Private ruling: Residency and assessable income
Date of advice: 1 December 2016
Published: April 2017
Ruling period: Year ending 30 June 2017 | Year ending 30 June 2018 | Year ending 30 June 2019 | Year ending 30 June 2020
Date scheme commenced: 1 July 2016

Ruling: Questions and answers | 1. Is the company a resident of Australia for income tax purposes? | Yes. | 2. Is the income earned in Australia by the company assessable in Australia? | No.

Relevant facts and circumstances: The company is incorporated as an Australian private company and is also a resident of another country for income tax purposes. The company imports products from another country and sells those products in the Australian market. The main shareholders in the company reside overseas. The activities of the company are 100% controlled by the overseas shareholders. All decisions regarding the management of the company are made overseas. The company has no physical presence in Australia, nor does it have any employees in Australia. The company has a bank account in Australia which is controlled from overseas. The company is a resident of another country for income tax purposes.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5 | Income Tax Assessment Act 1997 Section 6-10 | Income Tax Assessment Act 1997 Section 995-1 | Income Tax Assessment Act 1936 Section 6(1) | International Tax Agreements Act 1953 Section 5

Reasons for decision: Detailed Reasoning - Australian residency for taxation purposes: The terms resident and resident of Australia are defined in subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936). In terms of that definition, a company which has been incorporated in Australia is a resident of Australia for taxation purposes. The company is a resident of Australia for taxation purposes because it is incorporated in Australia. A company that is incorporated in Australia continues to be regarded as an Australian resident for taxation purposes even if the central management and control of the company is exercised outside Australia, and/or the company is also a resident of some other country for taxation purposes. | Detailed Reasoning - Assessability of income - entities with dual resident status for taxation purposes: The assessable income of a company that is a resident of Australia for taxation purposes will generally include all the company's ordinary and statutory income from all sources, in or out of Australia. As stated above, the company is a resident of Australia for taxation purposes because it is incorporated in Australia. Therefore, the company's ordinary and statutory income is potentially taxable in Australia. However, because the company is also a resident of another country for taxation purposes, we must consider the application of the double tax agreement between Australia and the other country (the DTA) to determine whether or not the income of the company is assessable in Australia. The DTA operates to avoid the double taxation of income received by entities that are residents of both Australia and the other country for taxation purposes. Article 4 of the DTA deals specifically with residency and provides that where a company is a resident of both Australia and the other country for taxation purposes, the company is deemed to be a resident only of the country in which its place of effective management is situated. For the purposes of Article 4 of the DTA, the place of effective management of a company is the place where the key management and commercial decisions regarding the company's operations are made. According to the commentary on Article 4 contained in the Organisation for Economic Co-operation and Development (OECD) Model Tax Convention on Income and on Capital , the 'place of effective management' test is very similar to the test of 'central management and control'. The concept of 'central management and control' is discussed in Taxation Ruling TR 2004/15 Income tax: residence of companies not incorporated in Australia - carrying on business in Australia and central management and control . Taxation Ruling TR 2004/15 notes that the location of a company's central management and control is a question of fact to be determined in light of all the relevant facts and circumstances and states that: This level of management and control involves the high level decision making processes, including activities involving high level company matters 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. The company is primarily owned by shareholders who reside in another country. It has no physical presence or employees in Australia. All decisions regarding the management of the company are made in the other country and the company's activities are 100% controlled by the overseas shareholders. The company's Australian bank account is also controlled from the other country. Considering the above, it is apparent that the key management and commercial decisions regarding the operations of the company are being made in the other country and that this is where the place of effective management of the company is located. Accordingly, although a dual resident of Australia and the other country for taxation purposes, the provisions of Article 4 of the DTA apply so that the company is deemed to be a resident of the other country for the purposes of applying the convention. Article 7(1) of the DTA provides that the profits of a business are only taxable in the country where the business is a resident for taxation purposes, unless the enterprise carries on business through a permanent establishment in the other country. Accordingly, unless it can be said that the company has a permanent establishment in Australia, its profits will only be taxable in the other country. The term 'permanent establishment' is defined in Article 5 of the DTA as a fixed place of business through which the business of an enterprise is wholly or partly carried on. A place of management, a branch, an office, a factory and a workshop are all places especially included as places of permanent establishment. As previously stated, the company has no physical presence in Australia and its place of effective management is situated in the other country. It cannot therefore be said that the company operates through any permanent establishment in Australia. Rather, it must be said that the company is operating in Australia from a permanent establishment in the other country. | Detailed Reasoning - Conclusion: Based on the facts in this ruling, the company is considered to only be a resident of the other country for the purposes of the DTA. As such, the sole taxing rights over the company rest with the other country because the company does not derive income through any permanent establishment in Australia. Such companies are not considered to be deriving assessable income in Australia.