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- 8 -TAXATIONCowell ClarkeIncome tax, which includes capital gains taxAustralia currently imposes income tax on the net income (i.e. gross income lessallowable deductions for expenses) plus realised capital gains of all business entitiesand individuals.A capital gain or capital loss is the difference between what it costs to acquire an assetand what is received on disposal of the asset. The taxable amount of a capital gain foran asset held for more than 12 months is calculated on 50% of the gain, except if anasset is owned by a company in which case no 50% discount is available. Capital gainsin respect of assets acquired prior to 20 September 1985 are generally not subject tocapital gains tax.Taxation of non-Australian residentsNon-resident companies, trusts and individuals are subject to Australian income tax onAustralian sourced income. Non-residents will generally be subject to Australian incometax on the same basis as residents and will be exempt from Australian tax on foreignsourced income. Different taxation implications may arise in relation to dividend, interestand certain royalty income and where a double tax agreement (DTA) (if one exists)between Australia and the relevant foreign jurisdiction provides otherwise. Australia hastax treaties with many countries in order to avoid double taxation and evasion and wherethe provisions of those treaties conflict with the Australian Income Tax Assessment Act,the provisions of the treaties generally prevail.A company will be considered an Australian resident for taxation purposes if it is:• incorporated in Australia, or• if not incorporated in Australia, carries on business in Australia and has either itscentral management and control in Australia, or it is controlled by Australianresident shareholders.Financing operationsCertain rules operate when the ratio of debt versus equity used to finance the Australianoperations exceeds specified limits (Thin Capitalisation rules). The Thin CapitalisationRules restrict the deductibility of finance expenses (e.g. interest) attributable to theAustralian operations of foreign multinational investors. These rules may apply to:• Australian entities that are foreign controlled and foreign entities that either investdirectly into Australia or operate a business through an Australian permanentestablishment; and• Australian entities that control foreign entities or operate a business throughoverseas permanent establishments and associate entitiesP950592_191.doc