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Structuring Considerations for a Move across the Tasman

By Bruce Patterson, Partner

First published in Business Broker May 2009

New Zealand and Australia have a common heritage.  We look much the same.  We see the same brands in the market place.  So it is quite surprising to many people just how far apart we are from a legal and regulatory perspective.

Terms such as “stamp duty”, “capital gains tax”, “land tax”, “payroll tax” and “franking credits” are not in our business vocabulary.

Each country’s tax system is designed to prevent “leakage” of income from one country to the other, so an understanding of the rules is essential when contemplating a move “across the ditch”.

Permanent establishment

When considering expansion overseas, there are several factors to consider: What is the scale of the intended operation?  Will it be a permanent operation or just a sales base?

We have a double tax treaty with Australia. If you trade in either country, without a permanent establishment, there is no tax on business income in the other (with some exceptions, such as GST and property rentals). So an Australian franchisor could set up operation in New Zealand, service it from Australia or by a non-dedicated New Zealand based agent and not pay tax in New Zealand.  Any income earned from NZ operations would be regarded as Australian income and, therefore, non-assessable in New Zealand. And vice versa.

This is important as it allows businesses to start at a low level to test a market, without the expensive setup costs.

It gets even better, because of the residency rules. It is possible to set up an Australian company which is regarded as New Zealand resident, because of how it operates. One can trade in Australia using an Australian registered company, but only ever pay tax in New Zealand. The inter-play between domestic law and the double tax treaty has wonderful opportunities for businesses designed specifically to encourage trade between the countries.

Taxes you don’t expect

The tax systems are not the same. New Zealand has a unitary system of government whereas Australia has a federal system. While Australians doing business in New Zealand can be pleasantly surprised, the opposite does not hold true. The Australian federal system has to be funded.  It does so with a raft of state and federal taxes.

All Australian states still impose stamp duty (up to 5.5%) on property transactions and each state is different.  In New South Wales, payroll tax accrues at 5.75% when a business payroll exceeds AU$623,000. There is duty payable on new cars, land tax on non-residences, even a parking space levy for the owners of “liable spaces”.

GST has the same name, buts its implementation has major differences. If you are issuing invoices in either country, you must know whether that country’s GST regime applies to any part of the supply, even if the supply is made from the other country.

New Zealand has some surprises as well. Although New Zealand doesn’t have a comprehensive capital gains tax, that doesn’t mean there are no capital gains taxes. It has a selective system which is arbitrary and in many cases unfair - and waiting for the unprepared.

Another surprise is that unit trusts (which are popular in Australia because of their tax pass through characteristics) are treated as companies in New Zealand and fall within the corporate tax regime.

Movements of capital and profit

Rules in both countries prevent the movement of profit to the other disguised as deductible expenses. Loans are subject to thin capitalisation rules. Simplistically, business funding by way of debt must not exceed 75% of assets. This is backed up with the transfer pricing rules to ensure that goods and services are traded between related parties arms length.

The structuring and funding for a business intended to operate in another jurisdiction requires care and thought. For example, if a new business is expected initially to trade at a loss, you should avoid loans otherwise under the transfer pricing rules, the lender may be obliged to charge interest which may be assessable income each year (whether paid or not).

It is possible to have a company incorporated in one country trading in the other. This is referred to as a branch operation. It is also common for the home entity to form a wholly owned trading entity in the other state. This is referred to as a subsidiary operation. Branch operations are popular where entities expect initial trading losses, because those losses can be offset against their other home country income. If a subsidiary were used, losses would be quarantined to the subsidiary and only able to be used against subsidiary profits in future periods.

Choice of entity

The typical trading structures in both countries are a company, a unit trust, an ‘inter vivos’ trading trust, sole trader and partnership. There is also now the Limited Liability Partnership, which presents some interesting opportunities. For trans-Tasman trading, the first two are probably the most practical.

However, the use of companies in trans-Tasman trading has one major disadvantage. New Zealand does not give credit for Australian franking credits and Australia does not give credit for New Zealand imputation credits. So whenever a company is involved, there will be double taxation of income. Another disadvantage of using a company in Australia is the Australian capital gain tax (CGT) regime. The CGT rules allow individuals and trusts to discount their CGT liability by 50%. Companies must pay CGT without any discount. This disadvantage can be resolved by adopting the right combination of entities on each side of the Tasman.

Summary

Trans-Tasman trading must be encouraged. New Zealand would be the third largest state in Australia and represent a new market 20% the size of the existing one. From New Zealand’s perspective, the Australian market is five times its size and, therefore, offers a scale of opportunity unparalleled by any other country.  So clearly mutual opportunities exist.

Capturing those opportunities requires planning, cunning and good advice. It is definitely achievable and done right will be profitable. I would encourage you to have another look at that opportunity before discarding the idea to the “too hard basket”, but get advice – and get good advice. You will need an advisor who knows both markets and can craft the best solution for your opportunity.

For advice on franchise structuring call Bruce Patterson or Chris Bradley (09) 309 1948 b.patterson@DuncanCotterill.com; c.bradley@DuncanCotterill.com