The Australian Taxation Office (ATO) on March 15, 2017, released Draft Tax Ruling TR2017/D2 setting out the Commissioner’s ‘preliminary but considered view’ on how to apply the central management and control test for determining the tax residency of a company that is not incorporated in Australia, following the recent High Court decision in Bywater Investments Ltd & ors v Commissioner of Taxation; Hua Wang Bank Berhad v Commissioner of Taxation (Bywater).
Please refer to January 2017 edition of this newsletter for a summary of the High Court decision.
The Draft Ruling closely follows the decision in Bywater and references the High Court judgment extensively. Some of the Commissioner’s key points of view include:
• It is not necessary for any part of the actual trading or investment operations from which a company’s profits are made to take place in Australia, simply having the central management and control of a business is sufficient.
• The nature of a company’s activities and business define which acts and decisions are an exercise of its central management and control. Central management and control is the control and direction of a company’s operations, a key element of which 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 identification of who exercises central management and control is a question of fact in each case. An individual with no formal authority who dictates or controls the directors’ decisions may be deemed to exercise central management and control of the company.
PwC observation: The Draft Ruling departs from long-established authority on the application of the relevant test and is most likely to lead to uncertainty for companies that are not incorporated in Australia where there are potential decision making ‘influencers’ in Australia. Should the Commissioner’s view in the Draft Ruling ultimately hold, it may be difficult to draw the line in many cases, for example, does an Australian parent of a foreign subsidiary merely influence the decision making of the board of directors of the foreign subsidiary, or do they actually dictate and control the decision making?
This decision should be a red flag to foreign incorporated entities whose decisions are made via consultation with Australian advisors and other personnel located in Australia. Boards and key management personnel located overseas should ensure that they are making the substantive decisions and not merely rubberstamping or mechanically implementing the decisions made by personnel located in Australia.
PwC Australia has lodged a submission with ATO outlining our concerns with the Draft Ruling