In a previous article, we delved into the significance of the Bywater case and how it has influenced the assessment of corporate tax residence, along with the subsequent actions taken by the ATO. As a tax advisor, it is crucial to understand the implications of these developments.
On 6 October 2020, the government announced its intention to implement technical amendments, aiming to provide clarity on the corporate residency test and return the treatment of foreign incorporated companies to the position before Bywater. The Board of Taxations report to the Treasurer on its Review of Corporate Residency was released to the public.
The report contains six recommendations:
- The central management and control test should be modified to ensure that, for a foreign-incorporated company to be an Australian tax resident, there needs to be a sufficient economic connection to Australia. This would be best demonstrated where the company’s core commercial activities are undertaken in Australia and its central management and control in Australia. By itself, central management in Australia will not be sufficient except in minimal circumstances. The new rules should apply prospectively and immediately after receiving Royal Assent. Still, a foreign incorporated company should also have the option to choose for the rules to take effect from 15 March 2017 (the date that Tax Ruling TR 2014/15 was withdrawn).
- Overarching guidance of the circumstances under which the core commercial activities of a company can be said to be conducted in Australia should be provided in the legislation and irrelevant materials.
- The ATO should consider providing additional practical guidance on the meaning of the term “central management and control in Australia” to provide greater alignment with modern business practises.
- The “voting power test” should be retained.
- Basing residence solely on a place of incorporation test should not be adopted.
- Basing residence based on place of management or place of effective management should not be adopted.
If you have a client looking to set up in Australia, please review the above and don’t hesitate to contact us to clarify any queries.
Kreston Stanley Williamson Team
Correct as of 16 December 2020
Disclaimer – Kreston Stanley Williamson has produced this article to serve its clients and associates. The information contained in the article is of general comment only and is not intended to be advice on any particular matter. Before acting on any areas in this article, you must seek advice about your circumstances. Liability is limited by a scheme approved under professional standards legislation.
