Edited version of your written advice

Authorisation Number: 1013078350461

Date of advice: 2 September 2016

Ruling

Subject: Income Tax: 'Resident or resident of Australia' for the purpose of section 6(1) of the Income Tax Assessment Act 1936

Question 1

Was Company X a 'resident of Australia', as defined in section 6(1) of the Income Tax Assessment Act 1936 (Cth) (ITAA 1936), at any time from its incorporation in June 20XX until and June 20YY?

Answer

No, Company X was not a resident under section 6(1) of the ITAA on and from its incorporation in June 20XX to June 20YY, because it was not carrying on a business in Australia.

Question 2

Was Company X a 'prescribed dual resident' of Australia, as defined in section 6(1) of the ITAA 1936, at any time between June 20XX and June 20YY?

Answer

No, as Company X was not a resident of Australia (as above) it did not, during the period June 20XX until and June 20YY; satisfy the tests for a 'prescribed dual resident' of Australia, as set out in subsection 6(1) of the ITAA 1936.

This ruling applies for the following period:

June 20XX to June 20YY, inclusive (the Ruling Period)

The scheme commences on:

June 20XX

Relevant facts and circumstances

● Company X was incorporated in Country A in June 20XX.

● The sole shareholder in Company X during the Ruling Period was Parent Pty Ltd (Immediate Parent), a company incorporated in Australia, and a “resident” of Australia, as defined in section 6(1) of the ITAA 1936.

● Immediate Parent, being the sole shareholder of Company X, controls the voting power in relation to Company X.

● Immediate Parent was a wholly-owned subsidiary of Trading Group Holdings Pty Ltd (TGH), also a company incorporated in Australia, and a “resident of Australia”, as defined in section 6(1) of the ITAA 1936.

● The head office (the Australian Head Office) of TGH and its Australian subsidiaries was situated in Australia.

● The Company X board of directors typically met and undertook its business at the Australian Head Office.

● All of the directors of Company X and TGH were residents of Australia.

● Company X was incorporated with the intention of establishing a Country A-based trading business.

● The TGH board of directors had involvement in Company X's operations, consistent with its level of involvement in every part of the Trading Group business (domestic and international).

● The preparation of financial accounts of Company X, and compliance with various regulatory requirements, were undertaken in Country A.

● AusTrading Pty Ltd (AusTrading) was, during the Ruling Period, a wholly-owned subsidiary of TGH, and a company incorporated in Australia, and a “resident of Australia”, as defined in section 6(1) of the ITAA 1936.

● AusTrading controlled the operation of the Australian trading sites of the TGH Group.

● The locating, leasing and setup of the Country A Site from which Company X was to conduct trading was undertaken over the period June 20XX to June 20ZZ. All these setup activities were decided, planned, and implemented or controlled by certain AustTrading staff (the Country A Project Team). The Country A Project Team was based in the Australian Head Office, but team members were variously on site in Country A throughout that time.

● In early 20ZZ Company X commenced trading from the Country A Site.

● Company X employed Country A-based individuals on a full-time and part-time basis to work at the Country A Site, the highest position being the manager, and the majority being sales staff (broadly the same as for all Trading Group sites).

● Company X's Country A-based staff had very limited authority to undertake any decisions, primarily as to staff rostering, leave, and possibly acquisition and repair of Country A Site furniture, fittings and equipment.

● Various activities were carried out by AusTrading for all Australian Trading Sites, and for international stores in a new jurisdiction, such as for Company X.

● From the outset, the Country A Site did not achieve the required turnover. AusTrading and/or the TGH board of directors made all decisions regarding attempts to improve the sales of the Country A Site, in accordance with Trading Group policy for all new stores, and the Country A-based staff would implement those decisions in Country A.

● Stock was sold by AusTrading to Company X at the same rates as it was sold to the Australian stores.

● AusTrading determined that the rate of return on investment in Company X's trading business was uncommercial, and ultimately the board of directors of TGH made the decision that Company X must cease its trading business. Company X ceased trading in 20VV (on a date hereafter referred to as the Cessation Date).

● AusTrading then instructed a team of its employees (the Country A Liquidation Team) to undertake the necessary steps to wind up the Country A Site operations. Members of the Country A Liquidation Team went to Country A, in the process of the Country A Liquidation, to undertake activities required to close the Country A Site, under the direction and control of AusTrading staff

● The process of winding up the Country A Site operations occurred over a period of approximately 3 to 6 months following the Cessation Date, and included disposal of trading stock, furniture and fittings, and making Country A-based staff redundant.

● The TGH board members made various trips to Country A before, during, and after the Country A Site closed, including in relation to negotiation of the termination of the Country A Site lease.

● Company X does not currently engage, and has not since the completion of the winding up of the Country A Site operations, engaged in any income-producing activities.

Relevant legislative provisions

Income Tax Assessment Act 1997 subsection 995-1(1), 'Australian resident'

Income Tax Assessment Act 1936 subsection 6(1), 'resident or resident of Australia'

Income Tax Assessment Act 1936 subsection 6(1), 'prescribed dual resident'

Reasons for decision

Question 1

Summary

Company X was not a resident of Australia for the purpose of section 6(1) of the Income Tax Assessment Act (ITAA 1936), because it was not carrying on a business in Australia.

Detailed reasoning

Subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997) ITAA 1997 provides that a person (which includes a company) is an 'Australian resident' if that person is a 'resident of Australia' for the purposes of subsection 6(1) of the ITAA 1936.

Paragraph (b) of the definition of 'resident or resident of Australia' in subsection 6(1) of the ITAA 1936 (the definition) provides that a company is a resident of Australia if it is:

● incorporated in Australia; or

● if it is 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.

Company X is a company incorporated in Country A, therefore the first statutory test is not satisfied.

To be considered a resident, Company X must therefore pass the second statutory test, the first requirement of which is that it carries on business in Australia

Taxation Ruling TR 2004/15 Income tax: residence of companies not incorporated in Australia - carrying on business in Australia and central management and control (TR 2004/15) provides the Commissioner's views on whether a company, not incorporated in Australia, is a resident of Australia under the second statutory test in paragraph (b) of the definition.

TR 2004/15 states the following:

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.

…

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. The Commissioner's approach to this factual determination is to draw a distinction between a company with operational activities which include trading, service provision, manufacturing or mining activities and a company which is more passive in its dealings.

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 mining activities. For example, the place of business of a large industrial concern is wherever its offices, factories or mines are situated.

11. On the other hand, 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 its CM&C is located.

Company X carried out retail trading from the Country A Site located on the island of Country A in the Relevant Country.

Company X leased the premises for the Country A Site, employed staff for that site, sold stock to customers from that site, and did not carry out any trading activities at any other location.

Company X also had its accounts prepared and audited, and other regulatory compliance activities carried out on its behalf in Country A.

In relation to the winding up of the retail trading business of Company X, these activities are to be characterised as continuation of the business. In Case 127 (1954) 4 CTBR(NS) expenditure was connected with a business which had been previously carried on and was still being carried on for the purpose of finalising its debts or winding up its affairs. And in Queensland Meat Export Co. Ltd v. Federal Commissioner of Taxation (1939) 5 ATD 175 a company is to be allowed a reasonable time to effect a sale of assets of a business following cessation of trade.

Up until the completion of the winding up of the trading activities of Company X, the tangible assets being sold/disposed of were located in Country A, and the Country A Site lease was an interest in real property in Country A. In these circumstances, there is no place of business of Company X in Australia in the sense that there is no place where business is done: Company X did not have major contracts or customers in Australia.

After completion of the winding up of trading activities, Company X ceased all activity, i.e. it was dormant.

The majority of the decision-making as to the activities of Company X was significantly influenced by the TGH board of directors and/or AusTrading. However, the Commissioner is of the view that having significant influence over the operations of an entity is not the carrying on of the business of that entity. Further, decisions as to the closure of the Country A Site, and exit from the lease, are considered to strategic decisions, and not in relation to the day-to-day operations of the business of Company X.

AusTrading undertook substantial activities in relation to Company X throughout the Ruling Period. However, the Commissioner is of the view that these activities were not the activities of Company X, but were part of the activities AusTrading normally undertakes on its own behalf in respect of some international stores and all of its domestic stores (and likely as a service to Company X and others.) Similarly, any additional activities AusTrading undertook in relation to improving the profitability of Company X were undertaken by AusTrading on its own behalf. That AusTrading undertook activities in Australia on its own behalf does not affect the location of the carrying on of the business of Company X.

As there were no major activities being carried on by Company Xin Australia during the Ruling Period, Company X did not carry on a business in Australia.

Accordingly, there is no need to consider any further application of the subsection 6(1) definition of 'resident', and Company X is not a resident of Australia under the second statutory test.

Question 2

Summary

Company X was not a 'prescribed dual resident' for the purpose of section 6(1) of the ITAA 1936.

As above, Company X was not a 'resident' of Australia.

Accordingly, and without concluding as to whether Company X has its central management and control in Australia, it cannot be a resident of Australia solely under the first requirement of subsection 6(1) of the ITAA 1936 for a company to be a 'prescribed dual resident', because it is not a 'resident' of Australia.

Detailed reasoning

Subsection 6(1) of the ITAA 1936 defines a “prescribed dual resident” to include a company that:

● is a resident of Australia within the meaning of subsection 6(1) of the ITAA 1936 for no other reason than that it carries on business in Australia and has its central management and control in Australia; and

● is also a resident of another country; and

● has its central management and control in another country.

Thus, the first requirement for a company that is not incorporated in Australia to be a 'prescribed dual resident' is that the company is a 'resident of Australia' within the meaning of subsection 6(1) of the ITAA 1936 for no other reason than that it carries on business in Australia and has its central management and control in Australia.

For the reasons set out above in our answer to Question 1, Company X is not a 'resident of Australia' within the meaning of subsection 6(11).

Accordingly, and without concluding as to whether Company X has its central management and control in Australia, it cannot be a resident of Australia under the first test for a company to be a 'prescribed dual resident', because it is not a 'resident of Australia', as defined in section 6(1) of the ITAA 1997.

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