Overview of the Australian tax system

Tax laws are complex and subject to change and their application depends on a full understanding of all the facts and circumstances involved in a particular case. This section does not contain a comprehensive discussion of Australian tax issues that are relevant to the types of transactions discussed in this guide. Prospective investors should always seek specific tax and financial advice in relation to a particular transaction or investment.

Basic features of the Australian tax system

Australian resident vs foreign resident

Australian residents are generally taxed on their worldwide income with some exemptions and concessions, such as tax offsets for dividends paid by Australian companies out of taxed profits (so-called "franked dividends") and foreign taxes paid on income subject to tax in Australia.

Foreign residents are generally only taxed on their Australian-sourced income. Australia's taxing rights may be further limited by double tax agreements. Certain exemptions and concessions under Australian tax law may also be available to foreign residents.

Income tax

Gains and losses made by Australian resident taxpayers from transactions and events involving debts and other financial instruments (either as an issuer or a holder) will generally be taken into account in calculating their taxable income. However, the calculation and timing of the gains and losses, how gains are taken into account and whether losses are deductible, among other things, are subject to complex rules, the application of which depends on various matters such as the terms of the debt and the nature and tax treatment of the taxpayer.

Where an Australian resident taxpayer holds a debt through a foreign branch, gains and losses from the debt (other than interest income, which is subject to withholding tax) may be exempt from tax, depending on the country in which the foreign branch is located and the nature of the holder's activities.

A foreign resident holding debt will generally only be subject to tax in Australia on net gains that have an Australian source or, if there is a comprehensive double tax treaty between the country of tax residence of the foreign resident and Australia, where the foreign resident holds a debt through an Australian permanent establishment.

Where the parties to a transaction involving a debt are in different jurisdictions and not acting at arm's length, transfer pricing rules will generally require gains and losses in respect of the debt to be recognised on an arm's length basis.

The corporate income tax rate in Australia is currently 30% (or 25% for certain "base rate" entities with an aggregated turnover of less than $50 million).

Other types of non-corporate, non-tax-exempt taxpayers are currently subject to income tax rates of up to 47% (including the Medicare Levy).

Withholding tax

Certain types of income (including dividend and interest income) derived by entities outside Australia are subject to a final withholding tax (which means that a tax return does not need to be lodged, but the entity cannot claim any deductions against the income).

If the holder of debt is outside Australia (ie a foreign resident entity that does not hold the debt through an Australian permanent establishment of the entity or an Australian resident entity that holds the debt through a foreign branch of the entity), payments of interest and amounts in the nature of interest (eg a discount) will be subject to a final interest withholding tax (with no deduction allowed for associated expenses) unless an exemption applies. Relevant exemptions that may apply include:

• the debt was issued in accordance with a prescribed "public offer" test; or
• the holder of the debt is a financial institution that is a resident of a country that has concluded a double tax agreement with Australia that includes a withholding tax exemption for financial institutions (subject to certain conditions).

The rate of interest withholding tax is 10% (subject to exemptions).

The rate of dividend withholding tax is 30% (subject to any lower rate prescribed by a double tax agreement). Franked dividends and dividends derived from a foreign source are generally exempt from withholding tax.

Goods and services tax (GST)

Australia imposes a type of value-added tax called goods and services tax or "GST" on certain supplies of goods and services connected with Australia. The current GST rate on taxable supplies is 10%.

As a general rule, registered entities making taxable supplies are required to remit GST to the Australian Taxation Office (ATO) and can claim input tax credits for GST on acquisitions associated with making taxable or GST-free supplies.

Some transactions (including many financial transactions between Australian parties) are not subject to GST, but are instead input taxed, meaning suppliers do not charge GST, but are subject to restrictions on claiming input tax credits for GST charged on the acquisitions they make (to the extent that the acquisitions relate to the input taxed supplies). Acquiring an interest in a debt is one type of input taxed supply.

GST-free supplies (such as exports and certain other cross-border transactions and eligible sales of a going concern) are not subject to GST and the supplier is not subject to any restrictions on claiming input tax credits. Where a supply is both GST-free and input taxed, GST-free status prevails

Stamp duty

Stamp duty is imposed by each State and Territory of Australia. Duty is generally charged on transactions involving transfers of "dutiable property". The categories of dutiable property vary considerably between jurisdictions and many duties on non-land transactions have been phased out in recent years.

The rate of duty also varies considerably but is typically set at around 5% of the higher of the value of the property transferred and the consideration provided for its transfer.

Dutiable property can include direct or indirect interests in land, leases and mining and oil and gas interests, and a limited range of other dutiable property such as debts and business assets.

The stamp duty implications of acquiring debts by way of a transfer will depend on whether the debt is secured or unsecured and the location of the debtor and/or the secured property. The following table outlines the basic treatment currently applying in each State and Territory of Australia.

Stamp duty considerations have historically encouraged the use of securitisation vehicles (for which exemptions apply), sub-participation arrangements and security trust structures.