Establishing a business in Australia

Business structure

Businesses can operate in Australia in a number of ways. Each business structure has its own legal characteristics and requirements, which should be considered in the context of your business needs and aims. The available options are outlined below. Each has its own tax implications, which are not addressed in detail here but should also be considered when making a final decision on structure.

Australian companies

In Australia, business is commonly conducted using an Australian company which, when incorporated, forms a separate legal entity with the power to hold assets in its own name and limit liability for its shareholders. The holders of the shares in the company therefore have no liability to the creditors of the company, except for monies unpaid on the shares.

An Australian company is created when the Australian Securities & Investments Commission (ASIC), Australia’s corporate, markets, and financial services regulator, approves a registration application and registers the proposed company. The Corporations Act 2001 (Cth) (Corporations Act), company constitution, and shareholders’ agreement govern Australian companies along with common, torts, and criminal law, including contractual and equitable principles.

There are two main types of Australian companies — public and proprietary.

Both public and proprietary Australian companies:

• are commonly limited by shares;
• must have a registered office within Australia;
• must have Australian resident directors, by whom the company is managed (at least two for public companies and one for proprietary companies);
• may have an Australian resident company secretary (compulsory for public companies and optional for proprietary companies);
• do not have residency restrictions on shareholders; and
• do not generally have minimum capital requirements for their establishment (other than in specific sectors such as banking).

The decision to choose either a public or proprietary company is usually dictated by the likely number of shareholders, the need to raise money from the public, and the desire, or otherwise, for the public disclosure of accounts and other information.

Public Australian companies
Public companies can be unlisted or listed on the Australian Securities Exchange (ASX) and can engage in fundraising activities to raise revenue by selling shares to the public.

Public companies typically have more than 50 nonemployee shareholders, and no maximum shareholder limit. However, public companies are subject to stringent disclosure requirements and must disclose annual financial reports, directors’ reports, and auditor’s reports to shareholders.

Proprietary Australian companies
Proprietary companies are generally simpler and cheaper to administer than public companies where the company is a “small proprietary company” (being one which does not trigger certain revenue, gross asset, and employee hurdles). “Large proprietary companies” have financial reporting requirements similar to those of public companies.

Proprietary companies are private companies that can be limited by shares or unlimited with share capital.

Proprietary companies must not have more than 50 non-employee shareholders and must not engage in activity that would attract certain disclosure requirements of the Corporations Act that relate to fundraising through the sale or issue of securities.

Advantages and disadvantages of Australian companies
Setting up a business in Australia as an Australian company, whether public or private, may be an attractive option. Advantages include recognised structures for debt and equity funding, the option of establishing a written shareholders’ agreement clarifying exit, governance, and dispute processes where there will be more than one shareholder, and enhanced company asset protection through the separation of ownership and operation of the company. Further, company shareholders are usually afforded limited liability, and the transfer of ownership by share transfer affords companies a level of flexibility in introducing new shareholders to the business with the same or different rights as to dividends and voting.

However, key disadvantages to note in determining whether to choose an Australian company business structure include business set-up and maintenance costs, a requisite understanding of company concepts, operations, and governance, and limited tax concessions, as well as strict regulation by ASIC and the Corporations Act.

Further, Australian law imposes substantial duties on directors of Australian companies, which include duties:

• to act in good faith in the best interests of the company as a whole;
• to act with care and diligence;
• to not improperly use information or the director’s position; and
• to ensure that the company does not engage in insolvent trading.

Substantial fines and personal liability on the part of directors apply for a breach of these duties.

Registered foreign companies

For foreign investors, a common alternative to incorporating an Australian company is the registration of a foreign company in Australia. Foreign companies can conduct a business within Australia without using an Australian business structure (such as a subsidiary) by operating an Australian branch. The foreign company must register by submitting registration forms to ASIC accompanied by certain documents, including a certified copy of the company’s foreign registration certificate. If these documents are not in English, translations must be provided.

A registered foreign company must have a registered office in Australia and must appoint an agent in Australia who will be responsible for any obligations the foreign company must meet and may be liable for any breaches or penalties.

In addition, once registered, the company is required to lodge copies of its financial statements (as prepared for its home jurisdiction) and to comply with various notification obligations under the Corporations Act.

Advantages of entering the Australian market as a registered foreign company include being able to operate directly in Australia and that no Australian company constitution is required. However, the primary disadvantage is that the foreign company is exposed to all the liability of the Australian business, as there is no intervening legal entity in which such liability is quarantined.

Partnerships

Partnerships can be formed when two or more individuals or companies carry on a business and are usually limited in size to 20 partners. Most partnerships are established and governed by a partnership agreement, which sets out the obligations of the partners to each other, in addition to applicable state and territory legislation.

A traditional partnership is an unincorporated relationship between people carrying on business, with a common view to profit in which the partners share profits in agreed proportions but are both jointly and separately liable for the liabilities of the partnership.

Limited partnerships can be formed in certain states when some (but not all) of the partners wish to limit their personal liability to the amount of their business investment, resulting in two classes of partners — general and limited. General partners’ liability for partnership liabilities is unlimited, whereas the liability of limited partners is limited (as recorded on the register).

Limited partnerships can be registered with the relevant state or territory authority, which is advantageous for particular venture capital groups as it may attract favourable tax treatment.

Incorporated limited partnerships are a special corporate form of partnership primarily established for people engaged in high-risk venture capital projects. They are a separate legal entity from their constituent partners.

An advantage of choosing a traditional partnership is that income tax is paid at a partner level, meaning that each partner is entitled to their share of net profit and loss incurred by the partnership, which can be offset against the partner’s other business gains and losses.

Limited partnerships, however, are taxed on a similar basis to a company.

A key consideration to note is that a partnership, other than an incorporated limited partnership, is not a separate legal entity, meaning that it cannot sue or be sued and its individual partners are exposed to personal liability.

Joint ventures

A joint venture is a relationship between two entities that enter into an agreement to work to achieve a shared strategic goal. Joint ventures can be either incorporated or remain as a contractual arrangement.

An advantage of unincorporated (contractual) joint ventures is that they are not regarded as separate entities for legal purposes under Australian law, although they may be required to lodge tax returns.

Unincorporated joint ventures are also an appropriate choice if the parties are seeking the flexibility to define the terms of their relationship within a contract, as opposed to legislation. As unincorporated joint ventures are not legal entities, it is common for the ownership parties to be corporations so that their investors obtain the benefit of limited liability.

Trusts

Trusts, which are governed by their respective trust deed and equitable principles, are widely used for a variety of investment and business purposes. A trust is an obligation imposed on a person (including an entity) to hold property for the benefit of beneficiaries. The trustee is responsible for managing the trust’s tax affairs, including registering the trust in the tax system, lodging trust tax returns, and paying tax liabilities. Trusts are useful when a commercial entity or business requires the contribution of capital from a number of contributors. The trustee or trustees (who may be corporations or individuals) then operate the business for the beneficiaries.

Unit trusts are a specific type of trust where trust property is divided into fixed and quantifiable parts called units. Unit holders (beneficiaries) subscribe to units in a similar way to shareholders subscribing to shares in a company and the value from the unit trust is distributed to the unit holders in fixed proportions to the units they hold. Another advantage of unit trusts is that the unit holders are protected from the liabilities of the trustee.

Trusts do not usually pay tax — rather, beneficiaries pay their own tax on distributions made to them. The trust itself will be subject to tax (at penal rates) if the trust fails to distribute its net income in the tax year. Trusts also provide some tax advantages over corporations and other structures, and, for this reason, they are often used to purchase real estate. However, a main disadvantage of engaging in business through a trust is that losses are trapped in the trust and do not flow to beneficiaries, meaning that losses can only be offset against future trust income.

Managed investment trusts and schemes

A managed investment trust (MIT) is a type of unit trust in which members of the public collectively invest in commercially operated passive income activities, such as shares, property, or fixed interest assets. A trust qualifies as an MIT if it meets certain requirements for the income year that it is in operation, including:

• the trustee is an Australian resident;
• the trust is a managed investment scheme (MIS) (as defined and regulated by the Corporations Act and explored further below);
• the trust meets the “widely held” requirement as a genuine collective investment vehicle; and
• the trust is operated or managed by an appropriately regulated entity registered under the Corporations Act (retail) or the Income Tax Assessment Act 1997 (Cth) (wholesale).

One of the advantages of an MIT is the tax benefits it may provide to a foreign investor.

An MIS is also known as a “managed fund”, “pooled investment”, or “collective investment”. An MIS generally involves a large number of people who have contributed money to obtain an “interest” in the scheme. An “interest” in a scheme is a type of financial product and is regulated by the Corporations Act, ASIC, and if available, each scheme’s written constitution. Some MIS are required to be registered pursuant to the Corporations Act.

A “responsible entity” operates the MIS and investors do not have day-to-day control over its operation.

MIS examples include:

• cash management trusts;
• Australian equity (share) trusts;
• international equity trusts;
• agricultural schemes (e.g. horticulture, aquaculture, commercial horse breeding);
• time-share schemes; and
• actively managed strata title schemes.

An advantage of an MIS is that costs are shared with the pool of investors, meaning that the cost of investing is reduced. Further, risk is theoretically reduced due to the diversification of investment, and the expertise of investment managers. However, it should be noted that, as for ordinary trusts, capital losses in a MIS cannot be distributed to members to offset against capital gains made outside the fund.

Corporate collective investment vehicles

Following five years of public consultation, the Corporate Collective Investment Vehicle Framework and Other Measures Bill 2021 (the Bill) is now set to commence from 1 July 2022.

The Bill introduces a new type of company for funds management, known as the Corporate Collective Investment Vehicle (CCIV), and establishes the accompanying regulatory and tax frameworks that will govern CCIVs. The CCIV regime blends elements of features of companies law under the Corporations Act and the MIS regime currently used in Australia, and drew upon inspiration from regimes in the EU, UK and Asia region.

A CCIV is a new type of company, limited by shares. The CCIV is an “umbrella vehicle” that has its own legal personality and must hold at least one sub-fund (being all or part of the CCIV’s business that is registered by ASIC as a sub-fund of the CCIV). Each sub-fund does not have its own separate legal personality. A CCIV (and each subfund) is created when registered with ASIC. The CCIV framework does not create a new tax regime for CCIVs; rather, it uses the existing trust taxation framework and the existing MIT regime. To utilise the MIT regime, the sub-fund of a CCIV must satisfy the MIT eligibility criteria (except that the requirement to be a MIS is replaced with a test for the CCIV sub-fund that essentially replicates the MIS requirements).

At the time of publication, it is unknown whether the new CCIV structure will be adopted by sponsors and investors.

Individual/sole trader

An individual can conduct business in Australia on their own behalf as a sole trader. Generally, only very small businesses carry on the business in the name of the individual owner. A sole trader is personally liable for all debts and obligations incurred by the business, and a personal income tax rate applies.

If an individual wishes to carry on business in a name other than their own, a trading or business name must be registered on ASIC’s Business Names Register. There is no specific legislation governing sole traders; rather, applicable legislation depends on the nature of the sole trader’s business.

Conducting a business as a sole trader is advantageous in that it is the simplest business structure — it is inexpensive, and there are few legal and tax formalities. However, a key disadvantage is that sole traders are legally and financially responsible for all aspects of their business, meaning that there is unlimited liability and personal assets may be at risk.

No requirement for local ownership

A business being established in Australia is not required to have any proportion of local ownership. As such, a nonresident may establish a wholly foreign-owned business in Australia.

Few business registration requirements

When conducting business in Australia there are a few administrative requirements, including the need to hold an Australian Tax File Number (TFN) and an Australian Business Number (ABN). These are issued upon an application being made to the Australian Taxation Office (ATO). Most businesses must also register for goods and services tax (GST) with the ATO in certain situations, including if the business or enterprise has a GST turnover (gross income minus GST) of A$75,000 or more.

There are also certain registration requirements in relation to the use of company and trading names in Australia. Any company operating a business in Australia (whether incorporated in Australia or incorporated outside Australia but registered as a foreign company) must be registered with ASIC. A company will only be permitted to be registered if its name is not identical to another company name that has already been registered with ASIC.

ASIC is the governing entity for the registration, renewal, and administration of business names in Australia.

Businesses must register a business name on ASIC’s Business Name Register if they carry on business in Australia, unless they are operating under their individual or company name.

No minimum amount of capital

Companies incorporated in Australia and foreign registered companies are not generally required to have a minimum amount of capital, issued shares, or stock.

However, there are adverse tax consequences for Australian companies owned by overseas parent companies that are funded by the parent company primarily by way of loan or debt, as opposed to capital or share equity.