1 Australia Business and Taxation Guide. Business and Taxation Guide to. Australia TCO\TRAV\207760_1:

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1 1 Australia Business and Taxation Guide Business and Taxation Guide to Australia

2 2 Australia Business and Taxation Guide Preface This business and taxation guide was prepared by William Buck Pty Ltd in Following is a complete listing of the William Buck offices in Australia: William Buck info@williambuck.com Sydney Level 29, 66 Goulburn Street Sydney NSW 2000 T (61 2) F (61 2) info@williambucknsw.com.au Melbourne Level 20, 181 William Street Melbourne VIC 3000 Level 1, 465 Auburn Road Hawthorn EastVIC 3123 T (61 3) F (61 3) info@williambuckvic.com.au Brisbane Level 21, 307 Queen Street Brisbane QLD 4000 T (61 7) F (61 7) info@williambuckqld.com.au Perth Level 3, 15 Labouchere Road South Perth WA 6151 T (61 8) F (61 8) info@williambuckwa.com.au Adelaide Level 6, 211 Victoria Square Adelaide SA 5000 T (61 8) F (61 8) info@williambucksa.com.au This guide has been prepared to assist investors interested in establishing a presence in Australia. It is intended as a general guide only and is not a substitute for obtaining appropriate professional advice and guidance. Praxity 2011 This guide is intended as a general guide only and should not be acted upon without further advice.

3 3 Australia Business and Taxation Guide Table of Contents 1. General information Attractions and possible obstacles for foreign investors Area and population Government and law Economic situation Currency Regulation of foreign investment Government incentives Business organisations available to foreigners Private limited liability company (Pty Limited) Public limited liability company (Ltd) Partnerships Limited partnership Joint venture Unit trust Discretionary trust Branch Setting up and running business organisations Australian business number Accounts and year end for taxation purposes Business activity statement (BAS) Establishing an Australian subsidiary Compliance requirements Reporting requirements Small proprietary companies Large proprietary companies Accounting records Partnerships Trusts Branch Corporate taxes and social charges Income tax returns Accounting period Assessable income... 17

4 4 Australia Business and Taxation Guide 6.4 Repatriation of profits (i.e. payment of dividends) Treatment of tax losses Tax consolidation Financing (debt versus equity) Thin capitalisation Capital gains tax (CGT) Transfer pricing Employee issues Payroll tax Fringe benefits tax (FBT) Workers' compensation Superannuation guarantee charge (SGC) PAYG withholding tax collections Terms of employment Personal taxation Migration Income tax Pension Private health insurance Double taxation agreements Sales and use taxes Goods and services tax (GST) Customs duties Portfolio investment for foreigners Income Capital gains Trusts Practical information Major centres Transport Language Time relative to Greenwich mean time (GMT) Business hours Public holidays Other... 32

5 5 Australia Business and Taxation Guide 1. General information 1.1 Attractions and possible obstacles for foreign investors Australia is a key economy in the Asia Pacific region and makes up one of the largest 20 economies in the world. Several positive features for foreign investors include: A strong and open economy. The Australian government is stable and government regulation is limited, relative to many other economies. The bank and finance infrastructure are well established. Four of the world s nine AAA rated banks are Australian. Australia is a multi-cultural society, with immigrants from most countries in the world. Geographically, Australia is a large country although the population is concentrated in a small number of locations. There is a well-established distribution network across the country. Australia has relatively low unemployment, a highly skilled workforce and a high standard of living. This can mean that labour costs in Australia are higher than in other countries. It is important to consider travel times to and from Australia. Flights from the major Asian airport hubs to the capital cities are regular, but take approximately seven to ten hours. 1.2 Area and population Australia is 7.6 million square kilometres in land area, the sixth largest country in the world by area. Australia is an island, lying south of the Indonesian archipelago, in the south east of the Asia/Oceania region. New Zealand and the Pacific Island are to the east of Australia. The population of Australia is 22.7 million. The majority of the populace is concentrated along the eastern seaboard. The major business centres are Sydney and Melbourne. A large portion of the Australian land mass is desert or arid areas. The climate ranges from tropical in the far north, through to cool in the most southern regions.

6 6 Australia Business and Taxation Guide 1.3 Government and law The Commonwealth of Australia is governed by the federal government, based in Canberra. The principle document establishing and regulating the federal government is the Australian Constitution. The leader of the federal government is the Prime Minister. Australia is divided into six states (New South Wales, Victoria, Queensland, South Australia, Western Australia and Tasmania) and two territories (Northern Territory and the Australian Capital Territory). Each state and territory has its owned elected government. The leader of each state government is the Premier and each territory government is led by a Chief Minister. Most matters relating to trade and commerce fall within the jurisdiction of the Federal Government. However, state governments also have the ability to regulate. In the event of a conflict, the terms of the Constitution will determine which legislation is valid. The power to levy income tax and regulation of corporations is held (by agreement with the state governments) by the federal government. Industrial relations law is a key area that continues to be regulated at both a federal and state level. The judiciary is independent of the government. 1.4 Economic situation The economy of Australia is one of the most developed, modern market economies in the world, with a GDP of approximately US$1.6 trillion. Australia's total wealth is 6.4 trillion dollars. In 2011, it was the 13th largest national economy by nominal GDP. Australia was also ranked the 19th largest importer and 19th largest exporter. The economy is dominated by the service sector, representing 68% of GDP. The mining sector represents 10% of Australia s GDP and economic growth is largely dependent on this sector. The economy expanded by 0.4% in the fourth quarter of 2011, and expanded by 1.3% in the first quarter of Currency The currency of Australia is the Australian dollar, represented by $, with A$ used to differentiate it from other dollar denominated currencies. The International Standards Organization (ISO) currency code is AUD.

7 7 Australia Business and Taxation Guide 2. Regulation of foreign investment Australia has limited and quite specific regulations in relation to foreign investments. Foreign entities conducting a business in Australia are required to register with the Australian Securities and Investments Commission (see section 5.4). Foreign controlled Australian companies are required to be audited. However, an exemption is usually available for smaller companies (see section 5.7). There are no exchange controls or equivalents. The main restrictions relate to specific investments, in particular land. Under the Foreign Acquisition and Takeovers Act 1975 foreign individuals or foreign owned companies must seek approval from the Foreign Investment Review Board (FIRB) before purchasing: Significant interests in urban real estate Certain shares of Australian owned private companies, or Shares in foreign companies that own Australian assets. The foreign investment controls have been significantly relaxed for U.S. investors/purchasers as a result of the Free Trade Agreement between the U.S. and Australia. FIRB approval is required for: All acquisitions of vacant land for commercial developments. All acquisitions of interests in developed commercial real estate valued at $50 million or more ($5 million if the real estate is heritage listed). U.S. investors need to apply for developed commercial real estate only when it is valued at $1,005 million or more. All acquisitions of mineral rights, mining leases, mining tenements or production licences when: o they provide the right to occupy Australian urban land and the term of the lease or o licence (including extensions) is likely to exceed five years, or they provide an interest in a profit sharing arrangement or income from the use of, or dealings in, Australian urban land. Acquisitions of an interest in a primary production business where the total assets of the business exceeds $231 million ($1,005 million in the case of U.S. investors). All Temporary Residents and Non-Residents are required to notify FIRB of any proposed acquisition of residential real estate.

8 8 Australia Business and Taxation Guide A temporary resident for these purposes is a person who is residing in Australia and: Holds a temporary residency visa which permits them to stay in Australia for a continuous period of more than 12 months (regardless of how long remains on the visa), or Has submitted an application for permanent residency and holds a bridging visa that permits them to stay in Australia until that application has been finalised. Temporary residents can buy one established dwelling only to live in. They may buy new dwellings, or vacant land to build new dwellings. Foreign non-residents or short-term visa holders can invest in Australian real estate only if that investment adds to the housing stock. This generally occurs by acquiring: New dwellings Off-the-plan properties under construction or yet to be built, or Vacant land for development. Non-resident foreign persons cannot buy established dwellings as investment properties or as homes. Companies that employ foreign persons need to apply to buy established dwellings to house their Australian-based staff. Such proposals normally meet with no foreign investment objections subject to the company undertaking to sell the property if it is expected to remain vacant for six months or more, or if the company ceases commercial operations within Australia. Government approval is not required for buying residential real estate if you are: An Australian citizen or you are ordinarily resident in Australia A New Zealand citizen A foreign national who holds a permanent Australian residency visa, or A foreign national buying a property as joint tenants with your Australian citizen spouse.

9 9 Australia Business and Taxation Guide 3. Government incentives The Australian government and each state and territory offer a range of incentives to businesses. The incentives are generally focused on particular industries, geographic areas or demographics. The main government incentives accessible by businesses across all sectors relate to Research and Development (R&D) activities. The R&D Tax Incentive is a broad-based, market driven programme accessible to all industry sectors. It provides a targeted tax offset to encourage more companies to engage in R&D. The R&D Tax Incentive aims to boost competitiveness and improve productivity across the Australian economy by: Encouraging industry to conduct R&D that may not otherwise have been conducted Providing business with more predictable, less complex support Improving the incentive for smaller firms to engage in R&D. The R&D Tax Incentive replaces the R&D Tax Concession for R&D in income years commencing on or after 1 July The R&D Tax Concession continues to be administered for R&D in income years commencing prior to 1 July The R&D Tax Incentive has two core components: A 45% refundable tax offset (equivalent to a 150% deduction) for eligible entities with a turnover of less than $20 million per annum, providing they are not controlled by income tax exempt entities. A non-refundable 40% tax offset (equivalent to a 133% deduction) for all other eligible entities. Unused non-refundable offset amounts may be carried forward to future income years. The R&D Tax Incentive is administered jointly by: AusIndustry (on behalf of Innovation Australia) and The Australian Taxation Office (the ATO). The types of entities eligible for the R&D Tax Incentive are corporations (called R&D entities ) that are incorporated under: An Australian law, or A foreign law, but are Australian residents for income tax purposes, or A foreign law, and o are residents of a country with which Australia has a double tax agreement, including a definition of permanent establishment, and o conduct business in Australia through a permanent establishment as defined in the double tax agreement. Generally, trusts are not R&D entities. The definition of R&D entities extends to body corporates in the capacity of trustees of public trading trusts, but not to trustees of any other sort of trusts.

10 10 Australia Business and Taxation Guide R&D activities must meet certain criteria to be eligible for the R&D Tax Incentive. Eligible activities are categorised as either core R&D activities or supporting R&D activities. Core R&D activities are experimental activities: Whose outcome cannot be known or determined in advance on the basis of current knowledge, information or experience, but can only be determined by applying a systematic progression of work that: o is based on principles of established science, and o proceeds from hypothesis to experiment, observation and evaluation, and leads to logical conclusions Which are conducted for the purpose of generating new knowledge (including new knowledge in the form of improved materials, products, devices, processes or services). An activity is eligible as a supporting R&D activity when: It directly relates to a core R&D activity, or For certain activities, it has been undertaken for the dominant purpose of supporting core R&D activities. Generally only R&D activities conducted in Australia or the external territories qualify for the R&D Tax Incentive. However, in certain circumstances R&D activities conducted overseas may also qualify. A company intending to claim a tax offset for R&D activities conducted overseas must apply to Innovation Australia for a decision (called a finding ) about the eligibility of these overseas activities. A company is only entitled to a tax offset for R&D activities conducted for itself. There are some exceptions to this, where the activities are conducted for associated foreign corporations. Companies access the R&D Tax Incentive through a two-stage process that involves: 1. Registering R&D activities with AusIndustry (on behalf of Innovation Australia), and 2. Claiming the tax offset in the company annual income tax return. Note: the tax return must be accompanied by the ATO s R&D Tax Incentive Schedule detailing the R&D expenditure incurred.

11 11 Australia Business and Taxation Guide 4. Business organisations available to foreigners The business organisations available to foreign investors in Australia are principally: Private limited liability company (Pty Limited) Public limited liability company (Ltd) Partnerships Limited partnership Joint venture Unit trust Discretionary trust Branch There are other types of entities that are relevant for particular industries. For example, No Liability (NL) companies are sometimes used in early stage (exploration) mining operations. Registered venture capital vehicles are available for foreign owned venture capital funds investing into Australia that meet specific criteria. Companies limited by guarantee are used for charitable and similar operations. 4.1 Private limited liability company (Pty Limited) A private limited liability company is the most common vehicle for privately owned business operations. The company is subject to income tax on its taxable profits at a rate of 30%. The liability of shareholders in the company is limited to the amount paid for their shares. A private company must have at least one shareholder and one director. At least one director must reside in Australia. 4.2 Public limited liability company (Ltd) A public limited liability company is similar to a private limited liability company but is: permitted to have a greater number of shareholders can offer shares to the public and can be listed on an official stock exchange. A public company is also subject to greater regulation and reporting. Business owners can change a private company to a public company after incorporation, if required. 4.3 Partnerships

12 12 Australia Business and Taxation Guide A partnership is a common law concept and is not an entity in its own right. Two or more people who are conducting business jointly will be considered a partnership. A partnership is not subject to tax. Rather, the partners themselves will be taxed on their proportionate share of the taxable income of the partnership. Each partner is jointly and severally liable for the debts of the partnership. Each partner also has the ability to incur liabilities on behalf of the partnership. Given the liability position, partnerships are not regularly used for business operations between unrelated parties. 4.4 Limited partnership A limited partnership is a partnership with a specific registration. The limited partners of a limited partnership have limited liability (similar to shareholders in a company). However, limited partners are not permitted to be involved in the management of the partnership s business. This means that they are essentially silent partners. Each limited partnership must have one general partner who has unlimited liability, similar to a partner in a standard partnership. A limited partnership is treated as a company for tax purposes. 4.5 Joint venture A joint venture is a contractual arrangement between two parties to conduct a particular activity and share the output. Joint ventures are often used in mining operations. A joint venture is distinguished from a partnership in that the output of the activity is shared between the joint venture parties and each party deals with their share of the output independently. As this distinction can be a fine one, some parties will chose to incorporate their joint venture in a special purpose entity (usually a private company owned by the joint venture parties). An unincorporated joint venture can often constitute a partnership for tax purposes, even though it may not be a legally recognised partnership. 4.6 Unit trust A unit trust is a form of trust arrangement where the entitlements of the beneficiaries of the trust in relation to the income and capital of the trust are fixed. The unit trust does not pay tax on its income. Instead, beneficiaries of the trust are taxed on the income in accordance with the proportions distributable to them. A unit trust is a flow through or fiscally transparent entity. The beneficiaries of the trust are not liable for the debts of the trust, except in specific circumstances pursuant to trust law. A private company is often used to act as trustee of the trust.

13 13 Australia Business and Taxation Guide Unlike a company, beneficiaries of a unit trust can access the concessional rate of tax, which is applied to capital gains made by the trust. For this reason, a unit trust can be a preferred vehicle for companies undertaking some types of investment activities. 4.7 Discretionary trust A discretionary trust is a form of trust arrangement where the entitlements of the beneficiaries of the trust in relation to the income and capital of the trust are not fixed. Rather, the trustee retains the discretion to determine who, within a class of beneficiaries, will be distributed the income or capital of the trust. In most other aspects, discretionary trusts are similar to unit trusts. Discretionary trusts are usually most suited to family investment style activities. 4.8 Branch A foreign entity has the ability to undertake business operations in Australia without establishing an Australian entity, for example they can choose to operate an Australian branch of an overseas entity. The branch is treated as a notional taxpayer and is subject to tax based on the nature of the overseas entity, for example a branch of a company is taxed as a company.

14 14 Australia Business and Taxation Guide 5. Setting up and running business organisations 5.1 Australian business number All businesses trading in Australia must obtain an Australian Business Number (ABN). Businesses are required to deduct withholding tax from any payments exceeding A$75 (excluding Goods and Services Tax - GST) made to another business that does not present its ABN or a valid basis for not holding an ABN. Registration for the ABN can take between two and three weeks for the Australian Taxation Office (ATO) to process, except where non-resident entities or individuals are involved. In these cases additional identity verification processes apply which can extend the time for the processing of ABN applications. 5.2 Accounts and year end for taxation purposes Under Australian tax laws, taxpayers are required to keep sufficient records of their income and expenditure in order to readily ascertain assessable income and allowable deductions. These records must be retained for a period of five years after completion of the transaction. 5.3 Business activity statement (BAS) Most taxes collected or payable by a business must be aggregated and paid to the ATO either monthly or quarterly. The business must lodge a BAS to record each tax paid and certain other data. 5.4 Establishing an Australian subsidiary A company is incorporated and registered with the Australian Securities and Investments Commission (ASIC). Once registered, a company will be allocated an Australian Company Number (ACN). Most companies are incorporated using a standard constitution (the company s internal rules), which is drafted in wide terms. Such a company can be incorporated with an investors choice of name within 24 hours. 5.5 Compliance requirements A proprietary company is required to have at least one resident director amongst its officers. The resident director does not need to be a permanent resident of Australia, but they must reside in Australia at the time in which they are acting as director. Changes in the company s particulars must be notified to ASIC on the prescribed form within the required time period from the date of the change. Late notifications will incur penalties.

15 15 Australia Business and Taxation Guide A proprietary company is required to review an annual extract of particulars (the Company Statement), which ASIC will send to companies within two weeks of their review date. The review date is the anniversary of a company s registration, unless ASIC has approved an application to change it. The Company Statement will contain details from the ASIC database, such as: The address of the registered office and principal place of business Details of the ultimate holding company Officeholders The company share structure and members. The directors are required to review the details in the statement to ensure they are correct. On an annual basis, the directors must formally resolve that the company is solvent; noting that monitoring the ongoing solvency of the company is a key obligation of the directors. 5.6 Reporting requirements The reporting requirements of proprietary companies depend upon whether the company is defined as large or small under the Corporations Act. A company is classified as small if it meets two of the following three criteria: Consolidated gross operating revenue less than A$25 million a year Consolidated gross assets less than A$12.5 million at year end Number of employees at the year end is less than 50 for that entity and all controlled entities. The proprietary company is otherwise categorised as large. 5.7 Small proprietary companies Small foreign controlled companies are required to prepare an audited financial report for filing with the ASIC unless they obtain one of the following exemptions: Where their results are included in a consolidated financial report lodged with the ASIC by a registered foreign company or an Australian company, or Where the company obtains relief from the ASIC before the commencement of the financial year, or within three months of incorporation in the first year. The Corporations Act sets out the requirements for a company to prepare a financial report for filing with the ASIC and the need to have the report audited. Once lodged with the ASIC the financial report is available to the public. Many small foreign controlled companies will obtain the class order relief from the ASIC (to remove the need to prepare and lodge audited financial statements) but will still appoint auditors to review internal financial reports or head office reporting packages. This assists the company by improving internal controls of the business in Australia and compliance with foreign reporting requirements. 5.8 Large proprietary companies

16 16 Australia Business and Taxation Guide Large companies are required by the Corporations Act to prepare an audited financial report in accordance with approved accounting standards. The ASIC will provide an exemption from preparation of an audited financial report if the company is a wholly owned subsidiary of another company that files accounts with the ASIC that consolidates the subsidiary s results, and the companies have a cross guarantee in place. 5.9 Accounting records Where statutory accounts are not required the directors must still maintain accurate accounting records. This is in order to explain the company's financial transactions and financial position, as well as to enable statutory accounts to be prepared if required. Management accounts are necessary for tax and management purposes. They also enable directors to monitor compliance in line with their fundamental obligation under the Corporations Act to ensure the company can meet its debts, as and when they fall due Partnerships Partnerships (general or limited) are established by contractual arrangement between the partners. Partnerships conducting a business must register a business name. Partnerships are not subject to annual audit or reporting obligations Trusts Trusts (unit or discretionary) are established by the settlement of funds and appointment of a trustee. If a corporate trustee is used, the incorporation and the ASIC related processes must be followed for the trustee. A corporate trustee of a trust does not include trust property when calculating if it is a large proprietary company. Trusts conducting a business must register a business name (unless trading under the name of a corporate trustee). Trusts (other than listed trusts or Managed Investment Schemes) are not subject to an annual audit or reporting obligations Branch A branch is established by operation of law rather than incorporation or a contractual process. A branch must be registered with the ASIC. Once registered, the branch will be allocated an Australian Registered Body Number (ARBN). There are specific identity verification processes that must be complied with to obtain this registration. A local agent must be appointed. This role is comparable to the resident director required for a company. Changes to the details registered with the ASIC must be notified. Financial statements for the foreign entity must be filed each year.

17 17 Australia Business and Taxation Guide 6. Corporate taxes and social charges 6.1 Income tax returns Companies that derive assessable income or have carry forward tax losses are required to file an annual income tax return with the Australian Taxation Office (ATO). The company income tax rate is currently 30%. 6.2 Accounting period A company must have a fixed accounting period of 12 months. The exception to this is in the first year after incorporation or during a transition to a substituted accounting period. The normal tax accounting year is 1 July to 30 June. However, a substituted accounting period can be adopted to align with the parent company's accounting period subject to approval from the ATO. 6.3 Assessable income An Australian company will include as assessable income all worldwide income and taxable capital gains from disposal of all taxable capital assets. Certain classes of foreign income are exempt income for an Australian company. Common examples are dividends received from a foreign subsidiary or profits from a foreign branch. Where foreign income is assessable income, a foreign tax offset system applies to reduce assessable income in cases where tax is also levied overseas. 6.4 Repatriation of profits (i.e. payment of dividends) Profits from an Australian resident subsidiary remitted to its offshore holding company as dividends will be subject to withholding tax, to the extent in which those profits have not been subject to company income tax in Australia. This is termed unfranked distributions. The rate of withholding tax is set in accordance with any international tax agreements that Australia may have with the country of the parent company (see section 8 for details). 6.5 Treatment of tax losses Losses arising from the Australian operation can be carried forward indefinitely to be offset against future annual profits. A deduction for losses in prior years will be denied in cases when the company cannot satisfy a continuity of ownership test or a same business test. Reference should be made to the foreign company's domestic income tax laws as to the availability of tax losses incurred by a subsidiary in Australia. A limited loss carry-back arrangement is currently being considered for implementation in Australia. 6.6 Tax consolidation The tax consolidation regime allows wholly owned Australian group companies (together with eligible trusts and partnerships) to consolidate for tax purposes. Entry into tax consolidations is not compulsory. However, there is very limited group relief available for groups that chose to remain outside of the tax consolidation regime.

18 18 Australia Business and Taxation Guide The rules may also apply to wholly owned Australian subsidiaries of a foreign parent, even when the Australian subsidiaries may not themselves be part of an Australian wholly owned group of companies (for example, the foreign parent has direct investment into two or more Australian subsidiaries). Such a scenario is referred to as a multiple entry consolidated (MEC) group. Entities that are part of a consolidated group are treated as one entity for income tax purposes and will file one income tax return that covers all members of the group. Each entity is treated as though it is a separate division of the consolidated group. Transactions between entities that are part of the same consolidated group are effectively ignored for income tax purposes. This allows the losses of one group member to be offset against the assessable income of another entity within the group. However, entities that form part of a consolidated group for tax purposes are still separate legal entities. As such, they are still required to maintain separate accounts, records etc. It is essential to note that goods and services tax, fringe benefits tax and withholding tax are not included within the consolidation regime and they will continue to be the responsibility of the individual entities in the group. 6.7 Financing (debt versus equity) When reviewing the financing of Australian operations, consideration should be given as to the appropriate mix of equity and debt. This decision is usually made in conjunction with the thin capitalisation rules outlined in section 6.8. When the funding of an entity incurs partial debt, care should be taken to ensure that the debt instrument (e.g. a loan) will meet the tax definition of debt. Several factors can impact the classification of debt or equity, such as: The applicable interest rate (or interest free nature of the loan) Term of the loan and Contingencies affecting payment of the return on the instrument. If a loan is determined to be equity, any interest will be treated as a dividend and as a result is not deductible. 6.8 Thin capitalisation The thin capitalisation rules operate in situations when the amount of debt used to finance the Australian operations exceeds certain limits. The rules can operate to disallow a proportion of the finance charges (e.g. interest) attributable to the Australian entity. If the entity is part of a tax consolidated group the tests are applied to the overall group. Broadly speaking, the amount of debt used to finance the Australian investments will be excessive when it is greater than the safe harbour debt to equity ratio of 3:1. Specifically, the thin capitalisation rules apply a test known as the safe harbour debt test, which requires that the company s total average debt should not exceed 75% of the average value of Australian assets. Accounting standards are applied when calculating and measuring the value of assets (including revaluations) and liabilities. This safe harbour test applies to all debt not just foreign (related party) debt. Where borrowings exceed the safe harbour debt test ratio, an alternate arm s length test can be applied. Essentially, the arm s length test will be satisfied if the borrowing could have been borne by

19 19 Australia Business and Taxation Guide an independent entity. There are strict criteria that must be satisfied to apply this test. A further alternative test is also available for outward investing entities based on 120% of their worldwide debt. The thin capitalisation legislation also includes a de minimus threshold, below which the thin capitalisation rules do not apply. This test allows entities with debt deductions, comprising interest and other debt costs of less than A$250,000, to claim a tax deduction for the debt deductions without having to satisfy any of the thin capitalisation tests. Due to the complexity of this area it is recommended that detailed advice and discussions be held prior to the finalisation of the capital structure of an Australian subsidiary. 6.9 Capital gains tax (CGT) Residents of Australia are generally liable for tax on gains on the disposal of assets wherever situated, subject to relief from double taxation if the gain is derived and taxed in another country. One important exception to this rule is when an Australian company sells shares in a foreign company. Any capital gains (or capital losses) resulting from the sale of foreign shares may be reduced in cases when the foreign company conducts an active trading business and other specific requirements are satisfied. Assessable capital gains are included in a company's taxable income and are taxed at the same rate as ordinary income. Historically, non-residents have been subject to Australian CGT on the disposal of shares in an Australian proprietary company. However, from 12 December 2006, non-residents are subject to Australian CGT only when the assets are interests in Australian real property, or the business assets of Australian branches of a non-resident. Australian CGT also applies to indirect Australian real property interests, which are non-portfolio interests in interposed entities (including foreign interposed entities), where the value of such an interest is wholly or principally attributable to Australian real property. Real property for all these purposes is consistent with Australian treaty practice and also extends to other Australian assets that have a physical connection with Australia, such as mining rights and other interests relating to Australian real property. A non-portfolio interest is an interest held alone or with associates of 10% or more in the interposed entity. The 50% CGT discount available to resident individuals and trusts is not available to non-residents (subject to limited transitional provisions for assets acquired before May 2012) Transfer pricing Australia applies transfer pricing provisions that are based on the OECD (Organisation for Economic Co-operation and Development) guidelines. Essentially, the legislation seeks to ensure that Australian businesses deal with international related parties on arm's length terms. These provisions apply to all Australian businesses, regardless of the type of entity used. It therefore applies equally to an Australian branch of an overseas company (treated as a separate taxpayer) and an Australian subsidiary.

20 20 Australia Business and Taxation Guide The ATO requires the taxpayer to file a schedule (International Dealings Schedule) with its annual income tax return, where the dealings with international related parties (income or capital nature) total more than A$2 million in the year. This schedule requires disclosure of the value and nature of the dealings. Taxpayers must also disclose whether transfer pricing documentation exists to support the pricing of the transactions and the transfer pricing methodology used to set or review the pricing of transactions. Whilst there is no legal requirement to prepare contemporaneous transfer pricing documentation to support that international related party transactions have been conducted on arm's length terms, the existence of such documentation allows a positive disclosure on the International Dealings Schedule and may reduce the risk of an ATO review or a review proceeding to an audit. Where an audit is conducted and concludes with a transfer pricing adjustment, the existence of quality contemporaneous transfer pricing documentation may reduce or eliminate any penalties. The ATO recommends this four step process, which is generally used by taxpayers in their documentation: Comprehensive functional analysis Selection of the most appropriate transfer pricing methodologies Application of the most appropriate transfer pricing methodologies, including benchmarking Preparation of contemporaneous documentation. The ATO is relatively sophisticated in the transfer pricing area and in the last decade has implemented a number of programmes that target taxpayers in a particular sector or with certain attributes. It focuses on large corporations and also has an active interest in the small to medium enterprise (SME) area. There is no limit to the number of years the ATO can amend when making a transfer pricing adjustment. It is therefore in a taxpayer's interest to ensure that its international related party dealings are conducted at arm's length and that supporting documentation has been prepared and maintained from the outset Employee issues There are a number of mandatory compliance requirements in Australia that can significantly affect company payroll costs Payroll tax Payroll tax is levied in all states and territories on the employer s payroll, including the value of noncash benefits. The effective rates generally range from between 5% and 7% depending on the level of payroll and the state or territory. For example, in New South Wales the rate is currently 5.45% on the payroll over A$658,000. Related companies and companies sharing employees are grouped together to determine the payroll tax threshold Fringe benefits tax (FBT) The federal government taxes employers on the value of certain non-cash benefits provided to employees. These include, but are not limited to: provision of a motor vehicle payment of private expenses

21 21 Australia Business and Taxation Guide the provision of rent free accommodation interest free loans, etc. FBT is currently levied at the rate of 46.5% on the grossed up value of the non-cash benefits provided during the FBT year, ending 31 March. Because the benefit is grossed up the tax payable is only slightly less than the value of the benefit. For example, the FBT on a GST-free expense paid on behalf of an employee (e.g. health insurance) of A$1,000 would be A$869 (A$1,000 x 1/(1-46.5%) x 46.5%). The reason for the gross up of the benefit is that the employee must earn A$1,869 to have A$1,000 after income tax of A$869 (A$1,869 x 46.5%) to pay for the benefit if was to be paid out of their salary. In effect employers pay the employee s income tax on fringe benefits, with the assumption that the top marginal tax rate applies. Accordingly, before negotiating an employee s package business owners should ensure that they are aware of the full cost of the package, including FBT, to the employer. There are limited opportunities to package expatriate employee remunerations, including some concessional taxed benefits, to minimise FBT and income tax Workers' compensation Employers are required to carry workers' compensation insurance in order to provide insurance cover for employees in respect of work related injuries. As soon as the business employs staff in Australia, workers' compensation insurance must be taken out in each state and territory that the business has employees. The cost of this insurance ranges from between 1% and 10% of the payroll expenditure, depending on the nature of the business Superannuation guarantee charge (SGC) Employers are required to contribute a prescribed minimum level of superannuation support for their employees each year to provide for the employees retirement. The minimum contribution is currently 9%. This is increasing to 12% progressively over coming years. The superannuation payments must be made within 28 days of the end of each quarter. Employers must notify employees within 30 days of the contributions being made. There are limited exemptions to these requirements. Specific exemptions apply to certain expatriate/non-resident employees where their country of residence has entered into a specific bilateral social security agreement with Australia. If an employer fails to pay the required amount they are subject to a charge (SGC) which is paid to the ATO and the payment becomes non-tax deductible PAYG withholding tax collections Employers are required to register with the ATO and withhold and subsequently remit the income tax payable by employees on their salary, generally on a monthly basis via the BAS to the ATO. The tax collected by the employer is known as Pay as You Go (PAYG) withholding. There are substantial penalties for failing to deduct the appropriate level of tax or for late payment to the ATO. Gross salary, PAYG withheld and other specific payroll related items are reported to employees annually on an ATO prescribed document termed a payment summary.

22 22 Australia Business and Taxation Guide Terms of employment Australia s industrial and workplace relations law have undergone significant changes in recent times through government initiatives designed to make the labour market more flexible and efficient. When establishing a presence in Australia care investors should take care to ensure that any terms of employment are in accordance with the relevant Australian legislation.

23 23 Australia Business and Taxation Guide 7. Personal taxation Expatriate employees working in Australia need to consider a number of issues. 7.1 Migration An expatriate travelling to Australia for more than three-months for business purposes must obtain employment authorisation (generally a Temporary Business Entry Long Stay visa, subclass 457). Companies operating in Australia, or those in other countries wishing to establish an entity in Australia, are able to sponsor individuals to come on the subclass 457 visa, which allows a stay in Australia of up to four years. Extensions are possible, providing there continues to be an approved sponsor to support the visa application. A visa holder cannot change conditions of employment without prior approval from the Department of Immigration. Individuals sponsored on these visas are able to work in a specified position within the company. Sponsors in these cases must demonstrate that: Their business is reputable They are in good financial standing to meet the sponsorship obligations and There will be benefits to Australia resulting from the sponsorships. Obtaining temporary work authorisation involves a three-step process: Business Sponsorship application, unless a business is already approved to sponsor Nomination Application for each proposed activity, and Temporary Business Entry Long Stay Visa subclass 457 for each nominated employee. Nominations are restricted to a list of occupations covering executives, management and specialist positions. Nominations for activities for regional areas extend to trade occupations. Nominated activities are subject to a minimum base salary level. All three steps are filed and processed in Australia if the business is operating in Australia. Where the business is not operating in Australia, filing and processing is usually undertaken at the nearest Australian overseas diplomatic mission. The normal time to assemble the corporate and employee s personal documentation is approximately three to four weeks. Once the application is filed with the Department of Immigration, the processing time frame is approximately two weeks. Delays can occur if the Department of Immigration requests additional information or documents, or there are concerns relating to radiological and medical reports. 7.2 Income tax For Australian tax purposes, expatriates living and working in Australia are categorised as either resident or non-resident. The imposition of tax on an individual will differ in numerous ways, depending on whether the resident or non-resident status applies. The most fundamental distinction is that a resident will be subject to Australian income tax on worldwide income (including

24 24 Australia Business and Taxation Guide capital gains), whilst a non-resident is subject to Australian income tax on Australian-sourced income only. It is therefore essential to review personal investments and other related matters prior to becoming a resident of Australia to determine tax exposure and establish whether there are any financial planning opportunities. Expatriate employees may be classified as temporary residents (regardless of whether they are resident or non-resident under the general rules). As a temporary resident in Australia they are subject to tax on Australian-sourced income and all remuneration (regardless of source) for employment services rendered whilst they are a temporary resident. 7.3 Pension As noted in section , there is a requirement for each employer to make a compulsory contribution into an Australian approved pension (superannuation) fund on behalf of each employee. The amount is currently 9% of salary up to a specified salary cap, which is subject to change. Employers sponsoring expatriate staff to Australia should also examine possible exemptions available from this requirement. 7.4 Private health insurance Expatriate employees may not be eligible for medical cover under the National Medicare scheme while working in Australia. Australia has health care agreements with some countries. These countries are Great Britain, New Zealand, Italy, the Netherlands, Malta, Sweden and Finland. Residents of these countries are entitled to limited access to Medicare, but only in emergency situations. It is therefore necessary for temporary residents on working business visas to consider taking out private health insurance to cover themselves in the event of sickness or a medical emergency, even if partial health cover is available via one of the health care agreements mentioned above. There are a number of private health funds operating throughout Australia that provide such insurance.

25 25 Australia Business and Taxation Guide 8. Double taxation agreements Australia has entered into double taxation agreements (DTAs) and protocols for the exchange of information with over 50 other countries. A principal objective of the DTAs is to avoid the double taxation of the same income. The DTAs need to be read in conjunction with the relevant domestic laws, noting that in the situation of a conflict the terms of the DTA will prevail. A DTA will only apply to a legal person (including entities) that is a resident of Australia and/or the other contracting State. Whilst the OECD model conventions are utilised by Australia, the terms of each DTA differs, sometimes slightly, sometimes significantly, and care needs to be taken to ensure that the relevant DTA is reviewed in detail. The concept of a permanent establishment is used to determine the rights to tax business profits. A permanent establishment generally requires a substantial temporal and geographical presence in Australia. However, many of the DTAs utilise an expanded definition of a permanent establishment. Particular care should be taken in respect of the: Provision of services, and Use of substantial equipment. In each of these instances, certain Australian DTAs contain provisions that can deem a permanent establishment to exist, even when the core permanent establishment rules do not. For these same areas a review of the definition of royalty is also warranted. This is because in some instances payments for services or for the use of equipment can be deemed to constitute a royalty. The DTAs will generally reduce the standard withholding tax rates applying to royalties, dividends and interest. A table of the reduced rates is set out below. Income from employment will be taxed in Australia when the employment services are rendered in Australia. However, an exemption is usually available when, in broad terms, the: Individual employee is in Australia for less than 183 days (noting that the time period over which the 183 days is measured differs between DTAs) Economic employer is a non-resident, or Employment remuneration is not being claimed as a tax deduction in Australia. There are particular rules that can apply in the case of company directors, sportspeople, entertainers, students and pension recipients. The taxation of fringe benefits provided to employees is also covered by some DTAs. In the absence of such a clause, Australian domestic law would apply. Some of Australia s DTAs deal with the taxation of capital gains, although as a general rule nonresidents will only be taxed in Australia on capital gains made on the disposal of direct or indirect interest in real property or assets used in an Australian permanent establishment.