Tax residency of corporations – part 1

Now that we have discussed individual residency, it is time to move on to corporate residency. The approach taken to determine the residence of both types of taxpayer is similar in many regards. In the old English case of De Beers Consolidated Mines Ltd v Howe Lord Loreburn said;

“In applying the conception of residence to a company, we ought, I think, to proceed as  nearly as we can upon the analogy of an individual. A company cannot eat or sleep, but it can keep house and do business. We ought, therefore, to see where it really keeps house and does business”

While the early cases remain relevant, we now have a statutory definition of corporate resident. The Income Tax Assessment Act 1997 says that “a company which is incorporated in Australia, or which, not being incorporated in Australia, carries on business in Australia, and has either its central management and control in Australia, or its voting power controlled by shareholders who are residents of Australia” is a resident.

This definition is comprised of three tests – the incorporation, central management and control and voting tests. The rest of this post will discuss these in turn.

Incorporation test

If a company is incorporated in Australia it will be a resident of Australia. While this test is very simple to apply, it is open to easy manipulation.

Central management and control test

If a company is not incorporated in Australia it will still be a resident if it “carries on business in Australia, and has…its central management and control in Australia”. Whether this test has two parts (and in my opinion it does) or just one is a matter of great controversy.

In the De Beers case mentioned above Lord Loreburn went on to add that “the real business (of a company) is carried on where the central management and control actually abides”. He regarded that as the “true test”. Later, in the Australian case of Malayan Shipping, Justice William rejected the argument that law could not refer only to the management and control of the business but must also refer to the actual operations themselves. The judge found that the reason for the wording of the Act was “to make it clear that the mere trading in Australia by a company not incorporated in Australia will not of itself be sufficient to cause the company to become a resident of Australia”. Malayan Shipping is thus authority for the proposition that if a company’s central management and control is in Australia then ipso facto it must be carrying on a business in Australia. This appears to be the majority view.

However, the Commissioner takes a differing view. In Tax Ruling TR 2004/15 he asserts that the test does have two requirements, and generally other acts of carrying on a business need to exist before the central management and control test is satisfied. In the Commissioner’s words Lord Loreburn’s analogy of a company keeping house and doing business is replicated in the two requirements of the test. The Commissioner’s position is based on the ideas that the courts should not easily consider any word or sentence used in an Act as superfluous and nor should judicial statements supplant or supersede the words of the law itself. TR 2004/15 argues that only where a company’s business is management of its investment assets and where it undertakes only minor operational activities, will both tests be satisfied by the same set of facts.

So the cases say one thing but the Commissioner says another. What’s a taxpayer to do? Well, tax rulings are binding on the Commsioner but not on taxpayers. Therefore if you like the Ruling you can apply it in the knowledge that the ATO won’t stop you. However, if you disagree (and are willing to argue your position in the courts should it come to that) you can ignore it in the knowledge that you have strong judicial precedent to support you.

There’s still lots more to go through regarding corporate residence so stay tuned for part two.

Cheers,

Simon

All advice in this blog is of a general nature. I’ve done my best to make sure it is accurate but I give no guarantees. Make sure you seek professional advice that is specific to your situation.

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