Category: Australia

What are Free Trade Agreements, and why do they exist?

This is the first of a series of posts introducing the new United Kingdom – Australia Free Trade Agreement (which is yet to come into force) and how it may be relevant to you.

What is a Free Trade Agreement?

A Free Trade Agreement (FTA) is a set of policies agreed to between two or more countries removing some barriers faced by companies when trading goods and services: barriers which otherwise exist by default.

By default, all World Trade Organisation Member states (nearly all countries) trade with one another on ‘Most Favoured Nation’ terms. In practice, this means companies face tariffs (taxes on imports and exports) of up to 20% on specified products, and around 5% for the majority of internationally traded goods.

FTAs not only reduce these tariffs but can also provide benefits in other ways, such as:

  • Raising/removing import quotas
  • Prioritising relevant transport
  • Reducing red-tape, and
  • Easing the movement of individuals and the hiring of workers.

FTAs in the context of international treaties / conventions

The United Kingdom and Australia are both parties to The Vienna Convention on the Law of Treaties 1969 (the ‘VCLT’). The VCLT governs the observance, application and interpretation of ‘treaties’. A treaty is defined by the VCLT as ‘an international agreement concluded between States in written form and governed by international law, whether embodied in a single instrument or in two or more related instruments’.

Where potential conflicts with other agreements may arise following the introduction of this FTA, the VCLT will govern these – informing a clear interpretational ‘pull’ to ensure coherence and minimising divergence from pre-existing obligations to third parties.[1]

Economic Theory behind FTAs

In his 1817 book ‘On the Principles of Political Economy and Taxation’, economist David Ricardo laid out the foundational arguments for laissez-faire (free) trade, including that,

‘Under a system of perfectly free commerce… each country reward(s) ingenuity… and distributes labour most effectively and most economically… (to the) general benefit… of the universal society of nations.’[2]

Following this line of thought, countries that find similar interests but have different strengths stand to benefit from agreements which liberalise trade. For example, a country that produces more tech devices than its population needs but does not have enough natural materials for clothing could well benefit from entering a targeted free trade agreement with a country that produces excess cotton and wool but needs more mobile phones.

Which countries use FTAs?

The EU has around 42 free trade agreements with over 70 different countries, more than any other country or political union. Besides the UK, the next most FTAs are active with Iceland, Switzerland, Norway and Chile: countries which participate in more than 30 FTAs each. By comparison, the US has only 14 FTAs.

After Brexit, the UK has signed many agreements with countries around the world on similar terms as existed while it remained in the EU, making the UK second only to the EU in its use of FTAs.

UK-Australia FTA

Among post-Brexit agreements, the UK’s FTA with Australia (which is yet to be formally ratified, and as such is not yet in force) stands out as initiating particularly strong efforts to encourage business opportunities, some of which may directly advantage you.

 

This blog series will introduce the ‘how’, ‘when’ and ‘why’ of changes that the UK-Australia FTA proposes.

Courtney Gleeson
Lawyer
Sheltons Group Legal (London and Sydney)
C.Gleeson@SheltonsGroup.com

Matthew Thorn
Law Graduate
Sheltons Group Legal (London and Sydney)

 

[1] Professor Albert Sanchez-Graells. 2022. Written Evidence submitted to the House of Commons International Trade Committee, following up on the Oral Evidence provided during the session of 9 March 2022 on “UK trade negotiations: Agreement with Australia” (HC 1002). London: The House of Commons.

[2] Ricardo, David., 2002. The principles of political economy and taxation. Cambridge: Janus Publishing Company Lim, p.83.

When moving between the UK and Australia, it is important to be aware of the differences that each jurisdiction imposes on areas of personal taxation. Failing to comply with the relevant procedures and local tax legislation could leave individuals with a series of penalties.

The table below highlights a list of arguably the most important areas of personal taxation that individuals should be aware of when moving between the UK and Australia. Whilst both countries operate a progressive income tax system, with the top tax rate peaking at 45%, this is where similarities cease as from here on, the UK and Australian tax systems function differently in almost every way.

UK Tax System vs Australian Tax System:


UK Tax System Australian Tax System
Tax Year for individuals 6 April to 5 April 1 July to 30 June
Who is required to file/lodge a Tax Return

In the UK, most individuals who are employed will pay tax on their income through payroll and are not required to file a Tax Return.

Tax Returns are required where:

  • Earnings are over £100,000 in a tax year
  • In receipt of non-UK sourced income
  • In receipt of property income
  • In receipt of taxable savings, investments and dividends
  • Claiming income tax reliefs
  • Need to pay capital gains tax
  • Self-employed or partnership income
  • Liable to high income child benefit charge
  • In receipt of taxable income which has not yet been taxed

 All Australian residents and non-residents with any Australian sourced income (some exclusions apply)
Payroll System In the UK, HMRC operates a Pay As You Earn (PAYE) system where tax is collected by the employer through every payslip. The employer then remits the tax withheld to the tax office (HMRC). Australia operates a Pay As You Go Withholding system which deducts tax and is then paid to the tax office. As with the UK, the employer withholds tax when processing payroll and then forwards this to the tax office.
Tax Free Allowance UK residents (and in some instances non-residents) receive a tax-free personal allowance each year. In 2023-23, the tax-free personal allowance is £12,750. In certain circumstances this can be reduced or increased. There is a tax-free threshold of $18,200 for all Australian resident taxpayers, regardless of the source of income. Foreign and temporary residents are excluded from this threshold.
Income Tax The UK operates progressive rates of income tax which include:

  • £0 to £12,570 (personal allowance) – 0%
  • £12,571 to £50,270 (Basic rate) – 20%
  • £50,271 to £150,000 (Higher rate) – 40%
  • Over £150,000 (Additional rate) – 45%

Australia operates progressive rates of income tax which include:

  • $0 to $18,200 – Nil
  • $18,201 to $45,000 – 19%
  • $45,001 to $120,000 – 32.5%
  • $120,001 to $180,000 – 37%
  • $180,001 and over – 45%

The income tax rates above are for ‘Australian’ Residents only. Different rates apply for ‘temporary’ and ‘foreign’ residents.
Capital Gains Tax

In the UK there is a Capital Gains Tax allowance of £12,300 per year (2022-23). After this your tax rate will depend on whether you’re a ‘Basic rate’ tax payer or ‘Higher rate’ tax payer:

Basic Rate: 18% on residential property and 10% other chargeable assets

Higher Rate: 28% on residential property and 20% other chargeable assets

There is a 50% Capital Gains Tax discount for Australian individuals who own an asset for 12 months or more. This means you pay tax on only half the net capital gain on that asset.

Taxable Capital Gains are added to the individuals assessable income and are taxed at the marginal rate at which the income falls.
Inheritance Tax In the UK, the standard Inheritance Tax threshold is £325,000 (which can increase to £500,000 where the home is passed to children of the deceased). Where an estate is valued over £325,000 there is a 40% Inheritance Tax rate. Australia does not have any Inheritance Tax.
Tax Return Deadline 31 January following the end of the tax year (31 October if filing a paper return). In Australia, the due date is 31 October following the end of the tax year. However, if an individual is registered with a tax agent this will usually extend to 15 May of the following year i.e. tax-year end 30 June 2022 would be due 15 May 2023.
Tax Payment Deadline 31 January following the end of the tax year. This is the same as the tax return deadline.

In Australia, the tax payment deadline depends on when the tax return is due and the date it is lodged. Where a tax return is due 15 May, the following payment dates will apply when the tax return is lodged:

  • Up to and including 12 February, the payment date is 21 March
  • From 13 February to 12 March, the payment date is 21 April
  • From 13 March, the payment date is 5 June

If the tax return is not due by 15 May, the payment will be due on the later of 21 days after the:

  • Relevant lodgement due date, or
  • Notice of assessment is deemed received
Assessable on Worldwide Income UK residents, for tax purposes are taxed on their worldwide income*.

Australian residents for tax purposes, are also taxed on their worldwide income.

‘Foreign’ and ‘temporary’* residents for tax purposes only need to declare income and gains derived in Australia.
National Insurance/ Medicare In the UK, both the employee and employer are required to pay national insurance contributions each month. The rates vary from 0% to 13.8%. National Insurance is also due on self-employed income. In Australia, individuals must pay a flat rate of Medicare (unless exempt). The Medicare levy is 2% of an individual’s taxable income. An additional Medicare levy of up to 1.5%, unless they pay for private health insurance.

*Assessable on worldwide income (UK) – Individuals resident of the UK with non-domicile status can opt to claim remittance basis and not be taxed on their overseas income as long as it is not remitted to the UK.
*Assessable on worldwide income (AUS) – Individuals who are ‘temporary’ resident will also be taxable on income earned from employment or services performed overseas whilst temporary resident.

The UK and Australian Tax Systems: An Overall Comparison

Determining which country has the more competitive tax system is no easy task.

Although income tax is generally lower in the UK (due to the progressive tax bandings), the Australian system includes a considerably lesser Medicare tax in comparison to the UK’s National Insurance rates. What’s more, where Australia allows a 50% discount on net taxable Capital Gains, the rate at which Capital Gains tax is payable in the UK may be under half of what individuals could be liable to pay in Australia (if their annual income exceeds the top tax bracket in Australia).

In addition, establishing whether an individual is an ‘Australian’, ‘foreign’ or ‘temporary’ tax resident of Australia, or their ‘domicile’ status when tax resident of the UK, heavily dictates their tax liability due at the end of the tax year.

Since 1978, Australia’s tax system has operated with no inheritance tax –which saw Australia as the first developed country to abolish death duties. In stark contrast, the UK still maintains an aggressive tax rate of 40% above the inheritance tax threshold. It is evident that, where an individual’s assets equate to more than £325,000 on death, the Australian tax system is significantly more attractive.

As the tax systems in the UK and Australia are extremely different, it requires in-depth analysis to understand how each system operates and the implications which might then present for an individual on a case-by-case basis.

If you require any advice or assistance with UK or Australian personal tax, we are here to help. Simply send us an email at the address below or fill in our contact form to arrange a free initial consultation.

Christian Iles
Tax Manager
Sheltons Accountants (London and Sydney)
C.Iles@SheltonsGroup.com

Click here to read our blog in regard to renting out your UK property whilst living in Australia.

Are you considering expanding your business to Australia? Join our free webinar on Tuesday 31 July at 10am for a review of the questions you should be asking yourself.

Your expert speakers

Richard Harper, now the owner of Keyway Trade Services in Sydney, shares his decades of experience in Australia with UKTI/Department for International Trade working with UK businesses entering Australia.

Ned Shelton, Managing Partner of the independent specialist firm Sheltons Accountants, makes available his many years of experience with working with UK businesses exporting to and setting up in Australia.

Who is the webinar for?

The webinar has been designed for any business that has been considering expanding from the UK to Australia. Ned Shelton and Richard Harper will discuss the key issues to consider before your business expansion.

What does the webinar cover?

The webinar will provide guidance on everything from Australian tax rules on exporting and on running a business in Australia to selling on-line, and from special considerations on selling in Australia to understanding Australia, Australians – and the Australian market.

Ned Shelton touches on

  • Company law – differences (to the UK)
  • Company tax
  • Fringe Benefits Tax (FBT
  • Superannuation
  • State taxes
  • When you need to register with ASIC (as a branch)
  • When you might have to pay company tax (the ‘permanent establishment’ issue)
  • ABNs, domain names and trademarks,
  • And especially: GST on sales (export) to Australia

Richard Harper addresses

  • Australia – the country in context
  • Agents and distributors and ways to market
  • Registration – prohibitions and restrictions
  • Resonating with Australians
  • Specifics on food and drink
  • The supermarket dominance
  • Key elements for success
  • The importance of market visits
  • Dealing with Aussies

Why join the webinar?

  • Explore the benefits of setting up a physical presence in Australia vs exporting to Australia
  • Learn about the various tax rates and rules
  • Find the most tax efficient ways to expand into the Australian market
  • Learn about the special features of Australia
  • Find out about the key actions prior to market entry
  • Hear about the traps and opportunities of selling to the Australia market
  • Put your questions to an expert panel

Reserve your place in seconds – for free

The webinar takes place on Tuesday 31 July at 10am. You can reserve your place in seconds here. It’s free! Can’t make it? No problem. We will send you a link to the full recording of the webinar so you can learn from the experts’ views at a more convenient time. Don’t miss out.

Doing Business with Australia guide

Doing Business with Australia

The ‘Doing Business with Australia Guide’ website is now live and the hard-copy brochures are currently being distributed.

12th November 2020 – The ‘Doing Business with Australia Guide’ is now officially live and can be accessed via: www.Australia.DoingBusinessGuide.co.uk

The main objective of this Doing Business with Australia Guide is to provide you with basic knowledge about Australia; an overview of its economy, business culture, potential opportunities and to identify the main issues associated with initial research, market entry, risk management and cultural and language issues. We do not pretend to provide all the answers in the guide, but novice exporters in particular will find it a useful starting point. Further assistance is available from the Department for International Trade (DIT) team in Australia. Full contact details are available in the guide.

To help your business succeed in Australia we have carefully selected a variety of essential service providers as ‘Market Experts’; Commonwealth Bank of Australia, Dentons Australia Ltd, Informed Solutions, Quest Apartment Hotels, Radisson Blu Plaza Hotel and Sheltons Accountants Australia.

The guide has been produced by International Market Advisor, in partnership with the Institute of Export & International Trade, and with support from the British High Commission Canberra and the Australian British Chamber of Commerce.

Five things to know about exporting to Australia:

  • The UK and Australia are very similar. Therefore, if your product or service is successful in the UK, there is a high chance that it will be successful in Australia.
  • The UK is Australia’s tenth-largest source of goods imports and second-largest in terms of services, showing that trade and investment between the two countries remains strong.
  • Australia has avoided recession for 28 years, making it, in recent decades, one of the most resilient and best performing advanced economies worldwide.
  • There are numerous opportunities for UK companies wishing to do business with Australia, such as in the education, energy, healthcare, creative industries, ICT, professional and financial services, and transport and infrastructure sectors.
  • Australia ranks 14th out of 190 countries in the World Bank’s 2020 Ease of Doing Business Index.

 

Source: Institute of Export & International Trade

Institute of Export & International Trade