Tax Strategies for Foreign Investors
Investing in Australia
The Australian Government welcomes productive foreign direct investment. It has helped build Australia’s economy and contributes to economic growth, innovation, and prosperity.
To protect Australia’s interests whilst maximising investment flows, certain foreign acquisitions of Australian shares and assets are reviewed by the Australian Foreign Investment Review Board (FIRB).
Most foreign investment proposals are approved. Once approved, foreign investors are generally treated the same as domestic investors under Australia’s laws.
Foreign investment framework
Australia’s foreign investment policy framework comprises the Foreign Acquisitions and Takeovers Act 1975, its related regulations, and Australia’s Foreign Investment Policy.
Australia's Foreign Investment Policy provides guidance on what factors are typically considered in assessing whether an investment proposal is contrary to the national interest. The concept of national interest includes factors such as national security, competition, the impact on other Australian Government policies (such as tax and environmental policy), the impact on the economy and the community, and the character of the investor.
Where a proposal involves a foreign government or a related entity, the Government also considers the commerciality of the investment.
Foreign investment information
Investment by a foreign entity in Australia may require the formal submission of a proposal. This is subject to approval by the Australian Foreign Investment Review Board (FIRB).
The FIRB examines proposals and advises the Australian Government on whether those proposals are suitable for approval under the Government's policy. Whether a proposal is required to be submitted to FIRB by the investor depends on the monetary value, the nature of the investment, and type of investor.
While this may not be a tax issue per se, as a foreign national in Australia you are subject to certain restrictions imposed by the Foreign Investment Review Board (FIRB) that regulate your ability to buy Australian property.
Under the current rules, unless a specific exemption applies, the acquisition of both residential and commercial properties in Australia by foreigners will need clearance from FIRB by default, regardless of the value of the property and nationality of the purchaser.
Some common examples of exempt acquisitions that do not require FIRB approval include:
- a New Zealand citizen buying a residential property in Australia;
- a foreign national buying residential property as a joint tenant with their spouse who is an Australian citizen;
- a new dwelling sold by a developer who has obtained prior approval to sell the property to a foreign national; and
- a foreigner buying an interest in developed commercial property where the property is to be used immediately and in its present state for industrial or non-residential
- commercial purposes, etc.
It is important to note that these restrictions extend to the indirect acquisition of property through Australian-incorporated company and trust structures. It is therefore very important for you to understand these rules before signing a purchase contract to buy property in Australia.
If you are permitted to buy Australian property as a foreign national, you need to determine your tax residency status in Australia. However, the tax residency rules are not straightforward and are not the same as your residency status for immigration purposes. For example, you may not be an Australian permanent resident or citizen under the immigration rules, but you may be treated as a tax resident of Australia for income tax purposes.
Under Australian tax law, if you are a tax resident of Australia, your worldwide income and capital gains are generally subject to Australian tax. Otherwise, only your Australia-sourced income (and foreign employment income earned while you are a temporary resident) and capital gains on ‘taxable Australian property’ (which includes Australian real estate) are taxable in Australia.
Further, the Australian tax law contains a special set of ‘temporary resident’ rules, which may also treat a tax resident or non-resident as a temporary resident. Broadly, you may be a temporary resident for Australian tax purposes if you:
- hold a temporary visa for immigration purposes;
- are not an Australian resident for social security purposes, and
- do not have a spouse who is an Australian resident for social security purposes.
Special rules may apply in some circumstances (e.g., if you hold a special category visa), so advice is recommended if you potentially come under these rules.
As a temporary resident, most of your foreign income is not taxed in Australia, but you will be subject to Australian income tax on income sourced in Australia and capital gains tax (CGT) derived on any taxable Australian property you own.
Furthermore, the domestic law in Australia will need to be applied in conjunction with any Double Tax Agreement (DTA) Australia has with your country of residence. The DTA may grant taxing rights on certain types of income exclusively to one country or, alternatively, it may allow both countries to tax the same income and require one of the countries to reduce the tax liability on the income by the tax already paid on the same income in the other country. If the DTA and domestic tax law contradict each other, the DTA will prevail.
These rules are very complex, and professional advice is highly recommended.
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Tax-Free Threshold
Although Australian tax residents are taxed on their worldwide income and capital gains (subject to the provisions in any applicable DTA), they are also entitled to the tax-free threshold and lower marginal tax rates. As a tax resident of Australia, up to $18,200 of your taxable income in the year ending 30 June 2019 is currently tax-free. In contrast, non-residents are not eligible for the tax-free threshold, which means they are subject to Australian tax on every dollar
they earn that is sourced in Australia.
Notwithstanding the above, non-residents are generally not subject to the Medicare Levy (currently 1.5% of taxable income), while residents pay Medicare Levy by default unless a specific exemption applies.
As mentioned above, a tax resident or non-resident may also be treated as a temporary resident. There are no special tax rates applicable to temporary residents – if an individual is a tax resident and also a temporary resident, they will pay tax at resident rates; if an individual is a non-resident but also a temporary resident, they will pay tax at non-resident rates.
There are several options for foreign investors structuring investments in Australia assets depending on their:
- Investment objectives (e.g., long term versus short term gains versus income stream);
- Country of residence; and
- Investment strategy.
Foreign investors are advised to carefully consider the structuring alternatives available as careful planning can often result in cost savings and greater global tax efficiency.
Three common examples of Australian investment structures are:
Via an Australian Holding Company
A holding company is a company that owns all the shares in another company. Rather than undertaking any operational or business activities itself, the holding company owns important business assets on behalf of the other company, which is called the ‘operating company.’ Because the operating company hires employees, enters into contracts and deals with customers, it bears all liability.
This is the preferred option for the holding of operating businesses and related assets. This is because corporate trusts are generally treated as a company for Australian tax purposes and attract the corporate tax rate of 30% on worldwide income and capital gains.
Asset Protection
As discussed above, setting up a holding company allows you to separate your business’ valuable assets from the responsibilities of the operating company. This means that these assets are protected from creditors if the operating company begins to perform poorly, incurs liabilities, or becomes insolvent.
In most circumstances, holding all valuable assets in a separate legal entity minimises the risk of losing these assets to repay debts.
Centralised Control and Ownership
In a typical dual company structure, the directors of the holding company will also control the operating company. This can make business operations easier to manage and boost performance and growth.
A centralised board also allows the company to keep running even if key personnel leave the operating company.
Tax Management
Finally, using this company model can reduce the total amount of tax that your whole group pays. For example, you could establish a holding company in another country with a lower corporate tax rate. However, you should carefully consider the laws that regulate international tax profits, as these laws may affect any tax benefits. Holding company may be protected if something goes wrong.
Direct (Foreign) Ownership
Foreign direct investment (FDI) is an investment made by a firm or individual in one country into business interests located in another country. Generally, FDI takes place when an investor establishes foreign business operations or acquires foreign business assets, including establishing ownership or controlling interest in a foreign company. Foreign direct investments are distinguished from portfolio investments in which an investor merely purchases equities of foreign-based companies.
Foreign direct investments are commonly made in open economies that offer a skilled workforce and above-average growth prospects for the investor, as opposed to tightly regulated economies. Foreign direct investment frequently involves more than just a capital investment. It may include provisions of management or technology as well. The key feature of foreign direct investment is that it establishes either effective control of or at least substantial influence over, the decision-making of the foreign business.
There are generous capital gains tax exemptions and concessions available to foreign investors, particularly in relation to non-Taxable Australian Property, that is, passive Australian assets, other than real property (direct and indirect interests), mining, quarrying and prospecting rights and certain assets connected with Australian permanent establishment business operations.
Via an Australian Unit Trust
A unit trust is a common business structure where the business is a venture between several unrelated interests. Beneficiaries have a fixed interest in all the property that is the subject of the trust.
A unit trust differs from a discretionary trust as the beneficiaries’ rights to income and capital are subject to the discretions on the part of the trustee. But why is it used? And when? This article will concisely outline what exactly is a unit trust, and unpack its advantages.
For passive investment activities, an Australian Unit Trust offers a range of tax advantages, including:
- The tax liability on the income of the trust is generally attributed to the unitholders. For non-resident unitholders, this tax liability is usually managed through the Australian withholding tax system on distributions made by the trustee;
- The withholding tax rates for non-resident investors in a Managed Investment Trust are generally lower than the Australian corporate tax rate (see below);
- The trust’s capital gains (realised on the disposal of trust assets) are generally exempt from Australian tax for foreign unitholders where the trust qualifies as a fixed trust, and at least 90% of the trust’s assets are non Taxable Australian Property;
- Investors enjoy flexibility on entry and exit, that is, investors can generally buy/sell their units in the trust to manage their interest; and
- As noted above under Direct Ownership, foreign unitholders will be exempt from Australian capital gains tax on the disposal of their units where the unitholding qualifies as non-Taxable Australian Property.
Tax Advantages of a Unit Trust
Unit trusts do not, generally, have the asset protection advantages for unitholders that discretionary trusts have for beneficiaries. But they are an attractive business structure because of the income tax advantages.
A unit trust, unlike a company, is not a separate taxable entity, and as such, the trust’s income or capital is distributed pre-tax. Another advantage is that the trustee’s creditors are not able to look to trust property in the event of the trustee’s insolvency. This is because property held on trust lies outside that which is available to satisfy the trustee’s creditors. Unit trusts are also subject to a lesser level of regulation, meaning that the trust’s financial results may remain confidential, and its accounts do not need to be audited.
