Edited version of private advice

Authorisation Number: 1051715805890

Date of advice: 13 July 2020

Ruling

Subject: Corporate residency

Question 1

Is AusCo a resident of Australia under subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes

Question 2

Did AusCo have its place of effective management in State X during the ruling period for the purposes of the residency tiebreaker in the DTA?

Answer

Yes

Question 3

Does CGT event I1 under section 104-160 of the Income Tax Assessment Act 1997 (ITAA 1997) happen when the residency of AusCo changes on XX August 20XX for the purposes of the relevant DTA??

Answer

No.

This ruling applied for the following periods:

Year ended 31 December 20XX

Year ended 31 December 20XX

Year ended 31 December 20XX

The scheme commenced on:

XX August 20XX

Relevant facts and circumstances

AusCo acquisition

AusCo is a company incorporated in Australia.

On XX August 20XX (the acquisition date), AusCo was sold to ForeignCo, a company incorporated and listed in State X.

AusCo's business and its business assets at the acquisition date up until now are all located offshore outside of Australia.

ForeignCo provides services and support to AusCo from State X.

AusCo has two full time employees, both located in State Y conducting the day to day management of the business.

AusCo Board

On the acquisition date, the existing directors of AusCo resigned and a new board of directors (the Board) was appointed. The Board consisted of senior board members of Foreign Co located in State X and a single director located in Australia.

The Australian director plays no role in the decision-making of AusCo, does not attend board meetings, and only advises on compliance with Australian regulations.

The Board has full responsibility for all business of AusCo and the decisions that comprise the control and direction of AusCo.

All board meetings take place in State X and are attended by directors located in State X.

Other facts

AusCo is a resident of State X under its domestic law and has lodged income tax returns in State X on this basis.

Relevant legislative provisions

Subsection 6(1) of the Income Tax Assessment Act 1936

Section 104-60 of the Income Tax Assessment Act 1997

DTA

Reasons for decision

Question 1

Is AusCo a resident of Australia under subsection 6(1) of the ITAA 1936?

Detailed Reasoning

Subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that a person (which includes a company) is an 'Australian resident' if that person is a resident of Australia for the purposes of the ITAA 1936. For a company, subsection 6(1) of the ITAA 1936 defines 'resident or a resident of Australia' to mean:

(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.

As AusCo was incorporated in Australia, it is and always will be a resident of Australia under the incorporation test of the definition of resident contained in subsection 6(1) of the ITAA 1936.

Question 2

Did AusCo have its place of effective management in State X during the ruling period for the purposes of the residency tiebreaker in the DTA?

Detailed Reasoning

Article 4 of the DTA broadly states that a person is a resident of a Contracting State if the person is a resident under the relevant State's domestic tax law.

AusCo is a resident of both Australia and State X and has lodged tax returns in State X for the relevant period. As such, it is appropriate to consider the 'tie breaker rule' in the DTA.

The tie-breaker rule in the DTA states:

Where by reason of the preceding provisions of this Article a person other than an individual is a resident of both Contracting States, then it shall be deemed to be a resident only of the State in which its place of effective management is situated.

'Place of effective management' is not defined in the DTA.

When interpreting treaties, the Commissioner's view in Taxation Ruling TR 2001/13 Income tax: Interpreting Australia's Double Tax Agreements (TR 2001/13), is that interpretation of the international tax treaties may include reference to any supplementary means of interpretation, including the OECD Commentary on the Model Tax Convention on Income and on Capital (the OECD Commentary): see paragraphs 101 through to 108 of TR 2001/13.

The term 'place of effective management' is also not defined in the OECD Model Tax Convention. However, the 2014 OECD Commentary on Article 4 of the Model provides some indication as to what the phrase means at paragraph 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 2014 OECD Commentary on 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, and

·         where accounting records are kept.

After evaluating the above factors, the Commissioner is satisfied that the key senior management and commercial decisions of AusCo occur in State X and have done so since the new Board was appointed on the acquisition date. The role of the director located in Australia is limited to ensuring compliance with Australian legal responsibilities and obligations. As such, for the purposes of the DTA, AusCo's place of effective management is not in Australia and is instead in State X.

AusCo is therefore a resident of State X for the purposes of the DTA.

Question 3

Does CGT event I1 under section 104-160 of the ITAA 1997 happen when the residency of AusCo changes on the acquisition date for the purposes of the DTA?

Detailed reasoning

CGT Event I1 occurs under subsection 104-160(1) of the ITAA 1997 when a company stops being an Australian resident. As AusCo was incorporated in Australia, it will continue to satisfy the definition of a resident of Australia under subsection 6(1) of the ITAA 1936. As such, CGT event I1 cannot happen to AusCo irrespective of the outcome of the residency tiebreaker under the DTA.