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Ruling
Subject: Residency of a company
Question 1
Is SubCo a non-resident of Australia for income tax purposes?
Answer
Yes
Relevant facts and circumstances
Background
SubCo is a company incorporated outside Australia. SubCo is a wholly owned subsidiary of HeadCo, a resident of Australia.
SubCo's operations solely relate to the business of natural resource activities. The assets of the company are an interest in a joint venture for the conduct of operations offshore. The day to day business of the company is the management of this interest. SubCo has no major operational activity in Australia.
Subco entered into a production sharing agreement (PSA) with the State company, the Operator, and other partners to the contract. The work done under the PSA includes resource exploration, and development of a resource extraction site.
Under the PSA, the Operator engages its employees and other third party contractors to carry out the work on behalf of itself, SubCo and other participants in the joint venture.
Under the arrangement the State company has responsibility for negotiating the sale and lifting of all resources recovered. The resources are sold to third parties, and not to the members of HeadCo.
SubCo has two directors who are Australian residents. SubCo has no other employees.
Relevant legislative provisions
Income Tax Assessment Act 1936 section 6(1).
Reasons for decision
Summary
Is SubCo a non-resident of Australia for income tax purposes?
Yes
Detailed Reasoning
The definition of non-resident for income tax purposes is in subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936) as a person who is not a resident of Australia.
This definition points us to consider the definition of a resident contained in paragraph 6(1)(b) of the ITAA 1936. It relevantly provides:
· a company which is incorporated in Australia, or which, not being incorporated in Australia, 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.
The residency test in paragraph 6(1)(b) of the ITAA 1936 for a company not incorporated in Australia is a composite test which requires the company to carry on business in Australia as a prerequisite, and in addition, have either its central management and control (CM&C) in Australia or its voting power controlled by Australian resident shareholders.
Taxation ruling TR 2004/15 provides guidelines for determining whether a company, not incorporated in Australia, is a resident of Australia under the second statutory test in paragraph 6(1)(b) of the ITAA 1936.
TR 2004/15 at paragraphs 5 and 6 provides that a company will be a resident under the second statutory test if two separate requirements are met. The first is that the company is carrying on business in Australia, and the second is that the CM&C is located in Australia. If no business is carried on in Australia, the company cannot meet the requirements of the second statutory test. It states:
5. For a company to be a resident under the second statutory test two separate requirements must be met. The first is that the company must carry on business in Australia, and the second is that the company's central management and control (CM&C) must be located in Australia.
6. If no business is carried on in Australia, the company cannot meet the requirements of the second statutory test and, in these circumstances, it is not a resident of Australia under the second statutory test. In these situations there is no need to determine the location of the company's CM&C, separate from its consideration of whether the company carries on business in Australia. If the company carries on business in Australia it also has to have its CM&C in Australia to meet the second statutory test.
Paragraph 9 and 10 of the TR 2004/15 provide that the question of where business is carried on is one of fact. It requires a consideration of where the major operational activities of the company are carried on. Paragraph 9 and 11 state:
9. The question of where business is carried on is one of fact. It requires a consideration of where the activities of the company are carried on and is dependent on the facts and circumstances of a case. However, the Commissioner's approach to this factual determination is to draw a distinction between a company with operational activities (for example trading, service provision, manufacturing or natural resource activities) and a company which is more passive in its dealings. It is appreciated that there will be some overlap in any particular situation.
10. For the purposes of the second statutory test, a company that has major operational activities relative to the whole of its business carries on business wherever those activities take place and not necessarily where its CM&C is likely to be located. Operational activities include major trading, service provision, manufacturing or natural resource activities. For example, the place of business of a large industrial concern is wherever its offices, factories or mines are situated.
In this case SubCo is a company incorporated outside Australia. It is a wholly owned subsidiary of HeadCo, an Australian resident company.
The main asset held by SubCo is an interest in the PSA. The business of SubCo is the exploitation of commercial licenses for type activities and the extraction of resources from these activities. This is done through the work SubCo is obliged to do in the PSA. .
Having regard to the TR 2004/15, it is considered that the major operational activities of SubCo are natural resource activities outside Australia. Whilst the directors reside in Australia, the activities conducted in Australia are minor and do not constitute a business being carried on in Australia.
Therefore, it can be concluded that SubCo is a non resident of Australia for income tax purposes as it is not incorporated in Australia and does not carry on a business in Australia.
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