New rules for companies with Australian connections

Tax Alert - February 2019

By Emma Marr

Extension of transitional period for applying ATO ruling on residence

Readers may remember the ATO’s surprising decision in June 2018 to treat many companies as Australian tax residents who previously would not have been. This was covered in the July 2018 Tax Alert. Along with the initial ruling released in June 2018, the ATO released draft guidelines for interpreting the ruling and determining the central management and control of a company that may be a tax resident of Australia. The nub of the problem for many New Zealand companies was that companies that didn’t have any trading operations in Australia could, under the ATO’s new ruling, be treated as Australian resident.

In December 2018 the Australian Tax Office (ATO) released a further (and final) version of their guidance. The main update to the guidance is an extension to the transitional period in which the Australian Commissioner of Tax will not apply his resources to review or seek to disturb a foreign-incorporated company’s status as a non-resident to between 15 March 2017 and 30 June 2019. Previously, the transitional period was to cease in mid-December 2018. In addition the ATO clarified aspects of the guidelines’ “ongoing compliance approach” to accommodate such things as circular resolutions and listed entities themselves (in addition to their subsidiaries which were already covered).

Companies that are potentially tax residents of both Australia and New Zealand should be urgently considering the impact of the ATO ruling on their operations. Any strategic decision making presence in Australia should be carefully considered to determine if it triggers Australian tax residence, at least in the ATO’s mind. This could include the existence of directors or other senior managers, board meetings, and other strategic decision making. 

The result of this ruling is potentially a host of dual resident companies. This leads to the next problem we have in Australia/ New Zealand tax rules…

Impact of the MLI on dual residents

Separately, the new Multilateral Convention (MLI) came into effect on 1 January 2019 for the New Zealand/Australia double tax agreement (DTA). One effect of this 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 DTA, 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 – the New Zealand Inland Revenue, and the ATO.

On 20 December 2018, Inland Revenue announced that it was working with the ATO to formalise a practical administrative
approach for non-individual dual residents affected by Article 4(1) of the MLI. The ATO similarly posted a note on their Competent Authority determination page.

Under Article 4(1) of the MLI, which is designed to address tax avoidance arrangements, non-individual taxpayers that are dual residents need to apply to either Competent Authority for a determination of their residency for tax treaty purposes.

The administrative approach will seek to provide certainty and minimise compliance costs for non-individual dual residents that meet certain eligibility criteria. To read more see here. Once finalised this will be published together with eligibility criteria and any additional guidance.

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