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Australia is amongst the wealthiest countries in the world. With an educated and skilled workforce, it presents great opportunity for expansion. Australia welcomes and encourages foreign investment, and while the government has the power to block proposals that are contrary to the national interest, the screening process is transparent and liberal.
However there are a number of issues which you must consider when you are looking to set up your business in Australia. This document takes you through some of the common questions we come across and gives you practical information about the issues you need to consider.
What type of Business Structure should we use?
There are advantages and disadvantages to all of them, and there is no one correct answer, it’s all dependent on your specific business circumstances and needs. A brief overview of the main structures is below:
- Not a separate legal entity but an extension of the overseas parent company
- No limited liability or ring-fencing of the Australian operations
- If have a permanent establishment (PE) in Australia then profits from this PE are liable to Australian Corporation tax
- The foreign parent company must register with the Australian Securities and Investment Commission (ASIC). This requires the company to have an Australian registered office (usually an accountant or lawyer’s office), and must appoint a local agent and public officer to take responsibility for ASIC and Australian Taxation Office (ATO) reporting obligations.
- Once registered, the parent company must file its annual accounts, prepared in accordance with the Australian Corporations Act with the ASIC, even if these are not made publically available overseas.
- Provides limited liability and ring-fencing to Australia operations
- Gives a perception of a local business, with longevity
- Corporation tax to be paid on company profits
- Tax returns must be lodged with the Australian Taxation Office annually. The standard Australian tax year ends on 30 June.
- Accounts generally require auditing if two of the following are satisfied:
- Consolidated revenue for the company and the entities it controls is $25 million or more
- Consolidated gross assets of the company and any entities it controls at the end of the financial year is $12.5 million or more
- The company and any entities it controls have 50 or more employees at the end of the financial year.
- The accounts of proprietary companies that are wholly owned by a foreign corporation are also required to be audited regardless of their size, but may apply for relief from this requirement where they do not satisfy two of the above tests.
How much Corporation Tax will the business pay?
Companies in Australia pay tax at a flat rate on taxable income for the year. The rates are:
|Tax rate (%)|
|Small business company (turnover < $2 million*)||28.5%|
(NB: rates are for the tax year to 30/06/2016. As at 22 February 2017, legislation is before parliament to reduce the small business company tax rate for the 2017 tax year to 27.5%, with the turnover threshold increasing to $10 million.)
What if we use Australia to set up our holding company?
Australia’s Conduit Foreign Income (CFI) rules make it an attractive location for regional headquarters in the Asia Pacific region. These rules allow CFI to be distributed from an Australian company to a non-resident in the form of an unfranked dividend without attracting any Australian tax.
CFI is basically foreign income that is not assessable in Australia when derived by an Australian company. This includes income derived from a foreign branch and dividends from wholly owned foreign subsidiaries. Such income is able to pass through an Australian company to its foreign parent with no Australian tax arising.
Australian tax is payable on earnings that are not CFI.
Australia operates a dividend imputation system, meaning the tax paid by the company is imputed to Australian resident shareholders by way of tax credit when dividends are paid. Where a fully franked dividend is paid to a foreign shareholder however, no withholding tax is payable. To the extent that a dividend is unfranked, withholding tax applies at a rate of 30% (although this rate is often lower where an international agreement applies).
What if we make cross-border transactions between group companies?
Australia follows internationally recognised Transfer Pricing (TP) rules where cross-border trading and financial transactions between affiliated entities have to be conducted on an arm’s length basis. The price and terms should be the same as if the transactions had been between completely independent parties.
Typical transactions between affiliated entities that are covered by TP regulations are:
- Sale and purchase of goods
- Provision of management services
- Property rental charges
- Transfer of intangible assets e.g. trademarks, patents
- Sharing of knowledge, expertise, business contacts etc.
- Provision of financial support e.g. inter-group loans and charging a “market” interest on loans
A business will need to prepare a Transfer Pricing Report proving the arm’s length basis of transactions. The report will include a functional and risk analysis, analysis of the adopted pricing model and benchmarking of the arm’s length basis.
There is no threshold below which the TP rules would not apply, however the ATO currently allows simplified transfer pricing recordkeeping for small business taxpayers (with turnover below $25 million) and distributors (with turnover below $50 million).