Australia: Related Information
Doing Business in Australia
This page was last updated on 18 Jan 2019.
A company is considered to be resident for taxation purposes if it is incorporated in Australia, or if it carries out business in the country and both central management and control are based in Australia or its voting power is controlled by shareholders who are Australian residents.
Resident companies are taxed on worldwide income from all sources, at a corporate tax rate of 28%. Non-resident companies are only taxed on Australia-sourced income and capital gains on the disposal of certain taxable Australian assets that were acquired from 20th September 1985. Taxable Australian assets generally include:
- Assets used by the non-resident to carry out business in Australia
- Property in the country
- Interests in resident partnerships, trusts or private companies
- Shareholdings of more than 10% in resident public companies.
In Australia, corporate tax is levied at federal level only, not by state, territory or local governments . However, these bodies do impose some taxes which might impact on foreign companies operating in the country: payroll tax (more applicable to larger employers), stamp duty, land tax and sales taxes.
Major changes to corporate taxation recommended by the Ralph Report in 2000 have been introduced on a piecemeal basis. New consolidated tax rules to allow groups of companies to be taxed as a single entity were originally scheduled for launch in July 2001, but following the introduction of the goods and services tax (GST), the government felt that the country's business sector was suffering from 'reform fatigue', and postponed the launch. The rules were reintroduced in 2002.
The government took further steps towards improving the international taxation regime for businesses by introducing measures in December 2003. These took effect from July 2004 and relaxed controlled foreign company (CFC) rules as they applied to broad exemption listed countries (BELCs), such as the US, the UK, Germany, France, Canada, Japan and New Zealand, in effect exempting income derived from outside such countries but passing through them (and therefore taxed in them).
CFC rules continue to apply to income derived through a trust or arising under the foreign investment fund (FIF) measures, even if derived through CFCs resident in such comparable tax countries.
The new legislation allowed fund managers to invest up to 10% of their fund in foreign passive investments before FIF rules applied, and also relieved complying superannuation funds from the FIF measures. The amendments also provided a withholding tax exemption on widely distributed debentures issued to non-residents if those debentures are issued by public unit trusts.
Australia's Treasury Secretary Ken Henry, who is heading the government's tax reform panel, has said that the country's tax system is far too complex and should be simplified for both individuals and businesses.
Types of Company
There are many different ways to conduct business in Australia, including corporations, branch offices, subsidiaries, trusts, joint ventures and partnerships. However, for international investors, the most appropriate vehicles are usually subsidiary companies or branch offices. In terms of taxation there is not a great deal to choose between the two (both are subject to the standard corporate tax rate). However, most foreign companies choose to operate through a locally established subsidiary company, as this has the added benefits of limited liability and separate legal status. In addition, franked dividends from an Australian subsidiary are not subject to withholding tax when paid to the foreign parent company. A foreign company that intends to do business in Australia must register with the Australian Securities and Investment Commission (ASIC), in order to do so.
Restrictions on Foreign Investment
Although all exchange controls have effectively been abolished in Australia, there are still certain reporting requirements and restrictions on foreign investment. Having said that, the government generally welcomes foreign direct investment (FDI) that is of benefit to the Australian economy or serve the national interest.
Foreign investment policy is implemented by the Foreign Investment Review Board (FIRB). The factors the FIRB considers when assessing a potential investment include the following:
- Whether the enterprise will create new employment opportunities for Australian citizens, or allow Australian participation in some way.
- Whether the enterprise will introduce new technological, managerial, or technical skills to the country and its citizens
- Whether the enterprise will help to develop international trade with Australia (for example developing new export markets, or increasing existing market access)
The following acquisitions must be notified to the Board, irrespective of the value or the nationality of the investor:
- All vacant land, whether residential or commercial;
- All residential property;
- All accommodation;
- All shares or units in Australian urban land corporations or trust estates, and
all direct investments by foreign governments or their agencies.
All other acquisitions (including shares or assets of an Australian business) should be notified if the target entity is valued at or above the applicable monetary threshold set by the policy or the Act.
Investors from countries with special provisions due to the Foreign Acquisitions and Takeovers (FTA) law, that is Canada, Chile, China, Japan, Mexico, New Zealand, Singapore, South Korea and the USA, except where noted have some different thresholds from other countries. The thresholds are:
$0: Media (all countries)
$58m: Agribusiness (Canada, China, Japan, Mexico, Singapore and South Korea)
$266m: Acquisitions in sensitive businesses* (FTA countries)
All business acquisitions (other countries)
$1,154m: Acquisitions in non-sensitive businesses (FTA countries)
Agribusiness (Chile, New Zealand and USA)
In addition, investors from foreign governments have a threshold of $0.
* From the FIRB website: “sensitive businesses include media; telecommunications; transport; defence and military related industries and activities; encryption and securities technologies and communications systems; and the extraction of uranium or plutonium or the operation of nuclear facilities.”
Federal Investment Incentives
In a broad attempt to encourage both foreign and domestic businesses to locate in Australia, the government reduced the federal corporate tax rate to 30% in 2001. This rate has remained at this level since then, though there are plans to reduce it further. Small businesses with an aggregated annual turnover of less than AU$10 million pay a slightly reduced corporate tax rate of 27.5%.
In addition to this, there are a number of incentives available on a federal level, although there are no special provisions made for foreign investors - the incentives are potentially eligible to all organisations which do business in Australia and pay corporate income tax there.
At the time of writing, there is a general exemption from wholesale sales tax which applies to goods purchased and used as business inputs by manufacturers, miners, and primary producers. Other incentives are available for those willing to establish regional headquarters companies in Australia, and for exporters. We will now examine these in more depth:
Regional Headquarters Companies
Measures introduced by the Australian government to encourage companies to establish regional headquarters (RHQs) or support centres in Australia include:
- Streamlined immigration procedures
- Wholesale sales tax exemption for certain equipment used in the course of business
- Tax deductions on certain relocation expenses
- General support and assistance, including help with site selection, facilitation of visit programmes, and introductions to key business contacts, such as government agencies and professional service firms.
Export Market Development Grant
Overseen by the Australian Trade Commission (AUSTRADE), the Export Market Development Grant is a programme that offers financial incentives to exporters. The scheme provides funds to cover up to 50% of eligible expenditures (costs incurred while promoting Australian products, skills, or industrial property rights) on export marketing. This may also include costs for market research, the provision of free samples, overseas representation, and advertising expenses. In order to qualify for the grant, the minimum expenditure must be at least AU$15,000 (since reduced to AU$10,000), and the maximum grant which can be received is AU$150,000.
In 2006, the grant scheme was extended for a further five years. However, changes have been announced to the EMDG scheme for applications lodged from 1 July 2009 and export promotion expenditure incurred from 1 July 2008. The key changes are:
- Increasing the maximum grant by $50,000 to $200,000.
- Lifting the maximum turnover limit from $30 million to $50 million.
- Reducing the minimum expenditure threshold by $5,000 to $10,000.
- Allowing costs of patenting products overseas to be eligible for EMDG support.
- Increasing the limit on the number of grants able to be received by a business from 7 to 8.
- Making the scheme more accessible to services exporters by replacing the current list of eligible internal and external services with a new ‘non-tourism services’ category which will provide for all services supplied to foreign residents whether delivered inside or outside of Australia to be eligible unless specified in the EMDG Act regulations.
- Allowing state, territory and regional economic development and industry bodies promoting Australia’s exports, including tourism bodies, to access the scheme.
- Introducing an EMDG performance measure into the scheme for those applicants who have already received two grants (exceptions apply for approved bodies and approved trading houses). Applicants will need to satisfy the requirements of this measure by taking one of two alternative tests - the export performance test or the Australian net benefit requirements.
In addition to these specific incentives, the Federal Government also considers the provision of incentives or assistance on a case by case basis where the project would generate economic or other benefits for Australia. The following criteria are usually applied in order to make a decision:
- Whether the investment would be likely to occur in Australia were there no incentives offered;
- Whether the potential investment will provide significant economic benefits for the country through:
- Increasing employment of Australian citizens
- Providing substantial business investment
- Providing a significant boost to Australia's Research and Development capacity
- Benefiting other Australian industries
The specific consideration of each proposal allows the government to take into account the availability of other forms of assistance on a state or territorial level.
The EMDG scheme was reviewed in 2015, concluding that Austrade should continue to manage the scheme. The review also made recommendations concerning the scheme’s overall effectiveness and improving engagement with clients and stakeholders.
State Investment Incentives
Australian states and territories actively compete with each other to attract new foreign investment. Incentives offered to suitable investors can be financial in nature, such as grants, loans, tax reductions and financed industrial premises, or they can take the form of non-financial assistance such as facilitation of investment projects, skill development, research and development programmes, employee recruitment, industry and network introductions, technology acquisitions, and help in identifying suitable premises.
Again, incentives and assistance are generally tailor-made to the individual business or individual, so it is difficult to offer a generalised picture of state investment incentives in each of the six states. South Australia, for example, offers tailored taxation incentives to eligible businesses, alongside help with site selection, planning approvals, staff recruitment and workforce training, and assistance for business migrants.
Queensland also offers a major project incentive scheme, focussed on manufacturing, processing, tradeable services, and tourism, in which a combination of taxation concessions, capital grants, refunds of stamp duties relating to the establishment of the business and project facilitation are on offer. The state also exempts businesses that intend to establish their regional headquarters there from all state taxes, including payroll tax, debit tax and land tax.
On a countrywide scale, talk about the establishment of enterprise zones in poorer or rural areas are also underway, the Australian government having been struck by the success of such zones in other countries such as the United States and South Africa.
However, at the time of writing (November 2010), there are no such zones in place in Australia.
Is Australia an Attractive Location For Multinationals?
The high standard of living, modern telecommunications and transport networks, wide variety of investment opportunities, and generally very well educated and trained workforce all contribute towards making Australia potentially a very rewarding place in which to do business.
Add to this the fact that Australia is in a very favourable position to access emerging Asian markets, and the combination of federal and state incentives for those prepared to locate their regional headquarters there, and the picture becomes even more appealing.
However, on the downside, the corporation tax rate is rather high, and some may find the country's controlled foreign corporation legislation too restrictive.
In February 2006, Peter Costello launched a new study, the outcome of which was designed to gauge the competitiveness of Australia's tax systems relative to other developed economies.
The aim of the study was to identify areas where Australia both leads and lags its international trading competitors, and it covered taxes collected at national, state and local government levels. Personal, business, indirect, property, transaction and superannuation taxes will be included in its remit.
The Business Council of Australia called for the country’s tax system to be put under "permanent watch" in order to ensure that it remains internationally competitive.
In a paper on tax reform, the BCA expressed concern that, despite the government's decision to review Australia's international tax competitiveness, there continues to be an absence of a strategic reform agenda for tax.
It called for the review of Australia’s tax system announced in 2006 not to be a one-off, and to avoid focusing exclusively on whether current tax rates are competitive today, but how these rates match up with current global trends.
BCA President, Mr Michael Chaney commented that: “Given the fast-moving nature of global tax reform, a competitive tax rate now may become uncompetitive within a short space of time."
He added: “That’s why tax reform must be a permanent item on the reform agenda.”
Mr Chaney urged the government not to "play catch-up" through periodic, short-term changes to rates and thresholds, but to anticipate global trends in tax reform through a considered, forward-looking plan of reform.
The BCA paper also argued that the review should not to simply focus on OECD comparisons, given the large volume of trade that Australia undertakes with non-OECD economies.
The paper also recommended that the tax system be subject to comprehensive and open review at least every two years, similar to regular tax review processes now in place in countries like New Zealand.
Entitled 'Keeping a Permanent Watch on Australia’s Tax System,' the paper noted a number of inadequacies in the Australian tax system, particularly the large gap - compared to other economies – between personal and corporate tax rates, which it said encourages high-income taxpayers to aggressively minimise their tax liabilities.
The paper also bemoaned the high cost of tax administration and the rapidly growing complexity of the tax system, the corporate tax burden, and the high rate of personal income taxation which discourages overseas talent to seek employment in Australia.
“Australia needs a more vigorous debate on spending priorities and strategies for the future,” Mr Chaney added.
“Business and individual taxpayers will not passively accept projections of ever-expanding spending needs and therefore, ever-increasing tax burdens," he concluded.
In August 2008, the government of Labour Prime Minster Kevin Rudd launched a discussion paper entitled 'Australia’s Future Tax System' (AFTS) by Treasury Secretary Dr Ken Henry, which claimed to be the most comprehensive review of the country's tax system in fifty years.
The wide ranging review encompassed many aspects of the federal and state/territorial tax system, and will consider: the balance of taxes on work, investment and consumption and the role for environmental taxes; enhancements to the tax and transfer system facing individuals, families and retirees; the taxation of savings, assets and investments, including the role and structure of company taxation; the taxation of consumption and property and other state taxes; simplification of the tax system, including the interactions between federal, state and local government taxes; and the proposed emission trading system.
The government announced that it intended to launch a consultation with the public on the proposed changes, with the Review Panel to provide its final report to the Treasurer by the end of 2009.
"Long-term reform of our tax and welfare systems is a key way to secure our economic foundations for the future, create wealth, spread opportunity and reward working Australians," announced a statement issued by Treasurer Wayne Swan.
The statement went on to explain that "The AFTS Review will play a vital role in modernising Australia’s economy to meet the great economic, social and environmental challenges of the 21st century. Meeting these future challenges - like climate change, the ageing population, new technologies and rapid globalisation – will require a tax system that is as fair and efficient as possible and the AFTS Review will help achieve that goal.
In February 2009, Henry said that the country may need to cut its company tax rate and amend its dividend imputation system to encourage economic growth and remain competitive. Henry has proposed funding a cut in company tax by reducing or removing dividend imputation - a move which would see investors in Australian companies lose their right to pay little or no tax on the dividends received during periods where full company tax rates are paid. Australia and New Zealand are amongst only a very few countries with an active dividend imputation scheme.
The AFTS, or Henry Review, was published by the government in May, 2010. Its main recommendation was a resource super profits tax (RSPT) on the mining sector, revenues from which would be used to subsidize corporate tax cuts for small businesses. The scope of RSPT has, however, since been modified and the levy renamed the Minerals Resource Rent Tax in response to an outcry from the mining industry.
In October, 2010, the Australian government released additional material underlying the 'Australia's Future Tax System' (AFTS) Review, to promote further discussion about tax reform.
The additional files released by the Treasury are academic working papers commissioned by the AFTS Panel and costings of final AFTS recommendations, prepared by Treasury and the Australian Tax Office. They include:
- The Small Medium Enterprises Total Tax Contribution Report (PricewaterhouseCoopers);
- Non-renewable resource taxation in Australia (Australian Bureau of Agricultural and Resource Economics research report);
- Housing Taxation and Transfers research study (Professor Gavin Wood, Associate Professor Miranda Stewart and Dr Rachel Ong); and
- Simulating Policy Change Using a Dynamic Overlapping Generations Model of the Australian Economy (University of New South Wales).
The government has also published a number of other papers relating to the AFTS Review, including the Architecture of Australia's tax and transfer system, and a detailed consultation paper.
The published documents detail the analysis the AFTS Panel considered relevant to their recommendations, according to the Treasury.
In the UN Conference on Trade and Development’s 2014-16 World Investment Prospects Survey, Australia was ranked the 10th best country in the world for foreign direct investment.