Private ruling: Residency
Date of advice: 6 December 2016
Published: May 2017
Ruling period: Year ended 30 September 2017 | Year ended 30 September 2018 | Year ended 30 September 2019 | Year ended 30 September 2020 | Year ended 30 September 2021 | Year ended 30 September 2022
Date scheme commenced: 01 October 2016

Ruling: Q1: Will the Commissioner consider Company A to be a resident of Australia for income tax purposes under subsection 6(1) of the Income Tax Assessment Act 1936 after the proposed restructure ( Company B restructure )? | A1: No. | Q2: Will the Commissioner consider Company A to be a prescribed dual resident for income tax purposes under subsection 6(1) of the Income Tax Assessment Act 1936 after the proposed Company B restructure? | A2: No. | Q3: Will the Commissioner consider Company A to have a permanent establishment in Australia for income tax purposes after the proposed Company B restructure? | A3: No.

Relevant facts and circumstances: Company A was incorporated in Country A. Company A's registered office is located in City B. Company A is part of the Company B Group, which is comprised of the following entities: (a) Company B, incorporated in Australia. The Board of Company B comprises X directors, Y of whom are Australian residents for tax purposes and Z of whom is a Country A resident for tax purposes (b) Company C, incorporated in Australia. The Board of Company C comprises A directors, all of whom are Australian residents for tax purposes (c) Company D, incorporated in Australia. The Board of Company D comprises A directors, all of whom are Australian residents for tax purposes (d) Company E, incorporated in Country A. The Board of Company E comprises A directors, Z of whom is a foreign resident for tax purposes and B of whom are Australian residents. Company E is expected to be wound up within the next year, and its investment in its subsidiary, Company A, transferred to its parent, Company B (e) Company F, incorporated in the Country A. The Board of Company F comprises C directors, D of whom are Country A residents for tax purposes and Z of whom is an Australian resident for tax purposes (f) Company G incorporated in City C. The Board of Company G comprises D directors, B of whom are City C residents for tax purposes and B of whom are Country A residents for tax purposes (g) Company H incorporated in Country D. The Board of Company H comprises C directors, B of whom are Country D residents for tax purposes, B Country A residents for tax purposes and Z Australian resident for tax purposes (h) Trust A, established by Company B with an external Australian resident trustee company, and (i) Trust B, established by Company B with an external trustee company resident in State G Company A's business is the management of its principle investment asset, being shares in its wholly-owned subsidiary Company F, which is a company incorporated and registered in the Country A that operates as a licenced investment manager. Company A does not have other trading or operating activities. Company F has its registered office and headquarters in the Country A from which its executive officers operate. A majority of Company F's directors are residents for tax purposes. Company F holds its board meetings in the Country A, and conducts its day-to-day management in the Country A. Company B, Company C and Company D operate in Australia and are a tax-consolidated group for Australian income tax purposes. Company A, Company E and Company F operate in the Country A and are grouped for the Country A income tax purposes. Company G operates in City C and is resident of City C for income tax purposes, while Company H operates in, and is resident in, the Country D income tax purposes. Restructure For corporate governance reasons, Company B and Company A each wish to restructure their board arrangements so that the current directors of Company B will also become directors of Company A. This is referred to as the “Company B restructure” for the purposes of this ruling. This will mean that the Board of Company A will comprise E directors, A of whom will be Country A residents for income tax purposes and Y of whom will be Australian residents for income tax purposes. Responsibility for the day-to-day management of Company A's business, which is essentially managing its investment in Company F, is in the Country A. It is expected that as part of the Company B restructure Company E will be wound up within a year of the restructure and that its investment in Company A will at that point transfer to Company B. Company A's Board of Directors Under the restructure, the Board of Company A will be comprised of E directors, Y of whom are Australian residents for income tax purposes, A of whom are residents of the Country A for income tax purposes. The executive director is a resident of the Country A for tax purposes and undertakes the strategic day-today management of Company A and its subsidiary Company F. Of the F non-executive directors, Y are residents of Australia for income tax purposes and B are residents of the Country A for income tax purposes. The Company A company articles requires motions at board meeting to be carried by majority or unanimous decision, without reference to a casting vote. In the case of a tied vote a resolution would not pass. No individual director of Company A has a power of veto or approval over decisions made by the board. The non-executive directors, both Australian and Country A, carry out duties consistent with the normal role of a non-executive director, including providing an independent view in areas such as: ● Offer constructive challenges and contributions to the development of corporate strategy ● Scrutinise the performance of management in meeting agreed strategic goals and objectives and monitoring senior management succession planning ● Assess the adequacy of the financial information produced by the company, the financial controls and systems of risk management, and ● Consider appropriate levels of remuneration of executive directors and have a prime role in appointing, and where necessary removing, senior management and in succession planning. Board meetings The high-level investment decisions such as the sale or restructure of existing investments and the making of new investments will be made at the board meetings of Company A. The Company B restructure will result in Company A having A scheduled board meetings in Country A and B scheduled board meetings in Australia. Although more directors are resident for tax purposes of Australia than the Country A, more meetings will be in Country A due to the investment and business activities of Company A being located in the Country A. Australian board meetings align with the interim and final profit announcements also made in Australia, where Company B announces those results to the ASX and to predominantly Australian investors. The Australian resident directors will attend the Company A board meetings at that time in Australia, while the Country A-based directors may attend those meetings in person or by telephone from Country A. None of the individual board meetings holds any particular significance over any other individual board meeting. The circumstances and events affecting the business at that time will determine the decisions made at each board meeting. Company A's board meetings in Australia will occur at either Company B's premises or another suitable premise. The circumstances prevailing at the time of the meeting will determine the location of a particular board meeting. Board meetings are expected to run for no more than Z or B days per occasion.

Relevant legislative provisions: Subsection 6(1) of the Income Tax Assessment Act 1936 | Subsection 995-1(1) of the Income Tax Assessment Act 1997 | Section 3AAA of the International Tax Agreements Act 1953 | Section 3AAB of the International Tax Agreements Act 1953 | Subsection 4(1) of the International Tax Agreements Act 1953 | Subsection 4(2) of the International Tax Agreements Act 1953 | Article 5 of the Convention between the Government of Australia and the Relevant Governments for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and on capital gains [2003] ATS 22 ( Country A Convention )

Reasons for decision: Detailed Reasoning - Detailed reasoning: Residence under domestic law Subsection 995-1(1) of the Income Tax Assessment Act 1997 ( ITAA 1997 ) provides that a person (which includes a company) is an 'Australian resident' if that person is a resident of Australia for the purposes of the Income Tax Assessment Act 1936 ( ITAA 1936 ). Subsection 6(1) of the ITAA 1936 relevantly defines 'resident or resident of Australia' for a company as: … (b) a company which is incorporated in Australia, or which, not being incorporated in Australia, carries on business in Australia, and has either its central management and control in Australia, or its voting power controlled by shareholders who are residents of Australia. As evident from the above definition, there are three separate residency tests for companies such as Company A. Company A will satisfy the residency test if: ● Company A is incorporated in Australia ( incorporation test) , or ● Company A is not incorporated in Australia but carries on business in Australia and either: ● has its central management and control in Australia ( CM&C test ), or ● has its voting power controlled by shareholders who are residents of Australia ( control test ). Company A was incorporated in the Country A, and is therefore not a resident of Australia under the incorporation test. Taxation Ruling TR 2004/15 Income tax: residence of companies not incorporated in Australia - carrying on business in Australia and central management and control ( TR 2004/15) details the Commissioner's view on the residency of foreign incorporated companies and the CM&C test. TR 2004/15 relevantly provides that if no business is carried on by a foreign incorporated company in Australia then satisfaction of the CM&C is irrelevant, this hold equally true for the control test as well. Paragraphs 5 and 6 of TR 2004/15 state: 5. For a company to be a resident under the [CM&C and control tests] two separate requirements must be met. The first is that the company must carry on business in Australia... 6. If no business is carried on in Australia, the company cannot meet the requirements of the [CM&C and control tests] and, in these circumstances; it is not a resident of Australia under the [CM&C and control tests]. Carries on business in Australia TR 2004/15 provides that the question of where business is carried on is one of fact that requires consideration of where the activities of the company are carried on. Paragraph 9 of TR 2004/15 states: 9. The question of where business is carried on is one of fact. It requires a consideration of where the activities of the company are carried on and is dependent on the facts and circumstances of a case. However, the Commissioner's approach to this factual determination is to draw a distinction between a company with operational activities (for example trading, service provision, manufacturing or mining activities) and a company which is more passive in its dealings. It is appreciated that there will be some overlap in any particular situation. Drawing out this distinction between operational and passive activities, paragraph 27 of TR 2004/15 states: 27. Where a company does not carry on major operational activities and the essence of its business is the investment of assets, it carries on business where those high level investment decisions are made - which may be where its CM&C is located. In these situations, the location of CM&C is indicative of where the company carries on business and vice-versa. After the Company B restructure, the business activity undertaken by Company A will continue to be the management of its principle investment asset, being shares in its wholly-owned subsidiary Company F, which is a company incorporated and registered in the Country A that operates as a licenced investment manager. Company A does not have other trading or operating activities and therefore the Commissioner has formed the view that the business of Company A is and will remain passive in nature. Applying the statement in paragraph 27 of TR 2004/15 to Company A, in light of the business it conducts, the location of Company A's CM&C will be indicative of where it carries on business and vice-versa. The location of a company's CM&C is outlined in TR 2004/15 at paragraphs 15 and 17, which state: 15. The location of the company's CM&C is a question of fact to be determined in light of all the relevant facts and circumstances. In order to reduce uncertainty, the Commissioner as a matter of practical compliance will accept for those companies whose CM&C is exercised by a board of directors at board meetings that the CM&C is in Australia if the majority of the board meetings are held in Australia. The exception to this is cases where the circumstances indicate an artificial or contrived CM&C outcome. For example, where there is no business reason for the location of the meeting or where the decisions are made by someone other than the Board. … 17. On the other hand for the purposes of paragraph 15, if a majority of board meetings are held in a particular jurisdiction outside Australia, the company's CM&C will not be located in Australia. This would apply regardless of whether the directors are Australian residents. Again, this is subject to the exception for cases where the circumstances indicate an artificial or contrived CM&C outcome. [emphasis added] Company A has indicated that there will be C scheduled board meetings per year, of these A will take place in the Country A, and B within Australia. Therefore, consistent with paragraphs 15 and 17 of TR 2004/15, the Commissioner is satisfied that Company A's CM&C is in Country A. Additionally, this conclusion is also indicative of where Company A's business is being carried on, namely, in the same place as where its CM&C is located, which is Country A. This is consistent with paragraph 27 of TR 2004/15. The exception to the application of the TR 2004/15 in the manner set out above would be if the circumstances indicated that the location of Company A's CM&C was artificial or contrived. The Commissioner is satisfied that having regard to the following circumstances of Company A's board meetings, there is nothing artificial or contrived about the proposed split of the board meetings between the Country A and Australia: ● The high-level investment decisions to be made at board meetings relate to the sale or restructure of existing investments and new investments of Company A's wholly owned Country A subsidiary, Company F, which operates as a licenced investment manager. ● Of the C scheduled board meetings each year, A board meetings will be in the Country A and B board meetings will be in Australia. ● The majority (A) of board meetings will be held in the Country A as this is where the investment and business activities of Company A are located, which is the investment in in its wholly-owned subsidiary Company F. The B Australian board meetings will align with the interim and final profit announcements that are to be made in Australia, where the ultimate head entity of Company A, Company B, announces those results via the ASX to its investors, which are predominantly Australian investors. ● None of the board meetings will hold any particular significance over any other board meetings in relation to the making of high-level investment decisions. The circumstances and events affecting the Company A business at that time will determine the agenda and high-level investment decisions made at each board meeting. ● The Company A articles refer to voting being by majority or unanimous decision, without reference to any director having a casting vote. In the case of a tied vote a resolution would not pass. ● No individual director of Company A has or will have a power of veto or approval over decisions made by the board. ● The sole executive director is a resident of the Country A for tax purposes and undertakes the strategic day-today management of Company A and its subsidiary Company F. ● The non-executive directors (Y of whom are Australian residents and B are Country A residents) will carry out duties consistent with the normal role of a non-executive director, including providing an independent view in areas such as: ● Offer constructive challenges and contributions to the development of corporate strategy; ● Scrutinise the performance of management in meeting agreed strategic goals and objectives and monitoring senior management succession planning; ● Assess the adequacy of the financial information produced by the company, the financial controls and systems of risk management; and ● Consider appropriate levels of remuneration of executive directors and have a prime role in appointing, and where necessary removing, senior management and in succession planning. Further to the above, the Commissioner notes that paragraph 21 of TR 2004/15 states: 21. It is possible for CM&C to exist in more than one country. Therefore the company can have CM&C in Australia notwithstanding that it also has its CM&C in another country. CM&C can be located where there is some part of the superior or directing authority by means of which the relevant affairs of the company are controlled. However, it is necessary that the exercise of that power and authority is to some substantial degree found in a place for the CM&C to be located there (and elsewhere). In this instance, the Commissioner has formed the view that there is no evidence of some superior or directing authority, apart from the board of directors, which will control the affairs of Company A from outside the Country A. Therefore, the Commissioner is satisfied that Company A's CM&C is only located in one country, namely the Country A. Conclusion Based on the above considerations the Commissioner has determined that Company A will not be carrying on business in Australia and will therefore not be a resident of Australia within the meaning of subsection 6(1) of the ITAA 1936 after the Company B restructure. | Detailed Reasoning - Question 2: Subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936) states: prescribed dual resident means a company that satisfies either of the following conditions: (a) the first condition is that: (i) the company is a resident of Australia within the meaning of subsection 6(1); and (ii) there is an agreement (within the meaning of the International Tax Agreements Act 1953 ) in force in respect of a foreign country; and (iii) the agreement contains a provision that is expressed to apply where, apart from the provision, the company would, for the purposes of the agreement, be both a resident of Australia and a resident of the foreign country; and (iv) that provision has the effect that the company is, for the purposes of the agreement, a resident solely of the foreign country; (b) the alternative condition is that the company: (i) is a resident of Australia within the meaning of subsection 6(1) for no other reason than that it carries on business in Australia and has its central management and control in Australia; and (ii) it is also a resident of another country; and (iii) its central management and control is in another country. Conclusion As Company A will not be a resident of Australia within the meaning of that term under subsection 6(1) of the ITAA 1936 for the reasons set out above in question 1, it will not satisfy the definition of a 'prescribed dual resident' under subsection 6(1) of the ITAA 1936 after the Company B restructure. | Detailed Reasoning - Detailed reasoning: As Company A is a non-resident for the purposes of the Australian domestic tax laws, in determining liability to Australian tax on Australian sourced income received by a non-resident, it is necessary to consider not only the income tax laws but also any applicable agreement as defined in section 3AAA or section 3AAB of the International Tax Agreements Act 1953 ( Agreements Act ). This includes the Country A Convention. Subsection 4(1) of the Agreements Act incorporates the ITAA 1936 and the ITAA 1997 so that those Acts are read as one with the Agreements Act. Subsection 4(2) of the Agreements Act provides that the Agreements Act effectively overrides the ITAA 1936 and the ITAA 1997 where there are inconsistent provisions (except for some limited provisions). As Company A is incorporated and headquartered in the Country A, it is necessary to determine whether Company A has a permanent establishment in Australia and thus is liable to tax on Australian sourced income. This enquiry turns on the definition of 'permanent establishment' found in both the Country A Convention and the ITAA 1936. Article 5 of the Country A Convention defines 'permanent establishment' as follows: (1)… the term “permanent establishment” means a fixed place of business through which the business of an enterprise is wholly or partly carried on. (2) The term “permanent establishment” includes: (a) a place of management; (b) a branch; (c) an office; (d) a factory; (e) a workshop; (f) a mine, an oil or gas well, a quarry or any other place relating to the exploration for or exploitation of natural resources; and (g) an agricultural, pastoral or forestry property. … (5) Notwithstanding the preceding provisions of this Article, an enterprise shall not be deemed to have a permanent establishment merely by reason of: (a) the use of facilities solely for the purpose of storage, display or delivery of goods or merchandise belonging to the enterprise; (b) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage, display or delivery; (c) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise; (d) the maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise, or collecting information, for the enterprise; or (e) the maintenance of a fixed place of business solely for the purpose of carrying on, for the enterprise, any other activity of a preparatory or auxiliary character. Subsection 6(1) of the ITAA 1936 defines 'permanent establishment' for Australian tax purposes. It relevantly states: 'permanent establishment' , in relation to a person (including the Commonwealth, a State or an authority of the Commonwealth or a State), means a place at or through which the person carries on any business… Taxation Ruling TR 2002/5 Income tax: Permanent establishment - What is 'a place at or through which [a] person carries on any business' in the definition of permanent establishment in subsection 6(1) of the Income Tax Assessment Act 1936? ( TR 2002/5 ) provides the Commissioner's interpretation of the term 'permanent establishment' under subsection 6(1) of the ITAA 1936. Paragraph 9 of TR 2002/5 states: 9. The subsection 6(1) definition of PE [Permanent Establishment] is based on the concept of PE used in Australia's tax treaties. For the purposes of the definition of PE in subsection 6(1) 'a place at or through which [a] person carries on any business' is a reference to a place used for carrying on that person's business activities. That place must have an element of permanence, both geographic and temporal. Permanence must be construed in the context of each particular business and is a question of fact and degree. Permanent in this context does not mean forever. [emphasis added] While there are differences in the definitions of permanent establishment under Article 5 of the Country A Convention and subsection 6(1) of the ITAA 1936, TR 2002/5 specifies that they should be given an identical interpretation, see paragraphs 25-28 of TR 2002/5. Paragraphs 25-28 of TR 2002/5 emphasise that the B terms share a common genesis. Paragraphs 25 and 26 of TR 2002/5 relevantly state: 25. Having regard to the context in which the definition arose, it is clear that the subsection 6(1) definition of PE in the ITAA 1936 continued the previous approach, which was based on the meaning of permanent establishment in the 1946 Country A DTA and the 1953 US DTC. The predominant idea in these two tax treaties was of a fixed place of business. For these reasons, it is the Commissioner's view that the phrase 'a place at or through which [a] person carries on any business' in the subsection 6(1) definition of PE has as its essence the concept of permanence…. 26. Further arguments support this approach. First, the term 'permanent establishment' itself connotes permanence. Secondly, the word 'place' denotes something that is not transitory or temporary, ie something that is permanent. The requirement that the person carry on a business at or through a place reinforces the idea of permanence in the sense of not being transitory or temporary. [footnote reference omitted] Therefore, the application of the facts to the law will be identical when considering whether Company A has a permanent establishment in Australia under either subsection 6(1) of the ITAA 1936 or Article 5 of the Country A Convention. Additionally and consistent with the decision of the High Court in Thiel v. FC of T 90 ATC 4717 ( Thiel ), the Commissioner's view, published in Taxation Ruling TR 2001/13 Income tax: Interpreting Australia's Double Tax Agreements ( TR 2001/13 ), is that interpretation of the international tax treaties may include reference to any supplementary means of interpretation. This includes the OECD Commentary on the Model Tax Convention on Income and on Capital ( the OECD Commentary ): see paragraphs 101 through to 108 of TR 2001/13. Therefore, given the Commissioner's view in TR 2002/5 that the term permanent establishment has the same genesis and is without significant difference between both the ITAA 1936 and the Country A Convention it is incumbent upon the Commissioner to consider the OECD Commentary, when making a determination about whether a permanent establishment exists under either Article 5 of the Country A Convention or subsection 6(1) of the ITAA 1936. Applying the interpretive principles set out above, it is noted that, similarly to paragraph 9 of TR 2002/5 that was quoted previously, paragraph 1 of the 2014 OECD Commentary on Article 5 of the Model Tax Convention on Income and on Capital identifies the following relevant traits which are characteristic of a permanent establishment: ● the existence of a "place of business", i.e. a facility such as premises or, in certain instances, machinery or equipment ● this place of business must be "fixed", i.e. it must be established at a distinct place with a certain degree of permanence ● the carrying on of the business of the enterprise through this fixed place of business. This means usually that persons who, in one way or another, are dependent on the enterprise (personnel) conduct the business of the enterprise in the state in which the fixed place is situated. Carrying on business It is clear from the above that for a permanent establishment to exist in Australia under the definition in subsection 6(1) of the ITAA 1936 and Article 5 of the Country A Convention it is necessary for an entity to be carrying on business in Australia through a fixed place of business. For the reasons set out above in question 1, the Commissioner has formed the view that Company A carries on business in the Country A where its CM&C is located. Additionally, Company A does not maintain an office or premises in Australia but would hold its B Australian-based board meetings per year at premises arranged at times and locations specific to each meeting depending on the circumstances existing at the time of the particular meeting. These meetings of a short duration to be held in Australia (i.e. one to B days) do not constitute the degree of permanence required to amount to a 'permanent establishment' in Australia for the purposes of subsection 6(1) and Article 5 of the Country A Convention. | Detailed Reasoning - Conclusion: The Commissioner does not consider Company A to have a permanent establishment in Australia for income tax purposes after the Company B restructure.

Reasons for decision: These reasons for decision accompany the Notice of private ruling for Company A. | While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.