Company formation in brief
Australian legislation provides for the possibility of establishing enterprises of various organizational and legal forms, of which the most popular for a foreign investor are:
Proprietary Company (Pty) is a private closed company, which is usually registered in the form of Company Limited by Shares (a company whose shareholders are limited in liability to the shares of paid shares in the capital of the company) and is characterized as follows:
Public Limited Company is a public company that can be either listed on the stock exchange or without the corresponding registration on the stock exchange in Australia - Australian Stock Exchange (ASX) and is characterized as follows:
Company Limited by Guarantees - a company whose members are limited in liability to the amounts of pre-agreed guarantees, as a rule, is registered for non-profit enterprises and charitable societies and is characterized as follows:
Partnerships - partnerships are regulated in Australia by the Partnerships Act. They can have from 2 to 20 partners. In most provinces of Australia, partnerships can only be established in the form of unlimited liability, where all partners are equally responsible for the debts and obligations of the business with all of their property. Some Australian states, however, also allow the registration of limited partnerships, where, in addition to unrestricted partners, there may be partners whose liability is limited to a predetermined amount.
If the partnership only conducts business outside Australia and does not open a bank account in Australia, then the partnership is not required to go through official registration and report to the Australian tax authorities. However, such a partnership will not be subject to the double taxation treaties that Australia has signed with many countries.
For the purposes of taxation of legal entities and individuals, Australia distinguishes between residents and non-residents. Residents pay income taxes on their worldwide income, while non-residents only pay income taxes in Australia.
Unlimited partnerships are not subject to taxation, and the partners themselves pay taxes where they reside, but are also required to pay Australian taxes on Australian sourced income, if any.
Almost all activities in Australia require a business license.
Trusts are popular with small family businesses in Australia. Trusts can take a variety of forms, providing for different relationships between the settlor, the manager and the acquirers of an interest in the trust.
Despite the fundamental fact that a trust itself is not a legal entity for Australian tax purposes, trusts are nevertheless considered to be separate legal entities “which, however, are usually financially transparent when the beneficiary of income or profits is which in question, "is currently entitled to them". Accordingly, the location of both the trust and its beneficiaries is a key issue in terms of Australian taxation objectives.
As noted earlier, a resident of Australia is generally subject to taxation on their worldwide income, and for inter vivos trusts, such income will be levied on the resident beneficiaries, at current rates if they are “currently” entitled to that profit, or from a trustee. persons at the maximum tax rate, if the beneficiary has not yet received such a right.
The non-resident trustee or beneficiary is usually charged in Australia only with income tax, which the non-resident individual will have to pay. Whichever of them will bear the tax burden depends on whether the beneficiary currently has the right to profit.
In addition, there are a number of regulations designed to ensure that the income and capital gains of a foreign trust in which Australian residents have (or may expect to have) various kinds of indirect income are also taxable.
Under common law, it is generally believed that the seat of a trust is where most of the trustees reside. If one of several trustees clearly exercises more of the management and control, the trust will be located where that trustee resides.
However, from the point of view of Australian tax law, a trust will be considered a "resident trust" regardless of which of the trustees and for how long was resident during the year of receipt of the income, as well as if the central management and control over the trust estate was carried out in Australia (also regardless of the term) during the year of receipt of income.
The Trustee is also considered an Australian resident in Australia, regardless of where it is located under common law.
In respect of a non-resident trust, foreign income tax liability arises in Australia if the recipient of the interest is a resident and:
• is the beneficiary and is currently entitled to these income;
• if, while not yet a beneficiary entitled to income, has an “interest” in the trust, or has a possible right to income in the future;
• is the beneficiary and has any share in the trust property paid for or used in the interests of this person;
• has interest income in a controlled foreign trust;
• has interest income in a foreign trust that is a foreign investment fund;
• has a controlled foreign company or trust, which in turn has interest income in the trust referred to in paragraphs (1), (2) or (3);
• has property or services transferred to the trust, in addition to a transaction based on the principle of equality and disinterest of the parties, or
• is the person who created the trust, as well as has the right to annul it, or when the beneficiaries of the trust are his minor children.
Australian tax liabilities apply to non-resident trusts with Australian sources of income:
- if no beneficiary is currently entitled to income, then the trustee will be taxed at the upper marginal rate, and
- if the beneficiary is currently entitled to the income, then it is taxed at the maximum tax rate and the trustee must withhold tax until the dividend is paid to the beneficiary.
The lack of practice of applying the established rules is a key issue, however, it does not affect taxation. The system operates regardless of whether the beneficiary has received income (or capital gains) or not, and whether he is currently vested with the appropriate right.
When a right arises as part of a tax exemption arrangement, it may be disregarded, in which case the trustee will only have to pay income tax.
In Australia, no person other than the recipient of taxable income or capital gains is required to pay income tax. A trustee is personally taxable only when the trust money or property falls into his hands and no tax has been withheld from it.
In cases where the receipt of income or capital gains is delayed, an additional tax is levied on the beneficiary equal to the interest received during the grace period.
Although Australian tax law generally treats trusts as separate companies, it (for tax purposes) also contains specific rules under which, under certain circumstances, trust income is attributed to another person.
If the trust was created on such conditions that the property belonging to it could return to the person from whom it was received, or passed through the beneficiaries and was determined as arising from the creation of the trust by its founder, any gain or reduction of assets, as well as income or loss of the trust will be taxed by the "creator". Accordingly, if a person establishes a trust and is at the same time a beneficiary, the “ownership” rule will apply to that person and it will be taxed on any property income or capital gains derived from the trust's ownership. In short, such trusts are treated as if their income or profits belonged to the founders, without taking into account the fact that the property was transferred to the trust (similar rules apply in the United States).
Likewise, income from foreign trusts in which a resident has assigned property or services for a period of time (even if he is not a resident at that time) will be taxed.
Australian tax law (Sections X and XI in ITAA36) defines the conditions for investing in Controlled Foreign Corporations (CFC rules) and for Foreign Investment Funds (FIF rules). The implicit goal of the CFC and FIF rules is to prevent resident Australian taxpayers from evading Australian taxes through portfolio or non-portfolio investments in non-resident companies that in turn invest.
A detailed explanation of the CFC and FIF rules is beyond the scope of this material, but it should be noted that they can have dramatic and unexpected consequences for Australian residents, as they can lead to the income being attributed to intermediary companies and their last Australian owners. CFC rules can be applied to controlled foreign trusts as well as corporations.
Australian tax law requires an Australian resident to show income in foreign companies or trusts when filing a tax return, or that such income may arise. Transactions with the listed non-residents become the object of special attention. The Australian Internal Revenue Service is very strict with the concealment of foreign income and is currently carrying out extensive investigations into such income. Australia is not an offshore destination, and it willingly cooperates with foreign tax authorities.
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