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Evolution of tax residency definition by Australian Tax Office needs to be observed by international companies

In the wake of a High Court judgment, a draft taxation ruling issued by the ATO means that tax residency in Australia will be determined based on where decisions are actually made, not where the entity is formally registered

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"Case law and the ATO’s interpretation of the concept of ‘central management and control’ has evolved. The location of central management and control, or ‘place of effective control’ will be a matter of fact and substance of where the decisions are actually made and not where the decisions are merely recorded or formalised."
Jamie Towers, Partner, Hanrick Curran
international tax advisor in Australia, Jamie Towers

International companies with an interest in doing business in Australia will be interested to learn that the Australian Taxation Office (ATO) has recently issued a draft taxation ruling TR 2017/D2 Foreign Incorporated Companies: Central Management and Control test of residency. Simultaneously, the ATO has withdrawn its earlier tax ruling TR 2004/15 which covered similar issues.

What this ruling means in the international context

Jamie Towers, partner at Hanrick Curran in Brisbane and a key member of Alliott Group's International Tax Services Group comments: "In view of this, foreign companies with transactions in multiple jurisdictions will need to carefully manage their decision making process in respect of transactions in foreign countries to mitigate undesired tax consequences."

The draft ruling reflects the ATO’s updated view of the concept of ‘central management and control’ as part of the definition of Tax Residence, and comes in the wake of the release of the Australian High Court’s judgement in Bywater Investments limited & Ors v Commissioner of Taxation [2016] HCA 45.

Tax residency rules in Australia

"Under Australia’s tax rules, a company is a resident of Australia if it is incorporated in Australia, or if not incorporated in Australia, carries on business in Australia and has either its central management and control in Australia, or its voting power controlled by shareholders who are resident in Australia. This residency definition originally came from British law and similar definitions feature in many Commonwealth countries tax laws. Further, in many tax treaties, the treaty definition of a resident features the concept of a ‘place of effective management’, which, while not identical contains similar concepts." Jamie Towers, partner, Hanrick Curran

A case ruling that revolved around determination of effective management and control

The Bywater Investments case was on appeal from the Federal Court and considered whether various overseas registered companies which had company directors who were resident overseas could be considered tax resident of Australia.

In particular, Bywater Investments Ltd was registered in Switzerland and all but one of its directors were resident in Switzerland. The director meetings took place in Switzerland, however, the company had been actively trading shares on the Australian Stock Exchange. The Commissioner of Taxation therefore sought to tax profits on the sale of the shares based on the understanding that the company was a tax resident of Australia.

The ‘business’ of buying and selling shares on behalf of Bywater Investments was conducted by an Australian resident, a Mr Gould without the involvement of the directors of the company. The Primary Court judge held that the directors had abrogated their decision making in favour of Mr Gould and only rubber stamped the decisions made by him in Australia.

The High Court held that residence is a question of fact and degree to be answered according to where the central management and control of the company actually abides. That is to be determined by reference to the course of the company’s business and trading rather than by reference to documents establishing its formal structure. As the decision making was abrogated to Mr Gould and the business and trading occurred in Australia by way of action of Mr Gould and the directors merely accepted his direction, the central management and control was found to be in Australia.

Further, the Company sought to rely on the Australia - Switzerland Double Tax Agreement to argue the tax residence of the company was in Switzerland under the ‘place of effective management’ concept in the Residence article of that treaty. The Court held the place of effective management is not limited to, or answered by identification of the location of the formal organs of each entity. Based on the facts, the place of effective management was held to be with Mr Gould in Australia.

An evolving international tax landscape

Towers comments: "Accordingly, the case law and the ATO’s interpretation of the concept of ‘central management and control’ has evolved. The location of central management and control, or ‘place of effective control’ will be a matter of fact and substance of where the decisions are actually made and not where the decisions are merely recorded or formalised. Foreign companies with transactions in multiple jurisdictions will need to carefully manage their decision making process in respect of transaction in foreign countries to mitigate unwanted tax implications."

Need further advice on this subject?

If so, please contact Jamie Towers at Hanrick Curran in Brisbane, Australia.