign Source Income Deferral) Act (No 1) 2010
Developments The Australian Government released a consultation paper on 16 July 2010 to reform and modernise the existing CFC rules. The consultation paper proposed some key changes to the existing CFC rules and included: • updating the definition of “active business income” for the purposes of testing passive income • providing exclusions for certain taxpayers and lightly taxed entities through the de minimis test • redefining “control” for CFC purposes • addressing the existing issues in calculating the attributable
income of a CFC • providing relief from the CFC rules in respect of income from transactions with other companies within the group, and • removal of double taxation where attributed income is not distributed to a controlling taxpayer. An exposure draft was issued on 17 February 2011. In June 2011, the Government announced that the new regime will only apply for income years starting on or after the date on which the legislation receives royal assent. In May 2013, the Government stated that the proposals would be reconsidered when the OECD has completed its review of base erosion and profit shifting. As of August 2013, no further progress has been reported. Ref: Consultation paper — Reform of the controlled foreign company rules (www.treasury.gov.au); Exposure Draft — Tax Laws Amendment (Foreign Source Income Deferral) Bill 2011: main provisions; Budget 2013/14, 14 May 2013
Indicates those countries whose listing is qualified by eligible designated concession income.
Indicates those countries whose listing is qualified by eligible designated concession income.
¶AUS ¶3-070 OTHER FOREIGN RULES (a) Foreign investment funds (FIFs) — repealed with effect from 14 July 2010 The foreign investment fund (FIF) rules were repealed with effect from
14 July 2010.
Developments In April 2010, the government announced a new “anti-roll-up fund” regime to replace the repealed FIF rules. The anti-roll-up rule was proposed to ensure Australian residents cannot defer or avoid tax liability for income held in foreign accumulation funds. As yet, the replacement regime has been released in draft form only. In November 2010, the Treasury published the 27 submissions it received during the consultation period. Ref: Exposure Draft — Tax Laws Amendment (Foreign Source Income Deferral) (No 2) Bill 2010: Anti-roll-up rule
Subsequently, on 17 February 2011 the Government released a further exposure draft on the new regime governing foreign accumulation funds and containing the proposed “anti-roll up” rule. The closing date for submissions was 18 March 2011. Furthermore, on 29 June 2011 the Government announced that the proposed rule on foreign accumulation funds will apply for income years starting on or after the date it receives royal assent. In May 2013, the Government stated that the proposals would be reconsidered when the OECD has completed its review of base erosion and profit shifting. As of August 2013, no further progress has been reported. Ref: Exposure Draft — Tax Laws Amendment (Foreign Source Income Deferral) Bill 2011: Foreign accumulation funds; Budget 2013/14, 14 May 2013
(b) Foreign investment funds (FIFs) — the old rules (2009/10 and prior) The foreign investment fund (FIF) rules applied where a foreign company or trust, although not controlled by Australian residents, allowed for the accumulation of income offshore in low-tax or tax-free
countries. This would otherwise have allowed the investor to minimise or defer payment of Australian tax. The FIF rules also applied to Australian residents who have invested in offshore life bonds or other foreign life policies with an investment component. Operation Under the FIF rules, Australian taxpayers that had an interest in a foreign company, foreign trust or foreign life policy which did not fall within the CFC rules were subject to tax on gains accrued on their FIF holdings. The accrued gain could be measured by reference to the increased value of the taxpayer’s interest in the FIF, a deemed rate of return on the taxpayer’s FIF investment, or by calculation of the taxpayer’s share of the FIF’s net income. Exemptions The FIF rules did not apply if the aggregate value of the taxpayer’s FIF interests was less than A$50,000. In addition, there were a number of exemptions, the most significant being for investment in a company principally engaged in an active business. A company was considered to have been carrying on an active business, unless its predominant activity was investment, real estate, financial services, banking or insurance. For these purposes, management of funds was treated as an eligible active business activity. A further exemption was the balanced portfolio exemption. Under this exemption, a taxpayer’s FIF interests were not subject to the FIF rules if 90% or more if its FIF interests were exempt. Ref: ITAA 1936 Pt XI
(c) Foreign hybrids Certain foreign hybrids are treated as partnerships for all purposes of income tax law. Prior to 2003/2004, these business structures were treated as companies under Australia’s taxation laws. Foreign hybrids include limited partnerships, limited liability companies treated as partnerships in the US, and other similar entities taxed on a partnership basis in their country of formation. Corporate limited partnerships are not treated as partnerships for tax purposes. Foreign
hybrids that are residents of Australia, or were otherwise dealt with under the FIF regime and not the CFC regime, are also excluded from this treatment. Operation Foreign hybrids treated as partnerships are subject to the ordinary rules for partnerships, except that deductions for partnership losses are limited. The loss limitation rules provide that limited partners may only claim losses of the foreign hybrid to the extent of their exposure to economic loss. Other consequences that apply as a result of treating a foreign hybrid as a partnership are that: • the CFC provisions do not apply to the entity • distributions do not have a significant tax impact, and • the CGT provisions apply only to the partners and not to the entity. Ref: ITAA 1997 Div 830
(d) Transfer of income to persons abroad The following describes the transfer of income-producing assets and the assignment of the right to receive income to non-residents. • Controlled foreign companies (CFCs): A CFC is not effective as a low-tax repository for both Australian and foreign source income and capital gains. Profits of a CFC are taxed in the hands of its Australian shareholders on a current-year basis, unless they have been similarly taxed in a listed country or qualify as active income under stringent guidelines (see AUS ¶3-060). • Transfers to non-resident trusts: Transfers of value, to a nonresident discretionary trust or non-resident trust by a resident transferor, result in the income of the transferor being deemed to include the income of the trust. This applies to both direct and indirect transfers. • Transfers by non-residents who subsequently become Australian residents: These transfers are exempt from the rules regarding
transfers to non-resident trusts if the non-resident or associate cannot control the trust after the end of the year of income in which the person became a resident. • Asset transfers: Asset transfers are deemed to occur at arm’s length values, and may give rise to capital gains tax liabilities to the transferor. • Income assignments: Income assignments for less than seven years are ineffective for tax purposes. Even an effective assignment may result in the assignor being deemed to have derived a taxable capital gain equal to the market value of the interest assigned. • Amounts of A$10,000 or more transferred out of Australia: The Australian Transaction Reports and Analysis Centre (AUSTRAC) is notified of such transactions, and where suspicions of criminal activity or tax avoidance are aroused, the Australian Tax Office may investigate the taxpayer and invoke wide ranging powers to: – tax the transferor on consideration received for the assignment of income, or – deem the transfer to be ineffective for tax purposes and tax the transferor. • Foreign investment fund (FIF) regime: These rules prevent offshore vehicles being used to defer Australian tax on passive income, even if the offshore vehicle is not controlled by Australian residents. The regime is, however, being replaced by new antiroll-up fund rules, and the Government’s proposals for this matter are currently in draft form (see (a) above). • Charitable trusts (and similar exempt bodies) which distribute funds offshore: In such situations, these trusts must pursue their charitable activities solely in Australia. If the entity is an institution, it is required to pursue objectives principally in Australia. Ref: ITAA 1936 Pt III Div 6AAA, Pt X and XI; ITAA 1997 Div 50 and 116
(e) International information exchange and tax enforcement The Organisation for Economic Cooperation and Development (OECD) has proposed a process whereby revenue authorities in various countries and jurisdictions can commit to eliminate harmful tax practices. The Taxation Information Exchange Agreement (TIEA) is a legal framework that allows information relating to tax havens to be given to a tax authority of another country. Australia has entered into TIEAs providing for the full exchange of information for both criminal and civil tax matters with other jurisdictions. TIEAs generally allocate taxing rights over certain income of individuals and help to establish a mutual agreement procedure in respect of transfer pricing adjustments for the benefit of residents of both tax jurisdictions. Australia has entered into TIEAs with the following jurisdictions. See AUS ¶1-005(c) for a list of Australia’s TIEAs. The Australian tax authorities have been active in warning people against using arrangements in overseas jurisdictions (particularly Vanuatu) to claim false deductions or hide income offshore. The authorities pay particular attention to arrangements through which Australian resident entities, with the help of a promoter in Vanuatu, seek to claim deductions for artificially created expenses and/or establish structures that enable the concealment of income in an attempt to avoid or evade Australian tax. Ref: Australian Tax Office media release No 2008/22, 7 May 2008 (see www.ato.gov.au)
¶AUS ¶3-080 FOREIGN TAX CREDITS/DOUBLE TAX RELIEF (a) Basic rules Foreign tax credits Residents are liable to tax on worldwide income and capital gains (subject to tax treaties and specific exemptions), irrespective of whether these are subjected to foreign tax. Under the old foreign tax credit system (operative until 1 July 2008), a foreign tax credit was
allowed for foreign tax paid on the foreign income, up to the amount of Australian tax payable in respect of that income. The current foreign tax credit system works on a worldwide basis such that the total foreign tax credit generated in a particular year may be utilised to offset the total Australian tax liability on the foreign source income derived during that year (subject to the separate foreign tax credit system for passive income and offshore banking income). Up to 1 July 2008, excess foreign tax credits could be carried forward for five years from 1 July 1990. However, from 1 July 2008, excess foreign tax credits are lost and may not be carried forward for future offset. Foreign losses The previous foreign loss and foreign tax credit quarantining rules (operative until 1 July 2008) prevented taxpayers from applying foreign losses against domestic income and allowed taxpayers to elect to apply domestic prior-year losses against foreign income. They also prevented taxpayers from receiving credit for foreign tax in excess of the Australian tax payable on assessable foreign income. Instead, they required taxpayers to carry forward these foreign losses and excess foreign tax credits to be applied against future assessable foreign income of the same class. From 1 July 2008, foreign losses are no longer quarantined from domestic income or from other foreign losses of a different class. There is no distinction between a foreign loss and a domestic loss for the purpose of calculating Australian taxable income. (b) Creditable foreign tax Up to 1 July 2008, to qualify for a foreign tax credit, a taxpayer must have been liable for and paid foreign tax in respect of the foreign income (including capital gains, FIF and CFC income) included in the taxpayer's assessable income. From 1 July 2008, a foreign income tax offset is only available for foreign income tax paid on an amount included in assessable income for Australian tax purposes. “Foreign income tax” is a tax imposed by a law, other than an Australian law, on income profits or gains.
To qualify for a foreign income tax offset, the taxpayer must have paid the foreign income tax. An offset is not available for credit absorption taxes or unitary taxes. Furthermore, following the repeal of the foreign loss quarantining rules, effective from 1 July 2008, foreign income tax offsets not utilised in the current income year expire (ie there is no carry forward of excess foreign tax offsets for future offset). Unutilised pre-1 July 2008 foreign tax credits are subject to the transitional rules. (c) Unilateral relief Credits are given for certain tax payments, whether or not Australia has a tax treaty with the foreign country. If there is a tax treaty, it specifies the method of credit. If not, the domestic Australian tax legislation (unilateral relief) specifies the method. (d) Calculation of foreign tax credit The maximum foreign tax credit available in respect of foreign tax paid on an amount of foreign income is the Australian tax payable on that income. Where the foreign tax exceeds the Australian tax, an excess foreign tax credit arises. To ascertain the net foreign income which qualifies for foreign tax credits, directly related and apportionable expenses, including interest, should be deducted from gross foreign income. The amount of the tax credit offset equals the sum of each amount of eligible foreign income tax paid, subject to a limit (or “cap”). The foreign tax offset cap is generally based on the amount of Australian tax payable on the double-taxed amounts and other assessable income amounts that do not have an Australian source. Taxpayers do not need to calculate the foreign tax offset cap if they elect to use the A$1,000 de minimis cap. In this case, a company is not able to claim more than A$1,000 of foreign income tax. (e) Carry-forward and transfer of excess foreign tax credits Up to 1 July 2008, excess foreign tax credits could be carried forward for five years. Further, excess foreign tax credits could be transferred within a company group and were required to be utilised in the order in
which they arose. From 1 July 2008, where the foreign tax exceeds the Australian tax, the excess foreign tax credit expires (ie there is carry forward of unused foreign tax credits arising on or after 1 July 2008). Ref: ITAA 97 Div 770; IT(TP)A 1997 Div 770
(f) Tax planning Because of the operation of the foreign tax credit rules, there is a clear need for tax planning to ensure that foreign taxes paid are fully utilised as credits against Australian taxes. (g) Quarantining of credits Up to 1 July 2008, in calculating the credit, different classes of foreign income were quarantined. There were four classes of foreign source income which were quarantined: • passive income • offshore banking income • lump sum payments from eligible non-resident non-complying superannuation funds, and • other income. The quarantining ruling ceased to apply to foreign losses incurred or foreign tax credits arising on or after 1 July 2008. (h) Credit procedure The self-assessment system requires taxpayers to self-determine their tax credit entitlements. In some circumstances where there are timing differences between the end of the Australian and relevant foreign income years, taxpayers are required to allocate the foreign income derived during a foreign year between two Australian tax years. (i) Tax treaties See AUS ¶1-005. (j) No exchange control restrictions
No exchange control restrictions apply on the inflow or outflow of funds to and from Australia, but currency movements of foreign or Australian currency in amounts of A$10,000 or more must be reported to the Australian Transaction Reports and Analysis Centre (AUSTRAC).
ARTICLES AND BUDGET REPORTS ¶AUS ¶4-014 BUDGET REPORT: 2011/12 On 10 May 2011, the Australian Government released the 2011/12 Federal Budget, containing the following relevant measures: Improved tax compliance With effect from 1 July 2011, the director penalty regime will be expanded. With effect from 1 July 2012, certain businesses will be required to report payments to contractors in the building and construction industry annually. Capital gains tax (CGT) Access to small business CGT concessions will be tightened for trusts and broadened for some small businesses, with effect from 10 May 2011 (see AUS ¶1-060(b)). With effect from the 2007/08 income year, gains or losses from renewable resource assets or preserving environmental amenity will be CGT exempt (see AUS ¶1-060(b)). Scrip for scrip rollover integrity provisions will apply to trusts, superannuation funds and life insurance companies, with effect from 10 May 2011 (see AUS ¶1-060(e)). Trading losses Project losses associated with designated infrastructure projects will be uplifted at the government bond rate and losses will be exempted from having to comply with the continuity of ownership test (COT) and the same business test (see AUS ¶1-080). With effect from 1 July 2011, the COT rules will be amended so that companies will no longer have to trace ownership through certain superannuation entities. The amendments will also remove technical deficiencies in the modified rules for widely held entities (see AUS ¶1-
080(a)). Film tax offsets Eligibility criteria for the film tax offsets will be broadened from 2011/12, with the amount of the offsets increased (see AUS ¶1100(g)). GST Certain supplies made to health insurers from 1 July 2000 in the course of settling health insurance claims are to be GST-free (see AUS ¶1-185(b)). The start date for a number of components of the 2009/10 Budget measure implementing recommendations of the Board of Taxation’s review of the GST system that were to commence from 1 July 2011 are to be deferred (see AUS ¶1-185(e)). Alternative fuels The introduction of excise and excise-equivalent customs duty on alternative fuels will be delayed until 1 December 2011 in response to representations from industry to allow additional time to implement the tax changes (see AUS ¶1-190(c)). Functional currency rules The range of entities allowed to use a functional currency will be extended to include certain trusts and partnerships keeping accounts solely or predominantly in a foreign currency (see AUS ¶1-210(d)). Tax rules for managed investment trusts (MITs) The changes announced in 2010 are to be deferred and extended (see AUS ¶2-050(e)).
¶AUS ¶4-016 BUDGET REPORT: 2012/13 On 8 May 2012, the Australian Deputy Prime Minister and Treasurer presented the 2012/13 Budget to Parliament. It contained the following measures of relevance to business: • changes to the personal income tax bands and rates for non-
residents (see AUS ¶1-020(b)) • removal of the entitlement of non-residents to the 50% tax discount on capital gains (see AUS ¶1-060(b)) • extension of the integrity provisions applicable to the use of scripfor-scrip CGT roll-over relief (see AUS ¶1-060(e)) • the introduction of a loss carry-back scheme (see AUS ¶1-080(c)), and • an increase in the withholding tax rate on income distributed to non-resident beneficiaries by managed investment trusts (see AUS ¶1-190(a) and AUS ¶2-050(e)).
¶AUS ¶4-030 BUDGET REPORT: 2013/14 On 14 May 2013, the Australian Deputy Prime Minister and Treasurer presented the 2013/14 Budget to Parliament. It contained the following measures of relevance to business: • an increase in the Medicare levy (see AUS ¶1-020) • changes to the application of the research and development expenditure tax incentive (see AUS ¶1-200(e)) • changes to thin capitalisation rules (see AUS ¶1-110(h)) • an increase in the fringe benefits tax rate (see AUS ¶1-190(h)) • re-statement of the proposal to phase down interest withholding tax incurred by financial institutions (see AUS ¶1-190(a)), and • removal of the beneficial tax treatment for offshore banking units (see AUS ¶1-200(b)).
¶AUS ¶4-109 Henry Review developments On 2 May 2010, the government released its response to the
“Australia’s Future Tax System” report (the Henry Review) containing recommendations to make significant changes to Australia’s existing taxation system. The Henry Review was commissioned back in August 2008 to review the existing taxation system in Australia, with the objective of putting forward recommendations aimed at improving the operation of the personal income tax structure, taxes on consumption, various state taxes and the social security system. The Henry Review made 138 recommendations for reforming the existing Australian taxation system, including various changes to corporate taxation, energy and resources, financial services, infrastructure and transport, individual taxation, superannuation and retirement, small business, alcohol and gambling, employment taxation, state taxation, climate change and environment. In the government’s response to the Henry Review, five of the recommendations have been accepted (in some form) and 29 have been wholly or partially rejected; with the remaining recommendations flagged for further consultation. The accepted recommendations announced by the government are: • A stepped reduction in the Australian corporate tax rate from 30% to 28%. The corporate tax rate will be initially reduced to 29% for the 2013/14 income year and then to 28% from the 2014/15 income year. • The introduction of a “resource super profits tax” on the energy and resource industry. A super profits tax of 40% is to commence on 1 July 2012 and will apply broadly to mining and petroleum projects. The super profits tax will be deductible for income tax purposes, reducing the effective additional impost to 24.8% (at the 28% corporate tax rate). Some of the key recommendations flagged for further consultation include:
• taxation of capital income (savings) • simplified tax returns for individuals • fringe benefits tax reforms • abolition of interest withholding tax on financial service industry borrowings • abolition of insurance taxes • broad based land tax • new cash flow tax, to fund abolition of payroll tax and inefficient state taxes • road usage taxation, and • superannuation contribution taxation. Ref: www.futuretax.gov.au