Angela Wood, Annemarie Wilmore and Daniel Osvath review the High Court decision in the Bywater Investments/Hua Wang Bank vs Tax Commissioner.
On 16 November 2016, the High Court of Australia (HCA) handed down its decision in the appeal of Bywater Investments Limited & Ors / Hua Wang Bank Berhad vs Commissioner of Taxation determining (consistent with the long standing and well established principle) that the appellants were Australian residents for the purposes of income tax because the central management and control of the companies actually took place in Australia.
The HCA confirmed Federal and Full Federal Courts' findings that where a board of directors does no more than mechanically implement (or ‘rubber stamp’) directions made by others (in this case accountant), then it is difficult to conclude that those are decisions of the board.
In making findings of fact, the HCA in the first instance conducted a forensic examination of documentary records of the board, recollections of the relevant directors, the director’s communications with third parties and the records of the accountant. It was clear to the HCA that in substance the decisions relating to the management and control of the companies was, as a matter of fact, in Australia.
The implications of this judgment for taxpayers may well extend beyond questions of central management and control and the application of the residency source rules. A strong theme in the HCA’s decision was the dominance of substance over form. Although not a new theme for those determining the application of Australian tax legislation, for example in the general anti-avoidance provisions, this concept will continue to be a key focus, particularly in the context of the Multinational Anti-Avoidance Law and the proposed Diverted Profits Tax.
In circumstances where the Commissioner perceives a degree of contrivance in activities, taxpayers can expect that Commissioner will continue to rigorously examine the actual arrangements, actions and practical reality of interactions between parties.