The tax debate has been a big one in Australia. It was a key topic for fast growing businesses featuring in our Technology Fast 50 in 2015 and has continued to be a topic of discussion over the last year. The 2016/17 Federal Budget honed in on taxes and transparency with cuts to the company tax rate for small and medium sized enterprises and the introduction of a Diverted Profits Tax for significant global entities, amongst other measures.
Despite the numerous changes over the last year, some tax tips offered to our Technology Fast 50 in the 2015 Winners’ report – as fast growing companies potentially looking to take the next step and expand overseas – remain relevant.
Tax avoidance and transparency
The 2016/17 Federal Budget introduced a number of measures to tackle tax avoidance, ensure the sustainability of the Australian tax system and create more transparency around global affairs.
The key threshold for these measures is more than A$1 billion in global revenues. An aspiration for most fast growing tech companies, with growth rather than tax management, their focus.
For those businesses nominating for Technology Fast 50, the challenge is more about moving beyond the start-up phase where cash is burned and revenue limited. Getting cash into the business is king! Once in growth phase, tax losses are likely to be carried forward to shelter some scaling of revenue and profitability, which is a natural outcome of the tax system.
However, as a business grows and expands offshore, traps for the unwary can arise. Some key aspects to bear in mind are:
- Identify which jurisdictions are most critical to growth
Identify potential jurisdictions for expansion and determine whether personnel are needed ‘on the ground.’ If so, establish whether they will be employees or independent service providers/contractors and understand what regulations need to be met.
- Regulatory environment
In any new jurisdiction entered, ascertain the incentives available, the best economic zone in which to locate and the preferred entity structure. Once a representative office, branch or a wholly owned company structure is agreed, establish what taxes the structure may be subject to.
- Use Australian IP to grow the business globally
For a technology company the digital nature of the goods or services offered adds complexity, giving rise to questions including: Will local customers be subscribers to a central software platform hosted in Australia? Will the local entity be a marketer or seller? How much value is derived from Australia versus the local jurisdiction? How best to apportion profits?
While thinking about tax efficient structures is a common approach, if returns are going to be taxed in Australia – at least for the current or founding shareholders – then leave that kind of planning to the next phase.