Corporate Tax Residency Update

 

CURRENT AS AT 23 December 2020

In a previous article, we covered the impact of the Bywater case, as well as the ATO’s response to the case, on the determination of corporate tax residence.

On 6 October 2020, the government announced that it will make technical amendments to clarify the corporate residency test in order to return the treatment of foreign incorporated companies to the position prior to Bywater.  The Board of Taxations report to the Treasurer on its Review of Corporate Residency was subsequently released to the public.

The report contains six recommendations:

  1. 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 together both the company’s core commercial activities are being undertaken in Australia and its central management and control in Australia.  Central management in Australia, by itself, will not be sufficient except in very limited circumstances. The new rules should apply prospectively and as soon as possible after receiving Royal Assent, but a foreign incorporated company should also have the option to choose for the rules to take effect from 15 March 2017 (which is the date that Tax Ruling TR 2014/15 was withdrawn).
  2. 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 extrinsic materials.
  3. 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 practices.
  4. The “voting power test” should be retained.
  5. Basing residence solely on a place of incorporation test should not be adopted.
  6. 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 Darren O’Malley of our office to clarify any queries.

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