Worldwide taxation – a challenge for Australian startups
Australia applies ‘worldwide taxation’ when calculating corporate and personal income tax. This means Australian startups can owe tax in Australia for all their international activities, even where the founder has moved overseas. Here we explain the key tax rules for Australian startups.
Australia is a relatively small consumer market. This means that many, if not most, Australian startups have their eyes on overseas expansion. However, when it comes to both personal income tax and corporate income tax, Australia applies a version of ‘worldwide taxation’ — that is, tax may be due with the Australian Tax Office (ATO) even where revenue is earned overseas or the founder/owners are based outside Australia.
Here we explain the tax obligations of Australian startups both in Australia and overseas, and explain what ‘worldwide taxation’ means for startup founders who choose to expand overseas.
What are the key local tax obligations for Australian startups?
When a startup is founded in Australia, what are its immediate tax obligations? In nearly all cases, an Australian startup will be established in Australia as a proprietary limited company. In short, this is a company with a maximum of 50 non-employee shareholders, and where offers can only be made to existing shareholders or employees.
If the startup is the product of a lone founder, then that founder may be the lone (100 percent) shareholder. Or, where the startup is founded by several partners, the partners may hold an equal number of shares in the company.
Tax obligations in relation to this kind of startup based in Australia include:
- Company income tax. In nearly all cases, an Australian startup will be a ‘base rate entity’ for company income tax purposes and pay a 25 percent rate (companies with turnover greater than $50 million pay 30 percent). This will apply to all profits of the company. Note, this applies even where the company sells goods overseas (worldwide taxation — more on this below).
- Goods and Services Tax (‘GST’).This will need to be applied to the purchase price of all goods and services sold in Australia (note, not worldwide because overseas the GST is ‘zero-rated’). Note, any company GST that the company has paid on purchases itself will be deducted from the amount it owes the ATO.
- Personal income tax. The startup founder or founders will owe personal income tax on any income that they receive from the startup. This may be paid on directors’ fees and/or on a salary if the startup founders make themselves employees of the company. Note, this salary is, of course, an operating expense of the company and therefore the full cost of employment (salary, plus withheld PAYG, plus superannuation and other benefits and contributions) will be deducted from revenue before arriving at the limited company’s taxable profits. Any dividends received by the shareholders will be taxed via the imputation system, in the form of franking credits. Of course, it is not a requirement for the founders to receive any income from the business.
- Employment taxes (e.g. state payroll taxes and Medicare taxes etc.). If the startup has employees in Australia, in addition to withheld PAYG, they must make any other compulsory contributions (such as superannuation). They may also have to pay a state-based payroll tax.
Which taxes apply when the startup operates internationally?
When an Australian startup decides to operate internationally, either by selling goods overseas or the founder(s) moving overseas, they may acquire tax obligations overseas, but tax obligations in Australia will often remain. Consider:
- Company income tax. Companies incorporated in Australia are tax residents and subject to income tax there — irrespective of whether the goods were sold overseas. Furthermore, an Australian company will still be a tax resident where it ‘carries on business in Australia, and has either its central management and control in Australia, or its voting power controlled by shareholders who are residents of Australia’. This means that, even where a startup decides to incorporate overseas, where there is still sufficient connection between the founders/managers and Australia, it will still have income tax obligations there. Even where a foreign company is non-resident, it will owe tax in Australia on Australia-sourced income.
- Company income tax elsewhere. In addition to tax in Australia, startups that expand overseas may become liable for corporate income tax in other countries in which they operate. The obligations will differ by country, and it is the obligation of the founders to check that they comply with the tax laws in relevant jurisdictions. However, as a general principle, the two key tests are incorporation and permanent establishment. Permanent establishment means that the startup has a fixed location overseas through which it carries out business.
- Value added tax (VAT). By operating overseas, an Australian startup may meet the threshold for VAT liability in other countries.
- Personal income tax for founders. Australia applies several statutory ‘tests’ to determine if an individual is liable for personal income tax in Australia: the Resides test, the Domicile test, the 183-day test and the Commonwealth Superannuation test. Most importantly for founders, they can still be liable for personal income tax as residents until they have satisfied the ATO that they no longer have a permanent place of abode there. Note also that on departure, the founder may start establishing personal tax residency elsewhere. For example, in Germany, the founder will immediately acquire tax residency on moving to the country and owe tax there.
- Digital services taxes. These are common in Europe (e.g. 2 percent in the UK) and elsewhere for businesses that may not otherwise qualify for corporate income tax in a location and apply to specified digital services, such as marketplaces and streaming platforms.
Who doesn’t do worldwide taxation?
As if things weren’t complicated enough, by expanding a business overseas, startups can also become liable for worldwide taxation overseas. That is, not only are they obligated to pay income tax in another jurisdiction, they have to pay that tax on money that they have earned all over the world. While double-tax agreements between countries will often be an effective way of avoiding ‘double taxing’ in these cases, many startup founders would still consider it undesirable.
So where can a startup founder incorporate overseas and not be subject to worldwide taxation? The key is countries which apply the ‘territoriality’ principle. This includes.
- Hong Kong: 8.2-16.5 percent corporate tax. 2-17 percent personal income tax.
- Singapore: 17 percent corporate tax rate. 0-22 percent personal income tax.
- Cayman Islands, Nevis, the Bahamas: no personal or corporate income taxes for offshore companies. Read more about this in our comprehensive guide to starting a crypto or fintech in the Caymans.
As a reminder, any startup which chooses to incorporate in one of those locations would still need to meet any Australian tax obligations that still apply to them.
In summary — don’t forget your Australian tax obligations
Some startup founders may be under the impression that by moving their business overseas they can avoid paying taxes in Australia. This is usually not true due to the ‘worldwide taxation’ approach applied by the ATO in the case of both corporate and personal income tax.