Australia

Market overview

The Australian government has sought to increase its tax base to obtain more revenue for its federal programmes. Some practitioners have commented on the Australian government's challenges to comprehensively reform the tax system.

The government has focused on implementing the BEPS Project, and the Australian Tax Office (ATO) has begun to take decisive action against MNEs on the issues of transfer pricing and tax avoidance. Tax professionals have mentioned that the Australian government has gone beyond the principles laid out in BEPS: the tax legislation is stricter, and many view this as offering the taxpayer less protection.

A key piece of legislation is the diverted profits tax (DPT). The DPT gives more powers to the ATO to handle international groups which have diverted profits from Australia to offshore companies. Such international companies use mechanisms designed to avoid paying Australian income or withholding tax.

The government has enhanced the ATO's budget, meaning more resources for – and more pressure on – the authority now to collect revenue. In the past, the ATO negotiated and was keen to finalise disputes. The government's approach appears to have resulted in the ATO being increasingly keen to initiate tax litigation when disputes arise. Some tax practitioners have stated that there is less consultation between the revenue authority and the tax advisory community on legislation and the interpretation of the law. Practitioners have also observed that the ATO also appears to be exercising greater influence on tax policy-making.

Dispute areas relate to cross-border issues, such as inbound debt pricing, the inbound importation of high-value goods and the exportation of commodities. The decision in Chevron Australia Holdings Pty Ltd (CAPHL) v Commissioner of Taxation [2017] FCAFC has highlighted the robust approach taken by the government. In this case, Chevron lost its appeal regarding its Australian subsidiary subjected to a TP challenge on an inbound loan. Chevron is seeking special leave from the High Court to appeal the Federal Court's ruling. The case is seen as significant, as there are very few tax cases that deal with transfer pricing on cross-border loans.


Tax authorities

Australian Taxation Office
26 Narellan St, Canberra ACT 2601, Australia
Tel: +61 2 6216 1111
Fax: +61 1300 097 953
Email: datamatchingteam@ato.gov.au
Website: www.ato.gov.au


Tax rates at a glance

(As of August 23 2017)

Corporate income tax rate 30% (a)
Capital gains tax rate 30% (a)
Branch tax rate 30%
 
Withholding tax
Dividends
Franked n.a.
Unfranked 30% (b)
Conduit foreign income n.a. (c)
Interest
General 10% (d)
Interest paid by Australian branch of foreign bank to parent 5% (e)
Interest (debentures, state and federal bonds and offshore banking units) n.a. (f)
Royalties from patents, know-how, etc. 30% (f)
Construction and related activities 5% (h)
Fund payments from managed investment trusts 15% (i)
Branch remittance tax n.a.
 
Net operating losses (years)
Carryback 0
Carryforward Indefinite

  1. The rate is 28.5% for eligible small business entities with turnover of less than AUD2 million. For corporations, capital gains are taxed at the relevant corporate income tax rate.
  2. This is a final tax that is imposed on payments to non-residents only. A reduced rate (in recent treaties, reduced rates typically are 0%, 5% or 15%, depending on the level of ownership) applies to residents in treaty countries.
  3. An exemption from dividend withholding tax applies to the part of the unfranked dividends that is declared in the distribution statement to be conduit foreign income.
  4. In general, this is a final withholding tax that is imposed on payments to non-residents only. However, withholding tax is imposed in certain circumstances on interest paid to residents carrying on business overseas through a permanent establishment (branch). Modern Australian tax treaties exempt government and unrelated financial institutions from withholding tax.
  5. Interest paid by an Australian branch of a foreign bank to its parent is subject to a rate of 5% on the notional interest rate based on the London Interbank Offered Rate (LIBOR).
  6. Unilateral exemptions from interest withholding tax are provided for certain publicly offered debentures, for state and federal government bonds and for offshore borrowing by offshore banking units.
  7. In general, this is a final withholding tax that is imposed on gross royalties paid to non-residents. A reduced rate (5% in recent treaties) applies to residents of treaty countries.
  8. The filing of an Australian tax return to obtain a refund may be required if this withholding results in an overpayment of tax. A variation of the rate to mitigate the adverse cash flow impact is available to certain taxpayers that have previously filed tax returns in Australia.
  9. Effective from July 1 2012, managed investment trusts that hold only newly constructed energy-efficient commercial buildings may be eligible for a 10% withholding tax rate.

Source: EY Corporate Tax Guide 2017 and Deloitte