company is considered to be resident for taxation purposes
if it is incorporated in Australia, or if it carries
on business there and both central management and control
are located in Australia or its voting power is controlled
by shareholders who are Australian residents.
companies are taxed on world-wide income from all sources,
at a corporate taxation rate of 30%. Non-resident companies
are taxed only on Australian sourced income and capital
gains on the disposal of certain taxable Australian
assets if acquired on or after 20th September 1985.
Taxable Australian assets generally include:
used by the non-resident to carry on business in Australia
- Real estate located in the country
- Interests in resident partnerships, trusts, or private
- Shareholdings of more than 10% in resident public
state, territory, and local governments do not impose
additional corporate taxation rates. However, they do
impose some taxes which might impact on foreign companies
operating in the country; namely payroll tax (more applicable
to larger employers), stamp duty, land tax, and sales
May 2004 the then Treasurer Peter Costello announced
measures aimed at reducing the compliance burden for
small businesses, by allowing firms currently below
the registration threshold and voluntarily registered
for GST to report and pay GST annually, instead of quarterly.
measures were designed to benefit around 740,000 small
businesses and 30,000 non-profit organisations that
were voluntarily registered and paid on a monthly or
April 2005, Costello reported a deal under which state
governments agreed to phase out indirect taxes in return
for receiving a guaranteed share of the revenues from
the goods and services tax, which was designed to replace
the existing system of indirect taxes. However, some
states were less keen to abolish these taxes than others.
"I haven't heard from all of them yet but the signs
are very positive," he added. Costello warned that the
uncooperative states could face "serious consequences"
if they did not uphold their end of the bargain. In
fact they had all given in by the end of 2005.
March 2005 a bi-partisan vote in the Australian parliament
approved tax incentives for small businesses, including
a 25% entrepreneurs' tax offset on the income tax liability
attributable to business income for small businesses
with an annual turnover of $75,000 or less. The new
law also gave small businesses greater flexibility in
the way they determine their taxable income. A pre-take
up family income test was put in place in 2008.
to corporate taxation recommended by the
Ralph Report in 2000 have been introduced on a piecemeal
basis, with a stream of changes continuing unabated
in 2002 and 2003. New
consolidated tax rules to allow groups of companies
to be taxed as a single entity were originally scheduled
for launch in July 2001, but following the introduction
of the controversial Goods and Services Tax (GST), the
government felt that the country's business sector was
suffering from 'reform fatigue', and postponed the launch.
The rules were reintroduced in 2002.
government took further steps towards improving the
international taxation regime for businesses in December,
2003, introducing measures which took effect from July,
2004, relaxing Controlled Foreign Company (CFC) rules
as they applied to countries possessing broadly similar
taxation regimes (BELCs), such as the US, the UK, Germany,
France, Canada, Japan and New Zealand, in effect exempting
income derived from outside such countries but passing
through them (and therefore taxed in them).
the package is complete", said Ernst and Young
at the time, "Australian multinationals doing business
in these major commercial centres will no longer need
to be overly concerned with measures that are aimed
at tax haven operations. The Government has clearly
recognised the fact that business takes place in these
countries for commercial rather than tax related reasons."
However, CFC rules continue to apply to income derived
through a trust or arising under the Foreign Investment
Fund (FIF) measures, even if derived through CFCs resident
in such comparable tax countries.
The new legislation allowed fund managers to invest
up to 10% of their fund in foreign passive investments
before FIF rules applied, and also relieved complying
superannuation funds from the FIF measures. The amendments
also provided a withholding tax exemption on widely
distributed debentures issued to non-residents if those
debentures are issued by public unit trusts.
Treasury Secretary Ken Henry, who is heading the government's
tax reform panel, has said that the country's tax system
is far too complex and should be simplified for both
individuals and businesses.
suggested that the problems with the corporate tax system
are not necessarily attributable to rates of taxation,
but are more rooted in the system's complexity. By simplifying
corporate tax, he has argued that not only would there
be more incentive to invest in Australia, there would
also be less opportunity for tax system 'arbitrage'
by multinational companies.
we were to adjust business tax arrangements to attract
a greater share of global investment, we would ensure
that firms had minimal incentives to artificially shift
profits offshore," he said in a November 2008 speech.
suggested that there is a "good case" for
switching to a tax on supernormal profits, or what economists
call "economic rents." Critics of this argument,
however, contend that this proposal has already been
considered, and rejected, in previous tax reviews, and
would do little to reduce complexity.
a speech to the Australian Industry Group in August
2009, Henry, commented on possible changes to the structure
of business taxes in the country to improve incentives
for productive investment.
indicated that the tax review was looking at future
corporate tax changes to make equity investment more
competitive with debt financing. He said that the effective
tax rates for investments financed by debt are much
lower than those financed by equity, reflecting the
full deduction against taxes for interest expenses,
while equity dividends are taxed. Importantly, he added,
“foreign sourced debt remains tax favored relative
to foreign sourced equity.”
raises the prospect, Henry continued, of “a sub-optimal
allocation of resources. One consequence of the overall
bias in favor of debt is that it encourages some firms
to increase leverage, an outcome that may increase their
risk exposure. For an individual firm, debt financing
can exacerbate vulnerability in the profit and loss
statement when revenue falls, since – unlike dividend
payments – the debt servicing costs are essentially
unavoidable, short of default.”
Types of Company
many different ways in which investors can conduct business
in Australia, including corporations, branch offices,
subsidiaries, trusts, joint ventures and partnerships.
However, for international investors, the most appropriate
vehicles are usually Australian subsidiary companies
or Australian branch offices. Although in terms of taxation
there is not a great deal to choose between the two
(both are subject to the standard corporate tax rate),
in practice, most foreign companies choose to operate
through a locally established subsidiary company, as
this has the added benefits of limited liability and
separate legal status. Franked dividends from an Australian
subsidiary are also not subject to withholding tax when
paid to the foreign parent company. A foreign company
that intends to do business in Australia must register
with the Australian Securities and Investment Commission
(ASIC), in order to do so.
on Foreign Investment
all exchange controls have now effectively been abolished
in Australia, there are still certain reporting requirements
and restrictions on foreign investment, although the
government generally welcomes foreign direct investment
(FDI) which will be of benefit to the Australian economy,
or serve the national interest.
investment policy is implemented by the Foreign Investment
Review Board (FIRB).
that the FIRB considers when making an assessment of
a potential investment include the following:
the enterprise will create new employment opportunities
for Australian citizens, or allow Australian participation
in some way.
the enterprise will introduce new technological, managerial,
or technical skills to the country and its citizens
the enterprise will help to develop international
trade with Australia (for example developing new export
markets, or increasing existing market access)
following acquisitions must be notified to the Board,
irrespective of the value or the nationality of the
vacant land, whether residential or commercial;
residential real estate;
shares or units in Australian urban land corporations
or trust estates; and
all direct investments by foreign governments or their
other acquisitions (including shares or assets of an
Australian business) should be notified if the target
entity is valued at/above the applicable monetary threshold
set by the policy or the Act.
non-US investors, as at January 2007, these thresholds
million: proposals to establish new businesses
million: developed non-residential commercial
real estate, where the property is subject to heritage
million: developed non-residential commercial
real estate, where the property is not subject to heritage
million: an interest in an Australian business;
where a non-US foreign investor acquires an interest
in an offshore company that holds Australian assets
or conducts a business in Australia, and the Australian
assets or businesses of the target company are valued
at/above 50 per cent of its total assets (and hence
not eligible for the offshore takeover threshold)
million: offshore takeovers where a non-US
foreign investor acquires an interest in an offshore
company that holds Australian assets or conducts a business
in Australia, and the Australian assets or businesses
of the target company are valued at less than 50 per
cent of its total assets (if the Australian assets are
valued at/above 50 per cent of total assets the general
$100 million threshold applies). N.B. This threshold
was increased to $219 million as of September 22, 2009.
thresholds apply to US investors as defined under the
Foreign Acquisitions and Takeovers Regulations 1989.
In a broad
move designed to encourage businesses (whether foreign
or domestic) to locate in Australia, the government
reduced the federal corporate tax rate to 30% as from
2001. In addition to this, there are a number of incentives
available on a federal level, although there are no
special provisions made for foreign investors - the
incentives are potentially eligible to all organisations
which do business in Australia and pay corporate income
time of writing, there is a general exemption from wholesale
sales tax which applies to goods purchased and used
as business inputs by manufacturers, miners, and primary
producers. Other incentives are available for those
willing to establish Regional Headquarters Companies
in Australia, and for exporters. We will now examine
these in more depth:
Regional Headquarters Companies
introduced by the Australian government to encourage
companies to establish regional headquarters (RHQs)
or support centres in Australia include:
sales tax exemption for certain equipment used in
the course of business
deductions on certain relocation expenses
support and assistance, including help with site selection,
facilitation of visit programmes, and introductions
to key business contacts, such as government agencies
and professional service firms.
Market Development Grant
by the Australian Trade Commission (AUSTRADE), the Export
Market Development Grant is a programme that offers
financial incentives to exporters. (The name kind of
gives it away
!) The scheme provides funds to cover
up to 50% of eligible expenditures (costs incurred while
promoting Australian products, skills, or industrial
property rights) on export marketing. This may also
include costs for market research, the provision of
free samples, overseas representation, and advertising
expenses. In order to qualify for the grant, the minimum
expenditure must be at least AU$15,000 (since reduced
to AU$10,000), and the maximum grant which can be received
the Grant scheme was extended for a further five years.
changes have have been announced to the EMDG scheme
for applications lodged from July 1, 2009 and
export promotion expenditure incurred from July 1, 2008.
key changes include:
the maximum grant by $50,000 to $200,000.
the maximum turnover limit from $30 million to $50
the minimum expenditure threshold by $5,000 to $10,000.
costs of patenting products overseas to be eligible
for EMDG support.
the limit on the number of grants able to be received
by a business from 7 to 8.
the scheme more accessible to services exporters by
replacing the current list of eligible internal and
external services with a new ‘non-tourism services’
category which will provide for all services supplied
to foreign residents whether delivered inside or outside
of Australia to be eligible unless specified in the
EMDG Act Regulations.
State, Territory and regional economic development
and industry bodies promoting Australia’s exports,
including tourism bodies, to access the scheme.
an EMDG performance measure into the scheme for those
applicants who have already received two grants (exceptions
apply for approved bodies and approved trading houses).
Applicants will need to satisfy the requirements of
this measure by taking one of two alternative tests
- the Export Performance test or the Australian Net
to these specific incentives, the Federal Government
also considers the provision of incentives or assistance
on a case by case basis where the project would generate
economic or other benefits for Australia. The following
criteria are usually applied in order to make a decision:
the investment would be likely to occur in Australia
were there no incentives offered;
- Whether the potential investment will provide significant
economic benefits for the country through:
- Increasing employment of Australian citizens
- Providing substantial business investment
- Providing a significant boost to Australia's Research
and Development capacity
- Benefiting other Australian industries
consideration of each proposal allows the government
to take into account the availability of other forms
of assistance on a state or territorial level.
in Australia actively compete against each other to
attract new foreign investment. Incentives offered to
suitable investors can be financial in nature, such
as grants, loans, tax reductions, and financed industrial
premises, or can take the form of non-financial assistance
such as facilitation of investment projects, skills
development, research and development programmes, employee
recruitment, industry and network introductions, technology
acquisitions, and help in identifying suitable premises.
incentives and assistance are generally tailor-made
to the individual business or individual, so it is difficult
to offer a generalised picture of state investment incentives
in each of the six states. Southern Australia, for example,
offers tailored taxation incentives to eligible businesses,
along side help with site selection, planning approvals,
staff recruitment and workforce training, and assistance
for business migrants.
also offers a major projects incentive scheme, focussed
on manufacturing, processing, tradable services, and
tourism, in which a combination of taxation concessions,
capital grants, refunds of stamp duties relating to
the establishment of the business and project facilitation
are on offer. The state also exempts businesses that
intend to establish their regional headquarters there
from all state taxes, including payroll tax, debits
tax and land tax.
On a countrywide
scale, talks about the establishment of Enterprise Zones
in poorer or rural areas are also underway, the Australian
government having been struck by the success of such
zones in other countries, for example the United States
and South Africa.
at the time of writing (August 2008), there are no such
zones in place in Australia.
Australia an Attractive Location For Multi-Nationals?
standard of living, modern telecommunications and transport
networks, wide variety of investment opportunities,
and generally very well educated and trained workforce
all contribute towards making Australia potentially
a very rewarding place in which to do business.
this the fact that Australia is in a very favourable
position to access emerging Asian markets, and the combination
of federal and state incentives for those prepared to
locate their regional headquarters there, and the picture
becomes even more appealing.
on the down side, the corporate taxation rates are far
from appealing, and some may find the country's Controlled
Foreign Corporation legislation unduly restrictive.
about the international attractiveness
of the Australian international business environment,
the (then) newly re-elected right-wing Australian government
(which has since been supplanted by a Labour administration)
began an extensive review of business taxation in 2002.
Government had been shocked when James Hardie Industries,
a major building materials group, announced in July,
2001 that it would shift its base to the Netherlands
in order to minimise tax charges. The widely diversified
group has substantial international income flows.
rates of foreign tax are imposed on our foreign income
when it is repatriated to Australia to pay dividends
to shareholders. Under the current structure, this problem
will increase as international demand for our products
grows," said Peter Macdonald, chief executive,
at the time.
group said that adopting the new structure - which would
also involve a secondary listing on the New York Stock
Exchange - would nearly halve its average tax rate.
Assistant Treasurer at the time, Senator Helen Coonan,
announced in May, 2002, that the Federal government
planned to provide tax relief for companies looking
to demerge, as long as they fitted certain criteria.
In order to claim capital gains tax relief during the
demerger process, the underlying ownership of the company
must not change, but the demerging entity must divest
at least 80% of its ownership interests in the demerged
entity. The legislation became effective in October
of that year.
as it may have been by some signs of progress, Australian
business interests were far from happy, and in October
2002, the Business Council of Australia (BCA) and Corporate
Tax Association (CTA) suggested several reforms for
the Howard government of the time to consider during
its review of Australia's international tax regime.
Chief Executive, Katie Lahey explained that: 'Simply
put, our international tax systems are inadequate for
a modern economy. The review provides a very timely
opportunity to remove obstacles, reduce complexity and
enhance the competitiveness of Australia's international
other topics, the submission addressed issues such as
dividend imputation, controlled foreign company rules,
tax treaties, conduit income, residency, foreign investment
fund rules, and expatriate taxation.
Executive Director, Frank Drenth announced that the
submission sought especially to address the bias against
Australian companies which invest offshore:
bias manifests itself through the way our system double
taxes taxed foreign earnings when they are distributed
to Australian shareholders - mums, dads, super funds
- as unfranked dividends,' he told reporters, adding
that foreign source income rules also need addressing,
as they are currently too broad.
the moment, it's a bit like fishing with dynamite -
you get a lot of fish, but you get a lot of other things
that you don't necessarily want,' the CTA chief observed.
positive news for international businesses came in December,
2002, when the NSW Supreme Court ruled against US-based
Unisys Corporation, which had claimed that it was not
obliged to pay withholding tax on royalties received
through a licensing partnership with Unisys Australia,
arguing that any royalty payments from the Unisys licensing
partnership (ULP) arose as a result of the ULP's US
Court was told that Unisys Corporation sub-leased rooms
to the partnership in the US and the only functions
carried out in these rooms were the filing and retrieval
of the partnership's records (approximately 100-200
pages of information),' the ATO statement explained.
Justice Gzell supported the ATO's challenge, explaining
that although the rooms leased to the partnership in
the US were at the disposal of the ULP, they could not
be said to be the place 'at or through which' the partnership
carried on its business.
storage and retrieval of documents could hardly constitute
the carrying on of Unisys licensing partnership's business,'
he ruled, ordering the corporation to pay both the royalty
withholding tax for which it is liable in Australia
and the ATO's costs.
the government did make some improvements to the tax
position of international companies in 2003, they did
not go far enough for the taste of business, which continued
fierce lobbying throughout 2004 for further changes.
September 2004, then Treasurer Peter Costello responded,
indicating that he wanted to overhaul the country’s
international taxation system to ease the tax burden
on firms operating overseas. Costello revealed that
one of his top priorities was to help firms that derive
much of their income overseas and pay tax on it but
do not benefit from a domestic tax credit.
would like to improve Australia's international taxation
arrangements so that Australian companies can expand
in foreign jurisdictions, while remaining domiciled
in Australia," Costello said. "We want to promote Australia
as a place for regional headquarters - for Australian
companies but also for foreign companies," he added.
Costello spoke as News Corp, the largest firm listed
on the Australian Stock Exchange, prepared to move its
domicile and primary listing to the United States.
continued to moan, and in November 2004 the Australian
Chamber of Commerce and Industry called upon the government
to use its Senate majority to push through a second
wave of major tax reforms to ensure that Australian
business remained competitive.
To argue its case, Australia’s largest business representative
body released a Taxation Reform Blueprint entitled ‘A
Strategy for the Australian Taxation System 2004-2014’
which sets out a comprehensive programme of reform of
both personal and business taxes over the next ten years.
While the Chamber explained that it welcomed the government’s
tax reforms in 2000, which saw the introduction of GST
and a reduction in company tax, it believed that the
measures did not go far enough to improve Australia’s
international competitiveness. ACCI chief executive
Peter Hendy warned that subsequent tax reforms in other
countries threaten to leave Australia behind.
particular, Australia’s high marginal tax rates and
low thresholds are uncompetitive by international standards,”
harms innovation, education and training, skilled immigration
and entrepreneurship, while promoting tax avoidance
and evasion,” he noted.
According to ACCI’s 2004 Pre-Election Survey, the level
of taxation was the number one issue facing Australian
businesses, followed closely by the complexity of tax
Consequently, the ACCI called on the government to make
changes in five key areas, including:
Major reductions to personal income tax, in particular
increasing the top tax threshold to $100,000, the
indexation of tax thresholds to inflation, the reduction
of tax thresholds to preferably no more that two and
the long term alignment of the top marginal tax rate
with the 30% corporate tax rate;
Reducing the cost of complying with the tax system;
The abolition of the state taxes as previously proposed
by the government, reform of Fire Insurance Levies
and a proposal to abolish payroll taxes;
Further reductions in Capital Gains Taxes (CGT) to
promote innovation and entrepreneurship with the introduction
of a ‘stepped rate’ where CGT reduces the longer an
asset is held; and
Removing taxes on superannuation contributions and
earnings, replacing these with tax on benefits only.
this parliamentary term, and with a Senate majority
from July 2005, the Federal Government has a golden
opportunity to put in place a taxation system that encourages
and rewards work, investment and enterprise,” Mr Hendy
February, 2006, Peter Costello launched a new study,
the outcome of which was designed to gauge the competitiveness
of Australia's tax systems relative to other developed
aim of the study was to identify areas where Australia
both leads and lags its international trading competitors,
and it covered taxes collected at national, state and
local government levels. Personal, business, indirect,
property, transaction and superannuation taxes will
be included in its remit.
Business Council of Australia called for the country’s
tax system to be put under "permanent watch" in order
to ensure that it remains internationally competitive.
a paper on tax reform, the BCA expressed concern that,
despite the government's decision to review Australia's
international tax competitiveness, there continues to
be an absence of a strategic reform agenda for tax.
called for the review of Australia’s tax system announced
in 2006 not to be a one-off, and to avoid focusing exclusively
on whether current tax rates are competitive today,
but how these rates match up with current global trends.
BCA President, Mr Michael Chaney commented that: “Given
the fast-moving nature of global tax reform, a competitive
tax rate now may become uncompetitive within a short
space of time."
added: “That’s why tax reform must be a permanent item
on the reform agenda.”
Chaney urged the government not to "play catch-up" through
periodic, short-term changes to rates and thresholds,
but to anticipate global trends in tax reform through
a considered, forward-looking plan of reform.
BCA paper also argued that the review should not to
simply focus on OECD comparisons, given the large volume
of trade that Australia undertakes with non-OECD economies.
paper also recommended that the tax system be subject
to comprehensive and open review at least every two
years, similar to regular tax review processes now in
place in countries like New Zealand.
'Keeping a Permanent Watch on Australia’s Tax System,'
the paper noted a number of inadequacies in the Australian
tax system, particularly the large gap - compared to
other economies – between personal and corporate tax
rates, which it said encourages high-income taxpayers
to aggressively minimise their tax liabilities.
The paper also bemoaned the high cost of tax administration
and the rapidly growing complexity of the tax system,
the corporate tax burden, and the high rate of personal
income taxation which discourages overseas talent to
seek employment in Australia.
needs a more vigorous debate on spending priorities
and strategies for the future,” Mr Chaney added.
and individual taxpayers will not passively accept projections
of ever-expanding spending needs and therefore, ever-increasing
tax burdens," he concluded.
August 2008, the government of Labour Prime Minster
Kevin Rudd launched a discussion paper entitled 'Australia’s
Future Tax System' (AFTS) by Treasury Secretary Dr Ken
Henry, which claimed to be the most comprehensive review
of the country's tax system in fifty years.
wide ranging review encompassed many aspects of the
federal and state/territorial tax system, and will consider:
the balance of taxes on work, investment and consumption
and the role for environmental taxes; enhancements to
the tax and transfer system facing individuals, families
and retirees; the taxation of savings, assets and investments,
including the role and structure of company taxation;
the taxation of consumption and property and other state
taxes; simplification of the tax system, including the
interactions between federal, state and local government
taxes; and the proposed emission trading system.
government announced that it intended to launch a consultation
with the public on the proposed changes, with the Review
Panel to provide its final report to the Treasurer by
the end of 2009.
reform of our tax and welfare systems is a key way to
secure our economic foundations for the future, create
wealth, spread opportunity and reward working Australians,"
announced a statement issued by Treasurer Wayne Swan.
statement went on to explain that:
AFTS Review will play a vital role in modernising Australia’s
economy to meet the great economic, social and environmental
challenges of the 21st century. Meeting these future
challenges - like climate change, the ageing population,
new technologies and rapid globalisation – will
require a tax system that is as fair and efficient as
possible and the AFTS Review will help achieve that
February 2009, Henry said that the country may need
to cut its company tax rate and amend its dividend imputation
system to encourage economic growth and remain competitive.
Henry has proposed funding a cut in company tax by reducing
or removing dividend imputation - a move which would
see investors in Australian companies lose their right
to pay little or no tax on the dividends received during
periods where full company tax rates are paid. Australia
and New Zealand are amongst only a very few countries
with an active dividend imputation scheme.