Review of Company Tax Residency Rules
Company residency rules are due to go under review, focusing on whether current central management and control test should be removed and corporate residency determined by the incorporation test only.
The Government has requested that the Board of Taxation conduct a review of the tax residency rules for corporate entities, with a focus on ensuring that the rules reflect modern corporate practices and support the tax system in preventing profit shifting by multinational entities. The review follows the release of recent ATO guidance on the interpretation of the 'central management and control test' for residency in TR 2018/5.
Currently, company residence in Australia for tax purposes is determined under a two-step test.
Companies incorporated in Australia are always considered residents under the first step. When it comes to companies that are not incorporated in Australia, they can be residents if they carry on business in Australia and either they have central management and control in Australia or voting power controlled by Australian residents. The concept of central management and control is the main consideration of the review.
At a high level, the purpose of the review is to consider whether the central management and control test is an appropriate test for company residency, including consideration of whether it could be appropriate to remove the test and rely on the incorporation test only.
The working paper issued by the Board of Taxation also refers to the possibility of using a 'place of effective management' test, which is used as a tie-breaker residency test in some double tax agreements.
Another issue to be considered is whether the rule concerning the control of the voting power needs to be retained, given that this is rarely applied in practice.
These matters can be complex and we recommend seeking advice if you are considering setting up a company or branch in Australia. For more information, contact us on 02 9957 4033 or email the team with your query.
This article is provided for information purposes only and correct at the time of publication. It should not be used in place of advice from your accountant. Please contact us on 02 9957 4033 to discuss your specific circumstances.