Setting Up a Business in Australia. Companies types and taxation.

Australia is a great place for business. However, like in any other country, there are things you need to know about doing business onshore.

This article outlines Australia’s Business Structures and their respective Tax Obligations. You can read the ‘How to Set up a Business in Australia’ full article here. You can download the complete BridgePoint Doing Business in Australia Guide here.

In this article:

• Companies Types
• Types of Entities and Tax Obligations
• Thin Capitalisation Rules
• Transfer Pricing Rules
• Doing Business in Australia with BridgePoint Group

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Business in Australia may be conducted by a person as a sole trader (individual), a company, a joint venture, a partnership, a trustee of a trust, a registered foreign company, or an Australian subsidiary of a foreign company.

A foreign investor may choose any of these options.

Different business structures have different legal features, responsibilities, and tax consequences. Therefore, a foreign investor who wants to establish a business structure in Australia will have to think carefully about which structure suits their goals and needs. This section gives a general overview of these business structures and explains their main tax obligations.

Company Types

In Australia, the predominant form of business organisation is a company limited by shares. These can be classified into two types: proprietary or public. A business can choose to register as either a proprietary or a public company depending on its needs and goals.

Proprietary Limited Company (Pty Ltd)

• Ownership: Can have a maximum of 50 non-employee shareholders.
• Shares: Shares are not publicly offered and cannot be traded on a stock exchange.
• Liability: Shareholders have limited liability
• Reporting Requirements: Large proprietary companies must lodge audited financial reports with the Australian Securities and Investments Commission (ASIC). Small proprietary companies may not be required to lodge audited financial reports.
• Suitability: Suitable for small to medium-sized businesses that want the benefits of limited liability without the complexities of public company regulation.

Public Company (Limited)

• Ownership: Can have an unlimited number of shareholders, including the public.
• Shares: Shares can be offered to the public and traded on a stock exchange.
• Liability: Shareholders have limited liability
• Reporting Requirements: Public companies must lodge audited financial reports with ASIC and comply with stricter corporate governance requirements.
• Suitability: Suitable for large businesses that want to raise capital through public share offerings and have the potential for growth and expansion. Public companies are subject to greater regulatory scrutiny than proprietary companies

Types of entities and tax obligations

Sole Trader

A foreign person who operates a business in Australia as a sole trader has personal liability for all the debts and obligations of the business. A sole trader must register a business name if they want to use a name that is different from their own. This type of entity can have employees in their business, but they cannot be an employee of their own business. A sole trader is also responsible for paying super guarantee for their employees, which is a compulsory superannuation contribution. A sole trader does not have to pay super guarantee for themselves, but they can make voluntary super contributions to save for their retirement.

Tax Obligations

• Use their individual Tax File Number to lodge their tax return and report their business income and expenses in the section for business items (there is no separate tax returns for sole traders).
• Eligible for an Australian Business Number (ABN) and use it for all their business activities.
• Register for Goods and Services Tax (GST) if:
• annual GST turnover is $75,000 or more
• provide taxi, limousine or ride-sourcing services (regardless of their GST turnover)
• want to claim fuel tax credits
• Lodge business activity statements, for example if they are registered for GST, have employer obligations such as Pay As You Go withholding (PAYGW), or have PAYG instalments (PAYGI).
• Pay tax on all their income, including their business income, at their individual tax rate.
• Can choose to make, or may be required to make, PAYG instalments to prepay their income tax.
• Can claim a deduction for any personal super contributions they make after notifying their fund of their intention to claim a tax deduction

Partnership

A partnership is a business arrangement where two or more individuals or entities work together as partners with the intention of making profit. Partnerships can be created by agreements or by actions. They are regulated by State and Territory laws, not by Federal law, and usually have two to 20 members, with some exceptions. Partnerships do not have a separate legal identity. Like sole traders, partners are personally responsible for all the debts and obligations of the business, both individually and collectively. In some States, there is an option to set up a limited liability partnership to provide some protection to the partners.

Tax Obligations

• Have a TFN and use it to lodge an annual partnership return that shows its business income and expenses and how they are shared among the partners.
• Obtain an ABN and use it for all its business transactions.
• Register for GST if it either: makes $75,000 ($150,000 for not-for-profit organisations) or more in annual GST turnover; offers taxi, limousine or ride-sourcing services (regardless of GST turnover); wants to claim fuel tax credits.
• May need to lodge business activity statements, for example if it is registered for GST, has employer obligations such as PAYG withholding.
• It does not pay tax itself. Each partner reports their portion of the partnership income and gainsor losses in their own tax return and is responsible for any tax that may be due on that income.
• The amounts you withdraw from a partnership are not considered wages for tax purposes. This may mean that the partnership income you must pay tax on is different to the amount of your drawings.

Trust

A trust is a legal arrangement in which one person (the ‘trustee’) holds the assets for the benefit of others (the ‘beneficiaries’). A trustee can be an individual or a company. Often, businesses use unit trusts or discretionary trusts as part of their structure. A trust is not a separate legal entity, but a company may act as the trustee to (among other things), ringfence the risk of liability.

Tax Obligations

• Lodge its own tax return and pay superannuation liabilities.
• Obtain its own TFN.
• Obtain an ABN if it operates a business in Australia.
• Register for GST if it: has annual GST turnover of $75,000 ($150,000 for not-for-profit organisations) or more; offers taxi, limousine or ride-sourcing services (regardless of GST turnover); wishes to claim fuel tax credits.
• Lodge business activity statements, for example if it is registered for GST, has employer obligations such as PAYG withholding.
• Lodge an annual tax return.
• Pay superannuation for eligible employees.
• Trustee of the Trust may pay tax on any undistributed profits at the relevant tax rate.

Company

A company is an independent legal entity that has its own tax and superannuation responsibilities, is managed by its directors and is owned by its shareholders. A company’s income and assets are its own property, not that of the shareholders. A company can share profits with its shareholders through dividends and may be able to add ‘franking credits’ (also referred to as imputation credits) to those dividends. This enables shareholders to receive credit for the tax already paid by the company, thereby avoiding ‘double taxation’. While a company typically offers good levels of asset protection, in certain instances, its directors can be personally liable for their actions. All directors are legally obliged to confirm their identity and apply for a director identification number (DIN) before being appointed.

Tax Obligations

• Pay its own tax and superannuation liabilities.
• Obtain its own TFN.
• Get an ACN when registered under the Corporations Act 2001, it can also get an ABN if it operates a business in Australia.
• Register for GST if it: has annual GST turnover of $75,000 ($150,000 for not-for-profit organisations) or more; offers taxi, limousine or ride-sourcing services (regardless of GST turnover); wishes to claim fuel tax credits.
• Lodge business activity statements, for example if it is registered for GST, has employer obligations such as PAYG withholding, or has PAYG instalments.
• Lodge an annual company tax return.
• May be required to pay income tax by instalments through the PAYG instalments system.
• Pay tax at its relevant company tax rate.
• Pay super guarantee for any eligible workers (this includes any company directors).
• Issue distribution statements to any shareholders it pays a dividend to.

Entities subject to comparable Company taxation

Registered Foreign Company

A foreign company can operate in Australia without setting up an Australian business entity. However, the foreign company must register as a foreign company in Australia. This requires filling out and submitting the relevant registration forms to ASIC. Upon registration, an Australian Registered Body Number (ARBN) will be allocated to the foreign company.

The foreign company conducting business in Australia is commonly known as a branch office in Australia. The Branch of a registered foreign company is not a separate legal entity. The foreign company is responsible for any liabilities. Foreign companies must appoint a local agent, who can be personally liable for any penalties imposed on a foreign company.

Subsidiary

A foreign company can also operate in Australia by registering a new Australian company with ASIC. This also requires filling out and submitting the relevant registration forms to ASIC. Companies incorporated in Australia will be issued with an Australian Company Number (ACN). The new Australian company conducting business in Australia is a separate legal entity. The subsidiaries are wholly or partly owned by their foreign parent companies.

Joint Venture

Foreign investors can engage in joint ventures with Australian entities. They commonly involve multiple companies or individuals collaborating on a particular endeavour. These ventures are often specific to a project and can take the form of either an incorporated joint venture, where participants jointly establish a company, or an unincorporated arrangement.

Thin Capitalisation Rules

The Thin Capitalisation Rules aim to prevent multinational companies from artificially inflating their debt expenses to reduce their taxable income in Australia. These rules disallow debt deductions which exceed certain limits. The rules apply to outward investors and to foreign controlled Australian entities or foreign entities carrying on business or other income producing activities in Australia through a permanent establishment (inward investors). The thin capitalisation rules apply when debt deductions (interest and other debt costs) are at least $2 million on an associate level.

Under the existing rules, the Safe harbour test disallows debt deductions to the extent that borrowings exceed the safe harbour ratio (60% of the value of an entity’s net Australian assets or a debt-to-equity ratio of 1.5:1). Where borrowings exceed these safe harbour amounts, the following alternative tests are available:

• Arm’s length debt test: this test allows taxpayers to determine a notional level of debt that would be loaned to the Australian business on an arm’s length basis.
• Worldwide gearing test: taxpayers can gear their Australian business to similar levels to the global gearing level.
• A Bill has been introduced to Parliament with proposed amendments. The new regime applies to income years commencing on or after 1 July 2023 and contains three new tests to replace the current tests:
• Fixed ratio test: this is the default test which limits debt deductions to 30% of an entity’s earnings before interest, tax, depreciation and amortisation (EBITDA).
• Group ratio test: this is an earnings based test allowing an entity in a group to claim net debt deductions proportionate to the group’s debt divided by its earnings.
• Third party debt test: only allows debt deductions related to genuine third-party debts which fund Australian operations.
• Financial entities and Authorised Deposit-taking Institutions (ADIs) would continue to be subject to the existing rules (except for the arm’s length debt test).

Transfer Pricing Rules

The Australian Transfer Pricing Rules impose arm’s length terms and conditions on Australian companies, branches, partnerships and trusts undertaking cross border transactions with international related parties. The rules seek to ensure that the appropriate level of profit is reported and taxed in Australia and prevent arrangements which artificially shift profits between countries. Transfer pricing applies to transactions such as goods, services, royalties, licence fees, loans and capital transactions.

Taxpayers with related party transactions in excess of $2 million are required to disclose these transactions to the ATO in their tax return. Transfer pricing documentation should be in place to demonstrate that the transactions have been conducted on arm’s length terms. Significant Global Entity (SGEs), broadly global parent entities or a member of that global parent entity’s group with annual global income of A$1 billion or more, have additional lodgement obligations with the ATO.

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We offer a comprehensive solution. From corporate structuring and tax advice, employing and remunerating staff, local representation to maintaining systems of control and reporting. We help you to successfully navigate the regulatory and operational landscape. We are familiar with Standard Business Reporting (SBR); Significant Global Entities (SGEs); Country-by-Country Reporting (CbC); Transfer Pricing; Thin Capitalisation; Single Touch Payroll (STP) and Director Identification Numbers.

We provide advice in respect of the Corporations Act, Trade Practices Act, National Employment Standards, Fair Work Act, Trade Marks Act, Privacy Act and the various State and Federal acts relating to taxation including Income Tax, Capital Gains Tax, Payroll Tax, Land Tax, Goods and Services Tax (GST) and the requirements to withhold tax from payment of dividends, interest and royalties.
We regularly interact with the Australian Taxation Office (ATO), Australian Securities and Investment Commission (ASIC), the Foreign Investment Review Board (FIRB), the Australian Competition & Consumer Commission (ACCC) and various State Revenue Offices around the country.

What makes us different

One stop shop
We offer a comprehensive and holistic approach to supporting international companies – including Significant Global Entities (SGEs) – in their expansion efforts, ensuring a smooth entry into the Australian market whilst carefully navigating the complexities of local regulations and business practices.

Local Knowledge and Market Insights
Venturing into a new market abroad can entail considerable expenses, time, and risks. Our dedication to clients extends beyond offering accounting and regulatory services. We provide comprehensive support by offering market insights and local assessments, empowering you to make well-informed decisions.

Unique Method
We employ a team-based, cross-functional approach to ensure you get the full benefit of our collective capability.

Results-Driven
We partner with our clients with an owner’s mentality.

Commercial Acumen
We understand the drivers of your success and help you to tackle the things that make the difference.

Broad Capabilities
We have a diverse team of highly trained experts selected to support every stage of your business journey.

What to expect from us

• A highly experienced team that will tell you everything you need to know about doing business in Australia.
• Clarity about obligations when employing and paying people in Australia including PAYG withholding, reporting, payment, superannuation and workers’ compensation insurance.
• Corporate structuring advice and establishment.
• Taxation advice and registration including ABN, TFN, FBT, Payroll tax, PAYGW and GST.
• Opening a local bank account.
• Local knowledge and representation including directorship, ATO, ASIC and OSR agency.
• Advice regarding the Tax Act, Corporations Act, Trade Practices Act, Privacy Act.
• Selection of compliant accounting software.
• Preparation of management reporting packs.
• Ongoing advice and support including pro-active communication.

We assist overseas headquartered companies to achieve a smooth entry into the Australian market whilst carefully navigating the complexities of Australia’s legal, regulatory and commercial environment. Our services are built on the strong foundation of a deep understanding of the numbers, with accounting, finance and business strategy at the core.

If you would like assistance in setting a business in Australian, or to find out more about the benefits of doing business in Australia with BridgePoint Group, download the complete Doing Business In Australia Guide here or contact us directly.