Australian mid-size businesses and investors who have operations overseas or invest across borders should take a detailed look at their structures from a tax perspective following the High Court’s decision last week in Bywater Investments & Ors v FCT [2016] HCA 45.

In its unanimous judgement, the High Court found that four foreign companies were in fact Australian resident companies for tax purposes.  Other business and family groups may suffer the same fate if they don’t administer their structures properly.

Critical to the decision was the finding that the boards of directors had abrogated their decision-making in favour of the controlling mind (who was Australian) such that the boards only met to mechanically implement or rubber stamp decisions made by him in Australia.
The process to reach this finding was painstaking and no doubt expensive, given that there were 19 challenges to the evidence and procedure throughout the litigation process.

Regardless of the background facts, it is clear that legal formality and structure is not enough. If foreign companies are not intended to be regarded as Australian tax residents, then the foreign activity needs to be much more than merely having boards of directors located overseas ratify decisions made from Australia, especially if merely through third party corporate service providers. And while in some situations Australia's double tax treaties may provide some protection, even this may be limited.

Implementing well crafted governance protocols will assist to align what actually happens with the underlying intent, leading to a more robust tax profile within Australia and abroad.

Groups with entities offshore, or where “central management and control” is otherwise an issue in their structure, should take this decision as a prompt to review how their foreign structures are governed, to identify what unforeseen tax risks and unintended consequences are lurking, and to determine what actions they should take.