Amendments to the corporate residency test have been drafted in an effort to partly move away from current administrative guidance which relies heavily on the physical location of directors.
Currently, a foreign incorporated company is deemed an Australian tax resident if its central management and control is in Australia. This test runs through many factors based on where the board of directors meet.
The proposed change will incorporate a new test, to be inserted before the central management and control test. This test causes the company to determine whether it has a “significant economic connection to Australia”.
Core commercial activities
For a foreign incorporated company to be considered a tax resident of Australia, both the company’s core commercial activities are being undertaken in Australia and its central management and control is in Australia.
Core commercial activities depend on:
the nature of the business carried on by the company
the location of staff and assets employed in the conduct of the core business activity of the company both in Australia and abroad
the size of the company
the sophistication of the company’s corporate governance practices
any separation between strategic management and operational control of the business
the composition of the company’s board and any additional roles held by directors, and
the distinction between activities that are core to the conduct of the business and those that are preliminary or ancillary, such as general support functions.
The Board of Taxation has emphasised in their report to the Treasurer that overarching guidance of the circumstances under which the core commercial activities of a company can be said to be conducted in Australia should be provided in the legislation and extrinsic materials.
Also, this should be supplemented with administrative practical guidance that includes the treatment of “holding companies” and the need for a “de minimis” threshold. A “de minimis” threshold should ensure that incidental or ancillary activities do not lead to a finding that business is being carried on in Australia. Further, clarification of the status of “pure” holding investment companies and their activities should have their own guidance.
The Board of Taxation has also recommended that a foreign incorporated company should have the option to choose the rules to take effect from 15 March 2017, the date TR 2004/15 was withdrawn.
