Important Changes To Residency Rules For Foreign Incorporated Companies
Following a recent high court decision, the Australian Tax Office (ATO) has made changes to the rules around the residency test for foreign incorporated companies.
The changes may affect Australian company groups with transactions and business interests overseas whose foreign incorporated companies are now deemed as Australian tax residents under the broader definition, therefore drawing them into the Australian tax net.
Australian tax residents are assessable on their worldwide income, meaning the changes could have significant tax consequences for impacted businesses.
Under general Australian tax law, a company will be a ‘resident of Australia for tax purposes’ if:
Previously the Commissioner’s view was that a company not incorporated in Australia would be deemed a resident if two separate requirements are met. The first is that the company is carrying on business in Australia and the second is that the company's central management and control (“CMandC”) is located in Australia.
In simple terms, depending on the business, the ATO’s previous view was these two requirements could be treated separately; CM&C could be in Australia without the company being seen as carrying on business in Australia. However, this approach has now been turned on its head in the draft ruling TR 2017/D2.
Under the new approach in TR 2017/D2, the ATO will not accept that the CM&C of a foreign incorporated company can be in Australia without the company being a tax resident.
Essentially, CM&C is deemed to be part of a company’s business and as such if CM&C is in Australian then the company will be a resident here, even if trading activities are outside Australia.
Other key aspects of TR2017/D2 include:
The above highlights the ATO’s toughened stance on the tax residency of foreign incorporated companies and is specifically relevant to Australian based companies with outbound operations.
It is critical these corporate groups review how their foreign incorporated companies are being managed and decisions are being made in light of this new definition of central management and control.
If you have any questions in relation to the above changes, or international tax issues in general, please contact us or speak to your ESV engagement partner on +61 2 9283 1666.