ATO Interpretative Decision

ATO ID 2002/46 (Withdrawn)

Income Tax

• This ATO ID is withdrawn as the view regarding the application of the Central Management and Control test expressed in it is inconsistent with the Commissioner's revised view on the application of the Central Management and Control test of company residency set out in Taxation Ruling TR 2018/5 Income tax: Central Management and Control test of residency.
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Issue

Whether a company incorporated overseas is considered to be an Australian resident under the definition of 'resident' in subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936) on the basis that it carries on business in Australia and its central management and control is in Australia.

Decision

The foreign company is not a resident of Australia in terms of the definition contained in subsection 6(1)(b) of the ITAA 1936 because it did not carry on a business in Australia.

Facts

The foreign company is a holding company incorporated in a country other than Australia and is subject to the corporations law of that country.

The operations of the foreign company are centred in the country of incorporation and, broadly, relate to the management of the worldwide company group. More specifically, the principle responsibilities of the foreign company include the raising of equity capital and using that capital for taking up equity in or making loans to subsidiary and associated companies, and performing certain head office functions. As a holding company, it also provides services to subsidiaries and associated companies for arm's length fees.

The foreign company's income will comprise mainly dividends from its subsidiaries, interest on loans and fees.

Each year, the board of directors of the foreign company will hold some board meetings in Australia and the others in different countries.

Two senior executive officers and board members of the foreign company are based in Australia but each will spend significant amounts of time each year outside Australia.

Reasons for Decision

Subsection 995-1(1) of the Income Tax Assessment Act 1997 defines an Australian resident to mean a person (which includes a company) who is a resident of Australia for the purposes of the ITAA 1936. The residency tests under paragraph (b) of the definition of 'resident' in subsection 6(1) of the ITAA 1936 for a foreign incorporated company depends on whether the company is carrying on business in Australia, and either its management and control is in Australia or its voting power is held by Australian resident shareholders (the secondary residency test).

A foreign company is generally a resident of the country in which it is incorporated but for the operation of the secondary residency test. However, in determining the residence of a foreign company, the provisions of any relevant double taxation agreement need to be considered once residence is established under the domestic law.

It is considered that the residency test in paragraph (b) for a company not incorporated in Australia is a composite test which requires the company to carry on business in Australia as a prerequisite and, in addition to have either its central management and control in Australia or its voting power controlled by Australian resident shareholders.

Whether a company carries on business in Australia is a question of fact to be decided on the particular facts of the case under consideration. The nature and extent of activities conducted in Australia are relevant.

The holding of some board meetings in Australia and the occasional presence of senior executive staff of the foreign company in Australia are insufficient to conclude that a business is being carried on in Australia.

As the foreign company is not carrying on business in Australia, it is not necessary to consider whether the foreign company's central management and control is in Australia or if its voting power is held by Australian resident shareholders. Similarly, it is not necessary to consider the application of any double taxation agreement.

This conclusion may not appear to align with the findings of the High Court in Malayan Shipping Co Ltd v. FCT (1946) 71 CLR 156. In that case, Williams J considered that 'if the business of the company carried on in Australia consists of or includes its central management and control, then the company is carrying on business in Australia and its central management and control is in Australia'. The business consisted of one asset which was tightly managed by, effectively, its sole owner shareholder. While the findings of William J can be justified on the facts of Malayan Shipping, the facts in this case are distinguishable. Accordingly, the decision in Malayan Shipping is considered not to govern the outcome in this case.

Legislative References:
Income Tax Assessment Act 1936
   Subsection 6(1)

Case References:
Malayan Shipping Co Ltd v. FCT
   (1946) 71 CLR 156

Keywords
Non resident companies
Company restructuring
Resident/residency
Residence of companies
Residence of companies - business test
Permanent establishment

Business Line:  Public Groups and International

Date of publication:  24 January 2002

ISSN: 1445-2782