Private ruling: Income tax - residency
Date of advice: 15 March 2018
Published: June 2018
Ruling period: 1 July 2011 to 30 June 2016
Date scheme commenced: The year beginning 1 July 2011

Ruling: Q1: Will the Taxpayer be treated as an Australian resident under subsection 6(1) of the Income Tax Assessment Act 1936 ( ITAA 1936 ) at any time during the period from 1 July 2011 to 30 June 2016? | A1: Yes. | Q2: If the response to Question 1 is ‘yes’, on what dates during the period did the Taxpayer commence, and if applicable, cease to be an Australian resident? | A2: The Taxpayer was an Australian resident from 1 July 2012 to 30 June 2016.

Relevant facts and circumstances: Initial Incorporation The Taxpayer was incorporated in the Country A ( Country A ) in 2007. At the time of incorporation, there was only a sole director ( Director ) and shareholder, who was born and raised in Country A. The Taxpayer carried on business as a sales agent of a program. The Taxpayer generated its revenue by subscribing participants to the program predominantly in Country A, and receiving an agreed percentage of the participant fees payable for access to the program where the Taxpayer had generated those sales. The owner of this program was an Australian company. The business was carried on from a rented commercial premise in Country A and employed several individuals to keep up with demand. Additionally, a contractor ( Contractor ) was engaged from the early stages of the Taxpayer’s business to market the program on behalf of the Taxpayer. Relocation of the Director As the business operations in Australia experienced rapid growth, the Director was offered a temporary role as the Chief Operating Officer ( COO ) of the Australian company. The Director temporarily relocated to Australia during 2011 on a temporary work (skilled) visa (subclass 457) to pursue this opportunity. It was always the Director’s intention that the relocation to Australia would be short term. The Director never purchased real property in Australia, nor disposed of their main residence in Country A (opting to rent it under short term lease agreement) and their personal belongings continue to be held in storage in Country A. The Director expected to return to Country A in 2017. While the Director was working in Australia, the owners of the Australian company put the trade and assets of the business up for sale. The Taxpayer purchased the trade and assets of the Australian company in 2011. As part of the acquisition, the Taxpayer inherited a number of Australian based employees and their corresponding employee liabilities. The employees were transferred to a newly incorporated Australian company ( Aus Co ). The valuable intellectual property (IP) that was acquired from the Australian company that was purchased by the Taxpayer was retained by the Taxpayer. The IP forms the foundation of the program. The employees of the former Australian company were integral to the day to day management and administration of the program. The Director extended employment contracts to key personnel, including two former owners via Aus Co in early 2012. The two former owners were later offered equity shareholdings in the Taxpayer. Business Operations Another company in Country A ( Country A Co ) was incorporated in 2012 to hold the employees and sales function of the Taxpayer. This was undertaken to ensure that the IP of the group would be segregated and protected from commercial risk, as the sales operations expanded globally. The Contractor’s contract was intentionally excluded from the transfer as their work is directly attributable to IP held by the Taxpayer. Accordingly, the Contractor has continued to be contracted by the Taxpayer to date. Structure of Global Business Operations since 2012 The Taxpayer: ● Owns the IP which underpins the program (the product sold by the broader group globally) ● Responsible for the ongoing development and enhancement of the IP supporting the global product which is primarily undertaken through scientific research that serves to validate the scientific efficacy of the program ● Owns the license rights to operate the program ● Derives income through charging licence fees to its global subsidiaries which is proportional to the ability of the global subsidiaries to sell the product to their external clients. Aus Co: ● Responsible for the operations and day to day administration of the program ● Provide services to all international subsidiaries of the Taxpayer for which management fees are levied including, but not limited to: ● Accounting services ● Billing and receivable collection services ● Legal services ● Arranging insurance ● Currency hedging services ● Website hedging services ● Advertising and marketing services Other subsidiaries ● Responsible for generating sales in their respective markets by subscribing new participants to the program. Intellectual Property and Product Development The IP, being the program, consists of the following: ● Program Rights (being the right to run the program); ● Domain Names; ● Trademarks; ● Website; ● Mobile Application Development; and ● Heart Algorithm Under the IP Licence Agreement in place between the Taxpayer and Aus Co, the Taxpayer as licensor, grants an exclusive licence to Aus Co to run the program and use the Program Rights, domain names and trademarks that are the subject of the agreement. The IP of the Taxpayer encompasses the ongoing scientific research that analyses the efficacy of the program that adds credibility and value to the global business operations of the Taxpayer. Without the scientific research that demonstrates the efficacy of the program, the ability to market and sell it as an effective and proven program, would be significantly diminished. The Taxpayer’s activities in relation to the ongoing development of its IP through scientific research are coordinated by the Contractor as Relevant Officer (RO). The Taxpayer arranges for scientific research to be undertaken each year by the Contractor in partnership with independent bodies. Findings are documented in independent journals/papers in respect of a particular hypothesis that ultimately assesses the operation of the program and its scientific merit. The findings of the research have consistently indicated that participation in the program leads to increased benefits for participants. This is communicated by the Taxpayer to the global sales force and reflected in the marketing materials of the program. This research creates a compelling case for participation in the program. This leads to increased sales for the subsidiaries of the Taxpayer and ultimately the derivation of license fees by the Taxpayer. The role of the Contractor The Contractor has been contracted by the Taxpayer, to be the RO, on an annual basis since 2009 to validate the benefits of the program and to continually develop the scientific IP which form the foundation of the global product offering. The Contractor lives in Country A permanently and has been a medical practitioner for XX years. The Contractor’s responsibilities as RO for the Taxpayer include: ● Analysis of participant data from the program for future IP improvements ● Coordination of scientific research projects, many of which are undertaken in partnership with independent bodies ● Communication of the results of scientific research to the global sales force to support the ability of the Taxpayer to derive license fees ● Annual design of the ‘science’ components of the program As a way of engaging prospective clients, the Contractor accompanies the Director to relevant meetings/forums to offer professional medical opinion on the program. The Contractor is not contractually obligated to undertake his duties at a specified business premises and accordingly, their work is primarily performed from their home in Country A. The Contractor attends meetings as and when required and has access to the Taxpayer’s business premises which they make use of from time to time. The Contractor reports directly to the Director of the Taxpayer on the efficacy of the program, and the impact that it has on participants with reference to their scientific research. The Contractor has limited interaction with the other directors of the Taxpayer. They primarily correspond with, and report to, the Director. The Director and the Contractor meet bi-annually in Country A at the Taxpayer’s business premises to discuss their priorities with respect to upcoming research projects over the next six month period and the overall direction of the IP development. Formal agendas are generally not prepared but the meetings are usually centred on research findings and upcoming research projects but may also include the review of the Contractor’s contract. The content of these meetings enables the Director to make critical decisions, on behalf of the board, regarding the annual IP development strategy, in collaboration with the Contractor, and direct him accordingly. Other activities of the Taxpayer The Taxpayer is also responsible for the ongoing development of the software and code which supports the mobile application and online platform forming part of the program. This is sub-contracted to Aus Co who delivers the required services by both engaging with third party providers and utilising its in-house resources. The Director has also had an active role in enhancing and maintaining the IP held by the Taxpayer. In addition to their interactions with the Contractor, this is further demonstrated through negotiation and interaction with an unrelated third party in Country B. This unrelated third party was engaged by the Director under a fixed term contract, on behalf of the Taxpayer, to generate other components of the Taxpayer’s IP. The Director managed this process unilaterally, predominantly through visits to Country B. Shareholders and Directors From incorporation up until sometime in 2012, the Director was the sole director and shareholder of the Taxpayer. The Taxpayer appointed X Australian resident directors ( Australian directors ) during 2012 and 2013. The admission of the Australian directors coincides with the timing of their becoming shareholders in the Taxpayer. During 2012, X Australian directors were invited to become equal shareholders in the Taxpayer with the Director, in recognition of their contribution to the Aus Co business, and their importance in executive roles going forward. The other Australian director was a subsequent investor who acquired their shares progressively. These shareholders have multiple roles in connection with the Taxpayer and its global subsidiaries, and their responsibilities in relation to the group may be undertaken in a variety of capacities: ● Directors of the Taxpayer ● Directors of Aus Co ● Owners/shareholders of the Taxpayer ● Executives employed by Aus Co/other subsidiaries of the Taxpayer Role of the Board The directors of the Taxpayer hold both executive and non-executive roles across the global business, which are reflective of their areas of expertise, as follows: ● The Director – Managing Director ● Australian director – Creative Director ● Australian director – Sales Director ● Australian director – Company Director The directors of the Taxpayer also make up the board of directors of Aus Co. The operational execution of the program is managed via Aus Co with the directors being largely based in Australia. There is a clear distinction between the operations and board responsibilities of the Taxpayer, as compared to those of Aus Co. The Taxpayer is responsible for enhancing and protecting the IP that forms the basis of the program. Aus Co acts to implement elements of the strategy determined by the Taxpayer to execute the program under licence from the Taxpayer, and to manage day to day operations. Aus Co is also responsible for sales activities in its local market, as are the other subsidiaries of the Taxpayer in their own respective markets. Roles in relation to the protection and development of IP are the most commonly exercised board duties and accordingly, the decisions of the board are largely centred around this. The Director acts as a representative for the board of directors. Other directors typically devolve to him their directors’ duties in respect of the Taxpayer. The Director estimates that 95% of the contracts of the Taxpayer are signed by them, as duly authorised agent for the board of directors. A clause in the Shareholders Agreement stipulates that a Major Directors Resolution is required for the Taxpayer only when they enter into any contract or arrangement with any party with a value or cost equal to or over a certain value. A Major Directors Resolution is defined as a resolution approved by the Directors controlling at least 75% of all votes that may cast at a Board meeting. The role of the board and the Director’s role in respect of their director duties of the Taxpayer have been documented by the Director in a sworn Affidavit. The Director travels twice a year to Country A. While in Country A, the Director will chair conference calls with the other directors of the Taxpayer to advise them of the decisions they have made relating to the Taxpayer’s matters while in Country A. The board of directors of the Taxpayer have formally agreed for the Director to be authorised to act on behalf of the board without the need to call a board meeting to reach decisions. This most commonly applies to the annual renegotiation of the Contractor’s contract which the Director has always managed and executed unilaterally. The Director will often undertake decisions on behalf of the board and notify them of his decisions purely as a common courtesy. This often occurs via a conference call which is chaired by the Director, typically from the jurisdiction they are in at the time, which is usually Country A. The board meetings discussed above are distinct from monthly meetings held by Aus Co. The Aus Co meetings are typically held at the Australian business premises and are focussed on the operational activities of the Australian company and the global sales entities. Generally, the matters pertaining to the Taxpayer do not form part of the content of the meetings of Aus Co, but inevitably there may be some cross over at times due to the multiple roles of the directors and shareholders across the business. There was a 100% change in ownership of the Taxpayer in 2016 when an unrelated third party company from the Country C acquired the Taxpayer.

Relevant legislative provisions: Income Tax Assessment Act 1936 , subsection 6(1).

Reasons for decision: Summary: The Taxpayer will be treated as an Australian resident under subsection 6(1) of the ITAA 1936 during a particular period from 1 July 2011 to 30 June 2016. | Detailed Reasoning - Detailed reasoning: Under paragraph (b) of the definition of ‘resident’ or ‘resident of Australia’ in subsection 6(1) of the ITAA 1936, a company will be resident in Australia if it meets one of three tests: (1) It is incorporated in Australia (the incorporation test); or (2) It has its central management and control in Australia and it carries on business in Australia (the central management and control test); or (3) Its voting power is controlled by shareholders who are Australian residents and it carries on business in Australia (the voting power test). It is evident on the facts that the Taxpayer was incorporated in Country A during 2007. Accordingly, as the company was not incorporated in Australia, the first statutory test as outlined above is not satisfied. The voting power of the company has been controlled by Australian resident shareholders since the admission of X Australian directors in 2012. This indicates that the third test as outlined above would be satisfied, if it were found that the Taxpayer carries on business in Australia. However, there is greater weight in determining residency by evaluating where the central management and control of the Taxpayer is. Therefore, consideration must be given to the central management and control test in regards to whether the Taxpayer has its central management and control in Australia as well as whether it carries on business in Australia. Central Management and Control Test Under the central management and control test of company residency, a company will be resident of Australia if it: (1) Carries on business in Australia; and (2) Has its central management and control in Australia. The following matters are relevant to determining whether a company meets these two criteria: (1) Does the company carry on business in Australia? (2) What is meant by central management and control? (3) Where is the location of central management and control and who exercises central management and control? Does the company carry on business in Australia? Paragraph 9 of Taxation Ruling 2004/15 Income Tax: residence of companies not incorporated in Australia – carrying on business in Australia and central management and control ( TR 2004/15 ) states that where a business is carried on “...requires a consideration of where the activities of the company are carried on and is dependent on the facts and circumstances of a case.” “...[T]he 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.” Paragraph 10 of TR 2004/15 provides that “...a company that has major operational activities relative to the whole of its business carries on business wherever those activities take place and not necessarily where its central management and control (CM&C) is likely to be located. Operational activities include major trading, service provision, manufacturing or mining activities. For example, the place of business of a large industrial concern is wherever its offices, factories or mines are situated.” Paragraph 11 of TR 2004/15 sets out that a company “...whose income earning outcomes are largely dependent on the investment decisions made in respect of its assets, carries on its business where these decisions are made. This is often where its CM&C is located.” Further, paragraph 43 of TR 2004/15 provides “...[e]xamples of the types of returns a company may receive from the management of its investment assets include rent, dividends, interest and royalties.” It is acknowledged that the Taxpayer owns the IP behind the program and that ongoing scientific research coordinated by the Contractor feeds into the ongoing development of the IP. However, it is considered that the interactions between the Director and the Contractor surrounding the overarching strategy regarding research projects and the overall direction of the IP development indicate that the Taxpayer’s business is driven fundamentally by its IP assets and the investment decisions made in respect of those IP assets. The Director’s discussions with the Contractor determine what needs to be researched for the development of the IP, which ultimately leads to the derivation of income for the Taxpayer through license fees generated from its IP assets, which are charged to their global subsidiaries, who in turn generate sales in their respective markets by subscribing new participants to the program. As it has been established that the Taxpayer’s income earning outcomes are generated from its IP assets, it is necessary to determine where these investment decisions are made in respect of those assets i.e. where its CM&C is located, in order to determine where its business is located. What is meant by central management and control? The second statutory test focuses on management and control decisions that guide and control the company’s business activities. Paragraph 13 of TR 2004/15 describes this as the “...high level decision making process, including activities involving high level company matters such as general policies and strategic directions, major agreements and significant financial matters.” However, as stated in paragraph 14 of TR 2004/15, “[p]ossession of the mere legal right to exercise central management and control of a company is not, of itself, sufficient to constitute CM&C of the company. Someone who has the ‘mere legal right to CM&C’ is a person with the legal right to make these decisions involving CM&C but who for one reason or another does not exercise this right. However, a person with the legal right to CM&C may participate in the CM&C of the company even if they delegate all or part of that power to another, provided that they at least review or consider the actions of the delegated decision maker before deciding whether any further or different action is required.” The term ‘central management and control’ was developed by the courts as a common law rule for determining the residence of a company. Lord Loreburn stated in De Beers Consolidated Mine Ltd v. Howe [1906] AC 455 at 458: “In applying the concept of residence to a company, we ought, I think, to proceed as nearly as we can upon an analogy of an individual. A company cannot eat or sleep, but it can keep house and do business. We ought, therefore, to see where it really keeps house and does business. An individual may be of foreign nationality, and yet reside in the Country A. So may a company. Otherwise it might have its chief seat of management and its centre of trading in England under the protection of English law, and yet escape the appropriate taxation by the simple expedient of being registered abroad and distributing its dividends abroad. The decision of Kelly C.B. and Huddleston B. in the Calcutta Jute Mills and Cesna Sulphur cases, involved the principle that a company resides for purposes of income tax where its real business is carried on. I regard that as the true rule, and the real business is carried on where the central management and control actually abides. It remains to be considered whether the present case falls within that rule. This is a pure question of fact to be determined, not according to the construction of this or that regulation or ruling, but on a scrutiny of the course of business and trading.” Paragraph 48 of TR 2004/15 provides that “...[d]etermining CM&C involves a focus on the who, when and where of the strategic decision making of a company. CM&C includes the setting of directions and goals, and the evaluation of the company's performance measured against these benchmarks and emerging market risks and opportunities.” It is therefore necessary to determine where the strategic decision making of the Taxpayer is undertaken as well as who undertakes the strategic decision making. Where is the location of central management and control and who exercises central management and control? The Commissioner, per paragraph 15 of TR 2004/15, “...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.” Paragraph 50 of TR 2004/15 considers the use of electronic facilities in conducting board meetings, rather than physical attendance. In this scenario, the focus is on where the participants contributing to the high level decisions are located rather than where the electronic facilities are based. If the range of locations using electronic means makes the judgement of where the majority of high level decision makers are participating from difficult, regard may need to be had to other factors such as where the key functions of the board are undertaken, where the decision makers usually undertake their company duties and participate in the company's high level decision making processes, where the high level decision makers are resident, and where the secretariat is located. Paragraph 60 of TR 2004/15 states that “...granting of a power of attorney to a person so that they can manage the company’s affairs, of itself, does not mean that the person with the power of attorney exercises CM&C of the company. It is possible that other persons (for example persons with the legal right to make high level decisions regarding the company’s affairs) continue to participate in the high level decision making by monitoring and evaluating the performance of the person with the power of attorney: Koitaki Para Rubber .” In the Taxpayer’s case, the Director travels bi-annually to Country A to meet with the Contractor to discuss the overarching strategy regarding research projects and the overall direction of the IP development. The Taxpayer contends that it is while they are in Country A, that the Director makes decisions in connection with the strategic development of the IP. The Taxpayer argues that the Australian based directors have devolved their responsibilities to the Director. While they are in Country A, the Director chairs board meetings via electronic means, and advised the Australian based directors of decisions they have made as their representative. These board meetings also involve the Director making recommendations to the rest of the board and then agreeing on future courses of action. Although the Director travels to Country A to determine and decide on the direction of the IP development, the fact of the matter is that they are not the sole person on the board of directors. There are three other persons on the board and they are all Australian residents and based predominantly in Australia. It is acknowledged that it is possible for directors to delegate, in the Taxpayer’s Memorandum of Association, and that the Taxpayer contends that this occurred whereby the Australian directors’ gave the Director authority to act on their behalf. However, the Taxpayer’s Memorandum of Association also requires directors to take decisions collectively, or unanimously. The Memorandum of Association does not allow the Director to sign off board decisions unanimously. This may happen if the Director gets formal agreement from the rest of the directors on the board. However, there is no formal documentation to demonstrate that the directors have decided that the Director can make decisions on the board’s behalf. There is also a statutory requirement in the Australian Corporations Act 2001 and Country A Companies Act 2006 for directors to act in accordance with the company’s constitution. Finally, the Director’s sworn Affidavit is not considered to be adequate to demonstrate that director obligations have been delegated. The delegation needs to be done formally as per the governing documents of the Taxpayer and there is no evidence to support the Taxpayer’s statement that the Australian based directors devolved their duties to the Director. Therefore, it is considered that the location of the central management and control of the Taxpayer is in Australia. It is acknowledged that the Director is in Country A to make decisions but the role of the Australian based directors cannot be diminished. As the majority of the directors remain in Australia during the decision making process and that they continue to have an active role in that process, it is held that the central management and control of the Taxpayer is conducted in Australia. Since it has been determined that the Taxpayer is an Australian resident for tax purposes and it is acknowledged that the Taxpayer is also a resident of Country A for tax purposes, as a result of being incorporated in Country A, consideration of the Convention Between the Government of the Country A of Great Britain and Northern Ireland and the Government of Australia for Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and on Capital Gains ( Treaty ) follows. Article 4(4) of the Treaty applies when a taxpayer is resident in both countries under their domestic laws. The taxpayer is deemed to be located where it has its ‘place of effective management’. In Hua Wang Bank Berhad & Ors v FCT [2014] FCA 1392 , Perram J in the Federal Court stated that the ‘place of effective management’ is an expression used in a treaty but the interpretive principles applicable in those situations do not require one to do more work than determine the meaning of ‘place of effective management’ in the particular treaty. The Treaty is based on the OECD Model Tax Convention and the OECD’s Commentary. Paragraph 24 of the OECD’s Commentary states: ‘24. As a result of these considerations, the “place of effective management” has been adopted as the preference criterion for persons other than individuals. The place of effective management is the place where key management and commercial decisions that are necessary for the conduct of the entity’s business as a whole are in substance made. All relevant facts and circumstances must be examined to determine the place of effective management. An entity may have more than one place of management, but it can have only one place of effective management at any one time.’ It has been argued by the Taxpayer that the ‘place of effective management’ is where the Director is when determining and deciding on the direction of the IP development. This occurs in Country A where the Director meets with the Contractor to discuss the overarching strategy and direction of the IP development. The Taxpayer argues that because the other directors have devolved their responsibilities to the Director, the Director’s decisions made while he is in Country A, is where the ‘place of effective management’ is located. However, as outlined above, it is acknowledged that the Director is in Country A to make decisions but the role of the Australian based directors cannot be diminished. There is no formal documentation to indicate that the Australian based directors devolved their duties to the Director. Accordingly, as the majority of the directors remain in Australia during the decision making process and that they continue to have an active role in that process, it is held that the ‘place of effective management’ of the Taxpayer is in Australia. | Detailed Reasoning - Question 2: If the response to Question 1 is ‘yes’, on what dates during the period did the Taxpayer commence, and if applicable, cease to be an Australian resident? | Summary: The Taxpayer is an Australian resident from a date during 2012 to a date during 2016. | Detailed Reasoning - Detailed reasoning: It has been determined that the Taxpayer is an Australian resident for tax purposes in Question 1. The appointment of the initial two Australian based directors during 2012 is the starting date that the Taxpayer is considered to be an Australian resident. Therefore, the Taxpayer is an Australian resident from a date during 2012 to a date during 2016. In 2016, the Taxpayer was 100% acquired by an unrelated third party company based in Country C.