Outline of the Australian Corporate Tax System

A company that is resident in Australia for tax purposes is subject to tax on its worldwide income (including any foreign income attributed to it under the accruals taxation regimes) and is assessed on its taxable income at the corporate tax rate of 30%. A company will be resident in Australia for tax purposes if:

Non-resident taxpayers (including an Australian branch of a non-resident entity) are only subject to tax on their Australian-sourced income.

The Australian income tax system operates on a self-assessment basis. Most companies pay four quarterly instalments of tax in advance (based on assessable income derived in the last quarter), and one final payment annually. The year of income for income tax purposes is generally 1 July to 30 June. However, taxpayers may apply for a different year of an alternative tax year of income.

Dividends and Imputation

Australian resident shareholders are usually assessed on dividends paid out of a company’s profits. However, Australia operates an imputation system that is designed to avoid the double taxation of corporate profits.

Non-residents are generally subject to dividend withholding tax rather than income tax.

Tax Consolidation Regime

Australia has an elective tax consolidation regime for wholly-owned groups with specific rules relating to the treatment of assets, losses and other tax attributes.

Capital Gains Tax

Capital gains of a company are taxed under a codified regime that specifically includes net taxable capital gains in the assessable income of the company, which is then assessed at the corporate tax rate of 30%.

Company Loss Recoupment Rules

A company may carry forward unutilised tax and capital losses from one year and apply it against income from a later year, subject to the relevant loss recoupment rules.

Research & Development

The Commonwealth Government provides a tax deduction of 125% on eligible research and development (“R&D”) expenditure. It increases to 175% where expenditure is greater than the base R&D incurred over the past 3 years. However, all R&D expenditure must satisfy specific requirements in order to qualify for the concession.

Alternatively, companies with an annual R&D group turnover of less than A$5 million who spend between A$20,000 and A$1 million a year on R&D are eligible to claim a refundable tax offset instead of an R&D deduction. The choice can be made in the company’s tax return for the relevant year.

Debt and Equity Rules

The debt and equity rules objectively classify financial arrangements as being either “debt” or “equity”, based on the terms of the instrument. Generally, returns on debt instruments are taxable and payments of such returns are deductible. Widely-offered debt interests may also be exempt from interest withholding tax if the requirements of the “public offer exemption” are satisfied. In contrast, returns of equity to the recipient are neither assessable nor deductible for the payer but such returns may be frankable for Australian resident recipients and are not subject to interest withholding tax if paid to non-residents (or a foreign permanent establishment of an Australian resident).

Thin Capitalisation

Australia’s thin capitalisation regime usually restricts the deductibility of interest if average debt levels exceed a 3:1 debt-to-assets ratio for most companies (other than financial institutions). Thin capitalisation calculations are complex and highly technical, with adjustments and exceptions for various circumstances.

Taxation of Foreign Source Income
Australia has a comprehensive system for the taxation of foreign source income.  

Transfer Pricing

Australia has comprehensive transfer pricing provisions that allow the Commissioner of Taxation to treat affected transactions as if they were transacted at “arms-length” in some circumstances.