Australia in a global world

Increasingly interconnected with the world

Australia has become increasingly interconnected with the global economy (Figure 3). Since FY2005, total ABS figures for commercial trade in goods and services 4 (FY2012: $590 billion) have grown faster than GDP. Merchandise trade made up 81% of Australia’s international trade in FY2012, of which 42% was metal ore or fuel commodities. International trade in services (including royalties) was $110 billion or 19% of total international trade.

Tax revenue and expenditure for international related party dealings (IRPD) in tangible property, services and royalties/licence fees totalled $273 billion in TY2012). Revenue and expenditure for IRPDs in tangible property of a revenue nature (such as stock in trade) accounts for 70% of total revenue and expenditure for IRPDs. Most is returned by the mining, motor vehicle, and machinery and equipment industries.

From FY2005 to FY2012, total ABS figures for international trade in services grew by 42%, for royalties by 49%, and for goods by 79%. In contrast, total tax revenue and expenditure for international related party dealings in tangible goods grew by 53%, in royalties/licence fees by 96%, 5 and in services by 133%. While the existence of international related party dealings does not represent tax avoidance in and of itself, the growth rate differentials highlight our focus on addressing BEPS.



 The first time series shows the growth of the following areas in Australia’s trade with 2003 as the base period: merchandise trade, charges for use of IP, services trade. The second time series shows the growth of the information reported in the IRPD with 2003 as the base period: services IRPD, royalties and license fees IRPD and tangible property of a revenue nature IRPD. They show that both of them have grown considerably over time.

Source: ABS: series 5368.2 International trade in goods and services , 5206.33 Industry gross value added; ATO: International Dealings Schedule (IDS), Financial Services (FS) IDS and Schedule 25A.


 Economic growth driven by financial services and mining

The Australian economy has performed well over the past decade. Our position as a major global supplier of mineral commodities has been a major factor in our comparatively strong economic performance. In nominal terms, GDP increased from $800 billion in FY2003 to $1.49 trillion in FY2012 (real value: $1.14 trillion).

Gross value added (GVA) measures (Figure 4) show:

  • Australia’s domestic economy is based on services which account for two-thirds of total GVA, similar to the rest of the OECD weighted average of 67%
  • before the global financial crisis took full effect in FY2009, the financial services sector grew strongly
  • the mining sector grew rapidly from FY2004, driven by high demand, particularly from China, and
  • the manufacturing sector has remained stagnant.

The graph shows the indexed GVA by various industries since 2003. The industries that have grown the most are mining ($134 b. in 2012) and financial services ($118 b. in 2012).

Source: ABS series 5220.10 Australian National Accounts – Expenditure, Income and Industry Components of GDP, current prices.

Australia is dependent on foreign capital

Since FY2005, our gross direct investment position (FY2012: $1 trillion) has grown faster than GDP, and direct debt investments into Australia have recently grown faster than direct equity investments into Australia. This debt balance remains less than half of that of direct equity investments (Figure 5). Direct capital imports have grown from a net deficit position of $64 billion in FY1993 to a $143 billion deficit in FY2012.

 The graph shows that both direct investment abroad and foreign investment into Australia has increased since 1993. However the net position has been constantly in deficit and has been growing.

Source: ABS: 5302.0 Balance of Payments and International Investment Position, Australia

Interest-bearing debt from international related parties totalling $372 billion was reported to the ATO in TY2012. This number, while higher than in the FDI data 6, is about 20% of total debt reported in company income tax returns. International related party interest expenses (TY2012: $16 billion) account for half of all interest expenses paid overseas, as reported in income tax returns.

Australia has thin capitalisation, transfer pricing and general anti-avoidance rules which mitigate these risks. However, the continued growth in Australia’s capital imports heightens the focus on issues such as debt push downs and excessive interest arrangements, as well as tax arbitrage via hybrid entities or instruments. These are included in the OECD’s Action Plan to address BEPS under Action Item 2 (neutralise hybrid mismatch arrangements) and Action Item 4 (limit base erosion by interest deductions and other financial payments).

    Last modified: 13 Jan 2015QC 43707