Practical Compliance Guide (PCG) 2018/9 provides a transition period for foreign incorporated companies to change their governance arrangements so that they do not become Australian residents solely because their central management and control (CM&C) are located in Australia.
The transitional period ends on 30 June 2019.
To be eligible for the transitional compliance approach a foreign incorporated company must meet the following conditions:
- immediately prior to the withdrawal of TR 2004/15, it must have:
- relied on this ruling and, on this basis, was not a resident of Australia;
- had not undertaken or entered any artificial or contrived arrangements that affected the location of its CM&C, or any tax avoidance scheme whose outcome depends, in whole or part, on it being a non-resident; and
- it must be an ordinary company and not a foreign hybrid; and
- it would become an Australian resident under the Australian Tax Office (ATO)’s revised view in TR 2018/5, solely because its CM&C is located in Australia.
The ATO will not apply resources to review or seek to disturb a foreign incorporated company’s status as a non-resident, provided during the transitional period it:
- changes its governance arrangements, to ensure its CM&C is exercised outside Australia by the transitional period;
- does not commence carrying on business in Australia, other than around its CM&C; and
- does not undertake or enter any artificial or contrived arrangements that affect the location of its CM&C, or any tax avoidance scheme whose outcome depends, in whole or part, on it being a non-resident.
Impact of becoming an Australian resident
If a foreign incorporated company becomes an Australian resident, the potential Australian income tax consequences include:
- if the foreign incorporated company is a 100% subsidiary of the head company of an income tax consolidated group and not a prescribed dual resident, it may become a subsidiary member of the group. This could generate tax cost setting in accordance with the ACA method, capital gains under CGT event L3 or L5, and denial of deductions;
- the foreign incorporated company becoming subject to Australian income tax, though concessions may apply, such as active foreign branch exemption in section 23AH;
- the non-portfolio dividend exemption in Subdivision 768-A no longer being available in relation dividends or non-share equity distributions paid by the foreign incorporated company; and
- the active foreign business asset exemption in Subdivision 768-G no longer being available to reduce a capital gain made on the sale of shares in the foreign incorporated company.
Actions before 30 June 2019
If you are involved or have interest in a foreign incorporated company, before 30 June 2019, you should:
- review its governance arrangements to identify where its CM&C is located;
- if necessary, relocate its CM&C outside of Australia to maintain non-resident status; and
- implement protocols related to decision making to ensure the CM&C is not inadvertently relocated.
Moving forward, records of board meetings and key decisions should be appropriately documents, including where each person was located when they participated in the meeting or made the decision
Central management and control and background
TR 2018/5 states a company’s CM&C refers to the control and directions of its operations, the key element of which is the making of high-level decisions that set the company’s general policies and determines the direction of its operations and the type of transactions it will enter.
CM&C is different from the day-to-day conduct and management of a company’s activities and operations. Though it is noted the day-to-day conduct and management of a company’s operations might be an exercise of CMAC in circumstances where they are effectively the same.
When determining who exercise a company’s CM&C, all of the relevant facts and circumstances must be considered. TR 2018/5 notes that CM&C will normally be exercised by its directors, but that there is no presumption that they will always exercise CM&C.
PCG 2018/9 provides ATO guidance on who exercises a company’s CM&C and where it is exercised. It also, provides an ongoing compliance approach for wholly owned subsidiaries of listed companies where, amongst other things:
- a substantial majority of its CM&C is exercised in foreign jurisdiction that is not a tax haven; and
- it is treated as a resident for tax purposes of that jurisdiction.
A foreign incorporated company will be a resident of Australia for tax purposes if:
- the company carries on business in Australia and has its CM&C in Australia (the “CM&C test”); or
- the company carries on business in Australia and has its voting power controlled by shareholders who are residents of Australia (the “voting power test”).
Historically, the ATO view set out in TR 2004/15, was that a foreign incorporated company would not be taken to carry on business in Australia by reason that its CM&C was in Australia. This meant that a foreign incorporated company that did not conduct operational or investment activities in Australia would not be treated as an Australian resident even if its CM&C was located in Australia.
This long-standing view changed after the “Bywater case” was handed down on 16 November 2016. In light of this case, the ATO has ruled in TR 2018/5 that a company carries on business both where its trading and investment activities take place and where the CM&C of those activities occurs. Consequently, subject to any Double Tax Agreement, a foreign incorporated company will be an Australia resident if it carries on a business anywhere in the world and has its CM&C located in Australia.