Foreign incorporated companies given additional time to correct tax residency status

The Commissioner has updated Practical Compliance Guideline 2018/9 (PCG), the guideline used identify where a company’s central management and control is located, to provide eligible foreign incorporated companies additional time to update their governance processes and retain their status as non-resident companies.

Recent updates to the PCG provide foreign incorporated companies with additional time to tidy up their governance processes before the Commissioner will apply resources to reviewing the tax residency status of such entities.  The Commissioner has also identified some low-risk scenarios which are unlikely to warrant review from the ATO.

What are the rules about?

PCG 2018/19 addresses the ‘central management and control’ test for determining whether a company is an Australian tax resident (original bulletin here).

When the original PCG was issued it provided for a ‘transitional approach’ such that eligible companies could, by updating their corporate governance processes, ensure that they were not treated as Australian tax resident by the Commissioner. Companies had until 30 June 2019 to get their governance processes in place.The updates to the PCG extend this timeframe which will be a welcome change for many corporate groups.

The updated PCG also acknowledges that the tax residency status of a company will often be a low risk issue for the ATO where the tax outcome for the company may not differ significantly even if it was Australian resident (i.e. due to the branch profits concession) and seeks to clarify what is considered an artificial or contrived arrangement for the purposes of the transitional and ongoing compliance approaches.

Who do the changes apply to?

The changes apply to foreign incorporated companies with Australian resident directors and/or strategic decision makers who have been taking steps to update their governance arrangements in line with the original PCG 2018/9.

When do the changes apply from?

The transitional period for an early balancer taxpayer with a 31 December year end will be extended until 31 December 2020, whilst the transitional period for a taxpayer with a 30 June year end will be extended until 30 June 2021.

What are the changes trying to achieve?

The updates provide additional guidance on the likelihood of the Commissioner applying resources to review the residency status of foreign companies with their management and control in Australia.

The Commissioner has advised that resources are unlikely to be applied where foreign companies have been taking active steps to update their governance processes under the original transitional period and finalise the implementation of such processes on or before the end of their 2021 income year. This extends the window for taxpayers to review and update the way in which their foreign companies are managed and controlled so that such companies are not treated as resident companies for Australian tax purposes.

The Commissioner has also indicated that resources are unlikely to be applied where the impact of the foreign company’s tax residency status to Australia’s tax revenue base is low (i.e. where profits would be non-assessable pursuant to Australia’s branch profits concession or taxable in any event under Australia’s controlled foreign companies rules).  However, the PCG does not address how companies which may be ‘low risk’ in their own right, might be dealt with in relation to other issues, for example the ability of their shareholders to access to dividend (768-A) and capital gains (768-G) concessions.  This is a significant issue and something that we will be seeking clarification on from the Commissioner.

Getting tax residency status right remains critical

Getting the tax residency status of a company wrong can have significant taxation consequences in Australia and overseas.  Therefore, it is important that taxpayers have a high level of comfort around the tax residency status of any entities within their group.

What are the next steps?

If you have a foreign incorporated company in your group or are proposing to establish a foreign incorporated company, it is important to review and confirm its Australian tax residency status. Please contact your Pitcher Partners representative to review any existing or proposed arrangements.