Foreign companies have until 30 June to implement governance changes
Foreign incorporated companies that may have their tax residency status questioned as a result of the High Court’s decision in the Bywater Investments case will now have more time to organise their governance arrangements to ensure they are not treated as resident for Australian tax purposes. Late last year the ATO issued an update to Practical Compliance Guideline PCG 2018/9 which gives these companies until 30 June 2023 to make any necessary changes. This is the fourth and final extension of the ATO transitional compliance approach.
Background
Foreign incorporated companies will now have more time to organise their governance arrangements following an update issued to Practical 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 The issue relates to foreign incorporated companies that treated themselves as foreign residents under the withdrawn Taxation Ruling TR 2004/15 but qualify as Australian residents under the replacement Taxation Ruling TR 2018/5.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 issuance of TR 2018/5 was triggered by the High Court’s decision in the Bywater Investments case. In that case, the High Court closely examined where the real business of the relevant company was carried on. The High Court noted that while board meetings were held overseas where the directors lived, each company was ultimately controlled by an Australian resident accountant thus making the companies Australian residents under the central management and control test.
TR 2018/5
Prior to the Bywater Investments case, the concept of central management and control was generally construed as meaning the place where the board of directors make the day-to-day business decisions, and this is similarly expressed in withdrawn TR 2004/15.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 company 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.”
Updated PCG 2018/9
The recently updated PCG 2018/9 contains examples and additional information to help foreign incorporated companies to work out whether they are tax resident in Australia under the Bywater Investments concept of “central management and control “. Foreign incorporated companies will now have until 30 June 2023 to make any necessary changes to their governance arrangements so that their central management and control is exercised outside of Australia. This is the fourth and final extension of the ATO’s transitional compliance approach.
During this transitional period (i.e. from the withdrawal of TR 2004/15 on 15 March 2017 to 30 June 2023), the Commissioner will generally not apply compliance resources to review or seek to disturb a foreign incorporated company’s status as a non-resident, provided no scheme or artificial or 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 questioned. The ATO’s 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 a resident” under the central management and control test of residency.
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.
Impacted by these changes?
If your foreign incorporated company hasn’t considered these changes to the central management and control test so far, now is the time to take advantage of the extended transitional period and make the necessary governance changes. Contact us today for expert help and advice.
Disclaimer: The information on this page is for general information purposes only and is not specific to any particular person or situation. There are many factors that may affect your particular circumstances. We advise that you contact Mathews Tax Lawyers before making any decisions.