Establishing an Overseas business in Australia in 2021
- Foreign Company Registration
- Resident for Tax purposes
- GST and Foreign Franchisors
Australia is a highly regulated market, but this regulation is what gives overseas companies confidence in our business systems and our economy when establishing their business operations here.
The two options:
- You can register your overseas company as a Foreign Company to carry on its business in Australia from your overseas company base, (registering as a Foreign Company); or
- Establish an Australian subsidiary where the subsidiary company trades in Australia.
Registration as a Foreign company with ASIC
A foreign company must not carry on business in Australia unless it is registered with ASIC. There is no definition of what carrying on business means in the Act. and section 21(3) below sets out the things considered not to be carrying on business.
The general law concept of “carrying on a business” therefore gives us some guidance as below:
- Conducting business in Australia directly or via agents with a succession of acts designed to advance an enterprise with a view to pecuniary gain (really anything that is a commercial enterprise);
- Conducting some commercial enterprise systematically and regularly with a view to profit;
- repeatedly making contracts or undertaking other acts in Australia even though the bulk of its business is conducted elsewhere.
This would therefore capture an overseas company entering the Australian market for a commercial enterprise for profit such as offering a License, a franchise arrangement, or establishing an agency or distribution network.
You should note the test for “carrying on business” however, is a different test for taxation purposes with the ATO.
The test for tax purposes
The test of an Australian resident for tax purposes depends on whether the “central management and control” of the company is in Australia or overseas. That is a matter of fact and ATO Ruling TR 2017/D2 sets out 4 matters the ATO will look at:
- Does the company “carry on a business” in Australia?
- What does central management and control mean in the circumstances?
- Who exercises that central management and control? e.g. Is there one person making the decisions? Are they the resident director? Or is it an overseas Board?
- When and where central management and control exercised is a factor.
Based on the High Court decision in Bywater Investments Ltd and Ors v Comm of Taxation: Hug Weng Bank Berhad V Comm of Taxation (2016) HCA 45 (Bywater Investments) and the ATO Ruling a company will generally have its place of central management and control in the location where the person(s) who make the critical decision’s actually makes those decision’s.
Registering as a Foreign Company with ASIC:
A “foreign company” under the Corporations Act 2001 (Cth) (Corps Act) is a body corporate incorporated outside Australia that does not have its head office or principal place of business in Australia.
Register as a foreign company:
If your “foreign company” wants to “carry on a business” in Australia it must be registered as a foreign company under the Corps Act with ASIC.
Carrying on business in Australia:
Whether or not a foreign company is “carrying on a business” is a question of fact and depends on the circumstances as stated above.
Section 21 (3) Corps Act -activities considered not carrying on a business:
(a) the Company is or becomes a party to a proceeding or effects settlement of a proceeding or of a claim or dispute; or
(b) holds meetings of its directors or shareholders, carries on other activities concerning its internal affairs;
(c) or maintains a bank account; or
(d) effects a sale through an independent contractor;
(e) or solicits or procures an order that becomes a binding contract only if the order is accepted outside Australia, or the State or Territory, as the case may be;
(f) or creates evidence of a debt, or creates a security interest in property, including PPSA retention of title property of the body;
(g) or secures or collects any of its debts, or enforces its rights in regard to any securities relating to such debts;
(h) or conducts an isolated transaction that is completed within a period of 31 days, not being one of a number of similar transactions repeated from time to time;
(j) or invests any of its funds or holds any property.
The common law guide suggests any business that is engaging in a commercial enterprise for profit in Australia is required to be registered as a Foreign company.
If you are doing business (apart from the above exceptions) in Australia the following documents must be provided to ASIC to register as a foreign company:
- certified copy of a current certificate of incorporation or registration;
- certified copy of constitution;
- list of directors containing personal details of those directors;
- a memorandum stating the powers of director’s resident in Australia and members of a local board of directors;
- information and documents relating to registrable charges on property of the foreign company;
- the registered office of the foreign company in its place of origin or its principal place of business; and
- notice of the foreign company’s registered office in Australia which complies with section 601CT of the Corps Act.
Australian registered office, local agent, and public officer:
So, you need an Australian registered office, an Australian local agent / representative and Public officer for the ATO tax purposes. The local agent is personally liable for anything the foreign company is required by law to do, and the Public officer for taxation obligations.
ARBN: ASIC will issue your foreign company with an Australian Registered Body Number (ARBN). Foreign companies must ensure that their ARBN and their name (as registered with ASIC) and place of origin are shown on their public documents. There are annual reporting requirements to ASIC.
Establishing a Subsidiary entity:
This involves registering a proprietary company (i.e. one with less than 50 shareholders) as a subsidiary of the foreign company.
The Subsidiary entity carries on business and trades in Australia and is required to be registered with ASIC and the ATO.
There must be at least one Australian director, an Australian registered office, and there are ongoing reporting requirements with ASIC. Australian companies must maintain a company register and unless an exemption applies lodge audited financial statements each year.
On registration the company is given an Australian Business Number, (ABN) Tax File Number (TFN), and typically register for Goods and Services Tax (GST) (assuming annual turnover exceeds $75,000) and Pay as You Go (PAYG) withholding tax where it has employees or contractors, or the business makes payments to other businesses, that do not quote an ABN.
If you do need to register as a Foreign company must you then apply for an ABN (Australian Business Number) with the ATO?
Non-Resident entities: may be entitled to an ABN where they are either:
- carrying on an enterprise in Australia;
- in the course of carrying out an enterprise or makes sales connected with Australia.
The entity does not have to be located in Australia.
You need to register for an ABN for GST and PAYG withholding tax. The ATO will issue a unique 11-digit identifier.
You need to quote your ABN on all invoices and documents for sales made. A failure to do so means the other business may withhold from their payment 47% (from 1/7/2107) under the PAYG system.
When applying for the ABN you can register for tax obligations such as GST and PAYG.
A business will need to register for GST where their annual turnover is $75,000.00 or more and register within 21 days of reaching or exceeding it.
A business can elect to register if their turnover is below that threshold but then they must charge GST. So, if a small business and you are unlikely to reach that turnover, you can offer prices without charging the 10% GST and be competitive or charge the same as your competitors and retain the extra as profit.
GST issues specific to Franchising:
- GST payable by franchisees to non-resident franchisors:
- GST is payable on franchise fees paid on or after the 1/7/2000, unless the franchise services are exempt as a financial supply.
- Royalty payments made to a non-resident franchisor require the franchisee to withhold a flat rate of 30% from the gross amount of a royalty payment and 10% from the gross amount of an interest payment.
- The double tax agreement with the non-residents country of residence may reduce that rate.
- The franchisee remits that sum in its BAS activity statement for the reporting period (usually quarterly) with an annual report.
- The amount of the royalty payment can only be deducted as a business expense to the franchisee where the franchisee has withheld the tax from the royalty or interest and it has been paid to the ATO.
If the amount withheld is not the same as the amount the payee owes, they can apply for a refund if the amount withheld and paid to the ATO is more than tax owed or make a top up payment to the ATO if the amount withheld is less than the tax owed.
Payments made by a franchisee to a franchisor will generally include GST, that is the fees are charged plus GST) where the Franchisor is GST registered. The franchisee if registered will receive a GST credit for the GST paid, included in:
- The initial franchise fees;
- Franchise renewal fees;
- Franchise royalties;
- Advertising marketing fees;
- Transfer fees; and
- Training fees.
Tax Deductibility of Franchise Fees:
The Initial upfront franchise fee or transfer fee is not deductible as a business expense, it is a capital cost forming part of the cost base of your business.
Franchise Renewal fees may be part of the cost base but if not included in your cost base it may be deductible as a business expense subject to prepayment rules.
Royalties and interest payments and ongoing training fees are a deductible business expense in the year you incur them.
- Business name and Trade Mark Registration
If the foreign company or Australian subsidiary wishes to trade under a name other than its own name (as registered with ASIC) it must register it as a business name with ASIC.
Trade mark searches must be done to minimise the risk of potential infringement of a third parties existing registered or unregistered rights in the proposed name and avoid any claim for misleading or deceptive conduct under the Competition and Consumer Act 2010 (Cth).
Trade mark registration confers a monopoly right to the holder of the trade mark to use the mark in respect of the goods or services for which it is registered so it is vital to register your name in the relevant classes.
- FIRB Federal laws for foreign investment
Foreign investment approval may be required if a foreign person (including a foreign company) acquires a substantial interest in an Australian company.
We have a network of Professional advisors, Accountants and consultants in the areas of compliance, taxation, market research and feasibility, valuations, Leasing and Property to assist our overseas clients with a successful roll out of Business in Australia.
What if you do not have a resident Director or Agent in Australia?
MMRB can be your required Australian registered office and (subject to certain requirements) be your resident Director, Public Officer or Agent where you may not have any trusted contacts in Australia.
Our services include:
- being appointed as a Local Agent or resident director
- Business structures, taxation and asset considerations.
- Business Expansion models – via company owned, License, Franchising Agency or Distribution models.
- Business entry planning including market and competitive market analysis.
- Advice on acquisition of Property and Leasing.
- Contract negotiations and risk analysis.
- Banking, ﬁnance and debt funding, opening bank accounts and insurances.
- Trade Mark and IP protection.
- Employment law advice.
- Local operational Support for Foreign Companies
- Financial reporting for ATO and ASIC and State tax and compliance.
- Tax advice and Corporate secretarial services for ASIC.
Access to Specialist Tax consultants regarding:
- Transfer pricing– setting prices of goods and services exchanged between subsidiary, affiliate or commonly controlled companies.
- Thin capitalisation– debt and equity tests to identify which finance arrangements constitute debt to prevent multinational entities shifting profits out of Australia by funding their Australian entity with high debt level to reduce the tax payable. The Australian Govt is tightening these rules to provide that entities align the value of their assets with the value in their financial statements.
- Double tax agreements– tax treaties (DTA) agreements between countries to avoid double taxation of business and personal income. Australia has signed treaties with more than 40 countries.
We have access to trusted consultants to provide support in the areas of Payroll, outsourced bookkeeping, outsourced ﬁnancial control.
Accredited Specialist Lawyers in Business Law, Employment Law and Commercial Litigation.
We know what business sectors are doing in the Australian market and provide our overseas clients real feedback about the market and information to assist with their financial modelling based on our understanding of the Corporate sector, local market trends as well as understanding the property and leasing market.
MARSH & MAHER RICHMOND BENNISON LAWYERS
Robert Toth, Accredited Commercisl Law Specialist
mobile 0412 67 37 57
MMRB is a member of the Franchise Council of Australia (FCA), International Franchise Lawyers Association (IFLA) and the US Commercial Service and International Advisory Experts (IAE).