October Tax Alert

Article

Is Australia re-thinking the scope of their corporate tax residence rules?

Tax Alert - October 2019

By Emma Marr

Companies with links to Australia will be cautiously pleased to hear that the Australian Board of Taxation (BOT) is undertaking a review of Australia’s tax residency rules. As a first step, the BOT has released a consultation paper to initiate the first part of its review.

It is hoped that this might lead to some reduction of the impact of recent developments in the way the Australian Tax Office (ATO) determines the tax residence of companies with some connection to Australia.

You can read our most recent article summarising the problem from February 2019 here. In summary, the ATO released a ruling, in 2018, that had the effect of treating some companies as Australian tax residents, when previously they would not have been. This was due to the ATO’s interpretation of the guidance on determining the central management and control (CMAC) of a company. Whereas previously a company had to carry on some business in Australia to be considered tax resident in Australia, the ATO’s new position was that it was enough for the company to have their central management and control in Australia. This meant that companies with (for example) some directors in Australia, that held some board meetings in Australia, or had senior management making strategic decisions in Australia, could unexpectedly become Australian tax resident and potentially dual resident companies.

Complicating the picture, New Zealand and Australia both adopted the Multilateral Convention (MLI), which meant that the New Zealand/Australia double tax agreement (DTA) no longer had a corporate residence tie-breaker test, and companies had to seek agreement from the Inland Revenue and the ATO on where they were tax resident. Since then, Inland Revenue and the ATO have developed an administrative approach that makes this relatively simple for many taxpayers, which is a welcome development. However, this does not un-do the fundamental problem, which is that the ATO has a very wide interpretation of the CMAC test.

The consultation paper released by the BOT indicates that the primacy focus of their review will be the CMAC test. You can read a more detailed summary of the consultation paper here, and the consultation paper itself here. It is good to see that the paper discusses limitations on the CMAC test, including the compatibility of the test with modern corporate governance procedures and features. It is certainly true that the availability of different ways of communicating across borders has allowed for significant changes in the way that companies are governed in the last decade, and current tax legislation and treaties haven’t evolved to take those changes into account.

If you have any concerns about the tax residence of your company, or would like to make a contribution to the BOT’s consultation process, please contact your usual Deloitte advisor.

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