Private ruling: Residency - exemption - foreign income tax offset
Date of advice: 12 March 2026
Published: 29 June 2026
Ruling period: For the income year ended 30 June 20XX | For the income year ended 30 June 20YY

Ruling: Q1: Is the Company a resident of Australia under subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936)? | A1: Yes. | Q2: If the answer to question 1 is 'yes', is the income of the Company non-assessable non-exempt income pursuant to section 23AH of the ITAA 1936? | A2: No. | Q3: If the answer to question 1 is 'yes' and question 2 is 'no', would the Company be eligible to claim a foreign income tax offset under section 770-10 of the Income Tax Assessment Act 1997 (ITAA 1997) for underlying income tax paid in respect of an amount or part of an amount that is included in the Company's assessable income? | A3: Yes.

Relevant facts and circumstances: The Company was incorporated in Country A in 20AA. Its registered office is located in Country A. The Company's two directors, Director A and Director B are Australian tax residents. The Company is part of the X family group, which conducts business activities in Australia and Country A. Its business activities comprise of holding investments in commercial properties which earn rental income. The ultimate controllers of the X family group are Director A and their spouse. The shareholder of the Company is Company A Ltd, as trustee for Trust No 1. The beneficiaries are X family. Company A Ltd is incorporated in Country A. The directors of this company are Director A and Director B. The shareholders of this company are another family related trustee company. The assets of the Company consists of passive investment assets located in Country A. These include commercial properties which are tenanted by third parties and other assets, including cash, bank accounts and loans to related companies. The accounting records of the Company are retained predominantly in Australia. The Company retains accountants in Country A to prepare the annual tax returns of the Company. The bank accounts of the Company are located in Country A. Its share register is retained in Australia. Company Z - Property Management The Company does not have any employees (either in Country A or elsewhere). The Company engages the services of Company Z, a Country A resident company, to manage its asset portfolio on its behalf. Company Z provides property management services to multiple other clients. Director B does not control this company. Director A is one of three directors of Company Z and via a related entity, controls one-third the shares in Company Z. A management agreement (the Agreement) was entered into between the Company and Company Z to manage the Company's commercial properties. This agreement was signed by Director A and Director B. The Agreement sets out the services that are to be provided by Company Z in respect of the Company's property portfolio. Decision making Given the nature of the Company's investments, decisions required to be made by Director A and Director B are only conducted on a limited and ad-hoc basis. The Company has not held any formalized board meetings for several years. Director B has largely remained in Australia. Director A conducts his business activities in relation to the Company in Australia and Country A. During a three year period, Director A travelled to Country A for business on three occasions staying for brief periods from 2 days to 8 days. Director B is an accountant and, also the accountant of the X family group, As accountant, Director A and Director B regularly speak to each other relating to the wider X Family Group (which could potentially include the Company). This occurs mainly via telephone but has also occurred via face-to-face meetings at the Director B's office. In respect of the sale of commercial properties in Country A undertaken in prior year, all the work relating to the sale transaction (negotiation, due diligence, legals, agents etc) was performed by Company Z in Country A. All sale transactions were ratified by both directors. Director A was the ultimate key decision maker in relation to the sale of these properties, including the initiation of the sale of these properties. Director B was also involved in the decision making process to sell these properties and had input into the decision. Company Z provided assistance and data to enable Director A to make these decisions. Development work is being performed on certain commercial properties located in Country A. Whilst Director B was involved in the decision making process in relation to the development works, the key decision maker in relation to all substantial development works was Director A. In relation to the loans made related companies, Director A approved the funding of loans. Director B was not involved in the decision making process for the making of these loans. The Company is a tax resident of Country A. The Company has always lodged Country A tax returns and paid tax in Country A at the Country A corporate tax rate. Property Management Agreement The Agreement between the Company and Company Z details the services provided to the Company for the management of the Company's property portfolio. The services that Company Z is to provide pursuant to the Agreement include the following: The Agreement sets out the parameters of Company Z's authority. Company Z is authorised to enter contracts on behalf of the Company in the proper exercise of its duties. However, Company Z is not authorised to make or enter into agreements covering a wide range of matters such as the sale and purchase of property; leasing or subleasing of property. It further states that Company Z must not do or purport to do any act, matter or thing which it is not expressly authorised to do pursuant to the Agreement without the prior written authority of the Company. The Agreement sets out the fees payable by the Company to Company Z. Fees are payable by the Company for the provision of Company Z's services which is calculated at a certain percentage of the net rental income for the property portfolio. Documentation provided showed that during the income years in question the Company derived income from the following sources: • rental income from commercial properties in Country A Foreign income tax was paid by the Company in Country A. The foreign income tax was paid by instalments in advance of the assessment of the Company's final income tax liability for each income year. In each income year, there was a difference between the Company's final income tax liability and the total amount of tax instalments paid. Company A had overpaid its final income tax liability and became entitled to receive a tax refund for each income year as a result of its overpayment of income tax. In each income year, the Company was paid interest by Country A taxation authorities for overpayment of the Company's income tax liability. Determination by Australian / Country A competent authorities A determination has not been made by the Australian / Country A competent authorities under the Country A Double Taxation Agreement as modified by Article 4 of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI), regarding the Company's country of residency, for the purposes of the Country A Double Taxation Agreement.

Relevant legislative provisions: Income Tax Assessment Act 1936 subsection 6(1) | Income Tax Assessment Act 1936 subsection 23AH(2) | Income Tax Assessment Act 1936 subsection 23AH(15) | Income Tax Assessment Act 1997 subsection 6-5(2) | Income Tax Assessment Act 1997 subsection 770-10(1) | Income Tax Assessment Act 1997 subsection 770-10(3) | Income Tax Assessment Act 1997 subsection 770-15(1) | Income Tax Assessment Act 1997 section 770-140 Country A Double Taxation Agreement Article 4 | Country A Double Taxation Agreement Article 5 | Further issues for you to consider | We have limited our private ruling to the questions raised in your application. There may be related issues that you should consider, including: | Application of the Country A Double Taxation Agreement | It was concluded in Question 1 of this document that the Company is a resident of Australia for Australian income tax purposes. The Company is also a tax resident of Country A. | Australia has entered into double tax treaty with Country A to prevent double taxation and fiscal evasion, namely the Country A Double Taxation Agreement. | Article 4 of the Country A Double Taxation Agreement sets out the tiebreaker rules for residency for a non-individual entity. The tiebreaker rules ensure that the non-individual entity is only treated as a resident of one country for the purposes of working out liability to tax on their income under the double tax agreement. The tiebreaker rules do not change a taxpayer's residency status for domestic law purposes. | As the Company is a resident of both Australia and Country A, it will be necessary to consider the 'tie breaker rule' in Article 4 of the Country A Double Taxation Agreement. | The Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting ('the MLI') is a multilateral treaty that enables jurisdictions to swiftly modify the operation of their bilateral tax treaties to implement measures designed to better address multinational tax avoidance and more effectively resolve tax disputes. | Article 4 of the MLI modifies the tiebreaker test for dual resident non-individual entities under the Country A Double Taxation Agreement. The Article provides that the competent authorities of the Contracting States shall endeavour to determine by mutual agreement the Contracting State of which such person shall be deemed to be a resident for Treaty purposes, having regard to: | In the absence of such bilateral agreement, such person shall not be entitled to any relief or exemption from tax provided by the Country A Double Taxation Agreement. | There has been no determination made by mutual agreement by Australia and Country A's competent authorities regarding the residency of the Company as modified by Article 4 of the MLI for the purposes of the Country A Double Taxation Agreement. | Consequently, the Company is not considered to be deemed a resident solely of Country A or Australia for the purposes of the Country A Double Taxation Agreement. | Therefore, the Company will not be entitled to rely upon the benefits of the Country A Double Taxation Agreement, and will be assessed under Australian income tax laws irrespective of the relief or exemption rules in the Country A Double Taxation Agreement.

Reasons for decision: Summary: As a resident of Australia for Australian income tax purposes, the Company's assessable income for the purposes of subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) will include, in the first instance, income from all sources worldwide unless an exception applies. One exception is the exemption found in section 23AH of the ITAA 1936. Subsection 23AH(2) provides that, subject to other parts of section 23AH, foreign income derived by a company, at a time when the company is a resident in carrying on a business, at or through a 'permanent establishment' of the company in a listed country or unlisted country is not assessable income, and is not exempt income, of the company. For the exemption to apply, Section 23AH(2) requires that the resident company is 'carrying on a business'. Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? at paragraph 13 lists the key factors in determining whether the activities carried on by an entity amounts to the carrying on of a business. In the circumstances, it is accepted that the Company is carrying on a business of investing in commercial properties given the: The term 'permanent establishment' is defined in subsection 23AH(15), which states that a 'permanent establishment' or 'PE', in relation to a listed country or unlisted country has the same meaning as in the double tax agreement in relation to that country if there is one, or if not, to have the meaning given by subsection 6(1). Australia has entered into a double tax agreement with Country A, namely the Country A Double Taxation Agreement. Article 5(1) of the Country A Double Taxation Agreement defines a permanent establishment as a fixed place of business through which the business of an enterprise is wholly or partly carried on. Taxation Ruling TR 2001/13 Income tax: Interpreting Australia's Double Tax Agreements (TR 2001/13) sets out the Commissioner's view on interpreting Australian's double tax agreements. Paragraph 104 of TR 2001/13 states that commentaries on the interpretation and application of the OECD model convention will often need to be considered as a matter of practice in interpreting tax treaties. Commentaries on the OECD Model Tax Convention on Income and Capital released in 2017 ('OECD Commentary') provides guidance on determining permanent establishments. Paragraph 6 of the OECD Commentary provides that the definition of 'permanent establishment' contains the following conditions: The OECD Commentary provides guidance on how these conditions can be satisfied as follows: Article 5(2) of the Country A Double Taxation Agreement contains a list of examples that can be regarded, prima facie, as constituting a permanent establishment. These include a place of management, a branch, an office, a factory, a workshop, a mine, an oil or gas well, a quarry or any other place of extraction of natural resources, and an agricultural, pastoral or forestry property. As discussed at paragraph 45 of the OECD Commentary, these examples only constitute a permanent establishment if they also meet the general definition in Article 5(1). In the present circumstances, the Company does not have an office, a branch or place of management in Country A through which its conducts its business of investing in and leasing commercial properties. Further, it is considered that the Country A properties held by the Company are not, in their own right, considered to be a fixed place of business through which the Company conducts its commercial leasing operations. In this regard, the Company does not carry out its commercial leasing business from each of these properties. the Company carries out its business from Australia where it is managed and controlled. These properties are rented out by the Company to third parties to conduct their own business operations. In support of the above conclusion, the OECD Commentary at paragraph 36 provides that an entity will not be considered to carry on a business through a permanent establishment where they are merely letting / leasing out property. It relevantly states the following: "Where tangible property such as facilities, industrial, commercial or scientific (ICS) equipment, buildings, or intangible property such as patents, procedures and similar property, are let or leased to third parties through a fixed place of business maintained by an enterprise of a Contracting State in the other State, this activity will, in general, render the place of business a permanent establishment. The same applies if capital is made available through a fixed place of business. If an enterprise of a State lets or leases facilities, ICS equipment, buildings or intangible property to an enterprise of the other State without maintaining for such letting or leasing activity a fixed place of business in the other State, the leased facility, ICS equipment, building or intangible property, as such, will not constitute a permanent establishment of the lessor provided the contract is limited to the mere leasing of the ICS equipment, etc. [my emphasis added] Accordingly, the Company does not have a permanent establishment within the meaning of that term under Article 5(1) of the Country A Double Taxation Agreement. Dependent Agent Article If an Australian resident enterprise does not conduct activities itself through a fixed place of business in Country A, it may still be deemed to carry on business through a permanent establishment under Article 5(8) of the Country A Double Taxation Agreement. This Article is subject to Article 5(9) of the Country A Double Taxation Agreement. Article 5(8) and Article 5(9) of the Country A Double Taxation Agreement state: 8. Notwithstanding the provisions of paragraphs 1 and 2, where a person-other than an agent of an independent status to whom paragraph 9 applies-is acting on behalf of an enterprise and: a) has and habitually exercises, in a Contracting State an authority to substantially negotiate or conclude contracts on behalf of the enterprise; or b) .... , that enterprise shall be deemed to have a permanent establishment in that State in respect of any activities which that person undertakes for the enterprise, unless the activities of such person are limited to those mentioned in paragraph 7 which, if exercised through a fixed place of business, would not make this fixed place of business a permanent establishment under the provisions of that paragraph. 9. An enterprise shall not be deemed to have a permanent establishment in a Contracting State merely because it carries on business in that State through a person who is a broker, general commission agent or any other agent of an independent status, provided that such persons are acting in the ordinary course of their business as such a broker or agent. Paragraph 84 of the OECD Commentary stipulates that the following conditions must be met for the dependent article to apply: Article 5(9) deals with agents of independent status. Paragraphs 104 to 110 of the OECD Commentary makes the following observations in respect of this Article: (a) whether the person's commercial activities for the enterprise are subject to detailed instructions or to comprehensive control by it, such person cannot be regarded as independent of the enterprise, (b) whether the entrepreneurial riskhas to be borne by the person or by the enterprise the person represents (paragraph 104 of the Article 5 Commentary). When considering criterion (a), regard is to be given to the following: - the fact that the principal is relying on the special skill and knowledge of the agent is an indication of independence (paragraph 106 of the Article 5 Commentary), and - it may be a feature of the operation of an agreement that an agent will provide substantial information to a principal in connection with the business conducted under the agreement. This is not in itself a sufficient criterion for determination that the agent is dependent unless the information is provided in the course of seeking approval from the principal for the manner in which the business is to be conducted. The provision of information which is simply intended to ensure the smooth running of the agreement and continued good relations with the principal is not a sign of dependence (paragraph 108 of the Article 5 Commentary). When considering criterion (b), independent status is less likely if the activities of the agent are performed wholly or almost wholly on behalf of only one enterprise over the lifetime of the business or a long period of time. However, this fact is not by itself determinative. All the facts and circumstances must be taken into account to determine whether the agent's activities constitute an autonomous business conducted by him in which he bears risk and receives reward through the use of his entrepreneurial skills and knowledge (paragraph 109 of the Article 5 Commentary). An independent agent cannot be said to act in the ordinary course of its business when it performs activities that are unrelated to that agency business (paragraph 110 of the Article 5 Commentary) Application of Article 5(8) - Dependent Agent The Company has engaged Company Z, a commercial property management company to manage the Company's commercial property portfolio in Country A. The Agreement authorises Company Z to do, amongst others, the following: - enter into contracts on behalf of the Company; - negotiate and complete the sale or purchase of properties; and - to negotiate and conclude the renewal of tenancies on behalf of the Company. However, the scope of Company Z's authority is restricted by other terms in the Agreement. Company Z cannot without the permission of the Company make or enter into agreements covering a wide range of matters such as the sale and purchase of property; leasing or subleasing of property. Furthermore, the Agreement contains other permissions that are required of the Company such as: Accordingly, it is considered that the authority afforded to Company Z by the Company under the terms of the Agreement does not provide Company Z with the required authority to make them a dependent agent. Application of Article 5(9) - Independent Agent Moreover, based on the information provided it is considered that Company Z is an independent agent which conducts its own property management business. This is because: Accordingly, the Company is excluded from the creation of a deemed permanent establishment in Country A under Article 5(8). As no 'permanent establishment' exists in Country A through which the Company's income is derived, the terms of section 23AH(2) are not satisfied. Consequently, the income received by the Company is not considered to be non-assessable non-exempt income under subsection 23AH(2). Subsection 770-10(1) of the ITAA 1997 provides that a foreign income tax offset can be claimed for foreign income tax paid by a taxpayer in respect of an amount that is included in their assessable income in the income year. Foreign income tax paid on non-assessable non-exempt amounts (except for section 23AI and 23AK of the ITAA 1936 amounts) is disregarded. Only where the taxpayer has paid foreign income tax on an amount included in its assessable income will double taxation, and consequently relief from double taxation, arise. If only part of an amount on which foreign tax has been paid is assessable, only the same proportion of the foreign tax counts towards the offset. Note 1 of subsection 770-10(1) states that the offset is for the income year in which your assessable income included an amount in respect of which you paid foreign income tax- even if you paid the foreign tax in another year. 'Foreign income tax' is a tax imposed by a law other than an Australian law, on income or profits or gains, whether of an income or capital in nature - see section 770-15(1). The taxpayer must have paid the foreign income tax or deemed to have been paid by the taxpayer. The Company was required to pay Country A income tax in accordance with Country A income tax law, a law other than an Australian law. Furthermore, the tax imposed by Country A income tax law is a tax on the Company's income. Accordingly, tax paid by the Company in Country A is 'foreign income tax' as defined. The Company paid the Country A income tax for each income year by instalment payments in advance of its final tax liability, as detailed in the 'Facts and circumstances' section of this document. Refund for taxes paid in Country A - section 770-140 However, under section 770-140 a taxpayer is not entitled to a tax offset for foreign income tax to the extent they, or any other entity, are entitled to either: • a refund of the foreign tax; or • any other benefit worked out by reference to the amount of foreign income tax (other than a reduction in the amount of the foreign income tax). In the 20XX and 20YY income year, the Company paid income tax by instalments in advance of its final tax liability. Following, the assessment of its income tax liability, the Company became entitled to a refund of income tax for an overpayment of Country A income tax in each income year. Accordingly, pursuant to section 770-140 the Company is taken not to have paid foreign income tax in respect of the amounts of overpaid income tax for which they are entitled to receive a refund. Exception - subsection 770-10(3) A limitation to claiming an amount of foreign income tax offset is set out in subsection 770-10(3). This provision states that an amount of foreign income tax you paid does not count towards the tax offset for the year if you paid it: a) to a foreign country because you are a resident of that country for the purposes of a law relating to the foreign income tax; and b) in respect of an amount derived from a source outside that country. The Company is a resident of Country A for their taxation purposes. Where foreign tax is paid by the Company in Country A on income derived from a source outside of Country A that tax will not count towards a tax offset on Australian tax paid. Therefore, the issue to be resolved is whether the source of the Company's income, on which Country A tax was paid, is located in Country A or not. Source Rules Documentation provided shows that the income on which the Company paid Country A income tax is comprised of the following amounts: The income tax provisions provide no guidance as to the meaning of the term 'source' in subsection 770-10(3). The source of income has been judicially considered in a number of cases. In Nathan v. Federal Commissioner of Taxation 25 CLR 183 at 189-190 it was recognised that the ascertainment of the actual source of a given income is a practical, hard matter of fact. In Federal Commissioner of Taxation v. Efstathakis 79 ATC 4256 at 4259; 9 ATR 867 at 870 Bowen CJ stated 'the answer is not be found in the cases, but in the weighting of the relative importance of the various factors which the cases have shown to be relevant.' The process of identification of the locality of a source of income may differ depending upon the nature of the income in question; per Stephen J in Esquire Nominees Limited as Trustee of Manolas Trust v. Federal Commissioner of Taxation 73 ATC 4114. In Resource Capital Fund IV LP v. FC of T (2018) ATC 20-647; [2018] FCA 41, Pagone J observed that: 51. ... The factors that will be relevant to the ascertainment of the source of income will vary from case to case, and will vary as between different kinds of income. The place of the performance of services is likely to be significant to determine the source of income derived from personal exertion: see Federal Commissioner of Taxation v French (1957) 98 CLR 398, 414-415, 420-421....; The location of the property will be significant when the income is derived from property (see Federal Commissioner of Taxation v.United Aircraft Corporation (1943) 68 CLR 525,536), and the place where a taxpayer has performed income earning operations will be significant where the income is derived from a service of operations (see Commissioner of Inland Revenue v. HK-TVB International Ltd [1992] 2 AC 397, 404, 408-409). Rental Income With regard to rental income and applying the above principles, it is considered that it is the real property itself that is the source of rental income. Therefore, the location of the source of rental income will be the place where the real property is situated. Support for this conclusion is found in Liquidator,Rhodesia Metals Ltd (In Liquidation) v. Commissioner of Taxes [1940] AC 774, PC. In that case, the sole business operation of an English company was the purchase of immovable property, mining claims, in Southern Rhodesia, and their development in that territory for purposes of transfer there at a profitable price. Both the contracts of purchase and subsequent sale were made in England, and the consideration for the sale was also received there. It was held that the company received the sale price from a source within Southern Rhodesia. On behalf of the Privy Council, Lord Atkin stated that: As a hard matter of fact the only proper conclusion appears to be that the company received the sum in question from a source within the territory, namely, the mining claims which they had acquired and developed there for the very purpose of obtaining the particular receipt In the present circumstances, the Company has leased its commercial properties, which are located in Country A to third parties. As it is the properties in Country A that produced the rental income, it is considered that the place of the source of rental income is in Country A, where the properties are located. Interest Relevant factors in determining the place of the source of interest income, include the following: At common law, a simple contract debt is deemed to be situated where the debtor resides - Attorney-General v. Bouwens (1838) 4 M & W 171 at 191; 150 ER 1390; English Scottish & Australian Bank Ltd v. IRC [1932] AC 238; [1931] All ER Rep 212. A bank account is a debt being a single chose in action - see Joachimson v. Swiss Bank Corporation [1921] 3 KB 110. The bank is the relevant debtor in the relationship - Foley v. Hill [1843-1860] All ER 16. The rules that apply to determine the location of debts would therefore apply to bank accounts. In Case No D33/90 , 5 HKIRBRD 248, the Board considered the issue of the location of the source of interest credited to US denominated bank account held by a Hong Kong incorporated company with a bank operating in Hong Kong. Cheques and drafts that were deposited into the account had to be cleared through the bank clearing system in the US. The Board held the source of the interest was Hong Kong. A debt was created when the bank account was credited with amount due from the bank to the taxpayer. Interest was payable by the bank on the debt, a chose in action, which was situated in Hong Kong, The cause of the interest was the credit balance in the savings account in Hong Kong and the clearance requirement was a technicality of the banking system. In the present circumstances, funds placed on deposit by the Company into bank accounts with a foreign bank, which operates in Country A, created a debt that is deemed to be situated in Country A. Interest is payable on the credit standing in each account which represents the Company's right to be repaid by the foreign bank. Therefore, as it is the credit standing in each Country A bank account that is the cause of the interest being paid, the place of the source of interest income is Country A. Statutory Interest - Country A Taxation Authorities The Company returned as income, payments of interest from the Country A Taxation Authorities in each income year. The interest payments arose as a result of the overpayment of income tax. Having regard to all the facts and circumstances around the interest paid by Country A Taxation Authorities and applying the 'practical, hard matter of fact' test, it is considered that the source of the interest payments was in Country A. This is because it was the tax liability due to the Country A Taxation Authorities and subsequent overpayment of that liability which attracted the payment of interest payable under Country A income tax legislation. As the overpaid tax liability in Country A is the cause of the interest payments from the Country A Taxation Authorities, the source of the interest payments is in Country A. In conclusion, as the source of the rental income and interest amounts derived by the Company in the 20XX and 20YY income years is in Country A, the exception 770-10(3) does not apply. Accordingly, the Company is entitled to claim an amount of foreign income tax offset for foreign income tax which was paid in respect of an amount that is included in the Company's assessable income, noting that the amount of foreign income tax is reduced by the amount of tax that the Company was entitled to a refund for 20XX and 20YY income years. (Note: Article 23 of the Country A Double Taxation Agreement provides a mechanism for relief from double taxation. Broadly, this Article is triggered where tax is paid in Country A or Australia, as the case may be and in accordance with the Country A Double Taxation Agreement. As the Company is denied any treaty benefits because of the absence of a determination as to its residency for the purposes of the Country A Double Taxation Agreement, its entitlement to an amount of foreign income tax offset will be assessed irrespective of the double tax relief rules that are set out in Article 23 of the Country A Double Taxation Agreement.)

to make payments to suppliers as budgeted for or as the Company has approved; | management of leases such as overseeing rent reviews; issuing invoices to tenants and receive payments; carrying out surrenders, re-grants, variations and renewals of leases; inspecting properties; | organising and managing contractors; | carrying out repairs and maintenance or improvements in respect of any property as budgeted for or is otherwise less than several thousand dollars; | where the repairs, maintenance or improvements is not budgeted for or is more than several thousand dollars, Company approval is required; | marketing any property for sale as the Company requires; | providing feasibility studies for any acquisition of any property; | negotiating and completing the sale or purchase of any properties in the name of the Company; | maintaining any insurance that it is responsible for taking out as required by the Agreement; | advising on redevelopment opportunities in the property portfolio; and | providing the Company with monthly updates in respect of any projects or development. | interest income from bank accounts held in a foreign bank which operates in Country A; | statutory interest income received from Country A taxation authorities for overpayment of the Company's income tax liability; and | its place of effective management | its place where it is incorporated or constituted, and | any other relevant factors. | Reasons for decision: The term 'resident' in relation to a company is defined within subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936) at paragraph (b) of that definition as follows: | 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. | The definition sets the criteria necessary to establish residency of a company. The first element of the definition states that a company which is incorporated in Australia, is a resident of Australia ('the incorporation test'). For a company incorporated in Australia, this is where the examination ends to determine if the company is a resident under the definition. | If a company is not incorporated in Australia, a company will be a resident under 'the central management and control test' of company residency in paragraph (b) if it carries on business in Australia and has its central management and control in Australia. | Alternatively, a company which is not incorporated in Australia will be a resident under 'the voting power test' if it carries on business in Australia and has its voting power controlled by shareholders who are residents of Australia. | The Company is incorporated in Country A. Therefore, it is not incorporated in Australia and is not a resident company under the incorporation test within subsection 6(1). | Central Management & Control Test (CM&C) | Taxation Ruling TR 2018/5 Income tax: central management and control test of residency (TR 2018/5) sets out the Commissioner's view on how to apply the CM&C test of company residency following Bywater Investments Limited & Ors v. Commissioner of Taxation; Hua Wang Bank Berhad v. Commissioner of Taxation [2016] HCA 45; 2016 ATC 20-589 (Bywater). | In TR 2018/5 at paragraphs 7 and 8, the Commissioner considers that if a company carries on business and has central management and control in Australia, it will carry on business in Australia. As central management and control of a business is part of carrying on the business, it is not necessary that trading or investment operations take place 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 of Australia. | The expression 'central management and control' refers to the control and direction of a company's operations; that is, the making of high-level decisions that set the company's general policies and determine the direction of its operations and the type of transactions it will enter - paragraph 11 of TR 2018/5. Paragraph 16 of TR 2018/5 provides the following examples of acts of central management and control: | • setting investment and operational policy including: | o setting the policy on disposal of trading stock, and/or the use and development of capital assets | o deciding to buy and sell significant assets of the company | • appointing company officers and agents and granting them power to carry on the company's business (and the revocation of such appointments and powers) | • overseeing and controlling those appointed to carry out the day-to-day business of the company, and | • matters of finance, including determining how profits are used and the declaration of dividends. | Conducting day-to-day activities and operations are not ordinarily an act of central management and control (paragraph 12 of TR 2018/5). | Who exercises central management and control? | Normally, where the power to manage a company is given to its directors under its constitution and the company laws rules applicable to that company, the company's directors will control and direct its operations (paragraph 20 of TR 2018/5). | However, identifying which person, or people, exercise a company's central management and control is a question of fact. It will not always be determined solely by identifying who has the legal power or authority to control and direct a company. The crucial question is who controls and directs a company's operations in reality (TR 2018/5 paragraph 19). | At paragraph 22 of TR 2018/5 it is explained that when determining who exercises a company's central management and control, all the relevant facts and circumstances must be considered. Facts and circumstances to be considered in determining who exercises a company's central management and control include the role of anyone who assumes the role of the directors' role in managing and controlling the company's affairs or has a role in the decision-making processes or governance of the company. | A person who has legal power or authority to control and direct a company, but does not use it, does not exercise central management and control. For example, in Bywater , the court disregarded the role of those directors who were formally appointed but did not play any real role in the affairs of the company. | In the present circumstances, the high-level decisions regarding the control and direction of the company's commercial operations were made by the directors of the Company. These decisions include the sale of this company's significant assets being its commercial properties; financial matters such as the provision of loans to related companies and approval of funding for development works on properties. | The property services, which are provided by Company Z in accordance with the Agreement relating to the management and maintenance of the properties, such as inspecting properties, liaising with and overseeing rent reviews are considered to be the day to day operations of a commercial leasing property business; and do not constitute the making of high level decisions of the Company. | Moreover, the terms of the Agreement restrict Company Z from entering into those agreements or transactions which would constitute high level decisions without the specific authority of the Company. This includes the sale or purchase of properties, amending or entering leases - and expending funds on carrying out unbudgeted repairs, maintenance or improvements greater than several thousand dollars. | There are two directors of the Company, Director A and Director B. Both directors reside in Australia. It is said that Director A is the key decision maker. However, Director B is an integral part of that decision making process for the Company, providing input or contributing to those high-level decisions such as the sale of properties and funding of development works. Notably, Director B is also the X family group accountant and co-director with Director A for other X family group entities, for example Company A, and thus is in a position to significantly influence or direct any high-level or strategic decisions of the Company. | Accordingly, it is considered that both directors exercise the central management and control of the Company. | Where is the central management and control exercised? | The final issue to consider is where the central management and control is exercised. | In TR 2018/5 at paragraph 31, it is explained that central management and control of a company may be exercised in more than one location. However, for the purpose of the central management and control test, a company's central management and control will only be considered to be exercised in a place if it is exercised in that place to a substantial degree, sufficient to conclude that the company is really carrying on business there. | Paragraphs 35 to 37 of TR 2018/5 discuss relevant considerations for determining where central management and control of a company is exercised. The matters that are most likely to determine where those who control and direct the operations of a company do so from are: | where those who exercise central management and control do so; | where the governing body of the company meets; | where the company declares and pays dividends; | the nature of the business and whether it dictates where control and management decisions are made in practice; and | minutes or other documents recording where high-level decisions are made. | Other matters of lesser weight include: | where those who control and direct the company's operations live; | where the company's books are kept; | where its registered office is located; | where the company's register of shareholders is kept; | where the shareholder's meetings are held; and | where its shareholders reside. | In this case, the directors have not for a number of years conducted formalised board meetings. Director A and Director B discuss the business affairs of the Company as part of their regular discussions concerning the X family group. These discussions are held via telephone but has also occurred via face-to-face meetings at Director B's office in Australia. | Director B has carried out the business activities for the Company in Australia. | Director A has carried out the business activities for the Company in Australia and Country A. In respect of the latter, during a three year period, Director A travelled to Country A for business on three occasions staying for brief periods from 2 days to 8 days. | Given that the directors made decisions regarding the control and direction of the Company mainly from Australia, it is considered that the central management and control was exercised in Australia. | Further factors that would support the view that the central management and control of the Company is in Australia are that: | its accounts and shareholder registry are kept in Australia; and | the Company's shareholder, Trust No 1 is a part of the X family group. The directors of the trustee company, Director A and Director B both reside in Australia. | Accordingly, the Company will be a resident of Australia under subsection 6(1) under the central management and control test. | profit making nature of its activities; | size and scale of its activities; and | systematic and businesslike manner in which its business activities are being carried out. | the existence of a 'place of business', | this place of business must be fixed, and | the carrying on of the business of the enterprise through this fixed place of business. | the term 'place of business' covers any premises and may exist where 'it simply has a certain amount of space at its disposal' (paragraph 10), | the mere fact that an enterprise has a certain amount of space at its disposal which is used for business activities is sufficient to constitute a place of business. No formal legal rights to use that place is required (paragraph 11), and | where an enterprise has an exclusive legal right to use a particular location which is used only for carrying on that enterprise's own business activities (e.g. where it has legal possession of that location), that location is clearly at the disposal of the enterprise (paragraph 12). | a person acts in a Contracting State on behalf of an enterprise; | in doing so, the person habitually concludes contracts, or habitually plays the principal role leading to the conclusion of contracts that are routinely concluded without material modification by the enterprise; and | these contracts are either in the name of the enterprise or for the transfer of the ownership of, or for the granting of the right to use, property owned by that enterprise or that the enterprise has the right to use, or for the provision of services by that enterprise. | payment for expenses on carrying out repairs, maintenance or improvements requires the Company's approval where the expense is not budgeted for or is greater than several thousand dollars; and | payments to suppliers which are not budgeted for. | Company Z operates a commercial property management business which provide its services to multiple clients and not exclusively or mainly to the Company. | The types of services it provides to the Company as set out in the Agreement are those that it provides in the ordinary course of its business of managing property and are not unrelated to the property management business. | It is considered that Company Z is not subject to the detailed instruction or control by the Company in respect of the commercial property management business operated by Company Z. The Agreement gives Company Z the authority to make a number of decisions and provide a number of services such as overseeing rent reviews, managing contractors, make payments within parameters to suppliers or contractors and in some circumstances, it can conclude contracts, but only after the Company has agreed to do so. | rental income from its commercial properties located in country A. | interest from a foreign bank operating in Country A. | interest from Country A taxation authority | the place where the loan contract was concluded made and the money was lent (FCT v Spotless Services Ltd (1995) 32 ATR 309) | the place where the loan is repaid; or | the place where the debtor resides.