Edited version of your private ruling

Authorisation Number: 1012449714532

Ruling

Subject: Residency

Question 1

Are you a resident of Australia as defined in subsection 6(1) of the Income Tax Assessment Act 1936 for income tax purposes for the year ended 30 June 20XX?

Answer

Yes

Question 2

Are you an Australian resident as defined in the Agreement between the Government of the Commonwealth of Australia and Country A for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income for the year ended 30 June 20XX?

Answer

Yes

This ruling applies for the following periods:

1 July 2011 to 30 June 2012

The scheme commences on:

1 July 2011

Relevant facts and circumstances

Company X was incorporated in Country A. Its two shareholders, Company Y and Company Z, are Australian residents for tax purposes.

Y of Company X's directors are Australian residents for tax purposes, and the Z director is a resident of Country A.

No director has any special powers over and above the other directors, with the exception of the Country A resident director, who is a nominee director for Country A regulatory purposes.

Company X does not have business premises in Country A or any other offshore location. Its registered office is located in Country A at the business premises of the agent that was previously responsible for the provision of tax administration law advice to Company X.

Company X does not have any employees, either in Australia, Country A or any other offshore location (other than the directors).

The directors of Company X make the high level decisions of the company. All business related decision making occurs in Australia.

Company X's Articles of Association provide that the business of the company shall be managed by or under the direction of the directors, who have the power inter alia to:

· issue shares in the company and determine special rights or restrictions, whether in regard to dividend, voting, return of capital, subject to any ordinary resolution of the company;

· make calls upon the members of the company in respect of any monies unpaid on shares;

· exercise all the powers of the company to borrow money and to mortgage or charge its undertaking, property, and uncalled capital or to issue debentures and other securities for any debt, liability, or obligation of the company or any third party;

· exercise the powers of the Company in relation to any official seal;

· appoint an attorney;

· delegate any of their powers to committees consisting of members of their body;

· appoint a managing director, and entrust to the managing director any of the powers exercisable by them;

· pay to the members such interim dividends as justified by the profits of the company.

Additionally, the Articles of Association require the directors to cause proper accounting and other records to be kept.

All directors' and shareholders' meetings are held in Australia. There have been no board meetings conducted in Country A. Reporting and board matters are heard at board meetings of the whole Group, which is conducted quarterly in Australia.

The director minutes, resolutions and annual general meeting minutes of Company X are incorporated with those of the Group.

Subsequent to incorporation, Company X did not carry on business in its own right during the financial year ended 30 June 20VV.

For the year ended 30 June 20XX, the profit and loss statement for Company X shows a profit derived from two transactions.

The first of these transactions involved a sale of a supply to an Australian listed company.

The contract for supply was negotiated by the Australian resident directors of Company X, and the contract was signed in Australia.

The supply was constructed to specification by a third party outside of Australia. The construction contract was negotiated by the Australian resident directors of Company X, occurring partly overseas and partly in Australia by telephone, email etc. All procurement for the contract was undertaken by the Australian resident directors of the company, and procurement contracts were signed in Australia by the directors.

Project management of the construction was undertaken by a third party Country A based project manager contracted by Company X, and involved regular travel by the project manager to a site and regular reporting to the directors of Company X who were based in Australia. The directors of Company X provided detailed instructions to the project manager regarding the management of the project.

The second transaction involved the sale of a supply to an overseas entity. The supply is unrelated to the sale of the supply in the first transaction.

The second transaction supply was developed in Australia by an Australian resident company.

Negotiation for procurement and sale of the second transaction supply was conducted by the Australian resident directors of the company in Australia. Company X may also provide supervision services to ensure overall quality and compliance with owner requirements. Company X's role is limited to the sale and project management.

Company X has not lodged a tax return in Country A.

To date Company X has not declared any dividends.

The Group provides technical services, project, and valuation consultancy. The Group encompasses five companies.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 6(1)

Income Tax Assessment Act 1997 subsection 995-1(1)

The Agreement between the Government of the Commonwealth of Australia and Country A for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income

Reasons for decision

Question 1

An Australian resident is defined in subsection 995-1(1) of the Income Tax Assessment Act 1997 ('ITAA 1997') to be a person who is a resident of Australia for the purposes of the Income Tax Assessment Act 1936 ('ITAA 1936').

Paragraph (b) of the definition of 'resident' or 'resident of Australia' in subsection 6(1) of the ITAA 1936 relates to companies. A company is a resident of Australia if:

· it is incorporated in Australia, or

· where not 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.

The first statutory test is not applicable as Company X was incorporated in Country A.

The second statutory test is a composite test which requires the company to carry on business in Australia, and in addition, to have either its central management and control in Australia or its voting power controlled by Australian resident shareholders. Thus, if no business is carried on in Australia, the company cannot meet the requirements of the second statutory test.

Carries on business

Taxation Ruling TR 2004/15 Income Tax: residence of companies not incorporated in Australia - carrying on business in Australia and central management and control ('TR 2004/15') provides guidelines for determining whether a company which is not incorporated in Australia is a resident under the second statutory test.

Where a business is carried on is a question of fact that requires consideration of where the activities of the company are carried on.

The Commissioner's approach to this factual determination, described at paragraphs 9 to 12 of TR 2004/15, is to draw a distinction between a company with operational activities, for example trading, service provision, manufacturing or mining activities, and a company which is more passive in its dealings, such as the management of investment assets.

A company that has major operational activities relative to the whole of its business carries on business wherever those activities take place and not necessarily where its central management and control is likely to be located. A large industrial concern, for example, may have its place of business where its offices, factories or mines are situated. By contrast, a company whose income earning is largely dependent on investment decisions made in respect of its assets carries on its business where these decisions are made, often where its central management and control is located.

Additionally, the two separate requirements of carrying on a business in Australia and central management and control located in Australia may be met by the same set of facts and activities as in Malayan Shipping Co Ltd v FC of T (1946) 71 CLR 156, where the nature of the business and the managing director's complete management and control over the business operations and internal administration of the company resulted in a situation where his powers and actions evidenced central management and control, the carrying on of a business and also the source of the income as being in Australia.

In the present circumstances, in the year ended 30 June 20XX Company X had active business operations, constituted by two transactions: the sale of a supply to an Australian listed company operating; and secondly, the sale of a supply to an overseas entity. The company also provided project management or supervision services as part of the transactions.

The company's activities in the first transaction did not extend to construction as this was undertaken by a third party overseas. In respect of the second transaction, the company's activities were limited to the sale as the design and the development of the second transaction supply was undertaken by another Australian resident company, from whom Company X purchased the supply.

Other than the directors, the company does not have employees either in Australia, Country A or any other offshore location. Its activities are primarily undertaken by its Australian resident directors who engaged in the negotiation and conclusion of contracts for the sales, procurement, the provision of project management or supervision services, and oversight of the Country A based project manager and the construction. These activities were conducted primarily from Australia, with only the negotiation of the construction contract occurring partly overseas.

Project management of the construction of the first supply occurred overseas and was undertaken by a third party Country A based project manager contracted by Company X, and under direction from the Australian resident directors.

Company X does not have any business premises outside of Australia. Although its registered office is situated in Country A, it is located at the business premises of the agent that was previously responsible for the provision of tax administration law advice to Company X.

In these circumstances, the location of Company X's operations, constituted by the activities of its Australian resident director, is located in Australia for the year ended 30 June 20XX.

Accordingly, as Company X carries on business in Australia, it satisfies the first requirement of the second statutory test in that year.

Central management and control

Central management and control refers to the decisions made at the highest levels in the company that guide and control the company's business activities.

TR 2004/15 states at paragraph 13 that this level of management and control includes activities involving high level company matters such as general policies and strategic directions, major agreements and significant financial matters. It also includes activities such as the monitoring of the company's overall corporate performance and the review of strategic recommendations made in the light of the company's performance.

Usually, these high level decisions are made by a company's board of directors and therefore the place where the board meets is highly relevant in determining where central management and control is located.

In order to reduce uncertainty, the Commissioner, as a matter of practical compliance, will accept for those companies whose central management and control is exercised by a board of directors at board meetings that the central management and control is in Australia if the majority of the board meetings are held in Australia: see paragraph 15 of TR 2004/15.

In the present circumstances, Company X's Articles of Association provide that the business of the company shall be managed by or under the direction of the directors, who have the power inter alia to:

· issue shares in the company and determine special rights or restrictions, whether in regard to dividend, voting, return of capital, subject to any ordinary resolution of the company;

· make calls upon the members of the company in respect of any monies unpaid on shares;

· exercise all the powers of the company to borrow money and to mortgage or charge its undertaking, property, and uncalled capital or to issue debentures and other securities for any debt, liability, or obligation of the company or any third party;

· exercise the powers of the Company in relation to any official seal;

· appoint an attorney;

· delegate any of their powers to committees consisting of members of their body;

· appoint a managing director, and entrust to the managing director any of the powers exercisable by them;

· pay to the members such interim dividends as justified by the profits of the company;.

Additionally, the Articles of Association requires the directors to cause proper accounting and other records to be kept.

Company X's high level decisions are made by the two Australian resident directors, who determined major agreements of the company in addition to carrying out the operations of the company. All business related decision making for the company occurred in Australia. No director has any special powers over and above the other directors, except for the Country A resident director who is a nominee director for Country A regulatory purposes.

Company X's reporting and board matters are heard at board meetings of the whole Group, conducted quarterly in Australia. All directors' meetings are held in Australia. There have been no board meetings conducted in Country A.

In these circumstances, the central management and control of Company X is exercised by its Australian resident directors in Australia.

As Company X carries on business in Australia and its central management and control is in Australia, it is a resident of Australia, as defined by section 6(1) of the ITAA 1936, for income tax purposes for the year ended 30 June 20XX.

Question 2

The Agreement between the Government of the Commonwealth of Australia and Country A for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ('the DTA') and Protocol sets out the rules determining the residential status of an entity for the purposes of the DTA.

The term 'managed and controlled' which appears in the relevant definition is not defined in the DTA.

In interpreting double tax agreements, the Commissioner in Taxation Ruling TR 2001/13 Income tax: Interpreting Australia's Double Tax Agreements ('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 ('the OECD Commentary').

The term 'managed and controlled' was referred to in paragraph 19 of the OECD Commentary on article 4 of the 1963 Draft Convention (which was adopted by the OECD Council on 30 July 1963), in the context of its use by the United Kingdom in conventions:

19. The formulation of the preference criterion in the case of persons other than individuals was considered in connection with the question of the taxation of income of shipping, inland waterways transport and air transport enterprises. A study of the existing bilateral Conventions for the avoidance of double taxation on such income has shown that a number of Conventions accord the taxing power to the State in which the "place of management" of the enterprise is situated; other Conventions attach importance to its "place of effective management", others again to "the fiscal domicile of the operator". The Conventions concluded by the United Kingdom in recent years provide, as regards corporate bodies, that a company shall be regarded as resident in the State in which "its business is managed and controlled". In this connection it has been made clear on the United Kingdom side that this expression means the "effective management" of the enterprise.

As such, in construing the term 'managed and controlled' in the DTA, the meaning of 'effective management' may assist.

The current Model Article 4 uses the term 'place of effective management'. The OECD Commentary states at paragraph 24 on Model Article 4:

24. … the "place of effective management" has been adopted as the preference criterion for persons other than individuals. 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. All relevant facts and circumstances must be examined to determine the place of effective management. An entity may have more than one place of management, but it can have only one place of effective management at any one time.

Factors identified at paragraph 24.1 of the OECD Commentary on Model Article 4 as being relevant to ascertaining the place of effective management include:

· where the meetings of the board of directors or equivalent body are usually held;

· where the chief executive officer and other senior executives usually carry on their activities;

· where the senior day-to-day management is carried on;

· where the headquarters are located;

· which country's laws govern the legal status of the entity;

· where accounting records are kept.

In the present circumstances, the key management and commercial decisions of Company X are made in Australia by the Australian resident directors who determine major agreements of the company, in addition to carrying out the day to day operations of the business. The Country A resident director is a nominee director for Country A regulatory purposes.

Company X's reporting and board matters are heard at board meetings of the whole Group, conducted quarterly in Australia. All directors' meetings are held in Australia. There have been no board meetings conducted in Country A.

As such, it is considered that for the purposes of the DTA, Company X is managed and controlled in Australia.

Accordingly, as Company X is managed and controlled in Australia, it satisfies the definition of 'Australian company', and is an 'Australian resident' for the purposes of the DTA for the year ended 30 June 20XX.

The tie breaker test in the DTA, which applies to dual residents, is not here applicable.

2011 year

Company X did not carry out any activities during the year ended 30 June 20YY. For the purposes of the present ruling it was not necessary to decide whether Company X was an Australian resident for the purposes of Australian domestic tax law or for the purpose of the DTA during the year ended 30 June 20YY.