The residency status of a company, regardless of whether it trades or invests in Australia, dictates the company’s Australian income tax obligations. Foreign resident entities are generally taxed in Australia on any income that has an Australian source. Australian resident entities are generally taxed on their worldwide income.
How resident requirements work for companies
A company not incorporated in Australia will be treated as a resident of Australia if it carries on business in Australia and has its central management and control in Australia. The commissioner has recently released a draft ruling on the concept of central control and management in response to the decision of the High Court in Bywater Investments Ltd v FCT.
Identifying whether key individuals exercise central control and management of a company is a question of fact and substance and will depend heavily on the nature of the company’s activities. Actions that would likely constitute central control and management, can include:
- Making high-level decisions that influence the investment and operational aspects of the company, including but not limited to the sale and purchase of trading stock;
- Power to appoint and dismiss company officers and agents into the company; and
- Overseeing and influencing the everyday business operations of the company.
The ATO emphasises that it is not necessary for any part of the actual trading or investment operations from which the company’s profits are made to take place in Australia. It is sufficient that the people controlling and directing the company as a matter of fact and substance reside in Australia. However, the nature of the company’s activities has a considerable influence on whether particular decisions would constitute an exercise of central control and management of the company.
There are significant taxation consequences for a company which is found to be a tax resident of Australia. Taxpayers should seek legal advice on corporate tax residency matters prior to establishing an offshore business, as a company can very easily inadvertently become an Australian taxpayer.
For assistance and advice on corporate tax residency matters contact our tax lawyers and accountants at The Quinn Group on (02) 9223 9166 or submit an online enquiry form today.