The ATO issued an updated version of PCG 2018/9 on 22 December 2022. This guidance sets out a transitional compliance approach for companies that treated themselves as foreign residents on the basis of withdrawn TR 2004/15 but qualify as residents under the replacement ruling, TR 2018/5, due to their central management and control being in Australia.
In particular, PCG 2018/9 gives companies time to change their governance arrangements so that their central management and control is exercised outside Australia. Companies “impacted” in their efforts to change their governance arrangements now have until 30 June 2023 to make the necessary changes.
This is the 4th extension of the transitional compliance approach – initially applicable from 15 March 2017 (when TR 2004/15 was withdrawn), then to 30 June 2019, 30 June 2021 and finally to 30 June 2023. The ATO says, however, it will not be providing any further extensions.
The relevant update to the PCG is para 104AA, as set out below.
104AA. The Commissioner has further extended the transitional period for companies impacted in their efforts to change their governance arrangements, as outlined in paragraph 103 of this Guideline. The transitional period is extended until 30 June 2023. The transitional period will not be extended further beyond this date. The Commissioner will continue to monitor impacts on these companies and provide further updates if necessary.
A full extract of the transitional arrangements, from PCG 2018/9 is set out below.
[Tax Month – January 2023, previous month, 9.1.23]
EXTRACT from PCG 2018/9 after this latest update
Transitional compliance approach
102. This administrative arrangement applies to a foreign-incorporated company that, immediately prior to the withdrawal of Taxation Ruling TR 2004/15 Income tax: residence of companies not incorporated in Australia – carrying on business in Australia and central management and control:
- had relied on TR 2004/15 and on that basis was not a resident of Australia
- had not undertaken or entered
- any artificial or contrived arrangements that affected the location of its central management and control, or
- any tax avoidance scheme whose outcome depends, in whole or part, on it being a non-resident.
- is an ordinary company incorporated under a foreign equivalent to the Corporations Act 2001 and is not a foreign hybrid within the meaning of section 830-5 of the Income Tax Assessment Act 1997 (ITAA 1997), and
- would become a resident under the central management and control test of residency under the Commissioner’s revised view in TR 2018/5, solely because its central management and control is located in Australia.
103. The Commissioner will not apply resources to review or seek to disturb a foreign-incorporated company’s status as a non-resident during the transitional period (see paragraph 104 of this Guideline) if it meets the criteria in paragraph 102 of this Guideline and during this period it:
- changes its governance arrangements, so that its central management and control is exercised outside Australia by the end of the transitional period
- does not commence carrying on business in Australia (other than because its central management and control is exercised in Australia), and
- does not undertake or enter
- any artificial or contrived arrangements that affect the location of its central management and control, for these purposes, if board meetings are undertaken in another country where that company has a substantive commercial presence, the mere fact that a company may fly Australian directors overseas to attend those board meetings would not by itself be regarded as artificial or contrived, or
- any tax avoidance scheme whose outcome depends, in whole or part, on whether it is a resident or non-resident.
104. The transitional period is the period between and including:
- 15 March 2017, and
- 30 June 2019.
104A. The Commissioner has become aware that implementing the changes envisaged in this compliance approach is taking an extended period of time for some companies. The Commissioner will therefore extend the transitional period for companies that are taking active and timely steps to change their governance arrangements as envisaged by paragraph 103 of this Guideline. The transitional period for an early balancer taxpayer with a 31 December year end will be extended until 31 December 2020, whilst the transitional period for a taxpayer with a 30 June year end will be extended until 30 June 2021.
104AA. The Commissioner has further extended the transitional period for companies impacted in their efforts to change their governance arrangements, as outlined in paragraph 103 of this Guideline. The transitional period is extended until 30 June 2023. The transitional period will not be extended further beyond this date. The Commissioner will continue to monitor impacts on these companies and provide further updates if necessary.
104B. The transitional arrangement at paragraph 103 of this Guideline extends to the Commissioner not applying resources to pursue penalties for failing to lodge taxation documents in the approved form as a result of residency status where a company satisfies the criteria in paragraph 102 of this Guideline.
105. The Commissioner acknowledges that unintended or unplanned circumstances arise from time to time which may cause the location of central management and control to be subject to question.
106. This ongoing compliance approach sets out a series of conditions which, if met by a foreign incorporated company, means the Commissioner considers it to be low risk of being a resident under the central management and control test of residency. Simply because a company does not meet these criteria does not automatically mean that the Commissioner considers it will be a resident of Australia.
107. The Commissioner will not normally apply resources to review or seek to treat a foreign-incorporated company as a resident 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, because directors regularly participate in board meetings from Australia using modern communications technology, where all of the following criteria are satisfied on an ongoing basis:
- the company is –
- a subsidiary of an Australian public group[4], that is an ordinary company incorporated under a foreign equivalent to the Corporations Act 2001 and is not a foreign hybrid within the meaning of section 830-5 of the ITAA 1997, and treated in the group’s Australian income tax returns and financial statements as non-resident for Australian taxation purposes and is disclosed as a controlled foreign company, or
- a listed holding company of a foreign public group, or
- a wholly-owned subsidiary of a foreign public group that is an ordinary company incorporated under a foreign equivalent to the Corporations Act 2001 and is not a foreign hybrid within the meaning of section 830-5 of the ITAA 1997, and treated in the group’s income tax returns and financial statements as a resident of a listed country; and
- a substantial majority of the company’s central management and control is exercised in a foreign jurisdiction (that is not a tax haven[5]) where it is treated as a resident for tax purposes under that jurisdiction’s law through –
- board meetings that are held outside Australia, or
- board meetings (including meetings via the use of modern communication technologies including teleconferencing) where the majority of directors are not present in Australia when such meetings take place, or
- decisions by the board undertaken by circular resolution where the majority of directors are not present in Australia when such decisions are made; and
- the company has not undertaken or entered –
- any artificial or contrived arrangement affecting the location of its central management and control, including previous or subsequent ‘migration’ of residency, for these purposes, if board meetings are undertaken in another country where that company has a substantive commercial presence, the mere fact that a company may fly Australian directors overseas to attend those board meetings would not by itself be regarded as artificial or contrived; or
- a tax avoidance scheme whose outcome depends, in whole or part, on the location of its residence; or
- arrangements to conceal ultimate beneficial or economic ownership, or
- arrangements involving abuse of board processes including backdating of documents or the board not truly executing its functions.
107A. Additionally, where a company that satisfies the criteria in paragraph 107 of this Guideline fails to lodge a return as a result of an honest but mistaken belief that the company was a non-resident, the Commissioner will not apply his resources to pursue penalties for failing to lodge taxation documents in the approved form.