Bywater Investments Ltd & Ors v Commissioner of Taxation
Document type: Decision Impact Statement
Venue: High Court (S134 & S135 of 2016)
Judgment date: 16 November 2016
Date published: 15 March 2017

Summary of decision:
Outlines the ATO's response to this case which concerned whether four foreign incorporated taxpayers were Australian residents within the meaning of subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936), and therefore subject to Australian income tax on their ordinary income under the Income Tax Assessment Act 1997.

Overview of facts:
The Bywater Investments Limited & Ors v Commissioner of Taxation; Hua Wang Bank Berhad v Commissioner of Taxation [2016] HCA 45 (Bywater) cases involved four taxpayers. All were foreign incorporated companies. The taxpayers disputed their assessments on a number of grounds including that they were not Australian residents for tax purposes under the central management and control test of residency in paragraph (b) of subsection 6(1) of the ITAA 1936. | The taxpayers entered artificial arrangements to give the impression that they were all managed and controlled offshore, either by Mr Peter Borgas in Switzerland or by the corporate services firm, Asiaciti, in Samoa. Under these arrangements, the role of the directors was to merely record and implement decisions of the company in relation to its transactions and policies that were made by Mr Vanda Gould in Sydney in a mechanical fashion. | Issues decided by the court | There were two issues considered by the High Court: | 1) Whether the appellants companies were resident in Australia within the meaning of subsection 6(1) of the ITAA 1936 because their central management and control was in Australia. | 2) If three of the appellants' central management and control was in Australia, whether their place of effective management was, for the purpose of the relevant double tax agreements, in Australia, the UK or Switzerland [1] . | Central management and control | The High Court unanimously found that the appellants' central management and control was in Australia. The decision clarified three key matters relevant to determining whether a foreign incorporated company is resident under the central management and control test of residency contained in paragraph (b) of subsection 6(1) of the ITAA 1936: • The decision confirms the long standing principle that where a company's central management and control is located is a question of fact to be determined by the reality of what happens. It is not determined by reference to legal formalities, or restrictions on who may exercise it or where it may be exercised, and may be exercised by persons without any legal authority to manage or control a company. • The court unanimously rejected the argument that Esquire Nominees [2] is authority for the proposition that a foreign incorporated company will have its central management and control outside Australia and will be non-resident if it has a local board who rubberstamps and implements decisions that are made in Australia. If a company's directors merely rubberstamp decisions made by others they do not exercise central management and control, rather it is those who actually make the decisions as a matter of fact. • The approach the Commissioner took in TR 2004/15 in relation to the earlier High Court decision in Malayan Shipping [3] can no longer be sustained. At [57] the majority of the court clearly agreed with Williams J's rejection of the contention that where a company has its central management and control in Australia it must, to be a resident of Australia, in addition also carry on its business operations in Australia. Therefore if a company carrying on business has its central management and control in Australia it will necessarily carry on business in Australia. That is so even when the only business carried on in Australia consists of that central management and control, and trading operations are conducted outside this country. | • The decision confirms the long standing principle that where a company's central management and control is located is a question of fact to be determined by the reality of what happens. It is not determined by reference to legal formalities, or restrictions on who may exercise it or where it may be exercised, and may be exercised by persons without any legal authority to manage or control a company. • The court unanimously rejected the argument that Esquire Nominees [2] is authority for the proposition that a foreign incorporated company will have its central management and control outside Australia and will be non-resident if it has a local board who rubberstamps and implements decisions that are made in Australia. If a company's directors merely rubberstamp decisions made by others they do not exercise central management and control, rather it is those who actually make the decisions as a matter of fact. • The approach the Commissioner took in TR 2004/15 in relation to the earlier High Court decision in Malayan Shipping [3] can no longer be sustained. At [57] the majority of the court clearly agreed with Williams J's rejection of the contention that where a company has its central management and control in Australia it must, to be a resident of Australia, in addition also carry on its business operations in Australia. Therefore if a company carrying on business has its central management and control in Australia it will necessarily carry on business in Australia. That is so even when the only business carried on in Australia consists of that central management and control, and trading operations are conducted outside this country. | Place of effective management | Only Gordon J found it necessary to consider where the taxpayer's place of effective management was located. In a separate judgement Gordon J found the taxpayer's place of effective management was in Australia for the purpose of the UK and Swiss Double Tax Agreements. In relation to where the place of effective management of a company is located, Gordon J observed that: • the meaning of place of effective management in double tax agreements must be interpreted in accordance with principles of customary international law or treaties governing the interpretation of treaties such as the Vienna Convention on the Law of Treaties. [4] • For the purpose of the UK and Swiss Agreements, where a company's place of effective management is located is a question of fact and substance, and is not determined by reference to legal formalities, or restrictions on who may exercise it or where it may be exercised. The location of a company's formal organs of governance is not determinative. [5] • The tests of the place of effective management and that of central management and control are different concepts. While a company's place of effective management may be in the same place where its central management and control is located, this cannot be assumed. [6] | • the meaning of place of effective management in double tax agreements must be interpreted in accordance with principles of customary international law or treaties governing the interpretation of treaties such as the Vienna Convention on the Law of Treaties. [4] • For the purpose of the UK and Swiss Agreements, where a company's place of effective management is located is a question of fact and substance, and is not determined by reference to legal formalities, or restrictions on who may exercise it or where it may be exercised. The location of a company's formal organs of governance is not determinative. [5] • The tests of the place of effective management and that of central management and control are different concepts. While a company's place of effective management may be in the same place where its central management and control is located, this cannot be assumed. [6]

Issues decided:
There were two issues considered by the High Court:: 1) Whether the appellants companies were resident in Australia within the meaning of subsection 6(1) of the ITAA 1936 because their central management and control was in Australia. 2) If three of the appellants' central management and control was in Australia, whether their place of effective management was, for the purpose of the relevant double tax agreements, in Australia, the UK or Switzerland [1] . Central management and control The High Court unanimously found that the appellants' central management and control was in Australia. The decision clarified three key matters relevant to determining whether a foreign incorporated company is resident under the central management and control test of residency contained in paragraph (b) of subsection 6(1) of the ITAA 1936: • The decision confirms the long standing principle that where a company's central management and control is located is a question of fact to be determined by the reality of what happens. It is not determined by reference to legal formalities, or restrictions on who may exercise it or where it may be exercised, and may be exercised by persons without any legal authority to manage or control a company. • The court unanimously rejected the argument that Esquire Nominees [2] is authority for the proposition that a foreign incorporated company will have its central management and control outside Australia and will be non-resident if it has a local board who rubberstamps and implements decisions that are made in Australia. If a company's directors merely rubberstamp decisions made by others they do not exercise central management and control, rather it is those who actually make the decisions as a matter of fact. • The approach the Commissioner took in TR 2004/15 in relation to the earlier High Court decision in Malayan Shipping [3] can no longer be sustained. At [57] the majority of the court clearly agreed with Williams J's rejection of the contention that where a company has its central management and control in Australia it must, to be a resident of Australia, in addition also carry on its business operations in Australia. Therefore if a company carrying on business has its central management and control in Australia it will necessarily carry on business in Australia. That is so even when the only business carried on in Australia consists of that central management and control, and trading operations are conducted outside this country. • The decision confirms the long standing principle that where a company's central management and control is located is a question of fact to be determined by the reality of what happens. It is not determined by reference to legal formalities, or restrictions on who may exercise it or where it may be exercised, and may be exercised by persons without any legal authority to manage or control a company. • The court unanimously rejected the argument that Esquire Nominees [2] is authority for the proposition that a foreign incorporated company will have its central management and control outside Australia and will be non-resident if it has a local board who rubberstamps and implements decisions that are made in Australia. If a company's directors merely rubberstamp decisions made by others they do not exercise central management and control, rather it is those who actually make the decisions as a matter of fact. • The approach the Commissioner took in TR 2004/15 in relation to the earlier High Court decision in Malayan Shipping [3] can no longer be sustained. At [57] the majority of the court clearly agreed with Williams J's rejection of the contention that where a company has its central management and control in Australia it must, to be a resident of Australia, in addition also carry on its business operations in Australia. Therefore if a company carrying on business has its central management and control in Australia it will necessarily carry on business in Australia. That is so even when the only business carried on in Australia consists of that central management and control, and trading operations are conducted outside this country. Place of effective management Only Gordon J found it necessary to consider where the taxpayer's place of effective management was located. In a separate judgement Gordon J found the taxpayer's place of effective management was in Australia for the purpose of the UK and Swiss Double Tax Agreements. In relation to where the place of effective management of a company is located, Gordon J observed that: • the meaning of place of effective management in double tax agreements must be interpreted in accordance with principles of customary international law or treaties governing the interpretation of treaties such as the Vienna Convention on the Law of Treaties. [4] • For the purpose of the UK and Swiss Agreements, where a company's place of effective management is located is a question of fact and substance, and is not determined by reference to legal formalities, or restrictions on who may exercise it or where it may be exercised. The location of a company's formal organs of governance is not determinative. [5] • The tests of the place of effective management and that of central management and control are different concepts. While a company's place of effective management may be in the same place where its central management and control is located, this cannot be assumed. [6] • the meaning of place of effective management in double tax agreements must be interpreted in accordance with principles of customary international law or treaties governing the interpretation of treaties such as the Vienna Convention on the Law of Treaties. [4] • For the purpose of the UK and Swiss Agreements, where a company's place of effective management is located is a question of fact and substance, and is not determined by reference to legal formalities, or restrictions on who may exercise it or where it may be exercised. The location of a company's formal organs of governance is not determinative. [5] • The tests of the place of effective management and that of central management and control are different concepts. While a company's place of effective management may be in the same place where its central management and control is located, this cannot be assumed. [6]

ATO view of decision:
The ATO accepts the decision.

Administrative treatment:
Taxation Ruling 2004/15 has been withdrawn and replaced by new Taxation Ruling TR 2017/D2 Foreign Incorporated Companies: Central Management and Control test of residency. | [1] The Agreement between the Government of the Commonwealth of Australia and the Government of the United Kingdom of Great Britain and Northern Ireland for the avoidance of Double taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital Gains, as affected by the 2000 United Kingdom notes; and the Agreement between the Government of the of Australia and the Swiss Federal Council for the avoidance of Double taxation with Respect to Taxes on Income and the Protocol to that Agreement. | [2] Esquire Nominees Ltd v FCT [1973] HCA 67; (1973) 129 CLR 177 | [3] Malayan Shipping Company Ltd. v FCT (1946) 71 CLR 156 | [4] At [149] | [5] At [165] | [6] At [163]

Legislative references: Income Tax Assessment Act 1936 6(1) International Tax Agreements Act 1995 Sch 1 15 The Agreement between the Government of the Commonwealth of Australia and the Government of the United Kingdom of Great Britain and Northern Ireland for the avoidance of Double taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital Gains, as affected by the 2000 United Kingdom notes The Agreement between the Government of the of Australia and the Swiss Federal Council for the avoidance of Double taxation with Respect to Taxes on Income and the Protocol to that Agreement
Case references: Hua Wang Bank Berhad & Ors. v Commissioner of Taxation [2014] FCA 1392 Bywater Investments & Ors. v Commissioner of Taxation [2015] FCAFC 71 Esquire Nominees v The Commissioner of Taxation of the Commonwealth of Australia (1973) 129 CLR 177 (1973) 73 ATC 4114 (1973) 4 ATR 75 Cesena Sulphur Company v Nicholson [1876] 1 Ex D 428 Malayan Shipping Company Ltd. v Federal Commissioner of Taxation (1946) 71 CLR 156 (1946) 8 ATD 75 Waterloo Pastoral Co. Ltd. v Federal Commissioner of Taxation (1946) 72 CLR 262 (1946) 8 ATD 165 DeBeers Consolidated Mines Limited v Howe [1906] AC 455 Koitaki Para Rubber Estates Limited v Federal Commissioner of Taxation (1941) 64 CLR 241 (1941) 6 ATD 82 Northern Australian Pastoral v Federal Commissioner of Taxation (1946) 71 CLR 623 (1946) 8 ATD 121 Wood v Holden [2006] 1 WLR 1393 Unit Construction Co. Ltd. v Bullock [1960] AC 351 Smallwood v Revenue and Customs Commissioners [2010] EWCA (Civ) 778 [2010] Simon's Tax Cases 2045 (2010) 80 Tax Cas 536 [2010] BTC 637 [2010] WTLR 1771 [2010] S.T.I. 2174 (2010) 154(27) SJLB 30