Foreign Investment Review Board
Employer/Employee Relationships
Industrial Awards/Enterprise Bargaining
Import and Export Controls in Australia
Customs (Prohibited Import) Regulations
Physical and Documentary Controls
Customs (Prohibited Export) Regulations
Controls on foreigner’s working in Australia
This booklet has been prepared for the use of clients, partners and staff of HLB International Member firms. It is designed to provide general information to those contemplating doing business in Australia.
As Australia’s laws are complicated and vary between States, the booklet is not intended to be a comprehensive document. It is however current at the date of publication, and incorporates several announced, but not yet legislated, changes to the law. Readers should be aware that the announced changes may be modified as they pass through the legislative process. Therefore, in all circumstances, professional advice should be obtained before taking further action.
All reasonable care has been taken in the preparation of this booklet. However, neither HLB International nor any Mann Judd firm accepts responsibility for the consequences of any action based on information contained herein.
MANN JUDD
July 1997
HLB International is a worldwide organization of professional accounting firms, each providing clients with comprehensive and personal services relating to auditing, taxation, accounting and general financial and management advice.
Founded in 1969, HLB has member and correspondent firms in 98 countries and ranks as the 12th largest accounting and business advisory group worldwide, with an annual fee income in excess of US $750 million, generated by more than 1,200 partners and 9,000 staff in over 420 offices.
HLB members are well established national or local firms, capable of handling international assignments in all the main business centres, and experienced in coordinating activities between countries.
Up to date advice and general assistance on international matters can be obtained from any of the offices of Mann Judd listed at the end of this guide, or from the International Executive Office in London.
HLB International Executive Office
Spectrum House
20-26 Cursitor Street
LONDON EC4A 1HY
Telephone: +44 (0)20 7334 4783
Fax: +44 (0)20 7405 5548
|
Peter Frost |
Chief Executive |
pjf@hlbi.com |
|
Jacqueline Weber-Brown |
Personal Assistant to Chief Executive |
jwb@hlbi.com |
|
Kevin Chowdhay |
Finance & Professional Services |
kjc@hlbi.com |
|
Sandra Dalmeijer |
Communications |
sd@hlbi.com |
Australia is a relatively young nation established in an ancient land. It has a diversified economy characterized by large-scale resource development, highly productive agriculture, and a wide range of manufacturing, but is geographically isolated from its major trading partners.
Australia’s landmass of 7,682,300 square kilometres has extremes of climate and topography. There are rain forests and vast plains in the north (almost 40% of the country lies in the tropics), snowfields in the southeast, desert in the center, and fertile croplands in the east, south and southwest.
It is the sixth largest country in area and is the only nation which occupies an entire continent.
In one of the biggest migrations this century, people from more than 120 countries have settled in Australia since World War II.
At the time of the 1996 Census, Australia’s population was 17.3 million people. Despite the continued growth in population throughout the years since European settlement, the rate at which the growth has occurred has varied considerably. During the 1970’s, population growth slowed as both net migration and natural increase declined, with average annual growth rates falling from 1.9% at the end of the 1960’s to 1.2% between 1976 and 1981. Natural increase stabilized more recently, while net migration generally increased and average annual growth rates have increased slightly to 1.45%.
The population of Australia is concentrated in capital and other major cities, mainly on the south and east coasts of the continent. This results from a variety of factors including climate, physical characteristics of the continent, changing agricultural practices, exploitation of mineral resources and personal preference.
English is the official language but, as a result of considerable post-war immigration, many foreign languages are spoken by ethnic community groups. Approximately one in eight Australians speak a language other than English at home. Among these some 21% speak Italian and 14% speak Greek.
“Australian English” does not differ significantly from other forms of English, although some colloquial and slang expressions are unique to Australia.
Australia has a decimal system of currency, the unit being the dollar, which is divided into 100 cents. The dollar has been free floating since December 1983.
Australia’s political institutions and practices follow the Western democratic tradition, reflecting British and North American experience.
Australia is a Constitutional Monarchy, being a federation which, pursuant to a proclamation on September 17, 1900, has since January 1, 1901, consisted of a Federal Government (Commonwealth) and separate Governments of each of the six sovereign States: New South Wales (whose capital is Sydney), Victoria (Melbourne), Western Australia (Perth), Queensland (Brisbane), South Australia (Adelaide), and Tasmania (Hobart). There are two mainland Territories within federal jurisdiction, namely the Australian Capital Territory where the Federal Parliament is located in Canberra, and the Northern Territory with Darwin as its capital city. There are also several smaller Federal Territories offshore from Australia.
There are two houses of the Federal Parliament, the House of Representatives being the Lower House and the Senate being the Upper House. The Head of the Government is the Prime Minister. Each State Parliament, with the exception of Queensland, also has two houses: the lower house being the Legislative Assembly and the Upper House being the Legislative Council. The head of each State Government is the Premier. Both the ACT and the Northern Territory have one house only, and the head of each Territory Government is the Chief Minister.
Australia has a Federal Constitution and also one for each of the States. The Federal Constitution vests certain specific exclusive legislative powers in the Federal Government and confers numerous other non-exclusive powers on the Federal Government, which may be exercised by the States until Federal legislation overrides them. Other legislative powers not vested in the Federal Government may be exercised exclusively by the State Governments. Where Federal law conflicts with State law the former takes precedence.
Foreign investment, exchange control, immigration, banking, taxation, life assurance, customs and excise, the media and communications, trade practices, patents, trade marks, copyright, shipping and overseas trade are examples of areas of legislative power currently exercised by the Federal Government. Mining, stamp duties, land tenure, crime, motor vehicle registrations, partnerships and certain special types of taxation are examples of legislative powers currently exercised by State Governments.
In addition, there is a third layer of government, Local Municipal Government, which operates under State laws in defined areas through elected local Councils which are responsible for regulating such things as building construction, road construction and maintenance and other local infrastructure services.
Depending upon the type of investment proposed, an overseas investor in Australia would need to have regard to the laws and regulations of one or more of Federal, State, Territory or local Governments.
According to the 1991 Census, Christian Catholics form the largest religious group, representing 27.3% of the total population, followed by Anglicans, 23.9%. In 1991 the third largest group was the Uniting Church with 8.2%. In all, 12.4 million Australians refer to themselves as being of Christian denomination.
The State Governments administer their own systems of primary, secondary, technical, and further education through Government Departments responsible to State Ministers. In Queensland, Tasmania and the Northern Territory a single Education Department is responsible for these three levels of education. In New South Wales, Victoria, Western Australia and South Australia there is a separate body responsible for technical and further education.
The basic principles underlying the shaping and conduct of Australia’s foreign policy are that Australia is a significant middle-level power with democratic institutions; having strong historical affiliations with other Western countries; and is developing an Asia-Pacific identity through its increasing regional involvement.
Australia’s prosperity is largely dependent on trade; it is geographically remote from its founding nation and principal migration source countries and from some of its major markets and its traditional allies; it is a relatively affluent and resource rich country in a populous, developing and rapidly changing region.
Initially, Britain and the Commonwealth countries were a central element of Australia’s foreign policy and activity. Later, as a consequence of the pre-eminence of the United States in the west and the Pacific during and following World War II, close relations were developed with that country.
While these links, and links with Europe, remain important factors in Australian foreign policy in terms of cultural tradition, security, strategic interests and trade, the specific focus of policy has shifted substantially to the Asia-Pacific region.
Australia is located in a region which includes the politically, economically and strategically significant countries of East Asia, South Asia, the Indian Ocean and many newly independent nations of the South Pacific. Awareness of the importance of these neighbouring states has led successive Australian Governments to seek to promote and maintain friendly and co-operative relations with them, not only to ensure the stability and security of the region, but also to develop mutually profitable trade, investment, exchange of technology and co-operation in the development process.
Australia gives special attention to its relations with China, Japan, ASEAN (the Association of South East Asian Nations) and its members, New Zealand, Papua New Guinea and the other South Pacific states. Recently the APEC (Asia Pacific Economic Co-operation) Forum has also been seen as a way of increasing Australia’s trade with its Asian neighbours and has been actively developed by Australia’s politicians.
Investment in Australia should be made on a sound commercial basis as there are no tax holidays or special privileges given to foreign investors. However, it should be borne in mind that Australian death duties are virtually non-existent.
There are certain restrictions on the acquisition of developed urban real estate by non-residents:
(a) Non-residents are no longer permitted to acquire developed urban residential real estate except for foreign companies seeking accommodation for senior executives resident in Australia, and
(b) Non-residents are permitted to acquire developed urban, commercial or industrial real estate provided that Australian residents have at least a 50% interest therein.
For many years the Australian banking system was tightly regulated, but this has changed markedly over the last decade. There is now one Federal Bank and a number of State Banks, together with private banks. Since deregulation, many foreign banks have commenced operation in Australia. Sophisticated financial services are available from both traditional banking sectors and from the many merchant banks and finance companies now operating in Australia.
A major review into Australia's financial system was completed in 1997. The recommendations of the Wallis Committee of Inquiry are still being considered by the finance industry, the Government, relevant regulatory authorities and the market place generally. The likely changes will be fundamental, although perhaps evolutionary rather than revolutionary. The objective is to make Australia's capital markets and financial sector more efficient and competitive, both domestically and internationally.
The Financial Transaction Reports Act 1988 requires that any cash transaction of $5,000 or more involving the flow of funds to or from Australia be reported by cash dealers to AUSTRAC (the Australian Transaction Reports and Analysis Centre). Similarly, any cash transaction of $10,000 or more within Australia must also be reported. There are exemptions available for certain transactions and certain businesses.
The Foreign Investment Review Board (“the Board”) is an advisory body which assists the Treasurer (i.e. Senior Federal Government Finance Minister) in the administration of foreign investment policy. The Chairman and Members of the Board have a wide range of business and other experience, and provide the Government with a business-oriented and independent source of advice on foreign investment matters.
The main functions of the Board are:
· to advise the Government on foreign investment matters generally;
· to examine proposals by foreign interests for investment in Australia and to make recommendations to the Government on those proposals;
· to foster an awareness and understanding of the Government’s policy in the community at large and in the business sector, both in Australia and abroad;
· to provide guidance, where necessary, to foreign investors on those aspects of their proposals that may not be in conformity with Government policy and suggest ways by which the proposals might be amended; and
· to maintain an awareness of the activities of foreign-controlled businesses operating in Australia.
Certain types of proposals by foreign interests to invest in Australia are subject to examination under foreign investment policy and the Foreign Acquisitions and Takeovers Act (1975).
For the purposes of foreign investment policy, a foreign interest is:
· a natural person not ordinarily resident in Australia;
· a foreign-controlled corporation or business; or
· any corporation or business in which there is a substantial foreign interest regardless of whether the corporation or business is foreign-controlled. (A substantial foreign interest is defined as an interest of 15% or more in the ownership or voting power of a corporation or business by a single foreign interest either alone or together with associates; or, an interest of 40% or more in aggregate in the ownership or voting power of a corporation or business by foreign interests and their associates, if any.)
(a) Proposals falling within the scope of the Foreign Acquisition and Takeovers Act (1975).
These include:
· An acquisition or issue of shares (including an option to acquire shares) which would result in, increase, or alter the foreign ownership of a substantial interest in a corporation that carries on an Australian business (subject to the corporation having total assets valued at greater than $5,000,000 or if more than 50% of the assets of the company are in rural land greater than $3,000,000);
· An acquisition of, including an option to acquire, an Australian business by the purchase of assets (subject to the corporation having total assets valued at greater than $5,000,000 or if more than 50% of the assets of the company are in rural land greater than $3,000,000);
· An agreement or an alteration of the memorandum or articles of association or other constituent documents of an Australian corporation which would give a foreign person holding a substantial interest in the corporation rights to representation on the corporation’s board; and
· An arrangement or a termination of an arrangement relating:
- to the leasing or the granting of other rights to use the assets of an Australian business; or
- to participation in the management or profits of an Australian business.
(b) Investment proposals not coming under the Foreign Acquisitions and Takeovers Act (1975) but falling within the following categories:
· portfolio investments in the media of 5% or more, and all non-portfolio investments irrespective of size;
· proposals to establish new businesses in other sectors of the economy where the total amount of the investment is $10 million or more. (Total investment means the total expenditure expected to be associated with the proposal, including the value of any assets leased);
· direct investments by Foreign Governments or their agencies regardless of size;
· takeovers of offshore companies whose Australian subsidiaries or assets are valued at $20 million or more, or account for more than 50% of the target company’s global assets;
· acquisitions of interests in urban land (including interests that arise via leases, financing and profit sharing arrangements, and the acquisition of interests in urban land corporations and trusts) that involve the:
–acquisition of developed non-residential commercial real estate valued at $5 million or more;
–acquisitions of accommodation facilities irrespective of value;
–acquisitions of vacant urban real estate irrespective of value; and
–acquisitions of residential real estate irrespective of value.
In general in Australia, if a relationship between a purchaser of labour and provider of labour is classified as one between an employer and an employee, it is subject to heavy statutory regulation. On the other hand, if the provider of labour is classified as a non-employee independent contractor, then subject to certain exceptions where statutes require particular groups of independent contractors to be treated as employees for particular purposes, contracting parties have a considerable degree of freedom in regulating their relationship.
In determining whether a person is an employee rather than an independent contractor, the courts examine the relationship as a whole, looking toward factors such as the degree of control which is exercised over that person’s work, and the extent to which he or she is integrated into the business structure of the person to whom he or she provides labour.
It is not possible to contractually deem a person who is clearly an employee to be an independent contractor, but nevertheless in borderline situations appropriate contractual drafting may determine to which classification a particular person is allocated.
The large majority of employees in Australia are subject to the provisions of State or Federal Industrial Awards or Agreements negotiated by the parties. There are some groups of managerial and professional employees who lie outside award coverage. Australian Industrial Awards are mainly concerned with wages and fringe benefits, hours of work, and leave provisions. They are negotiated between employees and labour unions, and often contain provisions for employers to give preference in employment to members of the appropriate union.
In the absence of agreement between unions and employers, awards are set by State and Federal industrial commissions and tribunals. The Australian Industrial Relations Commission (AIRC) seeks to resolve industrial disputes by compromise and, in essence, takes a pragmatic rather than a legalistic view of matters before it, seeing as its principal task the achievement of industrial harmony rather than implementing any particular rules or policies. However, this traditional piecemeal approach to industrial disputation became complicated with importance being attached to the National Wage Case, whereby general Australia-wide wage levels were set having regard to the capacity of the national economy to pay.
In recent times there has been a move away from the importance of the AIRC and a general trend towards enterprise bargaining and employment contracts as a way to achieve labour market reform and increase labour efficiency and productivity. This trend has accelerated with fundamental changes introduced into Federal industrial relations law late in 1996. The extent of these reforms differ from industry to industry and state to state but are generally perceived as a necessary element for wealth creation in Australia.
Apart from the requirements in awards for union preference, and equal opportunity legislation preventing discrimination on the grounds of sex or race, (in some States only) sexual orientation, and physical and mental disabilities, an employer’s right to hire labour as he sees fit is essentially unrestricted. However, an employer does not have a totally free hand with regard to dismissal of workers.
There are strong provisions preventing the dismissal of workers for union activities and legislative provisions to the effect that if a worker can show that his dismissal was harsh and unreasonable (even though it may not have been in breach of contract) he can seek damages or reinstatement. The availability and extent of these remedies vary from State to State. However, generally, if an employer can show that there were bona fide commercial reasons for the dismissal and that it was carried out in a fair manner, (e.g. a worker whose performance was regarded as inadequate is given a warning to improve or be fired), such an application for damages or reinstatement will fail. Problems in this area can usually be avoided if appropriate standardized dismissal procedures are set up and adhered to by management.
The importation of goods into Australia is controlled primarily by regulations made under the Federal Customs Act and tariffs applicable under the Customs Tariff Act which are administered by the Australian Customs Service (ACS). The purposes of these regulations are, in essence, to protect Australian industry and consumers and to raise revenue.
Goods may be prohibited from importation either absolutely or by reference to their place of origin or, unless certain specified conditions or restrictions are complied with. The regulations also prohibit the importation of certain goods without a licence or governmental approval.
The Federal Customs (Prohibited Import) Regulations specify goods:
· the importation of which is absolutely prohibited, such as goods in connection with which there is a false suggestion of a warranty or guarantee or there is a concern as to the production methods or quality, imitation or counterfeit bank notes, certain flammable substances, counterfeit coins and pre-packed goods where the packaging does not meet Australian packaging requirements as to statements of weights, measurements and descriptions;
· which cannot be imported without ministerial consent such as ammunition, coffee, dangerous confectionery, fireworks, daggers, pistols and firearms;
· which cannot be imported without complying with specified conditions, such as cigarettes without a health warning, radioactive material without the permission of the Minister for Primary Industry, and certain blasphemous, indecent or obscene films and books without the permission of the Attorney General.
These regulations also prohibit the importation of a large number of drugs without a licence from the Department of Health.
The importation of some goods is also prohibited unless a licence number under the federal Customs (Import Licensing) Regulations is obtained. Licenses will be required for the import of used earth-moving and excavation equipment, footwear, razor blades and motor vehicles. A licence may be granted subject to conditions, including a specification as to the time within which the goods may be imported. The licensing requirements create considerable difficulties for importers who are at risk if they enter into a contract to purchase goods overseas without a licence and fail to gain one, but in order to gain a licence must first have a contractual arrangement in place.
The Federal Commerce (Trade Descriptions) Act imposes an absolute prohibition on the import (or export) of goods having a false trade description and prohibits the importation (or export) of goods unless a trade description is applied. A trade description means any description or indication in relation to such features of the goods as the nature, quantity, quality, size, place of origin, manufacturer, method of manufacturing or composition and as to the existence of any patent, copyright of trademark.
A tariff quota system operates in Australia. The quota system applies by the imposition of a prohibitively high rate of duty for certain imports, in conjunction with concessional provisions for goods which fill the quota of imports available. A tender system for allocation of quotas is operated under the Customs Act.
Ships and aircraft cannot enter any port or airport which is not appropriately appointed under the Customs Act, and must give notice prior to arrival. Bulk cargo cannot be broken without the permission of the ACS. On report, the ship and its cargo are subject to the control of the ACS and the goods are to be held until payment of customs duty and customs clearance.
The importer will be required to present an ‘entry’ to the ACS in relation to his goods and produce an invoice. In some cases security for payment of customs duties may be required. The owner of goods may authorize a customs agent, to act as his agent but the owner remains responsible for the acts of the agent. Customs agents are required to hold a licence under the Customs Act.
The ACS follows the GATT Code approach in policing anti-dumping complaints under the Customs Tariff (Anti-Dumping) Act.
General duties of customs are imposed under the Federal Customs Tariff Act, 1987 on all goods imported into Australia. The rates of duty are set out in that Act and are generally imposed on an ‘ad-valorem’ basis. In general, all imported goods are liable to duty unless specifically exempted by the legislation.
The Customs Tariff Act provides for certain preferences to be granted. The beneficiaries of these preferences are goods produced or manufactured in the Forum Island Countries (the Pacific Islands including Fiji, Nauru, Tonga, Vanuatu and Western Samoa), developing countries and other places which are treated as developing countries. In addition, special rates of duty apply to goods produced or manufactured in New Zealand or Canada.
The Customs Tariff Act also sets out a number of items which may be admitted free of duty or for which concessional admission is allowed. These include the usual diplomatic, armed forces and charitable concessions.
As Australia is primarily an exporting nation there are comparatively few restrictions on the export of goods.
The Federal Customs (Prohibited Export) Regulations set out several categories of goods the export of which is either prohibited absolutely or subject to obtaining Government approval. There are very few goods, the export of which are absolutely prohibited. The export of archaeological and anthropological materials, certain historical records, ships and human biological material requires the consent of the Minister for Trade.
Many drugs cannot be exported from Australia unless the exporter holds a licence to do so and also has specific permission from the Department of Health. There are also restrictions on the destination of some exported drugs.
Australia has established a Business Skills Migration program which offers resident status to applicants who will use their skills and capital to actively engage in business of benefit to Australia.
Persons who have successful business records as either an owner or part-owner of a successful business (or in some cases senior executives employed in a major business) may apply.
To qualify under the Business Skills category a number of criteria are applied such as business attributes (recent history and skills), age, English language skills and net assets legally available for transfer to Australia.
In Australia there are five principal types of business organizations. In addition to these, a foreign corporation may incorporate a local subsidiary or register the foreign corporation, and operate a branch office. The type of business organization chosen is an important decision as each has advantages and disadvantages regarding liability, tax treatment, reporting, documentation and legal requirements.
A sole trader is an individual who carries on business on his or her own behalf. The individual may carry on business under his or her own name or adopt a business name which must be registered under uniform Federal and State legislation in the places where the individual carries on business. A register of business names is integrated with a register of company names to avoid similar names.
The principal advantages of sole proprietorship are that it is comparatively easy to wind up or sell such a business; the costs of establishing and operating the business are generally less than those of other structures; apart from an individual tax return, there are generally no other reporting or disclosure requirements. On the death of the sole proprietor, the business will cease, although it may be sold by the deceased’s personal representatives. The major disadvantage is that a sole proprietor has unlimited personal liability for his or her business obligations and debts. There may also be income tax disadvantages in operating this way. For example, there is at present a significant difference between the highest rate applicable to an individual's taxable income and that applicable to a company.
A partnership arises where two or more individuals or companies agree to carry on business together or in common with a view to deriving profit jointly. A partnership is not a separate legal entity and the liability of the partners for the obligations of the partnership is joint and unlimited. The rights of the partners, as between themselves, are largely determined by the terms of the partnership agreement. What is not covered in that agreement is regulated by legislation in each State and Territory and at common law.
Partnerships (other than certain professional partnerships) are generally limited in size to 20 partners, with partners able to be corporations and non-Australian residents. The interest of a partner is not freely transferable in that the consent of the other partners is necessary before a partnership interest can be transferred. However, a partner’s right to a share of the partnership income may be received on trust for another person. Generally, a partnership name must be registered under the business names legislation in the places where the partnership carries on business.
The principal advantages of partnerships are that the arrangements need not be committed to writing, though, for taxation reasons and to avoid future disputes it is prudent to have the full terms of the partnership clearly set out; the degree of control among the partners can be agreed upon and management may be vested in a particular.
Partners or a committee of partners; partnership losses can be offset against other income of individual partners for income tax purposes; partnership accounts need not be published; the partnership agreement is a flexible document which may be tailored to meet specific needs. For example, there may be differential profit sharing, unequal contribution of assets and labour, and individual ownership of assets used for producing partnership income.
For taxation purposes, partnership accounts must be prepared on the basis that the partnership is a single independent entity. The net income is then credited to the partners in their appropriate proportions and is taxed in their hands as part of their personal income. Conversely, losses are charged to individual partners and are deductible against any other income of those partners. Thus the partners must adopt and be bound by a uniform treatment of partnership expenses and revenue for tax purposes. Although a partnership does not itself pay tax, its taxable income is calculated as if a partnership were a taxpayer in its own right and certain deductions normally available to individuals and companies may not be available to the partners. In a successful and expanding business the partners may find that business development is being retarded by the need to set aside funds to meet individual tax liabilities.
The creation and management of limited partnerships is governed by State statutes, and a number of the statutory requirements are onerous and require strict compliance if the advantages of limited partnership are to be obtained. Recent amendments to the Income Tax Assessment Act, 1936 now mean that limited partnerships established after August 18, 1992 will be treated as companies for taxation purposes, therefore, the benefit of losses being directly deductible to partners will be lost.
An unincorporated joint venture may often be appropriate for property development or in the mining, oil and gas, or other natural resources sectors, where pre-production costs are likely to be high. The parties to a joint venture usually enter into a detailed agreement which specifies their respective rights and obligations. This agreement may be similar to a partnership agreement and the distinction between the two may easily become blurred where the participants are not entitled to take their profit in kind or the fruits of the venture are measured in money only.
A joint venture differs from a partnership and is not required to lodge a separate tax return. Each venturer may immediately incorporate its share of the costs of the venture into its general income-producing expenses for tax purposes. Furthermore, each venturer is free to treat its share of the cost of the venture independently of the other venturers, thus offering greater tax and accounting flexibility than a partnership.
Where a trust is established to carry on a business, the trustee both holds the assets of the business and runs the business for the benefit of the trust’s beneficiaries. The trustee may be a company, thus attracting limited liability and having perpetual succession.
The operation of the trust is regulated by a deed, and the flexibility of available trust structures means that any particular deed can be drawn to suit most applications and requirements. A trust may be private or public, and the latter may be listed on a stock exchange on which the beneficiaries’ interests are quoted. The beneficiaries’ entitlements may be in a fixed proportion or variable at the discretion of the trustee.
A unit trust structure may be adopted where a beneficiary’s entitlement to the income of the trust is dependent upon the number of units the beneficiary holds. Units are similar to shares in a company in a number of respects, although there are fundamental legal differences between the two.
Where family businesses are concerned the discretionary trust has become a popular vehicle for investment. A typical family trust gives the person establishing the trust and the trustee wide discretionary powers in relation to the distribution of income and capital among the beneficiaries; includes a provision giving the person establishing the trust power to remove and replace any trustee; gives to the trustee wide powers to acquire or dispose of property, carry on business, borrow money and offer security for such borrowing.
Unit trusts are commonly used as a vehicle for non-family businesses, for example where there are a number of separate families, individuals or companies involved. The beneficial ownership of the trust property is divided into a number of fixed units which may be further divided into income and capital units. The operation of unit trusts is governed by the same principles as other trusts. In unit trusts there is normally no discretion to distribute the beneficial interest in capital or income among unit holders.
The character of each unit trust will be determined by the provisions of the relevant unit trust deed. Generally, units in a unit trust are negotiable. Often this type of trust will be under the control of more than one person, thereby increasing the risk of management disputes.
The principal advantages of a trust structure are that trusts are relatively easy to form and are not subject to government controls on their formation or operation (except where a company acts as trustee, in which event the requirements of the Corporations Law must be fulfilled); there may be significant taxation benefits in the use of a trust; superannuation benefits may be more easily arranged where a business is run by a trust rather than in the case of a partnership or sole trader; a discretionary trust has considerable flexibility in terms of income distribution; in most cases, the key figure can maintain a significant degree of control.
Generally, a trustee is personally liable for his actions as trustee with a right of indemnity against the trust assets, provided he acts within the scope of his authority. The courts are becoming increasingly concerned about this state of affairs and beneficiaries of trusts have been held personally liable for trust debts in particular circumstances.
The principal disadvantages of a trust structure are that there are a number of formalities required to maintain a trust, namely, there must be strict adherence to the terms of the trust deed and in relation to any trustee company there must be adherence to the provisions of its constituent documents and the Corporations Law; there is legislation relating to the powers and duties of trustees to be adhered to; the courts have developed a complex set of rules relating to trusts; a trust structure will not enable individual participants to offset trust losses incurred in a year of income against assessable income derived from other sources.
A company is a legal entity and should be formed and operated in accordance with the “Corporations Law”. The Corporations Law is a nationally uniform body of law adopted by each state and territory under a co-operative Australia-wide scheme. The law governs the incorporation and management of companies and is administered by the Australian Securities Commission (ASC).
There are two main types of company, both of which are limited by shares: those having from 1 to 50 members and which restrict the right of shareholders to transfer their shares (proprietary companies), and public companies. Public companies must have at least 5 shareholders.
Proprietary companies fall into two categories: large proprietary companies and small proprietary companies.
Proprietary companies must use the suffix “Pty Limited” or “Proprietary Limited” in their names, whereas public companies must use the suffix “Limited” in their names. In each case “Limited” may be shortened to “Ltd”.
There are also unlimited companies, companies limited by guarantee and no liability companies. No liability companies must have at least 5 members and do not have a contractual right to recover from defaulting shareholders calls made on shares. However, such shares may be forfeited. These companies must use the suffix “No Liability” or “N.L.” in their names and are generally used for mining or exploration purposes.
Only shares in public companies and no liability companies may be listed on The Australian Stock Exchange (ASX).
Overseas companies may establish branches in Australia and become recognized "foreign companies" enabling them to carry on business in Australia.
All directors and secretaries must be natural persons. Public companies must have a minimum of 3 directors at least two of whom must ordinarily reside in Australia. Proprietary companies must have at least one director, at least one of whom must ordinarily reside in Australia. All companies must have at least one secretary, who must ordinarily reside in Australia.
Alternate directors may be appointed, and directors meetings may be held anywhere in the world. Usually a resolution signed by all of the directors may be used to obviate the necessity to hold a directors’ meeting.
All companies must lodge an Annual Return with the ASC. All public companies must have their annual financial accounts audited. All large proprietary companies must also produce audited annual financial accounts unless they qualify for exemptions under Class Order 96/1850. Small proprietary companies are not required to produce annual financial statements and reports or to be audited, unless requested by 5% of members, the ASC, creditors, or the Australian Taxation Office (ATO). Small proprietary companies may also be required to produce accounts to be audited under certain circumstances when they are controlled by an overseas parent entity and that parent entity decides not to lodge their audited accounts in Australia.
A company can be acquired for a cost of about $700 and the annual fees payable to the ASC are $195 per year.
The standard year-end for companies is June 30, although this can be altered with relevant permissions.
There are numerous advantages to incorporation, including:
· the company has limited liability. Assets held outside of the corporation are not attachable in the case of business failure;
· the corporation is a separate legal entity and can be continued or sold;
· it is easier to raise funds as investors can purchase stock independently of the underlying business operations; and
· there are tax advantages for corporations.
There are also disadvantages such as the cost of incorporation, legal fees and potential capital gains tax implications. There are additional reporting requirements and more detailed records must be kept for tax purposes.
Income tax in Australia is currently administered under the Federal Income Tax Assessment Act, 1936 (the ‘Tax Act’) together with associated legislation and regulations. However, the 1936 Tax Act is being progressively redrafted under the Tax Law Improvement Project. The first tranche of new legislation came into effect on July 1, 1997, with further amendments following, until the entire Tax Act has been rewritten. The aim of the rewrite is to improve the expression of the tax law, without actually changing it. Therefore, the following comments are applicable to both the old and the new law, subject to changes in the section numbers.
The provisions of the Tax Act apply to income and capital gains derived by individuals, corporations, trusts and partnerships. A liability to tax arises in respect of ‘taxable income’, which is defined by the Tax Act to mean the amount remaining after deducting from ‘assessable income’ all allowable deductions. The term ‘assessable income’ includes not only income as that term is ordinarily understood (including, for example, salary and wages, business profits, rent, interest and dividends), but also a number of other items which are deemed by the Tax Act to constitute assessable income, including the whole or part of any net capital gains. Income tax is imposed on an annual basis, the normal year of income being July 1 to June 30 following, although substituted accounting periods can be obtained in certain circumstances, as discussed below.
Apart from the withholding tax provisions and the capital gains provisions of the Tax Act, which both contain their own special rules relating to non-residents of Australia, the two key elements which give rise to a liability to Australian tax are residence and source. Thus, the assessable income of a resident of Australia includes income derived from all sources whether in or out of Australia, whilst the assessable income of a non-resident of Australia includes income derived from all sources in Australia.
Under Australian tax law, the source of income is largely a matter of fact to be determined by reference to principles developed by the courts. However, the Tax Act does deem certain types of income to have a source in Australia. For example, certain royalties paid by an Australian business to a non-resident are deemed by Section 6C of the Tax Act to have a source in Australia. Similarly, interest (except interest paid outside Australia to a non-resident on debentures issued outside Australia by a company) upon money secured by mortgage of any property in Australia is deemed by Section 25(2) to have a source in Australia. Further, as will be discussed below under the heading ‘Withholding Tax’, the withholding tax provisions operate in such a way as to give, in effect, an Australian source to dividends and interest paid to non-residents.
The operation of the Tax Act in respect of both residents and non-residents is subject to the provisions of the various double taxation agreements which Australia has entered into with other countries which provide relief from double taxation, as to which, reference is made below under the heading ‘Double Taxation Treaties’. Such agreements often contain their own rules for determining the source of different types of income.
Any person who resides in Australia within the ordinary meaning of that expression is a resident of Australia for tax purposes. In addition, the Tax Act extends the definition of ‘resident’ to include a person:
· whose domicile is in Australia, unless the Commissioner is satisfied that his permanent place of abode is outside Australia (the tests of domicile are complicated and depend on the individual circumstances of each case);
· who has actually been in Australia, continuously or intermittently, during more than ½ of the year of income, unless the Commissioner is satisfied that his usual place of abode is outside Australia and that he does not intend to take up residence in Australia; or
· who is a member of the Superannuation Scheme established by deed under the Superannuation Act, 1976; or is the spouse or a child under 16 years of age of such a person of either of the above.
All persons, whether resident or non-resident whose total assessable income (other than interest or dividend income to which the withholding tax provisions apply) exceeds the limit specified by the Commissioner of Taxation, are required to lodge with the Commissioner an annual return of income covering the period July 1 to June 30 of the year following.
Taxation is imposed on individuals on a progressive basis, with higher rates applying to higher levels of taxable income (referred to as ‘marginal rates’). Resident individual taxpayers are taxed at more favourable rates than non-residents, with further concessions accruing to resident families. The highest marginal tax rate is currently 47¢ in the $1, although a compulsory medical insurance levy adds a further 1.7%. Rates applicable to persons under the age of 18 years vary depending upon the nature of their income.
Employers are required to make tax instalment deductions from all payments of salary and wages paid to individual employees, which deductions are forwarded by the employers to the Commissioner. The total amount of the deductions so made is credited against an individual employee’s liability as determined at the conclusion of the relevant year of income.
The Tax Act defines a company to include all bodies or associations corporate or unincorporated, but specifically excludes partnerships from the definition.
As with individuals, it is necessary to determine whether or not a company is a resident of Australia for tax purposes. The Tax Act defines as a resident of Australia any company which is incorporated in Australia, or which, not being incorporated in Australia, carries on business in Australia, and has either its central management and control in Australia, or its voting power controlled by shareholders who are residents of Australia. In relation to a company that is not incorporated in Australia, it should be noted that a judicial decision has held that a company which has its central management and control in Australia necessarily carries on business in Australia, thus constituting it a resident of Australia.
Central management and control is a concept which originates in English law and one which has been developed by the courts in both England and Australia. The place of a company’s central management and control will usually be the place where the directors meet to do business of the company, although regard must always be had as to where real control of the company’s operations is located.
A company which qualifies as a resident solely under this concept, and is also a resident in another country will, as from July 1, 1997 be deemed to be a non-resident and denied a number of tax concessions.
A resident company is required to lodge with the Commissioner an annual return of income covering the period July 1 to June 30 in each year, or any 12-month period which the Commissioner has agreed, may be substituted in lieu thereof. A non-resident company, which derives Australian source income is similarly required to lodge an annual return of income unless it derives only interest and dividend income to which the withholding tax provisions apply.
Companies pay a flat rate of tax on each $1 of taxable income. The current rate is 36%. However, companies may be entitled to a tax rebate or tax credit for tax payable in respect of dividends included in their assessable income. Broadly, subject to certain anti-avoidance provisions, resident public companies (for tax purposes) are generally entitled to a tax rebate of the tax payable on all dividends paid on shares held in other resident companies, other than certain redeemable preference shares. However, a company, which is a private company for income tax purposes, is not entitled to a rebate in respect of the unfranked component of any dividend paid to it, other than from a company in respect of which there is 100% common ownership. For an explanation of the meaning of "unfranked" and a discussion on the taxation of dividends generally, see below under the heading "Dividend Imputation".
At common law, a partnership is defined to mean the relationship that exists between persons carrying on a business in common with a view to profit. For the purpose of the Tax Act, the definition of ‘partnership’ is extended to mean not only a partnership at common law but, in addition, any association of persons in receipt of income jointly. A partnership for tax purposes, therefore, includes any association of persons who jointly share in income or profits of an undertaking.
In conformity with the position at common law, a partnership is not regarded as a separate legal entity for tax purposes and no tax is payable by or on behalf of the partnership itself. However, a partnership return is required to be lodged with the Commissioner of Taxation on an annual basis, showing either the net income of the partnership (equivalent to taxable income) or the partnership loss of the partnership, as the case may be.
The Tax Act includes in the assessable income of each resident partner his or her individual share of the net income of the partnership, and allows as a deduction to each resident partner his or her individual share of any partnership loss. In relation to non-resident partners, the Tax Act includes in the assessable income of each non-resident partner his or her individual share of the net income of the partnership which is attributable to Australian sources, and allows as a deduction his or her share of any partnership loss which is attributable to Australian sources.
A trust is not a separate legal entity but, in contrast, is a relationship which exists between a person who holds property or in whose name property is vested, being the trustee, and the person or persons on whose behalf the property is held, being the beneficiaries. If the trust property produces income, the trustee will, in accordance with the terms of the trust and the principles of equity, hold that income, not on it's own behalf, but on behalf of one or more of the beneficiaries. Income of a trust estate is taxed only once, either in the hands of the trustee or the beneficiaries.
Unlike a partnership, trust losses are not allocated to beneficiaries and allowed as deductions. Instead the losses are accumulated for offset against future trust income. A number of tests have recently been introduced to counter the trafficking in trust losses.
An Australian resident who is a beneficiary of a non-resident trust is also liable to Australian income tax in respect of any income or other property distributed to or applied for the benefit of the beneficiary.
Prior to September, 20, 1985, the imposition of Australian income tax on capital profits was limited to profits arising from the sale of property purchased within 12 months of the date of sale, profits arising from the sale of property acquired for the purpose of profit-making by sale and profits arising from the carrying on or carrying out of any profit-making undertaking or scheme to the extent if any, that they were considered not to be income.
As a result of amendments to the Tax Act, Australia now taxes, either in whole or in part, most capital gains arising on the disposal of assets acquired by resident taxpayers on or after 20 September, 1985. In relation to non-resident taxpayers, Australia taxes, either in whole or in part, capital gains arising on the disposal of certain assets (defined by the Tax Act to be ‘taxable Australian assets’) acquired on or after 20 September, 1985. Taxable Australian assets include but are not limited to:
· land or buildings situated in Australia;
· an asset that has at any time been used in carrying on a trade or business wholly or partly at or through a permanent establishment in Australia;
· shares, or an interest in shares, of a private company which is a resident of Australia.
· shares, or an interest in shares, of a public company which is a resident of Australia, where the non-resident or an associate of the non-resident holds not less than 10% of the issued share capital of the public company; and
· an interest in a resident trust.
The actual amount of any capital gain assessable to tax is calculated by deducting from the consideration received or deemed to have been received on the disposal of the asset the cost (or deemed cost) of the asset indexed for inflation for the period during which it has been held by the taxpayer concerned (the latter referred to as ‘the indexed cost base’). The cost base is not indexed for inflation if the asset is held for less than 12 months. Capital losses, calculated as the difference between the consideration received on the disposal of the asset and the actual cost of the asset, are then deductible against other assessable capital gains. The resulting amount (that is, assessable capital gains less capital losses, if any) is included in the taxpayer’s assessable income for the purpose of calculating the taxpayer’s taxable income, which is then taxed in the normal manner, depending upon whether the taxpayer is a company or an individual. In some circumstances a concessional rate may apply to the taxation of capital gains, if the taxpayer is an individual.
Capital losses which exceed assessable capital gains (if any) derived in any particular year of income are not deductible against other types of assessable income; however such capital losses are capable of being carried forward indefinitely as a deduction against assessable capital gains derived in future years. However, revenue losses may be offset against capital gains.
The Tax Act contains provisions, effective from July 1, 1987, the purpose of which is to ensure that foreign investors having an interest of at least 15% in an Australian business maintain an appropriate balance between interest-bearing debt owed to those foreign investors (or associates of the investors) and the foreign investors equity capital in that business.
The ratio of relevant foreign debt to equity permitted by the provisions is 6:1 for banks and non-bank financial intermediaries, and 2:1 for all other businesses. (Note that up until June 30, 1997 the permissible ratio was 3:1). The provisions operate to deny to the Australian business a deduction for interest payments to the extent to which such ratios are exceeded.
The provisions do not apply to interest-free borrowings, or arm’s-length borrowing where the interest is assessable Australian income. However, from July 1, 1997, non-resident arm’s-length borrowings guaranteed by, or secured against a foreign investors assets, will be included within the definition of foreign debt.
Division 13 of the Tax Act deals with international transfer pricing or profit shifting. The provisions have effect only upon exercise of the Commissioner’s discretion, directed in considering all international agreements resulting in loss of Australian revenue, even in the absence of a tax avoidance motive. It is the internationally accepted “arm’s-length” principle that is the basis for determining whether Australia has been denied its fair share of tax in the supply or acquisition of property or services across international boundaries; defined as an “international agreement”.
The legislation is, therefore, concerned with underpricing of goods supplied or overpricing of goods acquired by Australian resident taxpayers, or non-residents deriving Australian sourced income.
Thus, where a taxpayer supplies property or services under an international agreement in circumstances where the Commissioner is satisfied that the parties to the agreement are not dealing with each other at arm’s-length, and the taxpayer either receives no consideration or receives consideration which is less than the arm’s length consideration, the Commissioner may determine to apply the provisions of Division 13. The consequences of the application of Division 13 in these circumstances is that the taxpayer is deemed for all purposes of the Tax Act to have received consideration equal to the arm’s-length consideration in respect of the supply of the property or services. In other words, the taxpayer’s assessable income will be increased by the difference between the consideration received (if any) and the arm’s-length consideration.
Conversely, where a taxpayer acquires property and services under an international agreement in circumstances where the Commissioner is satisfied that the parties to the agreement are not dealing with each other at arm’s-length, and the taxpayer gives consideration which is greater than the arm’s-length consideration, the Commissioner may also determine to apply the provisions of Division 13. The consequences of the application of Division 13 in these circumstances is that the taxpayer is deemed for all purposes of the Tax Act to have given consideration equal to the arm’s-length consideration in respect of the acquisition of the property or services. In other words, and deduction claimed by the taxpayer in respect of the acquisition of the property or services will be reduced by the excess of the consideration paid over the arm’s-length consideration.
The Commissioner has also released guidelines where Division 13 may be applied to attribute income to a resident company on a loan made by it to a non-resident company if there is no interest or the interest on that loan is less than the amount that would have been received by an independent party dealing at arm’s length with the borrower.
Where an interest expense is claimed by a resident company, Division 13 may be applied to reduce the deduction for interest on a loan received by it from a non-resident company if the interest expense is greater than the arm’s length amount.
Where the Commissioner exercises the powers conferred upon him by Division 13, he is also empowered to make compensating adjustments to the returns of the other taxpayers where he considers it to be just and reasonable. Tax penalties may also be applied if Division 13 is determined to apply.
The provisions of a double tax treaty may also apply to permit transfer-pricing adjustments to be made. This would be so if the other party was resident in a country with which Australia had a double tax treaty. In general, the double tax treaty article and Division 13 of the Tax Act are applied in the same manner by the Commissioner.
(a) Foreign Tax Credit System
Australian residents are subject to Australian tax on worldwide income derived. Under the Foreign Tax Credit System (FTCS), a credit is allowed for the lesser of foreign taxes paid or Australian tax payable in respect of foreign income assessable to a resident taxpayer. The effect of the credit system is to ensure that the total tax paid in respect of assessable foreign income equates with the Australian marginal rate.
In addition, Australian resident companies are entitled to a credit for foreign taxes paid by a foreign-related company on the underlying profits out of which the dividend has been paid. A related company is defined as a group of companies where each company has at least a 10% voting interest in the next company in the chain and where the Australian company has a voting interest of at least 5% in a foreign company that is a member of the group.
The only shortcoming of the FTCS was that foreign income derived by offshore companies and trusts could not be taxed to the Australian investor until remitted to Australia. As a result, it was possible to defer Australian tax on foreign income by accumulating that income in offshore entities.
(b) Controlled Foreign Companies
Part X of the Tax Act was introduced so that certain income of Controlled Foreign Companies (CFC) will be attributed to Australian resident taxpayers on an accruals basis.
There are three tests in determining whether a foreign company is controlled by Australian resident taxpayers. These are:
· strict control - 5 or fewer residents, together with their associates own, or are entitled or able to acquire, or are able to control, an interest of 50% or more in the foreign company; or
· assumed control - a single resident, together with associates owns, or is entitled to acquire, an interest of at least 40% in the foreign company, unless the company is controlled by parties unrelated to the single resident or associates.
· de facto control - 5 or fewer residents, together with their associates, effectively control the company.
It is both the direct and indirect interests that are taken into account in determining whether a foreign company is a CFC. An interest held in a CFC via an interposed entity will only be included when that interposed entity is either a CFC, a controlled foreign partnership or a controlled foreign trust.
Having established that the company is a CFC, income will only be attributed where the Australian taxpayer has a certain minimum interest in a CFC, the extent of which is to be determined by reference to the operative control test.
The government has announced changes in the way that CFC’s are to be taxed. The main change that has been proposed is that the Government is to introduce a list of truly comparably taxed countries. These are countries which Australia considers are taxed on a comparable basis to Australia. These countries are United States, United Kingdom, Japan, Canada, France, New Zealand and Germany. Income generated by companies resident in these countries would generally be treated as not subject to attribution on the basis that these countries have demonstrated a general commitment to fully taxing tainted income as it accrues, and also operate their own CFC regimes.
In respect of all other countries, the accruals measures seek to tax “tainted” income of CFCs, which is basically passive income such as interest and dividends, as well as business income derived from transactions with associates.
Certain income which would otherwise be subject to the accruals tax measures would not be attributable if it satisfies the “active income” exemption. Thus, the tainted income of a CFC will not be attributed to Australian resident shareholders if the CFC derives more than 95% of its income from genuine business activities (“active income”). This is basically income that is not tainted.
Dividends paid by CFCs out of previously attributed income will be exempt from tax. A credit, however, is allowed for any withholding tax deducted in respect of dividends paid.
Dividends that are not sourced from previously attributed income may be exempt where it is received by a resident company holding a “non portfolio” interest (i.e. greater than 10%) in the foreign company paying the dividend.
The Government also proposes to introduce the repatriation list. This is a list of countries which were previously the listed countries under the old CFC provisions. Dividends received from companies resident in a repatriation list country are fully exempt if paid from profits which were either taxed in Australia or taxed at comparable rates in a repatriation list country.
Resident companies conducting business in a repatriation list country at or through a permanent establishment where the profits of the branch are subject to tax in any other repatriation list country will not be subject to Australian tax on profits derived.
(c) Transferor Trust Rules
The transferor trust measures in Division 6AAA relate to the accruals taxation of income derived by non-resident trust estates.
The legislation was introduced to overcome the problem of the accumulation of foreign-sourced income in a non-resident trust estate which would not be subject to Australian tax until actually distributed to resident beneficiaries.
The circumstances in which a resident taxpayer will be attributed income of a non-resident trust estate depends upon whether the relevant trust is a discretionary or non-discretionary trust.
Exceptions to the rule apply where:
· the transfer was made in the ordinary course of carrying on a business and made on identical or similar terms to those that relate to transactions with ordinary clients or customers;
· the transfer was made under an arm’s-length transaction not in the ordinary course of carrying on a business and the transferor was not in a position to control the trust at any time after the transfer and before the relevant year of income; or
· if the transfer was made before April 12, 1989, the taxpayer was not in a position to control the trust at any time after that date and before the end of the relevant year of income.
For a non-discretionary trust estate, a resident taxpayer may be an attributable taxpayer if the taxpayer transferred property or services to the trust after April 12, 1989 and the consideration for the transfer was nil or less than arm’s length.
The attributable income of a non-resident trust is:
· where the trust is a non-listed country trust estate - the whole of the “net income” of the trust, determined according to the Australian tax law, with certain modifications;
· where the trust is a listed country trust estate - so much of the net income which benefits from concessional tax treatment.
The amount to be attributed is reduced by amounts already subject to tax in Australia or in a listed country. The attributed amount is also reduced by amounts already assessable to a resident beneficiary or to the trustee of a non-resident trust estate.
Distributions made by non-resident trusts out of income previously attributed is exempt when received by the Australian beneficiary.
In the absence of a resident transferor to whom income may be attributed, the measures seek to apply an interest penalty to resident beneficiaries when they become presently entitled to the accumulated trust income.
The penalty is the maximum marginal rate of tax for the resident taxpayer, irrespective of the actual rate applicable. This penalty is applied to trust distributions representing eligible designated concession income of a listed country trust estate, or, in the case of an unlisted trust estate, profits not subject to tax in any listed country.
(d) Foreign Investment Funds
The Foreign Investment Funds (FIF) measures contained in Part XI of the Tax Act have operated since January 1, 1993.
The FIF measures apply to an Australian resident that holds a share (other than “eligible finance shares”) in a non-resident company or an option, convertible note or other instrument that confers an entitlement to acquire a share in a non-resident company, regardless of the interest held.
FIF measures will also apply to an Australian resident that holds an interest in a non-resident trust, where the interest confers an interest in the corpus or income of the trust or represents an option, convertible note or other instrument conferring an entitlement to acquire an interest in corpus or income of the trust.
A person who has legal title to a Foreign Life Assurance Policy (FLP) will also be subject to the measures in respect of the interest in the FLP.
The FIF rules do not apply where the taxpayer is already subject to accruals measures in Part X and Division 6AAA in respect of interests held in foreign companies and trusts. However, the FIF measures takes precedence over the general trust provisions as discussed under the “Trust” section above.
There are approximately 14 exemptions listed in the legislation from the FIF measures.
A taxpayer may elect within limits to adopt the Market Value Method, Deemed Rate of Return Method, or Calculation Method for the purpose of determining the FIF income arising in respect of an interest in a FIF. In the absence of a taxpayer specifically electing to adopt the Calculation Method, the Market Value Method will normally apply.
A taxpayer may elect to adopt the Cash Surrender Value Method of calculating the FIF income in respect of an interest in a FLP. In the absence of exercising such an election, the Deemed Rate of Return Method will apply.
Taxpayers subject to the Market Value Method in respect of a FIF interest or Cash Surrender Value Method in respect of a FLP will be basically taxed on the movement in the market value of their interests in the FIF, and accordingly, will be taxed on the unrealized gains and be denied the benefit of indexation under the capital gains tax provisions.
Where a FIF makes an assessable distribution to a taxpayer out of current year profits which have not been previously assessed under the FIF measures, then broadly, the FIF income arising in respect of that FIF will be reduced by the amount of the assessable distribution.
Distributions made by a FIF out of previously attributed FIF income will be exempt from tax.
For the purposes of calculating the capital gain arising on the disposal of an interest in a FIF, the consideration received for the disposal of the interest will be broadly reduced by the amount of any previously attributed profits of the FIF which have not been distributed.
An imputation system for the taxation of company dividends operates in Australia and applies to all dividends paid on or after July 1, 1987.
In broad terms, the imputation system operates to impute or allocate tax paid by a company in respect of the company’s profits to shareholders in the company to whom dividends are paid. Dividends with an imputation credit attached are known as ‘franked’ dividends. Resident shareholders to whom franked dividends are paid are assessed to tax on the sum of the dividend received and the imputation credit, but are allowed a rebate of tax (that is, a credit) for an amount equal to the imputation credit.
For resident individual shareholders whose marginal rate of tax is 20%, the rebate allowable in respect of a franked dividend will completely offset the tax payable on the sum of the dividend received and the imputation credit. For resident individual shareholders whose marginal rate of tax is in the highest tax bracket, the rebate allowable will only partially offset the tax payable on the sum of the dividend received and the imputation credit. For resident individual shareholders whose marginal rate of tax is less than 20%, any excess rebate may be offset against income tax payable on other assessable income, including assessable capital gains. However, the rebate is not refundable where the rebate exceeds tax payable.
When a company declares dividends out of profits which have not borne company tax at the rate of 36% (for example, because of the entitlement to a deduction for carry-forward losses), the dividends are normally ‘unfranked dividends’ and do not carry an entitlement to an imputation credit. For resident individual shareholders, the amount of the dividend is included in the assessable income of the shareholder, who is taxable on the dividend in the normal manner.
Dividends may also be partly franked and partly unfranked. In such circumstances, each part of the dividend is treated as if it were a franked dividend or an unfranked dividend, as the case may be.
Dividends paid by a resident company to a shareholder which is a resident public company for income tax purposes are normally subject to a rebate of tax, provided certain anti-avoidance provisions are not breached, irrespective of whether they are franked dividends or unfranked dividends. In contrast, dividends paid by a resident company to a shareholder which is a private company for tax purposes will only be subject to a rebate of tax to the extent to which the dividends are franked dividends, unless there is 100% common ownership between the two companies, in which case unfranked dividends are also normally rebateable. Further, subject again to anti-avoidance provisions, in all cases where franked dividends are paid by one resident company to another resident company, the imputation credit is preserved, and the shareholder company is able to pay franked dividends of the same amount to its own shareholders, utilizing the imputation credit which has been distributed to it.
Dividends paid by resident companies to non-residents may also be subject to withholding tax, as to which, refer to the next heading below.
Following the change of the company tax rate to 36% (effective July 1, 1995), all franking account balances were restated to reflect the 36% rate.
An unfranked dividend paid by a resident company to a non-resident is subject to withholding tax. The applicable rate is 30% of the gross amount of the dividend, except where the person beneficially entitled to the dividend is a resident of a country with which Australia has entered into a double taxation agreement and the holding in respect of which the dividend is paid is not effectively connected with an Australian permanent establishment, in which case the applicable rate is generally limited to 15% of the gross amount of the dividend. In contrast, to the extent to which a dividend paid to a non-resident is franked, no liability to withholding tax arises.
The 1997 Federal Budget has modified the operation of the imputation system as it applies to dividends paid to certain non-residents. Where an Australian company is effectively wholly-owned (either directly or indirectly) by non-residents, the franking account mechanism has been replaced by an Exempting Account mechanism. Dividends paid to non-resident controllers from an Exempting Account, will remain free of withholding tax, as if the dividends had been fully franked.
Australian companies not effectively wholly owned by non-residents, but in which non-resident shareholders might have an interest, will continue subject to the imputation system as described above.
From July 1, 1994, dividend withholding tax does not apply to so much of an unfranked dividend paid to a non-resident shareholder as is subject to a Foreign Dividend Account (FDA) declaration. This mechanism allows profits received by an Australian company through dividends paid from offshore companies, to be paid to non-resident shareholders without the imposition of Australian dividend withholding tax.
Interest derived by a non-resident, other than interest derived by a non-resident in carrying on business in Australia at or through an Australian permanent establishment, which is paid to the non-resident by either:
· a resident of Australia; or
· a non-resident of Australia carrying on business in Australia at or through an Australian permanent establishment, is subject to withholding tax.
The applicable rate is 10%.
Australian-sourced interest derived by a non-resident in carrying on business in Australia at or through an Australian permanent establishment is included in the assessable income of the non-resident and taxed in the normal manner.
Royalties paid to non-residents are also subject to withholding tax. A royalty withholding tax of 30% applies on royalties paid or credited to non-residents. The amount of withholding tax may be reduced where a royalty is paid from Australia to a resident of a treaty country. The amount applicable to a treaty country will usually be 10% but may be as high as 25%, depending on the treaty agreement.
Dividends, royalties and interest upon which withholding tax is payable, and franked or exempted dividends paid to a non-resident, are not included in the Australian assessable income of the non-resident concerned. Withholding tax is, therefore, a first and final tax in respect of such income. Withholding tax is required to be deducted by the person paying the dividend, interest or royalty.
Australia has entered into a number of double taxation agreements or treaties, the form of which is based on, but not identical with, the OECD Model Double Taxation Convention on Income and on Capital (1977). Australia currently has double taxation agreements with Austria, Belgium, Canada, China, the Czech Republic, Denmark, Fiji, Finland, France, Germany, Greece (limited to airline profits only), Hungary, India, Indonesia, Ireland, Italy, Japan, Kiribati, Korea, Malaysia, Malta, the Netherlands, New Zealand, Norway, Papua New Guinea, the Philippines, Poland, Singapore, Spain, Sri Lanka, Sweden, Switzerland, Taiwan, Thailand, the United Kingdom, the United States of America and Vietnam. Agreements with Kuwait, Mexico and Yugoslavia are not yet legislated. New treaties are continually being negotiated.
The provisions of the treaties are given the force of law in Australia by virtue of the Income Tax (International Agreements) Act, 1953, which incorporates the provisions of both the treaties and the Tax Act. Subject to certain limited exceptions, to the extent to which any inconsistency exists between the Tax Act and a treaty, the provisions of the treaty are expressed to prevail.
Australia’s double taxation agreements apply to various types of income derived by residents of one country from sources in the other country. Each agreement adopts two alternative methods of avoiding or relieving double taxation, the applicable method depending upon the nature of the income. The first method reserves to the country of residence of the taxpayer (generally) the right to tax the income. The second method permits the country of source to tax the income and, to the extent to which the country of residence also taxes the same income, the agreements require the country of residence to give a credit against its tax for any tax paid in the country of source.
Subject to CFC, Transferor Trust Rules and FIF Legislation, business profits of an enterprise will be generally taxable only in a taxpayer’s country of residence except in circumstances where the business profits are attributable to a permanent establishment in the country of source through which an enterprise carries on business. Conversely, the country of source is permitted to tax business profits which are attributable to a permanent establishment in the country of source, through which the enterprise carries on business. In the latter circumstances, a credit will be available to the enterprise in its country of residence.
Each agreement defines extensively (but not necessarily in identical terms) what constitutes a permanent establishment. A permanent establishment usually includes, but is not limited to, a fixed place of business through which the business of the enterprise concerned is wholly or partly carried on, such as a place of management, a branch, an office, a factory, or a workshop. In addition, agents who habitually exercise an authority to conclude contracts on behalf of the enterprise usually constitute a permanent establishment.
As for July 1, 1997, a company which is a non-resident solely for the purposes of a double tax treaty will be deemed to be a non-resident and denied eligibility for a number of Australian domestic tax concessions.
Income which is taxable in the country of source also includes dividend, interest and royalty income. However, in relation to such income, all agreements limit the rate of tax which the country of source can impose on such income, except in circumstances where the income is effectively connected with a permanent establishment of the person beneficially entitled to the income in the country of source.
Other provisions of such agreements deal with income from real property, shipping and air transport profits, independent personal services, dependent personal services, income of entertainers, teachers and students, and pension income.
An individual who is a resident of Australia at any time during a year of income is liable to pay, in addition to income tax, Medicare levy based upon the individual’s taxable income for the year of income. The Medicare levy is also payable by some trustees. The rate of the Medicare levy from July 1, 1997 is 1.7%.
From July 1, 1997, an additional surcharge of 1% will be imposed on high income earners with no private health insurance.
Fringe Benefits Tax
By virtue of the operation of the Federal Fringe Benefits Tax Assessment Act, 1986, fringe benefits tax is payable by employers on the value of fringe benefits provided to either their employees or associates of their employees. Taxable fringe benefits may be provided either by the employer itself, by an associate of the employer or by any other person under an arrangement with the employer or an associate of the employer. In all cases, however, the benefit must be provided in respect of the employee’s employment.
Fringe benefits tax is payable in respect of a wide range of benefits, including:
· cars which are available for private use by the employee;
· interest-free or low interest loans;
· certain residential accommodation provided by employees;
· discounted or free goods and other property provided to employees; and
· discounted air travel for employees in the airline or travel industry.
The fringe benefits tax year is the 12 months period commencing on April 1, in each year and ending on the following March 31. An annual fringe benefits tax return is required to be lodged by April 28 showing the taxable value all benefits. Employers must pay three quarterly fringe benefits tax instalments in anticipation of each years' liability, with the balance payable at the time of lodgment of the annual return.
The rate of tax payable in respect of the value as calculated under the Fringe Benefits Tax Assessment Act of taxable fringe benefits is currently 48.5%.
As from April 1, 1994 fringe benefits tax has been levied on the tax-inclusive value of the fringe benefit and income tax deductions are allowed for the amount of fringe benefits tax paid.
This effectively means the benefit of the “tax saving” to an employee of the difference between the taxpayer’s marginal rate and the company rate will be negated for certain fringe benefits. However, fringe benefits that retain concessional status such as cars and superannuation will remain an effective means of remuneration packaging.
Sales Tax
Sales tax is imposed by federal legislation on the sale of goods. It is not imposed on personal or professional services, nor on the sale of real property or intangibles such as goodwill. Sales tax is, however, imposed on certain royalty payments made in respect of goods.
As a broad proposition, sales tax is a ‘once only’ tax which is payable on the last wholesale sale of goods, that is, on sales by manufacturers or wholesalers to retailers. Manufacturers and wholesalers may register for sales tax purposes. Sales tax is also payable in respect of goods imported into Australia by persons other than registered persons. The intention is that all goods which are either manufactured in or imported into Australia shall bear sales tax unless those goods are specifically exempt from tax.
Sales tax is levied upon what is referred to as the ‘taxable value’ of goods. The taxable value may be equated with the fair wholesale price of the goods concerned. Thus, where sales tax is payable upon a wholesale sale, it is payable on a taxable value equal to the price for which the goods are sold. If the tax is payable on a retail sale, such as a sale by a manufacturer directly to a consumer, it is payable, generally speaking, on a value equal to a fair wholesale price. If the manufacturer concerned sells by wholesale as well as by retail, its own wholesale price for similar goods will determine that fair wholesale price.
Sales tax is imposed on the seller of goods, but is usually passed on by the seller to the purchaser of the goods. Unless exempt, sales tax is levied on the sale value of goods at the rate of 12%, 17%, 22% (the standard rate), 32% and 45%, depending upon the nature of the goods. Some goods are exempt unconditionally, whilst others are exempt only if purchased by specified persons or for specific purposes.
Pay-roll Tax
Each of the States and Territories of Australia imposes pay-roll tax on employers in respect of wages paid to employees. Certain exemptions exist where the monthly or annual pay-roll does not exceed a specified limit.
Compulsory Workers Compensation Insurance
Each State has laws requiring insurance cover to be provided for employees. The particular arrangements vary between States, but generally involve private-sector insurance companies underwriting the risks. Premium rates vary between States and industry groupings, reflecting various levels of risk.
Land Tax
Land tax is levied by each of the States and is paid upon the value of all lands owned by a taxpayer which are situated within the State concerned. Certain land is exempt from tax, including (as a general rule) the taxpayer’s principal place of residence.
Stamp Duty
Stamp duty is a tax imposed on specified classes of written instruments and generally not on the transactions effected by them. State legislation imposes stamp duty on written instruments that have a nexus or connection with the relevant State, and Federal legislation imposes that duty on those written instruments that have a nexus or connection with a Federal Territory. The ability of a Government to enforce the collection of duty from a party to a written instrument who is outside the jurisdiction is limited by the legislative competence of the relevant Government.
In some cases where duty would otherwise be avoided by the parties to a transaction not bringing a dutiable written instrument into being, they are required to prepare a written record of the transaction and have duty paid on it.
Depending upon the type of written instrument involved, stamp duty may be denoted by the parties affixing a previously purchased adhesive stamp, or by having the relevant Government stamp duty authority affix the stamp after assessment and payment of the amount of duty payable.
The stamp duty legislation and regulations are currently not uniform throughout Australia, although duty rates are uniform in some cases to avoid ‘jurisdiction shopping’.
Some of the types of written instruments that attract stamp duty are transfers of marketable securities on Australian registers or in Australian corporations, conveyances of land and other property, declarations of trust, financing agreements and security documents, leases, transfers of leases, motor vehicle registration and transfers, bills of exchange and promissory notes, various bonds and covenants, hire purchase and instalment purchases agreements, policies of insurance, and returns evidencing credit and rental business.
The rate of stamp duty payable, in the case of a transfer or conveyance of property, is typically calculated by reference to the higher of the amount or value of the consideration paid and the true unencumbered value of the item of property transferred or conveyed, and is payable at ‘ad valorem’ rates on a sliding scale by reference to the result of that calculation. The stamp duty authorities are empowered to require proof of independent arm’s-length values.
Financial Institutions Duty and Debits Tax
Financial institutions duty and debits tax are imposed on bank and other financial institutions in respect of certain transactions. The duty or tax is usually passed on by the bank or other financial institutions to its customers.
A prescribed minimum level of superannuation support must be provided by employers for each of their employees. The minimum level is currently 6% of earnings and will rise to 9% by July 2002 and for subsequent years.
A superannuation guarantee charge will be imposed on employers failing to meet the requirements. An income tax deduction will not be allowed for this amount.
Internet web site: http://www.mannjudd.com.au
New South Wales
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MANN JUDD Level 11, Mann Judd House 159 Kent Street Sydney New South Wales 2000 Telephone +61(0)2 9251 7711 Fax +61(0)2 9251 7336 Emailmannjudd@mjnsw.com.au |
Partners: |
Edward J Bell John R Biddle S Anthony Fittler Ian D Haigh Dennis J Mattiske David McGrane Philip B Meade Frederick A Murrell Stephen K Preen Bruce V Rose Darryl K Swindells Edgar R Temple Neil P Wickenden Michael G Hutton
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MANN JUDD Lachlan Towers Cnr Macquarie and O’Connell Streets Parramatta New South Wales 2124 Telephone +61(0)2 9633 2600 Fax +61(0)2 9633 2392
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Queensland, North
MANN JUDD BOTTOMER 63 Mulgrave Road Cairns Queensland 4870 Telephone +61(0)70 515 322 Fax +61(0)70 311 253
From November 1997: Telephone +61(0)7 4051 5322 Fax +61(0)7 4031 1253 Emaildunwal@internetnorth.com.au
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Principal: A Ross Bottomer |
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Queensland, South
MANN JUDD
Level 27, Waterfront Place 1 Eagle Street Brisbane Queensland 4000 Telephone +61(0)7 3236 2999 Fax +61(0)7 3236 2224 Emailpartners@mjqld.com.au
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Partners:
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David J Gregg Brian G Hiley Stephen C Moye David J de C Nunn Robin J St Clair Andrew Vivian
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South Australia
MANN JUDD 1st Floor 44 Greenhill Road Wayville South Australia 5034 Telephone +61(0)8 8373 2070 Fax +61(0)8 8373 2087 Emailmjadel@ozemail.com.au
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Partners: |
Peter A Hunt Dan A Major Brenton E Wise Freda Bouras Andrew M Leunig Robyn M Scott John S Sutton
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Victoria
MANN JUDD Level 32, Nauru House 80 Collins Street Melbourne Victoria 3000 Telephone +61(0)3 9258 6700 Fax +61(0)3 9258 6711 Emailmannjudd@mjvic.com.au |
Partners: |
John G Barkla Craig G B Cooper Hugh R Docker Neville R John Andrew J Lean David J Lofthouse Christopher M Malkin Gary C Nelson Pradeep R Raniga Phillip A Ransom C Graeme Roberts
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Western Australia
MANN JUDD 15 Rheola Street West Perth Western Australia 6005 Telephone +61(0)8 9481 0977 Fax +61(0)8 9481 3686 Emailmannjudd@mjwa.com.au
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Partners: |
Ian H Barsden Terry M Blenkinsop Wayne M Clark Lucio Di Giallonardo Colin D Emmott Peter M Forbes Trevor G Hoddy
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Canberra, Australian Capital Territory |
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MARLOW BLUHM 8th Floor, Colonial Building 161 London Circuit Canberra ACT 2601 Telephone +61(0)6 249 6644 Fax +61(0)6 247 0514 EmailBluhm@dynamite.com.au
From August 1997: Telephone +61(0)2 6249 6644 Fax +61(0)2 6247 0514 |
Partners: |
Harry H Bluhm Roger S Grylls |