Changes to ATO Company Residence & Tax Ruling in Australia

As the result of a recent High Court case and an Australian Taxation Office (ATO) ruling, private groups located in Australia and investing offshore need to review their governance and control arrangements for overseas companies

Is your company at risk?

• Does your overseas company have Australian resident directors?
• Does your company only have overseas directors with no Australian resident directors?
• Does your company have influential individuals that live in Australia and take an active role in what happens in the overseas companies?

With less than 2 months to prepare if the answer is “yes” or you are “not sure” to any of these questions you may need to review your governance arrangements urgently and possibly consider the feasibility of not having central management and control (“CMC”) in Australia.

What does it all mean?

The ruling applies from 15 March 2017 but the Australian Tax Office (“ATO”) have given companies affected by this until 13 December 2018 to change governance arrangements to meet the new interpretation of the law on CMC and tax residence.

Australian company tax rules apply to a company that is incorporated in Australia, which is fairly obvious.

What is less obvious, and has been the cause of some confusion, is the tax treatment of foreign companies that carry out business overseas, but have their CMC located in Australia. Having a CMC located in Australia may mean that your foreign companies could be taxed in Australia.

CMC is the control and direction of a company’s operations. It is the strategic and high level direction of the company.  For example, policies and operations, will usually be exercised by its directors, but not always. It is not the day to day management of the company’s activities which is usually undertaken by managers under the control of policies set by the directors.

How should this should be interpreted? What does central management and control (“CMC”) mean and if this is exercised in Australia does it make an overseas company tax resident?

Since 2004 the ATO have applied the CMC test in a pragmatic way, which broadly meant that offshore trading companies would not be regarded as tax resident if they had substantial operations and some form of governance structure overseas. The prior approach was that overseas trading companies with an offshore director or two were unlikely to be treated as Australian tax resident, even if there were Australian resident directors on the Board.

For overseas investment companies the situation was less clear, and the ATO would look at where the investment decisions were made to establish tax residence.

The recent case of Bywater Investments Ltd, and the ATO’s reinterpretation of the law in the light of this case in Tax Ruling 2018/5, creates some significant changes that impact the way offshore companies owned by Australian groups need to be governed.

If an overseas company has CMC exercised in Australia the ATO may now treat it as tax resident here even if it is also tax resident overseas.

Implications

There are a number of tax consequences that may arise following this change in interpretation including:

• The overseas company may need to lodge tax returns in Australia;
• Its profits may therefore be subject to tax in both Australia and the overseas jurisdiction
• Capital gains tax consequences can arise on disposal of the overseas company;
• Overseas trading businesses versus investment businesses may now have different tax outcomes

What next?

Bentleys has extensive experience of advising private groups on management and governance operations both nationally and internationally and now is a great time to reconsider and examine the management of any foreign operations.