December 4, 2017
by Duncan Melbin
Last month the High Court handed down its decision as to company tax residency in the case of Bywater Investments & Ors v FCT.
The taxpayers involved in the case were four private companies, all of which were incorporated outside Australia.
However despite that, the ATO were seeking to assess income tax on the companies’ share trading activities on the Australian Stock Exchange during the years 2001 through to 2007.
The companies were arguing that they were not residents of Australia for income tax purposes because their “central management and control” was not in Australia.
The directors of the companies, who themselves resided outside Australia, gave evidence that they were the decision makers of the companies.
However, the ATO argued that it was the Australian resident Accountant who actually controlled the companies. Further they argued it was he who actually made all the commercial decisions about the share transactions entered into.
The directors stated the Australian Accountant was just an adviser and not the final decision maker. Further, the companies, citing the Esquire Nominees case precedent, also argued that what determines corporate residency is the place where the company’s decisions are formally made, not a place from which informal influence may emanate.
After an examination of the evidence, the primary judge in the Federal Court found that there was a deliberate attempt to conceal the role of the Australian Accountant’s true role and that the directors of the companies exercised no independent judgment. Instead they merely carried into effect the Accountant’s instructions. Therefore, the Court held that the companies’ place of central management and control was within Australia.
The companies subsequently appealed the decisions, all the way to the High Court.
The High Court affirmed that, as a matter of long-established principle, the residence of a company is a question of fact and degree to be answered according to where the central management and control of the company actually abides.
The High Court drew a distinction between a board of directors that actually meets and makes independent judgements and a board whose meetings are mere window dressing comprised of rubber-stamping decisions actually made elsewhere by others.
The High Court then unanimously held that the central management and control of the taxpayers was within Australia.
In response to the High Court decision, the ATO have issued a Decision Impact Statement stating that certain aspects of the decision in the Case meant the ATO’s view in their previous ruling, TR 2014/15, could no longer be sustained.
Accordingly the ATO have issued a new draft Taxation Ruling TR 2017/D2 and withdrawn the previous ruling.
The ATO had previously stated in TR 2004/15 that a company carried on business wherever its major operational activities relative to the whole of its business took place, notwithstanding that its central management and control may be located elsewhere.
However, in TR 2017/D2, the ATO states that, if a company has its central management and control in Australia, and it carries on business, it will carry on business in Australia within the meaning of the central management and control test of residency.
This represents a change of view from the ATO, however, the ATO states that, to the extent the principles contained in the withdrawn TR 2004/15 remain current, they will be written into TR 2017/D2. Further, the ATO will not apply the views in the draft ruling where it conflicts with an agreed settlement of a dispute before the draft ruling was issued.
The draft ruling will of course impact existing international structures, particularly for those that have substantial Australian influence, including Australian head companies with foreign subsidiaries. While it remains somewhat unclear as to how much influence Australian’s, including head companies, can have over foreign companies and subsidiaries before the line is considered to have been crossed, careful, constant, assessment and reassessment should be made to ensure you don’t fail your obligations here in Australia.
You can review the new Draft Ruling here.
If you have any doubts regarding your own company tax residency, please get in touch here.