The ATO has announced an important tax residency concession for foreign incorporated companies during the COVID-19 crisis.
On 24 March 2020, the government announced a ban on Australians travelling overseas, using powers given to it under the Biosecurity Act 2015. The ban is aimed at preventing travellers returning to Australia with COVID-19. There are limited exceptions, for example to allow people to return home if their normal place of residence is overseas.
From a tax standpoint, this ban becomes problematic for directors or other employees that are based in Australia who need to travel to attend foreign board or other meetings when they are board members or employees of an overseas company.
If the travel does not take place to attend such meetings, then it could risk bringing the foreign entity into the Australian tax net due to Australia’s concept of “central management and control” for the corporate residency test. This risk is particularly acute given stricter new guidance that has recently been issued by the ATO in this area.
To recap, a company is a resident of Australia if:
- it is incorporated in Australia, or
- if it is not
incorporated in Australia, it carries on business in Australia and has either
- its voting power controlled by shareholders who are resident of Australia (the voting power test of residency), or
- its central management and control in Australia (the central management and control test of residency).
On this front, recently the ATO published a new tax ruling and practical guidance on company residency for Australian tax purposes, namely, taxation ruling TR 2019/5 and practice compliance guideline PCG 2018/9.
Broadly speaking, this fresh guidance makes it easier than ever for a foreign incorporated company to become an Australian resident for tax purposes. For example, three of the ways that a foreign company’s central management and control can be in Australia under the new guidance are:
- The company’s core policies and strategic decisions are made in Australia. Thus, even if the final decisions on policies are ratified at an overseas board meeting, the central management and control may nonetheless still be in Australia.
- If overseas directors do nothing more than mechanically accept recommendations made to them, the central management and control can still be located in Australia if the real decision-maker is located here.
- If the sole shareholder and director(s) of a foreign company are in Australia at the time of making a fundamental decision regarding the company’s business operations, central management and control may be in Australia – even where the entity has no other connection to Australia.
Thus the new guidance adopts a substance over form approach, by examining the location of the actual decision making of the company. By contrast under previous rules the ATO took a less nuanced approach, deeming that a company’s central management and control would not be in Australia if, broadly speaking, substantially all the meetings of the company’s board were held overseas.
Recognising the potential risk of foreign companies being unfairly dragged into Australia’s tax net due to COVID-19 travel restrictions, in early April 2020 the ATO announced a welcome concession. That is, if the only reason for holding board meetings in Australia, or directors attending board meetings from Australia, is because of impacts of COVID-19, then the Commissioner will not apply compliance resources to determine if the entity’s central management and control is in Australia.
There is no sunset date for this concession, which presumably will remain in place at least while the strict overseas travel ban applies.