ATO reviewing residences of foreign incorporated companies

By Phil Shepherd - January 11, 2017

Are you at risk if the ATO reviews the residence of a foreign incorporated company? With the pressure the ATO is under to collect revenue it should probably come as no surprise that the ATO is seeking to take a tougher line on those claiming to fall outside the Australian tax net on the basis that they are non-resident taxpayers.

The ATO’s success late last year before the High Court in the case of Bywater Investments Limited & Ors v FCT; Hua Wang Bank Berhad v FCT [2016] HSC 45 (“the Hua Wang Bank case”) could prove to be an extremely useful vehicle for the ATO in its pursuit of companies trying to avoid Australian tax by arguing that they are non-resident taxpayers.

Australian tax residence

A foreign incorporated company will be Australian resident for tax purposes if it carries on business in Australia and has either its central management and control (“CM&C”) in Australia or its voting power controlled by Australian resident shareholders. 

The CM&C test has developed through the Australian and UK courts and it is generally accepted that CM&C is exercised where the key strategic decisions for a company are taken. Whilst the key strategic decisions for a company will usually be taken where its Board of Directors meets, it is ultimately a question of fact as to where CM&C takes place.

The Hua Wang Bank case saw the ATO undertake an extremely thorough review of the facts to determine that the companies in question had their CM&C in Australia - with the result that they were subject to tax on their worldwide income.

In light of the approach taken by the ATO and the decision of the High Court in the Hua Wang Bank case, a number of points will need to be borne in mind if you want to ensure that a foreign incorporated company is actually regarded as a foreign resident for Australian tax purposes.

Board meetings of the foreign company

All Board of Directors meetings for the foreign company should ideally take place outside Australia with Directors, particularly those who live in Australia, attending Board meetings in person rather than by telephone or video-conference.

In light of the Hua Wang Bank case, the Board of Directors meetings must represent the true ‘controlling mind’ of the company - for example, the Board must meet on enough occasions to allow the Board to actually exercise CM&C. 

That is, it must be clear to the ATO that the company's CM&C is taking place at the Board meetings and that the Directors are not merely ‘rubber stamping’ decisions made in Australia. 

Board minutes

The minutes of the Board of Directors meetings for the foreign company must evidence that decisions were actually made at the meetings. 

That is, the minutes should record the occurrence of events as they actually happened to evidence that CM&C was exercised at the relevant Board of Directors meeting. In particular, the minutes should ideally record what information was provided to the Directors before the meeting and how / why a decision was made at the meeting.

Directors

Following the Hua Wang Bank case the majority of the Directors of a foreign company must not only be non-Australian resident but they must also:

1.    be ‘real’ people with suitable qualifications for the tasks required by the company; and 
2.    have sufficient experience of the market(s) in which the company operates to be able to make informed judgments.

In short, in light of the Hua Wang Bank case it must be clear to the ATO that the foreign directors are actively involved in the key strategic decisions for a company. 

This means, for example, that: 

(a)    the foreign Directors will need to be kept up to date on all developments regarding the foreign company; and
(b)    all information required for a decision to be reached on an issue at a Board meeting must be provided to the Directors prior to a meeting to ensure that the Directors have sufficient time to adequately consider the issue.

Summary

The Hua Wang Bank case should serve as a timely reminder for Australian taxpayers to carefully examine the management of their foreign operations - particularly where there are Australian based Directors of foreign companies. 

Given that Australian tax resident companies are taxable in Australia on their worldwide income, the consequences of not having adequate controls and protocols in place to ensure that the CM&C of a foreign company remains outside Australia can be severe. 

With its success in the Hua Wang Bank case, we can expect that the ATO will closely examine the residence of a number of other foreign companies in the future.


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