Australia has a relatively complex federal tax system that includes an income tax, a capital gains tax, a consumption tax (the GST) and a number of employment-based taxes (for example, fringe benefits tax).
Australia also has a number of State/Territory-based taxes, such as stamp duty, land tax and payroll tax, and one of the keys to doing business in Australia is understanding how these taxes interact and how they affect business structures and transactions. Australia has a comprehensive international tax system, and a wide network of Double Taxation Agreements that will impact on anyone doing cross-border business involving Australia. As with most OECD countries, reforms to Australia’s tax system are regularly proposed, and Australia’s taxation authorities regularly issue rulings and other determinations on how they will interpret and administer the tax laws.
Income tax overview
Australia imposes taxation on the worldwide income of entities resident in Australia for taxation purposes and the Australian sourced income of non-residents subject to the application of a double taxation agreement (DTA).
A company is a resident of Australia for tax purposes if:
- it is incorporated in Australia, or
- where the company is not incorporated in Australia, it carries on business in Australia and either:
- has its central management and control in Australia, or
- its voting power is controlled by shareholders who are residents of Australia.
An individual is a resident of Australia for tax purposes if, generally, he or she:
- is domiciled in Australia, unless the Commissioner is satisfied that the person’s permanent place of abode is outside of Australia
- is in Australia for at least 183 days in a tax year, unless he or she does not intend to take up Australian residence and has a usual place of abode overseas; or
- is a member or eligible employee under certain superannuation legislation or is the spouse or a child under 16 of a person covered by such superannuation legislation.
For individuals that are classified as temporary residents (broadly where they hold a temporary visa and are not defined as a resident or spouse of a resident under Australian social security laws), they will be treated in the same way as non-residents and generally only taxed on their Australian sourced income subject to the application of a DTA.
Australian resident companies and individuals are required to be registered with the Australian Taxation Office (ATO) to have a tax file number (TFN).
Trading companies registered with the ATO will have various tax compliance obligations, including filing of an annual company tax return and the periodic reporting of activity statements.
Source of income
The source of particular items of income is dependent in most cases on matters of practical fact and, with certain exceptions, is generally determined on a common law rather than statutory basis. Australian income tax law also has rules in a number of instances which deem income to have an Australian source (for example, royalties paid to non-residents and premiums paid to insurance companies).
‘Taxable income’ is generally computed in the same manner for both individuals and companies. Tax is assessed on taxable income, which is broadly calculated as the assessable income, less allowable deductions.
Generally, losses and outgoings incurred in gaining or producing the assessable income, or necessarily incurred in carrying on business for that purpose, are deductible except for losses and outgoings that are of a ‘capital, private or domestic nature’.
Certain tax deductions can be claimed by a taxpayer notwithstanding that they are of a capital nature, such as for depreciation of plant (known collectively as capital allowances and generally claimed over the effective life of the asset) and certain expenses in establishing a business (generally claimed over five years or immediately in the case of some start-up expenses for small business).
An Australian company can elect to form a tax consolidated group with its wholly owned subsidiaries. The effect is to treat the group as a single entity for Australian income tax purposes. This means that intra-group transactions will be ignored for income tax purposes.
Gains on the disposal of assets will be treated as either revenue gains (income) or capital gains. Whether an asset is on revenue or capital account will depend on the relevant facts and circumstances.
Capital gains are included in the calculation of the taxable income. Capital gains made by resident individuals and trusts (but not companies) that dispose of assets held for at least 12 months will generally be reduced by half. Capital gains made by complying superannuation entities that dispose of assets held for at least 12 months will generally be reduced by one-third. Capital gains derived by companies are not eligible for the capital gains tax (CGT) discount. The CGT discount has been modified for non-residents. Broadly, any gains made by non-residents that are referrable to the period after 8 May 2012 will not be reduced by the CGT discount.
Small businesses may be eligible for certain CGT concessions, generally provided the business has an aggregated turnover of less than A$2 million or the taxpayer has assets less than A$6 million (and fulfils the active asset test). These concessions broadly relate to the assets used to conduct the business of the taxpayer. The concessions include a 50% reduction in capital gains for active business assets, a retirement exemption whereby active business assets that are sold may be partly or wholly exempt from tax if the proceeds are paid into a complying superannuation fund (for certain age limits), roll-over relief and a 15-year exemption whereby tax may not be required to be paid in respect of a gain when an active business asset that has been used for at least 15 years is disposed of.
Non-residents will only be subject to tax on capital gains made on the disposal of ‘Taxable Australian Property’ (TAP) subject to the application of a DTA. TAP is defined broadly to include direct real property interests (including mining, quarrying or prospecting rights), indirect real property interests and assets used in carrying on business in Australia through a permanent establishment as well as an option or right to acquire any of the foregoing.
A non-resident will generally have an indirect real property interest where it has a non-portfolio interest (that is, 10% or more together with associates) in a company or trust that has Australian real property interests where those real property interests represent more than 50% of the market value of the underlying assets.
Subject to certain exceptions, the purchaser in a transaction is required to pay to the ATO 12.5% of the proceeds payable in relation to a transaction entered into after 30 June 2016 where:
- the transferor is a foreign resident (or deemed to be a foreign resident); and
- the transaction involves an asset that is TAP.
This measure will not apply however to real property transactions under A$750,000.
Rollover relief may be available in respect of capital gains made in relation to a disposal event where shares or units in one entity are exchanged for shares or units respectively in another entity. The Australian rules also provide demerger relief in some instances.
Where rollover relief is available, any capital gain made on the disposal of the original shares or units will be deferred until the disposal of the exchanged asset. In addition to the instances outlined above there are a number of other potential rollover provisions such as those relating to small business restructures or compulsory acquisition.
Generally, a company or a trust can carry forward its tax losses on revenue account indefinitely, and can set off those losses against both income and capital gains. Capital losses can also be carried forward indefinitely, however they can only be set off against capital gains.
Broadly, the ability for a company to utilise its carried forward tax losses depends on whether it satisfies the continuity of ownership test. This test requires that more than 50% of all voting, distribution and capital rights be beneficially owned by the same natural persons in the year of loss, in the year of recoupment and all intervening years.
If a company fails to satisfy the continuity of ownership test, it may utilise its carried forward tax losses if the company carries on the same business it carried on immediately before the failure of the continuity of ownership test. The Australian parliament is currently in the process of amending the same business test with a more flexible ‘similar business’ test. The new rules would apply to tax losses made in the 2015-16 income year onwards. In addition to these rules there are also specific carry forward tax loss rules that apply to trusts.
The carry forward loss rules for companies are modified for certain widely held companies. Where a company that has tax losses joins a tax consolidated group, its losses may be transferred to the head company of the tax consolidated group. These transferred losses will be available to the consolidated group based on the relative value of the company to the rest of the consolidated group. The use of the transferred losses are also subject to the continuity of ownership test and/or the same business test.
Australian tax rates
Tables 1 and 2 summarise the principal rates of taxation that currently apply in Australia, exclusive of the Medicare levy of 2.0%. The rates may be changed by the Australian Government at any time.
The taxation year runs from 1 July in each year to 30 June in the following year, however certain entities may qualify for a substituted accounting period.
Table 1: Resident individuals (2018-19)
|Taxable income (A$)
||Tax on this income (A$)
| $0 – $18,200
| $18,201 – $37,000
|| 19c for each $1 over $18,200
| $37,001 – $90,000
|| $3,572 plus 32.5c for each $1 over $37,000
| $90,001 – $180,000
|| $20,797 plus 37c for each $1 over $90,000
| $180,001 and over
|| $54,097 plus 45c for each $1 over $180,000
Table 2: Non-resident individuals (2018-19)
|Taxable income (A$)
||Tax on this income (A$)
|$0 - $90,000
||32.5c for each $1
|$90,001 - $180,000
||$29,250 plus 37c for each $1 over $90,000
|$180,001 and over
||$62,550 plus 45c for each $1 over $180,000
Companies are generally taxed at the fixed rate of 30%. Special rates apply to small businesses, life insurance companies, complying superannuation funds, friendly societies and other registered organisations.
Fringe benefits tax
Fringe benefits tax (FBT) is payable on certain cash and non-cash benefits provided to an employee in connection with the employee's employment. FBT is imposed on and payable by the employer.
Employers have superannuation guarantee obligations under which they are required to contribute to their employees’ nominated superannuation (pension) fund incurring a ‘superannuation guarantee charge’.
The statutory minimum contribution amount is currently 9.5% of ‘ordinary time earnings’.
See also Employment and Industrial relations
Employee share schemes (ESS)
Australia has specific rules dealing with the taxation of benefits provided to employees under employee share schemes.
Broadly, any ‘discount’ to the market value of the ESS interest is taxable to the employees as ordinary income (not as a capital gain) in the tax year in which the benefits are granted. However, there are certain concessions:
- a A$1,000 tax-free concession – under this concession, the first A$1,000 of the ‘discount’ is exempt from tax, or
- tax deferral – under this concession, the tax liability is deferred generally until the earlier of when the award vests or is exercised, termination of the employee's employment or 15 years from the date that the benefit is granted.
There are different ‘gateway’ tests that must be met depending on which concession applies.
Separately, employees of qualifying start-up companies may be eligible for a tax concession. Any discount on ESS interests acquired by employees of start-ups is generally tax free subject to conditions. The CGT rules will then apply to the ESS interest, with the 12 month minimum holding period for the 50% CGT discount starting from when the ESS interest was acquired.
Employers/providers must also give each employee and the ATO certain information about ESS benefits that have been granted to the employee (such as the number of benefits granted and the amount of the ‘discount’).
All employers are subject to payroll tax based on the amount of wages (and deemed wages) they pay to employees and, in certain cases, payments they make to contractors. Each State has set certain exemption thresholds. These thresholds mean that payroll tax is not payable until the total amount of Australian group wages paid by an employer reaches the threshold.
Dividends distributed from after tax profits are subject to Australia’s ‘imputation system’. Generally, the system operates to impute the tax paid by the company as a credit to shareholders. To the extent that the shareholder’s tax liability is less than the credit, the shareholders may be entitled to a refund.
Dividends with an imputation credit attached are known as ‘franked dividends’. The franked portion of a dividend paid to non-residents is not subject to dividend withholding tax. However, the unfranked portion of a dividend paid to non-residents will be subject to dividend withholding tax at the rate of 30%, which may be reduced by the application of a relevant DTA.
An overseas company carrying on business in Australia through a branch or a permanent establishment is subject to Australian company tax at the current rate of 30% on profits attributable to that branch. There is no separate branch profits tax.
Generally, Australia levies a withholding tax rate of 10% on interest paid to a non-resident, provided the interest is not sufficiently connected to a permanent establishment of the non-resident in Australia. The interest withholding tax rate may be reduced by the application of a relevant DTA. An exemption from interest withholding tax applies to interest on debentures, notes and syndicated facilities that meet public offer requirements.
Interest derived by non-residents carrying on business in Australia through a permanent establishment is subject to the corporate tax rate.
Interest income derived by Australian residents will be included in the Australian resident’s assessable income and subject to tax at individual or company tax rates.
Interest incurred is generally deductible when incurred. However, Australia’s thin capitalisation rules may apply to limit interest deductions subject to a number of safe harbours.
Royalties are payments made for the use of rights. The payments may be periodic, irregular or one off. Royalties are deemed to have a source in Australia if they are paid to a non-resident by a resident of Australia, unless the resident pays the royalty in the course of carrying on a business outside of Australia or through a permanent establishment in another country.
Royalties are also deemed to have a source in Australia if they are paid or credited to a non-resident by another non-resident, and are, or are in part, an outgoing incurred by the non-resident payer in the course of carrying on a business in Australia at or through a permanent establishment in Australia.
Under domestic law, royalty income derived by a non-resident from Australian sources is subject to Australian withholding tax at a rate of 30% on the gross royalty payment. Where a DTA applies, the rate of Australian withholding tax is generally reduced. The entity paying the royalty is required to withhold and remit the Australian withholding tax to the ATO.
Royalty income derived by Australian residents will be included in the Australian resident’s assessable income and subject to tax at individual or company tax rates.
Managed investment trusts
Where a non-resident has an interest in an Australian trust that qualifies as a managed investment trust (MIT), MIT withholding tax may apply on the distributions made by the trust to non-residents.
Where the non-resident is located in an information exchange country, then a reduced rate of withholding of 15% generally applies. Where the non-resident is located in a jurisdiction with which Australia does not have an information exchange agreement, the rate of withholding is a 30% final tax.
For the purposes of determining the distribution subject to MIT withholding tax, dividends, interest and royalties are excluded (they will be subject to the dividends/interest/royalty withholding taxes), as well as non-Australian sourced amounts.Further, where the MIT distributions include capital gains in relation to assets that are not TAP, such gains will continue to be disregarded and will also not be subject to MIT withholding.
Eligible MITs can elect for certain common asset classes (shares, trust units and land) to be treated as capital assets for tax purposes. This provides greater certainty and can enable foreign investors an exemption from Australian tax on such assets and reduce the gain otherwise taxable to Australian investors.
Attribution Managed Investment Trusts
Under the Attribution Managed Investment Trust regime (AMIT Regime), a trustee may be able to elect for a MIT to be an AMIT.
To qualify to make the election to be an AMIT, the rights to income and capital arising from each of the membership interests in the trust must be clearly defined at all times. If the trust is a registered scheme, members are taken to have clearly defined rights in the income and capital of the trust under a safe harbour provided in the rules.
The benefits of electing to be an AMIT include:
- the trust being treated as a fixed trust for income tax purposes;
- for income tax purposes, the trust being able to attribute amounts of taxable income, exempt income, non-assessable non-exempt income, tax offsets and credits to members on a fair and reasonable basis in accordance with their interests as set out in the constituent documents of the trust;
- the trust being able to reconcile variances between the amounts actually attributed to members for an income year, and the amounts that should have been attributed in the income year (‘unders and overs’);
- amounts derived or received by the trustee that are attributed to members retain their character for income tax purposes in the hands of members;
- the position under the trust rules in Division 6 of the Income Tax Assessment Act 1936 (ITAA36), where a member’s share of the net income of the trust exceeds their share of the distributable income of the trust, is addressed by allowing an upward adjustment to the cost bases of their units.
Another key change introduced with the new AMIT Regime is an arm’s length test. This test applies to both MITs and AMITs. Under the arm’s length test, the Commissioner of Taxation may make a determination that a MIT or AMIT has derived non-arm’s length income, and the trustee may be liable to pay income tax in respect of the non-arm’s length income.Ordinary or statutory income is non-arm's length income if:
- it is derived from a non-arm's length scheme; and
- the amount is more than the MIT might have expected to receive if the parties had dealt with each other at arm's length.
The key differentiator between the general trust rules in Division 6 of the ITAA36 and the new AMIT Regime is the attribution model of AMIT Regime. Under the general trust rules, the net income of the trust for tax purposes is allocated to members based on their proportionate entitlement to the income of the trust. Under the AMIT Regime, the tax liability is attributed to members based on their clearly defined interests in the income and capital of the trust. Relevantly, where the trust is an AMIT, a member’s tax liability is not contingent on the trustee making a distribution. The trustee can distribute an amount it chooses without impacting the attribution of the tax liability to the member. However, the amount of the distribution is relevant to adjustments to the cost base of members’ units. That is, any excess of the distribution over the amount attributed to a member may decrease the cost base of the member’s units or result in a capital gain, and any excess of the amount attributed to a member over the distribution may increase the cost base of the member’s units.
Tax concessions for inbound investment
Australia offers general incentives to encourage investment in Australia. Some specific concessions are available, however, including:
- exemption from dividend withholding tax for certain foreign source dividends;
- a 43.5% refundable tax offset for eligible entities with aggregated turnover of less than A$20 million per annum undertaking eligible research and development activities (and a 38.5% non-refundable tax offset for all other eligible entities);
- concessionary tax rates for income derived by offshore banking units (reforms to modernise this regime began from 1 July 2015);
- capital gains on the sale of non-portfolio shareholdings in a foreign company held by an Australian company may be disregarded where the foreign company has an active underlying business; and
- venture capital tax concessions which are designed to encourage investment by giving concessions to eligible investors. Under the Venture Capital Limited Partnership (VCLP) program, certain foreign VCLP investors are exempt from capital gains on the profits of the VCLP’s eligible venture capital investments. Similar concessions are available for early stage VCLP’s (ESVCLP) Australian resident and foreign resident investors, whereby tax concessions from capital gains/losses are provided on eligible investments.
In addition, certain sophisticated investors may be eligible for further tax incentives. Where eligible investors purchase shares in a qualifying early stage innovation company, they may receive a non-refundable carry forward tax offset equal to 20% of the value of the investment up to $200,000 in addition to modified capital gains treatment.
Australia’s transfer pricing rules impose arm's length terms and conditions on cross border transactions. The purpose of the rules are to ensure that an appropriate level of profit, and therefore tax, is returned to Australia. The rules apply on a self-assessment basis and require taxpayers to identify what would occur between unrelated parties interacting at arm's length. Transfer pricing applies to transactions such as goods, services, royalties and licencing, loans, guarantees and capital transactions. It also applies to behaviours such as shifting risks outside of Australia or starting up a hub offshore.
This basic concept of transfer pricing is subject to three powerful ‘reconstruction’ exceptions. These can be summarised as follows:
- Firstly, the form of the arrangement between the related parties is to be disregarded to the extent that it is inconsistent with the substance of the relations (i.e. written arrangements may be ignored where they are inconsistent with the arrangements actually taking place).
- Secondly, if independent entities in comparable circumstances would not have entered into the particular arrangement, and instead would have entered into a substantially different arrangement, the assessment should be based on those relations.
- Thirdly, if independent entities in comparable circumstances would not have entered into the arrangement at all, assessment is based on that absence of relations.
The ATO has been emboldened by its recent win in the Chevron transfer pricing case. MinterEllison's tax controversy team represented the ATO in this case.
The Chevon case has had deep implications for multinational corporations that engage in cross border transactions, both in Australia and overseas. It means companies will need to carefully review the terms and conditions of their related party transactions and work out if they have sufficient evidence to support their position should they be challenged by the ATO.
The ATO has also reviewed its guidance for businesses about transfer pricing. It recently issued practical compliance guidelines that set out factors that the ATO considers when assessing the risks of particular cross border arrangements (e.g. financing, offshore hubs and inbound distribution activities).
Country by country reporting
Country-by-country reporting forms part of international measures targeting tax avoidance, by providing a comprehensive basis of tax data and legal information reported within countries and between countries.
Australian country by country reporting requirements apply to a 'significant global entity', (multinational groups with annual global income of A$1 billion or more) for income years commencing on or after 1 January 2016.
The provided information assists the ATO to assess risk and select taxpayers for further investigation.
New Multinational Anti-Avoidance Law (MAAL)
The MAAL provisions, which came into effect in late 2015, have strengthened the Australian general anti-avoidance provisions contained in Part IVA of the ITAA36. The measures apply to certain arrangements on or after 1 January 2016, regardless of when the arrangement actually commenced.
MAAL applies where the following requirements are met:
- a multinational group is a ‘significant global entity’ (multinational groups with annual global income for the period of A$1 billion or more);
- there is an arrangement under which a foreign entity in the group supplies goods and/or services (other than equity interests, debt interests or options over equity or debt interests) to unrelated Australian customers;
- activities are undertaken in Australia ‘directly in connection with’ the supply;
- activities are undertaken in whole or in part by an associated Australian entity or an Australian permanent establishment for the foreign entity, or by an unassociated Australian entity that is ‘commercially dependent’ upon the foreign entity or an Australian permanent establishment of that commercially dependent entity;the foreign entity obtains ‘ordinary income’ or ‘statutory income’ from the supply;
- some or all of that income is not attributable to an Australian permanent establishment of the foreign entity; and
- It can be concluded that the arrangement was entered into for the ‘principal purpose’ or a principal purpose of enabling a taxpayer to reduce Australian taxes or reduce Australian and foreign taxes (with a deferral of foreign tax being relevant unless there are reasonable commercial grounds for the deferral).
Diverted Profits Tax (DPT)
The DPT targets arrangements that transfer profits earned in Australia to an offshore related party. It applies to income years that start on or after 1 July 2017, but can apply to arrangements entered into before that date.
Broadly, the DPT applies to an arrangement, in relation to a ‘DPT tax benefit’ (broadly, an Australian tax saving) if the following conditions are met:
- a relevant taxpayer has obtained the DPT tax benefit in connection with the arrangement in an income year;
- it would be concluded, having regard to certain matters, that the person who carried out the arrangement did so for a ‘principal purpose’ of enabling the relevant taxpayer, or another taxpayer, to obtain a DPT tax benefit, or both to obtain a tax benefit and to reduce a foreign tax liability;
- the relevant taxpayer is a ‘significant global entity’ (multinational groups with annual global income of A$1 billion or more) for the income year;
- a foreign associate of the relevant taxpayer entered into, carried out or is connected with the arrangement; and
- it is reasonable to conclude that no other exemptions apply in relation to the relevant taxpayer, in relation to the DPT tax benefit.
The exemptions to the DPT available include satisfaction of a ‘A$25 million income test’, ‘sufficient foreign tax test’ and ‘sufficient economic substance test’. Relevantly, the sufficient foreign tax test will broadly only be satisfied if the increase of the foreign tax liability is equal to or exceeds 80%of the Australian tax reduction. Given the push from other OECD countries to reduce corporate tax rates, satisfaction of this test whilst Australia’s corporate tax rate remains 30% could prove problematic.
Certain types of entities are also excluded from the operation of the DPT, including foreign entities owned by a foreign government. If the conditions above are met, the ATO will be able to issue a ‘DPT assessment’, imposing a tax on the amount of the ‘diverted profit’ at a penalty rate of 40%, which will be payable within 21 days following the issue of the notice.
A DPT assessment will be subject to a method of review whereby the taxpayer is required to pay first and then have 12 months to provide the ATO's General Anti-Avoidance Rules Panel with additional information to show that its DPT assessment should be reduced. If the taxpayer is still dissatisfied with its original or amended DPT assessment after this process, it will have 60 days to challenge the assessment by making an appeal to the Federal Court of Australia.
Significantly, any appeal will generally be restricted to evidence provided to the ATO before the end of the 12-month review period. The effect of such a limitation is that during the review period, taxpayers and their advisers will need to directly consider how a court would interpret the material it provides to the ATO and how rules of evidence would apply to such material.
Residency, double taxation and foreign tax offsets
Australia’s capacity to tax non-residents may be limited where the non-resident is resident in a country with which Australia has entered into a DTA (see Table 3).
Generally, DTAs allocate taxing rights to the country of residence of the taxpayer. However, the country of the source of the income may impose withholding taxes on dividends, interest and royalties and may also tax in full the actual or attributed profits of any commercial enterprise carried on through a ‘permanent establishment’ in the country.
Australia has a general non-resident withholding tax regime. The taxation of worldwide income earned by Australian residents may in certain circumstances result in double taxation problems. Australia manages double taxation by either a foreign tax offset or a tax exemption.
A foreign tax offset is a non-refundable credit allowed for foreign tax that is paid by an Australian resident on foreign sourced income which is also assessable in Australia. While the offset is based on the amount of foreign tax paid, it is generally capped at the amount of Australian income tax payable on that foreign sourced income. Excess foreign tax offsets cannot be carried forward to use in later years.
Generally, Australian tax rules provide an exemption for dividends from controlled foreign companies, branch profits from operations in foreign jurisdictions and capital gains derived on the sale of shares in a foreign entity which carries on an active business.
Table 3: Countries with which Australia has a DTA
|| Sri Lanka
| Czech Republic
|| New Zealand
|| South Africa
|| United Kingdom
|| South Korea
|| United States
|| Papua New Guinea
Multilateral Instrument (MLI)
The MLI is a multilateral treaty that enables jurisdictions to modify their existing bilateral tax treaties in order to implement measures to address multinational tax avoidance and more effectively resolve tax disputes.
The legislation containing the MLI provisions came into force within Australia in August 2018, however the date that a MLI will take effect is dependent on the matching actions of other jurisdictions as treaty partners need to take steps to implement a MLI for a specific tax treaty. It is expected that the earliest a MLI can take effect in Australia is 1 January 2019.
Goods and services tax
A goods and services tax (GST
) has applied in Australia since 1 July 2000 to the supply of goods, real property and other supplies (such as intangible rights and services).
Broadly, the GST is similar in operation to the value added tax systems operating in Europe.
GST is payable at a flat rate of 10% of the value of a taxable supply. A taxable supply arises where:
- the supply is made for consideration
- the supply is made in the course of an ‘enterprise’ the supplier carries on
- the supply is ‘connected with the indirect tax zone’ (broadly Australia and its external territories),
- the supplier is registered or required to be registered for GST; and
- the supply is neither a ‘GST-free’ nor an ‘input taxed’ supply (see below).
An entity is required to be registered for GST if it carries on an enterprise (which includes but is not limited to a business) that has an annual turnover in excess of A$75,000 from supplies that are connected with the indirect tax zone. An entity may voluntarily register for GST if it does not meet the registration threshold, provided it is carrying on (or intends to carry on) an enterprise in the indirect tax zone. Registering for GST enables an entity to recover input tax credits (effectively a GST refund) for GST it pays on its business inputs. However, registering for GST imposes compliance (e.g. reporting – see below) obligations on the entity, which should be considered against the benefit of claiming input tax credits.
In order relieve non-resident suppliers of the obligation to account for GST on certain revenue neutral business- to-business supplies, the GST law was amended with effect from 1 October 2016 so that certain supplies are no longer subject to GST. The amendments primarily apply to supplies that are made by non-residents who don’t have a permanent establishment in Australia – e.g. the leasing of domestically operated aircraft by a non-resident lessor to an Australian lessee.
The definition of supply under the GST law is drafted broadly as ‘any form of supply whatsoever’ and includes the supply of goods, services, real property, advice, information and rights. It also includes an obligation to do anything or refrain from an act or to tolerate a situation. Similarly, consideration is defined broadly to include ‘any payment, act or forbearance’ made in connection with the supply or for the inducement of the supply. This includes the provision of non-monetary consideration.
The supply will be ‘connected with the indirect tax zone’ if:
- in the case of goods, the goods are delivered in the indirect tax zone, made available in the indirect tax zone or are imported into or exported from the indirect tax zone or in the case of real property (including an interest in, or right over, land), if the real property is located in the indirect tax zone
- in the case of anything other than goods and real property, the ‘thing’ is done in the indirect tax zone or supplied through an enterprise carried on through a permanent establishment in the indirect tax zone (as defined for this purpose). If the ‘thing’ is neither done in the indirect tax zone nor supplied through an enterprise carried on through a permanent establishment in the indirect tax zone and the ‘thing’ is a right or option to acquire another thing that would be connected with Australia, then the supply will be connected with the indirect tax zone.
Whether a supply is ‘done’ in the indirect tax zone will depend on its nature – for example, the ATO regards a supply of rights to be ‘done’ in the place where the agreement to supply those rights is made.
From 1 July 2017, supplies of services and digital products provided by non-residents to Australian consumers have been subject to GST (colloquially referred to as the ‘Netflix’ tax). If you sell through an electronic distribution platform (e.g. an app store), the platform operator is responsible for registering, reporting and paying the GST. Limited GST registration obligations will be available to entities that make such supplies to simplify the process for remitting GST.
A GST registered supplier’s entitlement to claim an input tax credit (effectively a GST refund) for the GST component of the cost of things acquired in the course of carrying on their enterprise will depend on the type of supply the acquisition is used to make.
GST withholding measures:
From 1 July 2018, new rules relating to the sale of new residential premises and subdivided residential land were introduced. The 'new' rules are aimed at addressing non-compliance within the property development industry, by requiring the purchaser of the property to withhold an amount from the purchase price and pay that amount directly to the ATO. Under the previous rules, the obligation was on the seller to collect the GST payable on a sale of property and remit the GST amount to the ATO.
GST on low value goods:
With effect from 1 July 2018, offshore supplies of goods into Australia with a customs value of A$1,000 or less may be subject to GST where that supplier exceeds the GST turnover threshold of A$75,000 and the supply is made to an Australian consumer (generally, a private individual). These measures were introduced to ‘level the playing field’ for domestic Australian retailers that were required to charge GST on their sales within Australia. There are also special rules that, where there is more than one entity involved in the goods being brought to Australia (including electronic distribution platforms and re-deliverers), the GST liability may shift to those entities.
For GST purposes there are:
Taxable supplies: for which GST is payable by the supplier when it makes the supply, but the supplier is entitled to an input tax credit (that is, a GST refund) for GST incurred on things acquired to make the supply. Examples of taxable supplies include commercial rent and most types of services consumed in the indirect tax zone.
GST free supplies: for which no GST is payable by the supplier when it makes the supply, but the supplier is entitled to an input tax credit (that is, a GST refund) for GST incurred on things acquired to make the supply. Examples of GST free supplies include certain types of food, education courses and the export of goods or outbound supply of intangibles such as rights or services for use or consumption outside of the indirect tax zone.
Input taxed supplies: for which no GST is payable by the supplier when it makes the supply, but the supplier will not be entitled to an input tax credit for GST incurred on things acquired to make the input taxed supply. Examples of these supplies include financial supplies and residential rent.
The importation of goods into the indirect tax zone ordinarily attracts 10% GST on the value of the goods at the time of the importation. If the importer is registered for GST in Australia and imports the goods in carrying on its enterprise, it may be entitled to claim back the GST incurred on the importation (that is, a GST refund). Some GST registered importers, upon application, may qualify for deferred payment of GST on importations.
A GST registered entity is required to submit GST returns to the ATO either quarterly or monthly depending on its annual turnover. An entity with an annual turnover of A$20 million or more is required to submit returns monthly.
Entities with an annual turnover of less than A$20 million may submit returns quarterly or may elect to submit returns monthly.
Each of Australia’s six states and two territories (states) imposes their own form of taxes. The more significant types of state based tax are:
- stamp duty (which includes transfer duty, ‘land rich’ or ‘landholder’ duty, motor vehicle registration duty, insurance duty, and mortgage duty)
- land tax, and
- payroll tax (See Employment taxation for detail).
In all States with the exception of South Australia, stamp duty is a tax imposed on transactions (called ‘dutiable transactions’) concerning ‘dutiable property’. In South Australia, stamp duty is predominantly a tax on instruments, such as contracts and transfer forms (as opposed to transactions).
Although the definition of ‘dutiable property’ varies between States, it generally includes land and, in some States, business assets (such as plant and equipment, goodwill, and intellectual property) and particular rights. Transfers of dutiable property and declarations of trust over dutiable property are two types of dutiable transactions.
Generally, stamp duty will not be payable on the establishment of a business. However, as stated above, a stamp duty liability will arise in some States where an existing business is purchased and the assets of the business include dutiable property.
While stamp duty on the transfer of business assets has now been abolished in some States, it still remains in a number of States. Stamp duty remains payable on the transfer of land and interests in land in all States.
The rate of transfer duty imposed by stamp duties legislation is imposed on a sliding scale that varies between States, generally ranging from a top rate of 4.5% in Tasmania to a top rate of 5.75% in Queensland based on the dutiable value of the dutiable transaction. Further, all States have now introduced regimes to impose additional duty where a 'foreign purchaser' acquires 'residential land' (noting that these terms can be broadly defined).
There is no longer stamp duty on the transfer of shares or units themselves. However, in addition to the direct acquisition of land, a liability to stamp duty may also be triggered upon the acquisition of shares in a company or interests in a trust at the same rate as for a transfer of land where the transaction effects an indirect acquisition in land.
Although the provisions vary between the States, often ‘landholder’ duty is triggered when an entity (either alone or when aggregated with related entities) acquires a 50% or greater interest in a company (or, with regard to an acquisition of interests in a private unit trust, a 20% or greater interest (in Victoria) or 50% or greater interest (in other States) that holds (directly or indirectly) interests in land. Further, in Queensland and South Australia, duty may in certain circumstances be imposed on the acquisition of an interest in a trust as if it were a direct acquisition of the trust property.
All States also impose landholder duty on the acquisition of a 90% or greater interest in a listed entity that holds (directly or indirectly) interests in land. In some States, a concessional rate of duty (being 10% of the private landholder duty rates) applies in respect of such acquisitions.
Further, all States impose insurance duty on general insurance (some States still impose duty on life insurance). Insurance duty is levied on the amount of the premium paid in relation to a contract that effects general insurance or the sum insured in relation to policies of life insurance. where relevant. Generally the insurer pays the insurance duty, although the cost is usually passed on to the insured.
Each of the States generally impose an annual land tax on the ‘owner’ of land in the relevant jurisdiction. ‘Land’ generally includes vacant land, land that is built on, and lots in building unit plans.
Land tax is assessed on the taxable value of an owner’s total land holdings. Broadly, the taxable value is the aggregate of the relevant unimproved values of all land owned less the value of any exempt land.
Land tax is generally imposed on the taxable value of the relevant land above a certain threshold amount (for example A$629,000 in New South Wales for the 2018 land tax year). The applicable rate of land tax varies across States and holding structures, however the rate is generally around 2% p.a. (noting that higher rates can apply where a foreign entity or person directly or indirectly owns the relevant land).
Tax policy in Australia is continually evolving to meet changing conditions. New reforms are regularly proposed.
For the latest news in tax reform, visit our Tax pages on our website.