Bag of tricks - where a haven comes in handy
The parent company loans money to its Australian subsidiary via an offshore finance arm based in a low-tax jurisdiction. The Australian operation then pays interest on the debt, which is tax deductible, rather than dividends, which are not. Thin capitalisation rules - strengthened in the latest budget - limit the amount of debt that can be used to fund Australian operations.
Transfer pricing
The parent company sells its products to its Australian subsidiary at an inflated price, often via a subsidiary based in a low-tax jurisdiction. This means the Australian arm makes negligible profit on the product it sells and the profit is essentially shifted to another part of the company.
Intangible assets
The parent company houses its intangible assets - such as intellectual property or licences - in subsidiaries in low-tax jurisdictions. Its Australian operations then pay the tax-haven-based subsidiaries to use those assets.
Offshore billing
The parent company charges Australian customers for services using an offshore subsidiary based in a low-tax jurisdiction. Because the money goes directly from the customer to the tax haven it does not form part of the Australian arm's income and is never taxed here.
Frequently Asked Questions about this Article…
Debt loading is when a parent company lends money to its Australian subsidiary through an offshore finance arm in a low‑tax jurisdiction. The Australian business then pays interest on that debt — which is tax deductible in Australia — instead of distributing profits as dividends, moving taxable profit out of the country.
Thin capitalisation rules limit how much debt a company can use to fund its Australian operations. As the article notes, those rules were strengthened in the latest budget, reducing the amount of deductible interest companies can claim and making debt loading less effective at shifting profits offshore.
Transfer pricing involves a parent company selling goods to its Australian subsidiary at inflated prices — often via a related entity in a low‑tax jurisdiction. That leaves the Australian arm with little or no profit on sales, while the real profit is recorded in the other part of the company.
That strategy means a parent company places intellectual property, licences or other intangible assets in subsidiaries located in tax havens. The Australian operation then pays those offshore subsidiaries to use the assets, shifting income and profit out of Australia.
Offshore billing occurs when a parent company invoices Australian customers through an offshore subsidiary in a low‑tax jurisdiction. Because the money goes directly to the tax‑haven entity, it doesn’t count as income for the Australian arm and therefore isn’t taxed in Australia.
Companies use low‑tax jurisdictions to move profit away from Australia so more profit is taxed at lower rates elsewhere. The tactics include debt loading, transfer pricing, locating intangible assets offshore and offshore billing — all ways to shift taxable income out of the Australian entity.
When a group uses inflated intercompany charges, deductible interest, or offshore billing, the Australian subsidiary reports lower operating profit and pays less tax locally. The economic profit is effectively recorded in the offshore entities instead.
In the scenarios described, interest payments on intra‑group loans are tax deductible for the Australian operation, reducing taxable income. Dividends paid to a parent company are not tax deductible, which is why companies sometimes prefer debt structures to shift profits offshore.
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