Establishing a business in Australia

A Q&A guide to establishing a business in Australia.

This Q&A gives an overview of the key issues in establishing a business in Australia, including an introduction to the legal system; the available business vehicles and their applicable formalities; corporate governance structures and requirements; foreign investment incentives and restrictions; currency regulations; and tax and employment issues.

To compare answers across multiple jurisdictions, visit the Establishing a business in... Country Q&A Tool.

This article is part of the global guide to establishing a business worldwide. For a full list of contents, please visit www.practicallaw.com/ebi-guide.

Contents

Legal system

1. What is the legal system in your jurisdiction based on (for example, civil law, common law or a mixture of both)?

Australia is a common law jurisdiction.

 

Business vehicles

2. What are the main forms of business vehicle used in your jurisdiction? What are the advantages and disadvantages of each vehicle?

Business can be conducted through any of the following structures:

  • Company.

  • Trust.

  • Partnership.

  • Joint venture.

  • Sole trader.

Four types of company can be incorporated:

  • A company limited by shares (public and proprietary).

  • A company limited by guarantee.

  • An unlimited company (public and proprietary).

  • A no liability company (available only where the entity's business is limited to mining).

The type of company used depends on the nature of the business or activity. However, 98% of companies registered are either public or proprietary companies limited by shares. Members of a company limited by shares contribute capital by subscribing and paying for shares in that company, and their liability is limited to the unpaid amount on those shares.

Proprietary companies are the most common because they have simple and cost-effective administration requirements. A proprietary company, which may be further classified as small or large, is a private company designed for a relatively small group of persons (a maximum of 50 non-employee members). A proprietary company can place restrictions on the transfer of its shares. A public company may have a much larger membership and is not subject to these restrictions.

 

Establishing a presence from abroad

3. What are the most common options for foreign companies establishing a business presence in your jurisdiction?

A foreign company establishing a business presence must do so through either:

  • Establishing or acquiring an Australian subsidiary company.

  • Establishing a branch office by registering itself as doing business in Australia.

The significant practical differences between establishing a subsidiary company in Australia and doing business through a branch office are that:

  • A subsidiary company is a separate legal entity and must have at least one director who is a resident in Australia, whereas a branch office is not a separate legal entity.

  • A subsidiary (depending on the type of company) only needs to lodge its own accounts with the Australian Securities and Investments Commission (ASIC), whereas a branch office must lodge the accounts for the foreign company.

 
4. How can an overseas company trade directly in your jurisdiction?

It is possible to undertake transactions in Australia without establishing a business presence. However, the following issues should be considered:

  • Tariffs apply to some goods imported into Australia, such as clothing, footwear and passenger cars and components.

  • Agency and distribution arrangements are not specifically regulated, although franchising is subject to separate regulation.

Other legal issues that may arise include:

  • Protection of intellectual property rights.

  • The law of the contract, the relevant forum for enforcing the contract and the possible impact of the UN Convention on Contracts for the International Sale of Goods 1980.

  • Security for payment, including title retention.

  • Dispute resolution and the relevant forum for settling disputes.

  • Currency of payment and protection against exchange rate fluctuations.

  • Potential product liability claims.

  • Taxation, although Australia has an extensive system of agreements with its main trading partners to avoid double taxation.

 
5. What are the formalities for setting up a partnership?

A partnership is the relationship that exists between persons carrying on a business in common, with a view to profit. In addition to any agreement between the partners, partnerships are regulated by the Partnership Acts of each state and territory. Because a partnership is not a separate legal entity:

  • Each partner is the agent of the other partners and can make contracts, undertake obligations and dispose of partnership property on behalf of the partnership in the ordinary course of the partnership business.

  • Arrangements between partners protect partners in their relationship with each other.

  • Third parties without knowledge to the contrary are protected from actions committed by partners beyond their authority.

  • Each partner is personally liable, jointly and severally, for the liabilities of the partnership. The liability of each partner is unlimited except in the case of limited partnerships.

  • The partners personally own the property of the partnership.

  • The partnership must submit an annual tax return disclosing its income, outgoings and the distribution of profits to partners. However, the partners individually (and not the partnership as a whole) must pay tax on their share of partnership profits. These profits become part of each partner's other income (or losses).

Limited partnership structures can be established by an agreement in all states, but not in the Australian Capital Territory or the Northern Territory. A limited partnership structure consists of a general partner (GP) and a limited partner (LP). The GP has unlimited liability and has obligations which mirror those of a partner in a common law partnership. The LP's liability is limited to the amount of capital it has contributed to the partnership. The LP cannot participate in the management of the partnership or bind the partnership. In most states, a company can be an LP. The establishment of an LP must be overseen by the relevant state government office responsible for administering limited partnerships.

 
6. What are the formalities for setting up a joint venture?

A joint venture is established by an agreement between the parties wishing to share the product of an enterprise as opposed to sharing the profits. Joint ventures are common in the mining industry. They are not separate legal structures and are governed by the terms of the agreement between the joint venturers and by the common law.

Joint venturers often appoint a company to manage the business of the joint venture.

Although not strictly correct, the term "joint venture" is often used by business people to refer to both:

  • A special purpose proprietary company where two or more parties have subscribed for shares to carry out a project.

  • A partnership between two or more parties carrying on a business with a view to making a profit.

A true joint venture does not itself receive income. Only the participants in the joint venture receive income, which arises when they sell the product they receive from the joint venture. The income arising to a party from the products of a joint venture can be aggregated with all other income and expenses of the party.

 
7. Are trusts available in your jurisdiction?

Trust structures are available. In a trust structure for conducting a business, the business's assets are held by a trustee, which carries on the business on behalf of the beneficiaries. A trust will be a unit, fixed or discretionary trust. Trusts can be private or public. A public trust can be listed.

The usual unit trust structure for conducting a business provides for beneficiaries to hold units both:

  • To which entitlements attach.

  • Which can be transferred in a similar way to shares in a company.

Income arising from a trust is taxed in the hands of the beneficiary rather than the trustee.

The answers to the following questions relate to private limited liability companies (or their equivalent).

 

Forming a private company

8. How is a private limited liability company or equivalent corporate vehicle most commonly used by foreign companies to establish a business in your jurisdiction formed?

Regulatory framework

The principal legislation regulating the formation and operation of companies (and certain other business entities) is the Corporations Act 2001 (Cth). The broader regulatory framework includes regulations made under:

  • The Corporations Act.

  • "Class orders" published by the Australian Securities and Investments Commission (ASIC) (which modify or clarify the operation of certain provisions of the Corporations Act and other legislation administered by ASIC, including exempting certain entities from provisions of the Corporations Act).

  • General case law.

For more information on the ASIC, see box, The regulatory authorities.

Tailor-made or shelf companies

Due to the ease of registration and short time required to register a company (registration takes place within one business day), shelf companies are no longer used in Australia.

Formation process

To register a company, an application for registration as an Australian company (Form 201) is filed with ASIC. A paper copy of the application must be filed with ASIC (unless the company is created by a service provider who has software permitting it to lodge online with ASIC).

Each company must do/have all of the following:

  • Nominate the state in which it will be registered.

  • Register its name (limited liability companies must include "Limited" or "Ltd" in their name, and proprietary companies must also include "Proprietary" or "Pty").

  • A registered office, which must be located in Australia.

  • Appoint the directors (at least one of which must be a resident of Australia) and other officers (which may include a public officer for tax administration purposes) prescribed for its type.

  • Provide and keep updated information about its shareholders and ultimate holding company.

  • Lodge statements and financial reports as prescribed for its type and circumstances.

As long as all necessary information is provided to ASIC, a company can be registered within one business day. Registration entitles a company to carry on business anywhere in Australia.

On registration, each company is both:

  • Allocated an Australian Company Number (ACN), a unique identifying number.

  • Issued a Certificate of Registration stating the company's name.

For taxation purposes, trading companies also require an Australian Business Number (ABN), which is issued by the Australian Tax Office.

The company is also issued with a corporate key (an eight-digit number), which allows the company to administer certain aspects of its dealings with ASIC online.

Company constitution

The company constitution is the core document governing the conduct of a company's affairs. It is common practice to adopt a constitution. However, a company can instead choose to rely entirely on the replaceable rules set out in the Corporations Act (except for companies in which the sole member is also the sole director). In addition to company constitutions, many companies are also governed by agreements between shareholders.

The company constitution and the shareholders' agreement are not public documents (unless the company is a public company, in which case the constitution must be lodged with ASIC and is therefore publicly available).

Company constitutions can be generic or bespoke, depending on the:

  • Nature of the business conducted by the company.

  • Specific controls on the affairs of the company which the original shareholders wish to impose.

Shareholders of a company often prefer for the company constitution to remain a "mechanical" document with more sensitive commercial provisions relating to the conduct of the business to be included in a shareholders' agreement.

 

Financial reporting

9. What financial reports must the company submit each year?

A proprietary company that is owned by a foreign corporation must submit annual financial reports to the Australian Securities and Investments Commission (ASIC) if it is a "large" proprietary company. A company is a "large" proprietary company if it satisfies two or more of the following criteria:

  • The consolidated revenue for the financial year of the company and any entities it controls is A$25 million or more.

  • The value of the consolidated gross assets at the end of the financial year of the company and any entities it controls is A$12.5 million or more.

  • The company and any entities it controls have 50 or more employees at the end of the financial year.

Certain wholly owned subsidiaries can apply for an exemption from filing audited annual financial reports with ASIC if they both:

  • Are covered by a relevant ASIC class order.

  • Enter into a deed of cross-guarantee with the Australian holding entity.

A registered foreign company (that is, a company operating as a branch in Australia) must lodge its financial statements with ASIC each calendar year. The financial statements must include a balance sheet, profit and loss statement and cash flow statement.

 

Trading disclosure

10. What are the statutory trading disclosure and publication requirements for private companies?

A private company must display all of the following:

  • Its name at each place of business that is open to the public.

  • Its name and the words "registered office" prominently at its registered office.

  • Its name and its Australian Company Number (ACN) or Business Number (ABN) (see Question 8) on:

    • each public document of the company;

    • every negotiable instrument (for example, cheque or promissory note) of the company; and

    • any document lodged with the Australian Securities and Investments Commission (ASIC).

 
11. How do companies execute contracts or deeds?

A company can execute a document in one of the following ways:

  • By two directors signing the document.

  • By one director and one company secretary signing the document.

  • By the sole director who is also the sole company secretary signing the document (for a propriety company).

  • By fixing the common seal of the company and having it witnessed by persons specified in the above three bullets.

If executed in this manner, a contracting party can assume that the document has been validly executed by the company (sections 129(5) and 129(6), Corporations Act). Alternatively, a company can appoint an attorney under a power of attorney to execute a document. In this case a witness is required.

 

Membership

12. Are there any restrictions on the minimum and maximum number of members?

The minimum number of members for company formation is one member (for example, in a sole member company). There are no unique requirements that apply to sole member companies. The maximum number of members for a proprietary company is 50 (non-employee) members. A public company structure is required for companies with more than 50 members.

 

Minimum capital requirements

13. Is there a minimum investment amount or minimum share capital requirement for company formation?

As long as some share capital is invested, there are no minimum share capital requirements for company formation. For example, a share capital of A$1 is sufficient for company registration.

 
14. Are there restrictions on the transfer of shares in private companies?

The only restrictions on transfers of shares in proprietary companies are those imposed by the company constitution and any shareholders' agreement. Accordingly, a company's constituent documents can contain pre-emption rights or any other restrictions. Most company constitutions (and the replaceable rules under the Corporations Act) provide the company directors with a general discretion to refuse to register the transfer of shares for any reason. However, restrictions under the Corporations Act apply in relation to the buy-back and cancellation of shares.

 

Shareholders and voting rights

15. What protections are there for minority shareholders under local law? Can additional protections be given?

Minority shareholders benefit from certain protections under the Corporations Act. The principal protections are:

  • The liability of a member is limited to the amount of the share capital invested by that member, and the member is not personally liable for the company's liabilities.

  • Members who alone or together control at least 5% of the voting rights can require the company directors to call members' meetings and put resolutions.

  • Members can seek court relief if an actual or proposed act, omission or resolution of the company is either:

    • contrary to the interests of the members as a whole; or

    • oppressive to, unfairly prejudicial to, or unfairly discriminatory against a member or members.

 
16. Are there any statutory restrictions on quorum or voting requirements at shareholder meetings? Do quorum or voting rights need to be proportionate to shareholdings?

The company constitution determines the quorum and voting requirements at shareholder meetings. However, if the company constitution is silent on quorum, then the Corporations Act provides that the quorum for a members' meeting is two members (unless the company only has a sole member).

Voting rights are also determined by the company's constituent documents (for example, the company constitution and any shareholders' agreement) and the terms on which the relevant shares were issued.

 
17. Are specific voting majorities required by law for any corporate actions (for example, increasing share capital, changing the company's constitution, appointing and removing directors, and so on)?

Matters can be set out in the company's constituent documents as requiring specific thresholds for voting. In addition, the Corporations Act requires that certain major actions can only be undertaken in accordance with a special resolution where both:

  • 21 days' notice is given to the members entitled to vote on the resolution (certain special resolutions can be passed on shorter notice provided that consent of at least 95% of members is obtained before the meeting).

  • The resolution is passed by at least 75% of the votes cast by members entitled to vote on the resolution.

Matters requiring a special resolution include changes to the company's constitution and reduction in share capital.

For all other resolutions, a simple majority of the votes cast (that is, a majority of more than 50%) is sufficient.

 
18. Can voting majorities required by law be disapplied to protect a minority shareholder (for example, through class rights or weighted voting)?

Mandatory voting majorities that must be met under the Corporations Act cannot be reduced. However, the company's constitution can increase the minimum member approval thresholds.

 

Sectoral restrictions

19. What are the conditions or restrictions on establishing a business in specific industry sectors? Are there industry sectors in which it is not permitted to establish a business?

Specific regulatory licences and conditions must be obtained and satisfied by any company (foreign or Australian) wishing to conduct business in certain industries (for example, banking, consumer credit and media). In addition, Australia's foreign investment regulatory regime may apply in relation to foreign interests wishing to invest in Australia (see Question 20).

 

Foreign investment restrictions

20. Are there any restrictions on foreign shareholders?

Restrictions under the government's foreign investment policy have been updated with substantial amendments to the Foreign Acquisition and Takeovers Act 1975 (FATA), which came into operation on 1 December 2015. The new regime continues to encourage foreign investment in Australia, but has varied impacts on foreign investors depending on the type of investment or transaction they wish to undertake.

Certain types of proposals by foreign interests to invest in Australia require prior approval (depending on the value and sector of the assets or business being acquired). Therefore, the proposals must be notified to the Foreign Investments Review Board (FIRB). Proposals requiring prior notification to the FIRB and approval by the Treasurer include:

  • Acquisitions of vacant non-residential land, residential land or shares in urban land corporations or trust estates.

  • Direct acquisitions or investments by an entity that has one foreign government or its agencies holding 20% or more equity, or two or more foreign governments and their agencies holding 40% or more equity.

  • Acquisitions by a foreign person of substantial interests in existing Australian corporations or businesses with total gross assets over A$252 million (or A$1,094 million for Chilean, Japanese, Korean, New Zealand and US investors).

  • Takeovers of offshore companies whose Australian subsidiaries or gross assets are valued at A$252 million (or A$1,094 million for US investors) or more, where those Australian assets account for less than 50% of the target company's global assets.

A foreign person acquires a substantial interest in the ownership of a corporation or business if either:

  • That person and any associates acquire 20% or more of the ownership of the entity.

  • That person, together with other foreign persons and each of their associates, acquires 40% or more in aggregate of the ownership.

In most industry sectors, foreign investment proposals that require approval are approved unless determined to be contrary to the national interest. However, specific policies and rules apply in the case of proposals involving foreign investment in urban land (particularly developed residential real estate, which is unlikely to be approved), and the agricultural sector. An investment in the banking, civil aviation, airports, transport, media and telecommunications industry sectors is also regarded as sensitive.

Residential real estate functions now fall under the jurisdiction of the Australian Taxation Office (ATO). The ATO's governance involves the establishment and enforcement of a foreign land ownership register. All foreign investors are required to give notice of their interest in agricultural land, and report to a relevant commissioner the details of any events before them taking or ceasing ownership. Over time this register will evolve to ultimately encompass residential land ownership as well as water entitlements.

There are new application fees associated with foreign investment. These will be a minimum of A$5,000 for residential and agricultural investments and A$25,000 for business transactions, with increasing fees based on the transaction value. Foreign government investors, or investors in special industries (such as the media or aviation will be subject to different fees.

FIRB approval is usually given within 30 days of lodging an application. The Treasurer can block an investment or require divestment if either the:

  • FATA is breached.

  • Investment is considered to be contrary to the national interest.

 
21. Are there any exchange control or currency regulations?

Inward investment is not subject to exchange controls, but this does not preclude the need to obtain approval from the Foreign Investments Review Board (FIRB) in certain situations. Outward exchange flows are not restricted. However, both outward bound and inward bound exchange flows are subject to cash transaction reporting guidelines imposed on both:

  • Cash dealers (which include banks, financial institutions, insurance companies, currency and bullion dealers and others).

  • Other persons who send or receive international fund transfer instructions.

Cash dealers must report to the Australian Transaction Reports and Analysis Centre details of certain transactions, including:

  • Significant cash transactions involving the transfer of currency (coin and paper money of Australia or a foreign country) of A$10,000 or more (including foreign currency equivalents), unless the transaction has been specifically exempted.

  • International telegraphic or electronic funds transfers to and from Australia, unless the transaction has been specifically exempted.

  • Transactions that the cash dealer has reasonable grounds to suspect are relevant to criminal activity.

 
22. Are there restrictions on foreign ownership or occupation of real estate, or on foreign guarantees or security for ownership or occupation?
 

Directors

23. Are there any general restrictions or requirements on the appointment of directors?

To be appointed as a director, a person must be at least 18 years of age and provide consent. There are no restrictions in relation to nationality or residency, provided that at least one company director is an Australian resident.

A person becomes ineligible to be a director if he or she either:

  • Becomes bankrupt (or has not been discharged from bankruptcy).

  • Has been disqualified by the Australian Securities and Investments Commission (ASIC) from being a director of a company (and continues to be subject to the disqualification order).

 

Board composition

24. What are the legal requirements for the composition of a company's board of directors?

Structure

The Corporations Act only recognises a single board structure, and all directors have the same powers and responsibilities (although the company's constitution can establish sub-committees of the board due to practical considerations). One director must be an Australian resident.

Number of directors or members

A proprietary company must have at least one director (Corporations Act). If this statutory minimum is satisfied, the company's constitution can determine the minimum and maximum number of directors.

Employees' representation

Employees do not have a statutory right to board representation.

 

Reregistering as a public company

25. What are the requirements for a business to reregister as a public company?

Membership

Once a company no longer qualifies as a proprietary company (that is, it has more than 50 members), it must convert to a public company. This requires a public company to lodge audited annual financial accounts and comply with the two following additional obligations imposed on public companies under the Corporations Act:

  • Appointment of an auditor.

  • Appointment of at least three directors and a company secretary to manage the regulatory affairs of the company.

Share capital

There is no minimum requirement for share capital (for example, A$1 is sufficient).

 

Tax

26. What main taxes are businesses subject to in your jurisdiction?

The Australian taxation regime comprises federal and state taxes. The main federal taxes are:

  • Income tax.

  • Corporate tax.

  • Capital gains tax.

  • Goods and sales tax (GST).

  • Fringe benefits tax.

  • Superannuation tax.

The main state taxes are:

  • Stamp duty (which includes transfer duty, "land rich" or "land holder" duty, motor vehicle registration duty, insurance duty and mortgage duty).

  • Land tax.

  • Payroll tax.

Federal taxes are administered by the Australian Taxation Office (ATO) and state taxes are generally administered by the various state revenue offices.

Income tax

Income received by individuals is taxed at progressive rates, with different rates applying to resident and non-resident individuals. Details of the current tax rates can be obtained at www.ato.gov.au.

Corporate tax

Companies are generally taxed at a fixed rate of 30%. Special rates apply to life insurance companies, complying superannuation funds, friendly societies and other registered organisations. An Australian company can elect to form a tax consolidated group with its wholly owned subsidiaries. The effect is to treat the group as a single entity for Australian income tax purposes and ignore intra-group transactions for income tax purposes.

Capital gains tax

Gains on the disposal of assets are treated as either revenue gains (income) or capital gains (depending on the relevant facts and circumstances). Capital gains are included in the calculation of the taxable income. Capital gains derived by individuals and trusts (but not companies) that dispose of assets held for at least 12 months are generally reduced by half.

GST

This tax applies on the supply of goods, real property and other supplies (such as intangible rights and services). Broadly, GST is similar in operation to the value added tax systems operating in Europe.

GST is payable at a flat rate of 10% of the value of a taxable supply. A taxable supply arises where all of the following apply:

  • The supply is made for consideration.

  • The supply is made in the course of an enterprise the supplier carries on.

  • The supply is connected with Australia.

  • The supplier is registered or required to be registered for GST.

An entity must be registered for GST if it carries on an enterprise (which includes but is not limited to a business) that has an annual turnover in excess of A$75,000 from supplies that are connected with Australia.

A GST registered supplier's entitlement to claim an input tax credit (effectively a GST refund) for the GST component of the cost of things acquired in the course of carrying on its enterprise, depends on the type of supply the acquisition is used to make.

Stamp duty

In all states, stamp duty is imposed on transactions or instruments concerning dutiable property (dutiable transactions). The definition of dutiable property varies between jurisdictions. It generally includes land and, in some states, business assets (such as plant and equipment, goodwill and intellectual property) and particular rights.

Generally, stamp duty is not payable on establishing a business. However, a stamp duty liability will arise in some states where an existing business is purchased and the assets of the business include dutiable property. Stamp duty is payable on the transfer of land and interests in land in all states.

Transfer duty under stamp duties legislation is imposed on a sliding scale that varies between jurisdictions (with a top rate of usually 5% but 7.25% in the Australian Capital Territory, based on the dutiable value of the dutiable transaction).

The transfer of shares in a private company or private unit trust does not attract a duty unless the company or trust owns land, so that the transaction effects an indirect acquisition of land.

 
27. What are the circumstances under which a business becomes liable to pay tax in your jurisdiction?

Australia imposes tax on the:

  • Worldwide income of entities resident in Australia for taxation purposes.

  • Australian-sourced income of non-residents.

Tax resident

A company is a resident of Australia for tax purposes if it both:

  • Is incorporated in Australia or, where it is not incorporated in Australia, carries on business in Australia.

  • Has its central management and control in Australia, or its voting power is controlled by shareholders who are residents of Australia.

Australian resident companies and individuals must be registered with the Australian Taxation Office (ATO) to have a tax file number (TFN). Trading companies registered with the ATO have various tax compliance obligations, including filing of an annual company tax return and the periodic reporting of activity statements.

Non-tax resident

Australia's capacity to tax non-residents may be limited where the non-resident is resident in a country with which Australia has concluded a double taxation agreement (DTA). Australia has DTAs with 45 countries.

Generally, DTAs allocate taxing rights to the country of the taxpayer's residence. However, the country of the source of the income can both:

  • Impose withholding taxes on dividends, interest and royalties.

  • Tax in full the actual or attributed profits of any commercial enterprise carried on through a permanent establishment in the country.

The source of income depends in most cases on matters of fact and, with certain exceptions, is generally determined on a common law rather than statutory basis. Australian income tax law also contains rules that deem income to have an Australian source in a number of cases (for example, royalties paid to non-residents and premiums paid to insurance companies).

Australia has a general non-resident withholding tax regime.

 
28. What is the tax position when profits are remitted abroad?

There is an imputation company tax system. When a company pays tax on its profits, "franking" credits arise. These credits can be attached to dividends paid by the company. A dividend paid by an Australian company to a foreign shareholder is not subject to withholding tax if they are "fully franked" with these credits. To the extent such a dividend is not franked, withholding tax of up to 30% can apply. This rate can be reduced under double taxation agreements (DTAs), generally to 15% and in some cases to zero.

Interest withholding tax generally applies at the rate of 10%. This can be reduced to as low as zero if exemptions apply, such as the public offer exemption or financial institution exemption under certain DTAs.

Withholding taxes also apply to trust distributions including concessional rates for trusts qualifying as managed investment trusts (that is, trusts where members contribute funds but do not have day-to-day control).

 
29. What thin-capitalisation rules and transfer pricing rules apply?

Thin capitalisation rules

The thin capitalisation rules are broadly designed to limit the tax deductions for debt expenses where average debt levels in a year exceed prescribed maximum debt levels. The rules apply to:

  • Foreign controlled Australian entities.

  • Australian entities that control a foreign entity.

  • Foreign entities that carry on a business in Australia.

Generally, the maximum debt threshold is the greater of the amounts calculated under any of the following tests:

  • The safe harbour debt test. Broadly, the maximum level of debt under the safe harbour debt test is 60% of the total value of assets, as determined under Australian accounting standards.

  • The worldwide gearing debt test. Broadly, the maximum level of debt under the worldwide gearing debt test is the worldwide gearing ratio (the debt to equity ratio) applied to the total value of assets, as determined under Australian accounting standards.

  • The arm's-length debt test. Broadly, the maximum level of debt under the arm's-length debt test is a notional amount of debt capital that would have been lent by a commercial institution in respect of Australian operations, having regard to certain factual assumptions and relevant factors. The factual assumptions include that any guarantee, credit or other form of credit support (for example, parent guarantee) is taken not to have been received. The relevant factors include the commercial practices adopted by independent parties dealing at arm's-length in the industry and the general state of the Australian economy.

The taxpayer can choose which method to apply in each financial year.

Changes to thin capitalisation rules

For financial years starting on or after 1 July 2014, the thin capitalisation rules were changed to:

  • Tighten all safe harbour limits, as follows:

    • for general entities, the limit has been reduced from 3:1 to 1.5:1 on a debt-to-equity basis (that is, from 75% to 60% on a debt to total asset basis);

    • for non-bank financial entities, the limit has been reduced from 20:1 to 15:1 on a debt-to-equity basis (that is, from 95.24% to 93.75% on a debt to total asset basis); and

    • for banks, the capital limit has been increased from 4% to 6% of their risk weighted assets of the Australian operations.

  • Extend the worldwide gearing ratio amount to all (general, bank, non-bank financial) entities and reduce it from 120% to 100%.

  • Increase the de minimis threshold for total debt deductions from AU$250,000 to AU$2million.

Transfer pricing

Australia has comprehensive transfer pricing rules. These rules operate where products and services are provided under an international agreement and the parties are not dealing at arm's-length in relation to the transaction. In these circumstances, the Commissioner of Taxation can make a determination to substitute an arm's-length value as the consideration received or provided.

These provisions can affect pricing policies between an Australian company or branch and an overseas parent, subsidiary or associated entity. The Australian legislation uses the arm's length principle in determining how income and expenses should be allocated in international dealings. Broadly, the Australian tax authorities follow the Organisation for Economic Co-operation and Development (OECD) methodology.

The government is currently undertaking a wide-ranging review of Australia's domestic transfer pricing and treaty practice, and has recently introduced new transfer pricing rules.

For more information on tax on corporate transactions see: Tax on Transactions Global Guide.

 

Grants and tax incentives

30. Are grants or tax incentives available for companies establishing a business in your jurisdiction?

There are general incentives to encourage investment in Australia and, in special cases, state governments give tax incentives to have a business established in that state. Specific concessions are also available, including:

  • Deductions for certain set up or relocation costs in establishing a regional headquarters in Australia.

  • Exemption from dividend withholding tax for certain foreign source dividends.

  • A 45% refundable tax credit for eligible entities with turnover of less than A$20 million per annum undertaking eligible research and development activities (and a 40% non-refundable tax credit for all other eligible entities).

  • Concessionary tax rates for income derived by offshore banking units.

  • Capital gains on the sale of shares in a foreign company held by an Australian company are disregarded where the foreign company has an active underlying business.

The federal and state governments also offer a range of grants to promote the establishment and activities of business across a wide range of industries, including:

  • Agriculture/primary producer.

  • Culture, media and arts.

  • Defence and aerospace.

  • Education.

  • Food and beverage.

  • Healthcare /medical.

  • Information and communications technology.

  • Infrastructure and construction.

  • Manufacturing.

  • Mining, resources and energy.

  • Research and development.

  • Tourism.

For more information on grants and incentives, please refer to the Australian Government's Grants and Assistance Finder (www.business.gov.au/grantfinder/grantfinder.aspx). This a free online tool for locating the grants, assistance and funding programmes most relevant to a business that are available from the Australian, state and territory governments, and local councils.

 

Employment

31. What are the main laws regulating employment relationships?

There is a combination of federal, state and territory legislation, industrial instruments (including awards and enterprise agreements) and individual employment contracts.

Employment-related legislation

The primary legislation regulating the employment relationship is the Fair Work Act 2009 (FWA). This Act:

  • Sets minimum terms of employment (through the ten National Employment Standards (see below, National Employment Standards (NES)).

  • Provides for some specific employee protections.

  • Regulates unions and the collective bargaining process.

  • Sets out the role of the independent employment tribunal (Fair Work Commission (Fair Work)).

  • Deals with a range of other matters, including discrimination and equal opportunity, unfair dismissal and transfer of business.

There are also state employment laws that affect employers in relation to some issues (for example, long service), and laws covering superannuation, work health and safety, workers' compensation, discrimination and equal opportunity and other issues.

National Employment Standards (NES)

The NES set out ten minimum standards or entitlements in relation to:

  • Hours: a 38-hour working week plus reasonable additional hours.

  • Annual leave: four weeks' paid leave per year. Untaken leave is carried forward and is paid out on termination.

  • Personal/carer's leave, which includes sick leave: ten days' paid leave per year. Untaken leave is carried forward but not paid out on termination.

  • Parental leave: 12 months' unpaid leave with a right to request an extension of up to 12 months (the federal government also recently introduced a government-funded parental leave pay scheme).

  • Notice of termination and redundancy: up to five weeks' notice and 16 weeks' redundancy pay based on length of service.

  • Long service leave: usually based on state legislation, this provides for extended paid leave for long service (for example, two months' leave after ten years service).

  • Public holidays: eight core public holidays plus some additional state-specific holidays.

  • Community service leave: generally unpaid.

  • Rights to request flexible work arrangements.

  • Provision of the Fair Work Information Statement: this identifies key features of the FWA.

Awards

Awards are legally enforceable industrial instruments that establish minimum terms and conditions of employment for those employees to whom they apply.

From 1 January 2010, more than 120 new Modern Awards came into operation; they replaced in excess of 1,600 old awards (although other historical awards continue to apply in some cases). Modern Awards tend to be industry or occupation-specific and quite complex rules apply to their interaction. This can make it difficult to determine which applies.

All Modern Awards contain terms dealing with broadly similar matters, including:

  • Minimum wages, including job classification structures.

  • Arrangements relating to hours of work, including span of hours and rest breaks.

  • Type of work performed, such as full-time, part-time or casual employment.

  • Overtime, penalty rates and other monetary entitlements.

  • Consultation and dispute settling procedures.

Enterprise agreements

Enterprise agreements are enterprise-specific agreements negotiated between an employer and its employees (or unions on their behalf). The FWA governs all aspects of the negotiation, approval and operation of enterprise agreements.

Enterprise agreements usually operate to the exclusion of a Modern Award. However, before an agreement can take effect, it must pass a test (called the "better off overall test") to ensure the employees are not disadvantaged when compared against the terms of the applicable Award.

There are complex rules about the permitted content of enterprise agreements, how they are negotiated, and how they can be approved and terminated.

Employment contracts

Subject to legislation and to applicable industrial instruments, employers are able to(and typically do) make contracts of employment with employees, covering a range of matters. Policies and practices covering employment and industrial relations issues can also be implemented.

Superannuation

Superannuation is a requirement prescribed under the federal superannuation guarantee scheme. Employers must make compulsory superannuation contributions at the rate of 9.25% of the employee's earnings (salary and in some cases bonus and commission). The required statutory contributions are capped at a "maximum earnings base".

However, certain exceptions apply in respect of some employees, including:

  • Non-resident employees paid for work done outside Australia.

  • Resident employees employed by non-resident employers for work done outside Australia.

Work health and safety

Employers must ensure the health, safety and welfare of their employees while they are at work. If harm results to an employee through a breach of this duty, the employer may be both:

  • Liable to the employee both in contract and in tort.

  • Prosecuted under federal, state and territory legislation.

A corporation's officers also have positive due diligence obligations to ensure that the corporation meets its health and safety obligations.

Workers' compensation

All employers must have in place a statutory workers' compensation insurance policy that provides for compensation for employees who are injured in the course of employment. Workers' compensation legislation also includes protections against unfair termination of employment as a result of an employee's work related injury/illness. The legislation also imposes a positive duty on employers to find appropriate alternative employment for a partially incapacitated employee.

Discrimination and equal opportunity

Both federal and state legislation prohibit discrimination (in a range of aspects of employment including recruitment, promotion and termination) on the basis of certain unlawful grounds including sex, race, disability, religion and age.

Sexual harassment in an employment context is unlawful under federal and state legislation.

Companies with more than 100 employees are required to institute programmes providing women with equal opportunity in the workplace.

Redundancy procedures and payment

A redundancy generally arises if the duties of a position are no longer required to be performed. If an employee's employment is terminated for redundancy, the employee may be entitled to a redundancy payment under the NES, an applicable industrial instrument, their employment contract or a binding policy/procedure.

Modern Awards include consultation procedures that apply on a redundancy. Additional notification and consultation obligations (involving unions) can apply where an employer proposes to make 15 or more redundancies.

Unfair dismissals

An employee can start proceedings if they consider that the termination of their employment was harsh, unjust or unreasonable (FWA).

To be eligible to make an unfair dismissal claim, an employee must have been employed for at least six months and earn less than about A$129,300 per year (which increases from July each year). However, if they are covered by an industrial instrument, the level of their remuneration is irrelevant.

An employee dismissed because of a genuine redundancy (this is a statutory test) is not eligible to make an unfair dismissal claim.

Transfer of undertakings and employees

If a business is sold or outsourced, employees will only transfer if the new employer makes an offer of employment that the employee accepts. Where employees transfer in these circumstances, the new employer may become liable for their accrued leave entitlements. In addition, any enterprise agreement covering the employees is also likely to transfer to the new employer.

 
32. What prior approvals (for example, work permits, visas, and/or residency permits) do foreign nationals require to work in your jurisdiction?

Entry, work and residence entitlements are governed by the Migration Act and administered by the Department of Immigration and Border Protection (DIBP). Non-Australian citizens who are not Australian permanent residents are generally required to hold a valid visa with work entitlements to work in Australia.

Visiting Australia for short-term business purposes

There are a variety of visas available where an overseas business requires overseas employees to visit Australia for short-term business purposes.

Work is permitted in strictly limited circumstances, primarily where it is both:

  • Highly specialised in nature or in connection with an emergency.

  • Not ongoing. Under DIBP policy, this is defined as encompassing a position that is filled on a short-term basis, preferably not exceeding six weeks (although longer periods up to the maximum stay period of three months could be considered as falling within the business visitor visa programme).

Temporary Business (Long Stay) (Subclass 457)

The Temporary Business (Long Stay) (Subclass 457) visa is the visa programme most commonly used by businesses to sponsor overseas employees wishing to work in Australia on a temporary basis. The Subclass 457 Visa enables overseas residents to, for a period of three months to four years:

  • Work in Australia (but only for the sponsor employer).

  • Bring any family members with them.

  • Have no limit placed on travel in and out of Australia.

The 457 visa application process is as follows:

  • Step one: the employer applies for approval as business sponsor.

  • Step two: the employer nominates the position to be filled.

  • Step three: the prospective employee applies for the Subclass 457 visa.

The processing time for a Subclass 457 visa is currently promoted by DIBP as two to three months. However, processing times can be much quicker (two to six weeks) where all the relevant documents have been collated before lodgement and submissions are carefully drafted to address all criteria.

Permanent residence in Australia

An Employer Nomination Scheme (Subclass 121/856) visa permits businesses to facilitate highly skilled workers (generally under 45 years old) from overseas or in Australia on temporary visas, in obtaining permanent residency when the employer has been unable to fill a vacancy from within the Australian labour market or through its own training programmes. It requires evidence of at least a three-year contract with the nominating employer, but the visa holder becomes a permanent resident and can effectively remain in Australia indefinitely. No sponsorship obligations are imposed on the employer under this visa scheme.

Alternatively, there are a variety of general skilled migration visas available, each depending on the individual's skills and circumstances.

 

Proposals for reform

33. Are there any impending developments or proposals for reform?

There are currently no proposals for significant reform.

The most recent reforms came into force on 1 December 2015 in the form of the Foreign Acquisitions and Takeovers Legislation Amendment Bill 2015 (see Question 20).

 

The regulatory authorities

Australian Securities and Investments Commission (ASIC)

Main activities. ASIC is Australia's corporate, markets and financial services regulator, and is responsible for company registration.

W www.asic.gov.au

Australian Taxation Office (ATO)

Main activities. The ATO is responsible for administering Australia's taxation law, including issuing new companies with Australian Business Numbers (ABNs) and tax file numbers. They also administrate agricultural and residential land ownership under the revised foreign investment regime.

W www.ato.gov.au

Foreign Investment Review Board (FIRB)

Main activities. The FIRB is responsible for examining proposed foreign investment into Australia that is subject to Australian's foreign investment regime, and advising the Treasurer on foreign investment applications.

W www.firb.gov.au



Online resources

Australasian Legal Information Institute (AustLII)

W www.austlii.edu.au

Description. AustLII is an up-to-date online free-access resource for Australian legal information, including federal and state legislation, and judgments of various federal and state level courts and tribunals.

ComLaw

W www.comlaw.gov.au

Description. ComLaw has the official and most up-to-date collection of Commonwealth legislation (including regulations and gazette notes). Each state and territory has an equivalent website.



Contributor profile

Leigh Brown, Partner

Minter Ellison

T +61 2 9921 4941
E leigh.brown@minterellison.com
W www.minterellison.com

Professional qualifications. BA, LLB (Sydney)

Areas of practice. Acquisitions and disposals (assets and shares); takeovers (including schemes of arrangement and acquisitions with shareholder approval); capital raisings (IPO, rights issue and placement); major projects (including resources, joint venture and shareholder agreements); corporate reconstructions (including schemes of arrangement, capital reductions and share buy backs); venture capital and development capital investments; general corporate and corporations law advice.

Professional associations/memberships. Corporate Lawyers Association; Australian Mining and Petroleum Law Association; Australian Institute of Company Directors; Law Society of NSW, Business Law Committee.

Publications

  • Co-author of Joint Venture Precedents in Butterworths Australian Encyclopaedia of Forms & Precedents.

  • Co-author of Partnerships and Joint Ventures section in Halsbury's Law of Australia.


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