Edited version of your written advice

Authorisation Number: 1012745718414

Ruling

Subject: Residency

Question 1

Will Company A Ltd be treated as a resident of Australia under section 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936) for the year ended 30 June 2015 (commencing 1 July 2014)?

Answer

Yes. Company A Ltd will be treated as a resident of Australia under section 6(1) of the ITAA 1936 for the year ended 30 June 2015 (commencing 1 July 2014).

Question 2

Will Company A Ltd be treated as an Australian resident, and not as a X resident, under Article 3(1) of the Agreement between the Government of the Commonwealth of Australia and the Government of the Republic of X for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income [1969] ATS 14 (the X agreement)?

Answer

Yes. Company A Ltd will be treated as an Australian resident, and not as an X resident, under Article 3(1) of the X agreement.

This ruling applies for the following period:

1 July 2014 to 30 June 2015

The scheme commences on:

1 July 2014

Relevant facts and circumstances

1. In 2010, Company A Pte Ltd was incorporated in X as a private company (later renamed Company A Ltd).

2. In 2012, Company A Pte Ltd was converted into a public company and changed its name to Company A Limited in X

3. Subsequently in 2012, Company A Ltd listed on the X Stock Exchange.

4. Company A Ltd is a holding company with its investments being passive interests in a number of Australian resident operating entities with activities described as follows:

5. Each of the above subsidiaries was in existence at the time Company A Pte Ltd was incorporated.

6. The directors of Company A Ltd have agreed to hold the majority of board meetings in Australia as at 1 July 2014, on a go-forward basis, for the following reasons:

• Whilst listed in X (as this was identified as the best location to raise capital), the Company A Group currently has no material client operations in X.

• The main day-to-day operations of the Company A Group entities are currently in Australia.

• The main strategic members of the operating group reside in Australia (i.e. CEO, COO, Executive Chairman of the Board, CFO, Chief Legal Counsel, Company Secretary).

• The travel costs (and administrative costs) of holding the majority of board meetings in Australia are cheaper (there being only a minority of directors resident in X).

7. Since 1 July 2004, Company A Ltd has held an annual general meeting (AGM) in X, a Board meeting in Australia, and will hold one more Board meeting in Australia before 1 July 2015. Thereafter, the majority of Board meetings held annually will be held in Australia, with strategy meetings following the Board meetings. The AGM must be held in X in accordance with the listing rules of the X Stock Exchange.

Relevant legislative provisions

Income Tax Assessment Act 1936 Subsection 6(1AA)

Income Tax Assessment Act 1936 Subsection 6(1)

Income Tax Assessment Act 1997 Subsection 995-1(1)

International Tax Agreements Act 1953 Subsection 3(1)

International Tax Agreements Act 1953 Subsection 3AAA(1)

International Tax Agreements Act 1953 Section 4

International Tax Agreements Act 1953 Section 7

Agreement between the Government of the Commonwealth of Australia and the Government of the Republic of X for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income [1969] ATS 14 Article 1

Agreement between the Government of the Commonwealth of Australia and the Government of the Republic of X for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income [1969] ATS 14 Article 2(1)(e)

Agreement between the Government of the Commonwealth of Australia and the Government of the Republic of X for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income [1969] ATS 14 Article 2(1)(l)

Agreement between the Government of the Commonwealth of Australia and the Government of the Republic of X for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income [1969] ATS 14 Article 3(1)

Agreement between the Government of the Commonwealth of Australia and the Government of the Republic of X for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income [1969] ATS 14 Article 3(3)

Protocol amending the Agreement between the Government of the Commonwealth of Australia and the Government of the Republic of X for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income [1990] ATS 3 Article 2.

Reasons for decision

Question 1

Summary

Company A Ltd is a resident of Australia during the period 1 July 2014 to 30 June 2015 because, although not incorporated in Australia, it carries on business in Australia and has its central management and control (CM&C) in Australia during that period. It therefore meets the second statutory test in paragraph (b) of the definition of 'resident' or 'resident of Australia' in subsection 6(1) of the ITAA 1936.

Detailed reasoning

Subsection 6(1) of the ITAA 1936 defines, for the purposes of that Act, the term 'resident' or 'resident of Australia'. A company is a resident of Australia if it is:

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.

(Note that subsection 6(1AA) of the ITAA 1936 prevents this definition (and other expressions given meaning by provisions of that Act) having effect for the purposes of the Income Tax Assessment Act 1997 (ITAA 1997). However, subsection 995-1(1) of the ITAA 1997 defines 'Australian resident' for the purposes of 'this Act' to mean a person who is a resident of Australia for the purposes of the ITAA 1936.)

The present case deals with a company that is not incorporated in Australia. Therefore, to establish that the company is a resident of Australia, it is necessary and sufficient to establish that the company:

(a) carries on business in Australia; and

(b) either:

(i) has its CM&C in Australia; or

(ii) its voting power is controlled by shareholders who are residents of Australia.

The Commissioner has produced guidance for determining the residency status of companies not incorporated in Australia in Taxation Ruling TR 2004/15 Income tax: residence of companies not incorporated in Australia - carrying on business in Australia and central management and control, hereinafter referred to as 'the Ruling'.

The question of where a company carries on its business is one of fact. As paragraph 9 of the Ruling states:

[That question] 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 … and a company which is more passive in its dealings.

Similarly, the location of a company's CM&C is a question of fact to be determined in light of all the relevant facts and circumstances: paragraph 15 of the Ruling. A company does not necessarily carry on business and have its CM&C in the same place: paragraph 8 of the Ruling. However, as is stated at paragraph 7 of the Ruling:

…there are situations where the nature of the business or the level of control over the business requires the exercise of CM&C at the place where the business is carried on. Where a company's business is management of its investment assets and it undertakes only minor operational activities, the factors determining where a company is carrying on a business may be similar to those determining where it is exercising CM&C. In these situations the location of CM&C is indicative of where the company carries on business and vice versa.

Further, the Ruling states at paragraph 11:

… a company whose income earning outcomes are largely dependent on the investment decisions made in respect of its assets carries on its business where these decisions are made. This is often where CM&C is located.

The Commissioner accepts, as a matter of practical compliance, that for those companies whose CM&C is exercised by a board of directors at board meetings, the CM&C is in Australia if the majority of the board meetings are held in Australia: paragraph 15 of the Ruling. For these purposes, a board meeting is treated as being held in Australia where the majority of directors of the company meet in Australia: paragraph 16 of the Ruling.

Applying the above considerations to the facts (in particular, facts 4, 6 and 7), the Commissioner is of the view that during the period 1 July 2014 to 30 June 2015 inclusive, Company A Ltd carries on its business in Australia and has its CM&C in Australia.

Accordingly, for that period, Company A Ltd is a resident of Australia according to the meaning of that term in subsection 6(1) of the ITAA 1936 (and consequently is an Australian resident for the purposes of 'this Act' as defined in subsection 995-1(1) of the ITAA 1997).

Question 2

Summary

Company A Ltd is an Australian resident, and is not a X resident, under Article 3(1) of the X agreement. Article 3(3) of that agreement, which would serve as a tie-breaker if Company A Ltd was both an Australian resident and a X resident under Article 3(1) of the agreement, does not apply.

Detailed reasoning

Section 4 of the International Tax Agreements Act 1953 (Agreements Act) states:

(1) Subject to subsection (2), the Assessment Act is incorporated and shall be read as one with this Act.

(2) The provisions of this Act have effect notwithstanding anything inconsistent with those provisions contained in the Assessment Act (other than Part IVA of the Income Tax Assessment Act 1936) or in an Act imposing Australian tax.

The term 'Assessment Act' is defined in subsection 3(1) of the Agreements Act to mean the ITAA 1936 or the ITAA 1997. The term 'Australian tax' is defined in that subsection to mean income tax imposed as such by an Act, or fringe benefit tax imposed by the Fringe Benefits Tax Act 1986.

Section 7 of the Agreements Act states:

Subject to this Act, the provisions of the X agreement, so far as those provisions affect Australian tax, have the force of law:

(a) in relation to withholding tax - in respect of dividends or interest derived on or after 1 July 1969, and in relation to which the agreement remains effective; and

(b) in relation to tax other than withholding tax - in respect of income of the year of income that commences on 1 July 1969, or of a subsequent year of income in relation to which the agreement remains effective.

Subsection 3AAA(1) of the Agreements Act defines (amongst others) the following terms:

X agreement means the Agreement between the Government of the Commonwealth of Australia and the Government of the Republic of X for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income, done at Canberra on 11 February 1969.

X protocol (No. 1) means the protocol, done at Canberra on 16 October 1989, amending the X agreement.

X protocol (No. 2) means the protocol, done at Canberra on 8 September 2009, amending the X agreement.

The X agreement is set out in Australian Treaty Series 1969 No. 14 ([1969] ATS 14). Article 3 of that agreement establishes whether an entity is an Australian resident or a X resident for the purposes of the agreement. That Article has not been amended by either the X protocol (No. 1) ([1990] ATS 3) or the X protocol (No. 2) ([2010] ATS 26).

The relevant paragraphs of Article 3 of the X agreement are paragraphs 1 and 3, which are as follows:

1. For the purposes of this Agreement:

(a) the term "Australian company" means any company which being a resident of Australia:

(i) is incorporated in Australia and has its centre of administrative or practical management in Australia whether or not any person outside Australia exercises or is capable of exercising any overriding control or direction of the company or of its policy or affairs in any way whatsoever; or

(ii) is managed and controlled in Australia;

(b) the term "X company" means any company which is managed and controlled in X and which is not an Australian company;

(c) the term "X resident" means any X company and any person (other than a company) who is resident in X; and

(d) the term "Australian resident" means any Australian company and any other person (other than a X company) who is a resident of Australia.

3. Where by reason of the provisions of paragraph 1 of this Article a person other than an individual is both a X resident and an Australian resident-

(a) it shall be treated solely as a X resident if it is managed and controlled in X;

(b) it shall be treated solely as an Australian resident if it is managed and controlled in Australia.

Article 2(1)(l) of the X agreement defines, for the purposes of that agreement, the term 'resident in X' to have the meaning which it has under the laws of X relating to X tax; and the term 'resident of Australia' to have the meaning which it has under the laws of the Commonwealth relating to Australian tax.

Article 2(1)(e) of the X agreement defines the terms 'Australian tax' and X tax' to mean tax imposed by the Commonwealth and tax imposed by X respectively, being tax to which that agreement applies by virtue of Article 1 of that agreement.

Article 1 of the X agreement, as amended by Article 2 of the X protocol (No. 1), states:

1. The existing taxes to which this Agreement applies are:

(a) in Australia:

the income tax, and the petroleum resource rent tax in respect of offshore projects, imposed under the federal law of the Commonwealth of Australia;

(b) in X:

the income tax.

2. This Agreement applies also to any identical or substantially similar taxes which are imposed subsequent to the date of signature of this Agreement by X or the Commonwealth in addition to, or in place of, the existing taxes to which this Agreement applies.

Applying the above to the facts:

Company A Ltd, as determined in relation to question 1 above, is a resident of Australia within the meaning of that term as used in the ITAA 1936, that Act being a law of the Commonwealth relating to Australian tax (in particular, the income tax, to which the X agreement applies). Also, for the reasons given in question 1 related to CM&C, Company A Ltd is managed and controlled in Australia. Therefore Company A Ltd is an Australian company under Article 3(1)(a) of the X agreement.

Therefore Company A Ltd is an Australian resident under Article 3(1)(d) of the X agreement.

Company A Ltd is not a X company under Article 3(1)(b) of the X agreement because it is managed and controlled in Australia and is an Australian company under Article 3(1)(a) of that agreement.

Therefore Company A Ltd is not a X resident under Article 3(1)(c) of the X agreement.

That is, Company A Ltd is an Australian resident, and is not a X resident, for the purposes of the X agreement, as determined under Article 3(1) of that agreement. In these circumstances, Article 3(3) of that agreement does not apply.

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