Coinciding with the release of Kong: Skull Island, the Commissioner has opted for a re-boot of his own in releasing TR 2017/D2 yesterday and the subsequent withdrawal of TR 2004/15.
For those playing along at home, Matt Popham wrote in December 2016 on the Bywater/Hua Wang Bank case and the potential impact on foreign incorporated companies being taken to have “central management and control” (CM&C) in Australia - TR 2004/15 has now been replaced to reflect this case.
The new TR 2017/D2 has the following key aspects:
- A key difference from the previous ruling (and noted in Bywater/Hua Wang Bank) is that if a company carrying on business has its CM&C in Australia, it will necessarily carry on business in Australia – even where trading operations are outside of Australia;
- The key element of CM&C 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 –the conduct of day-to-day activities and operations are not CM&C;
- “Decision making” involves active consideration and deciding to do something in the best interests of the company. A lack of knowledge of the business will be seen to be rubber stamping and not “decision making”;
- The relevance of a company’s activities need to be considered – where a SPV is established for a transaction, the decisions for the SPV to buy and sell the relevant asset are the only activities to consider;
- Substance over (legal) form – legal authority is not determinative, instead who really controls and directs operations is;
- Formal documentation is only relevant if other evidence proves it is factual.
So what does all this mean? In our view, TR 2017/D2 is consistent with the decision handed down last year and taxpayers should ensure that they are mindful of the below.
- There is no presumption that the directors exercise CM&C – this is a “useful” starting point but not a rebuttable presumption.
- Do the directors of a company have the required knowledge of the business and do they actively consider all information before making decisions in the best interests of that company?
- Executives travelling to Australia on business, especially those with global or regional roles, as well as executives on assignment to Australia need to be mindful of whether they are exercising CM&C in Australia – individuals who are not directors can exercise CM&C.
- Where key executives are in Australia for the signing of contracts or to undertake negotiations – is the decision making being undertaken in Australia? Is that transaction “relevant” to determining the company’s CM&C?
- The ATO can access immigration information - are the minutes of meetings factually correct as to who was present and what was discussed, including the rigour of the discussion?
- The interaction of all of the above and the company’s tax governance framework is also an important consideration that can often be overlooked.
Will TR 2017/D2 become a classic like Back to the Future? Only time will tell.