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The investor’s guide: Australian tax

BDO tax partner Mark Molesworth explains how foreign investors can make tax-efficient arrangements when entering Australian agribusinesses, including those holding farmland.

Investing in Australian agribusiness assets comes with some unique taxation consequences, particularly for institutional investors. But there are three taxation arrangements that can help foreign investors interested in the country’s agriculture.

Property versus operating

Australia levies capital gains tax on non-residents who sell real estate that has increased in value in the time since it was purchased. This extends to shares held in companies where the shareholder holds more than 10 percent of the company shares and more than half of the assets of the company, by value, are Australian real estate. If the real estate and the business operations are held in a single structure, Australia will levy capital gains tax on the sale of shares where the land is worth more than the business and any other assets held by the company. To avoid paying tax on the increase in value of the business assets other than land where the land value is likely to be more than half the value of the company when the shares are sold, it is usual for non-residents to structure their investment into two different entities – a land holding company and an operating company.

While this means that a disposal of shares in the property company (either directly or indirectly) will certainly be subject to tax, it means that a sale of shares in the operating company is not subject to capital gains tax.

Investors should be aware of this structure and consider how the split between the operating company and the property company can be reflected in the context of their global groups.

Dividend imputation system

Australia is one of the few jurisdictions in the world that operates a dividend imputation system. Under this system, when Australian companies declare dividends they can choose to attach ‘imputation credits’ to that dividend. The credits represent the Australian company tax paid on the profits represented by the dividends. Australian resident shareholders are then able to offset these credits against their personal tax payable on the dividend.

For non-resident investors, the imputation credits cannot be used in this way. However, a fully franked dividend is not subject to Australian non-resident dividend withholding tax. In other words, a fully franked dividend bears no further tax when paid to a non-resident shareholder. The income tax paid by the company is the final tax for the purposes of non-resident shareholders.

Managed Investment Trust system

Australia has a particular type of collective investment vehicle called a managed investment trust. Such trusts are generally restricted to owning assets for passive investment purposes only.

The benefit for non-resident investors in agricultural assets through a managed investment trust is that income distributed by such trusts is subject to a final withholding tax system. For investors from countries with which Australia has a double tax agreement, the rate of final withholding tax is 15 percent, which compares well with the corporate income tax rate of 30 percent and our current top individual rate of tax of 47 percent.