Every so often, the common law method and the role of appeal courts in our legal system combine to produce an outcome that is both unsatisfying and unsettling. The High Court’s decision in Bywater Investments and Hua Wang is a good example. It may turn out to be momentous, or it may turn out to be an obscure oddity. At this stage, it is hard to tell.
The case revolved around a simple question: were companies incorporated offshore nevertheless resident for tax purposes because their ‘central management and control’ was located in Australia? The judge at first instance said this was a question of fact, he made findings about what the facts were, and he concluded the facts demonstrated that the ‘central management and control’ of each company was in Sydney. The Full Court said they saw nothing amiss in the judgment and the High Court took the same position.
But because of the way appeal courts operate, the High Court did not actually rule on what ‘central management control’ means; rather they simply agreed that the first judge had not made a mistake in deciding what the test was or in applying it. And in the common law system, judges decide just the issue that is before them and on the facts as found; they don’t (usually) speculate on other matters or give a view on what the answer would have been if the facts had been different.
And that is the problem trying to plumb the depths of these cases. The judge made findings of fact that the, ‘real business was conducted from Sydney …’ and everything else was ‘a crooked pantomime’: ‘the role of [the apparent director] was fake,’ his actions may even have amounted to ‘a sham’ and the evidence he gave to deny this was dismissed as lies. Perhaps not surprisingly, the judge found the company ‘had its place of central management and control in Sydney … and nowhere else.’ But unhappily this doesn’t tell us much about a less egregious world where the facts are different. The High Court reminds us the issue to be answered is a question of fact, and ‘each case [including this one] depends on its own facts and circumstances …’
The obvious question which the case leaves unanswered is, just how much influence can be exerted from Australia by an Australian parent company, before the offshore subsidiary becomes a resident? The influence of a parent company will usually be extensive and undeniable. Indeed, it was part of the taxpayers’ case that treating these companies as resident would turn on its head 40 years of commercial practice that, ‘the directors of foreign subsidiaries of Australian companies [can and do] act as they were instructed to by their Australian parent companies, without fear that the central management and control of the subsidiaries would thereby be sited in Australia.’
The High Court does not respond to this challenge directly but their language suggests what their approach might be – that what matters is not whether there is a high degree of control coming from Australia, but rather whether the directors of the offshore company take their duties seriously and perform them according to law. The taxpayer argued that tax would become unmanageable if, ‘directors of a foreign subsidiary actually [had to] turn their minds to directions from an outsider and then actually decide whether the directions are proper and appropriate …’ Not only was this dire prediction not heeded, one suspects it is exactly what the High Court is hoping to see in the future.
So whether these cases turn out to be a momentous change for Australian multinationals, or simply an oddity that depends entirely on their own very distinctive facts, remains to be seen. And it will depend on two matters – how expansively the ATO wants to interpret this decision and how willing future Courts are to accept the argument that the test is not principally about control from Australia, but rather about proper governance offshore.