New ATO draft ruling on company tax residence – TR 2017/D2

The following article originally appeared on the A&A/FTI Tax website:


On 15 March 2017, the Commissioner of Taxation released Draft Taxation Ruling TR 2017/D2 and withdrew Taxation Ruling 2004/15. These moves came in response to the High Court’s 2016 decision in Bywater Investments.[1] This decision, and the tax rulings, concerned the residence of companies not incorporated in Australia.

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.

Bywater Investments

Bywater concerned a foreign-incorporated company that held meetings of its Board of Directors outside of Australia. The taxpayer argued that the court was bound to find that central management and control (CM&C) was exercised abroad. The High Court rejected this approach and held that the location of CM&C of a company was not to be determined by its formal structure, but was rather a question of fact.

The Court found that, as a matter of fact, the real business of the appellant was conducted by an individual from Sydney (Mr Vander Gould), without the involvement of the foreign directors. The directors had abrogated their decision making in favour of Mr Gould and only met to rubber-stamp decisions made by him in Australia.

The situation in Bywater was contrasted with that in Esquire Nominees[2]. In Esquire, a firm of Australian accountants exerted significant influence over the directors. Nevertheless, it was found that CM&C was exercised by the directors, as they would not have acted on the accountants’ instructions had these instructions been improper or inadvisable.

TR 2017/D12 – Income Tax: Foreign Incorporated Companies: Central Management and Control test of residency

This ruling sets out the Commissioner’s preliminary but considered view on how to apply the CM&C test of company residency, following the Bywater decision.

The ruling states that;

“If a company has its central management and control in Australia, and it carries on business, it will carry on business in Australia within the meaning of the central management and control test of residency. It is not necessary for any part of the actual trading or investment operations from which its profits are made to take place in Australia.”

Authority for this proposition can be found in Malayan Shipping.[3]

This position represents a significant change from the view expressed in TR 2004/15 which was that other acts of carrying on a business generally need to exist before the CM&C test is satisfied. TR 2004/15 had argued that only where a company’s business is management of its investment assets and where it undertakes only minor operational activities, will both tests (carrying on a business and CM&C) be satisfied by the same set of facts.

Like TR 2004/15, the draft ruling states that CM&C involves the making of high-level decisions that set the company’s general policies, and determine the direction of its operations and the type of transactions it will enter. This is to be contrasted with day-to-day conduct and management of operational activities. The new ruling adds, in a reference to Bywater, that decision making involves active consideration and does not include the mere implementation of, or rubberstamping of decisions made by others.

Previously, the Commissioner’s view was that CM&C is usually exercised by the company’s board and therefore the place where the board meets is highly relevant in determining where CM&C is located. The new ruling however downgrades the actions of directors to a “useful starting point” and states that “there is no presumption that the directors exercise central management and control unless proved otherwise”. All relevant facts must be considered.

It follows that mere legal power or authority to manage a company is not sufficient to establish exercise of CM&C, particularly where this authority is not used. Furthermore, legal authority is not necessary for a person to exercise CM&C – if an outsider dictates or controls the decisions made by the directors, the outsider will exercise CM&C of the company. The key questions are whether the people with formal decision-making authority actively consider whether to do what they are told or advised to do and make a decision in the best interests of the company and whether they would refuse to follow advice or directions that are improper or inadvisable.

Practical considerations

A common issue is how much influence/control an Australian parent can have over an overseas subsidiary before that subsidiary becomes a resident. To demonstrate that the parent is merely influential and does not itself exercise CM&C, it may be advisable that;

  • The directors of the company have the required skills, experience and qualifications to perform their duties and sufficient knowledge of the business to make informed decisions;
  • The directors actively consider all information and advice before making decisions in the best interests of the company;
  • The directors meet frequently enough to actually exercise CM&C. Ideally these meetings would take place outside of Australia; and
  • Board minutes record, not only what decisions were made, but why the directors made them to evidence that decisions were actually made at the meetings.

The ruling, when finalised, is proposed to apply from 15 March 2017.

[1] Bywater Investments Limited & Ors v. Commissioner of Taxation; Hua Wang Bank Berhad v. Commissioner of Taxation [2016] HCA 45; 2016 ATC 20-589

[2] Esquire Nominees Ltd v. FCT [1973] 129 CLR 177

[3] Malayan Shipping Co Ltd v Federal Commissioner of Taxation [1946] 71 CLR 156


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