Understanding taxation of foreign subsidiaries in Australia.

Under Australian law, foreign holding companies can expand into Australia by incorporating 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 provides an overview of the taxation requirements of subsidiary companies in Australia, including what taxes apply to profit repatriation, important dates, and other tax-related obligations for 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 ranges between 25 to 30% depending on the conditions. Specifically, companies with an aggregated turnover of less than AUD 50 million and lower than 80% of their assessable income from base rate entity passive income will qualify for the reduced rate of 25%.

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 the standard withholding tax rate of 30%. However, double tax treaties may reduce this rate to between 0% and 15% based on the shareholder’s resident country.

Australia currently has signed tax treaties with over 40 jurisdictions, which include:

Franked dividends (dividends that have been taxed) are not subject to withholding tax.

Lodging tax returns

The standard financial year in Australia runs from 1 July to 30 June the following year. Companies are required to submit income tax returns by 31 October. Companies must first obtain a Tax File Number (TFN) to file a tax return. Where the company has appointed a Tax Agent, the filing deadline may be extended to 15 May of the following year.

Fringe benefits tax (FBT)

Employers are required to 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
• Entertainment-related expenses
• Expense payment benefits
• Debt waiver benefits
• Loans
• Accommodation (house, flat, or home unit)
• Living away-from-home allowances
• Meals
• 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 those provided by religious institutions

Employers must lodge the FBT return at the end of the FBT year, which runs 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.

Additional tax considerations

The Australian government intends to introduce a domestic minimum tax (DMT) of 15%, beginning with income years starting on or after 1 January 2024. Announced in May 2023, this measure aligns with the OECD/G20’s Pillar Two GloBE Model Rules, which require large multinational enterprises (MNEs) with global annual consolidated revenues of EUR 750 million or greater to contribute a minimum level of tax on their income in each jurisdiction they operate in. In effect, MNEs in Australia will be required to pay at least 15% tax on their income earned in Australia.

While these rules are set to apply to MNEs from 1 January 2024, the measure still needs to be law in Australia.

Tax deductions

Eligible tax deductions are business-related expenses necessary to generate income and cannot be for personal purposes. Subsidiaries can claim deductions for a range of business expenses that can include:

• 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 a period of five years

Receipts must include:

• Expense amount
• Payment date
• Document date
• Supplier’s name
• Nature of goods or services

Conclusion

Australian subsidiaries are generally considered 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 between 0% and 15% under tax treaties.

Companies can claim deductions on business expenses incurred in earning income. To claim these deductions, the company must keep records such as income statements, receipts, and payment summaries for five years. Given the technicality of tax regulations, it is advisable to consult with an expert to assist with compliance and plan your tax strategy.

How Acclime can help establish your subsidiary in Australia

Acclime Australia provides tailored solutions for subsidiary taxation and compliance. Our team of experts offers strategic guidance on corporate tax obligations, eligible deductions, and understanding profit repatriation related to the unique challenges faced by foreign subsidiaries.

From strategic tax planning to ongoing compliance support, Acclime enables your business to meet all statutory requirements efficiently, allowing you to focus on growing your operations in Australia confidently.