Taxation

Taxation in Australia — an overview

Australian Federal government-imposed taxes include income tax, withholding taxes, goods and services tax (GST), customs and excise duties, and fringe benefits tax (FBT). Australian State and territory government-imposed taxes, which do vary, include stamp duty, land tax and payroll tax.

The taxation year for income tax purposes ends generally on 30 June although in certain circumstances a taxpayer may apply for a substituted accounting period instead of 30 June. A substitutes accounting period is more likely to be granted if the financial year applied for needs to align with the financial year of a non-resident parent entity.

The income tax return lodgement due date depends on a number of factors including the type of entity, its accounting period and previous year’s turnover. An individual will be treated as a tax resident if that person:

• resides in Australia; or
• resides in Australia (unless the authorities are satisfied that the person has a permanent place of abode outside Australia);
• has been in Australia for more than 183 days in the year of income (unless the authorities are satisfied that the person has a usual place of abode overseas and does not intend to take up residence); or
• they are an eligible employee or member under certain superannuation legislation (or spouse or dependent child thereof).

A company will be treated as a tax resident if it is incorporated in Australia, as will a company that, although incorporated overseas, has its central management and control in Australia or its voting power controlled by Australian resident shareholders.

Australia’s double tax agreements can affect an individual or company’s tax residency position under Australia’s domestic tax law. Many of Australia’s double tax agreements contain a tie-breaker clause that applies to a dual tax resident.

Income tax

Income tax is imposed by the Australian federal government on individuals, companies, and superannuation (or pension) funds. In some cases, the trustee of a trust estate may be subject to tax although it is more usual for the beneficiaries or unit holders to be subject to tax on their share of the net income of the trust. Partnerships and joint ventures are not separately taxed, although the net income entitlements of the partners or joint venturers will be subject to Australian tax. A limited partnership is taxed as a company.

The assessable income of an Australian resident includes gross income and net capital gains derived from all sources both inside and outside Australia. Australia’s income tax provisions include controlled foreign company (CFC) and controlled foreign trust (CFT) rules. The CFC and CFT, can attribute income from a foreign controlled company or trust to an Australian resident controller (or associate) if that income is tainted, passive or concessionally taxed in its foreign jurisdiction.

The assessable income of a non-resident includes gross income derived from all sources in Australia and net capital gains on certain taxable Australian property.

All losses and outgoings are generally allowable deductions to the extent they are incurred in gaining or producing assessable income, or are necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income, provided those losses or outgoings are not of a capital, private, or domestic nature. For entities other than individuals and partnerships, to the extent that losses or outgoings exceed the income in any one year those losses can be carried forward and offset against income in a subsequent year. Companies and trusts need to satisfy specified tests in order to carry forward losses.

Eligible companies could choose to carry back tax losses made in the 2020 to 2023 income years if they had a tax liability in the 2019 to 2022 income years to claim a refundable tax offset.

The individual tax rates for Australian residents (2025 – 2026) are:
Taxable income (A$)	Tax on this income (A$)
0 – $18,200	nil
$18,201 – $45,000	16c for each $1 over $18,200
$45,001 – $135,000	$4,288 plus 30c for each $1 over $45,000
$135,001 – $190,000	$31,288 plus 37c for each $1 over $120,000
$190,001 and over	$51,638 plus 45c for each $1 over $190,000

In addition, there is a healthcare levy of 2% of taxable income in most circumstances, and a healthcare surcharge of up to 1.5% may apply where prescribed taxable income limits are exceeded and an appropriate level of private health insurance is not obtained.

A Low Income Tax Offset of up to a maximum of A$700 applies to lower income earners. This is subtracted from the tax payable by taxpayers whose taxable income falls within certain thresholds and the entitlement to which is automatically calculated by the Australian Taxation Office (ATO).

For non-residents, the applicable tax rates (2025 - 2026) are:
Taxable income (A$)	Tax on this income (A$)
0 – $135,000	30c for each $1
$135,001 – $190,000	$40,500 plus 45c for each $1 over $135,000
$190,001 and over	$60,850 plus 45c for each $1 over $190,000

“Working holiday makers” are subject to a concessional tax rate of 15% on the first A$45,000 of income. Foreign residents are not required to pay the healthcare levy.

The general company tax rate is 30% which applies to all companies that are not a “base rate entity”. A base rate entity is taxed at 25%. A base rate entity is a company that has an aggregated turnover of less than $50 million and no more than 80% of its income is “base rate entity passive income”. Aggregated turnover includes the ordinary business income derived by the company, its affiliates and connected entities. This can include the ordinary income of a foreign related entity. Passive income for this purpose is royalties, rent, capital gains, interest and certain dividends.

Company tax is generally payable quarterly. The amount to be paid is based on income derived from the relevant quarter multiplied by an instalment rate based on the last income tax return lodged.

Generally, trust beneficiaries or unit holders, are subject to tax on their share of the net trust income at the tax rate applicable to the particular beneficiary or unit holder. The trustee will be taxed (potentially at the maximum 45% rate) to the extent that net trust income is not distributed or is distributed to a non-Australian tax resident.

Certain types of trusts, such as public trading trusts, are taxed as companies. Special tax rules apply to other types of trusts, used for investment funds such as managed investment trusts (MITs) and attribution managed investment trusts (AMITs). The withholding rate applicable to the distribution of eligible income from a withholding MIT or AMIT is 15% or 30%. There is a regime applicable to a Corporate Collective Investment Vehicles (CCIVs) which, although a type of company, is subject to taxation as a trust on a similar basis to an AMIT. Superannuation or pension funds are generally taxed at the rate of 15% on various types of income as long as they are treated as, what is termed, a “complying fund”.

As a general rule, certain taxpayers are entitled to a refund if their tax offsets for franked dividends exceed their tax liability, ignoring those offsets. Once franking credits have been utilised to offset any income tax liabilities, any excess refunds will be refunded. The taxpayers that are entitled to a refund of excess franking credits include Australian resident:(a) individuals; (b) certain exempt institutions; (c) trustees assessed on an Australian resident beneficiary’s share of trust income; (d) complying superannuation funds, and (e) life insurance companies. Companies are generally not entitled to refunds (with limited exceptions).

Imputation of dividends

Australia has an imputation system of company taxation. This is designed to eliminate double taxation at the company level and the shareholder level.

Companies are required to maintain “franking accounts” which record the tax paid by the company and the “franking credit” attaching to dividends paid to shareholders. Dividends carrying franking credits are referred to as “franked dividends” and those that carry no franking credit are referred to as “unfranked dividends”.

Under this imputation system, Australian resident shareholders, are generally entitled to a tax offset equal to the franking credit. Withholding tax is not withheld on fully franked dividends paid to non-residents.

Consolidated groups

Australia has a complex tax regime applying to consolidated groups of entities. Under this regime a consolidated group is treated as a single entity for income tax purposes. This means that transactions between members of the group are largely ignored for income tax purposes. The head company of the group, which must be an Australian resident company, is responsible for the income tax liabilities of the group and files a single tax return for the group. An election must be made to form a consolidated group and each member of the group must be a wholly-owned Australian resident. The choice to form a tax consolidated group is optional but irrevocable.

In the case of wholly-owned Australian resident subsidiaries of foreign corporations, there are specific rules allowing for the formation of “multiple entry consolidated” (MEC) groups to which the consolidation tax rules have application.

Consolidated groups Australia has a complex tax regime that can apply to a consolidated group comprising a head company (an Australia tax resident company) and its 100% owned subsidiaries. An irrevocable choice must be made to form a tax consolidated group. Under this regime, a consolidated group is treated as a single entity for income tax purposes. Transactions between members of the group are largely ignored for income tax purposes. The head company is responsible for the income tax liabilities of the group and files a single tax return for the group. There are specific rules allowing wholly owned Australian resident subsidiaries of foreign corporations to form a “multiple entry consolidated” (or MEC) groups to which the consolidation tax rules have application. The MEC group rules allow for tax consolidation between different Australian holding companies owned by the same foreign parent.

Significant Global Entities

Entities classified as “Significant Global Entities” (SGE) are subject to additional provisions including the Multinational Anti-Avoidance Law (MAAL), Diverted Profits Tax (DPT) and increased penalties. Failure to lodge penalties of up to $825,000 can be imposed on a SGE for late filing of a relevant tax form. SGEs that are also classified as Country-by-Country (CbC) Reporting Entities are subject to additional reporting obligations, including a CbC Report, Master File, Australian Local File and must lodge General Purpose Financial Statements.

An entity is generally classified as an SGE if it has, or is part of a consolidated group with, an annual global income of at least A$1 billion. The classification also extends to entities that are members of a ‘notional listed company group’ satisfying the same income threshold. Notably, the second-layer test disregards consolidation exceptions (such as the investment entity exemption). This is particularly relevant for company groups controlled by a private equity firm.

Pillar Two

The Australian Government has implemented Pillar Two legislation which introduces:

• a 15% global minimum tax for large multinational enterprises (MNEs) with the:
• Income Inclusion Rule (IIR) applying to income years starting on or after 1 January 2024; and
• Undertaxed Profits Rule (UTPR) applying to income years starting on or after 1 January 2025
• a 15% Domestic Minimum Tax (DMT), effective for income years beginning on or after 1 January 2024.

The Australian global and domestic minimum taxes apply to Australian constituent entities that are part of a MNE Group with reported consolidated accounting revenue exceeding €750 million in at least two of the preceding four income years of the Ultimate Parent Entity (UPE).

The IIR imposes a top-up tax on the UPE, that is in-scope of the rules, of an Australian based constituent where it has an effective tax rate of less than 15%. The purpose of the DMT is to “override” the primary taxing right to ensure that any top-up tax arising under the IIR is assessable in Australia.

In-scope entities will have additional compliance obligations, including the lodgement or notification of a GloBE Information Return, an Australian IIR/DMT return and additional financial reporting requirements under the Australian Accounting Standards. The law has been drafted such that a failure to lodge the relevant returns on time will give rise to SGE penalties, where reasonable steps to comply with the law has not been undertaken by the taxpayer.

Given the complexity of these rules, eligible, constituent entities will benefit from applying the Transitional Safe Harbour rules, which significantly reduce the compliance associated managing these new obligations.

Withholding tax

Non-resident withholding tax is imposed on various payments to non-residents including interest, dividends, royalties, MIT or AMIT distributions, construction works or mining resource payments.

Interest withholding tax at a rate of 10% is generally imposed on interest paid or credited to a non-resident. The withholding rate can be reduced under relevant double taxation agreements or where it is paid on certain publicly offered debentures or debt interests.

Dividend withholding tax at a rate of 30% is generally imposed on unfranked dividends paid to a non-resident. The withholding rate is typically reduced for a dividend paid to a non-resident whose address is in a country with a double tax agreement with Australia. Fully franked dividends are not subject to a withholding tax.

Royalty withholding tax at the rate of 30% is imposed on royalties paid to a non-resident, although this rate is reduced (typically to 5% or 10%) under Australia’s double tax agreements.

MIT or AMIT withholding tax at a rate of 15% or 30% is imposed on eligible distributions paid to a non-resident.

A withholding tax of 5% applies to payments to a non-resident for construction and related activities.

The withholding tax rate on mining resource payments is advised by the ATO on application by the payer.

Transfer pricing

Australia has robust transfer pricing laws. These laws seek to address arrangements that shift profits out of Australia through pricing arrangements with foreign entity related parties on a non-arm’s length basis. The provisions seek to evaluate whether such pricing arrangements can be justified according to arm’s length pricing principles. Australia seeks to align its law in this regard with the OECD’s transfer pricing guidelines, which are relevant guidance under Australian law.

Taxpayers are required to “self-assess” their compliance with the transfer pricing rules. Importantly, to reduce penalty exposure, the laws require taxpayers to document on a contemporaneous basis how their arrangements satisfy arm’s length pricing principles having regard to arm’s length conditions that would apply to the tested transaction, and certain specific legislative elements (which do have some variance from the OECD’s guidelines). One particular example is that the ATO may, under the law, reconstruct (i.e. substitute or nullify) the arrangements entered into by taxpayers, with the arm’s length conditions.

Hybrid mismatch rules

Hybrid mismatch provisions are designed to prevent MNEs from leveraging differences in the tax treatment of various arrangements across jurisdictions to obtain tax benefits. These mismatches typically result in either a ‘deduction / non-inclusion’ outcome where the arrangement is deductible in one jurisdiction but not assessable in another, or a ‘deduction / deduction’ outcome where the arrangement is deductible in two jurisdictions. The hybrid mismatch rules neutralise these mismatches by denying the deductions or including the income as assessable for Australian entities.

Whilst the Australian hybrid mismatch provisions are based on the OECD framework, the rules are more expansive and stringent than most other jurisdictions as there is no de minimis threshold. The rules extend to ‘imported mismatches’, where hybrid arrangements occur indirectly within a MNE group or chain of entities.Debt deductions can be denied if a non-resident payee of interest is not subject to tax of at least 10%. The ATO expects multinational companies to assess and document the potential application of these rules to their cross-border transactions in order to support their position. Failure to meet this expectation may increase the risk of deductions being denied.

Thin capitalisation

Australia’s thin capitalisation regime was significantly modified with effect from 1 July 2024. It disallows otherwise deductible debt deductions (widely defined but includes interest) attributable to Australian entities that are foreign controlled, Australian entities with specified foreign investments, and foreign entities that either invest directly into Australia or operate a business through an Australian permanent establishment.

The thin capitalisation rules apply differently to general investors, financial entities and approved deposit taking institutions such as banks.

The thin capitalisation provisions do not apply to entities:

• claiming annual debt expenses of $2 million or less; or
• that are Australian outbound investing entities whose average ‘Australian assets’ represent at least 90% of its average total assets.

The effect of breaching the thin capitalisation rules is that an entity’s debt deductions are proportionately disallowed. There are three thin capitalisation tests. The ‘fixed ratio test’ is the default test and applies unless an entity chooses to apply the ‘group ratio test’ or the ‘third party debt test’.

Under the ‘fixed ratio test’, an entity’s debt deductions on borrowings in excess of 30% of its tax EBITA are disallowed. Entities that apply the ‘fixed ratio test’ may carry forward the disallowed debt deductions for 15 years, subject to satisfying certain tests.

The ‘group ratio test’ is applied by multiplying an entity’s tax EBITA by the ‘group ratio’ in which they are a member. The ‘group ratio is calculated by dividing the group’s third-party debt deductions by the group EBITA.

The third-party debt test allows debt deductions for third party borrowings but not related party borrowings.

The amended legislation also introduces a new ‘debt-deduction creation rule’ (DDCR) applicable for income years commencing on or after 1 July 2024. These DDCRs are intended to target multinational groups undertaking debt restructures that result in no substantive economic changes within the group. Broadly, the rules deny debt deductions on related party borrowings to fund dividends, returns of capital, or royalty payments to a related party or acquiring CGT assets from a related party unless specific exceptions apply.

Debt/equity rules

Financial arrangements entered into by corporate taxpayers can be tested under Australia’s tax laws to determine whether, notwithstanding the legal form of those arrangements, those arrangements should be treated for tax purposes as debt or as equity. For example, a loan arrangement may be treated under these rules as equity for tax purposes with the result that interest payments on that loan may be denied as a deduction. Conversely, equity held in a company may, under the rules, be treated as debt and dividends paid on the equity may be allowed as a deduction. Whether an arrangement is treated as debt or equity under these rules is also relevant to the tax treatment of that arrangement under the thin capitalisation rules referred to above.

There are tests specified to determine whether an arrangement will be treated as debt or as equity for tax purposes. An arrangement that is treated as both debt and equity under these tests will be treated as debt.

In brief terms, for an arrangement to be treated as debt for tax purposes it is necessary for the “debtor” to have an effectively non-contingent obligation to repay the amount obtained. It also needs to be substantially likely that the amount repaid is at least equal to the amount initially obtained, and this is measured in nominal terms for arrangements of up to 10 years and in present value terms for arrangements that exceed 10 years.

Anti-avoidance

Australia’s tax laws contain various provisions directed at tax avoidance schemes. These include general anti-avoidance provisions that can apply to schemes that have a dominant purpose of obtaining a tax benefit under the scheme. There are also provisions specifically directed at “significant global entities” (SGEs), which have a global annual income of A$1 billion or more, which include “multinational anti-avoidance laws” that can apply to certain structures adopted by a SGE to minimise Australian tax from Australian operations; “diverted profits tax” which can apply to the diversion of profits offshore by a SGE to minimise Australian tax, and country-by-country (CBC) reporting obligations.

Taxation of financial arrangements

Australia has complex rules addressing the taxation of the gains and losses from certain financial arrangements. The rules have particular application to large financial entities such as banks, insurance companies, and superannuation funds. It is possible for taxpayers to elect that the Taxation of Financial Arrangements (TOFA) rules apply to financial arrangements to which they are a party. Where TOFA applies, gains and losses are recognised in accordance with various prescribed tax-timing methods including the compounding accruals method and the realisation method.

Capital Gains Tax (CGT)

Capital gains in Australia are generally taxed at the same rate as income tax. Resident individuals and superannuation funds may, however, qualify for a discounted rate of tax in relation to gains from the disposal of assets held for at least 12 months. In the case of capital gains realised by individuals and trusts, the gains may be reduced by 50%, and in the case of superannuation funds the capital gains may be reduced by 33.3%.

In very general terms a capital gain is the difference between the sale price of the asset and its cost including certain acquisition costs. Capital losses may be offset against capital gains and may be carried forward to be offset against future capital gains, subject to satisfying the relevant loss recoupment test. The resulting net capital gain is included in the assessable income of the taxpayer.

There are certain CGT exemptions or concessions applicable to individuals, trusts, and small businesses. For example, individuals who are Australian tax residents are generally not subject to CGT on any gain resulting from the disposal of their main residence.

Foreign residents are subject to CGT on the disposal of interests in a narrower range of assets referred to as “taxable Australian property”. That term includes Australian real property interests and interests of 10% or more in an entity that has more than 50% of the value of its assets referable to interests in Australian real property. A foreign resident disposing of such “taxable Australian property” may be subject to a withholding of 15% of the sale proceeds. The withholding obligation is imposed on the purchaser of the relevant property.

Anti-avoidance

Australia’s tax laws contain various provisions directed at tax avoidance schemes. These include general anti-avoidance provisions that can apply to schemes that have a dominant purpose of obtaining a tax benefit under the scheme. As mentioned above, there are also provisions specifically directed at SGEs, which include the MAAL that can apply to certain structures adopted by a SGE to minimise Australian tax from Australian operations and DPT which can apply to the diversion of profits offshore by a SGE to minimise Australian tax.

Goods and Services Tax (GST)

GST-registered entities pay GST on their taxable supplies. The current GST rate is 10% and is calculated on the (GST exclusive) value of a taxable supply. Australia’s GST is a type of value-added tax, whereby the GST is imposed throughout the supply chain but with the end consumer usually bearing the full amount of tax. Generally, a GST-registered business in the supply chain will collect GST on their sales, but will deduct any GST they have incurred on their inputs.

Despite the name, GST applies to more than just the supply of goods and services. Any supply connected with Australia, including supplies of goods, services, real property, rights, licenses and intellectual property, is subject to GST if the supplier meets or exceeds the GST registration threshold, unless an exemption applies. There are two types of exemptions:

1. GST-free supplies, which include supplies of basic food, medical products and services, education services, exports of goods and services and supplies of going concerns; and

2. Input taxed supplies, which include financial supplies (e.g., supplies of shares and loans), residential rent and certain activities of charities.

Entities who make GST-free are usually still entitled to recover the GST in their inputs as input tax credits but entities making input taxed supplies are generally denied an entitlement to recover input tax credits on their related costs.

Currently, a supplier meets the GST registration threshold if it makes supplies connected with Australia in excess of A$75,000 in any 12-month period. Entities who are sufficiently related can elect to form a GST group, allowing them to lodge a single GST return (business activity statement) on behalf of all group transactions.

In response to the growing digital economy, the scope of Australia’s GST has been significantly expanded to include certain supplies made by non-residents, or the operator of a digital marketplace, direct to Australian consumers. Essentially, a non-resident entity or operator of a digital marketplace may be required to register for, and pay, GST on any supply made to an “Australian consumer” of:

• intangible (digital) supplies, such as a service, software or licence (e.g., access to apps); or
• “low value goods”, being goods with a customs value of A$1,000 or less.

In this context, an “Australian consumer” is an entity or individual who is either not registered for Australian GST or, if GST-registered, not acquiring the supply from the non-resident as part of their enterprise. Strict evidentiary rules apply to non-residents in terms of substantiating whether they are making supplies to Australian businesses or Australian consumers.

While the liability to pay GST to the Federal Government generally rests with the supplier, typically the burden of GST is economically passed on to the recipient. In most cases, Australia’s competition and consumer laws require any pricing to be displayed on a final GST-inclusive basis.

As such, should a supplier wish to pass on the burden of GST to the buyer, the GST must either be built into the price displayed or there must be a clear contractual provision obliging the buyer to pay the supplier an additional amount in respect of GST. In the absence of a specific contractual provision, the supplier would not otherwise have an automatic right to recover GST from the recipient of the supply. The inclusion of such contractual provisions is the usual practice in drafting contracts in Australia in a business-to-business context.

Certain purchasers of new residential premises, or potential residential land, are obliged to withhold an amount on account of GST from the purchase price of the property acquired and remit the amount so withheld to the ATO.

Fringe Benefits Tax

Fringe Benefits Tax (FBT) is a federal tax payable by employers on the value of non-cash benefits provided to employees and their associates. FBT is imposed on employers due to the difficulty of collecting tax from employees on such non-cash benefits provided.

The types of benefits to which FBT can potentially apply include the provision of a motor vehicle, the provision of accommodation, employee related entertainment and payment of an employee’s private expenses.Some benefits provided to employees are subject to concessional FBT treatment.

The rate of FBT imposed generally equates to the tax that would have been payable if, rather than the provision of a fringe benefit, an employee on the top marginal rate (currently 47%) had been paid a cash amount. The FBT cost of providing fringe benefits to an employee is typically taken into account by the employer when structuring an employee’s remuneration package.

Superannuation Guarantee Charge

Employers in Australia are required to provide a minimum level of superannuation (or pension fund) support to employees by making superannuation contributions to complying superannuation funds. At present, the minimum level of superannuation required to be paid is 12% of an employee’s “ordinary time earnings” up to a specified level. Directors of a company can be personally held to account for unpaid superannuation contributions.

Employees have the right to choose the complying fund into which payments are to be made by the employer. Employees generally have access to these funds on their retirement from the workforce. Employers who do not pay the minimum amount of superannuation required will be subject to the Superannuation Guarantee Charge based on the amount that the employer has failed to contribute (including super calculated on any overtime) plus an interest charge and administration fee.

Payroll tax

Each of the states and territories imposes payroll tax. The legislation in each state and territory is not uniform. This is a tax based on the amount of wages paid by certain employers where the annual wages or deemed wages paid by the employer exceed a specified threshold (which varies among the states and territories).

In this context, wages can include payments made to contractors and non-cash remuneration such as fringe benefits and share and share option schemes. The rates of payroll tax vary from 4% to approximately 7% of the annual wages bill.

Stamp duty

Each of Australia’s states and territories impose stamp duty on certain transactions. As stamp duty is a state-based tax, there are marked differences amongst the jurisdictions in terms of the types of assets that are dutiable. However, all states and territories continue to impose stamp duty on motor vehicles and transactions involving real estate, including:

• the transfer of significant holdings of shares in private companies and trusts that directly, indirectly or constructively hold interests in land; and
• the direct transfer of interests in land.

The legislation in each state and territory is not uniform. For example, Queensland and Western Australia continue to impose duty on the transfer of “business assets” such as goodwill, intellectual property and licences located in the relevant state or territory. Further, each state and territory has its own definition of “land” which includes not only freehold land but also an entity’s interest in a lease or any assets physically fixed to land (e.g. tenant fixtures and leasehold improvements).

The rate of stamp duty varies among the states and territories and can be substantial. In New South Wales, for example, duty at rates of up to 7% of the transaction value can apply. In recent times, many states impose an additional stamp duty surcharge of up to a further 9% on acquisitions of residential property by foreign persons.

Victoria has introduced a Windfall Gains Tax (WGT) to target landowners who receive a financial benefit from land rezoning that results in a taxable value uplift of more than $100,000. The tax can be levied at a rate of up to 62.5%, unless certain exemptions apply.

Commercial and industrial property acquired in Victoria that is in the Commercial and Industrial Property Tax system may be exempt from stamp duty.