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IR and ATO release administrative approach to determining residence

Tax Alert - June 2019

By John Lohrentz

This month there may be some good news for NZ / Australia dual-resident companies with a turnover below NZD $260m.  On 27 May, the New Zealand Inland Revenue (“IR”) and Australian Tax Office (“ATO”) (“Competent Authorities”) jointly published an agreed administrative approach on article 4(1) of the Multilateral Tax Convention ("MLI") that allows taxpayers meeting several eligibility criteria to “reasonably self-determine” their place of effective management (“PoEM”).  For larger companies, the new publication clarifies the application process and supporting information required to apply to the Competent Authority for a determination on tax residency under the Australia-New Zealand tax treaty.

A quick recap

The OECD’s MLI is an efficient and swift means of implementing the tax treaty related measures arising from the OECD’s base erosion and profit shifting (“BEPS”) project. Both Australia and New Zealand signed the MLI and the convention came into force on 1 January 2019 for withholding taxes. For other taxes, the MLI comes into force for taxable periods commencing on or after 1 July 2019.

One effect of the MLI is that there is much less certainty about the tax residence of dual resident companies. This is because the tie breaker test that used to apply under the Australia-New Zealand tax treaty, which would definitively determine the residence of a dual resident company, will now no longer apply. If there is doubt about the tax residence of a company, instead of following a tie-breaker test, the company will have to get the agreement of the two Competent Authorities.   

Following ATO release of the synthesized text of the MLI and the convention between Australia and New Zealand in February 2019, this administrative approach is welcome. Following the ATO’s 2018 ruling on corporate residency more NZ companies will likely be affected by the modifications made by article 4(1) of the MLI to the Australia-New Zealand tax treaty. Currently the administrative approach is only intended to apply between NZ and Australia.

Eligibility criteria

The administrative approach sets out eligibility criteria relating to a taxpayer’s structure, financials and compliance activities, see below for a summary.  The option to self-determine PoEM is only available if the taxpayer assesses that they meet all criteria for a relevant year, and criteria 8 and 9 are met on an on-going basis.  If there is a material change in circumstances taxpayers are expected to re-assess their eligibility.

The taxpayer must:

  1. Be an ordinary company;
  2. Reasonably self-determine its PoEM to be solely in Australia or NZ for the purposes of the Australia-NZ tax treaty;
  3. Have less than AUD $250 / NZD $260 million in group annual accounting income;
  4. Have less than 20% gross passive income compared to total assessable income in the last income year;
  5. Have less than 20% of the value of its total assets be intangible assets (other than goodwill);
  6. Not currently (or in the last five years) be engaged in any “compliance activity” relating to determination of residency, including members of the taxpayer’s group; and
  7. Not currently be engaged in any objection, challenge, settlement procedure or litigation in relation to any dispute with ATO or IR, including members of the taxpayer’s group.
  8. Notify the IR / ATO of its self-determined PoEM if a new compliance activity is begun; and
  9. Not have entered into a tax avoidance scheme or arrangements that, broadly, intends to defeat the MLI or rules of residency, including actions by the taxpayer’s group.

Taxpayers are encouraged to approach their Competent Authority if they are uncertain as to whether or not they meet the eligibility criteria.

IR will be able to review self-determinations

While the Competent Authorities reserve the right to review taxpayer self-determinations made under this administrative approach (where anti-avoidance rules may apply), they will generally not seek to review a taxpayer’s self-determination as long as all material facts and circumstances remain the same.

If a Competent Authority reviews a self-determination and comes to the opposite conclusion, the Competent Authority’s determination will apply from either 1 January 2019 or the date on which the taxpayer’s circumstances changed so that their self-determined residence became incorrect.

Applying for a determination

Taxpayers that do not meet the eligibility criteria need to apply in writing to either Competent Authority for a determination of their residency. IR’s guidance notes that taxpayers must set out:

  • Why they cannot apply the administrative approach; and
  • Make a submission on the entity’s jurisdiction of residence for treaty purposes, supported by relevant evidence (e.g. who makes the key management and commercial decisions for the entity, where decisions are in substance made, where the meetings of the board of directors are usually held, etc.).

Applications will be shared with the other Competent Authority and additional information will be requested if required.

As long as all information is provided, taxpayers can expect a written determination within six months.

Considerations for affected NZ companies

With the MLI now fully in force (for taxable periods beginning on or after 1 July 2019, except for some withholding taxes which have been covered since 1 January), and with the Australian Commissioner of Tax beginning to apply his resources to review foreign-incorporated company’s status as a non-residents from 30 June 2019, it is important to be clear on, or clarify, your company’s tax residence status this month. In particular, large taxpayers will need to consider what steps are required before the end of June to be compliant with the ATO’s ruling on corporate residency, or to apply for a determination on residence.

We also note that the supporting information required for an application to the ATO and to IR is different.  Taxpayers may wish to engage in the application process quickly to clarify all relevant supporting evidence, and to avoid time-delays in determining tax residence.

Please consider contacting your usual Deloitte advisor as a matter of priority if you need to make an application to IR or the ATO, or if you are looking for assistance to consider how the administrative approach applies to you.

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