The two main criteria for liability to Australian tax are residence and source of income.

A taxpayer, whether an individual or a company, who is a resident of Australia is taxable on income (unless specifically exempted) derived from all sources whether in or out of Australia. Certain income earned by foreign companies and non-resident trusts is attributed to resident taxpayers when it is derived by the foreign company or non-resident trust, not when it is remitted to Australia

A person who is not a resident of Australia is, generally speaking, liable to Australian tax only on income from Australian sources but, in the case of individual non-resident taxpayers, without the benefit of the tax-free threshold applicable to resident taxpayers. There are some exceptions to this general rule.

Australia has concluded tax agreements with a number of foreign countries to avoid the incidence of double taxation. Most double taxation agreements prescribe, in the case of an individual or a company that is dual resident, certain tie-breaker tests whereby the dual resident is deemed to be a resident solely of one of the two contracting countries. Provisions of this kind avoid the difficulties which would otherwise arise in the case of a person who is resident both in Australia and in the other country with which Australia has an agreement.

Offshore banking units

Offshore banking units are, on income from offshore banking activities, taxed at an effective 10% tax rate. Other Income and Capital Gains are taxed at the Company tax rate currently 30%.

Controlled foreign companies

An accruals taxation system taxes income sheltered in entities resident in tax havens by attributing income derived by such entities to their Australian resident controllers.

Accruals taxation of non-resident trust income

The accruals taxation system also attacks tax avoidance/deferral arising from the accumulation of foreign source income in non-resident trust estates which derive income in low-tax countries but which ultimately have beneficiaries resident in Australia.

Foreign investment funds

The foreign investment fund (FIF) measures are designed to counter tax avoidance opportunities that remained after the introduction of the controlled foreign company/transferor trust measures.

The FIF measures apply where a foreign company or trust, although not controlled by Australian residents, is an attractive investment vehicle because it allows for the accumulation of income offshore in low tax or tax-free countries, thereby allowing the investor to minimise or defer payment of Australian tax. The FIF measures also apply to Australian residents who have invested in offshore life bonds or foreign life policies with an investment component.The FIF measures contained in the Tax Act apply to Australian residents who have an interest in a foreign company or trust at the end of a year of income and those who held a foreign life assurance policy at any time in the income year.

Foreign tax credit system

Under the foreign tax credit system income derived by Australian resident taxpayers from all sources in and out of Australia is assessable unless a specific exemption provision applies (e.g. the exemption for foreign employment income). However, a credit will be allowed for foreign tax paid on the foreign income, up to the amount of Australian tax payable in respect of that income.

The foreign tax credit system has been replaced by the foreign income tax offset (FITO) system with effect for income years, statutory accounting periods and notional accounting periods starting on or after 1 July 2008.

The FITO allows taxpayers to claim a foreign income tax offset where they have paid foreign tax on amounts included in their assessable income. Unlike the FTL system there is no quarantining of offsets to paricular classes of income.

Foreign tax credits are also available for foreign tax paid or deemed to have paid on controlled foreign company income that is included in the assessable income of resident taxpayers.

Foreign tax credits are also available in certain circumstances for foreign tax paid on foreign investment fund income included in assessable income.

No foreign tax credits are available in respect of foreign tax paid on foreign branch profits which are exempt from tax.