New frontiers for source taxation – an Australian perspective

August 2026 | SPOTLIGHT | CORPORATE TAX

Financier Worldwide Magazine

August 2026 Issue

Governments and revenue authorities around the world continue to look at ways to secure (and potentially expand) their tax bases.

In Australia, one way this has been attempted is by expanding the scope of the concept of ‘source taxation’. This manifests itself practically in a range of ways that affect a diverse spectrum of transactions and arrangements (such as the application of withholding tax, the tax residence of companies, and foreign landholder duties and fees).

These attempts are arguably inconsistent with international tax norms as they have been traditionally understood but potentially reflect a trend of increasing protectionism. The broader question is whether what Australia appears to be doing in this area is illustrative of what other countries may be doing now or may think about doing in the future.

The past 10 years has seen significant change in the international tax landscape. Changes to the formal architecture of international tax (for example tax treaties) are still in the process of being implemented.

However, in parallel with the changes to the formal tax architecture, there are ongoing changes to the interpretation of the parts of that architecture that, on the face of it, have remained static. A significant amount of attention and corporate resource has been devoted to implementing the formal international changes. It is equally important to maintain awareness of the more subtle shifts in areas that appear to be ‘unchanged’ by international reforms.

Using Australia as an example, in this article we provide a high-level overview of the drivers for the current changes, explain how the changes to the formal tax architecture address only some of these drivers and illustrate how countries might pursue satisfying these drivers through unilateral action.

In broad terms, the international tax framework has been largely based on ‘residence’. That is, the right to tax profits is generally allocated to the country of residence of the profitmaking company. There are limited, but important, exceptions to this general principle, including profits from real property and profits from certain types of mobile assets in the form of royalties, dividends and interest. In these cases, tax can be imposed by the country that is the ‘source’ of the relevant profits.

Hand in hand with this residence-based framework, there has been a degree of ‘tax competition’ between countries. That is, countries have implemented tax settings more favourable than their peer jurisdictions to attract companies to bring economic activity to that country.

The expected benefit to citizens is directly though employment, increased skills and associated income.

On the assumption that this increased income would be earned by taxpayers resident in the country, this would also contribute to a sustainable tax base. Tax competition in this sense was seen as a positive and appropriate feature of the tax landscape.

However, several things have disrupted this model. For example, profits are increasingly driven by intangible assets (in the most general sense). This means that profits (and the entities that are generating those profits) are increasingly mobile between jurisdictions.

This has led to a perception that residence-based taxation, in conjunction with tax competition between countries, was being manipulated by multinational groups to ensure that profits were only being earned by companies that were resident in countries with low tax rates or where tax incentives meant that no tax was being paid at all.

Second, several global events (including the pandemic) have left many countries in need of additional revenue to recover past and expected expenditure. In this context, tax competition between countries is now generally viewed unfavourably by large established economies. This has arguably led to increased scepticism that global integration will give rise to greater prosperity for all.

Partly in response to this shift, the Organisation for Economic Co-operation and Development commenced its programme to address perceived base erosion and profit shifting. This has led to changes to the formal architecture of the international tax system, the most significant being the introduction of a global minimum tax (commonly referred to as Pillar Two) and increased tax transparency measures.

The former measure, among other things, sets a floor for tax competition between countries. The latter requires companies to disclose tax-related information in relation to the jurisdictions in which they operate. It is hoped that multinational groups will cease any aggressive tax practices that may otherwise become visible to avoid public condemnation.

These changes are significant and have the attention of senior executives and the board. They require new systems and processes with potentially serious financial and reputational consequences if they are not implemented effectively.

That said, in an Australian context, given the significant scrutiny which multinational organisations face from Australian tax authorities, it is unclear whether tax transparency measures will significantly improve tax collections.

However, these changes have not fully addressed the perceived threat to tax collections. This is largely discussed in relation to the ‘digital economy’ but is not limited to the information technology industry.

Many countries are still grappling with the fact that profits are taxed in the country of the company receiving those profits rather than the country in which the profits are sourced. This has led to esoteric (and ultimately unhelpful) debates about what specifically generates those profits. For example, whether it is an intangible asset held by the offshore company or the demand generated by the local customer base.

In the absence of a clear theoretical or structural solution to that debate, countries look to practically expand the existing exceptions to residence-based taxation. There is an increased risk of double taxation where the interpretation is not shared by both relevant jurisdictions. It is important that these potential changes do not slip under the radar while everyone is focused on the more formal changes to international tax architecture.

Set out below are examples of such changes based on Australian experiences, though different approaches may be taken in other countries.

First, there may be challenges to the residence of income-generating companies. The local tax authority may assert that the way a company operates means that it is a resident of that country rather than the country of incorporation. In Australia, the courts have held that the key test of Australian tax residence is where central management and control is exercised.

This potentially means that a foreign incorporated company can be an Australian tax resident even if there is no economic connection to Australia if an individual (such as a key executive) is practically directing the activities of the company from Australia. This raises the risk of companies flipping in and out of Australian tax residency depending on the location of key personnel.

This risk is heightened with the increasing mobility of the workforce. The Australian government recognised this uncertainty and announced that it would legislate to change the law. However, after more than five years, legislation has yet to be drafted. It is important to monitor staff movements and make sure that the human resources function is communicating with the tax team so that these types of risks can be identified and addressed.

Second, tax authorities may focus on payments offshore that potentially attract withholding taxes. They may seek to characterise an offshore payment as a royalty, a dividend or interest. They may also challenge reliance on exceptions to withholding taxes. The Australian Taxation Office (ATO) has been aggressive in attempting to characterise payments from Australia to foreign companies as royalties for the use of the intellectual property.

In a recent High Court case, the ATO argued that a payment for soft drink concentrate made by a local bottling company included an embedded royalty for the use of the relevant soft drink brand. The ATO was unsuccessful in that case but is continuing to pursue another soft drink company that has similar arrangements.

The ATO is also targeting arrangements for the distribution of software, arguing that payments made by the local software distributer to the software owner are royalties.

In relation to interest, there is an exception to withholding tax where the debt interest was offered to the public.

Like most tax exceptions, certain specific criteria must be satisfied. The ATO has targeted taxpayers’ ability to provide documentary evidence that these criteria were satisfied at the time that the debt was issued. Some taxpayers have had challenges providing this evidence due to poor document management practices (even if they are confident that the criteria were in fact satisfied at the time).

Finally, profits in relation to real property are generally taxable in the country in which the property is located. In Australia, both state and federal governments are focused on collecting tax from foreign entities that directly or indirectly hold an interest in Australian real property. The federal government has announced law changes to expand the scope of what will be considered real property for these purposes. These changes have not yet been drafted, but are expected, once legislated, to expansively deem things related to real property to be part of that property for tax purposes.

If any of these interpretive positions result in double tax (meaning tax on the same profit being imposed in two jurisdictions) and there is a tax treaty between the relevant countries, there is theoretically a mechanism for removing the double tax under the treaty.

However, this can be a lengthy and expensive process for taxpayers to navigate. Additionally, there are ways in which tax authorities can avoid the application of this mechanism – for example by invoking anti-avoidance legislation which is not subject to the operation of treaties.

Stewart Grieve is a partner and Don Spirason is a special counsel at Johnson Winter Slattery. Mr Grieve can be contacted on +61 (3) 8611 1353 or by email: stewart.grieve@jws.com.au. Mr Spirason can be contacted on +61 (3) 8611 1379 or by email: don.spirason@jws.com.au.

Stewart Grieve and Don Spirason

Johnson Winter Slattery