Private ruling: CFC rules
Published: February 2015
Ruling period: Year ended 30 June 2013 | Year ended 30 June 2014
Date scheme commenced: 1 July 2012

Ruling: Question and Answer | Is your income from CompanyX subject to the CFC rules? | No | Does your income from CompanyX pass the active income test? | Not applicable

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. The company was first registered in 2011. The company was in operation during the financial year ended 30 June 2014. The company owns and maintains international websites as its primary business. The company earns income by selling advertising on its websites. One of these web sites also facilitates transactions between users of the site. The company transacts all business through a company Electronic transaction account which is based in the Country A. The company has no physical existence outside its registered agent (in Country A) and its rented servers (in X). The company has almost no interaction with the Australian market and sources less than 5% of its income from Australia. The company has one employee in the Country B, and one employee in Australia (yourself) The company was initially set up to limit liability and group under one umbrella your online businesses. You reside in Australia on a full time basis. You are the sole director and shareholding of the company. You make decisions for the company. The day to day operational decisions for the actual operation of the company's assets are usually made by volunteers from all over the world. Your understanding is that the relevant jurisdiction for the enforcement of your advertising contracts is the Country A. You negotiate advertising arrangements via email with would-be clients. You believe that less than 5% of your company's income is tainted. Although the Electronic Transaction Provider does not always provide you with a country of origin for the advertising revenue. Your employee in Country B assists with website maintenance and programming and manages the company Electronic Transaction Provider (handling disputes and liaising generally with Electronic Transaction Provider) and handles customers' requests on sythe.org. The employee in Country B is typically paid on commission for some sales activities and a retainer for some programming and other activities. You pay the company's bills, manage and administer the rented servers, and generally ensure the upkeep and improvement of the site on a day to day basis. Your servers are located in Country B. CompanyX has a bank account in its own name in Country C. You are the sole signatory of this account. The CompanyX bank account has a credit card which the electronic transaction account uses for outgoing payments; however the electronic transaction will not clear funds into the credit card. You opened a bank account in Country B in your own name as Country B law does not allow a foreign company to open a bank account; this is where the Electronic Transaction Provider l funds clear. You are the sole signatory of this account. You use this account to pay your Country B employee. Every 6 months you wire the money from the Country B account to the company account in Country C. The electronic transaction account in registered to CompanyX, you are the primary authorised user. Your employee in the Country B is a secondary authorised user.

Relevant legislative provisions: Section 6(1) of the Income Tax Assessment Act 1936 | Section 340 of the Income Tax Assessment Act 1936 | Section 432 of the Income Tax Assessment Act 1936 | Section 995-1 of the Income Tax Assessment Act 1997

Reasons for decision: Summary: Controlled foreign company (CFC ) A CFC is a non-resident company that satisfies one of three control tests. Whether a company is a resident of a foreign country is determined according to Australian tax law as modified by double-taxation agreements with other countries. It is necessary to consider if CompanyX is a non-resident company prior to applying the three control tests. CompanyX is incorporated in Country A; Country A has no double-taxation agreement with Australia to modify the Australian definition of residence. | Detailed Reasoning - Residence: 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 ITAA 1936. The definition of 'resident' or 'resident of Australia' in subsection 6(1) of the ITAA 1936 sets out the statutory tests of residence. Paragraph (b) of that definition states that a company is a 'resident' or 'resident of Australia' if it is incorporated in Australia, or if it is not incorporated in Australia, it 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. | Detailed Reasoning - Carrying on a business in Australia: 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. 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 CompanyX provides operational activities as services in the form of provision of web content and facilitating transactions between people on the . We considered that a company carries on business wherever its major operational activities relative to the whole of its business take place and we have factored the following facts of your case: • You reside in Australia on a full time basis. • You make decisions for the company. • You negotiate advertising arrangements via email with would-be clients. • The company has no physical existence outside its registered agent (in Country A) and its rented servers (in Country B). • You pay the company's bills, manage and administer the rented servers, and generally ensure the upkeep and improvement of the site on a day to day basis. • Company X has a bank account in its own name in Country C. You are the sole signatory of this account. • You opened a bank account in the Country B in your own name as Country B law does not allow a foreign company to open a bank account; this is where the Electronic transaction funds clear. You are the sole signatory of this account. You use this account to pay your Country B employee. • The company has one employee in Country B, and one employee in Australia (yourself) • Your employee in Country B assists with website maintenance and programming and manages the company Electronic transactions (handling disputes ad liaising generally with Electronic transactions) and handles customers' requests on the website. • The employee in Country B is typically paid on commission for some sales activities and a retainer for some programming and other activities. CompanyX's operational activities are dominantly provided by you, an Australian resident. Therefore the company carries on a business in Australia as demonstrated by the company's decision making, administration, website upkeep, business negotiation and financial regulation are predominately executed by you personally. Whilst you have indicated that you have proportionally less business with Australian clientele, the location of your market is not a determinant of residency. As the business is being carried on in Australia we must consider if the central management and control of the company is also in Australia. | Detailed Reasoning - Central management and control: Central management and control involves the high level decision making processes, including activities such as general policies and strategic directions, major agreements and significant financial matters. It also includes activities such as the monitoring of the company's overall corporate performance and the review of strategic recommendations made in the light of the company's performance. Upon examining the facts of your case we need to determine the who, when and where of the strategic decision making of CompanyX: • You negotiate advertising arrangements via email with would-be clients. • You are the sole director and shareholding of the company. • You make decisions for the company. CompanyX has a sole shareholder/director making management decisions in Australia therefore has its central management and control in Australia. CompanyX is a resident company of Australia under the second statutory test of subsection 6(1) of the ITAA 1936. As a prerequisite of a CFC company is that it be a non-resident, CompanyX is not a CFC. | Detailed Reasoning - Active income test: The active income test requires a CFC to satisfy each of the following basic conditions: (1) be in existence at the end of its statutory accounting and be a resident of a listed or unlisted country at all times during the accounting period when the company was in existence (2) have at all times carried on business through a permanent establishment in its country of residence (3) maintain accounts which are prepared in accordance with accounting standards and give a true and fair view of the financial position of the company (4) have less than 5% of its gross turnover as stated in its recognised accounts in the form of tainted income. The calculation of gross turnover takes into account any capital gain or loss which arises when roll-over relief for an intra-group asset transfer is reversed, i.e. when the recipient CFC subsequently leaves the group (CGT event J1). As CompanyX is not a CFC, the active income test is not applicable.