Tax Strategies for Foreign Investors
Investing in Australia
The Australian government warmly welcomes foreign direct investment that will lead to economic growth. It has been crucial in the development of Australia's economy and has made significant contributions to economic expansion, innovation, and prosperity.
Certain foreign acquisitions of Australian shares and assets are subject to examination by the Australian Foreign Investment Evaluation Board. The purpose of this review is to ensure that Australia's interests are protected while also maximising investment flows (FIRB).
Most foreign investment proposals are approved. Once their applications have been granted, international investors in Australia are normally treated in the same manner as domestic investors.
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Foreign investment framework
The Foreign Acquisitions and Takeovers Act of 1975, the rules that went along with it, and Australia's Foreign Investment Policy all come together to form the framework for Australia's foreign investment policy.
The Foreign Investment Policy of Australia highlights the elements that are normally taken into consideration in order to assess whether or not an opportunity for investment is in the best interest of the country. Considerations such as national security, competitiveness, the impact on other policies enacted by the Australian government (such as tax and environmental policy), the impact on the economy and society, and the nature of the investor are all examples of things that can be categorised as "national interest" considerations.
The government conducts a commercial viability assessment of an investment if a proposal involves the involvement of a foreign government or an organisation with which it is affiliated.
Information on foreign investments
The submission of an official proposal may be required prior to the commencement of any foreign investment in Australia. This must must receive approval from the Australian Foreign Investment Review Board (FIRB).
The Financial Institutions Review Board (FIRB) examines proposed projects and provides advice to the Australian government regarding whether or not the projects meet the criteria necessary to receive clearance under government policy. The monetary value of the investment, the nature of the investment, and the type of investor are the factors that decide whether or not the investor is required to submit a proposal to FIRB.
While this is not strictly a tax problem, as a foreign person in Australia, you are subject to certain restrictions set by the Foreign Investment Review Board (FIRB) that govern your eligibility to purchase Australian real estate.
In accordance with the norms that are currently in place, non-Australian nationals who are interested in purchasing residential or commercial property in Australia are required to obtain clearance from the FIRB by default. This is true irrespective of the price of the property or the nationality of the buyer.
Exempt acquisitions, which do not need FIRB approval, frequently take the following forms:
- a New Zealand citizen purchasing a home in Australia;
- a foreign national purchasing residential property as a joint tenant with their Australian citizen spouse;
- a new home sold by a developer who has secured prior permission to sell the property to a foreign national;
- a foreigner purchasing an interest in constructed commercial property that will be used immediately and in its current state for industrial or non-residential purposes;
- business objectives, and so on.
It is crucial to remember that these limits also apply to the acquisition of property indirectly through Australian-incorporated companies and trust arrangements. As a result, it is critical that you understand these restrictions before signing a purchase contract to acquire property in Australia.
If you are a foreign national and wish to purchase property in Australia, you must first determine your tax resident status in Australia. However, the tax residence requirements are complicated and do not correspond to your immigration residency status. For example, you may not be considered an Australian permanent resident or citizen under immigration regulations, but you may be considered an Australian tax resident for income tax purposes.
If you are a tax resident of Australia, your international income and capital gains are normally subject to Australian taxation. Otherwise, only your income received in Australia (including foreign work income earned while a temporary resident) and capital gains on 'taxable Australian property (including Australian real estate) are taxable in Australia.
In addition, Australian tax law has a number of regulations referred to as "temporary resident" regulations, which stipulate that a tax resident or non-resident may be treated the same as a temporary resident. In general, the following factors may cause you to be regarded a temporary resident for the purposes of taxation in Australia:
- have a valid temporary visa for the purpose of immigration;
- are not considered a resident of Australia for the purposes of social security, and
- do not have a spouse who is considered to be a resident of Australia for the purposes of social security.
If you suspect that you may be subject to these criteria and are subject to specific regulations in some situations (for example, if you hold a special category visa), it is recommended that you seek the advice of a legal professional.
Most of your foreign income is not taxed in Australia as a temporary resident, but you will be subject to Australian income tax on income earned in Australia and capital gains tax (CGT) on any taxable Australian property you possess.
In addition, Australian domestic law must be utilised in conjunction with any Double Taxation Agreement (DTA) that Australia has in place with the country in which you choose to make your home. The DTA may allow both countries to tax the same income or it may allow only one of the countries to tax the income and require the other country to reduce the amount of tax that must be paid on the income by the amount of tax that has already been paid on the same income in the other country. Either way, the DTA may offer exclusive taxing rights to one nation on particular categories of income. If there is a dispute between the DTA and domestic tax legislation, the DTA will take precedence.
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Tax-Free Threshold
In spite of the fact that Australian tax residents are subject to taxation on all of their income and gains from capital (subject to the requirements of any DTAs that may apply), they do have access to a higher tax-free threshold and lower marginal tax rates. If you are an Australian tax resident, you are eligible for a tax exemption on up to $18,200 of your taxable income for the financial year that ends on June 30, 2019. On the other hand, non-residents do not meet the requirements to qualify for the tax-free threshold, which means that they are subject to Australian tax on each and every dollar that they make.
They get their income from operations based in Australia.
Regardless of what has been stated above, non-residents are typically exempt from the Medicare Levy, which is currently equal to 1.5% of taxable income. On the other hand, residents are required to pay the Medicare Levy by default, unless there is a specific exemption available.
As previously stated, a tax resident or non-resident may also be considered a temporary resident. There are no unique tax rates for temporary residents; if a person is both a tax resident and a temporary resident, they will pay tax at resident rates; if a person is both a resident and a temporary resident, they will pay tax at non-resident rates.
When it comes to the structuring of investments in Australian assets, international investors have numerous alternatives available to them based on their:
- The goals of the investment (such as long-term vs short-term returns or a steady income);
- country in which one resides; and
- Investment strategy.
Because thorough preparation can frequently result in cost savings as well as higher worldwide tax efficiency, it is recommended that foreign investors give careful consideration to the many structure options that are available.
There are three typical Australian investment structures:
Through a holding company in Australia
One definition of a holding company is a company that owns all of the equity of another business. The holding company does not participate in any commercial or operational endeavours; rather, it holds ownership of key business assets on behalf of the other firm, which is referred to as the "operating company." Because it is the operating corporation that hires employees, enters into contracts, and interacts with customers, it is responsible for any and all liabilities.
This is the approach that is recommended for holding operational businesses and assets associated to those businesses.
Because corporate trusts are typically categorised as corporations for Australian tax purposes, they are subject to the corporation tax rate of 30% on their worldwide income and capital gains. This rate applies whether the trust has made a profit or invested in something.
PROTECTION OF ASSETS
As previously noted, establishing a holding company allows you to segregate your firm's significant assets from the duties of the operational company. This means that if the operational company begins to perform poorly, incurs liabilities, or goes insolvent, these assets are protected from creditors.
In most cases, putting all valuable assets in a separate legal organization reduces the chance of losing them to settle debts.
CENTRALIZED MANAGEMENT AND OWNERSHIP
The directors of the holding company control the operational firm in a conventional dual company arrangement. This can improve business operations and promote performance and growth.
A centralized board also permits the organization to continue operating even if important individuals leave.
TAX MANAGEMENT
Finally, employing this business model can minimize the total amount of tax paid by the entire firm. You could, for example, form a holding company in a country with a lower corporate tax rate. However, you should carefully study the laws that govern foreign tax earnings, as these restrictions may have an impact on any tax advantages. If something goes wrong, the holding company may be safeguarded.
Direct Ownership Held by a Foreign Party
An investment that is made by a firm or a person in one country into businesses located in another country is known as foreign direct investment (FDI). In general, foreign direct investment (FDI) occurs when an investor develops international business activities or acquires foreign business assets. For example, an investor may create FDI when they acquire ownership or control of a foreign company. Portfolio investments, on the other hand, include an investor purchasing equities in foreign-based businesses. These are not the same thing as direct investments made in foreign countries.
Foreign direct investments are often made in open economies that provide qualified workforces and above-average growth potential for the investor. This is in contrast to governments that have rigors control over their investments and economic activity. In most cases, investing in foreign direct investment entails more than merely putting money into a company. There is also the possibility of managerial or technological provisions being included. The primary benefit of direct investment from outside sources is the establishment of either effective control or, at the very least, significant influence over the decision-making processes of a foreign company.
Beneficial capital gains tax exemptions and concessions are available to foreign investors, in particular in relation to non-taxable Australian property. Non-taxable Australian property consists of passive Australian assets other than real property (direct and indirect interests), mining, quarrying, and prospecting rights, as well as specific assets related to Australian permanent establishment business operations.
Using a Unit Trust in Australia
A unit trust is a popular type of business organisation in which a number of different interests are brought together to accomplish a similar objective. This is done in order to maximise return on investment. Beneficiaries receive an irrevocable stake in the totality of the property that is held in trust for them.
When contrasted with a discretionary trust, a unit trust can be identified by the fact that the rights of the beneficiaries to income and capital are not subject to the trustee's discretion. This is the defining characteristic of the unit trust. However, why is it applied in this manner? When precisely is this going to take place? This article will provide a complete review of what a unit trust is as well as the many benefits that come along with investing in one.
Investors who utilise an Australian Unit Trust to make passive investments are eligible for a number of tax benefits, some of which are listed below. Among these benefits is the ability to defer capital gains tax.
- The trust's income is typically viewed as the responsibility of the unitholders to report and pay taxes on. This tax requirement is normally dealt with for non-resident unitholders by the Australian withholding tax system that is applied to distributions that are distributed by the trustee.
- The withholding tax rates that non-resident investors in a Managed Investment Trust are often required to pay are lower than the rate at which the Australian firm is taxed (see below).
- Capital gains that are realised on the sale of trust assets are typically exempt from Australian taxation for foreign unitholders when the trust meets the requirements to be classified as a fixed trust and when at least 90 percent of the trust's assets are not considered to be taxable Australian property.
- Investors receive the benefit of entry and exit flexibility, which indicates that they can generally buy and sell their trust units to manage their interests. This allows investors to maximise their return on investment.
- If the unitholding meets the criteria to be considered non-Taxable Australian Property, then foreign unitholders will not be subject to the Australian capital gains tax on the sale of their units, as was discussed before under the heading "Direct Ownership."
INCOME TAX BENEFITS OF A UNIT TRUST
Unitholders in a unit trust do not often receive the same asset protection protections as beneficiaries of discretionary trusts. This is because unit trusts are structured differently. However, because of the favourable effects on one's income tax status, they are an attractive choice for a company structure.
Because a unit trust is not considered to be a separate taxable entity in the same way that a corporation is, any distributions of its income or capital are exempt from taxation. In the event that the trustee becomes bankrupt, the beneficiaries' creditors will not be able to take legal action against the trust property. This is another advantage. This is due to the fact that property held in trust cannot be used to satisfy the trustee's debts to third parties. Unit trusts are also subject to less regulation, which means that the trust's financial outcomes can be kept secret and the trust's finances do not need to be audited. This is another advantage of investing in unit trusts rather than other types of investment vehicles.
