In 2022 Tax Tips

Corporate Tax In Australia

Australia has a complex corporate tax system, which can confuse business owners. This article provides an overview of the corporate tax system in Australia and explains how to pay corporate taxes. 

It also outlines the different incentives and deductions available to businesses in Australia. So if you’re looking for information on how to pay your Australian company tax, this is the article for you!

Corporate tax in Australia is a complex issue and one that can seem daunting for business owners. In this post, we’ll take a look at corporate tax rates in Australia, what you need to know about paying corporate tax, and some of the deductions you may be able to claim. 

We’ll also explore how changes to the corporate tax rate could impact your business. If you’re looking for more information on corporate tax in Australia or want to talk to an accountant about your specific situation, get in touch today.

Did you know that Australia has one of the highest corporate tax rates globally? In this post, we’ll look at how corporate tax works in Australia and find out why businesses are calling for a reduction in the rate. 

We’ll also explore some of the benefits of a lower corporate tax rate. So, read on whether you’re an Australian business owner or just curious about how our tax system works!

As individuals, we all have to pay our fair share of tax. But what about companies? How much tax do they have to pay in Australia, and why is it such a contentious issue? In this blog post, we’ll take a closer look at corporate tax in Australia and find out what’s been happening lately. 

We’ll also explore the various arguments for and against increasing or lowering the corporate tax rate. So if you’re interested in learning more about corporate taxation in Australia, keep reading!

Did you know that the corporate tax rate in Australia is 30%? That’s right, companies in Australia are taxed at a higher rate than most other developed countries. So, what do you need to know about corporate tax in Australia? 

In this blog post, we’ll look at the corporate tax rate, how it compares to other countries, and what deductions you can claim. We’ll also answer some common questions about corporate tax in Australia.

In Australia, companies are taxed on their taxable income. This is the income left after deductions have been made for things like salaries, wages, and fringe benefits. The company tax rate in Australia is 30%. 

This means that for every $100 of taxable income, a company will pay $30 in tax. There are a few different ways of calculating how much tax a company owes, but the most common method is to use the company’s financial year. This runs from 1 July to 30 June the following year. 

In addition to company tax, businesses also need to pay GST (Goods and Services Tax). GST is a 10% tax that applies to most goods and services sold in Australia.

Do you know how much your company pays in taxes each year? Unfortunately, if you’re like most business owners, you probably don’t have a clue. That’s because corporate tax rates in Australia can be pretty confusing. 

In this blog post, we’ll break down exactly how much your company will pay in taxes for the current financial year. We’ll also give you some tips on how to reduce your tax bill. So, whether you’re a small business owner or a CEO, read on to learn more about corporate tax in Australia.

There are a few important things to know when it comes to corporate tax in Australia. Firstly, the Australian corporate tax rate is 30%. This is lower than the United States and Canada but higher than many other countries. 

Additionally, several deductions and offsets can be claimed by businesses, affecting how much they pay in taxes. Understanding these rules is important for business owners and managers who want to make sure they are paying the right amount of tax. 

This blog post will go over the basics of corporate tax in Australia, so you can understand what you need to do to comply with the law.

Let’s get started!

Significant Developments

A corporate tax rate of 25% applies to certain small business corporate tax entities with an aggregated turnover of less than 50 million Australian dollars (AUD) for 2021/22 and later income years, provided that the company does not derive substantial passive income. The corporate tax rate for all other corporate tax entities remains at 30%.

Temporary economic stimulus measures introduced as part of the Federal Government’s economic response to COVID-19 and still applicable include:

  • Supporting business capital investment through enhanced tax concessions, including for businesses with an aggregated turnover of up to AUD 5 billion, the choice to claim an immediate tax deduction for the cost of an eligible depreciating asset. See the Deductions section for more information.
  • Ongoing claims can be made for the JobMaker Hiring Credit for eligible businesses that took on additional employees aged 35 years and between 7 October 2020 and 6 October 2021. See the Tax credits and incentives section for more information.
  • A temporary loss carryback measure for companies with an aggregated turnover of less than AUD 5 billion that have tax losses incurred in 2019/20, 2020/21, and 2021/22 (proposed to be extended to 2022/23) income years for offset against taxed profits from the 2018/19 or later income years. 

For income years commencing on or after 1 July 2021, a more targeted research and development (R&D) incentive applies.

From an industry perspective:

  • Australia’s offshore banking unit (OBU) concession is scheduled to cease operating in the 2023/24 and later income years.
  • the Junior Minerals Exploration Incentive (JMEI), which enables eligible minerals exploration companies to generate tax credits for new shareholders based on their tax losses generated from greenfield mineral exploration expenditure, was extended until 30 June 2025. 

Under the superannuation guarantee (SG) scheme, which requires employers to contribute a certain percentage of an employee’s earnings base, subject to limited exceptions, to a registered superannuation fund or retirement savings account on behalf of the employee, the required SG percentage has increased to 10% from 1 July 2021. It will remain so until 30 June 2022.

The state of Victoria has a windfall gains tax which applies to the increase in the value of land in Victoria that results from a rezoning that takes effect on or after 1 July 2023.

The Australian government plans to enter into ten new and updated tax treaties by 2023.

Taxes On Corporate Income

Companies that are residents of Australia are subject to Australian income tax on their worldwide income. Generally, non-resident companies are subject to Australian income tax on Australian-sourced income only. 

However, where a company is a resident in a country, Australia has concluded a double taxation agreement (DTA); Australia’s right to tax business profits is generally limited to profits attributable to a permanent establishment (PE) in Australia.

All companies are subject to a federal tax rate of 30% on their taxable income, except for ‘small or medium business’ companies, which are subject to a reduced tax rate of 25% for the 2021/22 income year (26% for the 2020/21 income year). The reduced tax rate applies only to those companies that, together with certain ‘connected’ entities, fall below the aggregated turnover threshold of AUD 50 million.

Integrity measures also ensure that a company will not qualify for the reduced rate unless the specifically defined passive income (including, among other things, interest, rents, and net capital gains) that it derives represents no more than 80% of its total assessable income for the year. 

Income Determination

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1. Inventory valuation

Inventory generally may be valued at cost (full absorption cost), market selling value, or replacement price. Although inventory should be valued at a lower amount because of obsolescence or other special circumstances, the lower valuation generally may be chosen, provided it is a reasonable valuation. 

However, special rules apply regarding the valuation of trading stock for certain companies joining a consolidated group. For example, last in first out (LIFO) is not a sufficient basis for determining cost, nor is a direct cost regarding manufactured goods and work-in-progress.

Conformity is not required between book and tax reporting. For tax purposes, inventory may be valued at cost, market selling value, or replacement price, regardless of how inventory is valued for book purposes. 

Those who choose to come within the small-medium business entity measures (broadly defined as taxpayers who carry on business and who, together with certain ‘connected’ entities, have an aggregated turnover of less than AUD 50 million (previously AUD 10 million for income years that commenced before 1 July 2021) may ignore the difference between the opening and closing value of inventory if, on a reasonable estimate, this is not more than AUD 5,000.

2. Capital gains

A capital gains tax (CGT) applies to assets acquired on or after 20 September 1985. Capital gains realised on the disposal of such assets are included in assessable income and are subject to tax at the corporate tax rate. To determine the quantum of any gain for any assets acquired before 21 September 1999, the cost base is indexed according to price movements since the acquisition, as measured by the official CPI until 30 September 1999. 

There is no indexation of the cost base for price movements from 1 October 1999. Disposals of plant and equipment are subject to general rules rather than the CGT rules. Capital losses are allowable as deductions only against capital gains and cannot be offset against other income. In calculating capital losses, there is no indexation of the cost base.

Companies tax residents in Australia generally are liable for the tax on gains on the disposal of assets wherever situated, subject to relief from double taxation if the gain is derived and taxed in another country. 

However, the capital gain or capital loss incurred by a company from a CGT event about shares in a foreign company is reduced by a percentage reflecting the degree to which the foreign company’s assets are used in an active business if the company holds a direct voting percentage of 10% or more in the foreign company for a certain period before the CGT event. 

The attributable income from CGT events happening to shares owned by a controlled foreign company (CFC) is reduced in the same way. In addition, capital gains and capital losses made by a resident company regarding CGT events happening in respect of ‘non-tainted’ assets used to produce foreign income in carrying on business through a PE in a foreign country are disregarded in certain circumstances.

Non-resident companies are subject to Australian CGT only where the assets are taxable Australian property (i.e. Australian real property or the business assets of Australian branches of a non-resident). 

However, Australian CGT also applies to indirect Australian real property interests, non-portfolio interests in interposed entities (including foreign interposed entities), where the value of such an interest is wholly or principally attributable to Australian real property. 

For these purposes, ‘Real property’ is consistent with Australian treaty practise, extending to other Australian assets with a physical connection with Australia, such as mining rights and other interests related to Australian real property. A ‘non-portfolio interest’ is an interest held alone or with 10% or more associates in the interposed entity.

Proceeds from the sale of certain taxable Australian property by a non-resident are subject to a non-final WHT of 12.5% of the proceeds.

3. Dividend income

A ‘gross-up and credit’ mechanism applies to franked dividends (dividends paid out of profits that have been subject to Australian tax) received by Australian companies. The corporate shareholder grosses up the dividend received for tax paid by the paying company (i.e. franking credits attaching to the dividend) and are then entitled to a tax offset (i.e. a reduction of tax) equal to the gross-up amount. Using a special formula, a company with an excess tax offset entitlement converts the excess into a carryforward tax loss.

Dividends paid to another resident company that is unfranked (because they are paid out of profits not subject to Australian tax) are taxable unless paid within a group that has chosen to be consolidated for tax purposes. Dividends paid between companies within a consolidated tax group are ignored to determine the group’s taxable income.

Franked dividends paid to non-residents are exempt from dividend WHT.

An exemption from WHT is also available for dividends received by non-resident shareholders (or unitholders) in an Australian corporate tax entity (CTE) to the extent that they are ‘unfranked’ and are declared to be conduit foreign income (CFI). 

These rules may also treat the CFI component of an unfranked dividend received by an Australian CTE from another Australian CTE as not taxable to the recipient, provided it is on-paid within a specified timeframe. 

Broadly, income will qualify as CFI if it is foreign income, including certain dividends or foreign gains, which are not assessable for Australian income tax purposes, or a foreign income tax offset has been claimed in Australia.

Non-portfolio dividends repatriated to an Australian resident company from a company resident in a foreign country will be non-assessable, non-exempt income, but only if it is a distribution paid on an equity interest as determined under Australian tax law.

Income of a non-resident entity in which Australian residents hold interests is not assessable when repatriated to Australia. This is because the income has been previously attributed to those residents and taxed in Australia (see Controlled foreign companies [CFCs] in the Group taxation section for more information).

Stock dividends

man using calculator to count income and outcome

Stock dividends, or the issue of bonus shares, as they are known under Australian law, are generally not taxed as a dividend. The tax treatment is spreading the cost base of the original shares across the original shares and the bonus shares. 

However, suppose a company credits its share capital account with profits when issuing bonus shares. In that case, this will taint the share capital account (if it is not already a tainted share capital account), causing the bonus share issue to be a dividend. Depending on the facts, other rules may apply to bonus share issues.

4. Financial arrangements

Special rules apply to the taxation of financial arrangements (TOFA). ‘Financial arrangement’ is widely defined to cover arrangements that involve a cash settlable legal or equitable right to receive, or obligation to provide, something of economic value in the future.

These measures provide six tax-timing methods for determining gains or losses regarding financial arrangements, along with revenue account treatment of the resulting gains or losses to the extent that the gain or loss is made in earning assessable income or carrying on a business for that purpose. 

The default methods are the accruals method and the realisation method, one or other of which will apply depending on the relevant facts and circumstances of a particular financial arrangement. 

In broad terms, the accruals method will apply to spread an overall gain or loss over the life of the financial arrangement (or a particular gain or loss over the period to which it relates) where there is sufficient certainty that the expected gain or loss will occur. The realisation method deals with a gain or loss that is not sufficiently certain.

Alternatively, a taxpayer may irrevocably choose one or more of four elective methods (i.e. fair value, retranslation, financial reports, and hedging) to determine the tax treatment of financial arrangements covered by the election. 

However, qualification criteria must be met before the elective methods may be used. Generally, these criteria require that the taxpayer prepare a financial report by Australian (or comparable) accounting standards and be audited by Australian (or comparable) auditing standards.

Exemptions from this regime may be available regarding the duration of the arrangement or the nature of the relevant taxpayer and the annual turnover or value of assets of that taxpayer. In addition, certain financial arrangements are excluded from these rules, including leasing and hire purchase arrangements. 

Foreign residents are taxable on gains from financial arrangements under these measures to the extent that the gains have an Australian source.

5. Royalty income

Royalties are generally subject to taxation as ordinary income.

However, royalties paid to a non-resident (other than where it is received in respect of a PE in Australia of a resident of a treaty country) are subject to a final WHT applied to the gross amount of the royalty. 

Royalties for WHT purposes covers payments that fall within the ordinary meaning of the term as well as certain specified payments (e.g. payments for the use of, or the right to use, copyright, patent, design or model, plan, secret formula or process, trademark, or any industrial, commercial, or scientific equipment; the supply of scientific, technical, industrial, or commercial knowledge or information; the supply of any assistance that is ancillary and subsidiary to and is furnished as a means of enabling the application or enjoyment of any of the rights as mentioned earlier, equipment, or information; and the use of, or the right to use, visual images and sounds in connection with television or radio broadcasting that is transmitted by satellite, cable, optic fibre, or similar technology), subject to the application of any DTA. 

Generally, payments for services will not constitute the payment of a royalty. See the Withholding taxes section for further information.

6. Foreign exchange gains and losses

Foreign currency gains and losses are recognised when realised, regardless of whether there is a conversion into Australian dollars, and are included in or deducted from assessable income, subject to limited exceptions. 

For foreign exchange gains and losses associated with financial arrangements subject to the TOFA measures (as discussed above), the compliance impact of the foreign exchange rules will be reduced for those taxpayers who are eligible to and elect the TOFA retranslation or financial reports tax-timing methods, which will broadly have the effect of recognising for tax purposes the same foreign exchange gains or losses reported for accounting purposes.

To reduce compliance costs for foreign currency denominated bank accounts that are not subject to the TOFA rules, some taxpayers may elect to disregard gains or losses on certain low balance transaction accounts that satisfy a de minimis exemption or may elect for retranslation by annually restating the balance of the account by reference to deposits, withdrawals, and the exchange rates at the beginning and end of each year (or by reference to amounts reported by applicable accounting standards).

There are also exceptions to the realisation approach’s timing and characterisation aspects. For example, the foreign currency gain or loss is closely linked to a capital asset. The particular financial arrangement is subject to the hedging elections under the TOFA rules.

Entities or parts of entities, satisfying certain requirements, can choose to account for their activities in a currency other than Australian dollars for income tax purposes as an intermediate step to translating the result into Australian dollars (known as the ‘functional currency’ choice).

7. Foreign income

The current basis upon which the foreign income of corporations resident in Australia is taxed is set out below.

  • Foreign dividends or distributions paid on equity interests as defined for Australian income tax purposes (i.e. the exemption does not apply to dividends paid on legal form shares that are treated as debt interests) are exempt from tax when received by a resident corporate tax entity that holds at least a 10% participation interest in the foreign company. 

The exemption applies to distributions received indirectly (e.g. via a trust) by resident companies. However, hybrid mismatch rules may operate to limit the exemption (see the Group taxation section for more information).

  • Active foreign branch profits of a resident company from carrying on business through a PE in a foreign country and capital gains made by a resident company from the disposal of non-tainted assets used in deriving foreign branch income (except income and capital gains from the operation of ships or aircraft in international traffic) are not assessable for tax.
  • Other foreign income of Australian resident corporations is subject to tax; however, in most cases, an offset for foreign income tax paid is allowed to the extent of Australian tax payable on such income.
  • Generally, limited partnerships are treated as companies for Australian tax purposes. However, in certain circumstances, foreign limited partnerships, foreign limited liability partnerships, United States (US) limited liability companies, and United Kingdom (UK) limited liability partnerships are treated as partnerships (i.e. as a flow-through entity) rather than as a company for Australia’s income tax laws.
  • Australia also has a comprehensive CFC regime. See Controlled foreign companies (CFCs) in the Group taxation section for more information.

Our Advice

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Tax laws in Australia are evolving at an unprecedented pace, and your organisation must stay ahead of the curve to minimise risk and maximise opportunity. Our market-leading tax team has deep experience in advising on aspects of corporate tax law and can cut through the complexity while ensuring you are fully compliant with all legislation.

Whether you’re a public or private corporate group, private equity-backed company, a private equity fund or a hedge fund, with us, you will have access to a first-class legal partner that can support you across the full corporate life-cycle and reduce the need to deal with multiple firms.

We have built the knowledge and resources to become the cross-border merger and acquisition (M&A) structuring experts for Asia – offering both bespoke solutions and tried, tested and streamlined ways to efficiently facilitate your income or capital flow and minimise your tax costs.

Holistic and integrated advice

As a full-service law firm, we can take a holistic approach to corporate tax advice. Our tax and structuring teams work closely with other practice areas and bridge the gap between tax considerations and legal documentation. This means you will benefit from our premium advice fully informed by the other legal and regulatory considerations.

Driving efficiencies and reducing risk

It would be best to have a partner who understands the importance of the retail order of legal work for your transaction. For example, for an M&A deal, this might mean us delivering tax and structuring inputs first before the legal ‘heavy lifting’ and document drafting starts.

Our advice on corporate tax law includes:

  • Initial public offerings
  • Secondary offerings
  • Spin-offs
  • Joint ventures
  • Partnerships
  • Trusts
  • Corporate reorganisations.
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