Invariably, when a foreign business is considering setting up business in Australia, the question arises as to whether it is best to conduct the Australian business as a foreign branch or via an Australian subsidiary company. The answer to that question depends on a range of factors, including the tax implications of each structure and the commercial issues involved. This fact sheet highlights some of the issues involved.
Branch verses subsidiary
- The branch may not be taxable in Australia, depending on whether it constitutes a “permanent establishment” in Australia. In contrast, an Australian incorporated subsidiary company is taxed in Australia on its taxable income.
- It may be disadvantageous, in terms of profit repatriation, if an unfranked dividend from the Australian subsidiary were to be paid to its parent. This is because withholding tax (at a general rate of 30%, but typically reduced to 15% under Australia’s double tax agreements) may be payable. In contrast, a branch may not have to pay withholding tax.
- Losses are trapped in a subsidiary company whereas with a branch they may be utilised in the “home” country.
- A capital gains tax (CGT) exemption may apply upon the ultimate disposal of shares in the Australian subsidiary whereas a sale of branch assets will generally be subject to CGT.
The process for establishing an Australian subsidiary
- We will need the following information in order to incorporate an Australian private company:
- Proposed name of company
- Name of shareholder(s)
- Amount by which the company is to be capitalised (note there is no minimum capitalisation amount. As a result, it is common for companies to be initially capitalised with a nominal amount, such as $2 or $10). Note however that Australia has a 3:1 debt/equity “thin capitalisation” rule. Debt deductions (e.g. interest) can be limited if that ratio is exceeded.
- Full name of director(s). Although it is possible for a private company to have only one director, larger companies tend to have at least two directors. Note: the company must have at least one Australian resident director. That means that at least one director must essentially be living in Australia and have an address here.
- Date, place of birth and address of each director.
- Address of usual place of business in Australia
- Address of registered office. Note this is either the place of business, or alternatively, the address of your lawyers or accountants. Our office can be designated as the registered office, should you wish.
Once the above information has been received by us, we are able to incorporate the company in 24-48 hours. The cost of incorporation is approximately $750, which represents the Australian Securities and Investments Commission’s (ASIC) fees.
- Post incorporation, an Australian Business Number (ABN) and Tax File Number (TFN) will need to be obtained in order to trade in Australia. We can assist you with this, should you wish.
- The company will also need to register for GST and Pay As You Go Withholding in relation to payments to employees (PAYG). Again, we can assist with this, if you wish.
- If a trading name other than the name of the company is to be used, it will need to be registered.
Administrative requirements for operating an entity in Australia
- Lodgement of an annual income tax return
- Lodgement of an annual fringe benefits tax return (only if fringe benefits are being provided to employees)
- A Business Activity Statement (BAS) will need to be lodged either quarterly or monthly, depending on the size of the company’s turnover. The BAS shows the amount of GST remitted and estimated income tax payable for the period.
- Payroll tax may be payable in each State in which the business operates, depending on the amount of wages paid.
- A superannuation guarantee charge of 9 percent of wages is payable in relation to each employee.
- Workers compensation insurance will need to be taken out to protect your employees in the event of their injury or death. Note that the definition of “employee” is wide and generally captures contractors as well.
- An annual ASIC return is required to be lodged.
- An audit of the financial records of the company may be required and may need to be lodged with ASIC, unless an exemption applies.