“One of the important considerations for foreign investors wishing to set up a business presence in Australia is income tax. Careful planning at the initial stage is important to ensure compliance with Australia’s complex tax laws and that any proposed structure is tax efficient and available concessions are utilised.”
Australia has an extensive tax treaty network covering over 40 countries, including major trading partners such as the United States, the United Kingdom, Japan and China. Further, amendments to Australia’s international taxation regime have introduced certain attractive tax incentives for foreign multinational groups seeking to establish a regional holding company in Australia.
Broadly, an Australian resident company is subject to income tax on all worldwide income. Foreign “non-portfolio” dividends and capital gains from the sale of active foreign business assets are treated as not subject to tax in Australia (see below). The corporate tax rate is currently 30%.
A foreign resident company is subject to income tax only on Australian-sourced income. A company incorporated in Australia is generally considered to be a resident of Australia for tax purposes. Foreign incorporated companies that also carry on business in Australia may also be Australian residents if their central management and control is in Australia or if the majority of voting power is in Australia.
Common tax deductions include depreciation allowances and other business expenses incurred in relation to assessable income. Most taxpayers are entitled to carry forward tax losses indefinitely.
However, utilisation of carried forward losses by companies is subject to a continuity of ownership test or a continuity of business test. Australia also operates an imputation system of taxation whereby credits for underlying corporate tax are allowed to resident taxpayers who receive “franked dividends”.
Foreign investors may be subject to withholding tax on interest (at 0-10 per cent), royalties (at 5-30 per cent) and unfranked dividends (at 0-30 per cent). Otherwise, general assessment at the current general corporate income tax rate of 30 per cent applies. Franked dividends received by non-residents are free of withholding tax.
Australia has a consolidation regime which allows grouping between wholly owned Australian resident subsidiaries for tax purposes.
Use of a branch
It is possible to carry on business in Australia through a branch. However, where treaty protection is available, a foreign investor will generally not have a taxable presence in Australia in the absence of a permanent establishment. The corporate tax rate applying to branches is the same as applies to resident companies.
Trusts, partnerships and joint ventures
Trusts and partnerships are generally taxed on a “look through” basis – ie income is subject to tax in the hands of the beneficiaries (in some instances in the hands of the trustee) or partners. Certain joint ventures may be treated as partnerships for income purposes. The applicable income tax rate will depend on the tax profile of the beneficiary / partner / joint venturer. (Please refer to the following table showing a comparison of the different business entities).
Thin capitalisation and debt/equity rules
There are generally no minimum working capital requirements in Australia. A foreign investor is free to choose the manner in which working capital is injected into Australia. However, where interest-bearing debt is used, Australia’s thin capitalisation provisions may deny interest deductions unless certain debt to net asset ratios are adhered to. Broadly, the thin capitalisation provisions require debt to be no more than 75% of the net value of Australian assets (excluding related-party debt and assets). Different rules apply for financial services providers and similar companies.
Australia’s debt/equity measures focus on the economic substance of the interest rather than legal form. Proper characterisation of interests as either debt or equity will determine the tax treatment of returns on those interests.
Capital Gains Tax
Generally, gains arising from a capital gains tax (CGT) event (such as a sale) happening to an asset acquired on or after 20 September 1985 are subject to income tax. The CGT events are prescribed in the legislation. Gains on assets which are depreciating assets are treated separately under the capital allowances provisions. Individuals, trusts and certain superannuation and life insurance entities are entitled to claim a CGT discount (either 331/3 % or 50% depending on the type of entity) on gains derived from assets held for at least 12 months.
Foreign residents are only subject to CGT wherethey hold an interest in “taxable Australian property”. Taxable Australian property essentially includes direct interests in Australian real property (such as land), certain indirect interests in Australian real property, and the business assets of an Australian permanent establishment of the foreign resident.
Repatriation of profits
Repatriation of profits may generally be undertaken at any time as there are no exchange controls on such repatriation. In the case of a subsidiary, profits can be repatriated through the payment of a dividend which, if franked, is free of withholding tax. In the case of a branch, no withholding tax is payable on the remittance of branch profits to the foreign holding company. Payments of other amounts such as service or management fees on a pre-tax and deductible basis is generally possible subject to transfer pricing restrictions. These restrictions require amounts to be based on arm’s length rates. Payments of interest and royalties are also subject to the same constraints and may be subject to withholding tax (depending on the jurisdiction).
Participation exemption and exempt non-portfolio foreign dividends
Reforms to Australia’s international tax system have made Australia an attractive holding company jurisdiction. Among the many incentives, Australian holding companies are exempt from tax on dividends derived from non-portfolio holdings (at least 10% of voting power) in foreign companies. Further, there are also certain exemptions from CGT on the disposal of participating shares (whether held directly or indirectly) in a foreign subsidiary which engages in an active business. Other incentives include a wider foreign income conduit relief system, which allows Australian companies to repatriate non-taxable foreign income to non-resident members free of Australian tax.
Unfranked dividends, interest and royalties paid to non-residents are subject to withholding tax of up to 30%, 10% and 30% respectively.
Australia’s Double Taxation Agreements can reduce these rates substantially.
Australia has recently introduced a new withholding tax regime for managed investment trusts. Broadly, under this regime, Australian tax may be withheld from “fund payments” to foreign investors which consist of Australian sourced income and contain capital gains derived by the trust (other than dividends, interest and royalties).
The rate at which tax will be withheld will depend on the foreign investor’s country of residence and whether that country has an effective exchange of information (EOI) agreement with Australia. For foreign recipients who are resident in EOI countries, a 15% (final) withholding tax rate applies. In limited circumstances a withholding tax rate of 10% may apply to gains in respect of newly constructed “green” buildings. The withholding tax rate for non-EOI countries is 30%.
Goods and Services Tax (GST)
On supplying goods or services in Australia, the supplier is required to remit GST (at a rate of 10%) to the Australian Taxation Office (ATO) if it is registered, or required to be registered, for GST. A registered taxpayer is also entitled to claim as input tax credits any GST paid on expenses. It is recommended that all new businesses obtain specialist GST advice once the business structure has been finalised.
Stamp duty is imposed by the government of each state and territory in Australia. Generally, the legislation requires that documents (and, in some states and territories, transactions) which transfer an interest in certain property need to be “stamped” and the applicable duty paid. The rates of duty payable are based on the value of the assets transferred. For instance, the rate in New South Wales can be as high as 5.5% on conveyances of real property.
Employment related issues
Australian employers are under an obligation to withhold tax payable by employees on all taxable wages and salaries under the Pay As You Go (PAYG) system and remit the amount to the ATO. Other employment obligations for Australian employers include Fringe Benefits Tax (tax on fringe benefits provided to employees), payroll tax and compulsory superannuation contributions.
Australian personal income tax rates are as follows: