Getting to grips with taxation when investing overseas may seem a complicated process, but the gains of carrying out your business in Australia is worth the time taken to understand the taxation system.
At the latter end of 2020, the Department of Foreign Affairs and Trade reported that foreign investors had a total of $4 trillion dollars invested in the Australian economy. Despite the global pandemic affecting trade across the world, the Australian economy beat market expectations in March 2021 with the third straight quarter of expansion. For overseas investors, Australia still continues to be an attractive prospect and it is important to understand how foreign investment is taxed once you begin your enterprise following FIRB approval.
What is FIRB approval?
The Australian Foreign Investment Review Board or FIRB is an advisory body which reviews proposed investments from foreign investors. Their recommendations aid the Australian Government and the Treasury on the operation of Australia’s Foreign Investment Policy. The FIRB also gives guidance to foreign persons on policy and relevant legislation, and they monitor and ensure compliance of the Foreign Acquisitions and Takeovers Act (1975).
Acquisitions that are complex or sensitive from overseas investors are subject to the FIRB application process, so it is important to work with a specialist company that can maximise your chances of successful FIRB approval.
What taxation applies to foreign investments?
Once you have gained the relevant approval to start trading in Australia, it is important to gain an understanding of the taxation system that applies to you.
Taxable income is basically the accounting profits of the taxpayer so if the foreign investor is a “taxable entity” i.e. an individual, a limited partnership, or company, they will be subject to income tax. Foreign residents are also taxed on any capital gains received from the selling of taxable Australian property and taxed on income sourced in this country.
It is important to ensure that professional advice is sought on your individual taxation circumstances, for example the current rates (as of April 2021) for company income tax is 30%. However, if the company has a turnover of less than $50 million with no more than 80% income in passive forms, the tax is 26% in the 2020-2021 tax year then dropping to 25% for 2021-2022. Passive income relates to money earned from a limited partnership or renting a property or other business in which the person is not actively involved.
Individual foreign investors are taxed on a scale of rates depending on how much they earn, and further information can be sought from the Australian Tax Office or ATO. All foreign businesses have to meet their obligations and tax liabilities but there are also other areas relevant to enterprises who are involved in cross border arrangements.
Capital Gains Tax
This is the income tax that relates to financial gains (and losses) so, if buying land as an investment reaps a profit when sold, it could be subject to capital gains tax. For foreign investors, CGT would normally only apply if the gain was related to shares or rights in Australian land-rich entities or interests in Australian land.
Goods and Services Tax
This is an indirect tax as it is a federal value added tax on the supply of services, goods, and the import of goods. All businesses have to register for GST, as it is known, if registered as a business in Australia and the annual turnover is $75k or above. What is important for foreign investors to note is that they may have to pay GST if they supply digital products and other services to private customers. Again, this needs to be confirmed with a company taxation accountant.
This is a territory and state-based tax which is applied to a number of transactions often linked to the buying and selling of property, or leases or insurance. Foreign corporations and trusts may be subject to additional stamp duty if involved in buying residential land indirectly or directly via a land holder entity in Victoria, South Australia, West Australia, Tasmania, Queensland, and New South Wales.
As you would expect, tax law in this country includes anti-avoidance rules and the ATO in particular focuses on holding companies which appear to have no obvious commercial purpose. Private equity investment arrangements which set out to try to avoid paying out on gains from investments are of particular interest and the ATO set out a number of tax determinants which can be found on its website.
If a company’s level of debit is much greater that its equity capital, it is said to be thinly capitalised. There are thin capitalisation rules in place to reduce the amount of debt deductions that are available to foreign entities investing in Australia. These rules come into force when broadly speaking the debt is more than 60% of the net value of Australian assets. Under the rule a certain amount of the debt deductions may not be allowed when submitting the business’ tax return.
Foreign Investment Tax Incentives
There are several tax incentive schemes to encourage foreign investment into the country and again further information can be sought from a professional tax adviser. As noted above, foreign investors are normally not subject to CGT, and there are also tax incentives if the investment falls under the Research and Development tax incentive scheme. Venture capital investments include tax exemptions for limited partners who are foreign investors on their share of capital gains or revenue made when disposing of investments by the venture capital limited partnership. Managed investment trusts also offer an attractive tax measure for foreign investors subject to conditions that may be worth exploring as well.
In order to reap the benefits of foreign investment in Australia, you first have to ensure that your FIRB application is successful. Speak to the experts in foreign investment review board approval in Australia.
And take that first step to becoming an international enterprise.