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Resident companies pay tax on their worldwide income and capital gains (with certain categories of income and capital gains being exempted and with tax credits being granted where income and capital gains have already been taxed in a foreign jurisdiction).
A company is resident in Australia for tax purposes if: Double taxation of foreign income for resident Australian companies has traditionally avoided by the following rules (but see changes put forward by the Ralph Report and the relaxation of the CFC rules that took place in 2003): Withholding taxes are imposed on outgoing dividends, royalties and loan interest payments.
Thin Capitalisation Rules: New legislation which came into effect in 2001 introduced 'thin capitalisation' rules for Australian business, ie putting limits on the amount of interest that can be deducted for tax purposes if a firm finances itself predominantly by loan capital, something that was a common practice for foreign companies wanting to extract returns from their Australian subsidiaries without incurring withholding tax on dividends.
In August 2007, then Minister for Revenue and Assistant Treasurer, Peter Dutton, introduced Tax Laws Amendment (2007 Measures No.
Legislation introduced to the Australian parliament in April, 2004, simplified the taxation system for companies with offshore earnings by ensuring that they only pay a single layer of tax, according to the government.
The proposals became effective in October, and Andrew Binns, Tax Partner with Ernst & Young Australia praised them, saying that: 'As companies get to understand it more, they will come to see it as allowing them to restructure in a way that makes them more valuable to shareholders.' Mr Binns also argued that the move towards tax-free demergers is likely to provide a boost to the country's investment climate: 'The government is trying to encourage people to invest and take long-term views in the market,' he explained.'To have a tax cost, just because a company restructures to make it more efficient, is an impediment to that sort of activity.' Restructuring companies will no longer suffer capital gains tax penalties, while shareholders will also benefit through the deferral of capital gains tax and relief of tax on deemed dividends."Higher rates of foreign tax are imposed on our foreign income when it is repatriated to Australia to pay dividends to shareholders.Under the current structure, this problem will increase as international demand for our products grows," said Peter Macdonald, chief executive.The purpose of this provision is to take away an impediment under which multinational companies were deterred from transferring income through Australia.The Australian company must hold at least 10% of the foreign company's shares, and there are some further technical conditions.