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Ruling

Subject: Prescribed dual resident

Question 1

Will Company A, at any time during the year ended 31 December 2012, be a 'prescribed dual resident' for the purposes of Item 1 of the table in subsection 703-15(2) of the Income Tax Assessment Act 1997 (the ITAA 1997)?

Answer: No.

Company A will not be a 'prescribed dual resident' for the purposes of Item 1 of the table in subsection 703-15(2) of the ITAA 1997 at any time during the year ended 31 December 2012.

This ruling applies for the following period:

Year ended 31 December 2012

The scheme commences on:

1 January 2012

Relevant facts and circumstances

Company A is an Australian incorporated company.

Company A is the head company of an Australian tax consolidated group.

The Company A group completed a restructure in which all of the issued shares in Company A were purchased by a country Y incorporated company, (New Company B), in return for New Company B issuing shares in itself to the existing Company A shareholders. As a result, Company A was replaced by New Company B as the stock exchange listed entity. Company A is no longer a listed company on any stock exchange. Company A is now a wholly owned subsidiary of New Company B.

Control of Company A through 2011

The majority of Company A board meetings in 2011 were held physically in country Z.

The business discussed and conducted at the meetings in country Z comprised the highest level of strategic management that would generally be expected of a listed group holding company.

Two board meetings were held in country X - however, these were held on consecutive days around the company's Annual General Meeting, for which the directors would have been present in that country. Furthermore, the second board meeting (held the day after the first) was concluded after only brief discussions.

Across all of the board meetings in 2011, the largest single group of directors by personal tax residence was consistently comprised of those resident in Australia.

Control of Company A in 2012

It is expected that the number of Company A's board meetings will reduce to two or three per annum in 2012. Although the number of meetings will be reduced, it is expected that the pattern of the location of the board meetings should not be substantially different to the meetings in 2011.

The central management and control of Company A will continue to be conducted in the board meetings.

While the composition of the Board has yet to be determined, it is expected that a majority of Company A Directors will be tax residents of Australia.

There are no circumstances which would suggest that the central management and control of Company A will be exercised in country X, country Y or any other country with which Australia has a double tax treaty.

Assumption

It is assumed that Company A will not be a tax resident of country X, country Y or any other country with which Australia has a double tax agreement during the course of the year ended 31 December 2012.

Relevant legislative provisions

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

Income Tax Assessment Act 1936, subsection 6(1)

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website www.ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select: 'Part IVA: the general anti-avoidance rule for income tax'.

Summary

Company A will not be a 'prescribed dual resident'.

Detailed reasoning

Company A is the head company of an Australian tax consolidated group.

Item 1 of the table in subsection 703-15(2) sets out the requirements to be met by a head company of a tax consolidated group. The Australian residence requirements listed in that item of the table state that the head company 'must be an Australian resident (but not a 'prescribed dual resident')'.

Subsection 995-1(1) of the ITAA 1997 states that 'Australian resident' means a person who is a resident of Australia for the purposes of the Income Tax Assessment Act 1936 (ITAA 1936).

Subsection 6(1) of the ITAA 1936 states that 'resident' or 'resident of Australia' includes a company which is incorporated in Australia.

Company A is incorporated in Australia and is therefore an Australian resident. As such, the first element of the residence requirements in Item 1 of the table in subsection 703-15(2) is satisfied.

Subsection 995-1(1) of the ITAA 1997 states that 'prescribed dual resident' has the meaning given by subsection 6(1) of the ITAA 1936.

'Prescribed dual resident' is defined in subsection 6(1) of the ITAA 1936 as follows:

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.

Part (b) of the definition does not apply because, as discussed above, Company A is a resident of Australia due to the fact that it was incorporated in Australia. The relevant issue with respect to this ruling request is whether Company A satisfies the condition in part (a) of the definition of 'prescribed dual resident'.

The requirements for part (a) of the definition are set out in below:

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

As discussed above, Company A is incorporated in Australia and therefore is a resident of Australia within the meaning of subsection 6(1) of the ITAA 1936.

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

Australia currently has in force an agreement with country X and country Y.

(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

There is a dual residency tie-breaker test in the treaties with both countries.

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

There is a dual residency tie-breaker test in the treaties with both countries. However, for the residency tie-breaker test of either treaty to apply, Company A must be a dual resident, that is, Company A must be a resident of Australia and another country for the purposes of the respective treaty.

To be a dual resident, Company A must be a resident of country X or of country Y for the purposes of the domestic tax law of country X or of country Y.

There is nothing in the facts provided in respect of this ruling which suggests that Company A might conceivably be a resident of any country other than Australia, country X or country Y. Hence, on the present facts, it is not necessary to consider whether Company A might be a resident of some other treaty country.

It has been assumed that Company A will not be a tax resident of country X, country Y or any other country with which Australia has a double tax agreement during the course of the year ended 31 December 2012.

On the basis of the present facts and assumptions, Company A will not be a resident of country X or country Y for the purposes of domestic tax law of those countries. Accordingly, Company A will not be a resident of country X or country Y for the purposes of the treaties with those countries and the tie-breaker test in those treaties will not apply to treat Company A as a resident of country X or country Y for the purposes of the respective treaties. Hence, Company A cannot be a 'resident solely of the foreign country' in terms of paragraph (a)(iv) of the definition of the term 'prescribed dual resident'. Consequently, Company A will not be a 'prescribed dual resident'.