Australia re-thinks corporate tax residence
Tax Alert - November 2020
By Emma Marr
New Zealand companies managed or controlled in Australia may soon see some welcome clarity around their corporate tax residence, after an announcement in the 6 October 2020 Australian budget that the corporate tax residence rules will be changed.
The detail is still to be released, but there is cause for optimism that at least some of the changes made in the last two years will be rolled back, and efforts to comply with unexpectedly far-reaching ATO guidance may in some cases no longer be necessary.
What’s the change, and why is it needed?
For the last two years, the position of the Australian Taxation Office (ATO) has been that a non-Australian incorporated company with its central management and control (CMAC) in Australia is tax resident in Australia. This was a change from the previous position that a company needed to both have its CMAC, and carry on its business, in Australia, in order to be tax resident.
The ATO position, outlined in a ruling in 2018, followed the Australian High Court decision in Bywater Investments Ltd v Federal Commissioner of Taxation. The ruling stated that a foreign-incorporated company would be Australian tax resident if the company had its CMAC in Australia, regardless of whether its trading operations were also carried out in Australia.
This greatly expanded the reach of the Australian tax residence rules, and meant a number of New Zealand incorporated companies could become Australian tax resident simply as a result of having potentially even small amount of director control exercised from Australia. This created unexpected Australian tax filing and in some cases tax payment obligations for those companies, and a scramble by some trans-Tasman and multinational businesses to shift CMAC out of Australia.
It quickly become apparent that the ruling had a reach that the ATO may not have anticipated, and steps were taken to reach practical solutions in some cases. Related to this, the New Zealand Inland Revenue reached an agreement with the ATO to adopt an administrative approach, that allowed smaller taxpayers to “reasonably self-determine” their place of effective management under the New Zealand / Australia Double Tax Agreement.
The Australian Federal Budget on 6 October 2020 included an announcement (summarised below), that the test should revert, in substance, to the previous position.
2020-21 Budget Announcement
Corporate residency test to be amended
The Government will make technical amendments to the law to clarify that a company that is incorporated offshore will be treated as an Australian tax resident if it has a ‘significant economic connection to Australia’. This test will be satisfied where both:
- The company’s core commercial activities are undertaken in Australia and
- Its central management and control is in Australia.
This measure is consistent with the Board of Taxation’s recommendation in its 2020 report: Review of Corporate Tax Residency and will mean the treatment of foreign incorporated companies will reflect the position prior to the 2016 High Court decision in Bywater Investments Ltd v Federal Commissioner of Taxation.
The measure will have effect from the first income year after the date of Royal Assent of the enabling legislation, but taxpayers will have the option of applying the new law from 15 March 2017, being the date on which the Australian Taxation office (ATO) withdrew its previous ruling TR 2004/15 Income tax: residence of companies not incorporated in Australia — carrying on a business in Australia and central management and control.
The key will be how the legislation is drafted, and in particular, the scope of the new concept of “core commercial activities”. At this stage, there is no timeframe for the legislation to be introduced. We will bring you updates as they occur.
For further analysis of the Australian Budget read Deloitte Australia’s Federal Budget 2020-21 Report: The long road back.
The report of the Board of Tax which led to the Government announcement is now available, and can be accessed here.
If your company is controlled to any extent from Australia and you think this rule change may affect its tax residence, we can help you work through the impact of the announcement.
Contact your usual Deloitte tax advisor to discuss your options
November 2020 Tax Alert contents
- Australia re-thinks corporate tax residence