Corporate Tax Basics In Australia
Did you know that Australia has one of the highest corporate tax rates globally? In this post, we’ll take a closer look at the corporate tax system in Australia and what you need to do to pay your taxes. We’ll also explore some of the benefits of doing business in Australia. So whether you’re thinking of starting a business down under or are just curious about corporate tax, keep reading!
It’s important to understand the basics of corporate tax in Australia if you’re a business owner or plan on doing business in Australia. This blog post will give you a brief overview of corporate tax in Australia, including key concepts and rates.
In Australia, the corporate tax rate is 30%. This means that companies pay a percentage of their profits in taxes to the government. First, you need to know a few things about corporate taxes in Australia, including what qualifies as taxable income and which expenses can be deducted.
There are many things to think about when it comes to taxes, and for businesses, corporate tax is one of the most important. But, unfortunately, Australia has a complex corporate tax system, so it can be tricky to understand exactly what you need to do.
In this post, we’ll give you a brief overview of corporate tax in Australia, including important deadlines and rates. We’ll also help you figure out if you need to pay corporate tax and how to go about doing it.
Most people know that businesses have to pay taxes, but many don’t understand the specifics of corporate taxation in Australia. This post will outline the basics of corporate tax in Australia, including what is and isn’t taxable, how to file a return, and common deductions. By understanding these basics, you’ll better navigate the world of business taxation.
Did you know that every company in Australia is taxed on its profits? The corporate tax rate in Australia is 30%, higher than the rates in other countries. Still, several deductions and concessions are available that can reduce your taxable income.
In this blog post, we’ll look at the basics of corporate taxation in Australia, including what expenses are deductible and how to calculate your taxable income.
We’ll also discuss some of the recent changes to the corporate tax system in Australia. So if you’re thinking about starting a business or you’re already running one, then this blog post is for you!
The corporate income tax system in Australia is designed to ensure that companies pay their fair share of tax on profits generated in the country. This article will take a closer look at how the Australian corporate tax system works and what you need to do to meet your obligations. We will also discuss some of the key benefits of the Australian corporate tax system.
As an Australian business, it’s important to stay updated on the latest corporate tax changes and how they may impact your company. This blog post will provide a brief overview of corporate tax in Australia, including who is responsible for paying it and when it’s due. We’ll also share some tips for reducing your tax bill and keeping your business compliant.
There are a few things you need to know as an Australian business owner regarding corporate tax. This guide will give you a basic understanding of how corporate tax works in Australia, including when and how you need to pay it. We’ll also look at some of the deductions you can claim.
Australia has a relatively complex corporate tax system compared to other countries. This can be intimidating for businesses new to the Australian market, so we’ve put together a brief overview of the basics.
This article will discuss what types of income are taxable in Australia, how rates are applied, and any exemptions or concessions that may apply. We’ll also cover some key concepts such as consolidated groups and thin capitalisation.
Read on for all the details!
Getting the basics right has never been more important – good record keeping, substantiation, correct account codes, properly accounting for private use and declaring all cash transactions are essential to assuring yourself, your tax agent and the ATO that your tax affairs are in order.
Small businesses must ensure their bookkeeping and lodgments are correct and updated. The onus is on business owners to correctly report their income, claim their expenses and have the appropriate records.
When keeping your records, make sure to:
- record cash income and expenses
- account for personal drawings and use of company money or assets
- record goods for your use
- separate private expenses from business expenses
- keep valid tax invoices for creditable acquisitions when registered for GST
- keep adequate stock records
- keep adequate records to substantiate motor vehicle claims.
The ATO is getting smarter with its data, and business owners are increasingly contacting their income and expense claims.
The ATO will look for discrepancies in returns when compared against pre-fill data or business benchmarks and has increased resources to deal with the cash economy.
Contact the ATO to rectify any errors or mistakes. If you make a voluntary disclosure, you can generally expect a reduction in the administrative penalties and interest charges that would normally apply.
Your tax agent is required to take reasonable care when preparing your return, which means they may ask you detailed questions about your cash flow, business performance, personal use of assets and records.
1. Taxable period
The Australian tax year runs from 1 July to 30 June. However, a corporation may apply to adopt a substitute year of income, for example, 1 January to 31 December.
2. Tax returns
A corporation (including the head company of a consolidated tax group) lodges/files a tax return under a self-assessment system that allows the ATO to rely on the information stated on the return.
Where a corporation is in doubt about its tax liability regarding a specific item, it can ask the ATO to consider the matter and obtain a binding private ruling.
Generally, the tax return for a corporation is due to be lodged/filed with the ATO by the 15th day of the seventh month following the end of the relevant income year, or such a later date as the Commissioner of Taxation allows. However, additional time may apply where the tax return is lodged/filed by a registered tax agent.
3. Payment of tax
A PAYG instalment system applies to companies other than those whose annual tax is less than AUD 8,000 that are not registered for GST.
Most companies are obligated to pay instalments of tax for their current income year monthly or quarterly. All companies with a turnover of AUD 20 million or more pay instalments every month.
Instalments are calculated by applying an instalment rate to the amount of the company’s actual ordinary income (ignoring deductions) for the previous quarter. The instalment rate is notified to the taxpayer by the ATO and determined by reference to the tax payable for the most recent assessment.
The ATO may notify a new rate during the year on which subsequent instalments must be based. Taxpayers can determine their instalment rate, but there may be penalty tax if the taxpayer’s rate is less than 85% of the rate that should have been selected.
Final assessed tax is payable on the first day of the sixth month following the end of that income year, or such later date as the Commissioner of Taxation allows by a published notice.
4. Tax audit process
The Australian tax system for companies is based on self-assessment; however, the ATO undertakes ongoing compliance to ensure corporations meet their tax obligations.
The ATO adopts the justified trust concept from the OECD. It will seek objective evidence that would lead a reasonable person to conclude a particular taxpayer paid the right amount of tax and tailor its assurance approach based on a taxpayer’s unique business profile.
This generally means that the ATO will take a risk-based approach to compliance and audit activities, with efforts generally focused on taxpayers with a higher likelihood of non-compliance and higher consequences (generally in dollar terms) of non-compliance. Compliance activities take various forms, including general risk reviews, questionnaires, reviews of specific issues, and audits.
5. Statute of limitations
Generally, the Commissioner of Taxation may amend an assessment within four years after the day of which an assessment is given to a company. However, under the self-assessment system, an assessment is deemed to have been given to the company on the day it lodges its tax return.
The four-year time limit does not apply where the Commissioner believes there has been fraud or evasion, or to give effect to a decision on a review or appeal, or as a result of an objection made by the company, or pending a review or appeal.
For certain small business entities and, for assessments for income years commencing on or after 1 July 2021, medium business entities (i.e. those with an aggregated turnover of between AUD 10 million and AUD 50 million), a two-year amendment period applies.
A seven-year review period applies to an assessment to give effect to a transfer pricing adjustment raised for an income year commencing on or after 29 June 2013.
6. Topics of focus for tax authorities
The ATO has a ‘Top 1000’ program that aims to obtain additional evidence to ensure that the largest 1,000 public and multinational companies are reporting the right amount of income tax and GST in Australia.
This program supports and expands the ATO’s existing compliance approaches. Under the program, ATO teams engage with each taxpayer using tailored compliance approaches to ensure they are reporting the right amount of income tax or identifying tax risk areas for further action.
The ATO periodically releases its compliance focus areas that are attracting its attention. The following are current areas of focus by the ATO for large and multinational businesses:
- There is a strong focus on shifting profits to lower tax jurisdictions and the cessation of Australian operations, including a focus on cross-border transactions (particularly related-party financing).
- Structuring and business events include mergers and acquisitions, divestment of major assets and demergers, share buybacks, capital raisings and returns of capital, private equity entries and exits, and initial public offerings.
- Capital gains tax, losses (capital and revenue), tax consolidation, infrastructure investments, and financial arrangements.
- GST and property transactions, cross-border issues, and financial supply transactions.
- Sharing data and intelligence on risks and opportunities, sharing capabilities and strategies, and joint compliance with other jurisdictions.
- R&D tax incentive.
1. Depreciation and depletion
A capital allowances regime allows a deduction for the decline in value of depreciating assets held by a taxpayer. The asset holder is entitled to the deduction and may be the economic, rather than the legal, owner.
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 but does not include land, trading stock, or, subject to certain exceptions, intangible assets. In addition, deductions are available for certain other capital expenditures.
Intangible assets that are depreciating assets (if they are not trading stock) are:
- Certain mining, quarrying, or prospecting rights and information.
- Items of intellectual property (IP).
- In-house software.
- Indefeasible rights to use a telecommunications cable system.
- Spectrum licences under radio communications legislation.
- Datacasting transmitter licences.
- Telecommunications site access rights.
Taxpayers that do not qualify for any of the capital allowances accelerated depreciation concessions for businesses (see below) must depreciate the asset over its useful life (known as ‘effective life’) using either the straight-line (known as the ‘prime cost’ method) or diminishing-value method (straight-line rate multiplied by 200%).
Taxpayers may self-determine the useful life of certain items of depreciating assets or may choose the useful life for the asset as contained in a published determination of the Commissioner of Taxation.
Business taxpayers can immediately deduct items that cost less than AUD 100 and choose to write off all items costing less than AUD 1,000 through a low-value pool at a diminishing-value rate of 37.5% per annum to the extent the asset is used for income-producing purposes.
Taxpayers carrying on business and who, together with certain connected or affiliated entities, have an aggregated turnover of less than AUD 5 billion for the year may be eligible to apply accelerated depreciation concessions for certain depreciating assets. These rules can be difficult to navigate, but in summary, they are as follows:
- Temporary full expensing deduction: Businesses with an aggregated turnover of less than AUD 5 billion (or companies that meet an alternative AUD 5 billion income test and historical capital expenditure test) may choose to claim a tax deduction for the full cost of an eligible depreciating asset located in Australia or principally used in Australia that is acquired from 7:30 pm AEDT on 6 October 2020 and first used or installed by 30 June 2022 (proposed to be extended to 30 June 2023).
- Temporary backing business investment: Businesses with an annual aggregated turnover of less than AUD 500 million may choose to deduct 50% of the cost of an eligible new depreciating asset on installation, with normal depreciation rules applying to the balance of the asset’s cost, where the asset is acquired from 12 March 2020 and first used or installed ready for use by 30 June 2021.
- Instant asset write-off: Businesses with an annual aggregated turnover of less than AUD 500 million must deduct the full cost of eligible depreciating assets costing less than AUD 150,000 that are purchased between 7:30 pm AEDT on 2 April 2019 and 31 December 2020, and that is the first used or installed between 12 March 2020 and 30 June 2021.
‘Project pool’ rules allow expenditures that do not form part of the cost of a depreciating asset to be deductible over the life of a project that is carried on for a taxable purpose. Amongst other things, items that fall within the rules include the following:
- Amounts paid to create or upgrade community infrastructure for a community associated with the project.
- Site preparation costs for depreciating assets (except horticultural plants in certain circumstances).
- Amounts incurred for feasibility studies for a project.
- Environmental assessment costs applicable to the project.
- Amounts incurred to obtain information associated with the project.
- Amounts incurred in seeking to obtain a right to IP.
- Costs of ornamental trees or shrubs.
The so-called ‘blackhole’ expenditure provisions allow a five-year straight-line write-off for capital expenditure concerning a past, present, or prospective business, to the extent that the business is, was, or is proposed to be carried on for a taxable purpose.
The expenditure is deductible to the extent that it is not elsewhere taken into account (e.g. by inclusion in the cost base of an asset for CGT purposes). It is not denied deductibility for the income tax law (e.g. by the rules against deducting entertainment expenditure).
Special rules apply for primary producer assets, such as horticultural plants, water and land care assets, and the treatment of research and development (R&D) (see the Tax credits and incentives section for more information) and expenditure on certain Australian films.
A luxury car cost limit applies for depreciating the cost of certain passenger motor vehicles (AUD 60,733 [59,136] cost limit for 2021/22 [2020/21] income year).
Expenditure on in-house software development may be allocated to a ‘software development pool’ and written off over five years (30% in years two, three, and four, and 10% in year five).
Amounts spent on acquiring computer software or the right to use it (except where the acquisition is for developing in-house software) are generally treated as incurred on acquiring a depreciating asset, deductible over five years commencing in the first year used or installed ready for use.
A loss arising on the sale of a depreciating asset (depreciated value of the asset less sale consideration) is generally an allowable deduction. To the extent of depreciation recaptured, a gain on the sale of a depreciating asset is generally taxed as ordinary income. Gains exceeding the amount of depreciation recaptured are also taxed as ordinary assessable income (i.e. not as a capital gain).
Subject to exceptions referred to below, capital expenditure incurred after 15 September 1987 in the construction or improvement of non-residential buildings used for producing assessable income is amortised over 40 years at an annual 2.5% rate.
Capital expenditure on construction buildings used for short-term traveller accommodation (e.g. hotels, motels) and industrial buildings (typically factories) is amortised over 25 years at an annual 4% rate. Construction commenced on 26 February 1992.
The cost of eligible building construction that commenced after 21 August 1984 and before 16 September 1987 (or construction contracted before 16 September 1987) is amortised over 25 years at an annual 4% rate.
There is no recapture of the amortised amount upon disposal of the building, except where the expenditure is incurred after 13 May 1997, in which case recapture will apply, subject to certain transitional rules.
Similar provisions apply to income-producing residential buildings on which construction commenced after 17 July 1985.
The cost of income-producing structural improvements, the construction of which started after 26 February 1992, is eligible for write-off for tax purposes on the same basis as that of income-producing buildings, that is, at a rate of 2.5% per annum.
The cost of consumables may be either written off immediately or as used.
The following expenditure attracts an immediate 100% deduction: environmental protection activities, dealing with pollution and waste; landcare operations; exploring or prospecting for minerals, including the cost of mining rights and information acquired from an Australian government agency or government entity; mine site rehabilitation; and capital expenditure incurred by primary producers on fencing, water facilities, and fodder storage assets used to store grain and other animal feed.
Tax depreciation is not required to conform to book depreciation.
Percentage depletion based on gross income or other non-cost criteria is not available.
Goodwill and trademarks are not depreciating assets, and tax amortisation is not available.
3. Start-up expenses
Certain start-up expenses, such as costs of company incorporation or costs to raise equity, may qualify for a five-year straight-line write-off to the extent that it is capital expenditure concerning a current or prospective business that is or is proposed to be carried on for a taxable purpose.
An immediate deduction is available to a small-medium business entity (i.e. a business with an aggregated turnover of less than AUD 50 million) for a range of professional expenses (e.g. legal and accounting advice) and taxes or charges to an Australian government agency associated with starting a new business.
4. Interest expenses
Special rules classify financial arrangements as either debt or equity interests. These rules focus on economic substance rather than legal form, take into account related schemes, and extend beyond shares.
In this situation, interest expense on non-share equity would be treated as a dividend, which is potentially frankable, and would be non-deductible for the paying company/group.
The law allows companies to claim a deduction for interest expenses incurred concerning offshore investments that generate non-assessable, non-exempt dividend income.
Thin capitalisation measures apply to the total debt of the Australian operations of multinational groups (including branches of those groups). See Thin capitalisation in the Group taxation section for more information.
Australian taxpayers claiming interest deductions on a financing arrangement from a related foreign interposed zero or low-rate entity (broadly, a jurisdiction with tax rates of 10% or less or jurisdictions that may offer tax concessions) need to consider the potential application of complex integrity rules, which were introduced as part of Australia’s hybrid mismatch rules. Specialist advice should always be sought.
5. Bad or forgiven debts
A deduction may be available for bad debts written off as bad before the end of an income year. Generally, a deduction will only be available where the debt was previously included in assessable income, or the debt is in respect of money lent in the ordinary course of a money lending business. The ability to claim a deduction for bad debt is also subject to other integrity measures.
The amount of a commercial debt forgiven (other than an intra-group debt within a consolidated tax group) that is not otherwise assessable or does not otherwise reduce an allowable deduction is applied to reduce the debtor’s carryforward tax deductions for revenue tax losses, carry forward capital losses, undeducted capital expenditure, and other capital cost bases in that order.
Generally, any amount not so applied is not assessable to the debtor. Forgiveness includes the release, waiver, or extinguishment of a debt (other than by full payment in cash) and the lapsing of the creditor’s recovery right because of a statute of limitations.
6. Charitable contributions
Charitable contributions are generally deductible where they are made to entities specifically named in the tax law or endorsed by the Commissioner of Taxation as ‘deductible gift recipients’.
However, deductions for such gifts cannot generate tax losses. Generally, the deduction is limited to the amount of assessable income remaining after deducting from the assessable income for the year all other deductions.
Subject to limited exceptions, deductions are denied for expenditure on ‘entertainment’, which is broadly defined as entertainment by way of food, drink, or recreation, and accommodation or travel to provide such entertainment. However, as a general rule, an income tax deduction is available for the cost of providing entertainment that is a fringe benefit (i.e. provided to employees).
8. Fines and penalties
Fines and penalties imposed under Australian and foreign law are generally not deductible. This includes fines and penalties imposed concerning both civil and criminal matters.
The General Interest Charge (GIC) and Shortfall Interest Charge (SIC), imposed for failure to pay an outstanding tax debt within the required timeframe or where a tax shortfall arises under an amended assessment, are deductible for Australian tax purposes.
In general, GST input tax credits, GST, and adjustments under the GST law are disregarded for income tax purposes. Other taxes, including property, payroll, PRRT, and FBT, as well as other business taxes (excluding income tax and the Diverted Profits Tax [DPT]), are deductible to the extent they are incurred in producing assessable income or necessarily incurred in carrying on a business for this purpose, and are not of a capital or private nature.
10. Other significant items
Where expenditure for services is incurred in advance, deductibility of that expenditure generally will be prorated over the period during which the services will be provided, up to a maximum of ten years.
General value shifting rules apply to shifts of value, direct or indirect, regarding loan and equity interests in companies or trusts.
Circumstances in which these rules may apply include where there is a direct value shift under a scheme involving equity or loan interests, or where value is shifted out of an asset by the creation of rights in respect of the asset, or where there is a transfer of assets or the provision of services for a consideration other than at market value.
The value shifting rules may apply to the head company of a consolidated tax group or multiple entry consolidated (MEC) group for value shifts also involving entities outside the group, but not to value shifting between group members, which the tax consolidation rules address (see the Group taxation section for more information).
11. Net operating losses
Losses may be carried forward indefinitely, subject to compliance with continuity tests of more than 50% of ultimate voting, dividends, and capital rights or compliance with the same business test or similar business test (which applies to losses incurred in income years from 1 July 2015).
The ability to utilise these losses may be subject to additional rules (see the Group taxation section for more information).
A temporary loss carryback measure applies to companies with an aggregated turnover of less than AUD 5 billion in the form of a refundable tax offset (i.e. cashback), subject to satisfying certain conditions.
Tax losses incurred in 2019/20, 2020/21, and 2021/22 (proposed to be extended to 2022/23) income years are eligible for the loss carryback for offset against taxed profits from the 2018/19 or later income years only. The first year the offset can be claimed is the 2020/21 income year.
12. Payments to foreign affiliates
A corporation can deduct royalties, management service fees, and interest charges paid to non-residents, provided the amounts are referable to activities aimed at producing assessable income and also having regard to Australia’s transfer pricing rules.
In the case of royalties and interest payable to non-residents, there is also a requirement that any applicable withholding taxes (WHTs) are remitted to the Commissioner of Taxation before the deduction can be taken.
Certain payments made by a significant global entity (SGE), broadly an entity that is part of a group with global revenue of AUD 1 billion or more, under an arrangement involving a foreign entity that is an associate, may be subject to DPT.
The DPT aims to ensure that the tax paid by SGEs properly reflects the economic substance of their activities in Australia and aims to prevent the diversion of profits offshore through arrangements involving related parties.
Specifically, the DPT applies at a rate of 40% on the Australian tax benefit obtained in connection with a scheme involving a foreign entity that is an associate of the Australian taxpayer where the principal purpose, or one of the principal purposes, of the scheme, is to obtain an Australian tax benefit or to obtain both an Australian tax benefit and reduce foreign tax liabilities, subject to certain exceptions (e.g. a ‘sufficient economic substance test’).
Furthermore, Australian taxpayers making interest or derivative payments on a financing arrangement from a related foreign interposed zero or low-tax rate entity need to consider the potential application of integrity rules introduced as part of Australia’s hybrid mismatch rules.
1. What are the types of income to be declared in return?
The types of income that need to be declared are employment income, super pensions and annuities, Government payments and allowances, investment income(including interest, dividends, rent and capital gains tax), Business Partnership and trust income, foreign income, other income- including compensation & insurance payments, discounted shares under employee share schemes and prizes and awards.
2. What are the various types of records that need to be kept by the assessee?
The various types of records that are needed to be kept by the assessee are as follows:
- Income statements or payment summaries
- Statements from your bank and other financial institution showing the interest earned
- Dividend statements
- Summaries from managed investment funds
- Receipts or invoices for equipment or asset purchases and sales
- Receipts or invoices for expense claims and repairs
- Tenant and rental record
3. What is the duration for which such records are to be kept by the assessee?
These records are to be kept for five years from the date return is lodged.
4. What information do you need to lodge in the case of Individuals?
The information that needs to be lodged are as follows:
- Bank account details
- Income statement or payment summaries from all of the employers
- Payment summaries from Centrelink
- Receipts or statements for the expenses claimed as deduction
- Spouse’s income (if you have one)
- And the details of private health insurance if you have
5. How is income tax calculated?
Tax is calculated at taxable income. Therefore, assessable income less allowable deductions are equal to taxable income.
Gross Tax Payable=Taxable Income multiplied by tax rates.
Net Tax Payable= Gross Tax Payable Minus Tax Offsets.
Amount owing or refund= Net Tax Payable plus Medicare levy minus tax credits and refundable offsets.
The Medicare levy surcharge (MLS) is levied @1%, 1.25% or 1.5% is levied in addition to Medicare levy on Australian taxpayers who do not have any appropriate level of private patient hospital cover and earn above a certain income.