How Kiwi companies in Australia can avoid the ‘double tax’ trap
New Zealand companies setting up in Australia must plan their structures carefully to avoid a hefty double tax on profits.
In Brief
- Some New Zealand companies may end up paying over 53% tax on profits earned in Australia.
- Double tax arises because Australian corporate tax paid does not create imputation credits.
- To overcome double tax, less conventional structures should be considered.
The dilemma of double tax
Some New Zealand companies end up paying over 53% tax on profits earned in Australia once those profits are distributed through to the New Zealand ultimate shareholders.
Double tax arises because Australian corporate tax paid does not create imputation credits. Although an Australian company can usually distribute tax-paid profits to its New Zealand parent without further taxes, the New Zealand shareholders pay full tax on unimputed dividends they receive.
The issue is accentuated in a group that earns most of its profits from its Australian business and distributes those profits through to its ultimate New Zealand shareholders.
To overcome double tax, less conventional structures can be considered such that the Australian income is derived directly by the ultimate New Zealand shareholders, rather via dividends from the New Zealand parent.
“To overcome double tax, less conventional structures can be considered.”
The double tax is relieved where the shareholders can credit the Australian tax against their New Zealand tax on the Australian profits.
Possibly consider an Australian limited partnership (ALP) with an Australian corporate general partner and New Zealand individual(s) or a trust as the limited partner(s)1.
The ALP is taxed as a corporate for Australian tax purposes. However, the limited partner(s) are also taxed in New Zealand on that same income and should be able to claim credit for the 30% Australian tax 2, resulting in an overall tax cost of no more than 33%3.
A New Zealand limited partnership or a New Zealand look-through company, with a registered branch operation in Australia, are other alternatives to consider.
Sound transfer pricing policies
Where the New Zealand parent is supplying products, intellectual property, loans and/or management services to its Australian subsidiary, the transfer pricing policies can have a substantial impact on the incidence of double tax.
When the Australian company commences with few employees and is leveraging the business systems, brands and expertise of its wider New Zealand group, it would initially be expected to earn only modest profit margins (or perhaps losses). If the parent creates most value in the Australian business and controls decision-making on risks, it would be expected to earn most of the Australian profits.
If the Australian subsidiary is likely to incur start-up losses, consider whether, at arm’s length, the parent should be supporting its subsidiary through discounting the supply of products, royalties or management fees for an initial period.
Capital gains
Part of the set-up planning is designing an appropriate exit strategy that, in particular, mitigates Australian taxes on capital gains. As mentioned, double tax on profits is a key disadvantage of using an Australian corporate structure.
However, a New Zealand shareholder can divest its shares in an Australian company without capital gains tax, provided the Australian subsidiary does not own substantive Australian real property assets. If an entity is selling its Australian business assets, it may be subject to Australian capital gains tax on its Australian assets.
There are limited exemptions for small businesses. For example, if the total value of Australian assets does not exceed A$6 million, a 50% discount on any capital gain can be claimed on active assets.
Debt funding
Consider a portion of debt funding into Australia. A parent entity receiving interest on loans from its Australian subsidiary tends to be more tax efficient than receiving dividends. While Australia has thin capitalisation restrictions on debt funding, it also offers a generous threshold of A$2 million of interest expense (on a group basis) before the restriction applies.
Resident director requirement
As a final point, note that if setting up an Australian company, at least one director must reside in Australia. A New Zealand resident director cannot satisfy that requirement. There is no Australian resident director requirement if registering a branch operation.
1 If a corporate limited partner is preferred, it would need to have “look-through” status or be a corporate trustee.
2 A small company rate is 27.5% and larger company rate is 30%.
3 33% is New Zealand’s highest marginal tax rate applying to individuals and trusts.
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