Tax Residency of the Business

Regardless of the business structure, the most simplistic rule, particularly for small businesses with a single business owner, is that the tax residency of the business will follow the tax residency of its owner.

Sole Traders

Sole traders are understood in Australia to have the same legal identity as its business owner. This means that if the owner of the business becomes an Australian tax resident, the business profits also become taxable in Australia. 

Partnerships

Partnerships don’t have a separate legal status either. It is a documented relationship (the partnership) of two (2) or more business partners that have come together for the purpose of running a business with the objective of making a profit. Where at least 50% of the partnership interest is held by an Australian tax resident (or at least 40% by the Australian tax resident and any of its associates), the partnership will become taxable in Australia.¹² If the partnership is registered in another country, this is then called a ‘Controlled Foreign Partnership’ (CFP).³

Companies

When you are a sole shareholder and sole director of a company, then the company will become an Australian tax resident as soon as you become an Australian tax resident. The foreign incorporated company will be subject to the Central Management and Control Test (CMAC), which assesses whether the company carries on business in Australia, and where it has its central management and control.⁴ If this is in Australia, then the company will be considered an Australian tax resident under the Controlled Foreign Company (CFC) rules.⁵

If the company is owned and directed by multiple people, then an assessment of ownership interest must be made. Where the ownership interest of at least 40% of the company is held by Australian tax residents, the company may be subject to the CFC rules.⁶ The company will in such circumstances also be deemed to have an Australian permanent establishment if the country of incorporation has a tax treaty with Australia.

When a company is subject to the CFC rules, we can consider a foreign company registration with ASIC, where the foreign company retains the same legal identity as the Australian branch. Alternatively, an Australian subsidiary company can be incorporated, which will have its own legal identity. Profits are then distributed to the parent company via dividend distribution.

What is Transfer Pricing?

Transfer pricing, in essence, occurs when international transfers of funds and/or services between related entities occur. The objective is that the services must be comparable to third party providers of like services. For instance, if there was a loan between a foreign parent entity, and an Australian subsidiary (intercompany loan), then the interest rate would need to be similar to commercial market rates. The purpose of transfer pricing is to reduce the occurrence of underpayment of tax in Australia. Transfer pricing will attract additional reporting obligations which must be met, usually before the company tax return is lodged for the relevant year.

Taxably Helps!

The Controlled Foreign Entity rules will apply to small to medium businesses. This is not something isolated to large corporations. It is always prudent to seek professional advice as a business owner before moving to Australia. As international tax specialists and qualified accountants, we can provide advisory services related to the implications of the move, but also facilitate the business registration process, as well as the ongoing administration and compliance of the business.