The business structures available to Australian and overseas investors in Australia are as followings:
• Private limited liability company (Pty Ltd)
• Foreign Company (Branch)
• Joint Venture
1.1 Private limited liability company (Pty Ltd)
Pty Ltd companies are one of the most commonly used and best understood structures.
One of the main advantages of a company structure is its limited liability which is often the primary reason why a company is used for business operations. The company tax rate is 30%. The liability of shareholders in the company is limited to the amount paid for their shares.
A private company must have at least one shareholder and one director. At least one director must reside in Australia.
1.2 Foreign Company
A foreign entity has the ability to undertake business operations in Australia without establishing an Australian entity. A foreign company wishing to carry on business in Australia must be registered with ASIC.
The tax rate is the same as the company tax rate at 30%.
A partnership exists where two or more entities agree to carry on a business in common with a view of a profit.
A partnership is not taxed on the net income of the partnership. Rather, the partners themselves will be taxed on their proportionate share of the taxable income of the partnership.
Each partner is jointly and severally liable for the debts of the partnership. Each partner also has the ability to incur liabilities on behalf of the partnership.
Partners in partnership can be individual, company and trust.
1.4 Joint Venture
A joint venture is a contractual arrangement between two parties to conduct a particular activity and share the output.
A joint venture is distinct from a partnership as it is an arrangement where parties share the product or output rather than the profit of an enterprise.
The parties share costs and facilities in order to enable each party to achieve the maximum returns from a project. The project yields a quantity of outputs which are dealt with separately by each party.
As this distinction can be a fine one, some parties will chose to incorporate their joint venture in a special purpose entity (usually a private company owned by the joint venture parties). Accordingly, a joint venture will not be a partnership for tax purposes. However, if the joint venture arrangement provides that the output is to be sold and the parties receive a distribution of profits, the joint venture will be regarded as a tax law partnership.
Joint ventures are commonly used in the mining industry and property development.
Trusts have uses in family law, estate planning and family succession planning, but they are advantageous from a structuring perspective because they may provide asset protection and allow the potential streaming of capital gains and franked distributions to beneficiaries.
A trust is not a separate legal entity but rather should be characterised as a documented relationship subject to trust law.
A discretionary trust is a form of trust arrangement where the entitlements of the beneficiaries of the trust in relation to the income and capital of the trust are not fixed. Rather, the trustee retains the discretion to determine who, within a class of beneficiaries, will be distributed the income or capital of the trust.
A unit trust is a form of trust arrangement where the entitlements of the beneficiaries of the trust in relation to the income and capital of the trust are fixed.
Trusts do not pay tax on income. Instead, beneficiaries of the trust are taxed on the income in accordance with the proportions distributable to them.
A private company (Pty Ltd) is often used to act as trustee of the trust.
2. SETTING UP STRUCTURES
2.1 Formation of Australian Company (Pty Ltd)
Proprietary companies are often used for private ventures or as subsidiaries of public companies.
You can only choose a company name not already registered to a company. A company should be registered with ASIC.
A proprietary company may either be classified as a large proprietary company or a small proprietary company depending on certain criteria below:
A proprietary company is considered to be a large proprietary company if it satisfies two out of the three following criteria:
• the consolidated revenue for the financial year of the company and any entities it controls is $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 $12.5 million, or more
• the company and any entities it controls have 50 or more employees at the end of the financial year.
If a proprietary company does not satisfy two out of the above three criteria it is regarded as a small proprietary company. Large companies are required by the Corporations Act to prepare an audited financial report in accordance with approved accounting standards. The ASIC will provide an exemption from preparation of an audited financial report if the company is a wholly owned subsidiary of another company that files accounts with the ASIC that consolidates the subsidiary’s results, and the companies have a cross guarantee in place.
A foreign controlled company should lodge the audit report to ASIC every year. In accordance with s286 of the Corporations Act 2001 (Corporations Act), a company, registered scheme or disclosing entity must keep written financial records that:
• correctly record and explain its transactions and financial position and performance, and
• would enable true and fair financial statements to be prepared and audited.
Formation of Australian company is simpler than registration of a foreign company.
As at 1 July 2015, the ASIC fee for registering a company is $463. The ongoing annual fee is $246.
There are no residency restrictions on shareholders/members and no general minimum capital requirements for an Australian company.
2.2 Establishment of Australian Branch
A foreign company wishing to carry on business in Australia must be registered with ASIC under Part 5B.2 of the Corporations Act 2001 (the Corporations Act). All required documents by ASIC must be lodged with the application and be certified and translated in English.
The following documents are also required:
• Current certificate of registration or a document of similar effect that confirms that the company is currently registered
• Certified copy of the company’s constitution
• Memorandum of appointment of the local agent or power of attorney in favour of the local agent
• Certified copy of passport for the Authorised representative listed on the power of attorney.
Once registered, Australian registered body number will be issued. The name of the company, in legible characters, followed by the expression ‘Australian Registered Body Number’ (or a permitted abbreviation—see below) and the number itself must appear (where the name first appears) on:
• every public document issued, signed or published by, or on behalf of, the company including company letterhead
• every eligible negotiable instrument signed or issued by, or on behalf of, the company and
• all documents required to be lodged with ASIC under the Corporations Act.
Registered foreign companies are required to lodge financial statements with us at least once every calendar year and at intervals of not more than 15 months.
As at 1 July 2015, the ASIC fee for registering a foreign company is $463. The ongoing annual fee is $1,154.
ASIC will allocate an Australian Registered Body Number (ARBN) to the foreign company and issue to it a Certificate of Registration’ evidencing its registration as a foreign company in Australia.
2.3 Tax and Asset Protection and Business Structuring
When you consider the business structure, you should consider both taxation benefits and asset protection. As business operations may be exposed to many risks. The company may be sued unexpectedly.
If you set up and use a foreign company, in case of legal actions taken to your company it could damage not only the foreign company in Australia but also a parent company in overseas. This is why you should not only consider tax but also asset protection. There is way to minimise the uncertain damage in relation to the business in Australia. It would be better to use one company in each project.
Setting up a proprietary limited (Pty Ltd) company where shareholders are afforded more protection when it comes to the level of liability that they face for company debts. In special cases a director of a company may be responsible for the liabilities. In normal circumstances claims against a company would be limited to the net asset of the company. Shareholders would not be liable for company debts. As a director or secretary of a company, there are the requirements set out in the Corporations Act 2001 (Corporations Act). Even if you appoint an agent to look after the company’s affairs, you—not the agent—may still be held responsible for those legal obligations.
As a director, you must:
• be honest and careful in your dealings at all times
• know what your company is doing
• make sure that your company can pay its debts on time
• see that your company keeps proper financial records
• act in the company’s best interests, even if this may not be in your own interests, and even though you may have set up the company just for personal or taxation reasons, and
• use any information you get through your position properly and in the best interests of the company. Using that information to gain, directly or indirectly, an advantage for yourself or for any other person, or to harm the company may be a crime or may expose you to other claims. This information need not be confidential; if you use it the wrong way and dishonestly, it may still be a crime.
• If you have personal interests that might conflict with your duty as a director, you must generally disclose these at a directors’ meeting. This rule does not apply if you are the only director of a proprietary company. Directors will control the company’s business. The company’s constitution (if any) or rules may set out the directors’ powers and functions. The director must be fully up-to-date on what your company is doing:
• Find out and assess for yourself how any proposed action will affect your company’s business performance, especially if it involves a lot of the company’s money.
• Get outside professional advice when you need more details to make an informed decision.
• Question managers and staff about how the business is going.
• Take an active part in directors’ meetings.
Only be a company director or a company secretary if you are willing, able and have enough time to put in the effort.