Bywater Investments – Reconsidering Central Management and Control

On 16 November 2016, the High Court unanimously dismissed appeals by four companies (the appellants), ruling that they were Australian residents for income tax purposes.

Under s 6(1) ITAA 1936 a company, not incorporated in Australia, is resident if it carries on business in Australia and has either its central management and control in Australia or its voting power controlled by Australian resident shareholders. The focus of Bywater was on where the central management and control of the company was located.

The appellants sought to rely on the precedent set by Esquire Nominees[1]. In Esquire, a firm of Australian accountants exerted significant influence over the company. Nevertheless, it was found that central management and control of the company resided with the Board of Directors who met outside of Australia.

In Bywater (as in Esquire) the meetings of the directors were held abroad and the appellants argued that the court was bound to find that the central management and control was therefore exercised abroad. The High Court rejected this approach and held that, as a matter of long-established principal, the location of central management and control of a company was not to be determined by its formal structure, but was rather a question of fact.

In Esquire the court found that the accountants, while influential, had no power to control the directors as, had the accountants instructed he directors to do something that was improper or inadvisable, the directors would not have acted on the instruction. This is to be contrasted with the situation in Bywater. While the appellants characterised the role of Mr Vander Gould, a Sydney accountant, as an adviser, the court accepted that the real business of the appellants was conducted by Mr Gould from Sydney, without the involvement of the directors. The fact that the directors were located abroad was insufficient where the directors had abrogated their decision making in favour of Gould and only met to rubber-stamp decisions made by him in Australia.

Bywater is a reminder that courts will generally emphasise substance over form. It also holds a lesson for companies that seek to avoid the second test of residency by appointing foreign directors and for Australian parent companies that exercise influence over offshore subsidiaries – while parties in Australia may exert significant influence, if central management and control is to be situated abroad, the overseas directors must be seen to be independent and not merely rubber stamps.

[1] Bywater Investments & Ors v FCT (2016) HCA 45


The view expressed in this article are mine alone and do not represent my employer or anyone else. The article is intended only to provide a summary and general overview on matters of interest. It is not intended to be comprehensive nor does it constitute legal advice. You should seek legal or other professional advice before acting or relying on the article.



Taxing issues for departing taxpayers

The following article originally appeared in the November 2016 issue of The Taxpayer. This is the monthly journal of Tax & Super Australia (formerly Taxpayers Australia).


If you have any questions abou the issues raised in the article, please don’t hesitate to leave a comment, send me an email or contact me via LinkedIn.

There are a number of excellent articles in the magazine and I encourage you to get hold of a copy.

I will be contributing regularly to The Taxpayer. My next article will appear in December and will be on rental income and the small business CGT concessions.