Albatross’ Advices – Is it easy to start a business in Australia?

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    We often highlight how easy it is to start a business in Australia. Thanks to the law firm Albatross Lawyers it is even truer!

    Australia is a country where entrepreneurship is valued and encouraged. This is reflected at various levels including social acceptation, the ease of creating a company, the fiscal regime and even by some visas in the migratory system. Overall, many elements are encouraging the creation of companies.

    The case of the Gold Coast illustrates perfectly the Australian entrepreneurship spirit. The region has the most elevated rate of entrepreneurs (“self-employed”) in Australia since the fifties. Nearly 20% of the population is self-employed there. Queensland has always been a favourable environment for entrepreneurship but the Gold Coast is the real hub, even if the size of the companies varies between small and family enterprises.

    Many French people who migrate to Australia have usually the entrepreneurial spirit or develop it quickly. Frequently, French people identify opportunities and want to take advantage of this favourable environment for business. Two structures are often showcased depending on the needs: the “Sole Trader” and the “Pty Ltd” (.i.e. a “company”).

    Doing “Business” or having a “Hobby”

    Before getting into the details of business structures in Australia, it is important to ask yourself this question first: is your project a real business or a simple hobby which may have a pecuniary component? This will have an impact in terms of fiscal regulation.

    A “Hobby”, by its legal definition, is a pastime or leisure activity conducted in your spare time for recreation or pleasure.

    A “Business” is above all a commercial activity (even if this is your passion!) with an aim to make a profit.

    Link for comparison between “Hobby” and “Business”.

    Here are some important questions to ask yourself to help differentiate the two concepts in various situations. If you answer “Yes” to those questions then, your activity is likely to be a “Business”.

    • Is the activity being undertaken for commercial reasons?
    • Is your main intention purpose or prospect to make a profit?
    • Do you regularly and repeatedly undertake your activity?
    • Is your activity planned, organised and carried out in a businesslike manner?

    If your project falls legally under the definition of “Hobby”, then technically you do not have to create a specific structure. However, if the project is considered to be a real business (even of a small size), then you have to create the adequate structure to run the activity otherwise you could see the Australian Tax Office knocking at your door…

    When in doubt, it is always better to consider your activity as a business and become at least a “Sole Trader”.

    Link for “Starting your business checklist”.

    “Sole Trader”

    The “Sole Trader” structure is similar in spirit to the French structure of “autoentrepreneur” (self-entrepreneur) or “microenterprise”.

    It is the most widespread structure because it is quick and easy to create and costs barely anything. You can start your business in a few days (even if some governmental confirmations can take up to twenty days to arrive).

    It is a simple structure which allows you to have a commercial activity and to hire employees while limiting to the maximum your initial costs and your annual administrative charge. You are not an employee of this structure, you are a “Business Owner” and the income that you generate with this structure is not a salary, from a fiscal point of view, but a distribution of profit.

    It is very important to keep in mind that this structure is NOT a legal entity separated from you; you are the one who is recognised as doing business. This means that you are legally responsible for every activities of the company (“unlimited liability”). Therefore, if there are any problems, you can be sued directly; your personal assets are at risk and, in some cases, can be seized.

    At the same time, from a fiscal point of view, the incomes derived from your activity as Sole Trader come on top of your personal incomes. So there is no fiscal flexibility or potential for any tax minimisation strategy as a Sole Trader.

    You can create this structure without going through an advisory firm. In brief, you need t

    • Have your own TFN (Tax File Number) or to get one beforehand; every person who works in Australia must have one.
    • Get an ABN, Australian Business Number (free).
    • Register a business name if you wish (it costs about $34 for a year or $80 for 3 years).
    • Register yourself for GST (TVA) if you think that your sales (gross income minus GST) will reach $75,000 or more for this financial year (1 July to 30 June).
    • Register for PAYG / Superannuation / Worker’s Compensation / Fringe Benefits Tax (FBT) if necessary / State Payroll Tax (if necessary) if you think you are going to hire employees.

    This structure does not need a separate bank account but it is often recommend to have one to better manage the activity. This structure does not have any particular annual costs except the ancillary costs such as accounting (for your personal tax filing).

    “Pty Ltd/ Company”

    The structure of “Pty Ltd/Company” is similar in principle to the French structure of the « SARL ». The real name of this structure is “Small Proprietary Company Limited by Shares”.

    This is the most common structure for entrepreneurs who have a long-term vision or who seek a more substantial form of protection. The set-up process is not complicated but implies several steps, which make the overall process longer and costlier compared to a « Sole Trader ». However, the costs are still very affordable and you can also start your business in a few days (even if some official confirmations can take up to twenty days to arrive).

    A company is owned by one or several shareholders (or members), who possess shares of the company’s capital. The firm is managed by one or several directors, who can also be shareholders or third parties. Those directors have precise legal obligations.

    It is a formal structure which allows you to have a commercial activity, to have employees and develop your business while offering a structure that will survive you (because independent of your physical person). It also provides a protection against legal liability and a certain taxation flexibility. You can be an employee of this structure (if you wish) in addition to your status as director or shareholder. Incomes derived from the commercial activity belong to the firm (and not to you). You can receive a salary and/or distribute dividends.

    It very important to keep in mind that this structure is a legal entity separate from you (i.e. the company is a separate moral person like in France). It means that the firm is legally responsible for all its activities and that the shareholders/members benefit from a limited liability to the amount of the capital invested. Therefore, in case of problems, the company will be sued directly and its assets can be seized if needs be. The shareholders are not in danger. However, it is common for the directors, to be sued alongside the company. If the directors are also shareholders, and no protection strategy against legal liability has been established beforehand, then the personal properties of the directors/shareholders may be in danger. Thus, it is crucial to carefully study this aspect of legal liability and the full role of the company’s creators.

    From a fiscal point of view, the company is taxed as a separate entity and the actual tax rate for SME is 28.5%. Depending on the circumstances and the structure of the shareholders (trust or individual), it is possible to have a tax minimization strategy.

    Here are some important elements that you have to consider for the creation of a company:

    • Identification of the shareholder(s) ⟹ they can be individuals, another company, a trust or an empty shell as a trustee of a trust (called a corporate trustee) etc.;
    • Identification of the director(s) ⟹ they have to be at least 18 years old and at least one of the directors must reside in Australia (the visa type is not taken into account, only the fiscal status as resident is important; thus it is totally possible to be the director of an Australian company while being based in France or New-Caledonia provided that at least one other director is residing in Australia).
    • Determination of the initial capital of the society ⟹ Unlike in France, there is no minimum capital. In Australia, it is recommended to have a limited capital (ex. $10 or $100) because it is an advantage to have a liability limited to the capital. Therefore, it is not necessary and even counterproductive to have a significant capital for SME in most cases.

    Even though most of the important points related to a company are detailed in its standard constitution, when there are several shareholders/partners, it is highly recommended to also have a shareholders’ agreement. This document manages some precise elements, which differ depending on circumstances, such as the role of each director, their authorisation for the expenses or the credit card of the company, the procedure if one of the shareholders wants to leave/sell its shares, the management of disputes, etc.

    We strongly recommend you use the services of an advisory firm to make sure that it is the right structure or that the set-up choices are appropriate. Too often, we observe companies with inadequate legal foundations that result later in major costly problems (in terms of liability, tax, succession, etc.).

    In brief, you need to:

    • Acquire an ACN (Australian Company Number) that is registered with ASIC in the register of Australian Companies at a federal level (cost of $469).
    • Acquire a TFN (Tax File Number) for the company (free).
    • Register a business name if you wish (cost about $34 for a year or $80 for three years)
    • Register for GST (TVA) if you think that your sales (gross income minus GST) will reach $75,000 or more for this financial year (1st of July to 30 June).
    • Register for PAYG / Superannuation / Worker’s Compensation / “Fringe Benefits Tax (FBT)” (if necessary) / “State Pavroll Tax” (if necessary) if you have employees.
    • Register some intellectual propriety if necessary.

    This structure needs a separate bank account.

    This structure has annual costs which cover at least:

    • “Annual Review” with ASIC ($249)
    • Costs for the ASIC agent, usually your accountant (around $250-300)
    • Costs for accounting/tax filing, which varies depending on the size of the company.

    Link to create a company Pty Ltd.

    Hence… Sole Trader or Pty Ltd?

    Examples of circumstances for a « Sole Trader »:

    • If you want the simpler structure, the least complex and the least expensive ;
    • If you have a project with low risks of legal liability;
    • If fiscal flexibility/tax minimisation is not an important element for you (and your taxation situation is very simple);
    • If the exit strategy is not an important element (which is too often neglected by entrepreneurs); or
    • If you work alone or with few employees (usually linked to legal liability and litigation risk)

     

    Then the Sole Trader structure might be what you need.

    Examples of circumstances for a “Company/Pty Ltd”:

    • If you want a protective structure against legal liability;
    • If the fiscal flexibility/tax minimisation is an important element for you (and you have established an adequate taxation structure in parallel);
    • If having a sustainable management (e.g. in case of an accident or death) or an exit strategy are important points for you (e.g. if you wish to leave the company to your children or sell it to a third party etc.); or
    • If you have an activity that is going to increase in size and complexity over the years;
    • If you plan on employing a certain number of staff members etc.

    Then the structure of “Company/Pty Ltd” might be what you need.

    Link: comparison between “Sole Trader” and “Pty Ltd”.

    Link: checklist about differences between “Sole Trader” and “Pty Ltd”.

    Link: comparison of annual documentation and associated costs.

     

     

    Laurent Corgnet, Principal of Albatross Lawyers, specialised in Commercial Law, Franchising and Immigration.

     

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