Taxation Ruling
TR 2018/5
Income tax: central management and control test of residency
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Please note that the PDF version is the authorised version of this ruling.There is a Compendium for this document: TR 2018/5EC .Please note that the Government announced in the 2020-21 Budget that it will make technical amendments to clarify the corporate residency test. Practical Compliance Guideline PCG 2018/9 Central management and control test of residency: identifying where a company's central management and control is located and this Ruling provide our existing view on the central management and control test of corporate residency. Further guidance will be provided once legislative amendments are enacted. See Working out your residency for updates regarding our compliance approach in the interim.
| Contents | Para |
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| LEGALLY BINDING SECTION: | |
| Summary - what this ruling is about | |
| Ruling | |
| Date of effect | |
| NOT LEGALLY BINDING SECTION: | |
| Appendix 1: Detailed contents list |
Preamble
This publication provides you with the following level of protection:
This publication (excluding appendixes) is a public ruling for the purposes of the Taxation Administration Act 1953. A public ruling is an expression of the Commissioner's opinion about the way in which a relevant provision applies, or would apply, to entities generally or to a class of entities in relation to a particular scheme or a class of schemes. If you rely on this ruling, the Commissioner must apply the law to you in the way set out in the ruling (unless the Commissioner is satisfied that the ruling is incorrect and disadvantages you, in which case the law may be applied to you in a way that is more favourable for you - provided the Commissioner is not prevented from doing so by a time limit imposed by the law). You will be protected from having to pay any underpaid tax, penalty or interest in respect of the matters covered by this ruling if it turns out that it does not correctly state how the relevant provision applies to you. |
Summary - what this ruling is about
1. This Ruling sets out the Commissioner's view on how to apply the central management and control test of company residency[1] following Bywater Investments Limited & Ors v. Commissioner of Taxation; Hua Wang Bank Berhad v. Commissioner of Taxation [2016] HCA 45; 2016 ATC 20-589 (Bywater).
2. This Ruling does not deal with:
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- the voting power test of company residency for foreign incorporated companies[2], or
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- when a company carries on a business.
Ruling
Background
3. A company is a resident or a resident of Australia under the central management and control test of residency[3] if it:
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- carries on business in Australia, and
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- has its central management and control in Australia.
4. Four matters are relevant in determining whether a company meets these criteria:
- (1)
- Does the company carry on business in Australia? (see paragraph 6 of this Ruling).
- (2)
- What does central management and control mean? (see paragraph 10 of this Ruling).
- (3)
- Who exercises central management and control? (see paragraph 19 of this Ruling).
- (4)
- Where is central management and control exercised? (see paragraph 30 of this Ruling).
5. Whether a company is a resident under the central management and control test of residency must be determined by reference to all the facts and relevant case law.
Does a company carry on business in Australia?
6. To be resident under the central management and control test of residency, a company must carry on business in Australia.[4]
7. If a company carries on business and has its central management and control in Australia, it will carry on business in Australia within the meaning of the central management and control test of residency.[5]
8. It is not necessary for any part of the actual trading or investment operations of the business of the company to take place in Australia. This is because the central management and control of a business is factually part of carrying on that business.[6] A company carrying on business does so both where its trading and investment activities take place, and where the central management and control of those activities occurs.[7]
9. Central management and control of a company is not necessarily exercised where the trading or investment activities of the company are carried on.[8]
What does central management and control mean?
10. Central management and control refers to the control and direction of a company's operations.[9] It does not refer to a physical location in which the control and direction of a company is located, and may ultimately be exercised in more than one location.[10]
11. The key element in the control and direction of a company's operations is the making of high-level decisions that set the company's general policies, and determine the direction of its operations and the type of transactions it will enter.[11]
12. The control and direction of a company is different from the day-to-day conduct and management of its activities and operations.[12] The day-to-day conduct and management of a company's activities and operations is not ordinarily an act of central management and control.[13] Nor is the management of day-to-day activities under the authority and supervision of higher-level managers or controllers.[14]
13. The day-to-day conduct and management of a company's operations might be an exercise of central management and control in circumstances where they are effectively the same. For example, for a small passive investment company with a very small number of investments, the decisions to make, hold and dispose of those investments, would be both the day-to-day management and the central management and control of the company.[15]
14. Merely because a person is a majority shareholder, or has the power to appoint those who control and direct a company's operations does not, by itself, mean the person controls and directs a company's operations and activities.[16]
What is 'decision making'?
15. A person, or group of people, make a decision if they actively consider and decide to do, or not do something based on it being in the best interests of the company.[17] It does not include the mere implementation, or rubberstamping, of decisions made by others (see paragraphs 26 to 29 of this Ruling).
Acts of central management and control
16. Exercising central management and control of a company can involve:
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- setting investment and operational policy[18] including:
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- appointing company officers and agents and granting them power to carry on the company's business (and the revocation of such appointments and powers)[21]
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- overseeing and controlling those appointed to carry out the day-to-day business of the company[22], and
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- matters of finance[23], including determining how profits are used and the declaration of dividends.[24]
Matters of company administration
17. Matters of company administration are not acts of central management and control. These include:
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- keeping a company's share register, including registering transfers of shares[25]
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- keeping and adopting a company's accounts[26]
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- where a company pays dividends[27], and
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- the minimum acts necessary to maintain a company's registration.[28]
The relevance of a company's activities
18. The nature of a company's activities and business define which acts and decisions are an exercise of the central management and control of that company.[29] For example, where a company is a special purpose vehicle set up to conduct only two transactions - to buy and sell an asset - the decisions to buy and sell will be the only activities relevant to central management and control.[30] For a company carrying on an ongoing business of mining and selling diamonds, the relevant decisions include determining policies on the operation and development of mines, and the sale of the mined diamonds.[31]
Who exercises central management and control of a company?
19. Identifying who exercises central management and control is a question of fact. It cannot be determined solely by identifying who has the legal power or authority to control and direct a company.[32] The crucial question is who controls and directs a company's operations in reality.
A starting point
20. Normally, where a company is run by its directors in accordance with its constitution and the company law rules applicable to that company[33], which give its directors the power to manage the company, the company's directors will control and direct its operations.[34] It follows that ordinarily it is a company's directors who exercise its central management and control.
21. However, the actions of a company's directors, or others with the legal power and authority to control and manage the company, are not the end of the enquiry as to who exercises central management and control. There is no presumption that the directors of a company will always exercise its central management and control.[35]
22. When determining who exercises a company's central management and control, all the relevant facts and circumstances must be considered. Facts and circumstances to be considered in determining who exercises a company's central management and control include the role of anyone who assumes the role of the directors' role in managing and controlling the company's affairs or has a role[36] in the decision-making processes or governance of the company.[37]