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:
If you operate your business as a sole trader or an ordinary partnership, your Australian income tax obligations are based on your individual residency. Refer to Work out your tax residency.
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
- voting power controlled by shareholders who are residents of Australia.
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.
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; and
- you have not recognised those employees as creating a permanent establishment in Australia or generating Australian source income for the purpose of the tax laws of another jurisdiction.
This approach is applicable until 31 December 2021 and will not be extended further.
From 1 January 2022, this approach does not 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 an addendum to Taxation Ruling TR 2002/5 which provides an example on the issue of temporal permanence in the context of COVID-19. This provides taxpayers with assurance that we will continue to consider the impacts of the COVID-19 global pandemic where relevant when determining whether a permanent establishment exists.
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.
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.
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.
In the 2020–21 Budget, the former government announced technical amendments to clarify the corporate residency test. Legislation to implement this announcement remains unenacted.
Announced measures that are not yet law will be subject to consideration by the government. In these circumstances, you need to self-assess based on the current law.
If you choose to anticipate new law in line with the announcement and it is not enacted, you may need to seek an amendment. For more information, see Administrative treatment of retrospective legislation.
Further guidance will be provided if the legislative amendments are enacted.Work out the residency status of your business entity to determine your Australian income tax obligations.