Edited version of private advice

Authorisation Number: 1051806518811

Date of advice: 23 February 2021

Ruling

Subject: Consolidation - prescribed dual residency

Question

Was ACo a "prescribed dual resident" of Australia for income tax purposes under subsection 6(1) of the Income Tax Assessment Act 1936 for the purposes of joining a consolidated group on DD/MM/YYYY, and since that time?

Answer

No

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ending 30 June 20XX

The scheme commences on:

15 January 20XX

Relevant facts and circumstances

ACo is a company incorporated in YCountry. ACo was registered with the Australian Securities and Investment Commission (ASIC) as a foreign company.

Prior to DD/MM/YYYY, 100% of ACo's issued shares were owned by X.

X was born in another country and has been living in Australia since 20XX as a 'temporary resident'. Later, X was granted permanent residency in Australia.

Changes to ACo ownership and management

After X was granted permanent residency in Australia, X took the following steps to bring the control of ACo (the main holding company) to Australia:

•         X became a director of ACo,

•         X incorporated an Australian company, BCo, to take on the role as the principal holding company, and

•         on DD/MM/YYYY X sold all the shares in ACo to BCo.

X holds 100% of BCo's issued shares and is one of two directors. The other director of BCo was originally K, however, K resigned due to ill health and was replaced by N after DD/MM/YYYY. Both K and N are Australian residents.

X also took steps to have four foreign directors resign as soon as practicable. These directors had resigned by 13 June 20XX. At this time, the directors of ACo were:

•         X,

•         K, and

•         M.

On 23 November 20XX, K resigned as a director of ACo due to ill health and was replaced by N.

M is a resident of YCountry and has been a director of ACo since 23 September 20XX. M is an accountant.

ACo's constitution empowers the directors to undertake the strategic decision making such as:

•         The setting investment and operational policy;

•         Appointing company officers and agents and granting them the power to act on behalf of ACo as well as overseeing and controlling such appointees; and

•         Matters of finance, for example, determining how profits are to be used, when to declare dividends, borrow money and mortgage property.

Since the foreign directors resigned, all directors' meetings have been held virtually, by phone or Zoom with X and K in Australia at those times and M in YCountry.

Business and investment activities

ACo holds shares in subsidiary companies based in YCountry, and other foreign countries.

Due to X's long-term intention to reside in Australia he is intending to streamline his corporate group by winding-up or liquidating a number of the intermediate holding companies (including ACo) such that BCo holds shares directly in the active subsidiary entities.

Relevant legislative provisions

Income Tax Assessment Act 1936 subsection 6(1)

Income Tax Assessment Act 1997 subsection 703-15(2)

Reasons for decision

Summary

Based on the facts, it is considered that ACo was not a 'prescribed dual resident' at the Relevant Times,as it did not satisfy the requirements in subparagraphs (b)(ii) and (iii) of the definition of that term in subsection 6(1) of the Income Tax Assessment Act 1936(ITAA 1936) at the Relevant Times.

Detailed reasoning

Subsection 6(1) of the ITAA 1936 defines 'prescribed dual resident' to mean a company that satisfies either of the following conditions:

(a)  The first condition is that:

                    (i)        the company is a resident of Australia within the meaning of subsection 6(1); and

                   (ii)        there is an agreement (within the meaning of the International Tax Agreements Act 1953) in force in respect of a foreign country; and

                  (iii)        the agreement contains a provision that is expressed to apply where, apart from the provision, the company would, for the purposes of the agreement, be both a resident of Australia and a resident of the foreign country; and

                  (iv)        that provision has the effect that the company is, for the purposes of the agreement, a resident solely of the foreign country.

(b)  The alternative condition is that the company:

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

                   (ii)        it is also a resident of another country; and

                  (iii)        its central management and control is in another country.

The first condition in paragraph (a) of the definition of 'prescribed dual resident' does not apply to ACo as Australia and YCountry do not have an agreement (within the meaning of the International Tax Agreements Act 1953).

The alternative condition - a resident of Australia - the central management and control test

Paragraph (b) of the definition of "resident of Australia" in subsection 6(1) of the ITAA 1936 sets out that a company that is not incorporated in Australia is a resident of Australia if it carries on business in Australia, and it has either:

•         its central management and control in Australia (known as the central management and control test), or

•         its voting power controlled by shareholders who are residents of Australia (the voting power test).

Taxation Ruling TR 2018/5 Income tax: central management and control test of residency (TR 2018/5) sets out the Commissioner's view on how to apply the central management and control test of company residency.

Within the meaning of the central management and control test, if a company that is not incorporated in Australia has its central management and control in Australia it will carry on business in Australia (paragraphs 7 of TR 2018/5).

What is a company's central management and control?

'Central management and control' refers to the control and direction of a company's operations. Paragraph 16 of TR 2018/15 provides examples of acts of central management and control.

Matters of company administration (such as maintaining the company's share register, accounts, and carrying out the minimum acts necessary to maintain a company's registration) are not acts of central management and controls (TR 2018/5, paragraph 17).

Who exercises the central management and control?

Normally, where the power to manage a company is given to its directors under its constitution and the company laws rules applicable to that company, the company's directors will control and direct its operations. (paragraph 20 of TR 2018/5).

However, identifying which person, or people, exercise a company's central management and control is a question of fact. It will not always be determined solely by identifying who has the legal power or authority to control and direct a company. The crucial question is who controls and directs a company's operations in reality (TR 2018/5 paragraph 19).

Where is the central management and control exercised?

Central management and control of a company may be exercised in more than one location. However, for the purpose of the central management and control test, a company's central management and control will only be considered to be exercised in a place if it is exercised in that place to a substantial degree, sufficient to conclude that the company is really carrying on business there (TR 2018/5, paragraph 31).

Paragraphs 35 to 37 of TR 2018/5 discuss relevant considerations for determining where central management and control of a company is exercised. No single factor alone will necessarily determine the issue. The relevance and weight to be given to each will depend on the facts and circumstances of the case and surrounding circumstances.

From the facts provided, it is considered more likely than not that, at the Relevant times, the central management and control of ACo was exercised in Australia. Consequently, for the purpose of the central management and control test, ACo carried on business in Australia.

As such, at the Relevant Times ACo was a "resident of Australia" for tax purposes under the definition provided in subsection 6(1) of the ITAA 1936, and subparagraph (b)(i) of the definition of 'prescribed dual resident in that subsection is satisfied.

The alternative condition - a resident of another country.

Subparagraph (b)(ii) of the definition of 'prescribed dual resident' in subsection 6(1) of the ITAA 1936, requires that the company is a resident of another country.

Based on the facts, it is considered more likely than not that, at the Relevant Times:

•         the "management and control" of ACo, for YCountry tax purposes, was exercised in Australia and not YCountry,

•         ACo was not a resident of YCountry, for the purpose of subparagraph (b)(ii) of the definition of 'prescribed dual resident in subsection 6(1) of the ITAA 1936

•         subparagraph (b)(ii) of the definition of 'prescribed dual resident in subsection 6(1) of the ITAA 1936 was not satisfied.

The alternative condition - central management and control exercised in another country.

Based on the ruling facts and the application of the Commissioner's view in TR 2018/5, it is considered more likely than not that, at the Relevant Times, ACo's central management and control was not exercised in another country at the Relevant Times, and subparagraph (b)(iii) of the definition of 'prescribed dual resident in subsection 6(1) of the ITAA 1936 was not satisfied at the Relevant Times.

It is considered that ACo was not a 'prescribed dual resident' for Australian tax purposes at the Relevant Times as, based on the ruling facts, it did not satisfy the requirements in subparagraphs (b)(ii) and (iii) of the definition of that term in subsection 6(1) of the ITAA 1936 at those times.

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