Kiwi investing or expanding into Australia?
This helicopter guide to inbound Australian tax issues for New Zealand resident individuals and entities is meant to operate as a spring-board for high-level structuring discussions by NZ advisers.
The purpose of this guide is to enable readers to quickly identify the various issues raised by the different structuring options before seeking specific advice (preferably ours!) on the most suitable structuring option for your clients.
This guide is separated into five parts.
Part I highlights the tax issues for NZ-resident investors investing in Australian real property, shares and unit trusts.
Part II outlines the tax issues for NZ-resident employees seconded to Australia.
Part III details the tax issues for NZ-resident entities expanding into Australia (whether by way of branch or subsidiary).
Part IV outlines the basics of Australia’s GST.
Part V highlights Australia’s CGT withholding tax.
PART I – CGT ISSUES FOR NZ RESIDENTS INVESTING INTO AUSTRALIA
Although still a small market by global standards, Australia’s proximity to NZ and the close ties between the two countries means NZ residents often invest in Australian real property, shares and unit trusts.
Under Australian domestic tax law, the starting point is that Australia taxes foreign-residents on their capital gains from Australian sources.
Australia’s CGT rules operate such that a capital gain or loss is triggered where a CGT event arises.
The most common CGT event is CGT A1 – disposal of a CGT asset.
Where, amongst other things, individuals or trusts (but not companies) hold a CGT asset for at least 12 months prior to disposal, the 50% CGT discount will apply so as to halve the gross capital gain before being included in the taxpayer’s assessable income.
Special rules for foreign-resident investors
The general rules above are subject to a specific statutory exception that operates to limit the taxation of foreign residents on Australian source capital gains to those in relation to a limited class of assets, known as ‘taxable Australian property’ (“TAP”).
That is, a capital gain or loss is disregarded if you are a foreign resident, or the trustee of a foreign trust just before the CGT event (e.g. disposal) and the relevant asset was not TAP.
Relevantly, TAP means:
- taxable Australian real property;
- an indirect Australian real property interest;
- a CGT asset used in carrying on a business through a permanent establishment in Australia;
- an option or right to acquire a CGT asset over any of the above; and
- a CGT asset subject to an exit election (that is, where a previously Australian-resident individual chose to defer Australian exit tax by electing to pay tax on actual disposal).
Based on the above, where, for example, an NZ resident invests in Australian real property, they will always be subject to CGT in Australia on any capital gain.
However, in relation to the disposal of shares in an Australian company or units in an Australian unit trust, NZ residents will not be subject to CGT in Australia unless those interests qualify as ‘indirect Australian real property interests’ which, amongst other things, requires:
- the NZ resident (together with associates) to hold at least 10% of the Australian company or trust; and
- the Australian company or trust to pass the ‘principal asset test’, that is, the market value of the entity’s taxable Australian real property assets exceeds the market value of the entity’s non-taxable Australian real property assets (essentially, the company or trust is ‘land-rich’).
Foreign-residents no longer entitled to the 50% CGT discount
As outlined above, where the relevant conditions are met by an eligible taxpayer (individual or trust), the 50% CGT discount applies to reduce the gross capital gain by half before being included in assessable income.
However, from 8 May 2012, foreign-residents are not entitled to the 50% CGT discount, meaning that they will pay tax on the gross capital gain at non-resident rates (currently up to 45%).
For those NZ residents that held Australian TAP assets as at 8 May 2012, special transitional rules apply and specific advice should be sought in this regard in calculating any capital gain or loss in the future.
For those NZ residents that acquired Australian TAP assets after 8 May 2012, they are not eligible for the 50% CGT discount regardless of how long the asset is held.
PART II – NZ EMPLOYEES SECONDED TO AUSTRALIA
Under Australian domestic tax law, the starting point is that foreign-resident are taxed on their ordinary income (including salary and wages income) from Australian sources.
Application of the Australia/NZ Double Tax Agreement
The domestic Australian tax position above is reflected in the default position under the Australia/NZ Double Tax Agreement (“DTA”), that is, an NZ-resident is only taxed on employment income in NZ unless the employment is performed in Australia.
However, the default position is subject to an overriding provision such that an NZ resident deriving income from employment exercised in Australia is only taxed in NZ if:
- the NZ individual is present in Australia for a period or periods not exceeding in the aggregate 183 days in any 12 month period commencing or ending in the Australian income year; and
- the remuneration is paid by, or on behalf of, an employer who is not a resident of Australia, or is borne by or deductible in determining the profits attributable to a permanent establishment which the employer has in NZ; and
- the remuneration is neither borne by nor deductible in determining the profits attributable to a permanent establishment which the employer has in Australia.
If these conditions are satisfied, the NZ-resident employee is only taxed in NZ.
Further, even if these conditions cannot be satisfied, remuneration derived by an NZ-resident individual in respect of a secondment to Australia is only taxable in NZ where the individual is present in Australia for a period or periods not exceeding in the aggregate 90 days in any 12 month period.
PART III – NZ BUSINESSES EXPANDING INTO AUSTRALIA
Most NZ practitioners would be broadly familiar with the structuring options in relation to expanding into Australia (or elsewhere for that matter), that is, branch versus subsidiary.
Again, under Australian domestic tax law, a foreign-resident is taxed in Australia on all Australian-source income.
However, under the DTA, the Australian-source business profits of an NZ-resident are not taxed in Australia unless the NZ-resident has a permanent establishment in Australia.
What is a permanent establishment?
A permanent establishment is a fixed place of business in Australia.
Specific advice should be sought as to whether your operations will trigger a permanent establishment in Australia as the concept relies on the particular facts of each individual case and therefore, although similar cases may provide guidance, different facts may prove decisive in a particular case.
The Australian Taxation Office takes an expansive view as to what triggers a permanent establishment in Australia and has ruled that an NZ company had a permanent establishment in Australia where:
- it sold products to 3rd parties in Australia;
- sales orders were taken by two Australian-based employees who emailed orders to NZ;
- the employees were the Australian contacts of the company;
- the employees were provided with a car and office machinery;
- the employees operated out of a designated room in their own houses;
- the company had an Australian bank account; and
- the products were sent directly from New Zealand to Australian customers or via a 3rd party warehousing intermediary.
Based on the above, an individual employees’ home (or even, a single room of their home) may trigger a permanent establishment in Australia.
Branch versus subsidiary (tax issues)
Assuming that the NZ-resident’s Australian operations would give rise to a permanent establishment in Australia, we note that:
- in relation to an Australian branch:
- the profits of the branch will be taxed in Australia at the relevant rate (e.g. NZ-resident companies will be taxed at 30% and NZ-resident individuals at their marginal tax rate up to 45%);
- Australia does not have branch profits remission tax in moving the profits to NZ;
- the assets of an Australian permanent establishment are TAP assets and therefore, the NZ-resident will be subject to CGT in Australia if the Australian branch was sold in the future;
- in relation to an Australian subsidiary:
- it will be taxed on its worldwide income at 30%;
- in relation to dividends paid up to the NZ-resident shareholder(s):
- no dividend withholding tax will apply to the extent that the dividend is fully franked;
- dividend withholding tax of between 0% and 15% will apply under the DTA to the extent that the dividend is un-franked;
- the shares in the Australian subsidiary (unless it is ‘land-rich’ with Australian real property) are not TAP and therefore, the NZ-resident entity will not be subject to Australian CGT if the Australian operations are sold in the future by way of share sale (disposal by way of the sale of underlying assets by the Australian subsidiary will be taxed at 30% in the ordinary course giving rise to the taxation of dividends as outlined above).
Choice of structure of foreign tax credits/offsets
Cross border business activities often gives rise to multiple layers of taxation and the inability to claim foreign tax credits so as to push up the effective tax rate on foreign-source profits. However, some business structures facilitate the claiming of full foreign tax credits (up to the maximum tax liability in the home country) such that taxpayers pay no more than the maximum domestic tax rate in their home country.
Understanding the various structuring options available and how they are ultimately taxed in Australia, New Zealand and under the DTA is the key to making a fully informed decision and preventing any nasty surprises. In this regard, structuring options include:
- a New Zealand company with an Australian branch (and in turn, whether or not it gives rise to an Australian permanent establishment);
- an Australian subsidiary of a New Zealand parent company;
- a New Zealand limited partnership operating in Australia (whether or not an Australian permanent establishment arises); and
- a New Zealand Look-Through Company operating in Australia (whether or not an Australian permanent establishment arises).
PART IV – GST ISSUES
The rate of GST is (currently) 10%.
The registration turnover threshold (above which you are required to be registered) is AUD$75,000, although you may be voluntarily registered if you are under this turnover figure.
There are various supplies that are not subject to GST, that is:
- GST-free supplies (such as certain foods, health and education services and supplies of going concerns – similar to zero-rated supplies in NZ; and
- input taxed supplies (such as financial supplies, residential rent supplies and residential premises themselves [unless ‘new residential premises] – similar to exempt supplies in NZ.
Where an enterprise makes a ‘creditable acquisition’ or ‘creditable importation’, they are entitled to claim the relevant input tax credits.
Broadly, a creditable acquisition is an acquisition (or expense incurred) that had a GST component within it and was incurred in order for you to make taxable supplies or GST-free supplies (but not input taxed supplies – input tax credits are not available in this regard).
You make a creditable importation if goods are imported and they are entered for home consumption (unless specifically non-taxable).
From a cash flow perspective, NZ businesses importing into Australia should consider the ‘deferred GST’ regime, whereby instead of paying GST only to claim it back at the end of the relevant tax period, the liability is deferred and nets off against the refund at the end of the tax period.
PART V – CGT WITHHOLDING TAX
From 1 July 2016, and in similar circumstances to the NZ CGT withholding regime for properties held for less than 2 years, Australia imposes a 10% withholding tax on the purchase price of Australian real property over AUD$2m.
Even if you are caught by the CGT withholding regime, it is possible, in circumstances where there is insufficient equity in the property or the ultimate CGT liability on the property will be less than the 10% withholding amount, to apply to the ATO for a withholding variation (including to nil) as soon as possible after exchanging contracts so as to ensure that the relevant approvals are granted prior to settlement.
Economos has significant experience and expertise in assisting foreign investors and business invest or expand into Australia.
This requires an in-depth knowledge of Australian domestic tax laws and the operation of the DTA.
We provide commercially-focussed, complex international tax advice in a simple, easy-to-understand manner so as to enable your clients to make fully-informed decisions and avoid nasty surprises.
Our tax advisory services form a critical part of our broader service offering, including:
- tax compliance (income tax, GST, fringe benefits tax, payroll tax etc);
- financial reporting; and
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 Subsection 6-10(5) of the Income Tax Assessment Act 1997 (“ITAA 1997”)
 Section 104-10 of the ITAA 1997
 See Subdivision 115-A of the ITAA 1997
 See Division 855 of the ITAA 1997
 Section 855-15 of the ITAA 1997
 Section 855-25 of the ITAA 1997
 Section 855-30 of the ITAA 1997
 Subsection 6-5(3) of the ITAA 1997
 Article 14(1) of the DTA
 Article 14(2) of the DTA
 Article 14(4) of the DTA
 Note 8
 See Articles 7 (Business Profits) and 5 (Permanent Establishment) of the DTA
 See ATOID 2005/289 (available at https://www.ato.gov.au/law/view/document?docid=AID/AID2005289/00001)
 Subsection 7-1(1) and section 9-5 of the A New Tax System (Goods and Services) Tax Act 1999 (“GST Act”)
 Subsection 7-1(1) and section 13-5 of the GST Act
 Section 9-70 of the GST Act
 Section 23-15 of the GST Act and reg 23.15.01 of the A New Tax System (Goods and Services) Regulations 1999 (“GST Regs”)
 See Division 38 of the GST Act
 See Division 40 of the GST Act