Australia is a land of diversity comprising a skilled and multicultural work environment, competitive tax structure, a strong economy and a stable workforce amid beautiful infrastructure, making it an ideal location for Foreign Investments. With a total trade value of about AU$453 Billion, nine of Australia’s top twelve largest markets are in Asia and Oceania, reflecting the country’s predominant location and integrated global economy. The Free Trade Agreements (FTA) with Australia have made the movement of goods, services and investments easier and smooth, among the major economies across the world.
8 of the Top 10 Forbes Global 2000 companies and 9 of the Top 10 Fortune Global 500 companies have operations in Australia, with employment increasing by 20,200 people on an average every month. Australia is one of the fastest-growing economies in the Organisation for Economic Co-operation and Development (OECD).
In case you plan on setting up a business in Australia, this article will give you details you need to know about before you get started.
Why create a subsidiary in Australia?
The reasons why Australia is an ideal destination for many countries –
- Relatively low set-up costs, easy access to the Asia Pacific region, a dynamic financial services sector and a time zone which accesses both the close of business in the United States and trading opening in Europe.
- Known for its resources sector, Australia has had uninterrupted Annual Economic Growth among the developed economies for the 28th consecutive year. This shows the country as a safe and low-risk environment to do business in.
- Strong economy and flexible structure. The economic growth is projected to be 3% in 2020-21.
- Asset protection by diversifying your portfolio internationally.
- Stable government and potential industry growth, ability to adapt to global changes, strong regulatory bodies, diversified cultures and service-based economy contribute towards its stable growth.
- Innovation, technology and skills have boosted economic growth in Australia. It is ranked 13th in the world economy. The unemployment rate is forecasted to fall to around 4.75% by 2021.
- Global relationships and agreements (includes FTA’s and DTA’s), Australia has an FTA with New Zealand, Singapore, USA, Thailand, Chile, ASEAN countries, Malaysia, Korea, Japan, China, Hong Kong and Peru (most recent) showing its economic ties across the globe. Australia has a DTA with 45 countries.
- Entrepreneurial spirit and international cultures makes the country an ideal location for business.
Things to reflect on while setting up a subsidiary in Australia –
- First and foremost, it is important to understand how existing businesses operate in the other countries the company has established itself; and then decide the structure it wants to operate, in Australia.
- Detailed strategy of the organization emphasizing the overall goals and expansion program while analyzing the business structure in Australia.
- Depending on whether the company is set up as a branch or a subsidiary, the tax strategy must be determined as some international companies may benefit from Double Taxation Agreements (DTA).
- Lastly, the company must plan its long-term goals (2, 5 and 10 years) and its outsourcing (human resource, equipment, etc.) requirements.
What are the legal forms of companies?
Australia is a common-law jurisdiction. The most common forms of companies in Australia are -
- Private Company (Pty Ltd.) – the most common type of company in Australia can have no more than 50 non-employee shareholders. Limited liability is limited by shares. Shareholders and other directors of the company appoint the Board of Directors who govern business decisions and day-to-day operations and can be removed by the shareholder’s ordinary resolution.
- Public Company (Ltd.) – company’s shares listed on the Australian Securities Exchange (ASX) for trading and raising public money. Structured like a private company, however, requires a minimum of 300 non-affiliated shareholders with $2000 holding value each.
The other forms of companies in Australia –
- Sole traders – simple to set up and operate. It allows you to use individual TFN to lodge returns, unlimited liability and gives full control of business decisions and assets.
- Trusts – income earned is called Distributions and is taxed at corporate tax rate of 30%. Trusts are treated as Australian residents for tax purposes even if they are a non-resident. Disposal of trust results in a CGT event.
- Partnerships – easy and inexpensive to set up. Based on the proportion of partnership, each partner pays their share of income tax. Three main types of partnership -
- Incorporated Limited Partnership
- Limited Partnership
- General Partnership
- Branch or Subsidiary – A subsidiary is part of the company’s expansion strategy whereas a branch aims at increasing its customer base. In Australia, it is illegal to merge when the consequence lessens competition. Branches and subsidiaries are different corporate structures though they have similar characteristics. Hence, it is important to get legal advice before setting up as a branch or subsidiary.
- The Australian subsidiary can be completely owned by foreign shareholders, however, it is mandatory to have at least 1 Australian resident as a Director, per the law.
What are administrative formalities for setting up a subsidiary in Australia?
Having an economy that is resilient to economic cycles, setting up a subsidiary in Australia has become a lot more simple. The following bureaucracies have to be completed –
- Register with the Australian Securities and Investments Commission (ASIC) and file the ASIC 201 form “Application for Registering as an Australian company”, registering your board of directors and shareholders; and paying the registration fee.
- Obtaining an Australian Business Number (ABN) and a Tax File Number (TFN), if they plan on trading in the country.
- Secure a certificate of incorporation and obtain an Australian Company Number (ACN) through the Business Registration Services (BRS).
- It is essential to comply and register for –
- Pay As You Go (PAYG) withholding tax
- Goods and Service Tax (GST), only if the turnover exceeds $75,000
- Select a company name to make sure they align with the country’s requirements and assuring that the name chosen isn’t being used.
- Appoint a local agent to make sure the subsidiaries follow the legal system and get them authorized to accept legal notices.
- Have Australian bank accounts for payroll purposes and establish a physical location, because the state laws vary in Australia.
- Register for insurance at the State Insurance Regulatory Authority (SIRA) to safeguard against any accidents at work.
What is the tax system in Australia?
For tax purposes, the Australian financial year starts on 01 July and ends on 30 June next year. From July 1st to 31st October, individuals and businesses must submit their tax returns to the Australian Taxation Office (ATO). However, the subsequent financial year can be altered to sync with the parent company, after fulfilling the requirements listed in the Corporations Act 2001.
- Corporations are generally taxed at a 30% fixed rate, sometimes at 27.5% if the turnover does not exceed $10 Million.
- Fringe Benefits Tax (FBT) at 47% can be paid in four quarterly payments if the FBT liability for the last year was $3000 or more.
- Type 1: Higher Gross-up Rate – liable to GST credit claims
- Type 2: Lower Gross-up Rate – not liable to GST credit Claims
- Capital Gains Tax (CGT) exemption can be applied if the Australian subsidiary decides to dispose of the shares after holding them for a minimum period of 12 months.
- Double Taxation Agreements (DTA) helps to reduce the rate of taxes withheld. The withholding rate for dividends under the DTA is generally at 15% but can also be as minimal as 0%. However, this depends on each agreement.
- Australia has DTA with 45 countries – Argentina, Malta, Philippines, Russia, Sri Lanka, USA, Vietnam to name a few.
It is important to understand the tax obligations that the subsidiaries operations would be subject to, what can be eliminated, etc. as the Australian tax system can get complicated for international companies. Hence, it is also important to have an effective tax strategy.
The Australian tax laws are amended frequently aligning with the changes at the international (OECD), domestic level and changes in the government.
What is the Legal environment in Australia?
Australia has been ranked in the Top 20 of the 190 economies for the most favorable countries to conduct business in, with 6 of its metropolitan areas ranked 40 across the globe for its standard of living, making them as the most ideal places to live and work.
- Minimum wage in Australia as on July 1, 2019, is $19.40 per hour or $740.80 per week, with a 4 week paid leave.
- Minimum working hours is 38 hours per week or up to 7.6 hours every day, working from Monday to Friday.
- Superannuation – a contribution made for the employees benefit, is currently 9.5% of the employee’s salary (normal working hours).
- Every full time and part-time employee is entitled to 4 weeks of annual leave based on their ordinary hours of work.
- Subsidiaries must submit an annual review statement which verifies all the shareholders, directors and addresses of the subsidiaries; and provide a Solvency Resolution signed by the Directors.
- Submitting any US financial reports isn’t necessary. An investment of 1 AUD is sufficient for registration.
How can Expandys help you?
Our consulting firm can assist you in –
- Defining the strategic approach and action plan for setting up your subsidiary in Australia
- Carrying out all the steps necessary for the creation of the subsidiary on your behalf, aligning with the Australian legal system and building relations with the financial institutions of your choice.
- Hosting your branch office on our premises for efficient cost benefits.
- Manage your subsidiary by outsourcing your administrative, accounting and financial procedures: Administrative and accounting management, Social and human resources management, Year-end accounting operations, Legal management, Financial management.
- Support your action in the commercial development of your subsidiary.