The most common structure used by foreign investors to conduct a business in Australia is an Australian private company, that is, a ‘Pty Limited’ company.

An Australian private company is a separate legal entity that is required to be registered with the Australian Securities and Investments Commission (‘ASIC’). When registered, each company is issued with a unique Australian Company Number (‘ACN’).

A private company:

• Is limited to 50 non-employee shareholders.
• Cannot engage in fundraising activities.
• Must have at least one director who resides in Australia. If a Secretary is appointed, the Secretary must also reside in Australia.
• Must have a registered office in Australia and appoint a public officer;
• has various annual reporting obligations. However, these will vary depending on the size of the private company.
• Can be 100% foreign owned.
• Has a minimum number of one shareholder/s and no restriction on the number of shares that can be issued.
• Is governed by the Corporations Act 2001 (Cth) (‘Corporations Act’).

The restrictions on shareholders and fundraising do not apply to a public ‘Limited’ company. A private company can be converted to a public company if needed.

Provided all the information necessary is gathered, an Australian company can be registered with ASIC within one business day. Additionally, incorporating an Australian company does not require an attorney.

A foreign company may choose to carry on a business in Australia itself. This is known as establishing a foreign branch.

Where a foreign company chooses to carry on a business in Australia itself, it must be registered as a foreign company under the Corporations Act. The foreign company must apply to ASIC to register an Australian branch. Upon registration, a unique Australian Registered Body Number (‘ARBN’) will be provided to the Australian branch. The registration process can take up to four weeks to process, provided all the necessary documentation is provided to ASIC.

As with Australian companies, a foreign company establishing a branch in Australia must have a registered office in Australia and must appoint a public officer. The company must also appoint a local agent, responsible for the company’s compliance with the Corporations Act.

Once registered as an Australian branch, the foreign company must lodge its annual Financial Statements with ASIC and comply with specific reporting requirements.

Notably, operating though an Australian branch does not create a separate legal entity, as is created when a private or public company is incorporated.

Other types of structures are available in Australia and may be appropriate in particular circumstances.

A trust is a common form of business structure used in Australia by smaller, privately owned businesses.

Trust income is generally taxed in the hands of the beneficiaries each income year.

A trust is governed by common law and contract law in Australia. Establishing a trust does not require an attorney.

For foreign investors, trusts (mostly unit trusts) are generally used for property investments in Australia.

There are also specific entity structures available for venture capital investments and managed investments.

The general company tax rate in Australia is 30% unless the company is a small-to-medium company.

A company is generally a small-to-medium company if its annual turnover is less than $50m. Small businesses are currently taxed at 26%, with the tax reducing to 25% by FY22.

Withholding tax applies to dividends, interest, and royalties being paid to foreign residents. The withholding tax rates are generally 0% or 30% for dividends, 10% for interest and 15% for royalties. These rates may be reduced by tax treaty arrangements between Australia and the country of the foreign resident.

The 0% rate for dividends applies to dividends from ‘tax paid’ profits. These are termed ‘franked’ dividends.

The GST rate in Australia is 10% of the value of sale. This GST rate is applicable to all sales made in Australia unless they are GST-free or input taxed. Sales that qualify as being GST-free or input taxed are exempt from GST.

GST is generally payable by the supplier and is included in the price of the goods or services being supplied.

Fringe benefits tax is a tax payable by employers based on the value of non-cash benefits provide to employees. The FBT year applies from 1 April to 31 March. The fringe benefits tax rate is currently levied at 47% of the grossed-up value of the fringe benefits provided during the FBT year. In principle, the ‘gross up’ takes the cost of the benefit and grosses it up to the equivalent pre-tax income that an employee would have needed to earn to be able to have acquired the same benefit.

There various FBT exemptions and concessions available.

Payroll tax is levied in all states/territories in which the employer pays taxable wages, including non-cash benefits, above the relevant threshold.

Each state/territory has its own payroll tax rates and annual thresholds which vary year-on-year. The payroll tax for each state is on average 5% of the taxable wages exceeding the annual threshold. The thresholds vary from state to state, with the lowest being $650,000 in Victoria and the highest being $2,000,000 in ACT.

Payments to independent contractors are usually considered ‘taxable wages’ for payroll tax purposes.

As a general rule, Australia will tax all Australian residents on their worldwide income and capital gains. Australian resident taxpayers include:

• Companies registered in Australia
• Companies that are registered overseas, but have their central management and control in Australia
• Trusts that have an Australian resident trustee at any time during the income year
• Trusts that have their central management and control in Australia at any time during an income year, and
• Individuals who are resident in Australia for tax purposes.

Certain types of income derived by Australian resident companies will be exempt from income tax. For example, exemptions from Australian income tax may apply to:

• Dividends received from wholly owned subsidiaries
• Profits of a foreign branch / permanent establishment of the Australian company, and
• Capital gains from the sale of shares in wholly-owned foreign subsidiaries.

For non-residents, Australia will tax:

• All net profits that are “attributable” to an Australian branch. These are generally the profits derived from the activities carried out by the branch in Australia, and
• Any Australian sourced income.

If income that is taxed in Australia is also taxed in a foreign country (i.e. there is double tax), Australia has a foreign tax offset system which may reduce the tax payable in Australia. If there is a double tax treaty between Australia and the country that has also levied tax on the relevant income, the double tax treaty may provide some relief from double tax.

Losses that an Australian taxpayer derives from trading may be carried forward indefinitely. These carried forward losses of a taxpayer may be offset against future operating profits of that taxpayer, if that taxpayer can pass certain tests. The tests that apply vary depending on what entity the taxpayer is.

For example, companies need to pass one of the following tests:

• The continuity of ownership test – broadly this requires that the same individuals have a majority ultimate beneficial ownership interest in the company from the start of the year that the losses are first incurred, until the end of the year in which the losses are applied, or
• The business continuity test – this requires that a company be carrying on the “same”, or a “similar” type of business in the year that it is intending to recoup the losses as it did just before it failed the continuity of ownership test.

The test that a trust must pass to apply carried forward losses varies depending on the type of trust.

A fixed trust must pass the ‘50% stake test’ and the ‘income injection test’. A non-fixed trust must pass the ‘control test’ and the ‘patterns of distributions test’ in addition to the 50% stake test and the income injection test.

Employers are required to register with the ATO for PAYG Withholding. Employers will withhold and subsequently remit to the ATO a portion of the salary paid to employees. The tax collected by the employer is known as Pay as You Go (PAYG) withholding. An employer will be subject to penalties for failing to withhold and remit the appropriate level of PAYG tax, or for late payment of PAYG tax, to the ATO.

At the end of each financial year, an employer is required to provide their employees with a ‘PAYG Payment Summary’, which shows their gross salary, how much PAYG was withheld and other specific payroll related items.

Employers are also obligated to report employee salaries and wages, PAYG Withholding and superannuation contributions through Single Touch Payroll (STP). Employers are required to utilise STP-enabled payroll or accounting software which will automatically report this information to the ATO whenever payroll is run. STP is not required to be on a specific cycle and will follow the employer’s own pay cycle.

Employers are required to contribute a prescribed minimum level of superannuation support in each quarter for each of their employees. The minimum contribution is currently 9.5% of an employee’s ordinary times earnings (including commissions, bonuses and allowances). The minimum contribution will increase to 12% progressively over the coming years.

Employer must make the superannuation contributions within 28 days of the end of each quarter and notify their employees within 30 days of their contributions being made.

If an employer sends an Australian employee to work overseas temporarily, the employer must continue to pay super contributions in Australia for them. The overseas country may also require an employer to pay super (or an amount equivalent to super). However, Australia has bilateral agreements with some countries which would exempt an employee from paying the super in that overseas country.

In the alternative, an employer may not need to pay superannuation contributions in respect of 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 superannuation guarantee charge (SGC) which is paid to the ATO and the superannuation payment becomes non-tax deductible.

Where an employer provides non-cash benefits to an employee, their family or other associates of that employee, FBT may need to be paid by the employer in respect of those benefits. Examples of fringe benefits include allowing an employee to use a car for private purposes, paying an employee’s gym membership and reimbursement of a private expense incurred by an employee, such as school fees.

Employers must self-assess the amount of FBT they have to pay and lodge a FBT return at the end of each FBT year (1 April to 31 March). When working out their FBT liability, employers will need to ‘gross up’ the taxable value of benefits provided to their employees.

For example, the FBT on a GST free expense paid on behalf of an employee (e.g. health insurance) of $1,000 would be $886 ($1,000 x 1/(1- 47%) x 47%). The reason for the gross up of the benefit is that the employee on the top marginal tax rate must earn $1,886 to have net income of $1,000 after income tax of $886 ($1,886 x 47%) to pay for the benefit if it came 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 you should ensure that you are aware of the full cost of the package, including FBT, to the employer.

There are limited opportunities to package expatriate employee’s remuneration, including some concessionally taxed benefits, to minimise FBT and income tax.

An employer may also be required to pay payroll tax in respect of payments to their employees.

Salary and wages, bonuses, some allowances, the taxable value of fringe benefits and superannuation contributions are all ‘taxable wages’ for payroll tax purposes. Payments to independent contractors are also subject to payroll tax unless an exemption applies.

The payroll tax rates and thresholds differ depending on the laws in each state and territory. The payroll tax for each state is on average 5% of the taxable wages exceeding the annual threshold. The thresholds vary from state to state, with the lowest being $650,000 in Victoria and the highest being $2,000,000 in ACT.

Each state and territory has grouping rules, which operate to group ‘connected’ entities so that they are not able to access multiple payroll tax thresholds across the states and territories.

Employers are required to carry workers’ compensation insurance for its employees in respect to work-related injuries. Once a business employs staff in Australia, workers’ compensation insurance must be taken out in each state/territory the company has employees. The cost of this insurance will range from 1% to 10% of payroll costs, depending on the nature of the business.

An expatriate travelling to Australia for business purposes must obtain appropriate employment authorisation (Temporary Skill Shortage (TSS) Visa subclass 482).

In March 2018, the TSS Visa replaced the 457 visa and introduced new requirements including tightened English language requirements and a requirement for applicants to have at least two years’ experience in their skilled occupation.

Companies operating in Australia, or those in other countries wishing to establish operations in Australia, can sponsor individuals on the TSS Visa. Employers who are already approved standard business sponsors for the 457 Visa can sponsor skilled overseas workers under the TSS Visa by lodging a renewal form prior to the expiry of their existing sponsorship.

The TSS Visa allows an expatriate to work in Australia for:

• Two to four years (under the Short-term stream), and
• Up to four years with the possibility of applying for permanent residency (under the Medium-term stream).

There is an additional stream called the ‘Labour Agreement’ stream, which applies where the employer has a labour agreement with the Australian government and allows an expatriate to work in Australia for up to four years.

Obtaining temporary work authorisation under the TSS Visa involves a three-step process:

• A sponsorship application by the employer
• A nomination application for a skilled position by the employer, and
• A visa application by the proposed employee.

Nominations:

• Are restricted to a list of occupations that is significantly smaller than the list of occupations approved under the previous 457 Visa
• Extend to activities in regional areas including occupations relating to farming and agriculture, and
• Must meet salary and employment condition related requirements.

The necessary applications are lodged and processed in Australia with the Department of Home Affairs. Prior to lodgement, it will be necessary to gather all the relevant documentation relating to the application. The usual time to assemble the documentation is approximately three to four weeks.

Once the application is lodged with the Department of Home Affairs, the processing time frame can be up to eight weeks (however processing times may vary depending on the stream). Complete nomination applications are likely to be processed more quickly. Incomplete applications might be delayed or refused after two days if there is insufficient information provided to demonstrate that requirements are met.

This application process is normally undertaken in conjunction with a visa/migration specialist advisor.

A visa holder cannot change conditions of employment without prior approval from the Department of Immigration.

Australia’s industrial and workplace relations laws have undergone significant change in recent times through government initiatives designed to make the labour market more flexible and efficient. In establishing a presence in Australia, care should be taken to ensure that any terms of employment are in accordance with the relevant Australian legislation.

We recommend that employment contracts be reviewed by a specialist employment lawyer to ensure compliance with the Australian legal requirements.

Income tax

For Australian tax purposes, individuals living and working in Australia will be categorised as either ‘resident’, or ‘non-resident’. The imposition of tax on an individual will differ depending on their tax residency status.

The most fundamental distinction is that a resident will be subject to Australian income tax on their worldwide income (including capital gains), whilst a non-resident is subject to Australian income tax on Australian sourced income only. Further, resident individuals will be entitled to the tax-free threshold, however they will also be liable to pay the Medicare levy of 2%.

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, they will be taxed in Australia on their Australian sourced income and all remuneration (regardless of source) for employment services rendered whilst they are a temporary resident.

Individuals should review their personal investments and other income sources and assets prior to becoming a resident (or ceasing to be a resident) of Australia. This will help them to determine the potential tax exposure of a change in tax residency and establish whether there are any planning opportunities.

Work permits and visas

An expatriate travelling to Australia for business purposes must obtain appropriate employment authorisation (TSS Visa). The process for obtaining this type of visa is outlined above.

Expatriates moving overseas should also consider whether they need to obtain a similar work permit or visa to enable them to work in the foreign country of their choice.

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 the United Kingdom, New Zealand, Italy, Netherlands, Malta, Sweden, Ireland, Belgium, Slovenia, Norway and Finland. Residents of these countries are entitled to limited access to Medicare, but only in emergency situations.

It is therefore necessary for expatriates on temporary 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. Sometimes this is a requiremnet of obtaining the visa.

There are various private health funds operating throughout Australia which provide such insurance.

Medicare levy surcharge (MLS)

Resident individuals are liable to pay a Medicare levy based on the amount of their taxable income for the income year. The Medicare levy rate for the 2019/20 year is 2% of taxable income.

Individual taxpayers on higher incomes, who do not have adequate private patient hospital insurance for themselves and their dependants, may be liable for an additional Medicare levy surcharge of 1%, 1.25% or 1.5%, depending on their income level. For instance, individuals who earn more than $90,000 in the 2019 income year and do not have private health insurance are potentially liable for the MLS. Higher thresholds apply where dependants are involved.

If an individual cancels their private health insurance when moving overseas, they may still be liable for the MLS if they remain an Australian resident and their income exceeds the relevant threshold. In these circumstances, the individual should contact their health fund to determine whether any saving in premiums from cancelling or suspending health cover would outweigh the potential MLS payable.

Superannuation

When an expatriate moves overseas, their superannuation in Australia will remain subject to the same rules even if they are leaving Australia permanently. This means they will not be able to access their superannuation until they reach their preservation age and retire or satisfy another condition of release.

If an expatriate is planning on moving permanently or indefinitely to New Zealand, they may be able to transfer their super to a New Zealand KiwiSaver scheme from a participating Australian super fund.

An individual moving to another country may be able to secure the release of their superannuation but a tax liability will arise.

The R&DTI is available to Australian companies conducting experimental research and development activities that may benefit the wider Australian economy. To qualify, the company must be conducting at least one “core R&D activity” during the 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 of less than AUD $20 million, the incentive is in the form of a 43.5% refundable tax offset. For all other companies, the tax offset is 38.5% and non-refundable.

The R&DTI is jointly administered by the ATO and AusIndustry. Claimants self-assess their eligibility and are required to keep detailed records of their R&D activities conducted during the year.

There are additional measures for Australian subsidiaries conducting R&D activities on behalf of a foreign parent company.

The AC Grant provides Australian businesses with up to AUD $1 million of matched funding to take a novel product, process or service to market. To qualify, companies must:

• Have a novel product, process or service they wish to commercialise
• Be seeking to trade in an Australian state or territory other than the one the business is situated
• Be undertaking an eligible project, as defined by the Australian Government
• Own or have access to the beneficial use of any IP required for the project, and
• Not appear on the Workplace Gender Equality Agency list of non-complying organisations.

Unlike the R&D Tax Incentive, this is a competitive grant with a limited number of applicants approved each year.

Most States provide incentives for businesses to employ new workers. Depending on the size of the business, the incentive could be a cash rebate or a reduction of the business’ overall payroll tax liability.

The Export Market Development Grants (EMDG) scheme encourages export-ready Australian businesses to increase international marketing and promotion expenditure by reimbursing up to 50% of eligible expenses such as marketing consultants, trade fairs, advertising and marketing visits.

Depending on the business’ size, location and industry, there are numerous other Federal and State Government grants and incentives that may be available.