Mike and Sarah run Apex Structures, a successful Auckland construction consultancy turning over around $4 million a year. When a Melbourne developer approached them about a multi-year infrastructure project, they were understandably keen to get moving. Their first instinct was to simply invoice the Australian client through their New Zealand company, send a site manager over to run the job, and sort out the finer details later.
New Zealand and Australia share a language and a time zone, which is why so many business owners assume the tax and legal systems are close enough not to worry about. They are not.
Mike and Sarah assumed exactly that, and it is an easy assumption to make. It is also wrong, and the gap between the two systems is where their costs started building.
This is part one of a two-part look at cross-border entity formation. Here, we tell Apex’s story in full. In part two, we widen the lens to what any business considering offshore expansion should have in place before they start.
The trigger they didn’t know existed
The moment Apex’s site manager landed in Melbourne with a fixed project office to run from, the business had created an Australian permanent establishment. That single fact gave Australia the right to tax the profits from that project, and it did not require a formal branch or a company registration to happen. A fixed place of business, an employee working in the country for an extended period, or an agent authorised to sign contracts, any one of these can trigger it, often simply because a business is doing the work it was engaged to do.
Eighteen months into the project, their accountant delivered the news. Apex had been operating as an Australian permanent establishment the whole time, and had never filed Australian returns, registered for GST, or paid Australian superannuation for its Melbourne-based employee.
What the right structure would have looked like
Given the scale and length of the contract, and the fact that Apex intended to keep bidding for Australian work, a locally incorporated subsidiary, an Australian proprietary limited company registered with ASIC, would have been the appropriate structure from the start. It would have contained liability within Australia, given the business a clean tax position from day one and put it in a far stronger position to bid for further Australian contracts once this one was underway. A branch might have suited a shorter, one-off piece of work, but it carries no legal separation from the New Zealand parent, which is exactly the exposure Apex ended up with by default rather than by design.
What the mistake cost them
Backdated compliance, penalties for late lodgement, and the cost of restructuring after the fact, ran into six figures. The structure Apex had defaulted into was not tax-efficient either: double taxation meant profits were taxed in Australia, only partly relieved through New Zealand’s foreign tax credit rules, then taxed again as they were distributed to shareholders. Traced through in full, the combined tax on that Australian income landed well above 50%, largely because Australian franking credits are not recognised by Inland Revenue here.
An Australian subsidiary, set up correctly from day one, would have cost a few thousand dollars in advice and registration fees. What Apex paid instead, in tax, penalties and restructuring, ran to a multiple of that.
The cost of getting it wrong
Entity formation is one of the few decisions in offshore expansion that is hard to unwind once trading has started. The cost of getting advice before the first invoice goes out is small. The cost of getting it wrong, and finding out eighteen months later, is not.
Where UHY comes in
This is the exact conversation our international tax team has with clients before they take on their first offshore contract: what entity fits the work being done, what it triggers on both sides of the border, and what it will cost to run once it exists. Apex’s outcome is not unusual. What is unusual is finding out about it in advance rather than after the fact.
In Part Two, we set out the framework any business can use to make this decision properly, wherever the market is. If your business is weighing up expansion into Australia, or anywhere else, get in touch with our tax advisory team before you take on the work, not after. You can also reach out to the author, Jim Martin, via email at jim.martin@uhyhn.co.nz for more information.
This article is general in nature and is not a substitute for specific professional advice. Tax rates and thresholds referenced are current at the time of writing and are subject to change.
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