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Australia issues guidance on foreign companies’ central management and control test of Australian residency

Executive summary

On 21 June 2018, the Australian Taxation Office (ATO) issued three guidance documents regarding whether foreign companies are Australian residents under Australia’s central management and control (CMAC) test of corporate residency:

  • Final Tax Ruling TR 2018/5 Income tax: central management and control test of residency (ruling)
  • Draft Practical Compliance Guideline PCG 2018/D3 (Draft PCG) to accompany the ruling: Identifying where a company’s central management and control is located
  • A Compendium on TR 2018/5

This guidance impacts:

  • Foreign operating companies and foreign intermediary holding companies controlled by Australian groups (i.e., outbounds)
  • Foreign holding companies of foreign controlled Australian groups (i.e., inbounds), including those involved in funds management

International businesses should assess the Australian residency status of their companies or foreign collective investment vehicles (CIVs) to identify any risks and remedial action which may be required.

A change in residency status could give rise to significant tax implications, including:

  • Australian exposures to income tax and capital gains tax on transactions
  • Ineligibility to apply non-assessable non-exempt income (NANE) status to dividends
  • Membership of tax consolidated groups
  • Deductibility of interest expenditures arising from funds borrowed to equity fund foreign subsidiaries
  • Liability of foreign CIVs with an Australian investment manager to Australian income tax

Detailed discussion


The ruling largely follows the earlier draft TR2017/D2, despite submissions by professional bodies, including EY’s submission.

In this respect, where boards of foreign companies merely rubberstamp or “mechanically implement” decisions which are made by Australian controllers, parent companies, etc. without due consideration, the foreign companies run a significant risk of being treated as an Australian resident because their CMAC is in Australia.

The ruling is far less concessional than earlier ATO interpretations and looks to multiple recent judicial authorities. For example, it indicates that a foreign company’s

“day-to-day conduct and management of a company’s activities and operations is not ordinarily an act of (the company’s) central management and control. Nor is the management of day-to-day activities under the authority and supervision of higher-level managers or controllers.”

Draft PCG

The Draft PCG sets out how to identify the circumstances where foreign incorporated companies that are influenced or controlled by Australian controllers, directors, etc. will be treated as being Australian resident.

The Draft PCG contains practical guidance on the matters covered by the ruling. It discusses a range of issues and provides various illustrative examples, including:

  • Establishing where a company’s CMAC is located (this will not necessarily be limited to board minutes and relevant evidence may include contemporaneous emails and correspondence as well as oral evidence and statements by those involved in the company’s decisions)
  • Identifying high-level decision making of a company and the relevance of a company’s activities, including, where decisions are made in more than one place, with examples of small and large investments businesses and special purpose vehicles
  • Determining whether a person is merely influential or is the real decision maker
  • Instances where the exercise of CMAC vs. day-to-day management of a company’s operations may or may not exhibit an exercise of CMAC

The Draft PCG also outlines transitional and ongoing compliance approaches.

When finalized, the Draft PCG is proposed to apply from 21 June 2018. Submissions on the draft PCG are due by 20 July 2018.

Transitional compliance approach and resetting foreign companies’ residency

The Draft PCG outlines the proposed ATO transitional compliance approach. The Commissioner will not apply his resources to disturb a foreign incorporated company’s status as a nonresident during the transitional period if it meets certain criteria. These are quite specific, including that the foreign company is an ordinary company and is not a foreign hybrid.

The transitional period is to end on 13 December 2018 – six months from the issuance date of TR 2018/5.

Ongoing compliance approach

The Draft PCG provides the Commissioner’s acknowledgement that unplanned or unintended circumstances may arise from time to time which cause the location of CMAC to be questioned.

The Draft PCG outlines that the Commissioner will not normally apply his resources to disturb a foreign incorporated company’s status as a nonresident merely because part of the company’s CMAC is exercised in Australia, i.e., where directors regularly participate in board meetings from Australia using modern communications technology and certain criteria is satisfied on an ongoing basis.

Next steps for investment managers of foreign CIVs

Australian funds management firms will often be associated with foreign CIVs which have arrangements with Australian investment managers.

Australian investment managers associated with foreign CIVs will want to undertake an immediate prudential review of the governance and operations of the foreign CIVs, to confirm that they will be adequately protected under the Draft PCG. Some relevant examples in the draft PCG are helpful, but further clarification is needed.

Next steps for outbound investing businesses with foreign subsidiaries

Australian outbound businesses (whether foreign-owned or Australian-owned) with significant or mature operations/businesses and/or subsidiaries in foreign jurisdictions will want to undertake an immediate prudential review to identify whether:

  • They could be classified as an Australian resident under the ruling or the Draft PCG
  • Improved documentation of decision-making is needed
  • They can benefit from the Commissioner’s transitional compliance approach, to adjust directorial, management and documentation issues to reduce the risk of Australian resident status

Some businesses might consider that, for certain foreign subsidiaries which are not currently undertaking significant business or profitable activities, there are currently few tax risks even if they were treated as an Australian resident.

However, any future transaction which might crystallize significant increased value in the foreign subsidiary, or involve significant financing, capital injection, or joint ventures, might result in a taxable event and a dividend from the foreign subsidiary which would not be treated as NANE income for Australian tax purposes. Accordingly, the risk of inaction needs to be carefully understood and documented, given the potential for significant tax costs.

Integrating a prudential review with year-end financial reporting processes

These issues are particularly timely given the financial year end for 30 June balancing companies.

A prudential review should be integrated into year-end tax accounting, risk management and assurance processes, to identify the actions needed before the expiry of the Commissioner’s transitional period.

EYG no. 010010-18Gbl

Download this Tax Alert as a PDF file.

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