Business Structures in Australia
The most common business structures in Australia are:
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Sole Trader
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Partnership
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Company
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Trust
Your choice of business structure determines your tax liabilities, asset protection, and costs.
1. Sole trader
A sole trader is the most basic form business structure. It is an individual who operates, manages and is the only person legally liable for all aspects of the business. He can employ workers in his business, but you can’t employ himself.
As a sole trader, he:
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declares business income (or loss) as part of his personal income tax return and are taxed at the same rate as an individual.
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applies for an ABN and use his ABN for all his business dealings
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registers for Goods and Services Tax (GST) if annual GST turnover is $75,000 or more
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pays tax at the same income tax rates as individual taxpayers and may be eligible for the small business tax offset
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put aside money to pay income tax at the end of the financial year
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claims a deduction for any personal super contributions
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can't claim deductions for money 'drawn' from the business. Amounts taken from the business are not wages for tax purposes, even if he thinks of them as wages.
Personal services income (PSI)
If he is paid mostly for personal efforts, skills or expertise, he might be receiving personal services income (PSI) and may have to treat deductions in relation to this income differently.
2. Partnership
A partnership is a group or association of people who carry on a business and distribute income or losses between themselves. The partners share income, losses and control of the business. A written partnership agreement is not essential for a partnership to exist, but is a good idea. A partnership agreement should outline how income or losses will be distributed to the partners and how the business will be controlled.
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A partnership agreement can help prevent misunderstandings and disputes about what each partner brings to the partnership, and what they are entitled to receive from the income of the business. This is particularly important for tax purposes if the profit or losses are not distributed equally among partners.
The partners in a partnership are not employees, but the partnership might also employ other workers.
Partners are responsible for their own superannuation arrangements. However, the partnership is required to pay superannuation for its employees.
In a partnership business structure:
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income, losses and control of the business are shared among the partners
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the partnership has its own TFN and must lodge an annual partnership return showing all income and deductions of the business
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the partnership doesn't pay income tax on the profit it earns – each partner reports their share of the partnership income in their own tax return
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each partner pays tax on their share of the partnership profit at the individual tax rate and may be eligible for the small business tax offset
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the partnership must apply for an ABN and use it for all business dealings
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the partnership must be registered for GST if its annual GST turnover is $75,000 or more.
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As a partner you can't claim deductions for money drawn from the business. Amounts you take from a partnership are not wages for tax purposes.
Personal services income (PSI)
If you are paid mostly for your personal efforts, skills or expertise, you may be receiving personal services income (PSI) and you may have to treat deductions in relation to this income differently.
3. Company
A company is a legal entity with higher set-up and administration costs. Companies also have additional reporting requirements. A company is run by its directors and owned by its shareholders. While a company provides some asset protection, its directors can be legally liable for their actions and, in some cases, the debts of the company. All directors of a company are required by law to verify their identity and get a director identification. Companies are regulated by the Australian Securities & Investments Commission (ASIC).
In this business structure, the company:​
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must apply for a tax file number (TFN) and use it when lodging its annual tax return
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is entitled to an Australian business number (ABN) if it is registered under the Corporations Act 2001. A company not registered under the Corporations law may register for an ABN if it is carrying on an enterprise in Australia
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must be registered for GST if its annual GST turnover is $75,000 or more
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owns the money that the business earns - the individuals who control the business cannot take money out of the business, except as a formal distribution of the profits or wages
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must lodge an annual company tax return
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usually pays its income tax by instalments through the pay as you go (PAYG) instalments system
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pays tax at the company tax rate or lower company tax rate (if a base rate entity)
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may be eligible for small business concessions
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must pay super guarantee contributions (SGC) for any eligible workers. This includes you, if you are a director of the company, and any other company directors.
Personal services income (PSI)
If you have a company structure and the income the company receives is mostly for your personal efforts, skills or expertise, you need to work out if the personal services income (PSI) rules apply. If the PSI rules apply, the income will be treated as your individual income for tax purposes. This will also affect the deductions you can claim.
4. Trust
Setting up a trust can be expensive as a formal deed is required outlining how the trust will operate and there are formal yearly administrative tasks for the trustee. A trustee is legally responsible for the operation of the trust. The trustee can be an individual or a company. Profits from the trust go to beneficiaries.
If you use a trust for your business structure, the trust:
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must have its own tax file number (TFN) for lodging its annual tax return
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must apply for an ABN and use it for all business dealings
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must be registered for GST if annual GST turnover is $75,000 or more
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may be liable to pay tax depending on the wording of its deed and whether any income the trust earns is distributed to its beneficiaries
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may be able to access small business tax concessions
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must pay super for any of its employees (this may include the trustee if they are also employed by the trust).
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Who pays income tax?
While a trust must lodge an annual tax return, whether the trust pays tax (or not) is determined by how the trust income is distributed:
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if all trust income is distributed to adult resident beneficiaries, the trust is not liable to pay tax – each beneficiary reports the income in their own tax return
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if all or part of the net trust income is distributed to non-residents or minors, the trustee is assessed on that share on behalf of the beneficiary – these beneficiaries may need to declare their share of the trust's net income in their own income tax returns, and can claim a credit for the tax paid on their behalf by the trustee
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where the trust accumulates net trust income (does not distribute it), the trustee is assessed on that accumulated income at the highest individual tax rate.
Personal services income (PSI)
If you have a trust structure and the income the trust receives is mostly for your personal efforts, skills or expertise, you need to work out if the personal services income (PSI) rules apply. If the PSI rules apply, the income will be treated as your individual income for tax purposes. This will also affect the deductions you can claim.
Most common options for foreign companies establishing a business presence in Australia
1. Establishing or Acquiring an Australian Subsidiary Company
A subsidiary company is a separate legal entity and must have at least one director who is a resident in Australia, while a branch office is not a separate legal entity.
An Australian subsidiary is recognised as a separate legal entity with limited liability and is an Australian resident for tax purposes.
A subsidiary (depending on the type of company) only needs to lodge its own accounts with the Australian Securities and Investments Commission (ASIC) and may be exempted from that requirement if it is a small company. A subsidiary is however subject to income tax on their worldwide income, subject to certain exceptions in respect of foreign source income derived by resident companies.
2. Establishing a Branch Office
A branch office is not a separate legal entity, however the branch must comply with Australian legislation.
A branch office is only subject to tax on its Australian source income.
A branch office must lodge the accounts for the foreign company with ASIC There are various taxation issues associated with operating a branch in Australia, specifically, whether the branch comprises a permanent establishment (PE) in Australia. In this case the foreign company is required to have a taxable presence in Australia and the Australian PE gives rise to a taxable presence in Australia. Where this is expected to be the case, foreign companies usually choose to establish a subsidiary in Australia rather than set up a branch.
If a foreign company wishes to carry out business in Australia but does not wish to incorporate a separate Australian entity to manage its Australian operations, a registered foreign company would be a suitable choice.
What is a registered foreign company in Australia?
A registered foreign company in Australia is not a separate legal entity from the parent company. In practice, this is similar to establishing a representative office or branch of a foreign company in another country. The foreign company can register directly with the Australian Securities and Investments Commission (ASIC).
Steps of incorporating a registered foreign company
There are 3 key steps to setting up a registered foreign company in Australia.
Step 1: Ensure the name you wish to register is available
The ASIC website has a business name search tool that you can use to check if a business name is available.
A business name cannot be used if it is reserved by another entity, currently in use, or is deemed by ASIC to be unacceptable or misleading.
Step 2: Complete the relevant application form and compile accompanying documents
Form 402 – Application for Registration as a Foreign Company must then be completed in order to register the foreign company.
A number of documents must also be lodged along with Form 402, including:
A certificate from the company’s governing body in its home jurisdiction that confirms the company is registered. This certificate must be dated no earlier than three months before lodgement with ASIC.
A certified copy of the company’s constitution (certified by the ASIC, a notary public or a company officer with a duly certified affidavit)
A completed Form 418 – Memorandum of appointment of local agent.
A memorandum stating the powers of certain directors. If the directors listed in Form 402 include resident directors in Australia, or if there are members of a local board of directors, the company must lodge a memorandum stating the powers vested in those directors.
Step 3: Lodge the form and accompanying documents with the prescribed lodgement fee
Form 402 and the supporting documents must be submitted to the following address:
Australian Securities and Investments Commission
PO Box 4000
Gippsland Mail Centre VIC 3841
The cost of lodgement of Form 402 is AUD 506.
Once the application is processed and approved, the ASIC will issue an Australian Registered Body Number (ARBN) which is a unique, nine-digit code. This is similar to an ACN (Australian Company Number), but specifically to registered foreign companies.
ASIC can take up to 28 days to process an application to register a foreign company.
Post-registration requirements
Once the foreign company is registered with ASIC and has an ARBN, there are a number of post-registration obligations that the company must comply with.
Appoint a local agent
At all times, a registered foreign company must have a local agent.
By definition, a local agent:
Is answerable for the doing of all acts, matters and things that the foreign company is required to do by, or under, the Corporations Act
Is personally liable for a penalty imposed on the foreign company for a contravention of the Corporations Act if a court or tribunal hearing the matter is satisfied that the local agent should be so liable
Form 418 is used to initially appoint the original local agent, as well as to appoint new or replacement local agents. Form 404 – Notification of Change to Agent of a Foreign Company must also accompany Form 418 when appointing a replacement local agent.
Local agents act as a representative of the foreign company in Australia and are able to lodge ASIC forms on behalf of the company.
Display company name
A registered foreign company must display its name in a conspicuous position and in legible characters outside every office and place of business in Australia that is open and accessible to the public.
It must also display its place of origin, the words registered office at its registered office, and the word Limited or Ltd, or a notice that the liability of its members is limited, if that is the case.
Correctly use ARBN
There are strict guidelines regarding the use of the registered foreign company’s ARBN.
In summary, it must be displayed in legible characters in company correspondence, along with the words Australian Registered Body Number or ARBN.
Lodge a financial statement
Registered foreign companies must lodge financial statements with ASIC annually (at intervals no longer than 15 months).
Financial statements comprise a balance sheet, profit and loss, and cash flow statement, any other documents the company is required to prepare by the law that applies in its home jurisdiction (such as an audit report), and Form 405 – Statement to Verify Financial Statements of a Foreign Company.
The lodgement fee is AUD 1,260.
Financial statements must be lodged in original, hard copy format.
For companies exempt from lodging a Form 405, a Form 406 – Annual Return of a Foreign Company is required to be lodged for the same fee of AUD 1,260.
Notify ASIC of Other Changes
Registered foreign companies must also notify ASIC of the following changes:
Change of name, constitution or powers of local director (Form 409)
Change of Registered Office address or opening hours (Form 489)
Change in directors (Form 490)
Ceasing business or winding up (Form 407)