This article provides a high level overview of some of the Australian tax considerations for inbound investors using companies as investment vehicles, in the context of Australian income tax and capital gains tax (CGT).
BRANCH OR AUSTRALIAN SUBSIDIARY
Where an overseas entity is looking to acquire an agricultural business or shares in an existing Australian company, there are effectively two options in terms of an investment vehicle, establishing either:
- an Australian resident company – which can be, and usually is, a subsidiary of the overseas entity, or
- a permanent establishment (PE) – which is an Australian branch of the overseas entity – though this can cause practical commercial difficulties as some suppliers may prefer to deal with an Australian entity.
The profits of an Australian branch or PE of a foreign company will be subject to Australian tax. Similarly, an Australian resident company is generally subject to Australian tax on its worldwide income, though appropriate structuring at the outset would mean that only Australian operations were carried out in the Australian subsidiary. The Australian company tax rate is 30% which applies equally to both Australian companies as well as branches for foreign companies.
Where a branch is used, there are no further taxes on repatriation of any profits ‘from’ the branch to the parent company. In the case of a subsidiary, profits are generally repatriated by way of dividend. While in some cases Australian withholding tax can apply to a dividend (the rate depending on a double tax treaty), there is no withholding tax payable where dividends are paid from profits on which Australian tax has been paid. In that case, under Australia’s dividend imputation system, company tax paid on profits can be used to ‘frank’ dividends.
ACQUISITION OF ASSETS OR AN EXISTING COMPANY
Australian agricultural businesses are generally acquired by one of two ways, an acquisition of the:
- assets of the business – generally the operating structure, together with the plant and equipment, or
- shares in the company carrying on the business.
The purchase of the business, by either means, can be funded by equity or debt, or a mixture of both. The Australian tax regime, under the thin capitalisation rules, does limit the amount of debt that an entity can use for investment purposes, bearing in mind that Australian tax deductions are available for interest payable on borrowings (which includes offshore borrowings – which may be used to fund the acquisition). Therefore, where investors propose to use both a mixture of debt and equity to fund the acquisition, the amount of debt should be within the thresholds under the thin capitalisation rules. To the extent the debt exceeds those thresholds, tax deductions for any interest payable will not be available and, accordingly, the Australian tax payable will not be reduced.
Where assets of an existing business are being acquired, there is generally duty payable. Duty is a State based tax and varies between the States and Territories of Australia. However, in most jurisdictions it applies to the sale of a business and, in all cases, it applies where there is a transfer of an interest in land (i.e. the underlying farming land).
For share acquisitions, duty is normally payable where there is an acquisition of a majority interest in a company with substantial Australian land (under the land holder duty provision). Under the land holder provision, duty applies to the underlying land interests and in some States other business assets, although it is often still less than the duty on an asset acquisition.
CGT ON EXIT
Australia has a capital gains tax (CGT) regime that operates to tax profits (‘gains’) made on the sale of most capital assets (CGT Assets). Non residents are subject to Australian CGT where they dispose of interests in real property as well as assets used in a business carried on by an Australian resident.
If the shares in the company are instead sold by a non resident shareholder, CGT applies if:
- the shareholder, together with any associate, holds more than a 10% interest, and
- the majority of the underlying assets of the company are Australian land interests.
Therefore, where the investment involves substantial Australian landholdings, CGT is likely to apply. For companies, whether resident or non resident, CGT applies at the same corporate tax rate, currently 30%.
The tax issues discussed above should be considered in further detail in the context of the relevant and intended investment opportunity.