Tax change will make company residency clearer

Federal legislation will mean firms operating primarily overseas are less likely to be treated as Australian tax residents.

The federal government will legislate to reverse a High Court ruling so that companies doing business primarily overseas are less likely to be treated as Australian tax residents.

The federal government will legislate to reverse a High Court ruling so that companies doing business primarily overseas are less likely to be treated as Australian tax residents.

The government’s decision, encouraged by a recommendation from the Board of Taxation, will revert the understanding of tax residency to what it was prior to the 2016 ­Bywater case, which led to the Australian Taxation Office ruling that a company was a resident for taxation purposes if “central management or control” took place in Australia.

“Central management or control” refers to high-level decision making, such as board meetings, meaning Australian businesses with international subsidiaries often found they had to establish separate board structures to ­ensure the subsidiary was not classed as an Australian tax resident.

Under the changes, the subsidiary will have to have central management or control in Australia and be conducting its core commercial activities in Australia to be considered a tax resident.

KPMG enterprise national tax leader Clive Bird said the change would save time and money.

“This is a very important development which will be welcome news to a significant number of companies, which have been left in limbo over the past four years,” he said. “Many of these are emerging and mid-sized private companies as well as multinationals.

“The Bywater decision, and subsequent ATO ruling, has caused problems for taxpayers and their advisers, as it meant that foreign subsidiaries of Australian companies were likely to be deemed Australian tax residents even if they had no business activities in Australia. This meant they became subject to Australian tax rules in unintended ways.

“This development means that Australian businesses with foreign subsidiaries will no longer need to set up boards or board meetings in those countries in order to prevent them from being deemed as Australian resident companies for tax purposes.

“The COVID shutdown mean this was becoming impossible.”

The change will have immediate and retrospective effect