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%.

CONCLUSION

The tax issues discussed above should be  considered in further detail in the context of the  relevant and intended investment opportunity.