Doing Business in Australia 2011: Setting up a business presence

Companies

Public v Private companies

There are many types of companies and business structures recognised under the Australian Corporations Act 2001 (Cth) (Corporations Act). If a foreign company wishes to conduct business in Australia, it must either incorporate a new company (for example, a local subsidiary) or be registered under the Corporations Act (for example, a branch office).

In Australia, a company will usually be incorporated as a company limited by shares and either a proprietary company (which is a private company) or a public company. A public company may also be listed on the Australian Securities Exchange (ASX). This is discussed below.

A company is a separate legal entity from its shareholders, directors and managers. It has perpetual succession and its own income tax liability. Effectively, a company has the powers of an individual. It can own and dispose of property and other assets and will be able to contract, sue and be sued in its own right.

A shareholder in a company (other than an unlimited company, which is rare) will not be liable to contribute more than the amount (if any) unpaid on the shares it owns.

A proprietary company must:

  • have no more than 50 non-employee shareholders, and
  • not engage in any fundraising that would require a prospectus (as determined by chapter 6D of the Corporations Act).

Proprietary companies are classified as either small or large proprietary companies. Small proprietary companies have reduced reporting obligations in preparing their financial statements and annual returns. The regulatory, accounting and reporting obligations imposed on a proprietary company are generally lower than those imposed on a public company.

A proprietary company only needs one director ordinarily resident in Australia. A public company must have at least three directors, two of whom must be ordinarily resident in Australia. A public company is entitled to have more than 50 members.

Setting up a company

Companies are incorporated in one of Australia’s states or territories. Once incorporated, the company can conduct business in any Australian state or territory.

Key steps to incorporate a company include:

  • choose an available company name

  • choose the type and class of company that is proposed to be registered

  • obtain consents from the initial office holders and shareholders

  • establish a registered office

  • prepare the company’s constitution and company register,1 and

  • complete and lodge the application for registration of the company with the Australian Securities and Investment Commission (ASIC).
    When ASIC has processed the application it will allocate a unique nine digit Australian Company Number or ACN, register the company and issue a certificate of registration.

Following incorporation, documentation must be lodged with the Australian Taxation Office (ATO) to register the company for taxation purposes and to obtain an Australian Business Number or ABN. The ABN identifies the company for business dealings with the ATO and for future dealings with other government agencies.

Partnerships

In Australia, there is no requirement for a written partnership deed to constitute an ordinary partnership. State legislation, such as the Partnership Act 1892 (NSW), will govern and supplement a partnership, whether written or oral.

The maximum number of partners in a partnership is generally limited to 20. However, 50 partners are allowed in partnerships of actuaries, medical practitioners, sharebrokers and stockbrokers. 400 partners are allowed in partnerships of legal practitioners and 1,000 partners are allowed for partnerships of accountants.

Partnerships in Australia have the following features:

  • a partnership is not usually recognised as a separate legal entity
  • when entering into contracts for the purposes of the partnership’s business, each partner acts as agent for the other partners
  • the partners own the property of a partnership in their personal capacities
  • the partners are personally liable to creditors of the partnership (a creditor who obtains judgment against a partnership can enforce the judgment against partners personally), and
  • partners can share in the losses of a partnership by writing off those losses against the profits of other activities for taxation purposes.

Liability of partnerships

In a partnership, the partners are jointly and severally liable to the creditors of the partnership for their obligations despite any agreement between the partners. This disadvantage has been addressed by the introduction of limited liability partnerships.

A limited liability partnership is a partnership consisting of two categories of partners: general partners who manage the business and limited partners who take no part in management.

General partners are subject to unlimited liability whereas the liability of the limited partner is limited to the amount of capital contributed by that partner. However, a limited partner will lose the benefit of the limitation of liability if the partner takes part in management of the partnership.

A limited liability partnership is treated as a company for tax purposes but, unlike a company, it will not be subject to regulation by ASIC or the Corporations Act, unless the partnership engages in capital raising.

Costs and compliance arrangements

Costs to consider in relation to a partnership include accounting costs with respect to the preparation
of tax returns for the partnership.

In addition to complying with the Partnership Act of the State in which they are formed, partnerships will also need to comply with legislation specific to the nature of the partnership’s business, conditions of licences granted to the partnership or with rules adopted by professional associations.

Trusts

Overview

The Australian funds management industry recently surpassed $1,000,000,000,0002 (one trillion) in consolidated assets (total assets under management excluding cross investment and duplication). Australia has one of the world’s fastest growing pools of assets due to its compulsory superannuation scheme. The next trillion dollars is expected to be reached in significantly less time than the first trillion. This avalanche of superannuation money will largely flow into managed funds structured as trusts.

Having for many years been the subject of favourable tax treatment in Australia in comparison to companies, trusts have assumed a significant role in the investment activities of the funds management industry.

Trusts themselves are not generally subject to taxation.

Types of trust

A trust is a fiduciary relationship in which one person, known as the trustee, is the holder of an interest in property (the trust fund) subject to an equitable obligation to use and to keep the trust property for
the benefit of another person or some specific object or purpose (the beneficiary). Beneficiaries of most trusts have the advantage of limited liability.

There are several common types of trust used.

  • Managed Investment Scheme – a trust where people are brought together to contribute money and receive an interest in the scheme. Money is pooled together with other investors or used in a common enterprise. A responsible entity operates the scheme and investors do not have day to day control over the operation of the scheme.
  • Superannuation trust – provides retirement and other benefits to its members. The payment of superannuation contributions by employers is now compulsory in Australia, which has had a large impact on the number and size of superannuation trusts.
  • Fixed trust – a type of trust where each beneficiary has a fixed quantum of interest in the trust property. In a fixed trust, the beneficiaries have substantial rights to enforce the proper administration of the trust.
  • Discretionary trust – where the beneficiaries’ entitlements are subject to the trustee’s discretion, the trust is referred to as a discretionary trust. The nature of the trustee’s discretion can vary.

Managed investment schemes

Registered managed investment schemes are governed by the Corporations Act and are regulated by ASIC. If a scheme needs to be registered it must have a responsible entity, which is a public company and which holds an Australian financial services licence that permits it to operate a registered scheme. A constitution and compliance plan that meets the prescribed content requirements of the Corporations Act must be lodged with ASIC in order to register a scheme. A compliance committee may also be required if less than half of the directors of the responsible entity are external directors. Typically, schemes that do not have to be registered are wholesale trusts.

Trustee’s indemnity and limitation of liability

Generally, trustees have a right to be indemnified for costs and expenses reasonably incurred in the proper administration of the trust. This right of indemnity has priority over the interests of beneficiaries.

In commercial transactions involving a party acting as a trustee, it is common for agreements to contain a limitation of liability clause which states that:

  • the trustee has no liability to other parties to the agreement, except to the extent to which it is indemnified out of the assets of the trust in respect of the liability incurred by it, and
  • if the assets of the trust are insufficient, the other parties may not seek to recover any shortfall by bringing proceedings against the trustee in its personal capacity.

Joint ventures

A joint venture is a project which two or more persons undertake together. Joint ventures can be incorporated (as a separate legal entity, usually a company, with the joint venturers as the shareholders in the entity) or unincorporated. Generally, the joint venturers share the costs of production and receive a share of any resulting output in return. Legal ownership of joint venture assets, where the joint venture is unincorporated, is shared by the parties as tenants in common in an agreed proportion.

Joint ventures are widely used in Australia for exploration, development of mineral resources, mining and technological research projects. They are also often used when the parties intend to undertake one venture rather than carry on a continuous business.

Each participant in a joint venture is entitled to lodge its own tax return in which it claims its share of the costs of the joint venture. Unlike a partnership, each participant is generally responsible only for its agreed share of liabilities of the joint venture.

It is essential that the terms of a joint venture are set out in a detailed agreement which should, at least, cover ownership of assets, sharing of costs of production, the term of the venture, mutual obligations of the participants and a denial of partnership.

The role of the Australian Securities and Investments Commission (ASIC)

ASIC is Australia’s corporate, markets and financial services regulator. ASIC regulates Australian companies, financial markets, financial services organisations and professionals who deal and advise in investments, superannuation, insurance, deposit taking and credit.

ASIC is responsible for ensuring that company directors and officers carry out their duties honestly, diligently and in the best interests of the company. ASIC also assesses how effectively authorised financial markets are complying with their legal obligations to operate fair, orderly and transparent markets.

ASIC also licenses and monitors financial services businesses, including superannuation, managed
funds, derivatives, shares and company securities, to ensure that they operate efficiently, honestly and fairly. Anyone carrying on a financial services business in Australia needs an Australian financial services licence unless exempt under the Corporations Act or by ASIC exercising its exemption powers.

The role of ASX and the Listing Rules

All companies listed on the ASX are bound by a contractual relationship with the ASX. This means that the company must comply with the ASX Listing Rules. The responsibility for supervising listed companies’ compliance with the Listing Rules is shared between the ASX and ASIC. Amongst other roles, the ASX and ASIC review disclosures that listed entities provide to the ASX and work together to monitor and investigate misconduct by market participants and listed entities.

In the case of companies admitted to the Official List of the ASX and for Official Quotation of their securities on ASX, the ASX Listing Rules impose continuous disclosure obligations and financial reporting obligations. The primary function of the ASX Listing Rules is to maintain a fair, orderly and transparent market.

Takeovers

A takeover offer involves a bidder making an offer to at least 20% of the shareholders of a public company* for their target shares.

A takeover can take effect in a number of different ways, including an off market or a market bid,
a scheme of arrangement or a selective reduction of capital. There are specific provisions of the Corporations Act which must be complied with and a number of restrictions which prohibit certain persons from acquiring an interest in securities.

ASIC administers the takeover provisions contained in the Corporations Act. ASIC has the power to exercise its discretionary powers under the Corporations Act to grant relief from the takeover rules. When it does this it must take account of the requirement to ensure that the acquisition of the shares takes place in an efficient, competitive and informed market.

The Takeovers Panel, a peer review body with part time members appointed from Australia’s takeovers and business communities, is primarily responsible for resolving disputes in relation to a takeover bid until the bid period has ended. The Panel has wide powers with its primary power to declare circumstances in relation to a takeover, or the control of an Australian company, to be unacceptable circumstances.

* This would include a bid for the shares in a private company where there are greater than 50 sharesholders (including any employee shareholders).