Broadly, under Australian tax law a resident is subject to Australian tax on their income from all sources in or outside of Australia. A non-resident is subject to Australian tax only on income from sources in Australia, as well as certain other amounts such as capital gains from assets having the ‘necessary connection’ with Australia.

Some foreign source income may be exempt from Australian tax, for example:

• certain employment income derived by an Australian resident working overseas, and
• foreign source income derived by Australian resident companies, such as certain dividends and branch profits.

Australia’s tax law has specific provisions that apply to international dealings. For example, under our foreign tax credit system, an Australian resident can receive a credit against Australian tax for foreign tax paid on certain income derived overseas.

Australia also has a non-resident withholding tax system under which Australian income, such as dividends, interest and royalties, paid to a non-resident, is subject to a final withholding tax.

There are specific anti-avoidance provisions that apply to international dealings. These include controlled foreign company, transferor trust and foreign investment fund measures. These provisions apply to the tax that Australian resident taxpayers pay on the income of non-resident entities in which they have an interest and which has not been comparably taxed in offshore jurisdictions. This income is taxed on an accruals basis according to when the income is derived, not when it is remitted back to Australia.

Under controlled foreign company rules, Australian shareholders who have a certain interest in a controlled foreign company are taxed on their share of the controlled foreign company's "tainted income" as it is earned. This is not the case generally where that income is comparably taxed offshore or the controlled foreign company derives its income almost exclusively from active business activities. Tainted income includes passive income, such as income from investments (eg, rent, some interest, dividends and royalties), and certain sales and services income arising from related party transactions.

Under transferor trust measures, tax is imposed on a taxpayer where they have transferred property or services to a non-resident discretionary trust or, after 12 April 1989, to a non-resident non-discretionary trust for inadequate or no consideration. They may have certain income of the non-resident trust included in their assessable income.

Under foreign investment fund measures, where the controlled foreign company and transferor trust rules do not apply, Australian resident taxpayers are taxed on income sheltered in offshore companies and trusts in which they do not have a controlling interest. These measures also apply to Australian residents who hold a foreign life insurance policy. It should be noted that there are a number of exemptions to this measure.

There are other international anti-avoidance measures such as transfer pricing and thin capitalisation provisions that deal with arrangements to shift profits out of Australia.

The general anti-avoidance provisions of the Australian tax law may also apply to international dealings where certain conditions are met.

Australia has also entered into bilateral tax treaties with various other jurisdictions. While these treaties prevent double taxation in regard to international dealings, they also prevent tax avoidance by allowing for the exchange of information between relevant tax authorities in certain circumstances.

The Australian Commissioner of Taxation also has powers to issue, in certain circumstances, an ‘offshore information notice’. The Commissioner can also require a person carrying on business in Australia to provide a security for the payment of income tax.

Resources

Australia Tax Law and resources from the Australia Parliamentary

The Australia Board of Taxation is a non-statutory advisory body charged with contributing a business and broader community perspective to improving the design of taxation laws and their operation.

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