Taxation of income
Australian residents (excluding temporary residents) are generally taxed on income and capital gains earned domestically and in foreign jurisdictions. Income is taxed at rates that depend on the identity of the relevant taxpayer, using the following rates:
- Individuals are taxed under a progressive system with the highest marginal tax rate of 47 per cent (including a 2 per cent Medicare levy).
- Trusts are generally taxed at a rate of 47 per cent.
- Companies are generally taxed at the corporate tax rate of 30 per cent.
Taxable income is calculated by deducting allowable deductions from assessable income. These include deductions for expenses incurred in carrying on a business, capital allowances for depreciating assets, and tax losses from previous years, which may be carried forward to be offset in later years (indefinitely, until absorbed).
However, a distinction is drawn between revenue losses and net capital losses. Revenue losses may be carried forward for offset against later assessable income and gains. A net capital loss carried forward may be offset only against later year capital gains. Special integrity rules or restrictions apply to the prior year tax losses of companies and trusts to prevent trafficking in losses.
Non-residents who do not become Australian residents (either temporary or permanent) are generally only taxed on their Australian-sourced income; excluding dividends, royalties and interest, which are subject to withholding tax. So, non-residents are generally not taxed on their foreign income or on any capital gains from their assets that are not taxable Australian property.
Similar treatment may apply to individuals who are or who become temporary residents of Australia for tax purposes (regardless of the time spent in Australia). Individuals who hold a temporary visa and fall within the definition of temporary resident may be exempt from Australian tax on income from sources outside Australia. However, they will be taxed in respect of employment or services income earned while a temporary resident. Interest payments by temporary residents to non-resident lenders are not subject to interest withholding tax obligations.
Where a foreign enterprise has a branch office (permanent establishment) in Australia, and a double taxation agreement applies, profits are attributed to the permanent establishment as they would be if the permanent establishment were a separate enterprise dealing independently with its head office and other parties. The foreign enterprise is taxed in Australia, in relation to the profits of its permanent establishment, at the general corporate rate. Gains on capital gains tax assets used by a permanent establishment in conducting its business are also taxed in Australia.
If a foreign enterprise has no Australian permanent establishment and earns business profits sourced in Australia, and a double tax treaty applies, its effect will generally be that the business profits will not be subject to Australian tax.