If you run an international business with an Australian subsidiary, you have probably noticed that Australian company tax does not work the way you might expect. Expenses that are deductible in your home country may not be deductible here. Tax rates that look simple on paper come with hidden conditions for foreign-owned groups. And the Australian Taxation Office (ATO) has invested heavily in scrutinising cross-border arrangements.
The good news is that the system is logical once you understand it. There are genuine, legitimate opportunities to reduce your Australian tax if you plan ahead and structure things properly.
This guide covers the key areas that every international business with an Australian subsidiary needs to understand, including concessions that are commonly overlooked.
Your Australian tax rate: 30%, not 25%
Australia has two company tax rates. Companies that qualify as a base rate entity pay 25%. All other companies pay 30%.
To qualify for the lower rate, your company must pass two tests every year. First, aggregated turnover must be under A$50 million. Second, no more than 80% of the company's income can be passive income such as interest, dividends, royalties, or rent.
Here is what most foreign groups miss. Aggregated turnover is not just your Australian revenue. It includes the worldwide revenue of your entire connected group — parent company, sister entities, and every subsidiary in every country. If your group turns over €200 million globally, your Australian subsidiary with A$2 million in local revenue still has aggregated turnover of €200 million. It fails the test. It pays 30%.
The 80% passive income test creates a second risk. If your Australian entity primarily receives intercompany royalties, interest, or licence fees from the parent rather than active trading income, it can fail on this ground even with a smaller group.
For most subsidiaries of established international businesses, the realistic expectation is a 30% corporate tax rate. Plan accordingly.
Where the real savings are: deductions that international businesses miss
The general rule is simple. Expenses incurred in earning assessable income are deductible. But the real value is in knowing exactly what is available, because Australia has several deductions and concessions that are unique to this jurisdiction and that foreign owners routinely overlook.
Employee costs and superannuation
Salaries, wages, bonuses, employer superannuation contributions (12% from 1 July 2025), payroll tax, workers compensation premiums, fringe benefits tax, and training costs are all fully deductible.
One critical timing rule: superannuation is only deductible when actually paid, not when the liability arises. Pay it before the quarterly ATO deadline. Pay it late and the entire amount converts into a non-deductible Super Guarantee Charge. This is one of the most costly and avoidable mistakes we see.
Contractor and outsourced services
Payments to contractors, including offshore contractors, are deductible provided they are genuinely for services with a clear connection to Australian assessable income. This is directly relevant to businesses with offshore teams handling bookkeeping, IT, or development work for the Australian entity.
Blackhole expenditure under section 40-880
This is a uniquely Australian provision that most international clients have never encountered. When your subsidiary incurs capital expenditure that does not fit into any other deduction category, section 40-880 allows a deduction spread over five years at 20% per year. This covers incorporation costs, legal fees for structuring the business, and feasibility studies.
However, costs of raising equity are specifically excluded from this provision.
Prepaid expenses
Australian tax law allows deductions for prepaying up to 12 months of certain expenses before 30 June, subject to the 12-month rule and eligibility requirements (including turnover thresholds and the service period of the expense). Rent, insurance premiums, subscriptions, and service contracts may qualify. This is a legitimate and widely used year-end strategy where the rule applies, but it does not apply universally to all companies.
Trading stock valuation
At year-end, closing stock can be valued at cost, market selling value, or replacement value, and you can choose a different method for each individual item. Selecting the lowest value for each line item directly reduces taxable income. This is explicitly permitted under Australian tax law and is one of the simplest tax minimisation tools available.
Depreciation method choice
Plant, equipment, furniture, vehicles, and IT hardware are depreciated under Division 40. The choice of method matters: diminishing value front-loads deductions into the earlier years, while prime cost spreads them evenly. For a subsidiary looking to minimise tax in its early years, diminishing value is almost always the better choice. Buildings and structural improvements are depreciated at 2.5% per year under Division 43.
Leasehold improvements require analysis depending on their nature: some items are depreciated under Division 40, while structural works fall under Division 43, rather than being automatically written off over the lease term.
Software development pool
If your Australian entity develops software internally, development costs can be allocated to a software development pool and written off over five years. Acquired software is generally depreciated over five years from first use.
Tax losses with no expiry
Unlike many jurisdictions that impose time limits on loss carry-forwards, Australia allows losses to be carried forward indefinitely. Losses your subsidiary makes in its early years remain available to offset against future profits with no expiry date.
To utilise those losses, the company must satisfy either the continuity of ownership test or, if that is not met, the business continuity test.
Professional and compliance fees
Accounting fees, audit fees, legal fees related to business operations, tax agent fees, transfer pricing advisory costs, and company secretarial fees are all deductible. ASIC annual review fees are deductible. The cost of preparing transfer pricing documentation is also deductible, which makes the return on that investment even more compelling given it also protects you from penalty exposure on any ATO adjustment.
Everything else
Interest on borrowings, bad debts, rent, insurance, technology subscriptions, business travel, and marketing costs are all fully deductible under the general rules when incurred for genuine business purposes.
A good tax accountant actively reviews every one of these categories to ensure nothing is left on the table. The difference between reactive compliance and proactive deduction planning can easily be A$20,000 to A$50,000 or more in annual tax savings for a profitable foreign-owned subsidiary.
The traps: what is not deductible in Australia
This is where foreign-owned companies consistently get caught. Expenses that are routine deductions in the US, UK, or Europe may not be deductible under Australian tax law.
Entertainment expenses.
Client dinners, business lunches, team events, sporting tickets, and Christmas parties are generally non-deductible under Division 32. The legislation is explicit: even if business discussions take place, the expense is still entertainment.
In most cases this also denies GST input tax credits, although different outcomes can apply where the entertainment gives rise to fringe benefits tax (FBT).
Late superannuation.
Miss the quarterly deadline and the ATO imposes the Super Guarantee Charge. The entire amount, including the portion that would have been deductible if paid on time, becomes permanently non-deductible.
ATO interest charges from 1 July 2025.
The General Interest Charge and Shortfall Interest Charge are no longer deductible. Carrying a tax debt now costs more on an after-tax basis than at any point in recent history.
Fines and penalties.
All fines imposed under any Australian or foreign law are non-deductible, including regulatory penalties, parking fines, and ASIC late fees.
Non-depreciable capital assets.
Goodwill cannot be amortised for Australian tax purposes. Land is not deductible. Structural building improvements are depreciated at 2.5% per year, not written off immediately.
Non-compliant contractor payments.
If your company pays a contractor without meeting PAYG withholding obligations, the entire payment can be denied as a deduction.
Accounting provisions.
Provisions for annual leave, long service leave, warranty reserves, make-good obligations, and restructuring costs are not deductible until the expense is actually paid. The tax deduction follows the cash, not the accounting entry. For growing subsidiaries building up headcount, the gap between the leave provision on the balance sheet and the actual tax deduction can be material.
The international layer: transfer pricing, thin capitalisation, and profit repatriation
If your Australian entity is foreign-owned, a second set of international tax rules applies on top of the domestic framework.
Transfer pricing
All related-party cross-border transactions must be priced on arm's length terms under the Australian transfer pricing rules. The ATO enforces this aggressively for foreign-owned entities. The practical opportunity is that arm's length is a range, not a single point. If your subsidiary performs limited functions and bears limited risk, the acceptable profit margin can legitimately sit at the lower end of that range. But transfer pricing documentation is not optional. Without compliant contemporaneous documentation, you lose penalty protection entirely.
Thin capitalisation from 1 July 2023
If you fund your Australian subsidiary with related-party debt, interest deductions are now capped at 30% of tax EBITDA under the Fixed Ratio Test, replacing the old 60% debt-to-assets ratio. If total debt deductions are A$2 million or less, the thin capitalisation rules do not apply, which provides useful headroom for smaller subsidiaries funded by modest intercompany loans.
Repatriating profits from Australia
There are four main channels. Fully franked dividends are exempt from dividend withholding tax, making them the most tax-efficient repatriation method where the Australian entity has accumulated franking credits from paying company tax. Unfranked dividends attract up to 30% withholding tax, though DTAs typically reduce this to 5 to 15%. Interest on intercompany debt is deductible but subject to 10% withholding tax under most DTAs. Royalties face 30% domestic withholding tax unless reduced by a DTA, and the ATO closely scrutinises whether management fees are disguised royalties under Australia's broad domestic royalty definition.
The R&D Tax Incentive: Australia's most underutilised concession
The R&D Tax Incentive is one of the most valuable concessions available to foreign-owned subsidiaries in Australia, and one of the most commonly overlooked.
If your Australian entity conducts R&D involving genuine technical uncertainty, systematic experimentation, and the pursuit of new knowledge, you may qualify for:
a refundable tax offset equal to your company tax rate plus 18.5% (for eligible entities under A$20 million aggregated turnover), or
a non-refundable offset at your corporate rate plus an 8.5% to 16.5% premium based on R&D intensity (for larger groups).
Because the turnover threshold uses worldwide group aggregation, most subsidiaries of established international groups will fall into the non-refundable tier; but the premium above the corporate rate is still material at scale, and the offset carries forward indefinitely.
Eligible activities are broader than many assume. Software development, process engineering, product development, and technical problem-solving can all qualify if the work involves genuine technical uncertainty that could not be resolved through routine professional practice.
Eligibility depends on the entity meeting the definition of an R&D entity under Australian law, and this should be confirmed in each case. Registration with AusIndustry must be completed within ten months of year-end, and contemporaneous records are essential.
The cost of getting it wrong: ATO scrutiny and Australia's penalty regime
The ATO places a higher level of scrutiny on foreign-owned companies than on domestically owned ones. Related-party cross-border transactions create inherent transfer pricing risk, and your International Dealings Schedule will be examined closely.
Australia also has some of the most aggressive anti-avoidance rules in the developed world. Part IVA, the general anti-avoidance rule, allows the ATO to cancel any tax benefit from a scheme with a dominant tax-avoidance purpose, and it overrides tax treaties. The Diverted Profits Tax imposes a 40% penalty rate on significant global entities that artificially divert profits offshore.
The penalty regime for incorrect returns is severe. A shortfall attracts penalties ranging from 25% for failure to take reasonable care, to 50% for recklessness, to 75% for intentional disregard, with penalties doubled for Significant Global Entities.
A A$500,000 transfer pricing adjustment with no compliant documentation could result in A$150,000 in additional tax, A$37,500 in penalties, plus years of Shortfall Interest Charge compounding daily. Total exposure can easily exceed A$200,000. Proper transfer pricing documentation typically costs A$5,000 to A$25,000.
Compliance is not a cost. It is insurance. And it is priced at a fraction of the alternative.
Your nine-point Australian tax action plan
Know your rate. Check aggregated turnover against your group's global position. Do not assume you qualify for 25%.
Claim every available deduction. Blackhole expenditure, depreciation method choices, prepaid expenses, trading stock valuations, and the software development pool all matter.
Avoid the non-deductible traps. Entertainment, late superannuation, and ATO interest charges catch international businesses every year.
Investigate R&D Tax Incentive eligibility. If your Australian entity has any technical development activity, this could be your single largest tax benefit.
Structure intercompany debt within thin capitalisation limits. Model the 30% EBITDA cap before deciding how much related-party debt to inject.
Repatriate profits via fully franked dividends. Zero withholding tax makes this the most efficient and structurally clean route for most foreign parents.
Get transfer pricing right and document it. Contemporaneous documentation protects you from the penalty regime and demonstrates good faith to the ATO.
Pay on time. Late payments for superannuation, BAS, and income tax carry a higher after-tax cost than at any point in recent history.
Budget for compliance, not penalties. The cost of getting it right is always less than the cost of getting it wrong.
Talk to ABN Australia about your entity's tax position
ABN Australia specialises in helping international businesses set up and operate compliantly in Australia. We work exclusively with foreign-owned companies, which means we understand the specific issues your subsidiary faces: the international layer, the transfer pricing obligations, the repatriation strategies, and the deductions that generalist advisers regularly miss.
If you would like to review your Australian entity's tax position, or if you have specific questions about any of the issues covered in this guide, we are happy to start with a conversation.
This article provides general information only and does not constitute tax advice, financial advice, or any other form of professional advice. Tax outcomes depend on your specific circumstances, including your group structure, the jurisdictions involved, and the applicable Double Tax Agreements. You should speak to a registered tax agent before applying any of this information to your situation. ABN Australia Accounting Services Pty Ltd — Tax Agent Registration 26090360
Aaron Garry
Managing Director