Residency of Company's Central Management and Control

By Tyler J. Wise|March 14th, 2019|Blog|

With lowering of trade barriers for international trade, there comes with it the inherent tax confusion. If you do business in Australia, do you need to pay tax in Australia? Well, as is always the way with the income tax act the ATO like to ensure they have a large window to operate, and so the end outcome is always an objective one. The ATO have provided a very comprehensive practice compliance guideline (PCG 2018/9) to accompany TR 2018/5 in case you are unsure where your company stands in relation to the Australian income tax system.

If you are unsure if your foreign company is a resident of Australia, after exhausting all resources, it is encouraged you liaise with a tax agent so they might be able to communicate with the ATO on your behalf in order to determine your foreign company's residency status.

Generally a company is a resident of Australia if:

* it is incorporated in Australia, or

* if it is not incorporated in Australia, it carries on business in Australia and has either

* its voting power controlled by shareholders who are resident of Australia (the voting power test of residency), or

* its central management and control is in Australia (the central management and control test of residency).

It is important to note, that like many of the secondary tests, an objective outcome is determined based on all the facts of an individual company or case, and the location of a company's central management and control is determined by where it is controlled and directed as a matter of substance, and how its control and direction is exercised over time.

Normally, a company’s directors exercise its central management and control where they execute their duties and comply with the standards expected of directors under the applicable Australian or foreign company law. This will normally be where its directors make their decisions. Most companies will have little difficulty identifying where it is located, however, in instances where key executives might be located in multiple locations all the facts will be looked at, such as board meetings, and where these board meetings occur. If there are no board meeting minutes, then other 'high level' decisions will be looked at. Board minutes do not need to go in to detail of the decisions, and rationale, but as always, the more detail and conclusive the better. Fabricated board minutes will of course be disregarded, and do little to have the Commissioner rule in your favour.

If your company or business operations are too small to have board meetings and minutes the ATO and Commissioner will certainly look at other factors that influence the direction of the company.

It is important to note here too, that the ATO will look at regular patterns and commercial realities prior to making a decision or ruling. For instance if the business decisions are usually made in a foreign country, but are as a one off a meeting occurs in Australia, this does not automatically make the company a resident for tax purposes.

One area that can cause confusion, and can be looked through is figurehead titles. That being simply making a director/stakeholder of a company a non-resident, does not automatically imply the company will not be a resident for tax purposes. The beneficial ownership and power may exist overseas, but if the decisions are made locally, in Australia, and the overseas figureheads act on the advice from the Australian member, without question and constantly, then it can be argued that central management and control of the company is actually in Australia and as a result is a tax resident. This is not to be confused with local management authority. Having an Australian business manager make decisions for the local enterprise does not automatically imply residency in Australia, however, if those decisions cross over in to the overall direction, leadership and control of the company in whole, then issues and confusion can arise. An employee simply exercising their employment duties autonomously would not result in an issue in regards to this PCG, however, if the employee started to influence the parent entity's overall decisions and business direction it could result in it's residency being called in to question.

Further to this, it is no entirely uncommon for company directors to be located in different parts of the world and this must be looked in to as well. If there is a director that exerts more influence than another, their location and residency can be brought in to question. The location of the meetings can also be investigated to ascertain where the control of the company truly exists. However, simply attending to board meetings or the like outside of Australia is not a means to circumvent these tests, as if it is determined that the Australian director / beneficial owner exhibits the highest level of influence then it could be determined that the company's central management and control exists in Australia.

This is very much a matter of fact and objective opinion, and it would not be uncommon for decisions to be made in more than one location. In circumstances where a company's high-level decisions are made in more than one place, special care is taken to identify where the central management and control is located. It could even be that the central management and control is divided and in multiple places.

To assist in this, the underlying considerations are:

* in which place, or places were high-level decisions of the company made as a matter of substance and fact, and;

* whether central management and control is exercised in that place to a substantial degree, sufficient to conclude the company is really carrying on a business there.

The modern economy is one where companies can easily swell and contract from an existence in one country to another.  While these look through methods can easily be interpreted as a means for the ATO to attack businesses and transactions that have little connection with Australia, they are also equally necessary to ensure that entities and transactions do not escape tax-free throughout the global economy.

The ATO's data matching capabilities are extremely powerful and as a result their ability to locate entities who are at risk should not be disregarded. They will look at your business objectively when looking at the residency status and tax implications, however, as always, under the self-assessment system, taxpayer compliance, and attempts to remain compliant are always looked at favourably. If you are concerned about your company's residency then we encourage you to either review the documents referenced in this article, or to contact us for further assistance.

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