PCG 2018/9EC5: Compendium
Document type: Compendium
Status: Draft

It is suggested that the final update to the Guideline refers to the relevant provisions (section 23AH of the Income Tax Assessment Act 1936 (ITAA 1936), Subdivisions 768-A and 768-G of the Income Tax Assessment Act 1997 (ITAA 1997) and Part X of ITAA 1936) and provides a more detailed explanation and examples of how they give a similar treatment. This may allay some unfounded concerns about the tax effect of subsidiaries being deemed to be an Australian tax resident under the central management and control test of residency. As recognised in the Guideline, public groups that meet certain requirements can rely on the ongoing compliance approach for public groups for ongoing certainty. Additional guidance has been included in the ongoing compliance approach regarding circumstances considered to be low risk (from paragraphs 105 to 107G of the final update to the Guideline) to reduce compliance costs for public groups and provide greater certainty. This includes additional guidance for wholly offshore operating subsidiaries of public groups (subparagraph 107(b) of the final update to the Guideline) and guidance regarding how companies in public groups can evidence falling within the ongoing compliance approach (paragraphs 105 to 107G of the final update to the Guideline). The ongoing compliance approach does not extend to private groups as they have a lower level of public transparency and a greater level of diversity in the ways in which they are structured and operate. The white zone is also suggested to include foreign-incorporated companies that hold, directly or indirectly, shares in a foreign-incorporated company with an active business in a foreign jurisdiction for public groups. Foreign-incorporated companies that hold shares in other foreign-incorporated companies, directly or indirectly, may rely on subparagraphs 107(a) and (b) of the Guideline in relation to the ongoing compliance approach where the requirements are met. It is understood that some companies have been relying on the former Government's 202021 Budget announcement. Announced measures that are not yet law are subject to consideration by the Government. For more information refer to Law Administration Practice Statement PS LA 2007/11 Administrative treatment of taxpayers affected by announced but unenacted legislative measures which will apply retrospectively when enacted. Paragraph 115 of the draft Guideline provides, essentially, that a company falls within the 'low-risk' zone if 2 criteria are met: The circumstances currently listed in the 'low-risk' section of Table 2 of the draft Guideline go to the question of whether criterion 2 outlined above is satisfied; they are not independent positive criteria, as currently presented in Table 2. To fall in the low-risk zone of the risk assessment framework, one or more of the factors in the low-risk zone of Table 2 need to exist, in addition to the company not falling within the moderate or high-risk zones. Paragraphs 115 to 117 of the final update to the Guideline provide detail regarding how companies and groups evidence falling within the low-risk zone. This is now explicitly referenced in the low-risk zone of Table 2. For completeness, if an entity falls within the high-risk zone, they do not fall within the low or moderate-risk zones. For avoidance of doubt, a company is not excluded from this definition where it is a resident (or equivalent) under a foreign jurisdiction's law and subject to comprehensive liability to tax in that jurisdiction, and that jurisdiction has a territorial tax system. The reference to a 'resident of a tax haven' in Table 2 of the Guideline has been revised to include a reference to a 'resident of a specified country' with a new footnote (footnote 16) referring to the International dealings schedule instructions 2023 in the moderate and high-risk zones. In response to the 2 uncertainties raised: Paragraph 113 of the final update to the Guideline clarifies that all companies may not fit squarely within the risk assessment framework.






Relying on this Compendium: This Compendium of comments provides responses to comments received on draft Practical Compliance Guideline PCG 2018/9DC1 Central management and control test of residency: identifying where a company's central management and control is located. It is not a publication that has been approved to allow you to rely on it for any purpose and is not intended to provide you with advice or guidance, nor does it set out the ATO's general administrative practice. Therefore, this Compendium does not provide protection from primary tax, penalties or interest for any taxpayer that purports to rely on any views expressed in it.

Footnotes 1A and 1B have been added to paragraph 5B in the final update of the Guideline to refer to the relevant legislative provisions referenced and provide further explanation. Detailed examples have not been included as this is beyond the scope of this targeted update to the Guideline. | It is suggested that the final update to the Guideline comment that in cases where there are some differences in tax treatment between a foreign-incorporated company with its central management and control in Australia compared with if it was a controlled foreign company, the relevant treaty requirements would have to be considered (if there is a double taxation agreement with Australia and the other jurisdiction). | The application of double taxation agreements is outside the scope of this Guideline. | The final update to the Guideline needs a more appropriate balance between the nominal tax risk and cost of compliance for both public groups and the ATO. There is unwarranted uncertainty (and compliance costs) for taxpayers who represent an extremely low tax risk. | There has not been sufficient time provided to indicate the transitional compliance period was ending. Some companies have generally been working on an assumption that the law would be changed in accordance with the former Government's 202021 Budget announcement, which would mean a return in a practical sense to the position 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 (Withdrawn). | It is of fundamental importance that the company's self-assessment of its Australian tax position is based on the application of the income tax law, not on this Guideline (once finalised). For that reason, we suggest an amendment to paragraph 109 in the final update to the Guideline to ensure that there is no confusion between a company's self-assessment of its taxable income and its determination of the risk that the Commissioner will take action to verify the position taken by the company. | Paragraph 109 has been altered in the final update to the Guideline to reflect this feedback. References to 'self-assessment' of risk zones have been removed throughout the Guideline (see updated paragraphs 112 and 115). | For a company to fall within the 'moderate-risk' zone in Table 2 of the draft Guideline, it must not fall within the 'high-risk' zone. At present, this is not stated in Table 2. | Consistent with the response for Issue 7 of this Compendium, Table 2 has been amended to clarify that to fall within the moderate-risk zone, companies must not have any high-risk factors identified in Table 2. | We suggest changes to paragraph 119 in the final update to the Guideline to ensure it is known that Table 2 applies to a company which is not incorporated in Australia and asserts that it is not managed and controlled in Australia. | No change has been made as the Risk assessment framework in the Appendix to the Guideline only applies to foreign-incorporated companies and each of the factors in the 3 risk zones in Table 2 of the Guideline commence by stating that the company has self-assessed as a non-resident. | We consider that the concepts of 'resident of a foreign jurisdiction' and 'resident of a tax haven' are vague and unhelpful and should not be used at all in Table 2 of the final update to the Guideline.

Related rulings and determinations: PS LA 2007/11 | TR 2004/15