Taxation is one of the key business costs to think about when you’re entering the Australian market. At BDO we work with a wide range of New Zealand businesses to help them understand and manage their tax obligations in Australia. Based on our experience, here are some of the key issues and options you’ll need to consider.
Double taxation
One of the most fundamental tax issues for New Zealand businesses expanding into Australia is the potential double taxation of Australian profits. Tax paid in Australia does not generate imputation credits for New Zealand shareholders. What that means in practice is that if you have a permanent presence in Australia, such as a branch or subsidiary company, you’ll pay Australian income tax of 30%. However, if you want to repatriate those profits to the ultimate NZ natural person or trustee shareholders in the form of dividends, you must also pay 33% tax to Inland Revenue – effectively increasing your tax on those profits to 53%. To put it another way, you have to earn $143 in Australia to get the same after-tax proceeds to shareholders as $100 earned in New Zealand. This is obviously a signficant issue. However, there are a range of options in terms of managing it. The best solution will depend on your particular business; however options include:
- Using New Zealand retained earnings for dividend payments.
- Using Australian profits to fund business growth or reduce debt.
- Ensuring you are charging appropriately (through transfer pricing) for products and services provided to your Australian operation.
Business structure
Tax issues are also relevant in choosing the most appropriate business structure for your Australian operation. Common structures (and their tax implications) include:
Export only (no physical presence in Australia)
This is a typical way for companies to ‘dip their toe’ into Australia. Generally, if you’re simply exporting to Australia and have no physical/ permanent presence there, no Australian income tax should be payable. However there are a range of other tax obligations you’ll need to factor in such as GST, customs and stamp duty.
Australian branch of your NZ company
Establishing an Australian branch is a relatively common option. With this structure the double taxation issue applies to income earned in Australia. There are also adverse tax implications if you sell your Australian business, including Capital Gains Tax and Stamp Duty considerations.
Australian subsidiary of your NZ company
This is the most commercially accepted approach for New Zealand businesses establishing themselves in Australia. While the double taxation issue applies, it is much more advantageous on exit than a branch structure as no Australian tax should apply if you sell shares in Australian subsidiaries.
NZ limited partnership with Australian branch
This structure has the advantage of mitigating the double taxation issue, but it also has significant disadvantages. These kinds of structures are not well regarded in Australia, and it can be hard to find advisers with adequate experience of dealing with them. There are also significant adverse tax implications if you sell.
Australian limited partnership
This kind of structure is not very common, and has significant tax issues on exit.
Branch vs subsidiary?
Branches and subsidiaries are the most popular structures used by New Zealand companies setting up in Australia. In BDO’s experience of working with both of these, a subsidiary structure can have benefits:
- Australians can be quite ‘parochial’ in that they often prefer dealing with ‘local’ businesses. Being seen as a branch of a New Zealand company may put you at a disadvantage in terms of the perception of your customers, suppliers and other stakeholders.
- Subsidiaries provide a higher level of risk isolation than a branch structure.
- Registration with ASIC and ATO is typically much easier, faster and less costly for subsidiaries. The level of documentation required for a branch structure can be significantly greater and more complex.
- Local funding & banking is often easier to arrange for a subsidiary.
- Subsidiaries may be able to take advantage of tax concessions for research and development activities.
Get advice early
Of course, while they are important tax issues alone should not drive your choice of business structure. The best solution for you will also depend on a range of factors such as your time frame, your market, and your business strategy and ambitions. It’s essential to get good advice from people on the ground who understand the local environment and the local regulatory framework - it will save you a lot of time and potential expense down the track.
For more information contact one of our advisors below:
Alan Scott, Partner, BDO Wellington
Mark Lodder, Partner BDO Christchuch
Tim Zonneveld, Partner, BDO Auckland
Angie Hicks, Partner, BDO Brisbane