The ATO has released an update to its draft practical compliance guideline on identifying where a company’s central management and control are located under the central management and control test of company residency in s 6(1) of the ITAA 1936. The update adds a risk assessment framework to assist foreign incorporated companies in managing their compliance risks and provide certainty regarding the ATO’s compliance approach.
Companies may self-assess against the new risk assessment framework to understand the likelihood of the ATO applying compliance resources to review their residency. The framework contains 3 risk zones, consisting of low, moderate and high.
To fall into the low risk zone, one or more of the following must apply to a company:
- ordinarily has their central management and control in a foreign jurisdiction but has one-off temporary changes to their established governance practices that result in either meetings being held in Australia or directors attending meetings from Australia via “modern communication technology”.
- is a subsidiary incorporated in a foreign jurisdiction and is subject to an Australian parent company’s policies, proposals, or approval processes and there is evidence demonstrating independent consideration and judgement by directors in making high-level decisions in a foreign jurisdiction.
- has a wholly offshore operating business in a foreign jurisdiction, the company’s tax position in Australia is substantially similar to what it would be if the company was an Australian resident, and a substantial majority of the company’s central management and control is exercised in that jurisdiction through:
- board meetings that are held outside Australia, or
- board meetings (including meetings via the use of modern communications technologies including teleconferencing) where the majority of directors are not present in Australia when such meetings take place, or
- decisions by the board undertaken by circular resolution where the majority of directors are not present in Australia when such decisions are made.
- governance arrangements are intended to be changed so that central management and control was exercised outside Australia under the transitional compliance approach; however, it was unable to change its governance arrangements by the end of the transitional period (ie 30 June 2023). This criterion only applies for the transitional period (ie 15 March 2017 to 30 June 2023). From 1 July 2023, these companies will need to reconsider their governance arrangements in line with TR 2018/5 (Central management and control test of residency) and draft practical compliance guideline (PCG 2018/9DC1).
Generally, to fall within the low-risk zone companies must not have moderate or high-risk circumstances or features, and the Commissioner will not normally allocate resources to review a company’s position on central management and control test. Those companies must also keep contemporaneous board minutes and governance documents that accurately reflect high-level decision making and support the company’s self-assessment of low risk.
For companies where evidence of high-level decision making is not available, inconclusive or incomplete, the company’s residency position is likely to be considered to be moderate or high risk and the Commissioner is unlikely to accept board minutes as prima facie establishing where the company’s central management and control are located. Other supporting documentation to demonstrate high-level decision making, governance controls and processes may be sought by the ATO to understand the company’s residency position.
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.