Welcome to “Doing Business in Australia,” the eighth and last in our “Going Global” blog series. Designed for companies looking to expand globally, our series has already covered China, the Czech Republic, Hungary, France, Italy, Canada, the United Kingdom, and Germany. This series is intended to address important but below-the-radar finance and accounting issues. (Please note: this series is not intended to provide cross-cultural tips.)
Australia is a particularly good location for U.S. companies looking to expand operations in the Pacific Rim – and not just because they speak English, too. Australia is the world ‘s 19th ranked country in terms of purchasing power, and is the world ‘s 22nd largest exporter and the 21st largest importer, according to the CIA World Fact Book
, The two countries already had a strong trade and investment relationship in 2005, when the Australia-U.S. Free Trade Agreement (AUSFTA) went into effect. Today, the U.S. is Australia ‘s fifth-largest trading partner, generating $14.3 billion in exports, according to State Dept. fact sheet published earlier this year while the U.S. is its second-largest source for imports at $36.3 billion (behind China at $44 billion and ahead of Japan at $18.8 billion). The good news for U.S. companies is that the exchange rate has been fairly stable and roughly equal. According to the U.S. Dept. of State, the U.S. is Australia ‘s largest source of foreign investment while the U.S. is the largest destination of Australian foreign investment.
The Australian economy is dominated by its service sector. The country has nearly three million small businesses, employing “about one in five of the Australian workforce…Most (of those) operate as sole traders or family businesses and they are sometimes referred to as the backbone of the Australian economy,” Australian Commissioner of Taxation Michael D ‘Ascenzo, said in a talk to the Council of Small Business of Australia in Aug. 2012.
And, for the past three decades, the country “has transformed itself from an inward-looking, highly protected, and regulated marketplace to an open, internationally competitive, export-oriented economy,” reported the U.S. Dept. of State. Australia has also reformed its “taxation system, including introducing a broad-based Goods and Services Tax (GST) and large reductions in income tax rates.” (We ‘ll get more into that, in tomorrow ‘s post.)
Australia’s economic standing in the world is a result of a commitment to best-practice macroeconomic policy settings, according to the U.S. Dept. of State, “including the delegation of the conduct of monetary policy to the independent Reserve Bank of Australia, and a broad acceptance of prudent fiscal policy where the government aims for fiscal balance over the economic cycle. Economic recovery is strengthening, with GDP forecast to grow by 3.25% in 2011-2012 and 2012-2013. The success of monetary and fiscal stimulus is projected to return the budget to surplus in 2012. Net debt is forecast to peak at 8.9% of GDP in 2011-2012.” According to the CIA World Factbook, Australia ‘s GDP in 2011 was 2%, placing it at 146th in the world. Taxes comprise 31.8% of the GDP, ranking 82nd in 2011 in the world (the higher the number, the lower the percentage).
In 2012, the World Bank ranked Australia 15th (out of 183 economies), based on ease of doing business there as determined by 10 different variables. Some of the factors include the ease of starting a business: (2nd), trading across borders (30th), and getting credit (8th) – all good criteria for U.S. companies considering expansion into Australia.
Ok, so here ‘s our first tip.
Step #1: Make sure the accounting solution you choose can handle multiple currencies – particularly two different “dollars.” While traders often refer to Australian currency as the “Aussie,” it is officially known as the Australian dollar. While the good news for U.S. companies is that the exchange rate from the Australian and U.S. dollar has been fairly stable and roughly equal (in part because Australia has valued its dollar against the U.S. dollar since 1974), you need to make sure your systems don ‘t confuse the two. Make sure your solution can allow you to set currency as Australian (either A$ or AUD$) and American (USD$).
Step #2: Make sure you know the key acronyms. We ‘ll address most of these acronyms in the rest of this blog series.
- ABN – Australian business number
- AIIR – Annual investment income report
- ATO – Australian Tax Office
- FBT – Fringe benefits tax
- GIC – General interest charge
- GST – Goods and services tax
- PAYG – Pay as you go
- SAP – Substituted accounting period
- SGC – Superannuation guarantee charge
- TFN – Tax file number
Step #3: Save time at the end of the month by choosing a solution that offers automated currency rebalancing. Given the significant difference in time zones between the U.S. and Australia – which can range from 12 to 14 hours (including some cities like Adelaide that are 13 ½ hours ahead of New York) – it is important for U.S. companies to select an accounting solution that can import currency rates and pull together those numbers automatically, and set a policy for doing so. Otherwise, there may be confusion when the Australian entity closes its books at 5:00pm, on Dec 31st in Adelaide when it ‘s is 10:30pm on Dec. 30th in Los Angeles. That time difference can lead to tricky currency valuations and a lot of headaches. Automating currency rebalancing by establishing a set rule for currency valuations can reduce errors and discrepancies. Your accounting solution should also handle any inter-company transactions via different policies – the original rate (at the start of the month, for example), the rate at the time of the transaction or the rate at the time the transaction posted. The point to keep in mind is that you don ‘t want rate changes to impact the profitability of either the local or the international unit. That ‘s why you should also look for a solution that will let you to override the scheduled rates to enable you to keep things balanced.
Tomorrow we ‘ll look at the Australian tax system.
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