The Australian Taxation Office (ATO) has just released its much-anticipated Taxation Ruling on central management and control test of residency. TR 2018/5 covers the circumstances in which a foreign-incorporated entity may be an Australian tax resident, together with draft Practical Compliance Guideline (PCG 2018/D3).
This follows the High Court’s recent decision in the Bywater case [2016] HCA 45, where an Australian ‘puppet master’ was covertly pulling the strings, so that the non-resident director’s overseas ‘deliberations’ were not determinative of the place where ‘central management and control’ was exercised. As a result, the Commissioner withdrew his longstanding ruling: TR 2004/15 in March 2017 and issued TR 2017/D2, which he later revised: TR 2017/D2. In finalising TR 2018/5, the Commissioner has largely endorsed his earlier views in TR 2017/D2. He has set out a discussion of submission points made, in response to the consultation, in a separate Ruling Compendium.
TR 2018/5 now addresses four key questions:
1. Does a company carry on business in Australia?
Most significantly, TR 2018/5 confirms the ATO’s view that if a company carries on a business in any jurisdiction, and has central management and control (CM&C) in Australia, then it will be an Australian resident under Australian domestic law. In particular, it is not necessary for any part of the actual trading or investment operations of the business of the company to take place in Australia – as the mere conduct of CM&C in Australia will amount to a business in Australia.
2. What does CM&C mean?
TR 2018/5 affirms that the key element in the CM&C of a company’s operations is the making of high-level decisions that set the company’s general policies, and determine the direction of its operations and the type of transactions it will enter. These are to be distinguished from the day-to-day conduct and management of its activities and operations and matters of company administration, which are not typically itself acts of CM&C.
3. Who exercises CM&C?
A starting point is that the Directors of a company will typically exercise CM&C, though this is not a presumption and TR 2018/5 also re-emphasises that “rubber-stamping” may be disregarded and an enquiry made as to the actual place where CM&C has emanated from. This is precisely what occurred in the Bywater case.
4. Where is CM&C exercised?
Again TR 2018/5 confirms that this is an enquiry into the substance of decision-making, rather than a mere formality. Although it is not relevant to ask where Directors ordinarily reside, it is of critical relevance to consider in which jurisdiction they actually perform the activities constituting CM&C.
Implications
TR 2018/5 may reflect a surprising new order for a number of Australian groups with foreign subsidiaries, particularly the comments in relation to whether CM&C itself amounts to a business. These groups will also want to consider the practicalities set out in the draft PCG 2018/D3, which helpfully permits transitional “relief” period ending 18 December 2018 for certain groups that have relied upon the prior TR 2004/15.
Given the potential for significant practical impediments – and also the possibility of an additional tax impost – if foreign subsidiaries inadvertently become resident in Australia by virtue of having CM&C therein, it will be important to assess and remediate risks as soon as possible. Commercially palatable yet technically robust residency protocols will need to be in place and monitored going forward.
[KPMG Daily Tax News 27/6/18; Tax Month – July 2018]
Comprehension questions (answers available)
- Is the Commissioner’s response to the Bywater case, by way of a ruling that is final, whilst the Practical Compliance Guide is only in draft format?
- Can a company that has its ‘Central Management and Control’ in Australia, still be saved from being resident, if it’s business is outside Australia?
- Does the Commissioner accept that directors simply ‘rubber stamping’ decisions made, elsewhere, is not exercising CM&C?
- Does it sound like the ruling on where the ‘substance’ of the decision making is made, now ‘glosses’ the High Court’s longstanding ‘central management and control’ decision in Esquire Nominees [1973] HCA 67?
[answers:1.yes;2.no(CM&CinAustraliaIsABusinessAlsoAccordingToATO);3.yes]