With its high-quality facilities and state-of-the-art testing equipment, Australia is a popular location for biotech companies to conduct clinical trials. A key additional benefit of coming to Australia is the generous R&D tax incentive provided by the Australian government, which could result in a refundable incentive equal to 43.5% of eligible R&D expenditure for certain biotech companies going through the trialling phase. The incentive can then be put back into funding further clinical trials in Australia, resulting in a cycle which can significantly increase the scope of the trials in a way not otherwise possible in many other jurisdictions.
For the parent company, setting up and operating a business in an overseas jurisdiction comes with having to navigate new regulatory requirements. This article provides a high-level summary of some of the accounting and tax considerations inbound biotech companies should be aware of before committing to setting up an Australian presence.
Subsidiary company vs branch
- Whilst it is possible to do business in Australia as a non-Australian entity, a subsidiary company incorporated in Australia is the most popular legal structure used by biotech companies wishing to operate in Australia.
- The Australian subsidiary company must have at least one Australian resident director and an Australian resident “public officer” for dealings with the Australian Taxation Office. These two roles can be held by the same person.
Registrations and taxes
- Businesses will generally require an Australian Business Number and Tax File Number to operate in Australia.
- The Goods & Services Tax is Australia’s sales-based tax (i.e. VAT) and is generally levied at 10% on most goods and services. Registration is compulsory where turnover is expected to exceed AUD $75,000 in a 12-month period.
- Depending on the “aggregated turnover” (i.e. turnover of the subsidiary and certain related group entities) and the financial year, the Australian company’s tax rate will be between 25% – 30%.
- The standard year-end in Australia is 30 June, however businesses can apply to have an alternative year-end to match group reporting dates, such as 31 December or 31 March.
- Expatriates travelling to Australia for more than 3 months for business purposes must obtain proper employment authorisation.
- Companies operating in Australia can sponsor individuals on the subclass 457 visa, which allows a stay in Australia for up to 4 years.
- Superannuation (i.e. pension) is compulsory for all employees at a rate of 9.5% of their remuneration. Superannuation is payable by the company.
- Payroll tax is payable on a State-by-State basis and, once the Australian payroll exceeds the relevant threshold, is approximately 5% of total employee remuneration.
- A Workers Compensation Insurance policy is also required in each State that employees work in.
Research & Development Tax Incentive (“R&DTI”)
- The R&DTI is a key incentive from the Australian Government and is available to companies conducting eligible experimental research and development activities that may benefit the wider Australian economy.
- The grant is often available for biotech companies conducting clinical trials. To qualify, the company must be conducting at least one “core R&D activity” during the income year that demonstrates the following:
- The aim of the activity is to generate new knowledge in the form of new or improved products, processes or services.
- The outcome of the activity could not have been known in advance of conducting the activity, and
- A systematic progression of work based on the principles of established science.
- For companies with an “aggregated turnover” (see above definition) of less than AUD $20 million, the incentive is in the form of a 43.5% refundable tax offset (i.e. the offset is applied to any tax liability and any excess is refunded to the company in cash).
- For all other companies, the tax offset is 38.5% and non-refundable (i.e. the offset is applied to any tax liability and any excess is carried forward to apply against future tax liabilities).
- The R&DTI is jointly administered by the Australian Taxation Office and AusIndustry. Claimants self-assess their eligibility and are required to keep detailed records of their R&D activities conducted during the year.
Structuring of IP
- Any IP generated from the clinical trials can be owned either by the Australian subsidiary company or the foreign parent company.
- There are various tax and commercial considerations in deciding which entity should hold the IP and there is no one-size-fits-all approach.
- Australian companies that do not hold the IP may still be eligible for the Australian R&DTI, but additional measures are required, including putting in place various agreements prior to conducting R&D activities.
- Subsidiaries of foreign companies will require an audit of their financial statements unless they apply for a specific exemption within a specified timeframe.
- Despite the above, an audit of the Australian company’s financial statements will be required (and no exemption available) if the company meets any two of the following three criteria:
- Consolidated gross operating revenue of more than AUD $50 million a year;
- Consolidated gross assets of more than AUD $25 million at year end; and/or
- More than 100 employees at year end.
- Australia has extensive transfer pricing and tax anti-avoidance measures, so businesses are encouraged to maintain complying transfer pricing documentation to evidence that dealings with international related parties are on an arms-length basis.
- Businesses should consider the mix of debt and equity used to fund Australian operations, as Australia’s “thin capitalisation” provisions can limit the amount of interest expenses claimed as a tax deduction.
- Payments of interest, royalties and dividends from untaxed profits from the Australian company will be subject to withholding tax. The rate of withholding tax will be set in accordance with any double tax agreement that Australia may have with the country of the parent company.
- Large multinationals (with global annual aggregated turnover of more than AUD $1 billion) face additional reporting obligations and integrity measures including Country by Country reporting, Multinational Anti-Avoidance Law, Diverted Profits Tax and substantial administrative penalties for failing to meet tax obligations on time.
It is highly recommended that you check out our guide on doing business in Australia – here.
Looking to expand to Australia?
Biotech companies looking to expand to Australia should obtain timely tax advice to ensure their operations are structured tax-effectively and their extensive local tax obligations are met. Please feel free to contact us if you wish to discuss how William Buck can be the landing pad for your biotech venture.