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To Be or Not To Be (a Tax Resident)

To Be or Not To Be (a Tax Resident)

Liam Delahunty reviews the ATO's Taxation Ruling TR 2018/5 in regards to when a foreign-incorporated entity may be an Australian tax resident.

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Director, International Tax

KPMG Australia

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The Australian Taxation Office (ATO) has just released its much-anticipated Taxation Ruling on central management and control test of residency. TR 2018/5 covers the circumstances in which a foreign-incorporated entity may be an Australian tax resident, together with draft Practical Compliance Guideline (PCG 2018/D3).

This follows the ATO's withdrawal of the longstanding TR 2004/15 in March 2017 and the revised draft TR 2017/D2, as discussed in this previous Tax Insight article published in June 2017. The ATO has largely endorsed its earlier view in TR 2017/D2, and has set out a discussion of submission points made in response to the consultation in a separate Ruling Compendium. TR 2018/5 now addresses four key questions:

Does a company carry on business in Australia?

Most significantly, TR 2018/5 confirms the ATO’s view that if a company carries on a business in any jurisdiction, and has central management and control (CM&C) in Australia, then it will be an Australian resident under Australian domestic law. In particular, 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 – as the mere conduct of CM&C in Australia will amount to a business in Australia.

What does CM&C mean?

TR 2018/5 affirms that the key element in the CM&C 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. These are to be distinguished from the day-to-day conduct and management of its activities and operations and matters of company administration, which are not typically itself acts of CM&C.

Who exercises CM&C?

A starting point is that the Directors of a company will typically exercise CM&C, though this is not a presumption and TR 2018/5 also re-emphasises that “rubber-stamping” may be disregarded and an enquiry made as to the actual place where CM&C has emanated from. This is precisely what occurred in the Bywater case.

Where is CM&C exercised?

Again TR 2018/5 confirms that this is an enquiry into the substance of decision-making, rather than a mere formality. Although it is not relevant to ask where Directors ordinarily reside, it is of critical relevance to consider in which jurisdiction they actually perform the activities constituting CM&C.

Implications

TR 2018/5 may reflect a surprising new order for a number of Australian groups with foreign subsidiaries, particularly the comments in relation to whether CM&C itself amounts to a business. These groups will also want to consider the practicalities set out in the draft PCG 2018/D3, which helpfully permits transitional “relief” period ending 18 December 2018 for certain groups that have relied upon the prior TR 2004/15.

Given the potential for significant practical impediments – and also the possibility of an additional tax impost – if foreign subsidiaries inadvertently become resident in Australia by virtue of having CM&C therein, it will be important to assess and remediate risks as soon as possible. Commercially palatable yet technically robust residency protocols will need to be in place and monitored going forward.

© 2018 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

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