Edited version of your private ruling

Authorisation Number: 1052053253191

Date of advice: 1 November 2022

Ruling

Subject: Corporate tax residency

Question 1

Will ABC Pty Ltd be an Australian tax resident throughout the ruling period?

Answer

Yes

Question 2

Will ABC Pty Ltd be a prescribed dual resident throughout the ruling period?

Answer

No

This ruling applies for the following periods:

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

1.            ABC Pty Ltd was incorporated overseas in 2000 with the intention to act as an investment holding company. This was done on advice provided by tax advisors when Mr ABC & Ms XYZ were solely overseas tax residents.

2.            ABC Pty Ltd is a wholly owned subsidiary of DEF Pty Ltd. DEF Pty Ltd is an Australian resident company.

3.            The registered office of ABC Pty Ltd is and at all times has been overseas.

4.            The activities of ABC Pty Ltd are currently limited to making decisions such as approval of annual financial statements, determining whether to pay a dividend and approval of the annual overseas tax return.

5.            These activities are conducted in Australia by Mr ABC, the sole director of ABC Pty Ltd.

6.            ABC Pty Ltd currently has an 84.42% interest in Company 1 (Company 1). Company 1 is an overseas company.

7.            ABC Pty Ltd provided initial funding to establish Company 1 by subscribing for preference shares. In 2007, those preference shares were converted to deferred shares and ABC Pty Ltd received 64% of Company 1's ordinary shares.

8.            Company 1 is an active business with an office overseas. Company 1 is engaged in business activities overseas.

9.            As a result of market factors, Company 1 reduced the scale of its operations.

10.          ABC Pty Ltd's holding in Company 1 was initially funded by cash injected by a trust Mr ABC was a settlor of. The original ownership interest ABC Pty Ltd held was 73% and has been as low as 64% in 2007.

11.          The only other asset that ABC Pty Ltd has is cash at bank.

12.          ABC Pty Ltd has received dividends from Company 1 in:

•                     2013

•                     2015

•                     2016

•                     2018

•                     2020

•                     2022

13.          ABC Pty Ltd has not received dividends from other sources.

14.          ABC Pty Ltd has previously held interests in the following companies:

•                     Company 2 - located overseas

•                     Company 3 - located overseas

•                     Company 4 - located overseas

•                     Company 5 - located overseas

•                     Company 6 - located overseas

•                     Company 7 - located overseas

15.          ABC Pty Ltd disposed of its interest in Company 2 in 2015 due to it not developing a commercial business case. ABC Pty Ltd's interest in the remaining companies ended between 2008 and 2011 when the companies were wound up.

16.          ABC Pty Ltd has not disposed of any assets since April 2015.

Loans

17.          ABC Pty Ltd has provided loans to Company 1 between 2006 and 2012 for the purpose of funding its business operations. The first loan was interest bearing.

18.          ABC Pty Ltd provided a loan to Company 2 whose balance peaked in 2011. The loan was interest bearing however interest was waived when ABC Pty Ltd made an assessment that the debtor's business was not going to be successful. The loan was fully repaid in 2015 when ABC Pty Ltd sold its interest in the company.

19.          ABC Pty Ltd provided non-interest bearing loans to Company 3 & Company 4 which were written off when these companies were wound up after deciding to leave their respective markets.

20.          ABC Pty Ltd provided non-interest bearing loans to Company 6 & Company 7 which were written off when the companies were wound up.

Assumptions

Throughout the Ruling Period, the relevant facts and circumstances will continue to be correct.

Relevant legislative provisions

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)

Reasons for decision

Question 1

21.          Subsection 6(1) of the Income Tax Assessment Act 1936 provides:

"resident or resident of Australia" means:

...

(b) 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.

22.          Because ABC Pty Ltd is not incorporated in Australia, in order to be a resident of Australia it must carry on a business in Australia.

23.          Subsection 995-1(1) of the Income Tax Assessment Act 1997 provides:

"business" includes any profession, trade, employment, vocation or calling, but does not include occupation as an employee.

24.          Taxation Ruling TR 2019/1 Income tax: when does a company carry on a business? (TR 2019/1) discusses the presumption that a company carries on a business providing at paragraph 19:

In Westleigh and American Leaf, it was observed that where a company aims to make, and has a prospect of profit, it is presumed that the company intends to, and does in fact, carry on a business. In American Leaf, Diplock LJ observed that this means any gainful use to which a company puts its assets will, on its face, amount to the carrying on of a business. However, this presumption can be rebutted if it can be shown that, on the facts, the company had no aim or prospect of making a profit.

25.          TR 2019/1 summarises the key indicia, per Bowen CJ and Franki J in Ferguson v Federal Commissioner of Taxation [1979] FCA 29, to be taken into account when considering whether an entity is carrying on a business at paragraph 21:

•         whether the person intends to carry on a business

•         the nature of the activities, particularly whether they have a profit-making purpose

•         whether the activities are

­   repeated and regular

­   organised in a business-like manner, including the keeping of books, records and the use of a system

•         the size and scale of a company's activities including the amount of capital employed in them, and

•         whether the activity is better described as a hobby, or recreation.

26.          It provides a number of examples of situations in which companies have been held to have been carrying on a business at paragraph 58:

•         is a holding company with an expectation of receiving dividends from its subsidiaries, where it

­   acquired the shares in its subsidiaries by way of a gift

­   made interest bearing loans to those subsidiaries and provided management services to the group

­   leased plant and equipment to its subsidiaries free of charge, or

­   made interest-free loans to those subsidiaries

•         holds and rents out single or multiple real properties

•         invested in real property, intended to be held indefinitely for the purpose of deriving rent, and subsequently sold for profit, and

•         receives interest and royalties.

Intention to carry on a business

27.          TR 2019/1 provides at paragraphs 23 to 24:

23. Limited (including proprietary limited) and no liability (NL) companies are typically formed for the purpose of carrying on a business and are unlike individuals or trusts who may have multiple purposes for undertaking a gainful activity other than to make a profit or carry on a business.

24. As already noted in paragraph 19 of this Ruling, in Westleigh and American Leaf, it was observed that where a company aims to make and has a prospect of profit, it is presumed that it intends to, and does in fact, carry on a business.

28.          There is nothing to suggest that the activities that ABC Pty Ltd has engaged in since incorporation, were not done in order to pursue an aim of making a profit. When ABC Pty Ltd determined that Company 2 had not established a commercially viable business case it sold its interest in it. While the driver behind the decision was a perceived unlikelihood of future profit, it was nonetheless a profit driven decision. Similarly, interest being payable on loans to Company 2 and Company 1 is contrary to a differing aim such as philanthropy.

29.          ABC Pty Ltd primary source of income is dividends paid to it from Company 1. There is evidently the presence of realised profits from ABC Pty Ltd attributed to activities it has conducted. Despite the actual profit realised by ABC Pty Ltd, it is necessary to consider if ABC Pty Ltd had a prospect of making a profit.

30.          The companies that ABC Pty Ltd held interests in were particular industries. These companies are or were in notable markets, however ABC Pty Ltd obtained its interest in them when they were early in their commercialisation cycles.

31.          There is no evidence to suggest that investing in these companies did not have a reasonable prospect of profit. Therefore, this factor suggests that ABC Pty Ltd is carrying on a business.

Nature of the activities

32.          TR 2019/1 provides at paragraph 26:

...a company's profitable activities are unlikely to be in the nature of a hobby or be undertaken to meet a domestic need. Thus, any profit-making activities a company conducts are unlikely to have a domestic or personal character, and are likely to be characterised as being commercial in nature.

33.          It further provides at paragraph 29:

...the profit-making activities of a company, and those activities it carries on with a profit-making purpose, normally have a commercial character unlike those of an individual or trust. These differences have led the courts to observe that profit-making activities, such as receiving rent from property, do not give rise to a presumption that an individual is carrying on a business, whereas it would if those same activities are undertaken by a company.

34.          The way that ABC Pty Ltd has carried on its business, including providing loans to the companies it invests in and providing initial funds to establish Company 1 demonstrates that ABC Pty Ltd has carried on its activities with a profit-making purpose. Those activities have returned a profit in the form of dividends.

35.          In the absence of any evidence that suggests that ABC Pty Ltd has carried on its activities for another purpose, they are considered to have a commercial nature and therefore this suggests the carrying on of a business.

Repetition and regularity

36.          TR 2019/1 provides at paragraphs 38 to 40:

38. The degree of repetition or regularity of the company's activities is relevant to determining whether it carries on a business. While there is a need for activity, this may be satisfied even if a company's activity is relatively limited, irregular or has periods of inactivity.

39. Companies have been held to carry on a business where its ongoing activities are relatively limited and its key activities consist of:

•         letting the company's premises for rent on an ongoing basis,

•         leasing plant to its subsidiaries which themselves carried on a business for no fee,

•         providing secretarial, budgeting and financial services to its subsidiaries that carry on active businesses, or

holding shares in subsidiary companies which are engaged in trading.

40. The activities of a company that holds assets which generate ongoing returns may be limited to its ongoing management, ensuring it meets ASIC regulatory requirements, decisions (whether express or implicit) to continue holding a relatively static investment portfolio, the receipt and distribution (or retention) of income and other matters of an administrative nature. While relatively limited, this level of activity is sufficient to amount to the carrying on of a business.

37.          ABC Pty Ltd's activities are currently limited to making decisions such as approval of annual financial statements, determining whether to pay a dividend and approval of the annual overseas tax return. While they are limited in nature, they are necessary for its ongoing management.

38.          Therefore, the repetition and regularity with which ABC Pty Ltd conducts its activities suggests the carrying on of a business.

Organisation of activities

39.          TR 2019/1 provides at paragraph 42:

Whether activities are carried out in a systematic and organised way, or carried on in a business-like manner, is relevant to determining whether they amount to carrying on a business. This may involve, for instance, keeping detailed records of income, preparing formal business plans or budgets, or seeking professional advice.

40.          It further provides at paragraph 45:

A company's formal structure and the statutorily imposed requirements regarding how they must be managed and run are a point of difference to the activities of an individual. As a consequence, the gainful activities of a company must, as a matter of law, and typically are, carried on in a business-like manner. They normally support a conclusion that the activities of a company undertaken for the purpose of making a profit amount to carrying on a business.

41.          The fact that ABC Pty Ltd's investments have been focused on a limited number of companies in a limited number of industries, its engagement of professionals such as tax professionals to assist in its affairs and the lack of facts supporting the contrary, suggests that it is carrying on a business.

Size and Scale

42.          TR 2019/1 provides at paragraph 46:

46. The size and scale of the activities in question are relevant, but not necessarily conclusive, of whether they amount to the carrying on of a business. Where the company carries out activities which have a purpose and prospect of making a profit, the amount of capital it has invested in the activities and the scale of its activities, even if limited and small, will carry less weight than it would in the case of an individual or trust.

43.          The scale of ABC Pty Ltd's activities are limited in their intensity, however they do involve, in years where dividends are paid, receiving and paying significantly large dividends. These management decisions are conducted on a consistent year on year basis.

44.          It is considered that this factor suggests that ABC Pty Ltd is carrying on a business.

Ongoing Assessment

45.          TR 2019/1 provides at paragraph 53:

Whether a company carries on a business must be assessed based on its activity and status at that time.

46.          It further provides at paragraph 55:

A company that becomes dormant and where there is no further activity or no intention to resume its former or any other business, may cease to carry on a business. This is not likely to be the case where its activities are simply limited in nature (see paragraph 39 of this Ruling).

47.          While the activities that ABC Pty Ltd conducts have changed in nature, they are still done in order to further the aim of receiving dividend income from its investments.

48.          Therefore, it is considered that the change in scale and type of activities does not amount to ABC Pty Ltd becoming 'dormant', and instead represents a continuation of ABC Pty Ltd's investment business.

Conclusion on carrying on a business

49.          ABC Pty Ltd is carrying on a business.

Central management and control

50.          Taxation Ruling TR 2018/5 Income tax: central management and control test of residency (TR 2018/5) provides at paragraph 6 to 9:

6. To be resident under the central management and control test of residency, a company must carry on business in Australia.

7. If a company carries on business and has its central management and control in Australia, it will carry on business in Australia within the meaning of the central management and control test of residency.

8. It is not necessary for any part of the actual trading or investment operations of the business of the company to take place in Australia. This is because the central management and control of a business is factually part of carrying on that business. A company carrying on business does so both where its trading and investment activities take place, and where the central management and control of those activities occurs.

9. Central management and control of a company is not necessarily exercised where the trading or investment activities of the company are carried on.

51.          For the reasons given in paragraphs 21 to 49 of this ruling, ABC Pty Ltd is carrying on a business.

52.          ABC Pty Ltd's activities are carried out solely by Mr ABC. These activities are solely carried out in Australia.

53.          Therefore, it is considered that ABC Pty Ltd's central management and control takes place in Australia.

54.          Therefore, ABC Pty Ltd is carrying on a business in Australia.

Conclusion on Residency

55.          Throughout the ruling period, ABC Pty Ltd will be an Australian resident for tax purposes.

Question 2

56.          Subsection 6(1) of the ITAA 1936 provides:

"prescribed dual resident" means 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.

First Condition

57.          For the reasons outlined at paragraphs 21 to 55 of this ruling, ABC Pty Ltd is a resident of Australia.

58.          Subsection 3(1) of the International Tax Agreements Act 1953 provides:

"agreement" means a treaty or other agreement described in section 3AAA (about current agreements) or 3AAB (about agreements for earlier periods).

59.          There is such an agreement in subsection 3AAA(1).

60.          That agreement does not contain a provision where, apart from the provision, the company would, for the purposes of the agreement, be both a resident of Australia and the relevant country.

61.          Therefore, ABC Pty Ltd is not a prescribed dual resident in accordance with the first condition.

Alternative Condition

62.          For the reasons outlined at paragraphs 21 to 55 of this ruling, ABC Pty Ltd is a resident of Australia for the reason that it carries on a business in Australia and has its central management and control in Australia.

63.          ABC Pty Ltd is incorporated overseas and has its registered office overseas.

64.          However, there is nothing to suggest that its central management and control is conducted anywhere other than Australia.

65.          Therefore, ABC Pty Ltd is not a prescribed dual resident in accordance with the alternative condition.

Conclusion

66.          Throughout the Ruling Period, ABC Pty Ltd will not be a prescribed dual resident.

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