When is a company an Australian resident for tax purposes?

A critical component for any person operating a business is understanding the laws regarding taxation.  While the general provisions for taxation, such as the company tax rate, are relatively well known, complexities can arise where companies are unsure whether or not they are based within Australia, and are therefore subject to Australian taxation laws.  In this article, we consider what it means to be resident in Australia under the Income Tax Assessment Act 1936 (Cth)(Tax Act).

Who is a resident under the Tax Act?

Section 6(1) of the Tax Act defines whether a company is a resident or resident of Australia:

“a company which is incorporated in Australia, or which, not being 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 residents of Australia.”

This definition provides that there are three (3) ways in which a company may be considered to be a resident of Australia for taxation purposes.  These are:

  • where the company is incorporated in Australia; or
  • where the company is not incorporated in Australia:
    • the company carries on a business in Australia and has its central management and control in Australia (Central Management and Control Test); or
    • the company carries on a business in Australia and its voting power is controlled by shareholders who are residents of Australia (Voting Power Test).

In this article we consider the Central Management and Control Test.

Central Management and Control Test

The Central Management and Control Test was brought to the attention of the High Court of Australia for the first time in over forty (40) years in the case of Bywater Investments Limited & Ors v Commissioner of Taxation; Huq Wang Bank Berhad v Commissioner of Taxation [2016] HCA 45 (Bywater Investments).

The decision in Bywater Investments required the High Court to consider whether a group of companies (all with a common ownership; none of which were incorporated in Australia) had their place of central management and control in Australia.  If the answer to this question was yes, then those companies would be considered residents of Australia for tax purposes under section 6 of the Tax Act.

The Commissioner of Taxation argued that the central management and control of the companies was in Australia because the individual (the common owner) who made the decisions regarding the companies resided in Australia and made those decisions while he was in Australia.[1]

The lawyers for the companies argued that the central management and control of these companies was in the location where the board meetings were held.[2]   As the board meetings were conducted in Switzerland, the companies argued that they were not controlled or managed in Australia.

At first instance (before a single Judge of the Federal Court), the Court found that the companies were, in reality, operated and controlled by the individual in Australia rather than the board overseas, and as such, the companies were residents of Australia for taxation purposes, meaning they would have to pay tax to the ATO.  The rationale for this decision was that the question of central management and control is a question of degree dependant on the facts.  Accordingly, because the directors of the companies never did more than carry out the individual’s directions, the place of central management and control was the place where the individual made his decisions.[3]

On appeal, both the Full Court of the Federal Court and the High Court agreed with the reasoning of the Judge at first instance, with the High Court stating the true test for central management and control was to look at where the real decisions of the companies were made.

The key concept to emerge from Bywater Investments was summarised by the majority of High Court (French CJ, Kiefel, Bell and Nettle JJ) at paragraph 41 of the judgement (emphasis added):

“Ordinarily, the board of directors of a company makes the higher-level decisions which set the policy and determine the direction of operations and transactions of the company. Ordinarily, therefore, it will be found that a company is resident where the meetings of its board are conducted. But, contrary to the appellants’ submissions, it does not follow that the result should be the same where a board of directors abrogates its decision-making power in favour of an outsider and operates as a puppet or cypher, effectively doing no more than noting and implementing decisions made by the outsider as if they were in truth decisions of the board.”

Australian Taxation Office Taxation Ruling – TR 2017/D2

The Australian Taxation Office (ATO) publishes rulings (and draft rulings) for the public on how the ATO interprets certain taxation questions.  TR 2017/D2 is a ruling published by the ATO to assist individuals and companies understand how the ATO will apply the Central Management and Control Test in light of the High Court’s decision in Bywater Investments.

TR 2017/D2 sets out that the ATO will consider four (4) matters when determining whether a company meets the Central Management and Control Test.  They are:

  • Does the company carry on a business in Australia?
  • What does central management and control mean in the circumstances?
  • Who exercises central management and control?
  • Where is central management and control exercised?

Does the company carry on a business in Australia?

The ATO’s position is that a company can carry on a business in numerous locations – where trading and investment activities are undertaken, together with the locations where the central management and control is exercised from.

Therefore, even if a company has no physical trading or investment activities in Australia, the management of that company (through the exercise of central management and control) can be part of the operation of that business, which means that the business is operating in Australia.

What does central management and control mean in the circumstances?

The ATO considers central management and control to be the control and direction of a company’s operations.  The key element here is the making of high-level decisions that set the company’s policies on matters which set the direction for the activities of the company.  These policies are what determine the direction of the operations and the types of transactions that the company will undertake going forward.

The following are examples of exercising central management and control:

  • setting investment and operational policy, including:
    • setting the policy on disposal of trading stock, and/or the use and development of capital assets; and
    • deciding to buy and sell significant assets of the company;
  • appointing company officers and agents and granting them power to carry on the company’s business (and the revocation of such power and appointments);
  • overseeing and controlling those appointed to carry out the day-to-day business of the company; and
  • matters of finance, including determining how profits are used and the declaration of dividends.

The following are examples of activities which do not involve exercising of central management and control.  Note that these all relate to the administrative (day-to-day) operations of the company:

  • keeping a company’s share register (including registering share transfers);
  • keeping a company’s accounts;
  • where a company pays dividends (note this is different to determining when a company pays dividends); and
  • the minimum acts necessary to maintain a company’s registration.

It is clear that central management and control will be exercised when the act is a consequence of undertaking the company’s activities.  Therefore, the nature of the business and the company’s activities will assist to define which acts and decisions are an exercise of central management and control.

Who exercises central management and control?

The crucial question to answer when determining who exercises central management and control is who controls and directs a company’s operations in reality?

It is important to note that just because a person is a majority shareholder (or a group of people constitute a majority of shareholders), or has the power to appoint those who control and direct a company’s operations, does not, by itself mean the person (or persons) controls and directs a company’s operations and activities.

The ATO consider that a person, or group of people make a decision if:

“…they actively consider and decide to do something based on it being in the best interest of the company.”

While in the usual course of business the board of directors will be the person(s) responsible for making the relevant decisions, to assist in determining whether an outsider is more than merely influential, but is actually dictating and controlling the decisions of the directors, the following issues can be considered:

  • Do the directors actually consider whether to do what they are told, or advised to do, and do it because it is in the best interest of the company? If so, then they are likely the relevant decision maker. If they do not and merely implement the decision based on the outsider’s advising, then they are not the relevant decision maker, the outsider is.
  • Would the directors refuse to follow advice or directions of the outsider if they are improper or inadvisable? If so, then they are likely the real decision makers. If not, then the outsider is likely the relevant decision maker.
  • How much knowledge of the company do the directors have? If they do not have sufficient understanding and knowledge of the company to allow them to determine whether following the advice or instruction they received from the outsider would be improper or inadvisable suggests they are not the real decision maker.

Where is central management and control exercised?

A company will be controlled and directed in the location that the people making the decisions (being those who exercise central management and control) actually make those decisions.

It is possible, although rare, that decisions that amount to an exercise of central management and control are made in different locations.  In this regard, the Courts have observed that such management and control may be exercised in multiple locations if a substantial part of the control and direction of the company is determined in each location.

To assist in identifying the locations where those who control and direct the operations of a company do so from, the ATO lists a number of matters, including:

  • where the governing body of the company meets;
  • where the company declares and pays dividends;
  • where the shareholder meetings are held;
  • where the company’s register of shareholders is kept;
  • where the company’s books are kept;
  • where its registered office is located;
  • where those who control and direct the company’s operations live;
  • where its shareholders reside;
  • the nature of the business and whether it dictates where control and management decisions are made in practice; and
  • minutes or other documents recording where high-level decisions are made.

Although it is important to note that these matters do not necessarily identify or determine where central management and control of a company is exercised, they will be an aid, with different relevance and weight being attributed to these matters according to the circumstances of the case.

Take aways

Determining where a company exercises its management and control from is a very important consideration, as it carries with it sometimes substantial taxation implications.  Based on the decision of the High Court in Bywater Investments and the ATO’s ruling TR 2017/D2, a company will generally have its place of central management and control in the location where the person(s) who makes critical decisions actually makes those decisions.

Therefore, ultimately the questions that you must consider are:

  • who will be making the real decisions regarding the operation, direction and management of each of the companies in the proposed Corporate Structure?
  • what is the location that those decisions are made?

Further references

Legislation

Income Tax Assessment Act 1936 (Cth)

Cases

Bywater Investments Limited & Ors v Commissioner of Taxation; Huq Wang Bank Berhad v Commissioner of Taxation [2016] HCA 45

ATO Ruling

TR 2017/D2

Related articles by Dundas Lawyers

Are legal expenses tax deductible for a start-up?

Does your start-up qualify for an ESIC tax-offset?

Structuring contracts and capital gains tax

Value shifting in commercial transactions

Further information

If you need assistance with your corporate structure, please telephone me for an obligation free and confidential discussion.

Brisbane Lawyers
Malcolm Burrows B.Bus.,MBA.,LL.B.,LL.M.,MQLS.
Legal Practice Director
Telephone: (07) 3221 0013 | Mobile: 0419 726 535
e: mburrows@dundaslawyers.com.au

 

Disclaimer
This article is not legal advice. It is general comment only.  You are instructed not to rely on the commentary unless you have consulted one of our Lawyers to ascertain how the law applies to your particular circumstances.

[1] Bywater Investments Limited & Ors v Commissioner of Taxation; Huq Wang Bank Berhad v Commissioner of Taxation [2016] HCA 45 at [101].

[2] Bywater Investments Limited & Ors v Commissioner of Taxation; Huq Wang Bank Berhad v Commissioner of Taxation [2016] HCA 45 at [35].

[3] Hua Wang Bank Berhad v Commissioner of Taxation [2014] FCA 1392 at [393].

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