International Taxation and Cross-Border Transactions
Residence and source
Australia taxes residents on worldwide income and non-residents on Australian-source income. Residency tests include the resides test, domicile test, 183-day test and Commonwealth superannuation test. Dual residents are treated as non-residents for certain purposes under treaty tie-breaker rules. Source rules determine whether income is Australian-source, with specific rules for dividends, interest and royalties.
Foreign income and credits
Residents include foreign-source income and may claim foreign income tax offsets for foreign tax paid, limited to the Australian tax on that income. The controlled foreign company and transferor trust rules attribute certain income of foreign entities to Australian residents. Thin capitalisation limits debt deductions for foreign-controlled entities.
Transfer pricing and treaties
Australia's transfer pricing rules require arm's length conditions between related parties. Double tax agreements allocate taxing rights and provide mutual agreement procedures. Withholding tax applies to dividends, interest and royalties paid to non-residents, at rates reduced by treaty.
Traps
Common traps include applying the 183-day test without checking the resides test, forgetting that a non-resident's capital gains are generally limited to taxable Australian property, and claiming a foreign tax offset exceeding the Australian tax on the foreign income. Another is ignoring withholding tax on royalties.
Worked example
A resident earns $50,000 foreign income, pays $10,000 foreign tax, and faces Australian tax of $15,000 on that income. The offset is limited to $15,000, so the full $10,000 is creditable.
Superannuation and Retirement Planning
Contributions and caps
Superannuation is taxed at three points: contributions, earnings and benefits. Concessional contributions are taxed at 15% in the fund, subject to an annual cap, with carry-forward of unused cap amounts for balances under $500,000. Non-concessional contributions are made from after-tax money and are subject to a cap and bring-forward rules based on total superannuation balance. Excess concessional contributions are included in the individual's assessable income with a 15% offset.
Fund earnings and benefits
Fund earnings are taxed at 15%, and at 0% in the retirement phase for assets supporting retirement income streams, subject to the transfer balance cap. Benefits are tax-free from age 60 for taxed sources. The transfer balance cap limits the amount that can be transferred to retirement phase, with indexation.
Planning issues
Candidates must understand the work test, the bring-forward rules, Division 293 tax for high-income earners, and the treatment of death benefits and dependants. Contribution splitting and spouse contributions are also examinable.
Traps
A frequent trap is applying the 15% contributions tax to non-concessional contributions, or forgetting the transfer balance cap applies to retirement-phase income streams, not accumulation accounts. Another is treating earnings in retirement phase as taxable at 15%. Questions also test whether a contribution is within the cap based on the total superannuation balance.
Worked example
A 60-year-old contributes $30,000 concessional. The fund pays 15% ($4,500) contributions tax. If the cap is $30,000 and no carry-forward applies, no excess arises.
Tax Planning, Anti-Avoidance and Compliance
Planning versus avoidance
Legitimate tax planning arranges affairs to minimise tax within the law, using concessions and timing. Avoidance involves arrangements with a dominant purpose of obtaining a tax benefit. Part IVA of the Income Tax Assessment Act 1936 allows the Commissioner to cancel a tax benefit where a scheme is entered into with the dominant purpose of obtaining a tax benefit, having regard to the eight statutory factors including the manner of the arrangement, its form and substance, and the tax result.
Specific integrity measures
Candidates must know the specific anti-avoidance rules: the personal services income rules, Division 7A, the general value shifting rules, the thin capitalisation rules, and the transfer pricing rules. Each can apply independently of Part IVA. The Commissioner may also apply the general interest charge and shortfall penalties.
Compliance and disclosure
Taxpayers must disclose uncertain positions, and advisers must consider the reportable tax position regime and the tax avoidance disclosure requirements. Voluntary disclosure reduces penalties. The ATO's justified trust approach and the Tax Avoidance Taskforce target aggressive arrangements.
Traps
A common trap is assuming a commercially plausible transaction is immune from Part IVA; the dominant purpose test looks at the arrangement as a whole. Another is treating a specific rule as exhaustive when Part IVA may also apply. Questions also test whether a scheme has a tax benefit at all.
Worked example
A high-income professional interposes a trust to split income with a spouse who performs no work. The arrangement may attract Part IVA or the personal services income rules, and the Commissioner can cancel the tax benefit.