Many Australian residents with offshore business operations — especially those running companies in jurisdictions like Hong Kong — often wonder whether channelling income through offshore entities such as the British Virgin Islands (BVI) can reduce or eliminate their Australian tax exposure. However, under Australian tax law, such arrangements are carefully scrutinised and almost always result in the income being taxable in Australia.
How Australian Tax Residency Works
Australia’s tax system taxes its residents on worldwide income, including income sourced from foreign companies or trusts. A company is considered tax resident in Australia if its central management and control is exercised here, or if its voting power is ultimately controlled by Australian residents. This means that even if your business is incorporated in Hong Kong or BVI, it can still be deemed Australian-tax-resident if key strategic decisions are made while you’re based in Australia.
Controlled Foreign Company (CFC) Rules
Under the Controlled Foreign Company (CFC) rules, Australian residents who control more than 50% of a foreign company can have the company’s income attributed back to them. This occurs whether or not the profits are actually brought into Australia. These rules prevent Australian taxpayers from accumulating untaxed profits offshore through low-tax jurisdictions.
Foreign Trust Distributions and Section 99B
Income or capital received from foreign trusts — such as BVI or Hong Kong entities — is generally assessable under section 99B of the Income Tax Assessment Act 1936. The provision ensures that amounts accumulated overseas and later distributed or loaned to Australian beneficiaries are treated as taxable income in Australia. The Australian Taxation Office (ATO) also considers indirect transfers, gifts, or loans from these trusts to be assessable.
Transparency Between Australia, Hong Kong, and BVI
The British Virgin Islands has signed a Tax Information Exchange Agreement (TIEA) with Australia, meaning the ATO can request detailed financial and ownership information from BVI authorities. Similarly, under the Common Reporting Standard (CRS), banks and financial institutions automatically report offshore account information to tax authorities worldwide, greatly reducing the secrecy that once characterised offshore structures.
Risks of Using Offshore Structures for Avoidance
Transferring income from a Hong Kong entity through a BVI company and then into an Australian trust does not remove the underlying Australian tax liability. If the arrangement is seen as an attempt to disguise beneficial ownership or control, the ATO may invoke Part IVA (anti-avoidance provisions) to disregard the structure and impose heavy penalties. Penalties can reach up to 75% of the underpaid tax, in addition to interest and reputational consequences.
Legitimate Alternatives for Offshore Income
For Australians with genuine offshore operations, there are compliant ways to manage tax exposure:
- Maintain substantive management and control outside Australia if the entity is truly foreign.
- Use double tax agreements (where available) to prevent double taxation.
- Claim Foreign Income Tax Offsets (FITO) for foreign taxes legitimately paid on overseas income.
- Obtain a private binding ruling from the ATO to confirm the tax position of complex international structures before repatriating profits.