Company Taxation in Australia : A Short Summary
We receive a regular number of inquiries associated with the establishment of companies in Australia and particularly their taxation. In the paragraphs below, we have tried to summarise some of the major areas, although there is a reasonable degree of complexity and we would always suggest specific advice from an experienced Advisor, which is available through our Inquiry Forms.
The main types of business entities
- Branch of overseas company
- Partnership/ Joint venture
- Corporate limited partnership
The most common operating entity would be an Australian incorporated company.
- Company tax rate is 30%, except for 'small business' companies, which are subject to a reduced tax rate of 27.5%
- No branch profits tax
- Assessable income includes most business revenue including gross income from sales and services, dividends, interest, royalties and capital gains.
- Allowable deductions include most business expenses including depreciation, royalties, interest, management fees, and payroll taxes. Entertainment costs are not deductible.
- Prior year losses can be deducted against current year profits and capital gains provided the company passes a Same Owner test or Same Business test. Capital losses can only offset capital gains. Current year losses can be carried back to offset prior year profits in limited circumstances.
- Tax incentives are available for certain R&D activities carried on by Australian companies.
- Deductions are not allowed for allowances such as holiday pay, sick leave, long service leave until actually paid to the employee
- Strict transfer pricing rules require international dealings to be on an arm’s length basis which could impact interest, management fees, royalties paid to related parties overseas.
- Interest on borrowings is not deductible where total debt to equity is greater than 1.5:1, effective from 1 July 2014. Non-deductible interest still subject to withholding tax.
- Dividends from the foreign subsidiaries of Australian companies are generally exempt from tax, but no credit is available for foreign dividend withholding taxes paid
- Dividends from previously taxed profits (franked dividends) are not subject to withholding tax.
- Unfranked dividends are subject to 30% withholding tax, which may be reduced under applicable tax treaties. Australia’s tax treaties reduce dividend withholding tax to 0% - 15% depending upon the country of residence of the shareholder
- Interest withholding tax is 10% and is generally not reduced by treaties.
- Royalty withholding tax is 30%, generally reduced to 10% or less by treaties.
Wage Tax/ Social Security Contributions
- Employers are required to contribute 9.5% of each employee’s ordinary time earnings (up to a quarterly salary cap) to an Australian superannuation fund. The rate is increasing over time to 12%
- Employers must also withhold tax from each employee’s regular salary and wages and forward to the Australian Taxation Office
- Fringe Benefits Tax (at 47%) is paid on most non-cash benefits paid to employees. The FBT is tax deductible.
- There is no capital duty on value of outstanding shares
Goods and Services Tax (GST)
- GST at 10% is payable on most supplies of goods and services in Australia. GST is not payable on certain financial transactions, including food, health services and educational services.
- The Australian states and territories impose a range of taxes and charges on business including payroll taxes (generally around 5% of total payroll above a threshold amount), land taxes, stamp duties on certain transfers and documents
- Income tax returns are lodged annually based on a 30 June year end. Different year ends can be granted by the Australian Taxation Office.
- Income tax is paid based on quarterly instalments with any balance paid 5 months after year end
- Separate returns need to be prepared for GST, FBT and the various state taxes