Given the globalisation of business and the ease of accessibility to international markets via the Internet, many SME’s are now trading overseas as a part of their business model.
Consider the statistics – currently ATO figures show net foreign source income of companies’ totals $10.3 billion and increased 17.8% on the prior financial year
The problem is that many SME’s trading overseas may not be aware of their international tax obligations. So here’s a guide to the essential international tax issues all SME’s should understand.
Firstly, Australian residents are taxed on all their income worldwide. This means Australian residents must declare all income from all sources on their tax return, including any capital gains made on the disposal of an overseas asset.
Where income earned overseas has already been taxed in a foreign jurisdiction, the Australian foreign income tax offset is available to address any double-up. In most cases, you’ll receive a credit for the tax charged by a foreign tax agency.
Where SMEs have dealings with an overseas-related entity, those dealings must be on a commercial basis to ensure arm’s length principals are adopted and appropriate tax is paid. These principals are in place to prevent the of breach of transfer pricing rules, also known as international profit shifting, which address inappropriately discounted goods and the allocation of income and expenses.
Exports of goods and services from Australia will generally be GST free, but GST can apply in certain instances. There are specific rules that determine when GST applies in relation to the export of services, various rights, financial supplies and other professional services.
Businesses considering entering into export markets should obtain advice about their GST obligations and may also want to investigate Export Market Development Grants as a source of cash-back for money spent on export market development activities.
Where goods are being imported, the Australian Customs Service collects GST generally before Customs releases the goods. The amount payable is calculated as 10% of the value of the imported product. However, if you are an importer and are registered for GST, you may be able to defer payment by participating in the deferred GST scheme. The scheme allows you to defer the payment of GST on taxable importations until the first activity statement you lodge after the goods are imported.
There are also rules around what foreign exchange rate needs to apply to all foreign income, deductions and tax paid when converted into Australian dollars for inclusion on your Australian tax return. Generally, these rules require amounts to be converted at the exchange rate prevailing at the time of a transaction, or at an average rate.
Finally, given the ATO’s compliance focus on international transactions, including the high-profile Project Wickenby, there is increased audit activity in cases where people may try to conceal income and assets offshore, particularly in low tax and bank secrecy jurisdictions.
The ATO are working closely with AUSTRAC, banks and other overseas tax jurisdictions to trace fund flows around the world and have increased the capacity to identify Australians with income and assets hidden offshore.
If you have undeclared foreign income (this includes Australian income diverted offshore and deemed or attributed income) you can use the ATO’s offshore voluntary disclosure initiative available until 30 June 2010 to disclose this income.
Under this initiative, if you make an offshore voluntary disclosure and your additional taxable income is $20,000 or less in a tax year, you will not have to pay a shortfall penalty for that year. Where your additional taxable income exceeds $20,000 in any tax year, your shortfall penalty will be remitted to 10% of the additional tax for that year. A number of general interest charge concessions also apply.
Obtaining information and advice from your accountant on tax issues, as well as systems to implement to record and report accurate information, will help to enjoy a successful international business experience.
Marc Peskett is a partner of MPR Group a Melbourne based firm that provides tax and export market development advice to businesses, as well as accounting, business advisory and financial services to fast growing small to medium enterprises.
James was the editor and publisher of SmartCompany and LeadingCompany for five years. He is now the Australian Financial Review‘s companies & markets editor, and a former BRW editor.
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