Is your foreign incorporated company an Australian tax resident? New ATO draft ruling issued

By Phil Shepherd - March 16, 2017

With the release of a new draft ruling on the tax residence of foreign incorporated companies, we can expect that the ATO will now take a tougher line on those companies claiming to fall outside the Australian tax net on the basis that they are non-resident taxpayers. Is your foreign incorporated company at risk if the ATO reviews its tax residence?

Earlier this year I wrote an article entitled ATO reviewing residences of foreign incorporated companies. Since writing that article, the ATO has now withdrawn its previous ruling on the tax residence of foreign incorporated companies (i.e. TR 2004/15) and has released a new draft ruling TR 2017/D2 [‘the Draft Ruling’].

In a major change from the approach in TR 2004/15, the ATO now considers that the central management and control (CM&C) of a company is factually part of carrying on the company’s business. This change in approach means that if the CM&C of a foreign incorporated company is in Australia then the company will be a tax resident here.

In other words, under the new approach in the Draft Ruling the ATO will no longer accept that the CM&C of a foreign incorporated company can be in Australia without the company being a tax resident here.

While the ATO still accepts that a company’s directors will normally exercise CM&C, the ATO states in the Draft Ruling that there is no presumption that CM&C is exercised by the company’s directors unless it is proven otherwise.

Disappointingly, and unlike its predecessor, the Draft Ruling does not include any examples to illustrate how the ATO will apply its new approach to various situations.

Submissions on the Draft Ruling are due by 12 May 2017.  

The Draft Ruling reinforces the points I made in my earlier article about the Board meetings of the foreign company, Board minutes and Directors of a foreign incorporated company. For convenience, I have repeated these comments below:

Board meetings of the foreign company

All Board of Directors meetings for the foreign company should ideally take place outside Australia with Directors, particularly those who live in Australia, attending Board meetings in person rather than by telephone or video-conference.

The Board of Directors meetings must represent the true ‘controlling mind’ of the company - for example, the Board must meet on enough occasions to allow the Board to actually exercise CM&C. 

That is, it must be clear to the ATO that the company's CM&C is taking place at the Board meetings and that the Directors are not merely ‘rubber stamping’ decisions made in Australia. 

Board minutes

The minutes of the Board of Directors meetings for the foreign company must evidence that decisions were actually made at the meetings. 

That is, the minutes should record the occurrence of events as they actually happened to evidence that CM&C was exercised at the relevant Board of Directors meeting. In particular, the minutes should ideally record what information was provided to the Directors before the meeting and how / why a decision was made at the meeting.

Directors

The majority of the Directors of a foreign company should not only be non-Australian resident but they must also:

  1. Be ‘real’ people with suitable qualifications for the tasks required by the company
  2. Have sufficient experience of the market(s) in which the company operates to be able to make informed judgments

In short, it must be clear to the ATO that the foreign directors are actively involved in the key strategic decisions for a company. 

This means, for example, that:

  • The foreign Directors will need to be kept up to date on all developments regarding the foreign company
  • All information required for a decision to be reached on an issue at a Board meeting must be provided to the Directors prior to a meeting to ensure that the Directors have sufficient time to adequately consider the issue

Summary

The Draft Ruling should serve as a timely reminder for Australian taxpayers to carefully examine the management of their foreign operations - particularly where there are Australian based Directors of foreign companies. 

Given that Australian tax resident companies are taxable in Australia on their worldwide income, the consequences of not having adequate controls and protocols in place to ensure that the CM&C of a foreign company remains outside Australia can be severe. 

With the release of the Draft Ruling, we can expect that the ATO will closely examine the residence of a number of foreign incorporated companies in the future.


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