Home / International Investment / Investing Via an Offshore Company

Investing Via An Offshore Company

It might seem attractive to invest via an offshore company while you are a foreign resident.However, you need to think about how that entity will be taxed should you decide to repatriate to Australia.

If you are going to create a tax regime that taxes the worldwide income and capital gains of taxpayers, then you are going to need a set of special rules that deals with offshore entities that certain taxpayers might choose to use to avoid paying tax on their overseas investments.

Most countries that tax income and capital gains on a worldwide bases have a set of Controlled Foreign Corporation (CFC) rules even the rules are not specifically called CFC rules.

Australia has CFC rules and you can read about them in detail at this link.

If you have never had anything to do with CFCs and are not an expert in Australian tax law, you are likely to find the information at the above link extremely complicated.If you are thinking seriously about setting an offshore company and you think you will repatriate to Australia at some point in the future, you should seek professional tax advice before setting up the entity.

Offshore company example – foreign investor using BVI company to purchase Australian residential property

If we take a simple example to explain the complexities.Let’s say you wanted to set up a company based in the British Virgin Islands to buy an Australian residential property.Would that be a good idea?

The first thing you need to read is Section 252(2) of the Income Tax Assessment Tax (1936) – as follows:

Every company carrying on business in Australia, or deriving in Australia income from property, shall at all times, unless exempted by the Commissioner, be represented for the purposes of this Act by a public officer duly appointed by the company or by its duly authorized agent or attorney, and with respect to every such company and public officer the following provisions shall apply:

  • The company, if it has not appointed a public officer before the commencement of this Act, shall appoint a public officer within three months after the commencement of this Act or after the company commences to carry on business or derive income in Australia.
  • The company shall keep the office of the public officer constantly filled.
  • No appointment of a public officer shall be deemed to be duly made until after notice thereof in writing, specifying the name of the officer and an address for service upon the officer has been given to the Commissioner.
  • The company shall duly appoint a public officer when and as often as such an appointment becomes necessary.
  • Service of any document at the address for service, or on the public officer of the company, shall be sufficient service upon the company for all the purposes of this Act or the regulations, and if at any time there is no public officer then service upon any person acting or appearing to act in the business of the company shall be sufficient.
  • The public officer shall be answerable for the doing of all such things as are required to be done by the company under this Act or the regulations, and in case of default shall be liable to the same penalties.
  • Everything done by the public officer which the officer is required to do in the officer’s representative capacity shall be deemed to have been done by the company. The absence or non-appointment of a public officer shall not excuse the company from the necessity of complying with any of the provisions of this Act or the regulations, or from any penalty for refusal or failure to comply therewith, but the company shall be liable to the provisions of this Act as if there were no requirement to appoint a public officer.
  • Any notice given to or requisition made upon the public officer shall be deemed to be given to or made upon the company.
  • Any proceedings under this Act taken against the public officer shall be deemed to have been taken against the company, and the company shall be liable jointly with the public officer for any penalty imposed upon the officer.

In addition to the above onerous requirements, under Section 252 (2):

A person is not capable of being a public officer of a company at a particular time unless the person:

  • Is a natural person who has attained the age of 18 years; and
  • Is ordinarily resident in Australia; and
  • Is capable of understanding the nature of the person’s appointment as the public officer of the company.

If you are not ‘ordinarily resident’ in Australia you won’t be able to be the public officer, which means you will have to find someone else to take on that role for you.If you don’t have a family member or friend who is prepared to take on this onerous role, then you will almost certainly be better off owning the Australian residential property in your own name.

Some may argue that there are estate planning benefits from owning a portfolio of properties in one offshore vehicle.But you also need to consider the impact of having to comply with Section 252 if the company owns property or does business in Australia.

If you were able to find someone to take on the role of Public Officer, it is likely the cost would be in the order of AUD 10,000 per annum.

Offshore company example – Australian resident investor using BVI company to purchase Australian residential property

One of the main benefits of holding an overseas investment via a company would be the tax deferral benefit of only being taxed on income flowing from the offshore company when a dividend is paid.The Australian CFC rules are designed to specifically address the issue of tax deferral through the use of the term ‘tainted income’.If the income you earn from your CFC is tainted income then you will effectively lose the tax deferral benefit and the net income will be assessed to the shareholders with no deferral benefit.

In essence, the tax law will operate to negate the existence of the company where more than 5% of the income of the CFC is passive income.

It should be noted that most subsidiaries of Australian companies would not be adversely affected by the CFC rules because they would be operating an ‘active business’.In order to ensure that legitimate Australian business operations are not adversely affected, the CFC rules need to distinguish between activities that are in the course of normal business and those activities that are designed to avoid or defer tax.