The Regulatory framework for businesses in Australia has come a long way in the last ten years since the Corporate Law Economic Reform Programme (CLERP) came into being on 4 March 1997 and the Commonwealth announced A New Tax System (ANTS) in August 1998.
While the reform and simplification of laws is an on-going process, Australia has reached a milestone whereby the major changes are implemented. Below is a snapshot of the current regulations applicable to businesses in general.
Businesses are formed in one of the following structure in Australia.
An individual can carry on business as a sole trader and become personally liable for the debts arising from the business activities.
The individual may trade under his or her own name and if a different name is used, business name registration is required.
The individual includes the business income and expenses in his or her income tax return.
Two or more individuals or companies can form a partnership.
The partners are jointly and individually liable for the debts and obligations of the business.
A partnership is governed by the Partnership Acts of the relevant States and Territories, the terms of the agreement between the partners, and the common law.
The maximum number of partners in a business is twenty, subject to certain exceptions. Some States permit a certain number of partners, who are not actively involved in running the business, to have limited liabilities.
A name other than the partners’ own requires business name registration.
A tax return for the partnership business, which binds the partners in the treatment of income and expenses in their tax returns, must be lodged with the tax office.
Individuals or companies can establish a joint venture to share the produce of a business project.
A joint venture is governed by the terms of the agreement between the venturers, and the common law.
An unincorporated joint venture is not a legal entity and individual venturers may apply different tax treatments on their respective portions of produce deriving from the joint venture.
A company can be incorporated for a venture business.
A trust can be set up for a business whereby the trustee owns the assets and assumes liabilities on behalf of the beneficiaries of the trust.
The trustee may be an individual or a company. A trust can be private or public, whereas a public trust can be listed at the Australian Stock Exchange (ASX).
Trusts are classified into unit trusts, fixed trusts and discretionary trusts. The trust deed underlines the constitution of the trust, its activities, the nature and number of beneficiaries, and the terms and conditions that determine the income distribution and tax status of the trust and its beneficiaries.
A trust is a flow through structure whereby its beneficiaries presently entitled to their share of income lodge separate tax returns.
The beneficiary of a trust may be an individual or a company. If a trustee fails to identify the beneficiaries presently entitled to the income, the trust income will be taxed at the top marginal rate.
The source of a trust income preserves its nature when streaming down to its beneficiaries.
Income from a tax-exempt source is tax-exempt and capital gain or loss remains capital in nature to the beneficiaries.
Corporate unit trusts and public trading trusts are treated differently and may be taxed at the company tax rate. Distributions to unit holders are treated similar to company dividends with imputation tax credits available to unit holders.
The governing legislation is the Corporations Act 2001 (Corporations Act), whereby operation of this law is overseen by the Australian Securities & Investments Commission (ASIC).
There are two types of business incorporation, proprietary company and public company.
A proprietary company must be either limited by shares, or an unlimited company with a share capital and non-employee shareholders of 50 or less. A proprietary company must have at least one director who must ordinarily reside in Australia.
A public company must have at least three directors and one secretary. Two of the directors and one secretary must ordinarily reside in Australia. A public company may be listed at ASX and issue prospectus for the offer of shares, debentures or other securities.
A company must appoint a public officer, who must be a natural person, 18 years or over, and an ordinary resident in Australia.
A company must have a registered office in Australia.
A company can choose its internal governance from either its own Constitution, Replaceable Rules set out in Corporations Act, or a combination of both.
A foreign company, carrying on a business and having a place of business in Australia, must register with ASIC unless it is represented by a representative office or subsidiary.
A company must keep financial records for seven years after the transactions covered by the records are completed.
Company officers must make sure that the company attends to the basic housekeeping matters and the directors remain ultimately responsible for the company's compliance with the Corporations Act.
Entities required by Corporations Act to lodge financial reports with ASIC are public companies, large proprietary companies, small proprietary companies (foreign controlled), small proprietary companies (ASIC direction to lodge financial reports), disclosing entities, and managed investment schemes.
A proprietary company is large if it meets two of the criteria: consolidated revenue of $25 million or more, consolidated assets of $12.5 million or more, and employees of 50 or more.
The financial reports to be lodged are balance sheet, income statement, statement of cash flows, consolidated financial statements if applicable, notes to financial statements, directors’ declaration, directors’ report and auditor’s report.
Disclosing entities and registered schemes are required to lodge financial reports within three months of the end of the financial year, and other companies, within four months.
Companies, already lodged financial reports with ASX, are not required to file another one with ASIC.
ASIC is vested with powers to exempt or modify several provisions of the Corporations Act. In its Policy Statements, ASIC grants relief to eligible entities, where consolidated accounts are prepared by their parent entity; some small foreign companies, which are not required to prepare financial statements in their place of origin; and certain financial service companies on a written submission.
ASIC does not have power to grant retrospective relief.
Accounting Standards and Financial Reports
Australian accounting standards are legally binding under the Corporations Act and ASIC is responsible for enforcing compliance with the standards.
The Australian Accounting Standard Board (AASB), the standard setter, requires companies to adopt the Australian equivalents to International Financial Reporting Standards (AIFRS) for reporting periods beginning on or after 1 January 2005. All accounting standards are operative except a few standards, which will take effect between 1 January 2008 and 1 January 2009.
Business name registration in Australia is done on a state-by-state basis. Company name is registered independently and nationwide with ASIC.
While business and company name registration can be done online and the approval is instant, a successful registration does not guarantee a right to use the name where a trade mark has been used.
A trade mark registered with IP Australia is valid for ten years. While the registration can be applied on line, the review and approval process may take three to twelve months, or more in special circumstances. Trade mark application with a registered domain name will receive favourable consideration from IP Australia.
A business registration number, as evidenced on the business certificate issued by the States and Territories, is rarely used as identification.
ACN and ARBN are nine-digit identification numbers issued by ASIC to Australian company, and foreign company or registrable Australian body, respectively.
ABN is a unique identification number issued by the Australian Taxation Office to businesses, whether incorporated under Corporations Act or not. Businesses with annual turnover of $75,000 or more must register for ABN and businesses with turnover below the threshold can make voluntary registration. ABN has eleven digits with two digits preceding the ASIC number, if applicable.
ABN has been established as the unique business identification number in Australia.
Income Tax and Tax File No (TFN)
The underlying legislation is the Income Tax Assessment Act 1936 & 1997 (Tax Acts), whereby the operation of this law is overseen by the Australian Taxation Office (ATO).
Any scheme carried out to avoid tax will be rendered ineffective under Part IVA of the Tax Acts. Taxpayers, who are uncertain of their specific tax positions, can apply private rulings from ATO.
TFN, as distinct from ABN, is another unique identification number issued by ATO to individual and organizational taxpayers.
Taxpayers are not obliged to give their TFN to anyone or any organization. Taxpayers, who do not give their TFN to legitimate parties, such as employers or investment institutions, will have their wages or investment income withheld at the top marginal tax.
Individuals are taxed at progressive rates and the top marginal rate is 45% on taxable income over $150,000. The tax rate for residents starts from 15% and for non-residents, 29%. The first $6,000 taxable income is tax-free for residents, who pay 1.5% Medicare levy on taxable income, except for the low income earner.
Companies are taxed at 30% on ordinary class of taxable income and 15% on complying superannuation class of taxable income. Pooled development funds pay 15% on the small and medium sized enterprise components and 25% on unregulated investment income.
Tax losses are carried forward to offset against future assessable income arising from the same business and cannot be clawed back to prior years. Primary producers and some eligible business owners may apply the income averaging rule.
Group companies can lodge a consolidated tax return.
Eligible businesses can claim up to 125% tax deduction on costs spent on research and development activities under a joint initiative program owned by ATO and AusIndustry.
The uniform capital allowance (UCA) provides deduction rules to apply across a variety of depreciating assets. Small businesses have simpler deduction rules.
Capital Gains Tax (CGT) applies to assets disposed or deemed to have been disposed. A 50% CGT discount concession is available to individuals and certain trusts that hold the asset for at least 12 months.
The net capital gain is included in the assessable income. Any unutilised capital loss is carried forward to offset against future capital gains.
Small businesses with turnover less than $2 millions enjoy several tax concessions. They may claim immediate deduction on prepaid expenses and be eligible for entrepreneur tax offset.
Eligible small businesses may get CGT tax concessions. Fifty percent reduction on capital gains is available on the disposal of assets that satisfy the active assets test. The capital gain on the disposal of a business asset can be rolled over to the cost base of its replacement active asset. The capital gain on the disposal of a business asset can be ignored or partially exempted if the asset is owned for more than 15 years.
Withholding Tax on Interest, Royalties and Dividends
The payments of interest, royalties and unfranked dividends, from a resident to a non-Australian permanent establishment of a resident, or from an Australian permanent establishment of a non-resident to another non-resident in Australia, are subject to 30% withholding tax in general.
Where the country of the non-resident has a comprehensive double tax treaty with Australia, the withholding tax rate is reduced to 15% or lower.
Fringe Benefits Tax (FBT)
The underlying legislation is Fringe Benefits Tax Assessment Act 1986.
FBT is calculated on 46.5% of the gross-up taxable benefits paid by an employer on behalf of its employees or their associates.
The FBT year ends on 31 March.
Pay-As-You-Go (PAYG), Goods & Service Tax (GST) and Business Activity Statement (BAS)
Businesses are required to withhold 46.5% tax from payments to other businesses not quoting their ABN on their invoices.
Employers must withhold PAYG tax from the payment of wages to employees according to the tax table published by ATO.
GST, akin to the Value Added Tax, is calculated on 10% of the taxable supply of goods and services in connection with Australia.
Exports, certain food items and most of the health services, educational services and childcare services are GST-free. Financial services and the supplies of precious metals, certain residential rental accommodation and residential premises are input-taxed supplies.>/p>
A Business Activity Statement (BAS) summarizes the business tax position of GST, PAYG, withholding taxes, provisional income tax, provisional FBT, wine equalisation tax (WET) and luxury car tax (LCT) in one statement. Businesses with turnover more than $20 millions are required to lodge monthly BAS and calculate tax on accrual basis. Eligible small businesses may lodge BAS quarterly or annually and calculate tax on cash basis.
Record Keeping, Objection and Amendment
Taxpayers are required to keep records for five years.
Taxpayers may lodge objection against assessments, amendments, penalties and private rulings on Income Tax and FBT under certain conditions. Taxpayers cannot object to private rulings on GST, LCT or WET, and administratively binding advice (ABA).
Small businesses can lodge their objection within two years after a notice of assessment of income tax or FBT is issued. Other businesses can lodge their objection within four years after the notice of assessment of income tax or FBT is given.
Financial Year and Lodgement of Tax Return
The Australian financial year ends on 30 June. ATO has the discretion under Section 18 of the Tax Acts to grant a substituted accounting period (SAP) to balance on some other date.
Businesses must lodge income tax return with ATO for each year of business, whether a tax liability arises or not.
Payroll tax is a state tax assessed on the wages paid by an employer in the States and Territories where its employees or contractors are hired. Payroll tax calculation differs by state and the rate varies from 4.75% to 6.85%. An exemption threshold, which applies to the group employer’s nationwide wages over a full financial year, is available in the range of $504,000 and $1,250,000 across state.
Wages has a broad definition and includes salaries, allowances, commissions, bonuses, superannuation contributions, reportable fringe benefits, some leave pays, and employee shares and options.
Other Taxes & Duties
Land tax is imposed on ownership of land within each State or Territory.
Stamp duty varies state-by-state on a wide range of documents and transactions.
Customs duty is imposed on various goods imported into Australia at rates prescribed in the customs legislation, which is in conformance with the general international practice.
Both Federal and State legislations govern the workplace relation in Australia.
The federal Workplace Relations Act 1996 covered 85% of the workforce and the new WorkChoices law removed the unfair dismissal claims against employers with 100 or less employees, and encouraged employers to make direct agreement with employees. While the Australian Industrial Relations Commission retained its role in resolving disputes and unfair dismissal cases, the Office of the Employment Advocate (OEA) took the principal role in processing agreement and the Australian Fair Pay Commission set the pay rates to awards.
The Australian Labour Party (ALP) had a landslide win in the November 2007 Federal Election after eleven years of a coalition government. The ALP has made several election promises and one of which is to scrap the coalition’s Workchoices.
On 19 March 2008, the Workplace Relations Amendment Bill was introduced to the Parliament and approved by the House of Representatives to put a final death to the WorkChoices.
Workers’ compensation is under State jurisdictions. Employers are required to have insurance cover on the statutory liability of work-related injuries, rehabilitation costs and work-related diseases. Employers, which fail to comply with occupational, health & safety standards, can be prosecuted.
While corporations and tax legislations have undergone significant changes in the last few years, the reform of industrial relations have always been controversial.
Federal and State equal opportunity laws prohibit discrimination on the grounds of race, sex, pregnancy, age, sexual preference, politics, religion, trade union membership or disability. Employers can be liable for sexual harassment in the workplace as a result of the unlawful conduct of their employees.
Superannuation Guarantee Act 1992 and its subsequent amendments require employers to contribute superannuation, currently 9% on eligible wages, into each employee’s choice of complying superannuation fund with exception to some awards.
The ALP has committed to deliver a national and modern system of award coverage, supported by ten national employment standards, by 2010. Collective agreements are going to be the way of the future for Australian industrial relations. Employers will not have the law on their side to bargain away the minimum employment conditions and greater union presence are expected in the workplaces.
A complete overhaul of workplace regulations is expected reset the benchmark in the Australian industrial relations in the coming two years.