Foreign-incorporated companies will now have more time to organise their governance arrangements under a recent update issued to Practice Compliance Guideline PCG 2018/9. The issue relates to foreign incorporated companies that treated themselves as foreign residents under the withdrawn Taxation Ruling TR 2004/15 but qualify as Australian residents under the replacement Taxation Ruling TR 2018/5.
The withdrawal of TR 2004/15 and the issue of TR 2018/5 was triggered by the High Court’s decision in the Bywater Investments case, in which it examined closely where the real business of the relevant company was carried on. By doing so, the High Court noted that while board meetings were held overseas where the directors lived, an Australian accountant ultimately controlled each company thus making the companies Australian residents.
Before the Bywater Investments case, the Courts have generally interpreted the concept of central management and control as the place where the board of directors makes the day-to-day business decisions, which is similarly expressed in withdrawn TR 2004/15. However, after the High Court’s decision in Bywater Investments, the ATO issued TR 2018/5 to clarify that the key element in control and direction of a company’s operations is the making of “high-level decisions that set the company’s general policies, and determine the directions of its operations and the type of transactions it will enter”.
In addition, TR 2018/5 notes that a decision does not include the mere implementation, or rubberstamping, of decisions made by others. Thus, identifying individuals that exercise central management and control is a question of fact and cannot be determined solely by identifying who has the legal power or authority to control and direct a company.
“The crucial question is who controls and directs a company’s operations in reality.”
The recently updated PCG 2018/9 contains examples and additional information to help foreign-incorporated companies to work out whether they are a resident under the revised definition of “central management and control test”. Foreign-incorporated companies will now have until 30 June 2023 to make any necessary changes. This is the fourth extension of the ATO transitional compliance approach and it says it will not be providing any further extensions.
During this transitional period (ie from the withdrawal of TR 2004/15 to 30 June 2023), the Commissioner will generally not apply resources to review or seek to disturb a foreign-incorporated company’s status as a non-resident, provided no scheme or artificial/contrived arrangements have been entered into.
Going forward, the ATO accepts that there may arise unintended or unplanned circumstances which may cause the location of a foreign-incorporated company’s central management and control to be subject to question. Its ongoing compliance approach will set out a series of conditions, which, if met by a foreign-incorporated company, will mean that it is at “low risk of being an Australian resident”.
In addition, the ATO will not normally apply resources to review or seek to treat a foreign-incorporated company as a resident by applying the central management and control test of corporate residency for Australian tax purposes merely because part of the company’s central management and control is exercised in Australia, or because directors regularly participate in board meetings from Australia using modern communication technology under certain conditions.
This article is for general information only. It does not make recommendations nor does it provide advice to address your personal circumstances. To make an informed decision, always contact a registered tax professional.