Fiscal and Tax Regimes

The following information is extracted from the Department of Resources, Energy and Tourism publication, Mineral and petroleum exploration and development in Australia: a guide for investors (external site).


General taxation arrangements

The information in this section outlines the pertinent features of Australia’s taxation system, as it currently applies to minerals and petroleum exploration and development.


The GST system

The GST is a broad-based goods and services tax of 10% which applies to the supply of most goods and services consumed in Australia. Businesses with annual turnover of A$50 000 or more are required to register for the GST. Registered businesses are able to claim input tax credits for any GST included in their costs of production. Goods and services that are exported are GST free, which means that the exporter can claim an input tax credit for the GST included in the price of the goods and services used to produce the exports even though they do not include GST on the price of the exports.

Some other supplies, including most financial supplies, supplies of residential rents and residential premises and some supplies of precious metals are input taxed. This means that GST is not included in the final price, but input tax credits are not available for the input to producing the supply.

There is also another category of supplies that are GST free. GST free means that no GST is payable on the supply. However, the supplier in this instance can claim an input tax credit for any GST it paid on the things it acquired to make the GST-free supply. GST-free supplies include some food items, health, medical services, education, supplies of going concerns and precious metals.

Business entities require an Australian business number (ABN). The ABN enables registered companies to participate in the GST system (eg, to claim their input tax credits), among other things.

Another feature of the new tax system is the ‘pay as you go’ system. Pay as you go is a single integrated system for reporting and paying tax on business and investment income and withholding amounts. It replaced 11 different systems, such as the provisional tax, superannuation fund instalments and ‘pay as you earn’ systems, simplifying taxation arrangements for companies.


Company taxation arrangements

The company tax rate (also known as the corporate rate) is 30%.

The treatment of business expenditure for the mining, geothermal and petroleum industries is generally the same as for other industries. Expenditure that is not capital, such as daily operational expenses, is usually deductible at the time incurred. The cost of depreciating assets is generally deductible over the effective life of the asset. The following special treatment is given to certain expenditures.

Immediate deductions are allowable for the following:

  • Expenditure on eligible exploration or prospecting activities for minerals, including petroleum. This can include the cost of acquiring depreciating assets after 30 June 2001, including mining or prospecting rights and information, if first used in such activities.
  • Expenditure on rehabilitating mine sites upon which the taxpayer conducted the extractive activities, including expenditure on the removal of redundant offshore platforms.
  • Payments of petroleum resource rent tax.
  • Expenditure on developing or operating a mine site, or petroleum field, or certain mineral transport facilities (but not the cost of a depreciating asset), can be deductible over the life of the project.

In addition to these special deductions, there are a number of generally available deductions:

  • An immediate deduction for expenditure to the extent that it is incurred for the sole or dominant purpose of carrying out environmental protection activities (EPA). EPA activities prevent, fight or remedy pollution, or treat clean-up, remove or store waste from your earning activity. Your earning activity is: one you carried on, carry on or propose to carry on for the purpose of producing assessable income; exploration or prospecting; or mine site rehabilitation. However, if your expenditure forms part of the cost of depreciating assets it is not deductible as expenditure on EPA if a deduction is available for the decline in value of the assets.
  • Expenditure on EPA that is also an environmental impact assessment for your project is not deductible as expenditure on EPA. Instead, it could be deductible over the life of the project using a pool.


Capital gains tax (CGT)

There is not a separate tax on capital gains. Capital gains tax (CGT) is the tax payable on any net capital gain included in an annual income tax return. A net capital gain (broadly capital gains reduced by capital losses) is merely a component of assessable income. Accordingly, companies are taxed on a net capital gain at the company tax rate. The rate at which individuals are taxed on a net capital gain will depend on their marginal tax rate.

Generally, a capital gain arises if your capital proceeds are greater than your cost base, for example, if you received more for an asset than you paid for it. You make a capital loss if your reduced cost base is greater than your capital proceeds.

A capital loss can only be used to reduce any capital gains in the immediate or subsequent year of income. It is not deductible from assessable income.

Australian residents make a capital gain or capital loss if a CGT event happens to any of their assets anywhere in the world. As a general rule, non-residents make a capital gain or capital loss only if a CGT event happens to a CGT asset that has a necessary connection with Australia.

Generally, any capital gain or capital loss from an asset acquired before 20 September 1985 (pre-CGT) can be disregarded.

There are special rules that apply to depreciating assets. A capital gain or capital loss can only arise to the extent that a depreciating asset has been used for a non-taxable purpose (eg used privately). To the extent that a depreciating asset is used for a taxable purpose (eg in a business), any gain is treated as ordinary income and losses as deductions.

For all taxpayers, indexation of the cost base of an asset (for calculating a capital gain) was frozen at 30 September 1999. Individuals can reduce any capital gain remaining after applying capital losses by the 50% CGT discount. For assets acquired before 21 September 1999, they have the choice of applying the 50% CGT discount or by using cost base indexation (frozen at 30 September 1999).


Indirect taxation

A broad-based GST at a rate of 10% applies in Australia.

Business is able to claim a tax credit for GST paid on business inputs. The GST is only applicable to taxable items, with a number of items being GST free.

Exported goods and services are GST-free, while goods imported into Australia are generally subject to GST. Excise duties become payable on petroleum products, including gasoline and diesel fuel, produced for the Australian market, while exported goods are excise exempt.

Additional information on the application of the GST can be obtained from the Australian Taxation Office (external site)


Dividend imputation

Australia has a dividend imputation system of company taxation. Australian resident individuals who receive a taxable dividend from Australian resident companies receive a credit for tax paid by the company on its income:

  • for the shareholder, this means that the tax payable on the dividend income is already fully or partially paid (franked dividend)
  • for the company, this means that certain records must be maintained to verify the amount of credit that can be passed on to its shareholders.

The extent to which the company may 'frank' a dividend depends on the credits or balance in its franking account at the time the dividend is paid. Franking of dividends by companies is not mandatory. Credits to the franking account arise when a company pays tax, or when a company receives a franked income from another company.

Non-resident taxpayers do not pay tax on the amount of franked dividends paid by an Australian resident company. However, they will pay withholding tax on the amount of the dividend that is not franked. The withholding tax rate is levied at 15% and 30%, depending upon which country the dividend is going to and subject to any double tax agreements with the respective country.


Dividend withholding tax exemption for foreign source dividend income

Unfranked dividends paid by Australian resident companies to non-residents have been exempt from dividend withholding tax to the extent they consist of 'foreign dividend account (FDA) declaration amounts’. The FDA declaration amount is the part of the dividend specified by the company as representing profits from certain foreign sourced dividends, and permits the Australian company to make a declaration in relation to a foreign dividend received by it that is to be paid wholly or in part to a non-resident shareholder of the company. This amount would be excluded from Australian income tax.

The exemption alleviates Australian tax impediments to the use of Australian resident companies for investments in subsidiaries in other countries.


Double taxation agreements and foreign tax credits

Australia has concluded comprehensive agreements with a number of countries for the elimination of double taxation. The agreements adopt rules whereby the rights to tax are either exclusively allocated to one of the countries, or are divided between the countries to the agreement. In general, where both the country of residence and the country of source of income are given the rights to tax, the agreements generally provide for the country of residence to allow a tax credit. The question of income source generally relates to activities involving the exploitation of natural resources in Australia. The agreements also restrict the Australian tax payable on dividends (usually to 15%), interest and royalty (usually to 10%) paid to residents of the other countries.


Payroll tax

The general revenue base of the states and territories includes a tax on payrolls, with the payroll exemption threshold ranging from A$504 000 to A$1 250 000 per annum. The tax is payable by all employers and is based on wages paid or payable. In most states, this includes non-cash fringe benefits to employees.

Broadly speaking, the rate varies between 4.75 and 6.85%. Some states apply a single marginal rate, while others have progressive marginal rates or a deduction system, or both.


Fringe benefits tax

Employers generally are required to pay fringe benefits tax (FBT) on the value of certain fringe benefits they provide to their employees. A fringe benefit can be a right (including a property right), privilege, service or facility, such as, the provision of company cars, subsidised accommodation and travel, entertainment and the like.

The tax was levied at the rate of 48.5% for the FBT year ending 31 March 2006.

Mining companies benefit from specific concessions in the taxation of benefits provided in 'remote areas' (40 km from a population centre of 14 000 or 100 km from a centre of 130 000 or more) and in the methods used to calculate some benefits, such as work-related travel in commercial vehicles.
 
There is a full exemption from FBT for the provision of remote area housing benefits provided by employers to employees.


Tax concessions for research and development

The Australian Government recognises the desirability of companies initiating and undertaking their own research and development (R&D) activities. Accordingly, where companies incorporated in Australia and registered in the relevant year with the Industry, Research and Development Board, undertake R&D activities, eligible R&D expenses are deductible for taxation purposes at up to 125%, or in limited circumstances at 175%, in the year that the expenses are incurred. The decline in value on tangible depreciating assets used in R&D activities may also qualify for the 125% deduction. Note however, that there are exclusions from deductibility under the tax concession for R&D activities based around prospecting, exploring or drilling for minerals, petroleum or natural gas.


Thin capitalisation

The Australian thin capitalisation regime applies to foreign entities investing in Australia and foreign controlled Australian entities, as well as to Australian multinational enterprises with foreign controlled investments.

The thin capitalisation regime is principally about the extent to which an investment is financed by way of debt compared to equity. The regime seeks to ensure that multinational entities do not allocate an excessive amount of debt to their Australian operations. Where a benchmark level of debt funding is exceeded, deductions for debt financing may be limited.

With few exceptions, Australia taxes its residents on their worldwide income giving credit for foreign taxes paid on that income. This includes the attribution to Australian shareholders of certain income derived by controlled foreign companies.


Fuel excise credits

The off-road component of the Energy Grants (Credits) Scheme provides for a rebate of excise for diesel and like fuels used for eligible activities, and has been widened to include diesel and like fuels used in rail and marine transport. The on-road component of the scheme provides substantial reductions in diesel fuel excises for heavy on-road transport, therefore reducing transport costs. Payments under the scheme are considered to be assessable income.

In June 2004 the Australian Government announced a major program of reform to modernise and simplify the fuel excise system. The phase-in of these new arrangements will commence on 1 July 2006 and conclude on 1 July 2015. The changes will lower compliance costs, reduce tax on business and remove the burden of excise from business.

The government will limit the effective application of excise to:

  • business use of fuel in on-road applications in vehicles with a gross vehicle mass of greater than 4.5 t
  • private use of fuel in vehicles and certain off-road applications.

Excise rates for all fuels will be based on energy content, with alternative fuels receiving a 50% discount on energy content excise rates. The current system of grants and rebates will be replaced by a single business credit system. Excise credits will be claimable through the business activity statement from 1 July 2006.

Under the reforms, the burden of excise will be removed entirely from business using fuel in off-road applications and a full excise credit will be introduced for all business use of fuel off-road. This measure will be phased in for newly eligible activities, with a 50% being provided from 1 July 2008 and a full credit from 1 July 2012. Credits will apply to all taxable fuels, including petrol. Mining business will particularly benefit from this initiative.


Further information on general taxation matters

Inquiries on general taxation matters should be directed in the first instance to the Australian Taxation Office at:

GPO Box 9900
Adelaide SA 5001
Australia
Phone +61 8 8208 3111
http://www.ato.gov.au (external site)

 
Inquiries on petroleum-specific taxation matters should be directed to the:

Mining and Petroleum National Specialisation Leader
Australian Taxation Office
6 Gladstone Street
Moonee Ponds Vic 3039
Australia
Phone +61 3 9275 4891
Fax +61 3 9275 5094

Further details on reforms to business taxation are available at the Australian Government Treasury (external site)

For more information on the Energy Grants (Credits) Scheme phone the Australian Taxation Office's Fuel Grants Hotline on 13 72 26.

Additional information on the application of the fuel excise can be obtained from the Australian Taxation Office (external site)