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  • Working out your residency

    You need to know the residency status of your business entity to determine your Australian income tax obligations.

    Foreign resident entities are generally taxed in Australia on any income that has an Australian source. Australian resident entities are generally taxed on their worldwide income.

    There are different residency criteria for:

    Sole traders and ordinary partnerships

    If you operate your business as a sole trader or an ordinary partnership, your Australian income tax obligations are based on your individual residency.

    See also:

    Companies

    A company is a resident of Australia if:

    • it is incorporated in Australia, or
    • although not incorporated in Australia it carries on business in Australia and has either  
      • its central management and control in Australia, or
      • its voting power controlled by shareholders who are residents of Australia.
       

    COVID-19 effects on foreign incorporated companies

    Central management and control

    If the only reason for holding board meetings in Australia or directors attending board meetings from Australia is because of the effects of COVID-19, then we will not apply compliance resources to determine if your central management and control is in Australia.

    COVID-19 has resulted in overseas travel bans and restrictions and a high degree of uncertainty around international travel. You may be concerned about these effects on your corporate residency status because of a need to change locations of board meetings or where directors attend them from.

    Some boards of foreign-incorporated companies that are not Australian tax residents may temporarily suspend their normal pattern of board meetings because either:

    • there are overseas travel bans or restrictions
    • the board has made the decision to halt international travel because of COVID-19.

    If these companies instead hold board meetings in Australia or directors attend board meetings from Australia, this alone will not (in the absence of other changes in the company’s circumstances) alter the company’s residency status for Australian tax purposes. We are continuing to have regard to the ongoing impact of COVID-19 on business and will issue further updates to this guidance as required.

    Additionally, in light of the proposed legislative amendments to the corporate residency test announced by the government and the continuing impacts of COVID-19 on overseas travel, the Commissioner has extended the transitional period for foreign-incorporated companies as outlined in paragraph 104AA of PCG 2018/9. The transitional period will continue until the earlier of:

    • 30 June 2022 for a taxpayer with an income year ending 30 June, or
    • 31 December 2021 for an early balancer taxpayer with an income year ending 31 December
    • the date on which legislation amending the corporate residency test receives royal assent.

    Permanent establishment

    COVID-19 has resulted in overseas travel restrictions. Foreign companies may be concerned about potential effects on their business and tax affairs because of the presence of employees in Australia.

    The effects of COVID-19 will not alone result in the company having an Australian permanent establishment if it meets all the following:

    • The foreign incorporated company did not have a permanent establishment in Australia before the effects of COVID-19.
    • There are no other changes in the company’s circumstances.
    • The unplanned presence of employees in Australia is the short-term result of them being temporarily relocated or restricted in their travel because of COVID-19.

    We will not apply compliance resources to determine if you have a permanent establishment in Australia if:

    • you did not otherwise have a permanent establishment in Australia before the effects of COVID-19
    • the temporary presence of employees in Australia continues to solely be as a result of COVID-19 related travel restrictions
    • those employees temporarily in Australia will relocate overseas as soon as practicable following the relaxation of international travel restrictions
    • you have not recognised those employees as creating a permanent establishment or generating Australian source income in Australia for the purpose of the tax laws of another jurisdiction.

    This approach is applicable until 31 December 2021.

    From 1 January 2022, this approach will cease to apply and you will be required to consider whether ongoing arrangements give rise to a permanent establishment in Australia. You should contact the ATO and apply for early engagement to discuss the taxation consequences of these ongoing arrangements after that date.

    We have separately published a minor addendum to Taxation Ruling TR 2002/5 which provides an example on the issue of temporal permanence in the context of COVID-19.

    See also:

    Corporate limited partnerships

    A corporate limited partnership will be considered a resident of Australia if either the partnership:

    • was formed in Australia
    • carries on business in Australia – or has its central management and control in Australia.

    It is usually not necessary to determine the residency status of ordinary partnerships (which do not have the benefit of limited liability). The individual partners are taxed on their share of the net partnership income according to their individual residency status.

    Trusts

    Generally, trusts are considered Australian residents for an income year if:

    • a trustee of the trust estate was a resident at any time during the income year, or
    • the central management and control of the trust estate was in Australia at any time during the income year.

    For capital gains tax (CGT) purposes, the resident conditions are the same, unless the trust is a unit trust. A unit trust is a resident trust for CGT purposes for an income year if it meets the unit trust residency requirement at any time during the year.

    For public trading trust purposes, the conditions for determining whether a unit trust is an Australian resident for an income year are the same as those for unit trusts for CGT purposes.

    The unit trust residency requirement has two parts. A condition in both the first and second parts must be met.

    Unit trust residency requirement

    One of these requirements was satisfied:

    Any property of the unit trust was situated in Australia.

    The trustee of the unit trust carried on a business in Australia.

    And also, one of these:

    The central management and control of the unit trust was in Australia.

    One or more Australian residents held more than 50% of the beneficial interests in the income or property of the trust.

    Note: The concept of ‘property’ is broad and is not restricted to tangible property. It may include items such as trading stock, cash and software.

    Announced but unenacted legislative measures

    In the 2020–21 Budget, the government announced it intends to make technical amendments to clarify the corporate residency test. The proposed amendments will provide that a company incorporated offshore will be treated as an Australian tax resident if it has a ‘significant economic connection to Australia’.

    This measure, if enacted, is intended to have effect from the first income year after the date of royal assent of the enabling legislation. However, it's intended that taxpayers will have the option of applying the new law retrospectively from 15 March 2017.

    In the 2021–22 Budget, the government announced it will consult on broadening the proposed amendments to the corporate residency test to include trusts and corporate limited partnerships. The government has indicated it will seek industry’s views as part of the consultation on the original corporate residency amendment.

    Legislation to implement these government announcements remains unenacted.

    Subject to any future legislative amendments, TR 2018/5 and PCG 2018/9 provide our existing view on the central management and control test of corporate residency.

    A transitional approach has been in place since 15 March 2017, as outlined in PCG 2018/9. This approach will be further extended as outlined in paragraph 104AA of PCG 2018/9, in light of the announced but unenacted legislative amendments and the continuing impacts of COVID-19 on overseas travel. The transitional period for foreign-incorporated companies will continue until the earlier of:

    • 30 June 2022 for a taxpayer with an income year ending 30 June, 
    • 31 December 2021 for an early balancer taxpayer with an income year ending 31 December, or
    • the date on which amendments to the corporate residency test receive royal assent.

    Further guidance will be provided once the legislative amendments are enacted.

    See also:

    Last modified: 07 Jul 2021QC 45541