Australia: Related Information
Doing Business in Australia
A company is considered to be resident for taxation purposes if it is incorporated in Australia, or if it carries on business there and both central management and control are located in Australia or its voting power is controlled by shareholders who are Australian residents.
Resident companies are taxed on world-wide income from all sources, at a corporate taxation rate of 30%. Non-resident companies are taxed only on Australian sourced income and capital gains on the disposal of certain taxable Australian assets if acquired on or after 20th September 1985. Taxable Australian assets generally include:
- Assets used by the non-resident to carry on business in Australia
- Real estate located in the country
- Interests in resident partnerships, trusts, or private companies
- Shareholdings of more than 10% in resident public companies.
In Australia, state, territory, and local governments do not impose additional corporate taxation rates. However, they do impose some taxes which might impact on foreign companies operating in the country; namely payroll tax (more applicable to larger employers), stamp duty, land tax, and sales taxes.
In May 2004 the then Treasurer Peter Costello announced measures aimed at reducing the compliance burden for small businesses, by allowing firms currently below the registration threshold and voluntarily registered for GST to report and pay GST annually, instead of quarterly. These measures were designed to benefit around 740,000 small businesses and 30,000 non-profit organisations that were voluntarily registered and paid on a monthly or quarterly basis.
In April 2005, Costello reported a deal under which state governments agreed to phase out indirect taxes in return for receiving a guaranteed share of the revenues from the goods and services tax, which was designed to replace the existing system of indirect taxes. However, some states were less keen to abolish these taxes than others. "I haven't heard from all of them yet but the signs are very positive," he added. Costello warned that the uncooperative states could face "serious consequences" if they did not uphold their end of the bargain. In fact they had all given in by the end of 2005.
In March 2005 a bi-partisan vote in the Australian parliament approved tax incentives for small businesses, including a 25% entrepreneurs' tax offset on the income tax liability attributable to business income for small businesses with an annual turnover of $75,000 or less. The new law also gave small businesses greater flexibility in the way they determine their taxable income. A pre-take up family income test was put in place in 2008.
Major changes to corporate taxation recommended by the Ralph Report in 2000 have been introduced on a piecemeal basis, with a stream of changes continuing unabated in 2002 and 2003. 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 controversial 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 in December, 2003, introducing measures which took effect from July, 2004, relaxing Controlled Foreign Company (CFC) rules as they applied to countries possessing broadly similar taxation regimes (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).
"Once the package is complete", said Ernst and Young at the time, "Australian multinationals doing business in these major commercial centres will no longer need to be overly concerned with measures that are aimed at tax haven operations. The Government has clearly recognised the fact that business takes place in these countries for commercial rather than tax related reasons."
However, 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.
He suggested that the problems with the corporate tax system are not necessarily attributable to rates of taxation, but are more rooted in the system's complexity. By simplifying corporate tax, he has argued that not only would there be more incentive to invest in Australia, there would also be less opportunity for tax system 'arbitrage' by multinational companies.
"If we were to adjust business tax arrangements to attract a greater share of global investment, we would ensure that firms had minimal incentives to artificially shift profits offshore," he said in a November 2008 speech.
He suggested that there is a "good case" for switching to a tax on supernormal profits, or what economists call "economic rents." Critics of this argument, however, contend that this proposal has already been considered, and rejected, in previous tax reviews, and would do little to reduce complexity.
In a speech to the Australian Industry Group in August 2009, Henry, commented on possible changes to the structure of business taxes in the country to improve incentives for productive investment.
He indicated that the tax review was looking at future corporate tax changes to make equity investment more competitive with debt financing. He said that the effective tax rates for investments financed by debt are much lower than those financed by equity, reflecting the full deduction against taxes for interest expenses, while equity dividends are taxed. Importantly, he added, “foreign sourced debt remains tax favored relative to foreign sourced equity.”
This raises the prospect, Henry continued, of “a sub-optimal allocation of resources. One consequence of the overall bias in favor of debt is that it encourages some firms to increase leverage, an outcome that may increase their risk exposure. For an individual firm, debt financing can exacerbate vulnerability in the profit and loss statement when revenue falls, since – unlike dividend payments – the debt servicing costs are essentially unavoidable, short of default.”
Types of Company
There are many different ways in which investors can conduct business in Australia, including corporations, branch offices, subsidiaries, trusts, joint ventures and partnerships. However, for international investors, the most appropriate vehicles are usually Australian subsidiary companies or Australian branch offices. Although in terms of taxation there is not a great deal to choose between the two (both are subject to the standard corporate tax rate), in practice, 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. Franked dividends from an Australian subsidiary are also 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 now effectively been abolished in Australia, there are still certain reporting requirements and restrictions on foreign investment, although the government generally welcomes foreign direct investment (FDI) which will be 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 that the FIRB considers when making an assessment of 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 real estate;
- All accommodation facilities;
- 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/above the applicable monetary threshold set by the policy or the Act.
For non-US investors, as at January 2007, these thresholds were:
$10 million: proposals to establish new businesses
$5 million: developed non-residential commercial real estate, where the property is subject to heritage listing
$50 million: developed non-residential commercial real estate, where the property is not subject to heritage listing
$100 million: an interest in an Australian business; or
where a non-US foreign investor acquires an interest in an offshore company that holds Australian assets or conducts a business in Australia, and the Australian assets or businesses of the target company are valued at/above 50 per cent of its total assets (and hence not eligible for the offshore takeover threshold)
$200 million: offshore takeovers where a non-US foreign investor acquires an interest in an offshore company that holds Australian assets or conducts a business in Australia, and the Australian assets or businesses of the target company are valued at less than 50 per cent of its total assets (if the Australian assets are valued at/above 50 per cent of total assets the general $100 million threshold applies). N.B. This threshold was increased to $219 million as of September 22, 2009.
Different thresholds apply to US investors as defined under the Foreign Acquisitions and Takeovers Regulations 1989.
Federal Investment Incentives
In a broad move designed to encourage businesses (whether foreign or domestic) to locate in Australia, the government reduced the federal corporate tax rate to 30% as from 2001. 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 name kind of gives it away…!) 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 have been announced to the EMDG scheme for applications lodged from July 1, 2009 and export promotion expenditure incurred from July 1, 2008.
The key changes include:
- 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.
State Investment Incentives
The states in Australia actively compete against 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 can take the form of non-financial assistance such as facilitation of investment projects, skills 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. Southern Australia, for example, offers tailored taxation incentives to eligible businesses, along side help with site selection, planning approvals, staff recruitment and workforce training, and assistance for business migrants.
Queensland also offers a major projects incentive scheme, focussed on manufacturing, processing, tradable 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, debits tax and land tax.
On a countrywide scale, talks 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, for example 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 Multi-Nationals?
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 down side, the corporate taxation rates are far from appealing, and some may find the country's Controlled Foreign Corporation legislation unduly restrictive.
Worried about the international attractiveness of the Australian international business environment, the (then) newly re-elected right-wing Australian government (which has since been supplanted by a Labour administration) began an extensive review of business taxation in 2002.
The Government had been shocked when James Hardie Industries, a major building materials group, announced in July, 2001 that it would shift its base to the Netherlands in order to minimise tax charges. The widely diversified group has substantial international income flows.
"Higher rates of foreign tax are imposed on our foreign income when it is repatriated to Australia to pay dividends to shareholders. Under the current structure, this problem will increase as international demand for our products grows," said Peter Macdonald, chief executive, at the time.
The group said that adopting the new structure - which would also involve a secondary listing on the New York Stock Exchange - would nearly halve its average tax rate.
Australian Assistant Treasurer at the time, Senator Helen Coonan, announced in May, 2002, that the Federal government planned to provide tax relief for companies looking to demerge, as long as they fitted certain criteria. In order to claim capital gains tax relief during the demerger process, the underlying ownership of the company must not change, but the demerging entity must divest at least 80% of its ownership interests in the demerged entity. The legislation became effective in October of that year.
Pleased as it may have been by some signs of progress, Australian business interests were far from happy, and in October 2002, the Business Council of Australia (BCA) and Corporate Tax Association (CTA) suggested several reforms for the Howard government of the time to consider during its review of Australia's international tax regime.
BCA Chief Executive, Katie Lahey explained that: 'Simply put, our international tax systems are inadequate for a modern economy. The review provides a very timely opportunity to remove obstacles, reduce complexity and enhance the competitiveness of Australia's international tax law.
Among other topics, the submission addressed issues such as dividend imputation, controlled foreign company rules, tax treaties, conduit income, residency, foreign investment fund rules, and expatriate taxation.
CTA Executive Director, Frank Drenth announced that the submission sought especially to address the bias against Australian companies which invest offshore:
'That bias manifests itself through the way our system double taxes taxed foreign earnings when they are distributed to Australian shareholders - mums, dads, super funds - as unfranked dividends,' he told reporters, adding that foreign source income rules also need addressing, as they are currently too broad.
'At the moment, it's a bit like fishing with dynamite - you get a lot of fish, but you get a lot of other things that you don't necessarily want,' the CTA chief observed.
Less positive news for international businesses came in December, 2002, when the NSW Supreme Court ruled against US-based Unisys Corporation, which had claimed that it was not obliged to pay withholding tax on royalties received through a licensing partnership with Unisys Australia, arguing that any royalty payments from the Unisys licensing partnership (ULP) arose as a result of the ULP's US business activities.
'The Court was told that Unisys Corporation sub-leased rooms to the partnership in the US and the only functions carried out in these rooms were the filing and retrieval of the partnership's records (approximately 100-200 pages of information),' the ATO statement explained. Justice Gzell supported the ATO's challenge, explaining that although the rooms leased to the partnership in the US were at the disposal of the ULP, they could not be said to be the place 'at or through which' the partnership carried on its business.
'The storage and retrieval of documents could hardly constitute the carrying on of Unisys licensing partnership's business,' he ruled, ordering the corporation to pay both the royalty withholding tax for which it is liable in Australia and the ATO's costs.
Although the government did make some improvements to the tax position of international companies in 2003, they did not go far enough for the taste of business, which continued fierce lobbying throughout 2004 for further changes.
In September 2004, then Treasurer Peter Costello responded, indicating that he wanted to overhaul the country’s international taxation system to ease the tax burden on firms operating overseas. Costello revealed that one of his top priorities was to help firms that derive much of their income overseas and pay tax on it but do not benefit from a domestic tax credit.
"I would like to improve Australia's international taxation arrangements so that Australian companies can expand in foreign jurisdictions, while remaining domiciled in Australia," Costello said. "We want to promote Australia as a place for regional headquarters - for Australian companies but also for foreign companies," he added.
Costello spoke as News Corp, the largest firm listed on the Australian Stock Exchange, prepared to move its domicile and primary listing to the United States.
Business continued to moan, and in November 2004 the Australian Chamber of Commerce and Industry called upon the government to use its Senate majority to push through a second wave of major tax reforms to ensure that Australian business remained competitive.
To argue its case, Australia’s largest business representative body released a Taxation Reform Blueprint entitled ‘A Strategy for the Australian Taxation System 2004-2014’ which sets out a comprehensive programme of reform of both personal and business taxes over the next ten years.
While the Chamber explained that it welcomed the government’s tax reforms in 2000, which saw the introduction of GST and a reduction in company tax, it believed that the measures did not go far enough to improve Australia’s international competitiveness. ACCI chief executive Peter Hendy warned that subsequent tax reforms in other countries threaten to leave Australia behind.
“In particular, Australia’s high marginal tax rates and low thresholds are uncompetitive by international standards,” observed Hendy.
“This harms innovation, education and training, skilled immigration and entrepreneurship, while promoting tax avoidance and evasion,” he noted.
According to ACCI’s 2004 Pre-Election Survey, the level of taxation was the number one issue facing Australian businesses, followed closely by the complexity of tax legislation.
Consequently, the ACCI called on the government to make changes in five key areas, including:
- Major reductions to personal income tax, in particular increasing the top tax threshold to $100,000, the indexation of tax thresholds to inflation, the reduction of tax thresholds to preferably no more that two and the long term alignment of the top marginal tax rate with the 30% corporate tax rate;
- Reducing the cost of complying with the tax system;
- The abolition of the state taxes as previously proposed by the government, reform of Fire Insurance Levies and a proposal to abolish payroll taxes;
- Further reductions in Capital Gains Taxes (CGT) to promote innovation and entrepreneurship with the introduction of a ‘stepped rate’ where CGT reduces the longer an asset is held; and
- Removing taxes on superannuation contributions and earnings, replacing these with tax on benefits only.
“In this parliamentary term, and with a Senate majority from July 2005, the Federal Government has a golden opportunity to put in place a taxation system that encourages and rewards work, investment and enterprise,” Mr Hendy concluded.
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 costing's 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.