Tag: Australia

US-AU DTA: Article 1 – Personal Scope

Posted on by Peter Harper

GENERAL BACKGROUND

In this series, we will be discussing the Convention Between the Government of the United States of America and the Government of Australia for the Avoidance of Double Taxation and Fiscal Evasion concerning Taxes on Income 1982 and the 2001 protocol (DTA). 

These series aim to make sure the reader has a comprehensive understanding of the DTA and how to interpret and apply it correctly. 

The only way to get a comprehensive understanding of the DTA is to make sure you understand every article on its own. 

If the reader is anything like my wife, you will probably question the above statement and see it as a way of me dragging it out. Especially considering that the DTA only consists of 29 Articles in a 27-page document. How complicated can it be?

Well just to give you some perspective, the US bases all its DTAs on the US Model Tax Treaty. This model is used as a foundation and guideline on how to draft specific DTAs with various countries. The US Model Tax Treaty also has a Technical Explanation to understand how to interpret and apply a DTA. The technical explanation is 92 pages long. 

Most countries in the world (excluding the US) follow the Organization of Economic Co-operation and Development’s (OECD) Model Tax Convention which consists of 32 Articles. The commentary on the OECD’s Model Tax Convention is 658 pages. 

I would therefore recommend not taking international tax advice from my wife or any advisor who summarizes the DTA in one or two pages. It’s not that simple. 

In this week’s blog, we will discuss Article 1 of the DTA – Personal Scope

INTRODUCTION

The main reason why countries across the world implement DTAs is to avoid the imposition of comparable taxes in two or more countries on the same taxpayer in respect of the same subject matter and for identical periods. The harmful effects of double taxation on the exchange of goods and services and movements of capital, technology, and persons are so well known that it is scarcely necessary to stress the importance of removing the obstacles that double taxation presents to the development of economic relations between countries.

DTAs, therefore, help to clarify, standardize, and confirm the fiscal situation of taxpayers who are engaged in commercial, industrial, financial, or any other activities in other countries through the application by all countries of common solutions to identical cases of double taxation. 

The US and Australia tax their residents on a worldwide basis and non-residents on a source basis. So, these tax systems will seek to levy taxation where there is a source of income in a state/country (state is the term used for the country, either the US or Australia) and/or a person who is a resident in a country. Both source and residence are referred to as ‘connecting factors’ in the world of public international tax. This is where the DTA comes into play, to ascertain whether the US or Australia has taxing rights on a specific type of income.

INTERPRETING ARTICLE 1 OF THE DTA – PERSONAL SCOPE

Article 1 of the DTA states the following – 

Except as otherwise provided in this Convention, this Convention shall apply to persons who are residents of one or both of the Contracting States.

This Convention shall not restrict in any manner any exclusion, exemption, deduction, rebate, credit, or other allowance accorded from time to time: 

by the laws of either Contracting State; or 

by any other agreement between the Contracting States.

Notwithstanding any provision of this Convention, except paragraph (4) of this Article, a Contracting State may tax its residents (as determined under Article 4 (Residence)) and individuals electing under its domestic law to be taxed as residents of that state, and because of citizenship may tax its citizens, as if this Convention had not entered into force. For this purpose, the term “citizen” shall, for United States source income according to United States law relating to United States tax, include a former citizen or long-term resident whose loss of such status had as one of its principal purposes the avoidance of tax, but only for a period of 10 years following such loss.

The provisions of paragraph (3) shall not affect: 

the benefits conferred by a Contracting State under paragraph (2) of Article 9 (Associated Enterprises), paragraph (2) or (6) of Article 18 (Pensions, Annuities, Alimony and Child Support), Article 22 (Relief from Double Taxation), 23 (Non-Discrimination), 24 (Mutual Agreement Procedure) or paragraph (1) of Article 27 (Miscellaneous); or 

the benefits conferred by a Contracting State under Article 19 (Governmental Remuneration), 20 (Students) or 26 (Diplomatic and Consular Privileges) upon individuals who are neither citizens of, nor have immigrant status in, that State (in the case of benefits conferred by the United States), or who are not ordinarily resident in that State (in the case of benefits conferred by Australia).

Paragraph 1

This paragraph sets out the scope of DTA’s application. It applies to residents of the US and/or Australia. However, the scope is extended in certain articles of the DTA and can also apply to residents of third countries, for example, Article 10 (Dividends), Article 11 (Interest), and Article 25 (Exchange of Information). A resident is defined in Article 4 of the DTA. 

Paragraph 2

This paragraph goes on further to state that the DTA may not increase tax above the liability that would result under either the US or Australian domestic legislation or any other agreement between the US and Australia. It also provides taxpayers with the option to rather apply domestic law instead of the DTA, if the domestic law provides the more favorable treatment. A taxpayer, however, may not make inconsistent choices between the rules of the Internal Revenue Code and the DTA rules.

Asena Advisors is the only multi-disciplinary (Accounting and Legal) international CPA firm in the United States that specializes in U.S. -Australia taxation.
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Paragraph 3

This paragraph is probably one of the most important provisions of the DTA as it lays the foundation of taxing rights for the rest of the DTA. It provides the US with broader powers than what is usually provided to other countries in DTAs. This is due to the US being one of the only countries in the world (the other country is Eritrea) to continue to tax individuals who are US citizens on a worldwide basis irrespective of where they live in the world. 

It contains a ‘saving clause’ which stipulates that the US and Australia reserve the right to tax its residents as if the DTA had not come into effect.  The US and Australia also reserve the right to tax their citizens, individuals electing under their respective domestic laws to be taxed as residents, and in the case of the US, former citizens whose loss of citizenship had as one of its main purposes the avoidance of tax. This reservation was extended in the 2001 protocol to include not only former citizens but also former long-term residents of the US. This was to ensure that the DTA is consistent with US law, more specifically Section 877 of the Internal Revenue Code. 

Section 877(c) provides certain exceptions to these presumptions of tax avoidance. The US defines ‘long-term resident’ as an individual (other than a US citizen) who is a lawful permanent resident of the United States in at least 8 of the prior 15 taxable years. An individual is not treated as a lawful permanent resident for any taxable year if such individual is treated as a resident of a foreign country under the provisions of a tax treaty between the United States and the foreign country and the individual does not waive the benefits of such treaty applicable to residents of the foreign country.

The major thing to note here is that even though the right to tax its citizens is reserved for Australia as well, Australia does not tax individuals based on citizenship. Whereas in the case of the US, individuals are taxed based on citizenship. 

Paragraph 4

This paragraph sets out the limitations of the saving clause and where other provisions of the DTA will override the savings clause. The saving clause does not override the benefits provided under paragraph 2 of Article 9 (Associated Enterprises), relating to correlative adjustments of tax liability, or the benefits of paragraphs 2 or 6 of Article 18 (Pensions, Annuities, Alimony and Child Support), relating to social security payments, alimony and child support. 

Social security payments and similar public pensions paid by Australia and alimony, child support, and similar maintenance payments arising in Australia are taxable only by Australia even though the recipient may be a resident of the US. Similarly, social security payments by Australia to a citizen of the US, wherever resident, are taxable only in Australia. 

The benefits provided in Articles 22 (Relief from Double Taxation), 23 (non-Discrimination), and 24 (Mutual Agreement Procedure), and the source rules of paragraph 1 of Article 27 (Miscellaneous) are also available to residents and citizens of the Contracting States, notwithstanding the saving clause.

THE IMPORTANCE OF READING COMPREHENSION 

Although most people can read, the act of reading and the act of comprehending what you read are two very different things.

Reading comprehension is the ability to process text, understand its meaning, and integrate with what the reader already knows. 

Lawyers generally know the importance of reading comprehension. At law school, students are taught how to interpret legislation. So, this is not a gift or talent, lawyers are born with, but rather a skill set you can develop that will be extremely beneficial when looking at the DTA. 

The reason why it is extremely important to understand the DTA and more specifically Article 1 of the DTA, is so that you understand if the DTA even applies to you. We’ve assisted numerous clients who either misinterpreted the application of the DTA or whose advisor misinterpreted the application. 

The key questions you should consider to ensure the correct application of the DTA is – 

  1. What is the scope of the DTA and do I fall within that scope to use the DTA?
  2. Am I a resident of Australia or the US for purposes of the DTA?
  3. What are the benefits available to me in the DTA?
  4. What is the limitation of benefits in the DTA?
  5. What is the interplay between US/Australia domestic legislation and the DTA?
Our team of International Tax specialists at Asena Advisor has an in-depth knowledge of how to interpret international tax treaties and how to ascertain their applicability to your specific circumstances. 

Shaun Eastman

Peter Harper

LLC Australia

Posted on by Peter Harper

LLC Australia

With ties and clients in Australia, we here at Asena Family Office often get questions about how to set up an LLC there, including if there are differences that one should know about between Australia and the U.S. Today, we will be going over what an Australian LLC looks like, operates, and the people behind it.

What does LLC Company mean?

In the U.S., you can set up an LLC, which is short for a Limited Liability Company. However, in Australia, it is a company that is primarily called either a Proprietary Limited Company or a Private Proprietary Company.

What is Limited Liability Company in Simple Words?

It is the Australian equivalent of a US LLC, a Proprietary Limited Company, or a Private Proprietary Company.

What are the Characteristics of an LLC in Australia

Some of the most essential requirements for both public and private limited companies in Australia are:

    • Shares – Private companies can privately issue shares, while public companies can offer their shares to the public if the company operates as a listed company;
    • Directors – Public companies must have three or more company directors, and two must be Australian residents, while private companies must have one or more directors who are Australian residents;
    • Corporate meetings – Also known as annual meetings;
    • Taxes – The rates for two corporate incomes are considered applicable as 30% and 27.5% for small companies, but beginning in 2021, the reduced corporate tax has been charged at a lower rate. 

Why Would A Company Be An LLC?

Australia does not have a check-the-box regime (CTB rules) as the U.S. does. 

For Australian purposes, an LLC is incorporated as per the Corporations Act; investors can incorporate a private or a public company when the company first goes into operation. There is no separate definition or election for tax purposes in Australia.  

Is An LLC The Same As A Company?

It is similar to a US LLC to limit the business owner’s risks. However, for Australian purposes, it is a Company called either a Proprietary Limited Company or a Private Proprietary Company in Australia.

Can An LLC Be A Private Company?

Absolutely. With various options, please speak with one of our advisors about which option will be the best for you.

What is the Difference Between LLC and LTD Company?

To simply put, there is no difference. An LTD Company is a type of LLC, and when registering an LLC in Australia, it is registered as a company. On the other hand, an LTD Company is a type of LLC in Australia, which is a public limited company, and shares are open to the public. 

What is an S Corporation in Australia?

Australia does not have the option to elect your company as an S Corporation as the U.S. does for federal tax purposes. There are no CTB regimes in Australia as there are in the U.S. 

What is the Difference between PTY LTD and LTD?

Some key points to note when understanding the differences between these two forms of company are:

  • Shares – a private company can privately issue shares, while a public company can provide its shares to the public if the company decides to operate as a listed company; and
  • Directors – the public company is required to have at least three, preferably more, company directors, with two required to be Australian residents. Meanwhile, the private company must preferably have one or more directors who are also residents;
Is PTY LTD a Limited Liability Company?

Yes. A Limited Liability Company is often incorporated according to the Corporations Act, and when registering the company, investors can either incorporate a private or a public company. 

What is a PTY LTD Company in Australia?

Pty Ltd is a Private Limited Liability Company and is the most common company used by business owners in Australia. It is often considered restricted by current and future entrepreneurs as it is not allowed to have more than 50 non-employee shareholders. A Pty Ltd is also limited by one or more shares, as it is usually incorporated along with a share capital that is made up of shares claimed by each initial member upon the company’s incorporation. Members are also legally liable only to the point of any unpaid amounts that are on their shares. That is, their personal assets are not at risk in the event of the company being wound up. And it’s prohibited from offering shares to anyone other than existing company shareholders, employees, or a subsidiary company.

Why Do Companies Have PTY LTD?

A proprietary company with a limited liability decreases the risks of doing business because it is regarded as wholly independent from the company’s founders and members, and liability limits its share capital. 

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Can You Make An LLC in Australia?

The short and direct answer is yes. A Limited Liability Company is to be incorporated according to and under the Corporations Act. When first starting the company, investors can include private or public companies. There is no need to subscribe to a minimum paid-up company for either business form. However, there are specific provisions: the public company cannot have a maximum number of specified shareholders. However, the private one must have a maximum of fifty shareholders who are under employment within the company. For both Australian LLCs, the minimum number of shareholders is one.

What Is A Limited Liability Company Australia?

It is a company that is incorporated in terms of the Corporations Act 2001, and when first opening the company, investors can either incorporate a private or a public company. 

What are the Basic Steps for Company Incorporation in Australia?

Typically, your first step to forming an Australian company is choosing your business type. Suppose you’ve decided to start a Proprietary Limited Company (LLC) in Australia. In that case, the next steps are as follows: 

  • Reserve your company and/or business name;
  • Appointing a Company Director and other statutory officeholders;
  • Drafting and signing any bylaws for your LLC in Australia;
  • Registering your Proprietary Limited Company (LLC) in Australia;
  • Get your business and tax identification numbers and
  • Open a corporate bank account.

What Are The Bylaws of an Australian Limited Liability Company?

There’s more than one way to choose the kind of governance of your Australian Proprietary Limited Company (LLC) will have. To do this, you can choose to either:

  • Operate your company under the replaceable rules that are listed under the Corporations Act;
  • Create a unique constitution or incorporate elements from the replaceable rules and include your own; and
  • Appoint a sole director to your Proprietary Limited Company who is also a single shareholder and doesn’t need a formal internal governance system.

Opening an LLC in Australia

Each initial startup steps are unique for every Australian. Below are common courses of action to consider unless there is another that would be the most beneficial for you and the structure of your business.

Requirements for an LLC in Australia

When starting a Proprietary Limited Company or Private Proprietary Company in Australia, the minimum requirements include the following:

    • Zero minimum share capital;
    • One shareholder;
    • One company director; and
    • One resident director.

Once you have the proceeding, you’ll need to produce annual financial statements. However, you won’t need to register for a GST (Goods and Service Tax) unless your sales exceed A.U. $75,000 in the year.

What Licenses Are Necessary To Open A LLC In Australia

Standard Australian licenses and permits for any business either:

    • Give approval to your business to do an activity; or
    • Protect your business and employees with additional legal security.

Licensing and permit requirements will often vary by local laws, state, and industry; what you’ll need depends on your business type, business activities, and location.

What are the Main Steps in Registering an LLC in Australia?

Once you have selected the LLC type (either the public or the private one), you need to consider conserving a suitable trading name. Just like within other jurisdictions around the world, the Australian company’s trade name that is soon to go onto the market has to be unique nationwide. When deciding on a trading name, verifying if the chosen name has not already been activated or if it is already registered as a trademark in Australia is compulsory. You can always find experts at Asena Family Office for cases concerning intellectual property regulations.  

Another critical step is to prepare the company’s statutory documents. It is required that the documents are to be processed through which the legal entity will inherit a legal personality, being a separate entity from its founders. It is also vital to choose directors, followed by registering with the local institutions for tax purposes, per the law’s regulations. Another legal obligation to check off your list is to have an official business address, including your company’s headquarters and the development of its activities. This is a critical step for all companies registered in Australia, not only for LLCs. 

One thing to note about LLCs is that they are suitable for most of Australia’s development of economic activities, including importing and exporting raw materials and other goods. Regarding its taxation, investors must know that your company will be liable for all corporate taxes applied under your local tax law and benefits from the treaties signed to avoid double taxation. 

An Australian Private Limited Liability Company is not always required to finalize and turn in an audit. When drafting any statutory documents, you will be required to add provisions concerning the internal management rules of the company, its shareholding structure, and the rights and obligations of any parties that are involved with or in the company, such as shareholders and directors.

How Do I Form an LLC in Australia?

I like to recommend the following six checkboxes for clients when beginning the process of starting a Proprietary Limited Company or a Private Proprietary Company.

Reserve Your Company and/or Business Name

Each company in Australia must have its unique company name that does not infringe on another. 

If you don’t decide on a company name when forming your Australian LLC, the Australian Company Number (ACN) will be your company name during the formation process.

It is important to note that Business names don’t create new, separate entities, and your business name is your trading name.

Draft and sign bylaws for your LLC in Australia

Following the name selection, you need to make a decision on the governance of your Proprietary Limited Company (Australian LLC). Multiple courses of action are available, as you can choose to:

    • Operate your company under the replaceable rules that are listed under the Corporations Act;
    • Design a unique constitution;
    • Add elements of the replaceable rules and include your own; and
    • Select a Proprietary Limited Company with a sole director (who also acts a single shareholder) and doesn’t need a formal internal governance system.
Appoint a Company Director and Other Statutory Officeholders

First and foremost, you’ll need to hire on a legal representative currently residing in Australia to create your LLC. Usually, another name for their role in Australian entity formation is the Company Director, with every proprietary company requiring at least one for initial and long-term needs. The reason why is that the Company Director, as the resident legal representative, is responsible for overseeing the affairs of the new local company.

Foreign companies can also appoint a Nominee Director. They are an external legal expert hired onto the company but are authorized, similar to the Company Director, to make legal decisions on its behalf. Both directors are responsible for ensuring the company fully complies with all Corporations Act obligations.

Register your Proprietary Limited Company (LLC) in Australia

It’s possible to register your company either on paper or online, with Australia’s Business Registration Services providing an online portal for application completion if you are unable to be at their office in person. 

There are, however, certain cases where a company can’t register online. 

Once it is approved, your Proprietary Limited Company will be sent its Australian Company Number (ACN), Australian Business Number, registration certificate, and a corporate key to securely update your company information.

Get Your Business and Tax Identification Numbers

Following your initial registration, you will need to file for the appropriate taxes for your Australian LLC. One example is that every business must have a tax file number (TFN) to start tax filing, which is automatically produced when you obtain your Australian Business Number (also known as ABN for short).

The ABN is a distinctive 11-digit number that is used to identify your business to not only the government but your local community, too. Done on paper at the office, the process can also be completed over the Internet through the Business Registration Service website.

Depending on your circumstances and industry, you may be required by the BRS to register for any goods and services (GST) withholding, income, and fringe benefits taxes. 

Open a Corporate Bank Account

Once the above steps are completed and your company has been registered, you can get started on setting up a corporate bank account. 

Australia’s Anti-Money Laundering and Counter-Terrorism Financing Act in 2006 has set up rigid regulations for banks to undertake their due diligence with new applicants. For this reason, you can expect to provide a wide range of documentation confirming information, identification, and details of your newly-registered company.

Important Things to Know When Setting Up an LLC in Australia

Your Australian LLC (Proprietary Limited Company or Private Proprietary Company) will need an official business building or office, such as a registered address where it is to have a physical place of business for meetings (most often optional) and receive all official documents. 

This is part of the registration process; all Australian LLCs are required to have a physical address that can be used for business purposes and activities. During the registration, all institutions involved with the procedure will be required to provide information and all evidence that confirms where your company’s headquarters will be. 

The official business address can be any location that works best for your structure, such as an apartment, an office building, or another type of premises. Your final decision will depend on the needs of the business, such as necessary space and the type of activity carried out, whether administrative or otherwise. One can also build an office if one finds it necessary and more affordable than buying or renting a space. 

Asena Advisors focuses on strategic advice that sets us apart from most wealth management businesses. We protect wealth.
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How Much Is A Business License In Australia?

It will depend on the type of industry you are categorized in, with some starting at AUD $300. 

What are the Registration Costs for a Company in Australia?

The most common cost often ranges from AUD $443 to AUD $538. Your final amount will be dependent on the type of company you register. 

How Much Does an LLC Cost in Australia?

Same as above and will be dependent on the type of company and industry. 

How Much Does a PTY LTD Cost?

Pty Ltd costs are similar to the typical company numbers for registration. However, there are cases where it can go at a lower number, such as AUD $400 to AUD $500.

Australia – Classification and Tax Considerations

Reviewing your thoughts on what we’ve discussed and how it may factor into your company, there are additional base notes to understand Australia’s tax and classification system and expectations before coming to a conclusion.

What are the Main Taxes for a Limited Liability Company in Australia

A crucial consideration for companies in Australia is the country’s taxation system that applies to them. Companies often recognized as corporate structures, including an L.L., whether private or public, will be taxed following the Australian corporate tax system. 

If the company has an annual turnover that is above AUD $75,000, it is crucial to obtain an Australian Business Number (ABN).

How is an LLC taxed in Australia? 

If the company has an income below a certain threshold in a financial year, it will be taxed using a 27.5% corporate tax rate, representing a corporate tax that has been reduced.

However, for the last year (2021 as of this posting), the lower tax rate has been reduced to only 26%. It is predicted to further reduce in the next financial year (2022 as of this posting) to 25%, as according to the Australian Taxation Office, as the standard corporate tax rate charged to Australian companies is 30%. And in 2017-2018, the threshold in which the reduced corporate tax rate had been applied summed up to a total of AUD $25 million. However, beginning in 2018-2019, the threshold increased to a total of AUD $50 million.  

Please take into consideration that the Australian financial year is different from the standard financial year in other countries (from 1st January to 31st December). In Australia, the financial year begins on 1st July and ends on 30th June, but companies can decide to follow the worldwide financial period. 

Is An LLC Company Good?

An LLC in Australia is a company type suitable for those who want to form a small or medium-sized entity. For those interested in a public limited company, it is vital to find out that the legal entity can be listed on the Stock Exchange. 

Contact the Experts to Form Your LLC in Australia

Our experts at Asena Family Office have extensive experience advising entrepreneurs and setting up businesses in Australia that suit their needs. Please do not hesitate to contact us if you require assistance.

 

Connect with us in the righthand column to learn how to get started on your own LLC in Australia.

Shaun Eastman

Peter Harper