Australia imposes a federal corporate income tax, with no additional state or provincial levies. Trusts and partnerships typically operate as flow-through entities, avoiding income tax at the entity level, except in specific cases like public trading trusts and certain limited partnerships, which are taxed as companies.
These exceptions are taxed as companies, while the net income of other trusts and partnerships is allocated and taxed in the hands of beneficiaries or partners at their respective rates. In practice, trustees may be assessed where income is not effectively distributed at year end (or for certain minor/non-resident beneficiaries), and partners are assessed on their share of partnership net income regardless of cash distributions.
Integrity rules, including trust loss rules and streaming/characterisation rules, can materially affect outcomes. Australia has implemented the OECD/G20 Pillar Two Global Anti-Base Erosion (GloBE) Rules via a global and domestic minimum tax, designed to ensure in-scope multinational groups pay an effective minimum tax rate of 15% in each jurisdiction.
Implementation of Pillar Two Rules
An Income Inclusion Rule (IIR) and an Australian domestic minimum tax apply for fiscal years starting on or after 1 January 2024, while an Undertaxed Profits Rule (UTPR) applies for fiscal years starting on or after 1 January 2025. These rules generally apply to groups with consolidated revenue of at least EUR 750 million, subject to specific scope and exclusions under the Pillar Two framework.
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In-scope groups must calculate a jurisdictional effective tax rate (ETR). This starts with determining the net income of each constituent entity in the jurisdiction (based on financial accounting data), then identifying the covered taxes attributable to that net income, applying any available reporting simplifications and GloBE-specific adjustments under the Australian Minimum Tax Rules. If a jurisdiction’s ETR is below 15%, a top-up tax is calculated and allocated across relevant entities.
Australia’s tax system also includes Double Tax Agreements (DTA), which provide relief for Australian resident companies taxed on worldwide income, including foreign-source income. Capital gains made by companies are generally included in taxable income and taxed at the company’s applicable rate, with no separate CGT rate for companies.
Capital Gains and Taxation of Non-Resident Companies
Capital losses can only be used to offset capital gains (not ordinary income) and any unused capital losses are generally carried forward to future years (subject to continuity/ownership and related integrity rules). Non-resident companies are generally taxed only on Australian-sourced income, gains on taxable Australian property, and income subject to Australian withholding tax.
A foreign company can be deemed to be Australian tax resident if its central management and control is in Australia, even if it does not otherwise carry on business in Australia. The tie-breaker provisions in Australia’s DTAs will apply if a company is tax resident in more than one jurisdiction.
Withholding tax primarily applies to certain payments to non-residents, with common headline rates subject to DTA reductions and specific exemptions.
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Tax Disputes and Controversy
The Australian Taxation Office can cancel a tax benefit where a person entered into a scheme for the sole or dominant purpose of obtaining that tax benefit. The analysis involves identifying a reasonable alternative postulate and comparing tax outcomes. If the anti-avoidance rule applies, the Commissioner can reconstruct the tax outcome and impose interest and penalties.
Key factors include how the scheme was carried out, its form versus substance, timing, the tax result, and changes in financial position of the taxpayer. Controversies commonly arise from risk reviews and audits by the ATO triggered by data-matching, disclosures in financial statements, and large offsets and refunds. Penalties and interest can materially increase the cost of a dispute.
An objection must be lodged within the applicable statutory time limit, commonly 60 days. The taxpayer bears the burden of proof and must show the assessment is excessive or otherwise wrong, supported by evidence. Alternative and early-resolution options include requesting an accredited ATO facilitator to help guide discussions with the case team.
From 1 July 2025, interest charges incurred are no longer deductible, increasing the after-tax cost of carrying ATO debt.