Australia offers a wealth of investment opportunities for foreign businesses and individuals. Understanding how Australia’s tax system works can make things a whole lot easier for anyone thinking about investing their money down under, starting a business or purchasing property.

 

The Australian tax system

 

In Australia, income tax is levied on salaries and wages, investment income such as interest, dividends and rent, income from business and capital gains.

 

In relation to personal income tax returns, Australia’s tax system works on ‘self-assessment’. This means that when completing their annual income tax return, taxpayers are responsible for showing all their assessable income and claiming only those deductions and tax rebates/offsets to which they believe they are entitled.

 

Under the self-assessment system, the income declared and deductions claimed by a taxpayer in their tax return are accepted by the ATO, usually without adjustment, and an assessment notice is issued. Even though the ATO may initially accept the tax return as lodged, the return may still be subject to further review.

 

Personal income tax

 

Personal income taxes in Australia apply to the taxable income of each person on a progressive basis, with higher marginal tax rates applying to higher income levels. Unlike some other countries, personal income tax in Australia applies to the individual and not to the family unit.

 

How much tax you pay depends on:

• the income you earn
• whether you are a resident for tax purposes, and
• whether you have a tax file number.

 

Company tax

 

The company tax rate for the 2010–11 income year is 30 percent and is applied to all the taxable income of a company. Unlike individuals, companies do not have marginal tax rates or tax-free thresholds.

 

Employees of a company, which usually include the owner or director, must include any wages or salary from the company in their individual tax return.

 

When an Australian corporation pays corporate income tax, franking credits are generated and can then be applied to dividend payments at a maximum rate of 30 cents per dollar of dividend. This is called a franked dividend.  A company can also choose to distribute a dividend in which no corporate income tax is attached to the dividend.  This is called an unfranked dividend.

 

 

Goods and Services Tax

 

Australia also has a broad-based tax of 10% on most goods, services and other items sold or consumed in Australia, called the Goods and Services Tax (GST).

 

If you run a business and it is registered for GST, you include GST in the price of goods, services and other things you sell in the course of your business. This includes the disposal (by sale or otherwise transferring ownership) of capital assets used in your business such as motor vehicles and business equipment. These are called a taxable supply.

 

GST may be included in the price of purchases (including importations) you make for your business. However, if you are registered for GST, you can generally claim a credit for any GST included in the price you pay for things for your business. This is called an input tax credit.

 

While GST is paid at each step in the supply chain, businesses don’t actually bear the economic cost of the tax. This is because they include GST in the price of the goods and services they sell and can claim credits for most GST included in the price of goods and services they buy. The cost of GST is borne by the final consumer, who can’t claim GST credits.

 

There are other types of sales where GST is not included in the price. These include:

• input-taxed supplies – these include financial supplies, such as loans, and residential rents, and
• GST-free supplies – these include foods – basic grocery items excluding confectionary, snacks, prepared or cooked food, exports, most health services and education courses.

To find out more, including whether you need to register for GST, visit www.ato.gov.au and search ‘GST essentials’.

 

Capital gains tax

 

Capital gains tax (CGT) is the tax payable on any capital gain included on the annual income tax return of a taxpayer (individual or otherwise). It is not a separate tax, merely a component of that entity’s income tax.

Selling assets such as real estate, shares or managed fund investments is the most common way you make a capital gain (or capital loss). Managed funds may also distribute capital gains that must be declared in the investor’s annual income tax return.

 

Capital gains on disposal of Australia assets

 

If you are a foreign resident and you make a capital gain on the disposal of an asset that is known as ‘taxable Australian property’, then the capital gain may be taxed. To find out more read Capital gains in Australia available from www.ato.gov.au.

 

Doing business in Australia

 

Australia has Double Taxation Agreements with around 44 countries, and these treaties aim to reduce or eliminate double taxation caused by overlapping tax jurisdictions. They provide a level of security about the tax rules that will apply to particular international transactions.

Australia has treaties with the United Kingdom, United States, Germany, France, China, Japan, Singapore, Italy and India just to name a few.

If you do business in Australia, you may have to pay tax in Australia and lodge an Australian tax return.

Foreign or non-residents are taxed in Australia on Australian-source income. That includes interest on shares, unfranked dividends and royalties, and rental income.

 

Interest, unfranked dividends and royalties

 

Tax is generally withheld in Australia from interest, unfranked dividends and royalties paid to foreign or non-residents.

 

Generally, no tax is withheld from franked dividends, as the Australian company has already paid tax on the profit represented by the dividends.

 

You don’t need to lodge an Australian income tax return if the only Australian-source income you receive is interest, dividends or royalties on which non-resident withholding tax has been correctly withheld.

 

Advise your Australian payer of your current overseas address so that lower rates of tax can be withheld; otherwise tax may be withheld at the higher rate of 46.5%.

 

Rental income

 

If you received rental income from a property you own in Australia you may be liable to pay tax in Australia.

 

You may also need to lodge an Australian income tax return.

 

If you sell a property in Australia you may have to pay capital gains tax on the capital gain you make from the property.

 

Selling goods into Australia

The tax treatment of goods sold in Australia will depend on whether you are from a country that has a treaty with Australia, if you have a permanent establishment in Australia and whether you employ staff here.

 

You will not have to pay Australian income tax, or capital gains tax if:

 

• you are from a country that has a tax treaty with Australia
• you export goods to Australia without having a physical presence (such as a permanent establishment), and
• you don’t employ staff.

 

However, you may be liable to pay the goods and services tax (GST).

 

You will need to register for an ABN (Australian Business Number) for certain tax purposes, which may include paying the GST.

 

You may have to pay Australian income tax if:

 

• you are a resident entity of a country that does not have a tax treaty with Australia
• you export goods to Australia through a permanent establishment in Australia, and
• you employ staff in Australia.

 

For more information, read Selling goods into Australia available from www.ato.gov.au

 

Lodging an Australian tax return

 

To lodge an income tax return you will need a tax file number (TFN). Tax file numbers are issued by the ATO and are used to identify your tax records and should always be kept secure.

 

If you are an individual, read How to apply for a tax file number (TFN) – individuals. You can find this quickly by entering ‘Nat 2628’ in the search field on the ATO website.

 

The ATO website has information on applying for an ABN. Visit www.ato.gov.au and search ‘ABN essentials’.

 

If your entity is a company, partnership or trust, you will need a separate TFN. A TFN can be obtained at the same time as an ABN, using the same application form. To apply refer to the Australian Business Register at www.abr.gov.au.

 

 

For further information, contact Australian Taxation Office.