In 2021 Tax Tips

Taxation For Corporates In Australia

Australian corporations have to deal with several different rules and regulations when it comes to taxation. In this article, we’ll take a look at some of the key aspects of corporate taxation in Australia and outline the various obligations that companies have to meet. So if you’re looking for information on how your business is taxed in Australia, you’ve come to the right place!

Are you a corporate entity operating in Australia? If so, it’s important to understand the Australian tax system and your obligations. This blog post will provide an overview of corporate taxation in Australia, including key concepts and rates. 

We’ll also discuss some strategies you can use to reduce your tax liability. So, if you’re interested in learning more about corporate taxation in Australia, keep reading!

If you’re a corporate entity doing business in Australia, it’s important to be aware of the country’s tax system and how it applies to you. This article will take a closer look at the Australian corporate tax system, including rates and deductions. We’ll also discuss some strategies for reducing your tax bill. So if you’re looking to stay on top of your taxes in Australia, read on!

As a business owner in Australia, you need to know the various taxes that apply to your company. Corporate taxation is one of the most important, so it’s important to understand how it works. This blog post will provide an overview of corporate taxation in Australia and talk about some of the key things you need to know.

When it comes to taxation for companies in Australia, there are a few things that you need to be aware of. In this article, we will take a look at the different types of taxes that Australian companies are liable for and some of the deductions and allowances that you can claim. 

We will also discuss how your company should prepare its tax return. So, if you’re looking for information on corporate taxation in Australia, you’ve come to the right place!

It’s important to be aware of the country’s taxation system and how it will affect your business. In this post, we’ll look at some of the key aspects of corporate taxation in Australia and outline the tax rates that apply to various types of businesses. We’ll also discuss some common deductions that you may be able to claim so that you can keep as much money as possible in your pocket!

We all know that companies have to pay tax, but what you may not realise is just how much Australia’s corporate tax rates differ from other countries. In this post, we take a look at corporate taxation in Australia and compare it to the rates in some of our key trading partners. 

We also explore some of the changes that have been made to Australian company tax rates in recent years and offer some tips on how businesses can minimise their taxable income.

In Australia, companies are taxed at a rate of 30%. This means that for every dollar a company earns, it will need to pay 30 cents in tax. There are some exceptions to this rule, such as capital gains tax levied at a rate of 10%. 

Corporate tax is one of the most important sources of revenue for the Australian government, so it’s important to understand how it works. In this blog post, we’ll look at corporate taxation in Australia and explain how it affects businesses. 

We’ll also discuss some of the deductions and exemptions available to companies. So, if you’re looking for more information on corporate taxation in Australia, then this blog post is for you!

Let’s get started!

Corporate Residence

A company is a resident of Australia for income tax purposes if it is incorporated in Australia or, if not incorporated in Australia, it carries on business in Australia and either (i) its central management and control are in Australia (CM&C test) or (ii) its voting power is controlled by shareholders who are residents of Australia.

Guidance from the Australian Taxation Office (ATO) has indicated that if a foreign incorporated company carries on a business and has its central management and control in Australia, it will carry on business in Australia with the meaning of the CM&C test of residency, even though no part of the actual trading or investment operations of the business takes places in Australia. 

However, the government has proposed amendments to the existing legislation to clarify the position so that a foreign incorporated company only will be treated as an Australian tax resident if it has a ‘significant economic connection to Australia’. 

This test will be satisfied where both the company’s core commercial activities are undertaken in Australia, and its central management and control is in Australia. The measure will have effect from the first income year after the enabling legislation is enacted; however, taxpayers will have the option of applying the new law from 15 March 2017.

Permanent establishment (PE)

The concept of a PE is established in domestic law, and various DTAs concluded with Australia. 

Where a company is a resident in a country with which Australia has a DTA, it is important to regard the definition of PE contained therein as this will generally apply in priority to the domestic law.

Broadly, under Australia’s domestic law, a PE is a place at or through which a person carries on any business and includes:

  • A place where the person is carrying on business through an agent (except where the agent does not have or does not habitually exercise a general authority to negotiate and conclude contracts on behalf of the person).
  • A place where the person is using or installing concrete equipment or machinery.
  • A place where the person is engaged in a construction contract.
  • Where the person is engaged in selling goods manufactured, assembled, processed, packed, or distributed by another person for, or at or to the order of, the first-mentioned person and either of those persons participates in the management, control, or capital of the other person or another person participates in the management, control, or capital of both of those persons, the place where the goods are manufactured, assembled, processed, packed, or distributed.

Most DTAs contain a definition of PE similar to the definition under domestic law, though not identical.

Common Tax-Related Terms

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1. Australian business number (ABN)

Consider getting an ABN for your business. An ABN helps to manage your tax and business obligations and is used as a reference by the ATO for your business. You will also use your ABN when dealing with other businesses and government departments.

2. Business activity statement (BAS)

You must lodge activity statements with the ATO to report and pay your tax. You may do this online through ATO’s online services for business. The service also allows you to manage your business’s tax online.

3. Fringe benefits tax (FBT)

If you (or a person on your behalf) provide certain benefits to your employees or people associated with your employees, you may be liable for FBT. If so, you must register for FBT with the ATO and lodge a return each year.

4. Goods and services tax (GST)

GST is a broad-based tax of 10% imposed on most goods, services and other items sold in Australia. Depending on your turnover or service, you may need to register for GST.

5. Pay as you go (PAYG) instalments

PAYG instalment is a system that allows you to pay an expected tax liability in instalments. The ATO will notify you of your PAYG obligations.

6. Pay as you go (PAYG) withholding

PAYG withholding is a system of withholding income tax from an employee or contractor’s salary or wages. If your business has employees, you must register for PAYG withholding.

7. Single touch payroll (STP)

All businesses must report payroll information directly to the ATO. This includes:

  • salaries and wages
  • pay-as-you-go (PAYG) withholding
  • superannuation

This is known as Single Touch Payroll (STP). Every time you pay your employees, this reportable information must be sent to the ATO via your STP-enabled accounting software or another ATO approved method.

You should check that STP reporting is included in your accounting software.

Group Taxation

A tax consolidation regime applies for income tax and CGT purposes for Australian tax resident companies, partnerships, and trusts ultimately 100% owned by a single head company (or certain entities taxed like a company) resident in Australia. 

Australian resident companies that are 100% owned (either directly or indirectly) by the same foreign company and have no common Australian head company between them and the non-resident parent are also allowed to consolidate as a multiple entry consolidated (MEC) group. The group consolidated for income tax purposes may differ from the group consolidated for accounts or GST purposes.

Groups that choose to consolidate must include all 100%-owned resident entities under an all-in rule, and the choice to consolidate is irrevocable. 

However, eligible tier-1 companies (being Australian resident companies that have a non-resident shareholder) that are members of a potential MEC group are not all required to join a single MEC group when it forms but may form two or more separate MEC or consolidated groups, if they so choose, of which the same foreign top company is the 100% owner. 

If an eligible tier-1 company joins a particular MEC group, all 100% resident subsidiaries must also join the group. While the rules for forming and joining MEC groups allow more flexibility than with consolidated groups, the ongoing rules for MEC groups are more complex, particularly for tax losses and the disposal of interests in eligible tier-1 companies, which are subject to cost pooling rules. However, for practical purposes, these rules are relevant only if the non-resident’s interest is (or will become) an indirect Australian real property interest.

A single entity rule applies to members of a consolidated or MEC group. For income tax purposes, the subsidiary members are part of the head company. At the same time, they continue to be members of the group, and intra-group transactions are not recognised. In general, no group relief is available where related companies are not members of the same consolidated or MEC group

Rollover relief from CGT is available on the transfer of unrealised gains on assets, which are Australian taxable property, between companies sharing 100% common ownership where the transfer is between non-resident companies, or between a non-resident company and a member of a consolidated group or MEC group, or between a non-resident company and a resident company that is not able to be a member of a consolidated group.

Consolidated groups file a single tax return and calculate their taxable income or loss, ignoring all intra-group transactions.

When a consolidated group acquires 100% of an Australian resident entity so that it becomes a subsidiary member, generally, the cost base of certain assets (in general, those that are non-monetary) of the joining member is reset for all tax purposes, based on the purchase price of the shares plus the entity’s liabilities, subject to certain adjustments. 

In this way, acquiring 100% of an Australian resident entity by a consolidated group is broadly the tax equivalent of acquiring its assets. 

Subject to certain tests being passed, tax losses of the joining member may be transferred to the head company. They may be utilised subject to a loss factor, broadly the market value of the joining member divided by the market value of the group (including the joining member). 

The value of the loss factor (referred to as ‘the available fraction’) that applies for transferred losses may be reduced by capital injections (or the equivalent) into the member before it joins or into the group after the loss is transferred.

Franking credits and tax losses remain with the group’s head company when a member exits, and the cost base of shares in the exiting member is recreated based on the tax value of its assets at the time of exit, fewer liabilities subject to certain adjustments.

Generally, members of the group are jointly and severally liable for group income tax debts on the default of the head company unless the group liability is covered by a tax sharing agreement (TSA) that satisfies certain legislative requirements. 

A member who enters into a TSA generally can achieve a clean exit from the group where payment is made to the head company by the TSA.

1. Transfer pricing

Australia has a comprehensive transfer pricing regime to protect the tax base by ensuring that dealings between related, international parties are conducted at arm’s length. 

The arm’s length principle, which underpins the transfer pricing regime, uses the behaviour of independent parties as a benchmark for determining the allocation of income and expenses between related international parties. 

Australia’s transfer pricing regime aligns with international best practices as set out by the Organisation for Economic Co-operation and Development (OECD).

Transfer pricing adjustments operate on a self-assessment basis and apply in respect of certain cross-border dealings between entities and to the allocation of actual income and expenses of an entity between the entity and its PE, using the internationally accepted arm’s-length principle, which is to be determined consistently with the relevant OECD Guidance material (and applied to both treaty and non-treaty cases). 

In addition, companies must have transfer pricing documentation in place to support their self-assessed positions before the lodgement of the tax return.

Australia implemented the OECD‘s transfer pricing documentation standards for companies part of a group with global revenue of AUD 1 billion or more. Under these documentation standards, the Australian Taxation Office (ATO) receives the following information on large companies operating in Australia:

  • A country-by-country (CbC) report shows the information on the global activities, including the location of its income and taxes paid.
  • A master file containing an overview of the multinational’s global business, its organisational structure, and transfer pricing policies.
  • A local file that provides detail about the local taxpayer’s inter-company transactions.

The ATO has had a specific focus on transfer pricing of related-party cross-border financing, marketing, sales and distribution arrangements n recent times and has adopted a compliance approach that will vary depending on the risk rating of a taxpayer’s specific related-party arrangement.

2. Thin Capitalisation

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Thin capitalisation measures apply to the total debt of the Australian operations of multinational groups (including branches of those groups). The measures cover investment into Australia of foreign multinationals and outward investment of Australian-based multinationals and include a safe-harbour debt-to-equity ratio of 1.5:1. 

Interest deductions are denied to the extent that borrowing exceeds the applicable safe-harbour ratio. Where borrowing exceeds the safe-harbour ratio, multinationals are not affected by the rules if they can satisfy the arm’s length test (an independent entity could have born the borrowing). 

A further alternative test is available for certain inward or outward investing entities based on 100% of their worldwide gearing.

As mentioned above, the thin capitalisation rules apply to inward investment into Australia. In particular, they will apply where a foreign entity carries on business through an Australian PE or to an Australian entity in which five or fewer non-residents have at least a 50% control interest, or a single non-resident has at least a 40% control interest or no more than five foreign entities control the Australian entity. 

Separate rules apply to financial institutions. To facilitate their inclusion in the rules, Australian PEs of foreign entities must prepare financial accounts.

In calculating the safe harbour debt, an entity must prima facie comply with the accounting standards in determining its assets and liabilities and calculating the values of its assets, liabilities, debt and equity capital. 

International Financial Reporting Standards (IFRS), which apply in Australia, make it more difficult for some entities to satisfy thin capitalisation rules. 

However, thin capitalisation law allows departure from the Australian equivalents to IFRS to exclude deferred tax assets and liabilities and surpluses and deficits in defined benefit superannuation funds from functional calculations. As a result, it is no longer possible to revalue certain assets specifically for thin capitalisation purposes. 

3. Controlled foreign companies (CFCs)

Under Australia’s CFC regime, non-active income of foreign companies controlled by Australian residents (determined by reference to voting rights and dividend and capital entitlements) may be attributed to those residents under rules that distinguish between companies resident in ‘listed countries’ (e.g. Canada, France, Germany, Japan, New Zealand, the United Kingdom, and the United States) and in other ‘unlisted’ countries. 

In general, if the CFC is resident in an unlisted country and it fails the active income test (typically because it earns 5% or more of its income from passive or tainted sources), the CFC’s tainted income (very broadly, passive income and gains, and sales and services income that has a connection with Australia) is attributable. 

If a CFC is resident in a listed country, a narrower range of tainted income is attributed even if the CFC fails the active income test.

When income previously taxed on attribution is repatriated, it is not taxable.

4. Integrity measures for large multinationals

The following integrity measures seek to address multinational tax avoidance by entities that, in broad terms, are ‘significant global entities’ (SGEs) and ‘country-by-country reporting entities’ (CbCREs); broadly entities that are part of an actual consolidated accounting group  or consolidated notional accounting group (determined by assuming that each member of the group was a listed company and disregarding certain exceptions for preparing consolidated accounts) with global revenue of AUD 1 billion or more (see below):

  • Transfer pricing documentation standards applicable to a CbCRE (see above for more information).
  • The doubling of the maximum administrative penalties can be applied to entities entering into tax avoidance and profit shifting schemes.
  • A targeted anti-avoidance rule aimed at multinationals that enter into arrangements that artificially avoid having a taxable presence in Australia. Specifically, this measure will ensure that profits from Australian sales are taxed in Australia, where the activities of an associated Australian entity support the making of those sales. The profit from the Australian sales is booked overseas and is not attributable to a PE of the foreign entity in Australia. A principal purpose of entering into the arrangement must be to create a tax benefit.
  • A requirement for a CbCRE to lodge general purpose financial statements (GPFS) with the ATO where such accounts are not already lodged with the Australian Securities and Investment Commission.
  • A Diverted Profits Tax (DPT) is imposed at a penalty rate of 40% in circumstances where the amount of Australian tax paid is reduced by diverting profits offshore through contrived related-party arrangements. The DPT is extremely broad (for example, both financing and non-financing arrangements are in scope).
  • Significantly increased penalties (as great as AUD 555,000) can be applied for failing to lodge a tax return (or other tax-related documents) on time.
  • Doubling penalties can be applied for making a false or misleading statement.

5. Hybrid mismatch rules

Australia has comprehensive hybrid mismatch rules. Hybrid mismatches are differences in the tax treatment of an entity or instrument under the laws of two or more tax jurisdictions. If a mismatch arises, the law operates to neutralise the mismatch in Australia by:

Preventing entities that are liable to income tax in Australia from avoiding income tax or obtaining a double non-taxation benefit by exploiting differences between the tax treatment of entities and instruments across different countries by disallowing a deduction or including an amount in assessable income.

Limiting the scope of the exemption for foreign branch income and preventing a deduction from arising for payments made by an Australian branch of a foreign bank to its head office in some circumstances.

Denying imputation benefits on franked distributions made by an Australian corporate tax entity if all or part of the distribution gives rise to a foreign income tax deduction; and preventing certain foreign equity distributions received, directly or indirectly, by an Australian corporate tax entity from being exempt if all or part of the distribution gives rise to a foreign income tax deduction.

In addition, there is an integrity rule that has the potential to impose additional Australian tax on interest and derivative payments to foreign interposed zero or low-tax rate entities, irrespective of whether the arrangement involves a hybrid element.

Tax FAQs

1. What is the difference between tax offsets and deductions?

Deductions reduce a taxpayer’s assessable income, while tax offsets directly reduce the amount of tax payable. And the amount of offsets for which you are eligible depends on the income as it is based on income slots for which amount of offsets and a certain percentage of income are given.

2. What is an income test?

It is a criterion used to determine the eligibility for the number of offsets and benefits that can reduce the amount of tax.

Current Tax Rates for Companies is 30%, while the “base rate” (small) entity tax rate is 27.5%.

3. What’s the difference between a credit score and a credit report?

A credit report is a full summary of all your financial history, including bill payment history, defaults, bankruptcies and court judgements, plus any loans or credit you currently have in your name.

Your credit score is a number on the scale of 1-1000 (or sometimes 1200, depending on the agency) that indicates how reliable you are at repaying loans and managing debt. The higher the number, the better, and this number changes whenever you perform any financial activities, such as paying a bill on time or defaulting on a loan.

4. What are the various types of taxes levied?

The various types of taxes levied are:

  • Personal income taxes
  • Goods and Services taxes
  • Capital Gains tax
  • Corporate taxes
  • Trustees liability taxes
  • Excise taxes includes Luxury Car Tax, Fuel Taxes
  • Property Taxes
  • Custom duties
  • Payroll Taxes
  • Passenger Movement Charge
  • Fringe Benefits tax
  • Superannuation taxes
  • Inheritance tax

5. What are the consequences of not filing a return within the due date?

Late lodgement penalty amounting to $180 for the first 28 days after the lodgement date, which further increases by $180 after each subsequent 28 days period, up to a maximum of$900is levied and included prosecution in extreme circumstances.

6. How long do I need to keep my receipts?

Documentary evidence should be kept for five years from the date of lodgement of the tax return in which the claims are made. If you are depreciating an asset, the receipt should be kept until the item is fully depreciated (even if over five years).

7. Am I entitled to claim $300 for work-related expenses as this does not have to be substantiated?

You cannot just claim $300. You must incur any expense before it is claimable. Whilst you may not need receipts for expenditure up to $300, you must have spent the money, which must be relevant to your employment.

8. Can you complete my tax return if I miss a PAYG Payment Summary (group certificate)?

Your return can be completed using the details from a copy of the PAYG Payment Summary, a letter from your employer detailing the information on the PAYG Payment Summary or by reviewing your payslips for that period. 

If you cannot obtain the payment summary details from an employer, a Statutory Declaration would need to be completed. The detail from your PAYG Payment Summary may also be accessible by your tax consultant on the ATO Portal.

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