The Government will introduce key corporate tax residency amendments for foreign incorporated companies, alongside a handful of minor international tax measures.
Amendments to clarify Australia’s corporate tax residency rules for foreign incorporated companies
Following the High Court decision in Bywater Investments Ltd v Federal Commissioner of Taxation (Bywater), the ATO expanded their view on the circumstances under which foreign incorporated companies would be considered Australian tax residents. This has resulted in considerable uncertainty for Australian businesses expanding offshore and increased exposure to significant adverse tax consequences and additional compliance costs.
This additional uncertainty lead to the Government commissioning the Board of Taxation to provide recommendations to overcome the additional complexity and exposure for Australian businesses expanding overseas. Pitcher Partners has played an active role in the Board of Taxation’s recommendations and it is pleasing to see that the Government will be adopting those recommendations.
Going forward, a foreign incorporated company will be considered an Australian tax resident if it has both core commercial activities in Australia and its central management and control is exercised in Australia. This is expected to result in fewer foreign incorporated companies being considered Australian tax residents in contrast to the application of the ATO’s current view in Taxation Ruling (TR) 2018/5.
It is also encouraging to see that taxpayers will have the option of applying the new law retrospectively from 15 March 2017, thereby effectively preventing the adverse impacts of the Bywater High Court decision at taxpayer discretion.
While this is a welcome update for taxpayers, the effectiveness of the new rules will be dependent on an appropriate definition of the new concept of ‘core commercial activity’ and clarification of whether the current voting power test will be retained. Pitcher Partners will continue to be actively involved in consultation in relation to the new legislation to ensure the new rules provide sufficient certainty for middle market businesses expanding overseas.
Strengthening Australia’s foreign investment framework
In June 2020, Treasurer Josh Frydenberg announced major reforms to Australia’s foreign investment regime. These reforms were enacted to ensure that Australia’s foreign investment framework keeps pace with emerging risks and global developments. The reforms addressed key risks associated with foreign investment such as introduction of a national security test, stronger enforcement powers, greater compliance monitoring and harsher penalties. To support these reforms, the Australian Government had provided net funding of $54.1 million in the July 2020 fiscal update.
The Government has announced further funding to implement a new information and communication technology (ICT) platform. It is expected this platform will decrease Foreign Investment Review Board (FIRB) application processing times. The platform will also strengthen FIRB’s review and compliance activities. In addition, the ICT platform is expected to include a new consolidated Register of Foreign Ownership of Australian Assets.
The foreign investment fee framework is also expected to be simplified with adjusted fees taking effect from 1 January 2021. The revised fee framework will ensure that foreign investors (and not Australian taxpayers) bear the costs of administrating the foreign investment system.
Pathway to permanent residency to be extended to New Zealand Special Category visa holders but beware of tax consequences
New Zealand Special Category (subclass 444) visa holders meeting certain taxable income conditions will be able to apply to take up Australian permanent residency.
While great news for eligible New Zealand citizens looking to take up the opportunity, applicants should be mindful of Australian tax consequences associated with Australian permanent residency. Subclass 444 visa holders who may be considered temporary tax residents should plan for the additional tax and complexity associated with permanent residency. A move to non-temporary resident status can bring foreign investment income and capital gains within Australia’s tax net and may open individuals to attribution of income under Australia’s controlled foreign company rules. Accordingly, care needs to be taken when considering the option from a taxation perspective.