Australia offers a range of attractive industries and markets for foreign businesses and investors. Whether in FinTech, mining, agriculture, or renewable energy, there are certainly lucrative opportunities for markets of all types.
If you’ve already established yourself in one of these markets, or you’re looking into expanding into the Australian market, one thing to be aware of is the setup of the taxation system in the country. While it can seem complex, a simple explanation of what to expect should put you on the path to success.
Australian Taxation System – An introduction to corporate taxes
Firstly, to understand what amount of corporate tax your company has to pay, you have to understand what regulations apply. The first step is understanding whether or not your company is considered a resident of Australia. A company is considered resident in Australia if one of the following three things apply:
- It is incorporated in Australia
- The company conducts business in Australia and is managed or controlled from within the country
- The company conducts business in the country and its voting power is controlled by resident shareholders.
Companies residing in Australia are subject to Australian income tax on their worldwide income. Normally, foreign companies are subject to Australian income tax on Australian-sourced income only. However, there is a possibility a company principally resides in a country with which Australia maintains a double taxation agreement (DTA). This means Australia can tax business profits. This right is generally limited to profits attributable to a permanent establishment (PE) in Australia. Meaning, non-resident companies have a smaller amount of earnings on which they have to pay taxes.
Corporate income tax rates
However, the type of residency has no influence on the corporate income tax rate. All companies are subject to a federal tax rate of 30% on their taxable income. However, this does not include small business companies. These entities are subject to a reduced tax rate of 27.5% up to and including the 2019/20 income year. Furthermore, small companies are defined by their level of aggregated turnover. This tax rate only to those companies that, fall below the aggregated turnover threshold of AU$50 million. This includes certain ‘connected’ entities.
The future for this tax regulation seems even more attractive. New initiatives will see a reduction in this very tax rate. The 27.5% rate for ‘small business’ entities subsequently will be reduced to 26% for the 2020/21 income year. This will continue at 25% for the 2021/22 and later income years.
Corporate tax regulations
The Australian taxation system recognizes other income tax regulations which you are required to follow. An example of this is with filing tax returns. Tax returns must be filed annually. The tax authorities make a distinction in company sizes when considering this filing. Companies with turnover over AU$10 million file before 15 January and other companies before 28 February.
Lastly, besides the tax authorities, other authorities do not impose any corporate tax for resident companies. However, there are some taxes that might affect foreign companies operating in Australia. These taxes include payroll tax, stamp duty, and land tax.
Also, being a resident company offers some significant tax differences in comparison with being non-resident. For example, dividends received by resident shareholders are not taxable. This is because these dividends have been received from previously corporate taxed profits. However, non-residents find themselves subject to a 30% dividend tax. Moreover, capital gain tax is 30% for residents and 27.5% for non-residents.
Australia applies specific withholding tax regulations that you should be aware of. Dividends paid to any parent company (both resident and non-resident) are exempt from withholding tax. However, the company must be able to prove corporate tax has been paid on the subsidiary’s profits. If this is not the case, the company must pay a standard corporate tax rate.
Moreover, when paying interest to foreign entities any company is subject to 10% withholding tax. Lastly, sales and transfers of real estate are subject to a property tax. The rates for this property tax differ per local authority and can go up to 7%.
As an employer, it is important to understand what type of taxes you’ll have to pay in order to employ people. In Australia, companies pay social security and unemployment insurance fund rates for the employees. These contributions are valued at a rate of 9.5% of employees’ gross salaries. Moreover, they must pay an additional 46% tax on all fringe benefits provided to their workforce. Also, employers must withhold payroll tax due on all employees’ payroll tax wages and benefits. This rate can differ per authority and averages at around 5.5%.
So, what does an employee pay?
Personal income tax in Australia has its own system. The tax is based on a progressive rate and depends on the level of income. The highest personal income tax rate is 47%, including a 2% Medicare levy. The income tax rate is as follows:
- AU$1 – AU$18,200; not required to pay income tax.
- AU$18,201 – AU$37.000; required to pay 19% on any dollar made above AU$18,200
- AU$37,001 – AU$87.000; required to pay 32.5% on any dollar made above AU$37,000
- AU$87,001 – AU$180.000; required to pay 37% on any dollar made above AU$87,000
- AU$180,001 and over; required to pay a fee of AU$54,232 and 45% on any dollar made above AU$180,000.
How much tax you pay is dependent on where your level of income lies in regard to the taxation system. However, you must pay your taxes on all income levels. Meaning, as illustrated in the previous explanation, you pay your taxes through the system and not solely in the level your income falls in. Additionally, recently a new income tax offset has been introduced called LAMITO. This offset will be available to any earners of an income up to AU$125,333.
Specialized needs call for specialized assistance
Following tax regulations in Australia is a task that requires knowledge of the system. As previously described, the system itself is not hard to follow. However, due to the many regulations and exemptions, one might find himself getting lost in the paperwork.
In order to understand and comply with tax regulations in Australia, a local partner might be of help. Biz Latin Hub is an expert in connecting businesses and supporting startups in the region.
Our recently-received award for Business Excellence by the Australian-Latin America Business Council demonstrates the support we receive from Australian institutions. Find out more about how we can transform the fortunes of your business. Contact us on [email protected] today for assistance tailored to your needs.