Each level of Government in Australia imposes its own taxes – that is, Federal, State and Territory, and Local Governments.
Federally, the Australian Taxation Office (‘ATO') is responsible for collecting a variety of taxes, such as income tax, capital gains tax (‘CGT'), fringe benefits tax (‘FBT') and goods and services tax (‘GST').
At a State and Territory level, each Government has its own revenue authority which impose various taxes, such as land tax, payroll tax and stamp duty.
At a Local Government level, annual charges are levied on the owners of real estate.
Taxation in Australia
New entrants will need to consider the tax implications of investing or carrying on an enterprise in Australia, and whether they are classified as an Australian resident or non-resident for Australian tax purposes.
Broadly speaking, Australian residents are taxed on their worldwide income, that is, from sources both in and outside of Australia.
Contrastingly, non-residents of Australia are only taxed on their Australian-sourced income and on capital gains made in relation to assets that have a substantial connection with Australia, such as Australian real property.
However, non-resident taxpayers who derive Australian-sourced income from interest, dividends and royalties are instead subject to Australian withholding tax, which is withheld at the source.
If an entity is operating in more than one jurisdiction, they may be subject to double taxation and so consideration should be given to the operation of any Double Taxation Agreement (‘DTA'). A DTA can operate to allocate sole taxing rights to one jurisdiction, provide tax relief to overcome double taxation, or reduce the rates of withholding tax that would normally be imposed.
Whilst foreign investment in Australia is encouraged, it is regulated by the Foreign Investment Review Board (‘FIRB').
Accordingly, foreign investors looking to invest in Australia generally require prior approval from the FIRB to ensure that such investment is in line with Australia's national interest.
A common form of foreign investment in Australia is investment in Australian real estate (property), which may attract an array of taxes.
Land Tax and Surcharge Land Tax
Each State and Territory levies land tax on owners of land located in its jurisdiction, with the general exception of a person's principal place of residence.
In relation to foreign owners of land, additional land surcharges may be imposed, depending on the State or Territory in which the property is located, the type of land interest owned, and the type of entity that owns the land interest.
Stamp Duty (Transfer Duty) and Surcharge Purchaser Duty
Each State and Territory also impose stamp duty, or transfer duty, in relation to acquisitions or transfers of land located in its jurisdiction.
Similar to land tax, surcharge purchaser duty is imposed on foreign acquisitions of land in addition to any stamp duty paid in relation to the transaction.
Whilst stamp duty deals with direct acquisitions in land interests, duty can still be imposed on any indirect transfer of land interests through the landholder duty regime.
In this situation, duty is generally imposed on an acquirer's proportionate indirect interest in the value of the underlying land held by an entity.
For example, where a company is land rich and an individual acquires shares or units in such company or unit trust, landholder duty may apply.
From 1 July 2019, costs incurred in relation to the holding of vacant land, such as interest expenses, land taxes and council rates, are generally denied as a tax deduction where the vacant land is not used or made available for use by a taxpayer or their affiliate's business.
The structure that an entity chooses to invest in or operate business from in Australia will have a significant bearing on the after-tax result, as different rates of income tax are imposed for different entity types.
The main types of structures available for foreign entrants are:
- Permanent establishment (‘PE')
- Discretionary trust
- Fixed unit trust
An inbound investment vehicle's debt deduction, such as interest and borrowing expenses, may be disallowed or limited under the Australian thin capitalisation rules.
Generally speaking, a portion of such expenses will be denied as a deduction if the entity's average debt exceeds 60% of its average assets – that is, where its debt to equity ratio exceeds 1.5:1.
Despite this general rule, where an entity's debt deductions are less than the de-minimis threshold of $2 million for an income year, the think capitalisation rules do not apply.
Where a taxpayer has cross border related party dealings, the transfer pricing rules require that these related parties deal with each other on an arm's length basis. This means that they must deal with each other in the same manner that they would if they were dealing with independent parties in the same situation.
If an entity is thinking of establishing a business in Australia, certain tax incentives and offsets may be available to them.
For example, where an entity is an early stage innovation company (‘ESIC') or undertakes eligible research and development (‘R&D') activities, particular offsets and concessions may be available.
Where a foreign entity carries on business in Australia or has Australian investments, they need to consider what compliance obligations they have.
Foreign businesses and investors may have Australian tax obligations where they are in receipt of Australian sourced-income or they have a PE in Australia. This means that they may need to lodge annual income tax returns and pay income tax.
Foreign entities that have active businesses in Australia may also be required to lodge Business Activity Statements to remit any GST collected, and withhold income tax on payments made to its employees, on a monthly, quarterly or annual basis, depending on the size of the business and its turnover.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.