Quick Summary. Located “down under” in the Southern Hemisphere and covering the Indian and Pacific Oceans, Australia consists of a mainland continent, the island of Tasmania, and several smaller islands. Australia comprises six states and 10 territories, with its capital at Canberra. Australia boasts the world’s 14th-largest economy and one of the highest per-capita incomes in the world.
In 1788, Governor Arthur Phillip led the British settlement and colonization of Australia, establishing Great Britain’s first colony in Australia: New South Wales. Following the founding of New South Wales, Great Britain established further colonies, dividing up Australia further: Tasmania (1825), Western Australia (1829), South Australia (1836), Victoria (1851), and Queensland (1859). Each colony exercised its own tax system, which was primarily based on customs and excise duties.
In 1901, according to the Commonwealth of Australia Constitution Act 1900, the Federation of Australia occurred. This was the process by which the six separate British colonies noted above united to form the Commonwealth of Australia. Australia’s federal government, however, did not introduce a federal income tax or corporate income tax until 1915 as part of its efforts to pay for the expenses of World War I. Moreover, from 1915 to 1942, income taxes were levied at the state and federal level in Australia. In 1942, the Commonwealth passed the Income Tax Act. Today, the Australian Taxation Office is the primary agency responsible for the administration of the Australian tax system.
Under Australia’s system of government, tax laws arise through the enactment of Parliamentary acts and legislation, tax treaties, regulations, and case law. Its primary tax laws derive from the Constitution of Australia, Income Tax Act of 1942, Income Tax Act of 1997, and other federal legislation.
Australia is a parliamentary, federal constitutional monarchy. Its system of government combines elements of the systems of the United Kingdom and the United States. Its constitution provides for a bicameral Parliament, with a Senate and House of Representatives, as well as a monarch. Its executive branch, the Federal Executive Council, is comprised of a prime minister and other ministers. In addition, its judicial branch is headed by the High Court of Australia.
Australia is a member of the United Nations, G20, OECD, and World Trade Organization.
Currency. The official currency of Australia is the Australian Dollar (AUD). It is a free-floating currency.
Common Legal Entities. Australian law permits various forms of business organization. These include partnerships, private companies, proprietary limited companies, no-liability companies, and incorporated limited partnerships.
Tax Authorities. In November 1910, the Australian Parliament passed the Land Tax Act of 1910, establishing a Commissioner of Land Taxation as a branch of the Treasury. This office has had various names changes since its creation (e.g., Federal Taxation Office and Commonwealth Taxation Office) and is now called the Australian Taxation Office. The Australian Taxation Office is responsible for the administration of the Australian federal taxation system. It is also the principal revenue collection agency and administers other government programs, such as the superannuation system. In addition, each state and territory in Australia have their own revenue offices.
- Australia is party to more than 40 tax treaties and is a signatory to the OECD MLI.
- United States-Australia Tax Treaty. The United States and the Australian federal government have entered into a tax treaty and one amendment, known as a “Protocol” (collectively, the “US-Australia Treaty”). The Protocol entered into force on September 27, 2001. Some of the US-Australia Treaty benefits are discussed below.
- Generally, under the US-Australia Treaty, dividends are subject to a reduced tax rate of 15-percent. However, the tax rate may be reduced to 5-percent if the beneficial owner is a company that owns 10-percent or more of the voting stock of the company making the dividend payment.
- If royalties arise in one country and are paid to a resident of the other country, the royalty payments are generally subject to a reduced tax rate of 10-percent. However, certain types of royalties are excluded from the reduced withholding tax rate.
- Business Profits. Generally, business profits of a resident of a contracting state are not taxable in the other contracting state unless the resident conducts business in the latter state through a permanent establishment. If this applies, the resident may be taxed in the latter state to the extent any business profits are attributable to the permanent establishment.
- Personal Services. Independent personal services income derived by an individual resident of a contracting state may be taxed in the other contracting state to the extent such individual (a) is present in the other contracting state for more than 183 days in the taxable year, or (b) has a permanent establishment regularly available in the latter contracting state and the independent personal services income is attributable to the permanent establishment. For employment income, a resident of a contracting state may be taxed in the other contracting state to the extent employment is conducted in the other state, subject to some exceptions.
- Gains from Real Property. If a resident of one contracting state has gains from the sale or disposition of real property located in the other contracting state, it may be taxed by the latter contracting state.
Corporate Income Tax Rate. Generally, the Australian federal corporate tax rate is 30 percent. However, in the 2020-21 income year, a reduced rate of 26 percent may apply to certain companies if (a) no more than 80 percent of its assessable income for the year is “base rate entity passive income”; and (b) it has an annual aggregated turnover of less than 50 million dollars. The states and territories do not impose additional corporate taxes on corporations.
Individual Tax Rate. Similar to the United States, Australia’s federal government imposes graduated tax rates on the taxable income of individuals. For the 2020-21 year, these graduated rates range from 19% to 45%. The states and territories do not impose additional income taxes on individuals.
Corporate Capital Gains Tax Rate. Generally, capital gains are taxed at the same rate as other assessable income (30 percent for corporations; the marginal ordinary income tax rate for individuals). However, Australia recognizes certain concessions related to capital gains, such as: exemptions, capital gain deferral rollovers, and a 50-percent capital gains discount.
Residence. Unlike the United States, Australia does not tax on the basis of citizenship. Rather, an individual is subject to Australian taxation based on certain factors, such as: residence, domicile, physical presence during more than one-half of the income year, or whether the individual is a member of a certain superannuation scheme. Australia also implements a “temporary resident” concept. If an individual is a resident of Australia, he or she is subject to tax on worldwide income from all source.
Similarly, Australian-resident companies are subject to tax on their worldwide income. Generally, a company is considered a resident of Australia if it is incorporated in Australia or if its management and control is located in Australia.
Withholding Tax. Australia imposes a 30-percent withholding tax on dividends and royalties and a 10-percent withholding tax on interest paid to nonresidents. Additionally, Australia does not impose a withholding tax on fees for services performed by nonresidents. Australia also has other withholding taxes, such as withholding taxes on foreign resident capital gains.
Transfer Pricing. Australia applies an arm’s-length standard to its transfer pricing rules, generally based upon comparable uncontrolled price, resale price, and other methods, with a “reasonably arguable” exception. Additionally, Australia has adopted country-by-country reporting (“CbCR”) for certain multinational enterprises (MNE) groups, generally following BEPS Action 13.
CFC Rules. Australian residents are subject to a current tax on its foreign subsidiary’s attributable income. Anti-avoidance rules may apply.
Hybrid Treatment. Effective 2019, Australia has implemented hybrid mismatch rules that adhere to Action 2 of the OECD/G20 Base Erosion and Profit Shifting (BEPS) project. This is generally applied to prevent certain entities from avoiding income taxes in Australia.
Inheritance/estate tax. Australia does not impose inheritance or gifts taxes.
Overview of Australia’s Income Tax System. Australia imposes a federal income tax on the income of individuals and companies, based on residency. In addition, the states and territories do not impose any income taxes on the income from activity within the provinces. Nonresidents are generally subject to tax on income from Australian sources and on gains from the disposal of taxable Australian property. The Australian corporate tax system attempts to alleviate the double taxation of income through implementation of a modified imputation system, which provides a tax credit with respect to dividends paid by domestic corporations to individuals.
Individuals. Australian resident individuals are subject to income tax on their worldwide income. Each individual must separately compute his or her tax liability, and family members may not file joint income tax returns. Gross income is divided among several categories, including employment income, personal services income, and superannuation income. Individual taxpayers are entitled to deductions for a limited number of personal expenses, including work-related expenses and gifts or donations.
Dividends, interest, and royalties are subject to tax, and the expenses incurred to produce investment income generally are deductible. Dividends paid by domestic companies are taxable at a reduced rate.
Corporations. Australian resident corporations are taxable on their worldwide income from business income and capital gains. Expenses are generally deductible to the extent they are reasonable and incurred for the purpose of gaining or producing income. In general, Australian corporations may deduct expenses related to depreciation, depletion, bad debts, and charitable contributions.
Australia levies taxes at both the individual and the shareholder level, although the double taxation is partially eliminated through a modified imputation system. A notional dividend tax credit provides tax relief with respect to domestic dividends paid to individuals.
Australian entities resident in Australia are generally subject to tax on their worldwide income at rates that depend on the status of the corporation and the type and location of income earned. A corporation is considered to be an Australian resident if it was incorporated in Australia or, if incorporated outside of Australia, its central management and control is located in Australia.
Corporate groups can form an income tax consolidated group with an Australian resident head company. Once the group is consolidated, it is treated as a single entity for income tax purposes. As a result, a single company income tax return for the consolidated group should be lodged/filed with the Australian Taxation Office. Moreover, intercompany dividends paid by a company to its shareholder company are assessable to the shareholder company. However, if both companies are a part of the same tax consolidated group, the intercompany dividend is not assessable to the shareholder company.
Partnerships. Similar to United States tax law, Australian tax law does not recognize a partnership as a separate taxpayer. Accordingly, each partner of an Australian partnership is subject to tax on such partner’s share of partnership income each year, regardless of whether distributions are made from the partnership to the partner.
It should be noted that if the composition of a partnership changes (e.g., a partner retires, a partner dies, a new partner is admitted, etc.) the partnership is dissolved and a new partnership is formed.
Other Taxes. While Australia does not impose a tax on the contribution of share capital to an Australian company, Australia does impose other types of taxes. For example, Australia imposes additional taxes on companies, such as fringe benefits taxes, for fringe benefits provided by employers to their employees. Additionally, Australia levies a petroleum resource rent tax, which applies to all Australia offshore oil and gas projects (with certain exceptions). Australia also imposes excise duties on certain “luxury” items, such as: liquor, cigarettes, tobacco, and petroleum.
Inheritance and Gift Taxes. Australia does not impose inheritance or gifts taxes on its residents.
Payroll Taxes. Each state and territory in Australia imposes a payroll tax on employers who meet certain criteria. Specifically, employers with total annual Australian wages that exceed a certain exemption threshold must pay taxes to their respective state/territory revenue office.
Indirect Taxes. Australia imposes a goods and services tax (GST) of 10 percent on most goods, services, and items sold or consumed in Australia. Moreover, each state and territory in Australia imposes various types of indirect taxes on the transfer of property. A purchaser of dutiable property (e.g., real estate, land interests, business assets, etc.) must generally pay a transfer duty. Additionally, a purchaser who acquires 50 percent or more of a private company or trust that is a landholder will be subject to a landholder duty. New South Wales imposes a duty on the transfer of shares in a company registered in New South Wales. Australian states also impose a land tax on owners of land where the land value exceeds certain thresholds.