Edited version of private advice

Authorisation Number: 1051800088316

Date of advice: 8 March 2021

Ruling

Subject: Corporate residency

Question 1

Is the company a resident of Australia for income tax purposes under sections 6-5 and 6-10 of the Income Tax Assessment Act 1997?

Answer

Yes

Question 2

Is the income earned in Australia by the company assessable in Australia under sections 6-5 and 6-10 of the Income Tax Assessment Act 1997?

Answer

No

This ruling applies for the following periods:

Year ending 30 June 20xx

Year ending 30 June 20xx

Year ending 30 June 20xx

Year ending 30 June 20xx

The scheme commences on:

1 July 20xx

Relevant facts and circumstances

The company is incorporated as an Australian private company and is also a resident of another country for income tax purposes.

The company imports products from another country and sells those products in the Australian market.

The main shareholders in the company reside overseas. The shareholders are also the overseas based directors and are located in a head office which is based overseas.

There is an Australian shareholder who resides in Australia.

The activities of the company are 100% controlled by the overseas shareholders/directors.

All decisions regarding the management of the company are made overseas.

The Australian shareholder makes no decisions nor receives any correspondence in relation to the operation of the company.

The Australian based director/shareholder is a point of contact only.

The company has no physical presence in Australia, nor does it have any employees in Australia.

The company has a bank account in Australia which is controlled from overseas.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 6-10

Income Tax Assessment Act 1997 Section 995-1

Income Tax Assessment Act 1936 Section 6(1)

International Tax Agreements Act 1953 Section 5

Reasons for decision

Australian residency for taxation purposes

The terms resident and resident of Australia are defined in subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936). In terms of that definition, a company which has been incorporated in Australia is a resident of Australia for taxation purposes.

The company is a resident of Australia for taxation purposes because it is incorporated in Australia.

A company that is incorporated in Australia continues to be an Australian resident for taxation purposes even if the company is also a resident of another country for taxation purposes. The operation of the relevant Convention is considered below.

Assessability of income - dual Australian/other country resident

The assessable income of a company that is a resident of Australia for taxation purposes will generally include all the company's ordinary and statutory income from all sources, in or out of Australia.

The Convention operates to avoid the double taxation of income received by entities that are residents of both Australia and the other country for taxation purposes.

As the company has shareholders/directors that are based in another country we must consider if the company is a dual resident due to central management and control in that other country.

Considering central management and control

Article 4 of the Convention deals specifically with residency and provides that where a company is a resident of both Australia and the other country for taxation purposes, the company is deemed to be a resident only of the country in which its place of effective management is situated.

For the purposes of Article 4 of the Convention, the place of effective management of a company is the place where the key management and commercial decisions regarding the company's operations are made. According to the commentary on Article 4 contained in the Organisation for Economic Co-operation and Development (OECD) Model Tax Convention on Income and on Capital, the 'place of effective management' test is very similar to the test of 'central management and control'.

Taxation Ruling TR 2018/5 Income tax: central management and control test of residency (TR 2018/5) provides:

"What does central management and control mean?

10. Central management and control refers to the control and direction of a company's operations. It does not refer to a physical location in which the control and direction of a company is located, and may ultimately be exercised in more than on location.

11. The key element in the control and direction of a company's operations is that making of high-level decisions that set the company's general policies, and determine the direction of its operations and the type of transactions it will enter.

12. The control and direction of a company is different from the day-to-day conduct and management of its activities and operations. The day-to-day conduct and management of a company's activities and operations is not ordinarily an act of central management and control. Nor is the management of day-to-day activities under the authority and supervision of higher-level managers or controllers.

13. The day-to-day conduct and management of a company's operations might be an exercise of central management and control in circumstances where they are effectively the same. For example, for a small passive investment company with a very small number of investments, the decisions to make, hold and dispose of those investments, would be both the day-to-day management and the central management and control of the company.

...

Acts of central management and control

16. Exercising central management and control of a company can involve:

•         setting investment and operational policy including:

o   setting the policy on disposal of trading stock, and/or the use and development of capital assets

o   deciding to buy and sell significant assets of the company

•         appointing company officers and agents and granting them power to carry on the company's business (and the revocation of such appointments and powers)

•         overseeing and controlling those appointed to carry out the day-to-day business of the company, and

•         matters of finance, including determining how profits are used and the declaration of dividends."

The company is primarily owned by shareholders who reside in another country. It has no physical presence or employees in Australia. All decisions regarding the management of the company are made in the other country and the company's activities are 100% controlled by the overseas shareholders. The company's Australian bank account is also controlled from the other country.

Considering the above, it is apparent that the key management and commercial decisions regarding the operations of the company are being made in the other country and that this is where the place of effective management of the company is located. Accordingly, although a dual resident of Australia and the other country for taxation purposes, the provisions of Article 4 of the DTA apply so that the company is deemed to be a resident of the other country for the purposes of applying the convention.

Article 7(1) of the Convention provides that the profits of a business are only taxable in the country where the business is a resident for taxation purposes, unless the enterprise carries on business through a permanent establishment in the other country. Accordingly, unless it can be said that the company has a permanent establishment in Australia, its profits will only be taxable in the other country.

The term 'permanent establishment' is defined in Article 5 of the Convention as a fixed place of business through which the business of an enterprise is wholly or partly carried on. A place of management, a branch, an office, a factory and a workshop are all places especially included as places of permanent establishment.

As previously stated, the company has no physical presence in Australia and its place of effective management is situated in the other country. It cannot therefore be said that the company operates through any permanent establishment in Australia. Rather, it must be said that the company is operating in Australia from a permanent establishment in the other country.

Conclusion

Based on the facts in this ruling, the company is considered to only be a resident of the other country for the purposes of the Convention. As such, the sole taxing rights over the company rest with the other country because the company does not derive income through any permanent establishment in Australia.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).