28 Sep 2017

CU LAB: Doing Business in Australia ‒ Tax

Mark Friezer outlines the key implications of doing business in Australia as a subsidiary, compared to a branch.

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Generally speaking, most of our clients who operate in Australia with any sort of substance operate through a subsidiary rather than a branch. There's a couple of reasons for this.

Most importantly from a commercial perspective, I think third party suppliers find it much easier to operate, to contract with a subsidiary; entry to leases, staffing arrangements and so forth are much easier done with a subsidiary than with a foreign company operating as a branch.

The other thing is that a foreign branch operation will need to register in Australia as a foreign corporation, and that brings with it some fairly onerous compliance obligations. So you need to lodge the parent company accounts or, if an Australian agent, maintain a branch register of members. From a purely tax perspective there are differences but really, they're not substantial.

Disclosure requirements differ according to whether you've got a branch or subsidiary. So with a branch operation, you'll need to disclose foreign accounts to the corporate regulator. From a tax point of view, given that the tax calculation is a profits attributable calculation ‒ so in other words, it looks to the profit that in Australia by a foreign company ‒ it may well be that the Australian tax authorities will seek to refer to the parent company accounts in order to audit the Australian branch operation.

So having a subsidiary actually has the advantage of insulating the foreign company from a fairly greater scrutiny by the Australian authorities.

Australia doesn't impose a branch profits tax any longer. So in other words, the profits earned in Australia by the branch to the foreign company won't suffer any additional tax over the normal corporate tax rate.

Australia has a thin capitalisation regime which limits the amount of gearing that you can place into a subsidiary of a foreign parent. So generally speaking that gearing ratio is 1.5 debt to one equity. What that means is, if you've got $100 of funding, you can do it $60 with debt and $40 with equity.