The Australian Taxation Office (ATO) has recently updated its Practical Compliance Guideline PCG 2018/9, offering foreign-incorporated companies and their advisors clearer and more definitive guidance on the central management and control test of residency. This update is significant for its introduction of a risk assessment framework and clarifications on ongoing compliance for public groups, refining the principles outlined in Taxation Ruling TR 2018/5.
Understanding the Central Management and Control Test
The central management and control test is pivotal in determining a foreign company’s tax residency in Australia. TR 2018/5, effective from 15 March 2017, marked a shift from the ATO’s previous approach. Under this ruling, a foreign company’s actual trading or investment operations need not occur in Australia for it to be considered a resident if its central management and control are in Australia.
Risk Assessment Framework in PCG 2018/9
PCG 2018/9 now includes a risk assessment framework that categorizes the risk levels regarding a company’s residency status into three zones:
- Low Risk: Companies with low risk are unlikely to face ATO reviews.
- Medium Risk: Companies may undergo further analysis, especially if multiple moderate-risk factors are present.
- High Risk: Companies at high risk will likely be subject to compliance activity.
This framework offers foreign companies a clearer understanding of their potential risk exposure concerning the ATO’s review processes.
Ongoing Compliance Approach for Public Groups
The updated guideline also addresses the ongoing compliance approach for public groups. It sets out specific circumstances where there is a very low risk of a foreign-incorporated company being treated as a resident under the central management and control test. This update provides ongoing certainty for these groups.
Three-Step Process for Determining Location of Central Management and Control
PCG 2018/D3 outlines a three-step process for determining the location of a company’s central management and control:
- Identify High-Level Decisions: Differentiate high-level decisions from day-to-day management decisions.
- Identify Decision Makers: Normally, these are the company’s directors, provided they meet legal standards.
- Determine Decision-Making Locations: Establish where the high-level decisions are made. This includes scenarios where directors meet in multiple locations or make decisions remotely.
The directors are considered the exercisers of central management and control if they meet several conditions, including making decisions at board meetings and not being unduly influenced by external parties.
Transitional Compliance Approach
The transitional compliance approach, introduced in 2017 to give companies time to adjust their governance arrangements, concluded on 30 June 2023. The updates in PCG 2018/9 reflect feedback received from the community on the draft updates published earlier in 2023.
Seeking Clarification and Assistance
Companies unsure about their residency position after considering TR 2018/5 and PCG 2018/9 are encouraged to contact the ATO for further discussion and clarification.
Conclusion
The ATO’s updated guidance provides foreign companies with a more transparent and structured approach to assess their Australian tax residency status. By clearly defining risk levels and compliance approaches, the ATO aims to offer better certainty and guidance to foreign entities operating in or with Australia. As tax laws and interpretations continue to evolve, it is essential for foreign-incorporated companies and their advisors to stay informed and compliant with these changes.
Author: Darren O’Malley
*Correct as of 04 December 2023
*Disclaimer – this article has been produced by Kreston Stanley Williamson as a service to its clients and associates. The information contained in the article is for general comment only and is not intended to be advice on any particular matter. Before acting on any areas contained in this article, it is imperative you seek specific advice relating to your particular circumstances. Liability is limited by a scheme approved under professional standards legislation.
