Edited version of private ruling

Authorisation Number: 1011797076480

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Ruling

Subject: Company residency

Question

Is the Australia Pty ltd company deemed to be a resident solely of Australia under the Schedule X of the International Tax Agreement Act?

Answer

Yes.

This ruling applies for the following period

Income year ended 30 June 2010

Relevant facts

The Australia Pty Ltd (the company) was incorporated in Australia.

The foreign country tax authority deemed the company to be a tax resident of the foreign country X for the 2009-10 income year.

The company operates from its head office in Australia.

The company also operates a branch office in foreign country X.

The administrative function of the company is located in its head office, in Australia.

The day to day management decisions of the company are made by senior staff located at their head office in Australia.

The company conducts a service provision type business. The company obtains its business and clients through a strategic marketing campaign.

The contracts with major clients are negotiated by the director, the business development manager and marketing manager. As major contracts and negotiations are ongoing, there were decisions made regarding contracts during the 2009-10 income year. These negotiations and contracts were made by the same management team.

The strategic management and operational business decisions are made by the Business development manager and the director.

The company's accounting records are kept in accordance with the Australian Accounting standards.

The director of the company is the sole director and sole shareholder of the company.

The director is deemed to be a resident of foreign country X for income tax purposes in foreign country X .

The director is also deemed to be an Australian resident for income tax purposes as per private ruling issued previously.

The director is an Australian citizen.

The company does not hold formal board meetings due to the company only having a sole director.

When the director is overseas, the director maintains contact with the Australian head office via phone, facsimile and email on a regular basis.

During the 2009-10 income year, the director was in foreign country X for majority of the income year.

The director was in foreign country X during the 2009-10 income year because the director has had previous foreign country X experience working for a telemarketing company. The establishment of a branch office in foreign country X required the director to be based there until such time as a suitable manager could be found for that side of the operation. Subsequently, a manager has been appointed for the foreign country X branch office.

All activities and decisions regarding the company are made by the director in conjunction with her management team.

The management team consists of the marketing manager (who is now also the new director of the company) and the Business Development manager. All client contact and business negotiations are handled by this management team.

Relevant legislative provisions

International Tax Agreements Act 1953 Section 4

International Tax Agreements Act 1953 Schedule 4

International Tax Agreements Act 1953 Schedule X Article 4(1)

Income Tax Assessment Act 1936 Subsection 6(1)

International Tax Agreements Act 1953 Schedule X Article 4(4)

Reasons for decision

Section 4 of the International Tax Agreements Act 1953 (Agreements Act) incorporates that Act with the Income Tax Assessment Act 1936 (ITAA 1936) and the Income Tax Assessment Act 1997 so that those Acts are read as one. The Agreements Act effectively overrides the ITAA 1936 and ITAA 1997 where there are inconsistent provisions (except for some limited provisions).

Schedule X to the Agreements Act contains the double tax agreement between Australia and foreign country X (the foreign country X Agreement). The foreign country X Agreement operates to avoid the double taxation of income received by Australian and foreign country X residents.

Article 4(1) of the foreign country X Agreement provides that a person is a resident of foreign country X if the person is resident in foreign country X for the purposes of their tax and a resident of Australia if the person is a resident of Australia for the purposes of Australian tax.

The company is a resident of foreign country X because it will be treated as a resident of that country for the purposes of their domestic tax law.

The company was incorporated in Australia and therefore is a resident of Australia under subsection 6(1) of the ITAA 1936.

For the periods of dual residency, it is necessary to consider the tie breaker rules in the foreign country X Agreement.

Article 4(4) of the foreign country X Agreement provides that

Where by reason of the provisions of paragraphs 1 and 2 a person other than an individual is a resident of both Contracting States then it shall be deemed to be a resident solely of the Contracting State in which its place of effective management is situated.

The term 'effective management' is not defined in the foreign country X Agreement.

In interpreting the wording of the DTA, the Commissioner in Taxation Ruling TR 2001/13 accepts that it is appropriate to have reference to the OECD Commentary on the Model Tax Convention on Income and on Capital (Condensed Version 2005) (the OECD Commentary).

The OECD Commentary states at paragraph 24 on Article 4 that:

The place of effective management is the place where key management and commercial decisions that are necessary for the conduct of the entity's business as a whole are in substance made.

Based on the explanation used in paragraph 24 of the OECD Commentary, the test of 'place of effective management' is very similar to the test of 'central management and control' (CM&C) and is a question of fact.

The OECD Commentary at paragraph 24.1 provides that a case by case approach is the best way to deal with the difficulties in determining the place of effective management of a legal person that may arise from the use of new communication technologies.

In this case, the company does not hold board meetings. The strategic management and operational decisions of the company are made by the Business Development Manager and the director. When the director is overseas, the director maintains contact with the Australian head office via phone, facsimile and email on a regular basis. The company management team consist of its marketing manager and business development manager.

All activities and decision regarding the company are made by the director in conjunction with the management team.

Since the effective management of the company was not done by its director alone it is not sufficient to consider that the place of effective management and the CM&C of the company were shifted to foreign country X for the 2009-10 income year because its director was in foreign country X for most of that income year.

Apart from its director, all the factors relevant in determining the company residency are in Australia. The day to day management decisions of the company are made by senior staff located at their head office in Australia. The administrative function of the company is located in its head office in Australia. The company was incorporated in Australia; it carries on business in Australia, its accounting records are kept in accordance with the Australian Accounting standards.

In addition, the director normally resides in Australia. In the 2009-10 income year, the director was in foreign country X because the director has had previous experience working in a similar business and was establishing a branch office in foreign country X. The director is an Australian citizen and was determined to be an Australian resident under the tie breaker test for residency pursuant to Article 4(3) of the foreign country X Agreement.

In subsequent income year(s), the company has since found a new manager for the foreign country X branch and the marketing manager of the company is now also the new director of the company.

Accordingly, since the effective management decisions were not made by the director alone but in conjunction with the management team in Australia, we consider that the company is a resident solely in Australia under Article 4(4) of the tie breaker test in the foreign country X Agreement for the 2009-10 income year.

Australian competent authority

Where a person considers that the actions of Australia or a treaty partner result or may result in taxation not in accordance with a particular tax treaty, the person may request competent authority assistance.

The competent authority will seek to resolve cases of taxation contrary to the provisions of a tax treaty, such as, the resolution of juridical and economic double taxation or, where a particular class of income is taxed in contravention of a rule in the tax treaty.

The company is a resident of Australia under Article 4(4) of the foreign country X Agreement. Foreign country X has found the company to be a resident of foreign country X . As there is a conflicting result from the application of the foreign country X Agreement, you may need to get in touch with the Australian competent authority to resolve this issue.

Contact can be made by either post or email:

Email:australiancompetentauthority@ato.gov.au

Post: Australian Competent authority

International Strategy and operations

Large Business and International

P O BOX 900

CIVIC SQUARE ACT 2608