Understanding taxation of foreign subsidiaries in Australia
Under Australian law, foreign holding companies can expand into Australia through the incorporation of a new, wholly owned subsidiary company. This company is considered a separate legal entity. To avoid penalties and unexpected charges whilst operating, they must continually fulfil their statutory obligations, including tax compliance.
This guide will provide an overview of the taxation requirements of subsidiary companies in Australia. Specifically, what taxes apply to profit repatriation, when tax returns should be lodged and other tax obligations related to a subsidiary company.
How are subsidiaries taxed in Australia?
A subsidiary company is considered an Australian resident and is taxed on its worldwide sourced income and capital gains. The corporate tax rate for subsidiaries is either 30% or 25%; however, for companies with an aggregated turnover of less than AUD 50 million that obtain less than 80% of their assessable income from base rate entity passive income, it will be subject to a reduced rate of 25% for the 2021-2022 income year.
Base rate entity passive income includes:
- Corporate distributions and franked credits on those distributions
- Royalties and rent
- Interest income
- Gains on qualifying securities
- Net capital gain
Tax on profit repatriation
Unfranked dividends (dividends that have not been taxed) paid to the non-resident parent company are subject to withholding tax at a standard rate of 30%. However, the withholding tax rate can be reduced to between 0% to 15% based on the resident country of the shareholder under Double Tax Treaties. Australia currently has signed tax treaties with over 40 jurisdictions, which include:
Republic of Kiribati
Papua New Guinea
United States of America
Franked dividends (dividends that have been taxed) are not subject to withholding tax.
Lodging tax returns
The standard / default financial year in Australia starts on 1 July and ends on 30 June of the following year. Companies must submit income tax returns by 31 October, and to be able to file tax returns, you must have a Tax File Number (TFN). Where the Australian company has appointed a Tax Agent, then the due date may be pushed out to 15 May of the following year.
Fringe benefits tax (FBT)
Employers must pay fringe benefits tax on any benefits paid to employees in addition to their salary. According to the Australian Taxation Office (ATO), fringe benefits include:
- Car leasing
- Expense payment
- Debt waiver
- Accommodation (house, flat, or home unit)
- Living away from home allowances
- Property (goods, land, buildings or financial assets)
The following are not considered fringe benefits:
- Salary and wages
- Shares purchased under employee share acquisition schemes
- Employment termination payments
- Volunteer or contractor benefits
- Exempt benefits such as benefits provided by religious institutions
Employers must lodge the FBT return at the end of the FBT year, from 1 April to 31 March of the following year.
Goods and service tax (GST)
Goods and service tax is a tax that is applied to goods and services sold or consumed in Australia. Subsidiaries must register for GST if your business has a GST turnover of AUD 75,000 or more.
Expenses that you can claim as deductions must be related to earning income and not for private use. You can claim deductions for the following business expenses:
- Business travel expenses
- Salary, wages and super contributions
- Repair, maintenance and replacement expenses
- Operating expenses
- Depreciating assets and other capital expenses
If you plan to claim tax deductions, you will need to keep records:
- In writing, either on paper or electronically
- In English or other forms that can be accessed and converted into English
- For five years
Receipts should show the amount of expense, the date the expense was paid, the date of the document, the supplier’s name, and the nature of goods or services.
Generally, Australian subsidiaries are tax residents and are taxed on global income at a rate of 30% or a reduced rate of 25%, depending on annual turnover. When profits are repatriated to the foreign parent company, unfranked dividends are subject to a 30% withholding tax. However, this rate can be reduced to 0% to 15% under tax treaties.
Companies can claim deductions on business expenses involved in earning income and not for private uses, such as business travel expenses and maintenance costs. To claim those deductions, the company will need to keep documents such as income statements, receipts and payment summaries for five years.
If you have any further questions about subsidiary taxation or want to set up a subsidiary in Australia, don’t hesitate to contact Acclime. Our team of accountants, tax agents, and legal professionals deliver an integrated service that enables your business to maximise the Australian market’s opportunities and incentives.